Today (a day early), 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, there were dramatic results in two FCPA trials. Also, while the Citigroup matter remains pending before the Second Circuit, a second settlement where the Court asked the SEC to address certain questions reached a conclusion. A record-setting insider trading scheme was brought, while one of the informants from the Raj Rajaratnam case reappeared in a new matter. These cases and other matters from the last month are discussed in greater detail after the jump.
Two FCPA criminal trials were completed in the last month, with the Government failing to obtain a conviction of any of the defendants in those cases.
The trial in the FCPA Sting case (which was the trial of the second of four groups of defendants) actually began in September 2011. The Government originally charged 22 defendants with conspiring to violate the FCPA and violating the FCPA (along with other charges). The key witnesses included an informant and an undercover FBI agent posing as the Minister of Defense of Gabon. While three defendants have pled guilty, the trial of the first group resulted in a hung jury and a mistrial on July 7, 2011.
When the Government finished its case-in-chief in the second trial in December, Judge Richard Leon dismissed Count 1 (conspiracy to violate the FCPA) and dismissed the Government's case in its entirety against one of the six defendants in the group. The jury began deliberating on January 13, 2012. As discussed here, on January 30, 2012, Judge Leon accepted a partial verdict, acquitting two of the defendants. On January 31, 2012, the Judge declared a mistrial as to the remaining three defendants when the jury was unable to break its deadlock (described here). The jury foreman provided an interesting description of the deliberations (discussed here), including the fact that the jury found nearly all of the prosecution witnesses to be evasive and combative (the Washington Post also took a look at the informant and agents in an article available here).
The case took yet another twist when, as described here, at a February 7, 2012 Status Conference regarding the trial of the next group of defendants, the prosecution team revealed that his superiors were examining the continued viability of the case, and would be making a decision on whether to continue the prosecution by February 21, 2012.
The trial in the O'Shea FCPA Case came to a sudden end when, on Monday, January 16, 2012, Judge Lynn Hughes granted defendant John O'Shea's motion for acquittal, dismissing the FCPA charges against him, as discussed here. A Press Release from defense counsel stated that Judge Hughes "found that the Government’s chief witness, … could not tie Mr. O’Shea to the alleged crimes," and that his conduct "was reasonably explained by lawful motives."
Following the acquittal of the FCPA charges, Mr. O'Shea still was alleged to have conspired to violate the FCPA, engaged in money laundering and created a false document to obstruct the Government's investigation. However, as discussed here, on February 9 2012, prosecutors filed a motion in federal court in Texas requesting that the remaining charges against him be dismissed. The Judge granted that motion the same afternoon.
Despite the disappointing results from the two trials, the Government and the SEC had some successes in the FCPA arena in the last month. As described here, on Monday, February 6, 2012, the SEC and DOJ announced settlements with a medical device company and its subsidiary stemming from alleged bribes paid to doctors in Greece for more than a decade. The U.S. subsidiary, Smith & Nephew Inc., agreed to pay a $16.8 million fine as part of a deferred prosecution agreement with the DOJ, while the English parent company, Smith & Nephew plc, agreed to settle the SEC’s charges by paying more than $5.4 million in disgorgement and prejudgment interest.
Last month, we included a lengthy discussion of the events in SEC's case against Citigroup Global Markets, Inc., which was seemingly settled in October 2011, only to have Judge Jed Rakoff reject the settlement. The SEC not only appealed that decision, but sought a writ of mandamus against the Judge, as well. The case remains pending before the Second Circuit, who first must decide whether to stay the District Court case while the interlocutory appeal proceeds (the issue was submitted to the Second Circuit's Motion Panel on January 17, 2012).
