Last week, the SEC reached a settlement with CR Intrinsic Investors, LLC, which tore up the record books on insider trading cases. CR Intrinsic, an affiliate of SAC Capital, agreed to pay over $600 million to settle charges of using nonpublic information about clinical pharmaceutical trials to earn profits of over $274 million.
Continue Reading...State of Illinois Charged With Misleading Muni Bond Investors
The SEC charged the state of Illinois with failing to inform municipal bond investors of potential issues with its pension funding plan. The state failed to disclose that its pension obligations were at risk of “structural underfunding” issues associated with the state’s statutory funding plan, and misrepresented the overall risk associated with the pension’s financial condition. Illinois offered $2.2 billion in bonds during 2005 to 2009.
Continue Reading...Mark Cuban Insider Trading Case Set For Trial
Mark Cuban, the charismatic owner of the NBA’s Dallas Mavericks, lost his attempt to dismiss the SEC’s insider trading case against him, sending it to trial. The district court judge in Dallas said the ruling was “in some respects a close one.” Mr. Cuban is charged in connection with a 2004 sale of his stock in Mamma.com, allegedly after learning non-public information about an upcoming equity offering. Read the original complaint here.
Continue Reading...Second Circuit Hears Oral Argument on SEC-Citigroup Settlement
Last November, a federal judge in New York rejected a proposed settlement between the SEC and Citigroup in connection with charges of misleading investors at the beginning of the financial crisis. This week the Second Circuit Court of Appeals heard oral arguments in the case, which saw the SEC and Citigroup join forces against the District Court. Jim Hamilton has a good analysis of the proceedings here.
Continue Reading...On February 15, 2013, the Securities and Exchange Commission ("SEC") issued a press release announcing that it had obtained an emergency court order to freeze assets in a Swiss-based trading account that was used to gain more than $1.7 million from insider trading activities in connection with yesterday's announced acquisition of H.J. Heinz Company.
In a complaint filed in Federal Court in Manhattan, the SEC alleges that, prior to any public disclosure of Berkshire Hathaway's and 3G Capital's agreement to acquire Heinz for approximately $28 billion, unknown traders purchased call options on the day prior to the announcement of the merger. The announcement of the merger caused Heinz’s stock to increase nearly 20 percent on substantially increased trading volume from the prior day, allowing the traders to realize substantial gains from their trades. The SEC further alleges that the traders were in possession of material nonpublic information about the Heinz acquisition when they purchased out-of-the-money Heinz call options prior to the announcement. Additionally, these trades were made through an account that had no history of trading Heinz securities during the last six months, and on in a period where there was minimal trading in activity in Heinz call options.
SEC Settles with Pond Securities In Market Manipulation Case
Four defendants - Andreas Badian, Jeffrey Graham, Pond Securities, and Ezra Birnbaum - agreed to settle charges of market manipulation, the SEC announced this week. In a complaint filed in April 2006, the SEC alleged that the defendants manipulated the stock of Sedona Corporation and violated record-keeping rules by falsely creating trade tickets. Without admitting or denying the allegations, the defendants agreed to disgorgement of profits and civil penalties of over $700,000.
Read the SEC release here.
Continue Reading...Nekekim Corp. and CEO Charged In Fraudulent Gold Mining Scheme
The SEC brought charges against California corporation Nekekim Corp. and its CEO Kenneth Carlton alleging both defrauded investors by claiming they had “unconventional” methods to extract gold from a “complex ore.” According to the SEC complaint, Carlton and Nekekim advertized that their “physicist” – who had no scientific background – had developed a proprietary technique to extract gold. Using test results from discredited labs and withholding negative results from reputable labs, Nekekim and Carlton allegedly misrepresented that their mines contained significant gold deposits. Hundreds invested in the scheme, which ultimately failed to produce mining revenue.
Read the complaint here.
Continue Reading...Following the short holiday week, below are notable developments in SEC enforcement activity for the week of Dec. 24-28.
