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

On January 31, 2012, Judge Richard Leon declared a mistrial in the trial of the second group of defendants in the FCPA Sting case when the jury was unable to reach a verdict as to John and Jeana Mushriqui and Mark Morales. The mistrial occurred the day after the jury returned a partial verdict, finding two of the defendants not guilty.  The result adds to the string of litigated FCPA cases where the Government has failed to secure (or maintain) a conviction in recent weeks.

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On Monday, January 30, 2012, the SEC filed two lawsuits in federal court in Indiana and commenced two administrative proceedings stemming from an accounting fraud scheme at the Thornton Precision Components ("TPC"), which is the Sheffield, England subsidiary of Symmetry Medical Inc. ("Symmetry"), an Indiana-based manufacturer of medical devices and aerospace products. According to the Commission, the accounting fraud at TPC "was so pervasive that it distorted the financial statements of the parent company." In those proceedings, the Commission settled charges with Symmetry and eight individuals, including the parent company's CEO and the subsidiaries' outside accountants.

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Four separate websites have reported this afternoon that two of the defendants in the FCPA Sting or "Shot Show" case have been acquitted and Judge Richard Leon has stated that he would declare a mistrial if the jury is unable to reach a verdict as to the remaining three defendants. Specifically, C. M. Matthews and Joseph Palazzolo of the Wall Street Journal, Professor Mike Koehler of the FCPA Professor Blog, Mary Jacoby of Main Justice and Richard Cassin of the FCPA Blog all reported this afternoon that the jury found Patrick Caldwell and John Godsey not guilty, but remained hung as to John and Jeana Mushriqui and Mark Morales.

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In the on-going dispute as to whether the SEC can enforce an investigative subpoena on an accounting firm in China, the parties have submitted differing proposed scheduling orders. Although the arguments between the parties focus on procedure at this point, they are potentially significant in that the Court is being asked to address actually how a party overseas who receives a subpoena will be required to respond. Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") located in China, argues that the Court should first determine if the SEC is required to serve the subpoena under the provisions the Hague Convention, and then allow discovery before the parties submit briefs and expert reports on the issue of whether the firm should respond to the subpoena. The SEC proposes that the parties go immediately to briefing and expert reports on the subpoena-response issue.

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On Tuesday, January 24, 2012, the SEC filed a Memorandum which defended the proposed settlement with Koss Corporation ("Koss") and its CEO. The Commission's Memorandum was filed after a Wisconsin federal judge, Rudolph Randa, issued a letter order on December 20, 2011, directing the Commission to "provide a written factual predicate for why it believes the Court should find that the proposed final judgments are fair, reasonable, adequate, and in the public interest," citing Judge Rakoff's November 28, 2011 order in SEC v. Citigroup Global Markets, Inc. (discussed here). The issues in the Koss Corporation litigation do not include the "neither-admit-nor-deny" policy at the hear of Citigroup Global Markets, but focus on specific language in the proposed Judgments. The SEC's Memorandum defends the provisions, while arguing that the language (which is similar to that used in other judgments) should not be changed.

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On Monday, January 23, 2012, the SEC announced that Diamondback Capital Management LLC ("Diamondback"), the Stamford, Connecticut-based hedge fund named as a defendant in the SEC's insider trading case last week (as discussed here), has agreed to settle charges with the Commission. Diamondback will pay more than $9 million as part of the settlement, which must be approved by Judge Paul G. Gardephe, a federal judge in New York. Diamondback has also entered a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.

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On January 11, 2012, Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. The lawsuit was filed after the shareholders, in an advisory vote, rejected the Board-approved executive compensation program. The Magistrate Judge found that the plaintiffs failed to make a presuit demand as required for a derivative suit and were not excused from doing so under the arguments they raised regarding the Board members' exercise of the business judgment rule or their lack of independence or disinterest. As Broc Romanek of theCorporateCounsel.Net Blog pointed out, "[t]his is the first federal court decision to dismiss such an action." Magistrate Judge Acosta has referred his Findings and Recommendations to District Judge Michael W. Mosman for review and final determination.

