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Federal Securities Law Blog Information on federal securities laws, news and developments

Monthly Archives: May 2011

SEC Approves BX Venture Market for Smaller Company Securities

Posted in SEC News

Earlier this month, the SEC approved a new securities market for smaller companies called BX Venture Market. Demand for such a market highlights a constant tension between the SEC’s goal of facilitating capital formation on one hand and protecting investors and markets on the other. Issuers unable to meet the listing standards of NYSE and NASDAQ may benefit from the more relaxed requirements of BX Venture Market. The new market could be a great fit for companies trading over-the-counter and thinking about an initial exchange listing, or companies that have been delisted from a national securities exchange and are looking for a better-regulated listing alternative than what was previously available. Companies listed on BX Venture Market must be registered under the Exchange Act, current in periodic filings, and have an independent audit committee, among other requirements.…


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SEC Adopts Final Whistleblower Rules

Posted in Dodd-Frank Act, SEC News, Whistleblower Issues

At an open meeting on Wednesday morning, the SEC adopted final rules to implement Section 922 of the Dodd-Frank Act regarding securities whistleblower incentives and protection. One of the significant highlights of the final rules is that the Commission has sought to struck a compromise between the importance of the corporation’s compliance programs on the one hand, and the incentive for the whistleblower to report directly to the SEC (and by-pass the corporation) on the other hand. The SEC’s Press Release announcing the adoption of the rules (and providing a brief summary) is here, while a copy of the SEC’s Release and the rules themselves are available here.…


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Judge in Carson Litigation Rules That the Question of Whether an Employee of a State-Owned Company is a “Foreign Official” is a Question for the Jury

Posted in Criminal Charges in Securities Cases, Foreign Corrupt Practices Act

On Wednesday, May 18, Judge James Selna in California became the latest Judge to rule on the issue of whether the FCPA extended to payments made to employees of foreign state-owned companies. Judge Selna denied defendants’ motion to dismiss in U.S. v. Carson, holding that "the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact." As a result, the issue will be presented to the jury.…


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For the First Time, The SEC Rewards Cooperation By Entering Into a Deferred Prosecution Agreement

Posted in Foreign Corrupt Practices Act, SEC Enforcement Cases, SEC News, SEC Settlements: Policy, Issues and Disputes, Trends

In January 2010, the SEC announced "a series of measures to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions." One of those measures included the use of Deferred Prosecution Agreements ("DPA"). On Tuesday May 17, the SEC announced that it has entered into its first such agreement, settling an FCPA matter with Tenaris S.A., a global manufacturer of steel pipes. In announcing the settlement, the Commission provided some guidance as to what cooperation was provided by Tenaris in order to earn such the first DPA.…


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Revised Discovery Guide and Document Production Lists for FINRA Customer Arbitration Proceedings Take Effect on May 16, 2011

Posted in FINRA

On Monday, May 16, 2011, the revisions to FINRA’s Discovery Guide (“Guide”) and Document Production Lists (“Production Lists”) for customer arbitration proceedings take effect. These revisions will apply to all customer cases filed on or after May 16. FINRA first adopted the Guide in 1999 for use in customer arbitration proceedings and last revised the Guide in 2007. The Guide supplements the discovery rules contained in the FINRA Code of Arbitration Procedure for Customer Disputes. (See Rules 12505-12511.)

FINRA’s revisions to the Guide expand the guidance FINRA gives to parties and arbitrators on the discovery process. This expanded guidance is particularly important because of the growing prevalence and raising costs of electronic discovery (“e-discovery”). The revisions to the Guide also replace the current fourteen Production Lists with just two Production Lists of presumptively discoverable documents. One Production List will specify which documents firms/associated persons should produce. The other Production List will specify which documents customers should produce.

The revised Discovery Guide makes clear that it applies to e-discovery. The revised Guide  expressly states that “electronic files” are “documents” within the meaning of the Guide. The revised Guide also empowers the arbitrators to decide any dispute regarding the form in which a party produces a document. The form of production continues to be a hot topic in-e-discovery. Parties can get into numerous disputes over the form of production, including whether “native” electronic files should be produced and whether metadata should be included with the production.