Insider Trading: One More Charged for IBM-SPSS Merger Scheme
The SEC has charged another broker for taking part in an insider trading scheme connected to IBM’s acquisition of SPSS. Trent Martin learned of the impending merger from an attorney friend working on the deal, who confided in Martin for “moral support, reassurance, and advice,” according to the SEC complaint. Martin allegedly purchased SPSS shares the first day he learned of the deal, then tipped his roommate, Thomas Conradt, who was charged earlier this month.
Read the SEC complaint here.
Continue Reading...Below are notable developments in SEC enforcement activity for the week of December 3-7, 2012.
Big Lots CEO Resigns Amidst SEC Inquiry
The CEO of Central Ohio-based Big Lots (NYSE: BIG) is under scrutiny by the SEC surrounding his sale of over $10 million in company stock prior to a negative quarterly earnings report. Big Lots stock fell 24 percent as a result of the April 2012 earnings report. Steven Fishman will retire as soon as a replacement is found, after serving as CEO since 2005.
Article here.
Chinese Affiliates of Big Four Accounting Firms Charged For Refusing To Produce Documents
The SEC announced charges this week against the Chinese affiliates of the Big Four accounting firms for refusing to produce audit records for Chinese companies under investigation for violations of accounting fraud. According to the SEC’s administrative order, the four firms (as well as BDO) have refused to cooperate with the SEC investigations for months. For the Shanghai office of Deloitte & Touche, these recent charges are similar to those brought by the SEC in May and September.
See the order here.
Continue Reading...Below are updates on notable SEC enforcement activity from the week of November 26-30, 2012:
“White-Out” Firm Found Guilty
Jeffrey Liskov and his firm, EagleEye Asset Management, LLC were found guilty of securities fraud by a jury in Boston. The Plymouth, MA firm was found guilty of misleading investors by misrepresenting the risks associated with investments in the foreign currency exchange (“forex”) market.
The Commission alleged that Liskov and EagleEye persuaded “older” clients to shift investments from low-risk securities into high-risk forex positions based on misleading information. Despite racking up huge losses for the clients, Liskov earned over $300,000 in performance fees. Among the allegations were that Liskov used “white-out” to change names and dates on forms in order to, among other things, fraudulently transfer client assets into forex trading accounts.
After four hours of deliberation, the jury found Liskov and EagleEye liable for violations of Section 10(b) of the Exchange Act, Rule 10b-5, and the Advisers Act.
For more, read the SEC Release.
Insider Trading: Oil Company CEO Charged
Former CEO of Denver-based oil company Delta Petroleum Corporation was charged with insider trading. In the run-up to California-based investment firm Tracinda taking a 35% stake in Delta, former CEO Roger Parker tipped a close friend, who in turn tipped friends and family, according to the SEC complaint. Delta’s stock rose 20% in value once the Tracinda investment was announced. The complaint also alleges Parker provided early insights into a positive earnings report. The SEC obtained emails and phone records in connection with the alleged tipping.
For more, read the SEC Release.
Continue Reading...On September 14, 2012, Securities and Exchange Commission ("SEC") announced that it had brought charges against the New York Stock Exchange and its parent company NYSE Euronext ("NYSE") for compliance failures that improperly gave certain customers a "head start" on trading information. A graphic analysis of the NYSE's improper practices is attached. The NYSE agreed to a $5 million penalty and significant undertakings to settle the SEC's charges. This case marks the first time that the SEC has brought charges against a national securities exchange that resulted in the payment of monetary damages.
Pursuant to Regulation NMS, the SEC prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in consolidated feeds, which broadly distribute trade and quote data to the public. The purpose of these provisions are to ensure that the public has fair access to current market information about stock prices and trades at the same time.
The SEC Order alleges that the NYSE's practices violated Rule 603(a) of Regulation NMS which "requires that exchanges distribute market data on terms that are 'fair and reasonable' and 'not unreasonably discriminatory.'" The SEC alleges that "[o]ver an extended period [beginning in June 2008], NYSE violated Rule 603(a) in connection with the release of certain data through two proprietary feeds. The primary reason for the disparity in the release of the information appears to be due to an internal architecture issue where the proprietary feed to customers was faster than the path used to send quotes to the network processors.