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Today, federal prosecutors and the SEC named seven fund managers and analysts as defendants in an insider trading scheme based on nonpublic information about Dell’s quarterly earnings and similar inside information regarding Nvidia Corporation. The U.S. Attorney called the trading in Dell shares the "largest insider trading scheme involving single stock charged to date." Three of the individuals pled guilty and are cooperating with the Government. The SEC's lawsuit also named two Connecticut-based hedge fund firms as defendants.

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On Monday, January 16, 2012, Judge Lynn Hughes granted defendant John O'Shea's motion for acquittal in the FCPA case, dismissing the FCPA charges case against him. According to a Press Release from defense counsel, Judge Lynn Hughes "found that the Government’s chief witness, … could not tie Mr. O’Shea to the alleged crimes. The judge found that O’Shea’s conduct, including efforts to renew an ABB-Esimex contract, was reasonably explained by lawful motives." The decision by Judge Hughes marks the second loss in less than two months for the Government in cases related to the  Comisión Federal de Electricidad ("CFE") – Judge A, Howard Matz had previously vacated the guilty verdict in the Lindsey Manufacturing case, as discussed here.  UPDATED (on January 19, 2012): While Judge Hughes' Order dismisses the 12 FCPA counts, the Judge has scheduled a status conference for the remaining counts (conspiracy, money laundering and creating a false document) for January 20, 2012.

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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, events in the Citigroup matter continued to dominate the news, but there were some interesting developments in FCPA cases, insider trading cases and discovery issues. These cases and other matters from the last month are discussed in greater detail after the jump.

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On Thursday, January 12, 2012, Business Roundtable ("BRT"), the association of chief executive officers of leading U.S. companies, requested leave to file an Amicus Brief in the SEC v. Citigroup Global Markets, Inc. appeal, requesting that the Second Circuit reject the "potentially dangerous, approach to reviewing settlement agreements" in Judge Jed Rakoff's November 28, 2011 decision in the lower court.

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The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert to help investors be better aware of fraudulent investment schemes that may involve social media. While social media can benefit investors, it also presents opportunities for criminal activity and fraud. Social media provides fraudsters an easy, low-cost way to create a site, account, email, direct message, or web page that looks and feels legitimate – giving criminals a better chance to convince you to send them your money. Once the fraud is perpetrated, it is difficult to track down the true account holders because of the anonymity that social media allows to criminals. As a result, investors need to use caution when using social media when considering an investment. The key to avoiding investment fraud on the Internet is to be an educated investor. The SEC has provided five tips to help investors avoid investment fraud on the Internet:

• Be Wary of Unsolicited Offers to Invest - An unsolicited sales pitch may be part of a fraudulent investment scheme. If you receive an unsolicited message from someone you don’t know containing a “can’t miss” investment, your best move is to pass up the “opportunity” and report it to the SEC Complaint Center.

• Look out for Common “Red Flags” - It sounds too good to be true; the promise of “guaranteed” returns; pressure to buy RIGHT NOW.

• Look out for “Affinity Fraud” - Never make an investment based solely on the recommendation of a member of an organization or group to which you belong, especially if the pitch is made online. Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention.

• Be Thoughtful About Privacy and Security Settings - Understand that unless you guard personal information, it may be available not only for your friends, but for anyone with access to the Internet – including fraudsters.

• Ask Questions and Check Out Everything - Investigate the investment thoroughly and check the truth of every statement you are told about the investment.

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Two unique insider trading cases have received a bit of attention recently. One case, brought on December 12, 2011 against a company and its former CEO, alleged that they defrauded shareholders by buying back stock at severely undervalued stock prices – at a time when the company was privately held. The second, brought on January 9, 2012 against the former CEO of company and his friend, alleged that the former tipped the latter about the upcoming acquisition of his company and resulted in a report in the Atlanta Business Chronicle that the CEO took and passed a polygraph test and was then asked by the SEC to take a second polygraph test.

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On Monday, January 9, 2012, Judge Richard Leon, who had already dismissed the central conspiracy count against six defendants in the FCPA Sting Case, was faced with an interesting question: if the conspiracy count was dismissed for insufficient evidence, should the trial continue when much of the evidence the Government has offered was based on the acts and statements of coconspirators who were not present at the trial? The Motion for a Mistrial filed by the defendants presently at trial argued that they were prejudiced by the evidence regarding the now-dismissed conspiracy count. Judge Leon denied the Motion, ruling that the trial will continue.

