Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

The SEC announced on Tuesday, September 27 that it had filed a settled administrative proceeding against RBC Capital Markets LLC for misconduct relating to the sale of unsuitable investments (credit-linked notes that were tied to the performance of synthetic collateralized debt obligations or "CDOs") to five Wisconsin school districts. The action is the latest in the SEC's cases arising out of the Financial Crisis of 2008 (the Senate's study of the causes of this crisis is discussed here).

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In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board's decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.

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On Thursday, the SEC's Inspector General David Kotz, Former General Counsel David Becker and Chairman Mary Schapiro testified before a joint session of two House Subcommittees regarding the recent report by the Inspector General regarding the involvement of Mr. Becker in matters relating to Bernie Madoff. As previously discussed here, on September 20, the Inspector General released a report ("OIG Report") finding that Mr. Becker "participated personally and substantially in particular matters in which he had a personal financial interest by virtue of his inheritance of the proceeds of his mother's estate's Madoff account and that the matters on which he advised could have directly impacted his financial position." The Inspector General referred the results of the investigation to the Public Integrity Section of the Criminal Division of the United States Department of Justice.

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On Wednesday, September 21, two defendants who were convicted of conspiracy and insider trading charges in separate trials earlier this year were sentenced in federal court in New York. Zvi Goffer, who formerly worked at with the Schottenfeld Group LLC (part of Raj Rajaratnam's Galleon Group), was sentenced to ten years in prison, while Winifred Jiau, a consultant at Primary Global Research LLC (an expert networking firm), received a four year sentence. Like many of the recent high-profile insider trading cases, the Government's evidence included wiretapped telephone conversations between the participants in both cases. DOJ and the SEC continue to vigorously pursue and punish those participating in insider trading cases.

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On Tuesday, September 20, the SEC's Inspector General released one of a series of reports expected this month (as discussed here) – this one concerned the involvement of David Becker, the former General Counsel and Senior Policy Director of the Commission, in matters relating to Bernie Madoff. The Inspector General "found that Becker participated personally and substantially in particular matters in which he had a personal financial interest by virtue of his inheritance of the proceeds of his mother's estate's Madoff account and that the matters on which he advised could have directly impacted his financial position." The Inspector General is referring the results of the investigation to the Public Integrity Section of the Criminal Division of the United States Department of Justice and Congress has scheduled a hearing this week to look into the matter.  A copy of the Report is available here.

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On Thursday, September 15, SEC Chairman Mary Schapiro and former SEC Chairman Harvey Pitt provided testimony to the House Committee on Financial Services. As previously discussed, the SEC has faced a number of issues this summer, including inquiries about its now-suspended document destruction policy (here), upcoming reports from the Inspector General on a variety of topics (here), various reform recommendations (here) and legislation introduced in Congress which could significantly impact the agency's authority (here). Both Chairman Schapiro and Mr. Pitt expressed concern about legislation that would impact the structure and authority of the Commission. Chairman Schapiro focused on the already-started process of analyzing recommendations proposed by the Boston Consulting Group as a path to reform. According to a Washington Post article, Mr. Pitt (who submitted written testimony) also "denounced the agency’s inspector general …, saying the internal watchdog appears bent on destroying reputations and staff morale and crippling the SEC’s effectiveness."

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Today, the Federal Securities Law Blog takes a look back at the last 30 days in the world of securities-related litigation in a regular feature which appears on approximately the 15th of each month. Recent issues which the SEC has faced this month include inquiries about its now-suspended document destruction policy, upcoming reports from the Inspector General, the appeal regarding the decision to vacate Proxy Rule 14a-11, the formation of an Investment Advisory Committee, various reform recommendations and Congressional challenges to its new Whistleblower Rules. These issues, and others, are discussed in greater detail after the jump.

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There were two interesting news items this week regarding what the nation's regulators are doing to protect investors – one from the SEC and the other from the Department of Justice. The SEC announced that it "is in the process of re-establishing an Investor Advisory Committee," while Commissioner Luis A. Aguilar expressed disappointment that the Committee was not being re-established sooner. Meanwhile, the U.S. Department of Justice Office of the Inspector General issued an Audit Report criticizing the Complex Asset Team of the U.S. Marshals Service for its management of complex assets, including its handling of certain assets seized from Bernard Madoff.

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On Friday, September 9, the Office of the Chief Operating Officer of the SEC issued its Report on the Implementation of SEC Organizational Reform Recommendations, which was mandated by Section 967 of the Dodd-Frank Act. The 25-page report was prepared to address the recommendations made in March 2011 by the Boston Consulting Group ("BCG"), who submitted a Report to Congress examining the internal operations, structure and need for reform at the SEC (as discussed here). Friday's report noted the budgetary issues the SEC faces and reported on the largely organizational steps the agency has taken to begin the multi-year task of implementing the recommendations. In short, the SEC summarized that that "[w]hile the agency has made progress, the path forward is still long."

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On Friday, September 9, the Department of Justice announced that it had entered into a Non-Prosecution Agreement with CSK Auto Corporation, a retailer of automotive parts and accessories which used to be publicly traded, to settle a criminal investigation into alleged securities law violations stemming from a corporate earnings manipulation and double-billing scheme. Under the terms of the agreement, CSK Auto will pay a $20.9 million penalty. The resolution of this matter is the latest in a series of matters being handled by both DOJ and the SEC regarding the events at CSK Auto.

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According to a report in the Wall Street Journal, "SEC General Counsel Mark Cahn issued a memo to Division of Enforcement staff telling them to stop existing record-destruction procedures for closed cases, until further notice." This issue originally arose in mid-August (as discussed here) when Senator Chuck Grassley (R. Iowa) asked SEC Chairman Mary Schapiro whether the Commission destroyed files relating to some of its more high-profile and controversial matters, such as its investigations of Bernie Madoff, Goldman Sachs, Bank of America, Lehman Brothers and others. The Senator's inquiry was based on allegations he had received in a letter from Darcy Flynn, a thirteen-year veteran of the staff.

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On Tuesday, September 6, the SEC announced that it is not seeking rehearing of the decision by the D.C. Circuit Court of Appeals invalidating Exchange Act Rule 14a-11. That Rule, which was previously discussed here, allowed 3% shareholders (or larger) to use the company proxy statement to nominate directors. As discussed here, on Friday, July 22, 2011, the D.C. Circuit Court of Appeals issued an Opinion vacating the rule. Business Roundtable v. SEC, No. 10-1305, slip op. (D.C. Cir. Jul. 22, 2011).

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On Friday September 2, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed lawsuits in state and federal court in New York and Connecticut against 17 different financial institutions (including Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and JP Morgan), certain of their officers and various underwriters, alleging violations of the federal securities laws and common law relating to the sale of mortgage-backed securities. In its news release, the FHFA claimed alleged that "the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to" Fannie Mae and Freddie Mac.

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On August 30, 2011, the SEC announced it had settled a case with James O'Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304's "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O'Leary's case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.

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