The SEC Order noted that the "NYSE did not take adequate steps to comply with Rule 603. Although the business units that designed NYSE’s market data systems attempted to ensure that the systems complied with Rule 603, NYSE’s compliance department played no role in the design, implementation, or operation of the systems. NYSE also did not systematically monitor its data feeds to ensure they complied with Rule 603, and had no written policies and procedures concerning the rule."
On August 16, 2012, in a Complaint filed in the U.S. District Court in the Northern District of California, the Securities and Exchange Commission ("SEC") charged Oracle Corporation with violating the Foreign Corrupt Practices Act ("FCPA"). The Complaint alleges that, from 2005 to 2007, employees of an Indian subsidiary of Redwood Shores, a California-based enterprise systems firm, arranged transactions with India's government in a way that enabled Oracle India Private Limited's distributors to secretly "park" approximately $2.2 million of transaction proceeds in side funds. The Complaint alleges that Oracle India employees then directed its distributors to make unauthorized payments out of these side funds to local vendors, who operated merely as storefronts that did not provide any services to Oracle. It is further alleged that these payments were documented by Oracle's subsidiary using fake invoices.
The SEC's Complaint alleges that (1) Oracle violated the FCPA's books and records provisions and internal controls provisions by failing to accurately record the side funds that Oracle India maintained with its distributors, and (2) Oracle failed to devise and maintain a system of effective internal controls that would have prevented the improper use of company funds. Without admitting or denying the SEC's allegations, Oracle agreed to pay a $2 million penalty to settle the SEC's charges.
On August 7, 2012, the Securities and Exchange Commission (the "SEC") charged Pfizer Inc. with violating the Foreign Corrupt Practices Act ("FCPA"). The SEC Complaint alleges that employees and agents of Pfizer’s subsidiaries in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia made improper payments to foreign officials to obtain regulatory and formulary approvals, sales, and increased prescriptions for the company’s pharmaceutical products. The Complaint further alleged that there were efforts to conceal the bribery by improperly recording the transactions in accounting records as legitimate expenses for promotional activities, marketing, training, travel and entertainment, clinical trials, freight, conferences, and advertising.
The SEC filed a separate Complaint charging another pharmaceutical company that Pfizer acquired several years ago – Wyeth LLC – with its own FCPA violations. Pfizer and Wyeth agreed to separate settlements in which they will pay more than $45 million combined to settle their respective FCPA charges.
On August 2, 2012, the Securities and Exchanges Commission ("SEC") charged an executive in the treasury department at Bristol-Myers Squibb with insider trading. The Complaint filed in the United States District Court of New Jersey alleges that Robert D. Ramnarine made more than $300,000 in illegal profits by misusing nonpublic information he obtained while helping Bristol-Myers Squibb evaluate whether to acquire three other pharmaceutical companies (Pharmasset Inc., Amylin Pharmaceuticals Inc., and ZymoGenetics Inc.).
The SEC alleged that Ramnarine used multiple personal brokerage accounts to illegally trade in stock options of these potential target companies. The SEC further alleged that, prior to his trading, Ramnarine conducted Internet research from his office computer to determine whether he could be detected by regulators -searching for such phrases as “can stock option be traced to purchaser” and “illegal insider trading options trace” and viewing such articles as “Ways to Avoid Insider Trading.” “Ramnarine tried to educate himself about how the SEC investigates insider trading so he could avoid detection, but apparently he ignored countless successful SEC enforcement actions against similarly ill-motivated individuals who paid a heavy price for their illegal trading,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.
The SEC is seeking a court order to freeze Ramnarine’s brokerage account assets. The U.S. Attorney’s Office for the District of New Jersey announced that it is pursuing a parallel criminal action and the arrest of Ramnarine.