Importantly, the revised Guide provides that a party may object to producing documents on a Production …


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UPDATE – Lindsey Manufacturing Seeks Dismissal of the Government’s FCPA Case, Claiming Prosecutorial Misconduct

Posted in Criminal Charges in Securities Cases, Foreign Corrupt Practices Act

UPDATED on May 16, 2011As mentioned previously, Lindsey Manufacturing Company (a privately-held company) was the first corporate defendant to be convicted after trial of FCPA charges (for conspiracy to violate the FCPA and five counts of FCPA violations based on payments to employees of the Comisión Federal de Electricidad ("CFE"), an electric utility company owned by the government of Mexico). Assistant Attorney General Lanny Breuer stated last fall that it was a "new era of FCPA enforcement." The Lindsey Manufacturing verdict and some of the arguments raised by the defense present some indication of exactly how aggressively these issues will be fought by the government and defendants alike.…


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Insider Trading Case With Wiretaps Results in Raj Rajaratnam’s Conviction

Posted in Criminal Charges in Securities Cases, Insider Trading

Today, in a case closely watched on Wall Street, a federal Jury in New York convicted Raj Rajaratnam, the Managing Member of Galleon Management, LLC, of five counts of conspiracy to commit securities fraud and nine counts of securities fraud, stemming from what prosecutors called "his involvement in the largest hedge fund insider trading scheme in history."

Prosecutors stated that Mr. Rajaratnam received non-public, material insider information through overlapping conspiracies from insiders and others at hedge funds, public companies, and investor relations firms, such as Goldman Sachs, Intel, IBM, McKinsey and others. Prosecutors argued that he then executed trades in the stock of public companies, including Goldman Sachs, Clearwire, Akamai, AMD, Intel, Polycom, and PeopleSupport. The evidence in the eight-week trial included numerous recordings of wiretapped phone calls between Mr. Rajaratnam and co-conspirators (many of whom pled guilty). According to media reports, defense counsel, who argued that Mr. Rajaratnam pieced together information from a variety of sources to reach a decision on investing, plans to appeal.

Each conspiracy conviction carries a maximum penalty of five years, while each insider trading charge carries a maximum of twenty years. Mr. Rajaratnam is scheduled to be sentenced on July 29, 2011.…


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Corporate Defendant Lindsey Manufacturing Tried and Convicted on FCPA Charges (Along With 3 Other Individuals)

Posted in Criminal Charges in Securities Cases, Foreign Corrupt Practices Act

On Tuesday, May 10, 2011, a federal jury convicted Lindsey Manufacturing Company (a privately-held company), its President Keith Lindsey, its Vice President Steve Lee and an intermediary, Angela Aguilar in an FCPA case. The charges were based on payments to employees of the Comisión Federal de Electricidad ("CFE"), an electric utility company owned by the government of Mexico, which were made in exchange for the CFE to award contracts to Lindsey Manufacturing. The case is notable for two different reasons: (1) Lindsey Manufacturing was the first corporate defendant to fully litigate FCPA charges through trial; and (2) Lindsey Manufacturing was one of the three recent cases where defendants raised the argument as to whether the FCPA extended to payments made to employees of foreign state-owned companies, an assertion which failed in this instance.  UPDATE on May 16, 2011 – Professor Michael Koehler of the FCPA Professor Blog reports that Lindsey Manufacturing was NOT the first company to litigate an FCPA case all the way through trial: "That first occurred in 1990-1991 when Harris Corporation (and certain of its executives) prevailed in an FCPA trial."  


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Shareholders’ Derivative Complaint Filed Against Johnson & Johnson For FCPA Violations

Posted in Foreign Corrupt Practices Act, Private Securities Litigation

On May 2, 2011, a derivative complaint was filed against eleven members of the Board of Directors of Johnson & Johnson alleging breach of fiduciary duty, mismanagement and violations of the federal securities laws based on the company’s recent settlements with the Department of Justice and the Securities Exchange Commission regarding violations of the Foreign Corrupt Practices Act. As Kevin LaCroix’s blog, The D & O Diary, pointed out, this was the "the first civil lawsuit relating to" the Government’s investigations into "whether drug companies paid bribes overseas to increase sales and to obtain regulatory approvals."

On April 8, 2011, DOJ announced that Johnson & Johnson had agreed to pay a $21.4 million criminal penalty as part of a deferred prosecution agreement to resolve improper payments by its subsidiaries to government officials in Greece, Poland and Romania and kickbacks paid to the former government of Iraq under the United Nations Oil for Food Program in violation of the FCPA. The same day, the SEC announced that it had charged Johnson & Johnson with violating the FCPA based on same conduct. The company settled with the SEC by consenting to a court order permanently enjoining it from future violations of certain provisions of the Exchange Act and agreeing to pay over $38 million in disgorgement and $10 million in prejudgment interest. 

In the shareholders’ derivative lawsuit, Wollman v. Coleman, No. 11-cv-02511 (D.N.J. Filed May 2, 2011), plaintiffs alleged that the Board members failed to implement internal controls to detect …


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