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

On Thursday, October 27, 2011, the SEC entered a Cease-and-Desist Order against FINRA, which, according to the SEC's Press Release, included a finding that "certain documents requested by the SEC’s Chicago Regional Office during an inspection were altered just hours before FINRA’s Kansas City District Office provided them." FINRA consented to hire an independent consultant and undertake other remedial measures.

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On Thursday, October 27, 2011, New York federal Judge Jed Rakoff issued an Order in the SEC's case against Citigroup Global Markets, Inc. (previously discussed here), scheduling a hearing for November 9, 2011. In the Order, Judge Rakoff said "[t]he Court is required to ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest." As a result, he raised a series of questions that he wants answered at that hearing before he will approve the settlement, continuing his pattern of carefully considering each settlement proposed by the SEC in cases assigned to his docket.

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On Tuesday, October 25, 2011, defendants Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corporation who were convicted in August 2011 for their roles in a conspiracy to violate the FCPA and commit money laundering, were sentenced to 15 years and 7 years in prison, respectively. With respect to Mr. Esquenazi, a Press Release from the U.S. Attorney's Office for the Southern District of Florida pointed out that "[t]his is the longest sentence ever imposed in a case involving the Foreign Corrupt Practices Act."

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On Wednesday, October 26, 2011, both the SEC and the U.S. Attorney's Office for the Southern District of New York filed charges against Rajat Gupta, the former Managing Director of McKinsey & Company and board member at Goldman Sachs and Procter & Gamble. Mr. Gupta, who previously argued that an Administrative Proceeding brought by the SEC against him was unfair because he denied a trial before a jury will now have two opportunities to challenge the charges against him in Court.

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On November 1, 2011, the Ohio Supreme Court is scheduled to hear oral argument in an unusual case where the Director of the Ohio Department of Commerce has sued to recover the proceeds of insurance policies from the family of Roy Dillabaugh, who operated a Ponzi scheme. The Second District Court of Appeals for Montgomery County previously held (in an Opinion available here) that the Director cannot seek to recover the proceeds, but a court-appointed Receiver has the authority to file such a suit (although the Court did not address any potential limits to the Receiver's authority on the grounds that the issue was not ripe for decision).

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In an October 13, 2011 Opinion that carefully considers the language of two insurance policies, the Eleventh Circuit Court of Appeals ruled that Office Depot, Inc. was not entitled to coverage for most of the legal fees incurred by the company while responding to inquiries from the SEC. In-house counsel would be wise to review their respective policies to determine if company would face a similar issue or would be covered if an SEC investigation occurs.

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On Wednesday, October 19, 2011, the SEC announced a settlement with Citigroup's principal U.S. broker-dealer, Citigroup Global Markets, Inc., who had been charged with misleading investors about a $1 billion collateralized debt obligation ("CDO") tied to the housing market. The Commission's charges stem from failure to advise investors that at the same time it was selling the CDO, Citigroup "took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value." Citigroup agreed to pay $285 million, which, according to the SEC, made it the third largest recovery for the Commission in enforcement actions against companies whose misconduct occurred leading up to or during the financial crisis.

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LexisNexis has selected the Federal Securities Law Blog as a nominee for its the Top 25 Business Law Blogs of 2011. To narrow down to its final list of 25 honorees, LexisNexis is seeking feedback and input from the online community. If you find our Blog useful and informative, we would appreciate your "vote" of support – as well as for those other blogs that you enjoy. To view the article listing us as well as other nominees, click here. To vote, you need to be a registered Community member of LexisNexis (click here for free registration) and be logged in. To vote, you then need to enter a comment to its article.

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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 have appeared in the news include the SEC's Inspector General's examination of the SEC's conduct, cases which have been brought that stem from the market crisis and the several significant criminal sentences in insider trading cases. These issues, and others, are discussed in greater detail after the jump.

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A pair of articles appeared this week that traced trends in particular areas of securities enforcement. The Wall Street Journal presented data showing an increase in the length of sentences in insider trading cases over the last eighteen years. A second article which appeared in Corporate Counsel suggested that the SEC's settlement of a case involving back-dated options "may have symbolized the end of an era."

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Today, in a case closely watched on Wall Street, Judge Richard Holwell sentenced Raj Rajaratnam, the Managing Member of Galleon Management, LLC, to Eleven years in prison. Although the sentence is the longest to date for anyone involved in the Galleon Group, it fell considerably short of the lengthy sentence sought by the Government.

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The SEC brought a case against Thomas Wu, the former CEO of United Commercial Bank, for misleading investors regarding the financial state of the bank during the 2008 financial crisis. Mr. Wu, who the SEC described as a "rising star in the banking industry," allegedly directed subordinates to conceal information regarding the true value of the bank's collateral and assets, understating the value by at least $65 million and causing as the United Commercial to be one of the ten largest bank failures during the recent financial crisis.

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On Wednesday, October 5, the U.S. Court of Appeals for the Second Circuit ruled that FINRA lacks the authority to bring court actions to collect disciplinary fines it has imposed. Fiero v. FINRA, No. 09-cv-1556, slip op. (2d Cir. Oct. 5, 2011). The decision is the latest development in a case which can be traced back to 1998. Significantly, the ruling appears to extend to all "self-regulatory organizations" ("SROs"). However, the Court hints that, under Section 19(b) of the Exchange Act, an SRO can potentially address this issue by filing a proposed rule change with the SEC, who must publish notice of the proposed rule change and give interested individuals an opportunity to comment prior to either approving or disapproving the rule (something which FINRA failed to do in this situation).

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A report on Monday, October 3 from Bloomberg Markets Magazine detailed a years-long scheme by Koch Industries, Inc. to make improper payments to win contracts in six countries – payments which the company admitted "constitute violations of criminal law." The article states that the Justice Department would not confirm or deny the existence of any investigation into the activities, but such an investigation seems likely given the articles description of events that may violate the FCPA or the laws regarding the Iran Trade Embargo.

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Sean McKessey, the Chief of the Office of the Whistleblower at the SEC, spoke at a panel discussion regarding the Foreign Corrupt Practices Act on Tuesday morning. Mr. McKessey commented on the efforts of his office to date and responded to questions regarding a number of issues.

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In a report released last week, the SEC's Office of Inspector General ("OIG") stated that it "did not find sufficient evidence to substantiate any allegations of misconduct" by the SEC Division of Enforcement during its investigation of Mark Cuban. The OIG's Report (which is dated August 22, 2011, but not available until last week and is available here) is one of several investigations that were underway (as previously discussed here).

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An article in Friday’s Wall Street Journal discussed a "major shift" in the SEC strategy, claiming the Commission "could file more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness." The article, by Jean Eaglesham, entitled "At SEC, Strategy Changes Course," is available here, registration required.

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