As we have previously mentioned, the developments in the SEC's insider trading case against Mark Cuban have been worth watching closely, particularly because Mr. Cuban is one of the rare individual defendants who has the financial ability to mount a defense in such litigation against the SEC, and his counsel has raised numerous interesting defenses and issues that could impact cases in the future, especially in the area of discovery He has filed several motions attempting to obtain copies of the notes and summaries of SEC personnel who conducted interviews during certain Commission investigations. On June 6, 2012, Mr. Cuban filed his third Motion to Compel in the case, requesting that the Court: (1) reconsider a prior ruling regarding the production of SEC interview notes and summaries taken in the course of investigating Mr. Cuban; (2) compel the production of SEC’s interview notes and summaries from interviews taken in the course of the Mamma.com investigation: and (3) compel the production of certain exhibits to the SEC Office of Inspector General Report into potential SEC misconduct during the investigation of Mr. Cuban.
Continue Reading...On Monday, June 4, 2012, New Jersey Federal Judge Katharine Hayden sentenced Matthew Kluger (a former associate at several prominent law firms) to twelve years in prison for his role in a insider trading scheme. One of his co-conspirators, Garrett Bauer (a Wall Street trader), received a nine-year sentence. On Tuesday, June 5, 2012, Judge Hayden sentenced Kenneth Robinson, another co-conspirator (who cooperated and wore a wire to obtain evidence against Messrs. Kluger and Bauer) to 27 months in prison. As U.S. Attorney Paul Fishman pointed out, Mr. Kluger's sentence "is the longest handed out for" insider trading. Remarkably, the prison term for Mr. Kluger (who pled guilty and apparently recovered less than $1 million in the scheme) eclipsed the eleven year sentence received by Raj Rajaratnam (who did not plead guilty and earned tens of millions of dollars in his scheme).
Continue Reading...An article by Ben Protess and Azam Ahmed of the New York Times examined the new techniques by used by the SEC to catch those engaging in insider trading. As the article explained, the Commission "is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator." As discussed here, last month, Devin Leonard of BusinessWeek profiled Sanjay Wadhwa, a deputy chief of the SEC's market abuse group, and took a close look at the insider trading investigation of Raj Rajaratnam (and the many leads that investigation has yielded). That article and the Times piece reflect what the SEC is doing to aggressively pursue insider trading defendants.
Continue Reading...On Monday, May 14, 2012, both the SEC and the Citigroup Global Markets, Inc. filed their appellate briefs (available here and here) in the three consolidated appeals regarding Judge Jed Rakoff's November 28, 2011 Opinion and Order rejecting the SEC's proposed settlement with Citigroup. Both entities argued that Judge Rakoff committed error in his Opinion and Order, arguing, among other things, that it was contrary to well-established law to reject a consent settlement with a federal agency because it was not supported by admitted or judicially established facts. Both parties also argued that the settlement between them was fair, reasonable and adequate. A Brief in support of the district court’s position will be filed in August 2012.
Continue Reading...On May 9, 2012, the SEC announced that it has filed an Administrative Proceeding against Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") for its refusal to provide the agency with audit work papers in connection with the Commission's investigation of the accounting firm's client for alleged accounting fraud. The Administrative Proceeding was filed while the Commission is in the midst of a subpoena enforcement action against the same accounting firm, that is scheduled to be heard in federal court in early June. The new matter is latest proceeding in the dispute over whether the SEC can compel the Chinese accounting firm to respond to its subpoena – the penalty which D&T Shanghai could face for its failure to comply is censure or being denied the ability to appear before the Commission.
Continue Reading...The SEC filed and settled two cases this week in which insiders tipped family members about events at publicly traded companies. In both cases, the insider and the tippees settled with the Commission, paying far more than any profit earned.
• On Tuesday, May 8, 2012, the SEC filed a case against Mohammed Mark Amin, a Hollywood movie producer, and his brother, cousin, and three other friends and business partners for insider trading in the shares of DuPont Fabros Technology Inc., a company in which Mr. Amin served on the board of directors. Those who traded earned approximately $618,000, but the six defendants settled by paying nearly $2 million.