In a second case, Wisconsin federal judge Rudolph Randa issued a December 20, 2011 order 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 Citigroup. The issues in the Koss Corporation litigation did not include the "neither-admit-nor-deny" policy at the heart of Citigroup, but focused on specific language in the proposed Judgments. As discussed here, the SEC submitted a brief on January 24, 2012, defending the language and arguing that it should not be changed. The SEC's Memorandum was much more low-key in tone when compared to the brief it submitted in Citigroup. The more subdued approach was successful when, as discussed here, Judge Randa stated that the SEC's Brief "largely satisfies the Court’s concerns." He accepted the SEC's offer to revise the judgments to specifically include language from the consent order, and said that, while he continued to question whether the judgments will be final judgments, he "will not withhold … approval based on that concern."
The Courts were not the only ones looking at SEC settlements. As discussed here, a February 3, 2012 New York Times article by Edward Wyatt reported that over the last decade there have been "nearly 350 instances where the [SEC] has given big Wall Street institutions and other financial companies a pass on … sanctions." The article identified examples of when large Wall Street companies, including JPMorganChase, Goldman Sachs and Bank of America, have avoided certain punishments specifically aimed at fraud cases and continued to have certain advantages reserved for the most dependable companies. The waiver of certain sanctions by the SEC has allowed these financial giants to continue to use rules that let them instantly raise money publicly, without waiting weeks for government approvals, to remain protected under the Private Securities Litigation Reform Act of 1995, and to continue managing mutual funds and help small, private companies raise money from investors.
As discussed here, on January 18, 2012, prosecutors and the SEC brought separate cases naming 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 seven individuals, who worked at three different hedge funds and two other investment firms, in an industry dubbed "Perfect Hedge," used the information regarding Dell, to net more than $60 million in illegal profits for the three hedge funds. The U.S. Attorney called trading in Dell shares it 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 case named all seven men as defendants, along with two of the hedge funds. As discussed here, the SEC announced on January 23, 2012 that one of those hedge funds, Diamondback Capital Management LLC, agreed to settle charges with the Commission by paying more than $9 million. Diamondback has also entered a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.
If you thought the conviction and lengthy sentence of Raj Rajaratnam was the end of the Galleon Management cases … well, think again. As discussed here, on Friday, February 10, 2012, the U.S. Attorney for the Southern District of New York and the SEC announced charges against Douglas F. Whitman, the head portfolio manager at Whitman Capital, LLC, related to alleged insider trading. It is claimed that Mr. Whitman was tipped by his friend and neighbor, Roomy Khan – who allegedly provided him with the same information that she provided Raj Rajaratnam regarding Polycom, Inc and Google, Inc.
The last thirty days were rough for some accountants. As discussed here, on February 8, 2012, the Public Company Accounting Oversight Board ("PCAOB") announced that it had settled a proceeding with Ernst & Young LLP by censuring the accounting firm and imposing a $2 million penalty upon it, which was the largest civil money penalty ever imposed by the agency. In addition, four of E&Y's current and former partners were sanctioned for violating PCAOB rules and standards.
In two lawsuits in federal court in Indiana and two administrative proceedings filed on January 30, 2012 and described here, the SEC accused employees and accountants of Thornton Precision Components (based in Sheffield, England) of an accounting fraud "so pervasive that it distorted the financial statements of the parent company," Symmetry Medical Inc., an Indiana-based manufacturer of medical devices and aerospace products. In those proceedings, the Commission settled charges with Symmetry and eight individuals, including the parent company's CEO and the subsidiaries' outside accountants.
Whistleblower Retaliation Case
As described here, in a February 3, 2012 Opinion, the First Circuit Court of Appeals reversed a Massachusetts federal court decision and held that, while the whistleblower protections of the Sarbanes-Oxley Act apply to employees of "public companies" (i.e., a company with registered securities or one that files reports under Section 15(d) of the Exchange Act), they do not apply to an employee of a contractor or subcontractor of such a public company.
Finally, as discussed here, on January 11, 2012, Oregon Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation 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. His recommendation is to dismiss the suit without prejudice, which would allow plaintiffs an opportunity to amend the complaint. Plaintiffs objected to the decision on January 25, 2012, and it will now be considered by District Judge Mosman.