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Category Archives: Executive Officer Matters

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Should entrepreneurs care about crowdfunding? It depends on the crowd.

Posted in Executive Officer Matters, General Business News, JOBS Act, SEC News

It has been more than two years since the JOBS Act was passed and almost nine months since the SEC proposed crowdfunding rules — but still no final rules. Should entrepreneurs care? Probably not. The proposed SEC rules are burdensome. The rules limit the total amount raised to $1 million in any rolling 12-month period, and moderate-income investors would be limited to a $5,000 investment (at the most). Additional proposed rules require audited financials (for some offerings), limits on advertising, and filings with the SEC, among other requirements. Entrepreneurs with great ideas should not settle for these types of investments.

Crowdfunding for accredited investors already exists, and it may fill an important funding gap for growing businesses that have not attracted angel investors and are not ready for venture capital or private equity. Not all startups are tech based, and not all angel investors in a particular entrepreneur’s community know what a good investment looks like. But a well-curated accredited crowdfunding platform can provide exposure to a lot of potential accredited investors.…


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Judge in Lehman Class Action Orders Officer Defendants to Provide (In Camera) Information Regarding Their Net Worth As Part of Settlement Process UPDATED: May 24 Ruling

Posted in Executive Officer Matters, Private Securities Litigation

When asked to approve a $90 million settlement (which was to be paid by insurance coverage) between class action plaintiffs and the directors and officers in the In re: Lehman Bros. Sec. and ERISA Litig., Judge Lewis Kaplan issued a May 3, 2012 Memorandum and Order directing certain defendants (five officers), who had already allowed a retired Judge (specially retained to assist in the parties’ discussions) to review information regarding their assets, to provide that same financial information to the Court for an in camera review. Judge Kaplan will review that information in order to make a determination regarding the fairness of the settlement.

UPDATE: After reviewing the information, in a Memorandum and Order on May 24, 2012, Judge Kaplan approved the settlement, holding that, although he was "concerned at the lack of any contribution by the former director and officer defendanst to the settlement, Lead Counsel’s judgment that the $90 million bird in the hand is worth at least as musch as whatever is in the bush, discounted for the risk of an unsuccessful outcome of the case, is rasonable." …


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SEC Files Case Against Chinese Company For Misrepresentations Regarding the Use of Its IPO Proceeds

Posted in Executive Officer Matters, SEC Enforcement Cases

On Monday, April 23, 2012, the SEC announced that it had filed a case against SinoTech Energy Limited, an oil field services company based in China, with intentionally misleading investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC also charged CEO Guoqiang Xin and former CFO Boxun Zhang for their involvement in the fraud. The Complaint, filed in federal court in Louisiana, alleges that the company’s IPO registration statement misled investors about the acquisition and value of a key asset lateral hydraulic drilling units ("LHD Units") that are central to its business. In addition, the SEC charged Qingzeng Liu, SinoTech’s chairman and controlling shareholder, with misappropriating at least $40 million of SinoTech’s cash between June, 2011 and August 2011.…


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SEC Files SOX Clawback Case Against Former CEO and CFO of Surgical Products Manufacturer

Posted in Compensation Matters, Executive Officer Matters, Sarbanes-Oxley Act, SEC Enforcement Cases

On Monday, April 2, 2012, the SEC announced that it has filed suit in federal court in Austin, Texas against Michael A. Baker, the former CEO of ArthroCare Corporation, and Michael Gluk, the former CFO, to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. As the SEC pointed out in its press release, the two men "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008."…


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The SEC Settles a Case With an Executive at United Commercial Bank, But Gives Him Credit For His Substantial Assistance

Posted in Executive Officer Matters, Market Crisis Cases, SEC Enforcement Cases, SEC Settlements: Policy, Issues and Disputes

On March 27, 2012, the SEC announced that it has sued John Cinderey, a former executive vice president at United Commercial Bank for aiding and abetting securities law violations relating to falsifying books and records and misleading the bank’s auditors. The Commission settled with Mr. Cinderey, who agreed to be permanently enjoined from violating provisions of the federal securities laws. The settlement reflected the credit given to Mr. Cinderey "for his substantial assistance in the investigation," along with his agreement to cooperate to assist in an ongoing related enforcement action.…


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Citing The Example of an AXA Rosenberg Executive, the SEC Provides Regarding How Individuals May Receive Credit Under the SEC’s Cooperation Initiative

Posted in Executive Officer Matters, SEC Enforcement Cases, SEC Settlements: Policy, Issues and Disputes