• On Monday, May 7, 2012, the Commission filed a case against Angela Milliard, a former paralegal at Semitool Inc., a semiconductor company in Montana, and her father for trading on inside information about the 2009 acquisition of the company. The daughter and father (who earned $67,000) agreed to settle the SEC's case by paying more than $175,000.
Continue Reading...Prosecutors and the SEC work quite vigorously to recover ill-gotten gains from those who have committed securities fraud, with the ultimate goal of compensating investors. A conviction in a criminal case or judgment in civil case brought by the SEC may result in a large number, like the $53.8 million forfeiture judgment in the criminal case and the $92 million civil judgment against Raj Rajaratnam (discussed here), but that is only the first step. A May 3, 2012 Press Release from DOJ provides some insight into this process (and how long it may take) – following a 2007 conviction of Joseph Nacchio, the former CEO of Qwest Communications International Inc., based on events which took place between 1999 and 2002, DOJ announced that it "has returned approximately $44 million to victims of [that] securities fraud scheme."
Continue Reading...In a Memorandum Order entered on May 1, 2012, Judge Jed Rakoff formally denied a motion to compel by Rajat Gupta and Raj Rajaratnam, who were seeking an order that the SEC produce documents concerning settlement negotiations between the Commission and cooperating witnesses. In an April 11, 2012 telephone conference, Judge Rakoff tentatively ruled in the Commission's favor, but allowed the parties to submit letter briefs on the issue. In the Memorandum Order, Judge Rakoff confirmed his tentative ruling, rejecting the defendants' argument that the information from the negotiations could be used to prove bias, stating that "[t]he best evidence of bias in a cooperator's testimony comes from the actual agreement he struck with the SEC, not from his lawyer's attempt to get him a good deal."
Continue Reading...On Wednesday, April 25, 2012, DOJ announced that Garth Peterson, a former managing director for Morgan Stanley’s real estate business in China, pled guilty in federal court in Brooklyn, New York for participating in a conspiracy to evade the internal accounting controls which the company was required to maintain under the FCPA. Because Morgan Stanley had a system of internal controls designed to assure that its employees were not bribing government officials, the Government did not prosecute the company. The SEC also announced that it brought and settled a case against Mr. Peterson.
Continue Reading...An article by Scott Patterson and Jenny Strasburg in the Wall Street Journal today revealed that, during an investigation of Pipeline Trading Systems LLC, an SEC attorney showed a witness a notebook which included handwritten notes from a whistleblower, and the witness recognized the handwriting and was able to tell his employers who the whistleblower was. The Whistleblower agreed to speak to the Journal and be identified, and detailed how he was treated both before and after he blew the whistle on Pipeline's activities. UPDATE: As discussed below, the SEC denies inadvertently disclosing the whistleblower's identity.
Continue Reading...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.
Continue Reading...An April 19, 2012 article by Devin Leonard of BusinessWeek profiles Sanjay Wadhwa, currently a deputy chief of the SEC's market abuse group. The article takes a close look at the insider trading investigation of Raj Rajaratnam (and the many leads that investigation has yielded). Although many bloggers point out situations where the SEC or prosecutors are criticized (this blog included, in entries such as here and here), the BusinessWeek article, entitled "The SEC: Outmanned, Outgunned and On a Roll," is instructive in highlighting how the SEC overcomes disadvantages and what it has done to improve its investigative efforts in recent years.
Continue Reading...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."
Continue Reading...On March 26, 2012, Judge Jed Rakoff issued an Opinion and Order in the two related cases against Rajat Gupta, granting in part a Motion to Compel and ordering the SEC to turn over to the U.S. Attorney's Office materials relating to 44 witnesses (who were interviewed by the SEC and prosecutors jointly during the investigations of Mr. Gupta). He further ordered the prosecutors to review those memoranda and promptly turn over to the defense any material under Brady v. Maryland, 373 U.S. 83 (1963) (material exculpatory evidence to the defense – including evidence that could allow the defense to impeach the credibility of a prosecution witness). The ruling identifies another possible method (albeit a limited one) for a party seeking discovery from the SEC's investigative file).
