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

Today, the Federal Securities Litigation Blog continues its with its larger-than-usual blog entry examining the Top 10 securities litigation stories that were the most intriguing in 2011. As mentioned yesterday, like any sort of Top 10 list, not everyone will agree. Other bloggers will have their own lists with different stories. But on a personal basis, these stories that fascinated me – like a good book, I look forward to the next "chapter" in these stories in 2012.

Here's a quick headline look at the Top 5:

5. The SEC's Inspector General Reports on the Conduct of the Commission Staff.

4. Insider Trading at Galleon Management: Record-Setting Results.

3. The New Whistleblower Rules: Do I Tell Management Before I Tell The SEC?

2. The Lindsey Manufacturing Saga: The Verdict DOJ was "Fiercely Committed" to Obtaining is Vacated.

1. The Citigroup Case: Judge Rakoff's Decision and the Potential Impact on How SEC Cases Proceed.

These five stories are discussed in greater detail after the jump.

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Today and tomorrow, the Federal Securities Litigation Blog will take a break from discussing the most recent events and, with a larger-than-usual entry, examine the Top 10 securities litigation stories that were the most intriguing in 2011. Undoubtedly, others will be preparing similar lists and this is not intended to be a definitive or complete version. Instead, these are the stories that piqued my interest. Half of the list will be discussed today and the other half tomorrow.

Here's a quick headline look at the bottom half of the Top 10:

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders' Rights to Include Board Nominee on Proxy Materials.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

8. The SEC's Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

These five stories are discussed in greater detail after the jump.

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On Wednesday, December 28, 2011, the Second Circuit Court of Appeals stayed the SEC's case against Citigroup Global Markets, Inc. (which is before Judge Rakoff in New York). The appellate court received an emergency motion for a stay after Judge Rakoff denied the request made at the District Court level. That emergency motion is to be submitted to the Second Circuit's motions panel on January 17, 2012. The appellate court ruled that "[i]n the interim, proceedings in the District Court are stayed until a ruling by the motions panel."

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On Thursday, December 22, 2011, Judge Richard Leon ruled on the Rule 29 Motions for Judgment of Acquittal in the FCPA Sting Case by dismissing Count 1 (on the grounds that there was not sufficient evidence to that the six defendants participated in the overarching conspiracy to violate the FCPA) as to all six defendants in Trial Group No. 2. In addition, Judge Leon dismissed the Government's case against defendant Stephen Giordanella in its entirety. The trial will resume on January 3, 2012 with the remaining five defendants having their opportunity to put on their defense. The rulings are considerable setback for the Government in what the Department of Justice called the first sting operation in an FCPA case.

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Yesterday the SEC released its final rule regarding the exclusion of the value of a person’s primary residence when determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. The accredited investor standards are used to determine certain exemptions from Securities Act registration for private offerings. Prior to Dodd-Frank, investors could include their primary residence in calculating a minimum net worth of more than $1,000,000. Section 413(a) of the Dodd-Frank Act changed the requirement to exclude the value of the primary residence, for which the SEC has now finalized rules.

But, expect more changes to the accredited investor concept. Section 415 of the Dodd-Frank Act requires the Comptroller General of the United States to conduct a “Study and Report on Accredited Investors” examining “the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds.” The study is due by July 2013, and the SEC will likely use the study for future rule making.
 

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On Friday, December 16, 2011, the SEC filed a Motion in front of Judge Jed Rakoff, asking him to stay to proceedings which the Commission had brought against Citigroup Global Markets, Inc. while the SEC's appeal is pending before the Second Circuit. On December 20, 2011, Citigroup filed a memorandum joining in the SEC's Motion. Unless a stay is granted, the parties will be forced to litigate the matter before Judge Rakoff as part of a consolidated case with the SEC's action against Brian Stoker. As discussed below, the motion to stay presented the SEC with another opportunity to argue why Judge Rakoff was wrong to reject the proposed settlement.

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In legal briefs filed in the last week, Mark Cuban and the SEC continued to attack each other for their conduct in discovery. On December 13, 2011, Mr. Cuban responded to the Commission's November 22 Motion to Compel (which asked the Court to order Mr. Cuban to produce a privilege log of documents) by arguing that: (1) he had already produced a log for the years 2004 to 2006; and (2) the Commission was asking for a log of documents for the 2007 to 2011 time-frame, long after the events in dispute took place. The SEC filed its own motion on December 16, 2011, asking that Mr. Cuban be ordered to appear for his deposition at some point in December or January (as opposed to the day before the February 17, 2012 discovery cut-off, which was the only date Mr. Cuban had proposed). While the on-going disputes are over procedural issues, they relate to documents from the investigation from the period long-after the events in the case and provide an interesting look at the strategy of both the SEC and the defense in litigating this matter.

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In a 135-page report issued entitled "U.S. Securities and Exchange Commission: A Roadmap for Transformational Reform" issued on December 14, 2011, the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness expanded on the incremental changes it proposed in a 2009 report, saying that "extraordinary steps are needed to achieve change." The Report, which was authored by Jonathan Katz (who was Secretary of the SEC for twenty years) and was briefly discussed in our Monthly Review entry on December 15, contains 28 separate recommendations on how to reform the Commission as a whole, and specifically addresses the Division of Enforcement and the rulemaking process.