Normally, when the SEC posts a Litigation Release on its website, it announces a new case which it has filed, or settlement or judgment in a previously-announced case. One of the SEC’s Litigation Releases posted on March 19, 2012 was unique in that it did not announce any of those usual events, but instead was issued "to provide guidance regarding the circumstances under which individuals may receive credit as part of the SEC’s Cooperation Initiative." The announcement this week focused on the acts of a un-named (and un-charged) senior executive at AXA Rosenberg, an institutional money manager that specialized in quantitative investment strategies, who cooperated with the SEC, leading to charges regarding a material error in a computer code that was used to manage client assets.…


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SEC Charges Three Mortgage Company Executives With A Scheme Related To A False Annual Report During Designed to Cover Up the Company’s Financial Crisis

Posted in Executive Officer Matters, Market Crisis Cases, SEC Enforcement Cases

On Tuesday, March 13, 2012, the SEC announced that it had filed claims against the CEO, CFO and Chief Accounting Officer of Thornburg Mortgage Inc., which used to be one of the nation’s largest mortgage companies, alleging that the three executives hid "the company’s deteriorating financial condition at the onset of the financial crisis" in the company’s Annual Report. According to the Commission, "[t]he plan backfired and the company lost 90 percent of its value in two weeks," and ultimately filed for bankruptcy. The case is the latest brought by the SEC relating to the market crisis.…


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Federal Judge in Oregon Upholds Dismissal of “Say-on-Pay” Lawsuit Against Umpqua Board

Posted in Compensation Matters, Dodd-Frank Act, Executive Officer Matters, Private Securities Litigation, Say-on-Pay Issues, Shareholder News

In an Opinion and Order dated February 23, 2012, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. Magistrate Judge Acosta recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs’ failure to make a presuit demand was not excused under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.…


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Three Individuals Are Sentenced For Their Involvement in the Bonny Island / TSKJ Joint Venture FCPA Case

Posted in Criminal Charges in Securities Cases, Executive Officer Matters, Foreign Corrupt Practices Act

Another chapter ended in the series of FCPA criminal prosecutions arising out of the TSKJ Joint Venture this week, when Texas federal Judge Keith P. Ellison sentenced three men for their role in the portion of the case involving Kellogg Brown & Root. On Thursday, February 23, 2012, former KBR executive, Albert "Jack" Stanley was sentenced to 30 months in jail, while Jeffrey Tesler, who controlled an entity through which payments were funneled, was sentenced to 21 months in prison. On Wednesday, February 22, 2012, Wojciech Chodan, the former Vice President of M.W. Kellogg, Ltd., received a sentence of one year unsupervised probation.…


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SEC Brings Case Against Indiana Manufacturer and Eight Executives and Accountants for Accounting Fraud at English Subsidiary

Posted in Compensation Matters, Executive Officer Matters, Sarbanes-Oxley Act, SEC Enforcement Cases

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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Federal Magistrate Judge in Oregon Recommends Dismissing “Say-on-Pay” Lawsuit Against Umpqua Board

Posted in Compensation Matters, Dodd-Frank Act, Executive Officer Matters, Say-on-Pay Issues, Shareholder News

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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Two Interesting Insider Trading Cases Against Former CEOs – One Involving Shares of a Privately Held Company, the Other Involving a Polygraph Test

Posted in Executive Officer Matters, Insider Trading, SEC Enforcement Cases

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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The Top 10 Most Intriguing Federal Securities Litigation Stories in 2011 (Part 1 of 2)

Posted in Compensation Matters, Criminal Charges in Securities Cases, Executive Officer Matters, FINRA, Foreign Corrupt Practices Act, Sarbanes-Oxley Act, SEC Enforcement Cases, SEC News, SEC Settlements: Policy, Issues and Disputes, Shareholder News, Trends

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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SEC Settles Clawback Case Against Former CSK Auto Executive at the Second Attempt

Posted in Compensation Matters, Executive Officer Matters, Sarbanes-Oxley Act, SEC Enforcement Cases, SEC Settlements: Policy, Issues and Disputes, Trends

On Tuesday, November 15, 2011, the SEC announced that it had reached a settlement with Maynard L. Jenkins, the former chief executive officer of CSK Auto Corporation, who agreed to re-pay approximately $2.8 million of the over $4 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. This settlement, which still most be approved by the Court, comes almost four months after the SEC rejected a previous settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint (as previously discussed here).…


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Settlement in Chesapeake Energy Derivative Action: CEO Keeps $75 Million Bonus, But Agrees to Buys Back $12 Million Art Collection

Posted in Compensation Matters, Executive Officer Matters, Private Securities Litigation, Shareholder News