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On Friday, January 6, 2012, the SEC Division of Corporation Finance issued Disclosure Guidance: Topic No. 4 (European Sovereign Debt Exposures) regarding disclosure relating to registrants' exposures to risk of debt to certain European countries. As a result of the uncertainties with European sovereign debt holdings, the SEC reviewed disclosures of direct and indirect exposures from these holdings made by financial institutions that are SEC registrants. The SEC's review noted that the disclosures of the exposure by registrants has been inconsistent in both substance and presentation. The SEC believes that this inconsistency may lead to disclosures that lack transparency and comparability for investors.

In reviewing the disclosures, the SEC issued comments requesting enhanced disclosure relating to the European sovereign debt exposures. The comments asked registrants to disclose for each country:

• Gross sovereign, financial institutions, and non-financial corporations’ exposure, separately by country;
• Quantified disclosure explaining how gross exposures are hedged; and
• A discussion of the circumstances under which losses may not be covered by purchased credit protection.

As a result, the SEC is providing guidance that registrants provide additional disclosure in their Management's Discussion and Analysis ("MD&A") regarding their European sovereign debt exposures. The disclosure guidance asks registrants to determine which countries are covered focusing on those experiencing significant economic, fiscal, and/or political strains, and asks registrants to disclose the basis used for identifying the countries included in their disclosure. The disclosure guidance provides that disclosures should be provided separately by country, segregated between sovereign and non-sovereign exposures, and by financial statement category, to arrive at gross funded exposure, as appropriate. The disclosure guidance also provides that registrants should also consider separately providing disclosure of the gross unfunded commitments made, and information regarding hedges in order to present an amount of net funded exposure. The disclosure guidance provides an outline of disclosure topics for registrants to consider when analyzing their European sovereign debt exposures.
 

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According to media reports, the SEC decided last week that it will no longer allow defendants who plead guilty in criminal proceedings to settle parallel civil charges with the Commission by neither admitting or denying the allegations. At the present, the policy shift applies only in those cases where there has been an admission of guilt, not in cases where there has been no plea or if there is only civil proceedings.

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On January 3, 2012, Judge Lynn Hughes denied defendant John O'Shea's Motion to Dismiss the Indictment against him. Mr. O'Shea's Motion, which was filed in March 2011, argued that the Indictment failed to alleged that he bribed a "foreign official" because it only alleged that he bribed employees of a state-owned entity. Judge Hughes' decision marked the fifth time the argument has been rejected. The case against Mr. O'Shea is now set to go to trial on January 11, 2012.

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In an Opinion and Order entered on January 4, 2012 and a separate Order entered on January 5, 2012, Magistrate Judge Deborah Robinson granted the SEC's motion for a order to show cause, requiring Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") to file a brief by mid-January 2012 and appear before the Court in early February to explain why it should not be required to respond to the SEC's subpoena on it. The ruling is largely procedural, but it does set in a motion a round of briefing and a hearing to address whether the SEC can compel the Chinese accounting firm to respond to its subpoena.

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The participants in the Citigroup litigation did not take much of a break during the holidays. As discussed here, on December 27, 2011, Judge Rakoff denied the SEC's request to stay the litigation. As it turns out, the Commission did not even wait for that order – it appears that the SEC's Motion for an Emergency Stay was filed with the Second Circuit before Judge Rakoff denied the similar motion in the District Court. That resulted in the Second Circuit's Order for a temporary stay (also discussed here). On December 29, 2011, Judge Rakoff issued a Supplemental Order, stating that the SEC made a "materially misleading" statement to the Court of Appeals and accused the Commission of misleading him during the process in the District Court. On December 29, 2011, the SEC filed a petition for a Writ of Mandamus and on December 30, 2011, the SEC filed a Supplemental Brief with the Second Circuit, responding to Judge Rakoff's statements by asserting that it [the Commission] was acting "in good faith."

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