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On Friday, December 16, 2011, the House Committee on Financial Services announced that it "will hold a hearing next year to examine the practice by the Securities and Exchange Commission of settling cases with defendants that neither admit nor deny complaints made by the SEC." The decades-long practice has garnered a great deal of attention recently, particularly in light of Judge Jed Rakoff's November 28, 2011 decision (discussed here) to reject the SEC's settlement with Citigroup Global Markets, Inc. due to that very practice The exact timing of the Congressional Committee hearing has not been set, yet.

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On Friday, December 16, 2011, the SEC announced that it had entered into non-prosecution agreements with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") and filed charges against six of their former executives for securities fraud, alleging that "they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans."

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On Thursday, December 15, 2011, the SEC appealed the Opinion and Order issued on November 28, 2011 by Judge Jed Rakoff rejecting the SEC's proposed settlement with Citigroup Global Markets for $285 million (previously discussed here). In a statement, the Director of the Division of Enforcement, Robert Khuzami said that Judge Rakoff "committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits."

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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. In the last month, the most discussed issues have been two losses suffered by the federal regulators – one by the SEC where the Court refused to approve the settlement in the Citigroup matter and the other by criminal prosecutors, who saw the conviction in the Lindsey Manufacturing case vacated. These cases and other matters from the last month are discussed in greater detail after the jump.

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On Tuesday, December 13, 2011, the Department of Justice and the SEC brought charges against a group of former employees and agents of Siemens AG for FCPA violations based on an alleged decade-long scheme to bribe senior Argentine government officials to secure, implement and enforce a $1 billion contract with the Argentine government to produce national identity cards. In the words of Assistant Attorney General Lanny Breuer, "[t]his indictment reflects our commitment to holding individuals, as well as companies, accountable for violations of the FCPA." The authorities have been undoubtedly active in the FCPA area this year against individuals, securing a sentence of record length against a telecommunications executive in one case (as discussed here), but suffering setbacks in other cases, such as the hung jury in the first of several trials in the FCPA sting case against employees of companies in the military and law enforcement products industry (discussed here) and the recent decision by Judge Matz to vacate the convictions of executives of Lindsey Manufacturing (and the company itself) (as discussed here).

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In a December 9, 2011 Opinion, the D.C. Circuit affirmed a lower court's decision that the SEC was not required to produce the notes of its staff members taken during an investigation of two individuals who were subsequently Government witnesses in a criminal prosecution of another individual. The Court found that notes were privileged under the work product doctrine, but did not decide whether they were protected under the deliberative process privilege. The case in another example of matters where defendants in securities fraud cases have sought the production of the SEC's taken during its investigations – as discussed here, in his insider trading case, Mark Cuban has also sought the production of, among other things, the notes of the SEC attorneys taken during the investigations.

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An article from Lina Saigol and Kara Scannell in the Financial Times this morning (December 12, 2011) reports that the SEC's Division of Corporate Finance has sent letters to at least a dozen companies instructing them to "disclose business activity in and with Syria, Iran and others deemed 'state sponsors' of terror by the State Department." The article is available on-line here (registration required).

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On Thursday, December 8, 2011, the U.S. Attorney for the Central District of California announced that it had indicted the David Tamman, outside counsel for New Point Financial Services, of conspiring with the company's investment fund manager, who was also indicted, to obstruct an SEC investigation. The indictment alleges that that the two conspired to alter and backdate various documents, remove incriminating documents from investor files before they were produced, and provide false testimony to the SEC. Mr. Tamman joins the growing list of attorneys (such as the one discussed here) who are alleged to have taken elaborate efforts to conceal illegal activity, but end up being named as defendants in criminal cases nonetheless.

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On December 8, 2011, various government agencies announced that Wachovia Bank, N.A. has entered into a series of settlements with the SEC, the Department of Justice, the Office of the Comptroller of the Currency, the Internal Revenue Service, and 26 state attorneys general to pay $148 million related the bank's entry into fraudulent secret arrangements with bidding agents to rig at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico.

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The Director of the SEC's Division of Enforcement appeared before two Congressional Committees in the last week to testify about the Commission's recent work in the area of insider trading. The testimony raised two interesting topics: (1) a review of the "new initiatives" instituted by the SEC to combat insider trading; and (2) information on how the current law of insider trading applies to securities trading by members of Congress and their staffs.

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On December 1, 2011, Judge A. Howard Matz entered an order granting the motion to dismiss filed by Lindsey Manufacturing Company, Keith Lindsey, Steve Lee in the criminal FCPA case against them. As discussed here, the Court announced its intention to do so at a hearing on November 29, 2011. In its Order, the Court said that the Government conducted a "sloppy, incomplete and notably over-zealous investigation … that was so flawed that the Government’s lawyers tried to prevent inquiry into it." The Court's decision was based, in part, on: the untruthful testimony of an FBI agent to the grand jury; the provision of false information in applications for search and seizure warrants; the improper review of e-mail communications between a defendant and her lawyer; the failure to comply with discovery obligations and other court rulings; and misrepresentations to the Court. The Court held that "the multiple acts of misconduct … undoubtedly affected the verdicts and thus substantially prejudiced" the Defendants, necessitating the decision – made with what the Court called "deep regret" – to vacate the convictions and dismiss the Superseding Indictment.

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According to media reports (here and here, for example), SEC Chairman Mary Schapiro, in a letter dated November 28, 2011 to Senators Jack Reed and Larry Crapo, has requested a series of statutory changes which would allow the Commission to impose stricter financial penalties for certain securities law violations, as well as greater penalties for recidivists.

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