On Wednesday November 2, 2011, several media outlets reported on the details of the settlement in the shareholders derivative action filed against executives of Chesapeake Energy Corporation. The case, which was filed in state court in Oklahoma in April 2009, was on appeal after the claims were dismissed in February 2010. Under the terms of the settlement, CEO Aubrey McClendon, whose compensation in 2008 included a $75 million bonus (following a six-month period where the company’s share price fell from $74 to $16.17 a share), will buy back an art collection which he sold to the company for approximately $12 million in 2008.…


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Eleventh Circuit Rules That Insurance Policy Does Not Cover Legal Fees Incurred During SEC Investigation

Posted in Executive Officer Matters, General Business News, SEC Enforcement Cases

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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Recent Articles Discuss Two Trends in Securities Enforcement: Increasing Sentences in Insider Trading Cases and the Possible End of An Era in Backdated Options Cases

Posted in Compensation Matters, Criminal Charges in Securities Cases, Executive Officer Matters, Insider Trading, SEC Enforcement Cases, Trends

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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Ohio Federal Judge Allows Say-on-Pay Lawsuit to Proceed

Posted in Compensation Matters, Dodd-Frank Act, Executive Officer Matters, Ohio Securities News, Private Securities Litigation, Say-on-Pay Issues, Shareholder News

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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Justice Department Announces Settlement With CSK Auto: $20.9 Million Fine and a Non-Prosecution Agreement In Earnings Manipulation Case

Posted in Compensation Matters, Criminal Charges in Securities Cases, Executive Officer Matters, Sarbanes-Oxley Act, SEC Enforcement Cases

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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SEC Settles Clawback Case With the Former CFO of Beazer Homes USA

Posted in Compensation Matters, Dodd-Frank Act, Executive Officer Matters, Sarbanes-Oxley Act, SEC Enforcement Cases

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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SEC Brings Fraud Case Against Biopharmaceutical Company, Three Other Companies and Four Executives For Misleading Investors About Sole Product and Insider Trading

Posted in Executive Officer Matters, Insider Trading, SEC Enforcement Cases

On Monday, August 1, 2011, the SEC filed suit against eight defendants for making false statements in public filings regarding the status of the human clinical trials for the drug SF-1019 by Argyll Biotechnologies LLC. The statements did not disclose that the Food and Drug Administration had issued clinical holds on testing for the drug, which is derived from goat blood and was Argyll’s sole product. In addition, three executives were charged with insider trading for selling shares of Immunosyn Corporation (the company which made the false filings) for $20 million during the same period. SEC v. Ferrone, No. 11-cv-05223 (N.D. Ill. Filed Aug. 1, 2011).…


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Negotiations in SEC Clawback Case Collapse When Commission Rejects Settlement Proposal From Its Own Staff

Posted in Compensation Matters, Executive Officer Matters, Sarbanes-Oxley Act, SEC Enforcement Cases, SEC Settlements: Policy, Issues and Disputes, Trends

The SEC’s Commissioners have rejected a proposed settlement to "claw back" a portion of the bonuses and stock sale profits a former CEO received during a period of accounting fraud. The SEC had previously described the case as the first clawback case under the Sarbanes-Oxley Act against an individual who was not alleged to have otherwise violated the securities laws. The negotiations failed when, according to a report in the Washington Post (available here), the SEC rejected the settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint.…


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Former Chairman of Mortgage Lender Taylor, Bean & Whitaker Sentenced to 30 Years in Prison For His Role In Market Crisis Case

Posted in Criminal Charges in Securities Cases, Executive Officer Matters, Market Crisis Cases

On June 30, 2011, Lee Farkas, the former Chairman of Taylor Bean & Whitaker ("TBW"), was sentenced to 30 years in prison for his role the failure of his company and of Colonial Bank. While the sentence fell short of the Government’s request for a sentence of 385 years, it is likely that the 58-year old Mr. Farkas will spend the rest of his life in jail. 


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Former Chairman of mortgage lender Taylor, Bean & Whitaker convicted for scheme that contributed to his company’s collapse and the failure of Colonial Bank

Posted in Criminal Charges in Securities Cases, Executive Officer Matters, Market Crisis Cases

On Tuesday, April 19, 2011, in one of the first criminal trials arising out of the market crisis, a federal jury in Alexandria, Virginia convicted Lee Farkas of: one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; four counts of wire fraud; and three counts of securities fraud. The charges arose from Mr. Farkas’ role in a $2.9 billion fraud scheme that led to the failure of Colonial Bank (which was one of the 25 largest banks in the United States in 2009), and Mr. Farkas’ company, Taylor Bean & Whitaker ("TBW"), one of the largest privately held mortgage lending companies in 2009.…


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