Continue Reading...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.
Continue Reading...On Friday, March 23, 2012, the SEC filed a subpoena enforcement action in federal court in California against Wells Fargo & Company. The Commission is investigating Wells Fargo’s sale of nearly $60 billion in residential mortgage-backed securities ("RMBS") to investors. The proceeding is unusual in that, while the Commission was still attempting to obtain information from Wells Fargo which it sought in investigative subpoenas, it sent Wells Fargo a "Wells Notice," stating that the Commission staff was "considering recommending" an enforcement action against the bank. When the SEC continued to press Wells Fargo for responses to the subpoenas, the company responded that it no longer thought a response was necessary while the Wells Process was ongoing. As a result, the Commission filed the subpoena enforcement action, arguing that the issuance of a Wells Notice did not forgive Wells Fargo from responding to the subpoenas.
Continue Reading...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.
Continue Reading...On March 14, 2012, the SEC announced that it had filed a complaint in federal court in San Francisco and an Administrative Proceeding relating to private investment funds which were established to acquire the shares of Facebook and other Silicon Valley firms which were privately-held. The Commission's charges included allegations that investors were misled and the funds and their managers pocketed undisclosed fees and commissions. According to the Commission, the fund managers raised more than $70 million from investors. The Commission also brought an Administrative Proceeding against an online service that matched buyers and sellers of pre-IPO stock, charging the entity with engaging in securities transactions without registering as a broker-dealer. The cases appear to be the first of their kind relating to the purchase of shares in the pre-IPO market.
Continue Reading...This morning, the Second Circuit's Motion Panel granted the SEC's motion to stay the District Court proceedings in the litigation against Citigroup Global Markets, Inc. while the appellate court considers whether it should set aside Judge Rakoff's decision refusing to approve the settlement between the parties. Specifically, the Court of Appeals found that the Commission and Citigroup "made a strong showing of likelihood of success" in either their appeals or petition for mandamus. The Court also stated that the SEC and Citigroup have shown "serious, perhaps irreparable, harm sufficient to justify grant of a stay." According to the Court, a stay would not substantially injure any other persons. The Court also found that the SEC's "assessment of the importance of its settlement to the public interest" was entitled due deference. Because it granted the stay of the lower court proceedings, the Court also ruled that there was it was not necessary to expedite the appellate proceedings. Finally, the Court directed the Clerk of the Court "to appoint counsel, who will advocate for upholding the district court’s order."
Continue Reading...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.
Continue Reading...On Monday, March 5, 2012, the SEC announced that it had filed two separate cases, charging William Duncan, a California-based insurance broker, and John Williams, a Pennsylvania-based tax manager, with insider trading in the shares of Hi-Shear Technology Corporation ("Hi-Shear"). Both men obtained material confidential information regarding Hi-Shear’s proposed acquisition by Chemring Group PLC ("Chemring") and purchased Hi-Shear shares before the September 16, 2009 announcement of the transaction. Both men agreed to settle with the Commission.
Continue Reading...A March 2, 2012 article by Joshua Gallu on Bloomberg.com states that the SEC's claim that there has been an increase in the number of enforcement actions "isn’t supported by a detailed examination of the statistics." Mr. Gallu's article states that 31% of actions filed in fiscal year 2011 were not new, but "were so-called follow-on administrative proceedings that institute penalties in cases that already had been brought." The article calls into question the SEC's claim that its recent reorganization of the Division of Enforcement was yielding the 2011 record results.
Continue Reading...On February 17, 2012, both the U.S. Attorney for the Southern District of New York and the SEC announced that they had brought charges against John Kinnucan, the President of Broadband Research Corporation, for insider trading. The criminal charges allege that he tipped clients regarding three companies, while the SEC's civil case, which also named Broadband as a defendant, alleged that that he provided clients with non-public, material inside information that he obtained from insiders at one of those companies. According to CNBC, Mr. Kinnucan had been approached in November 2010 by federal agents and asked to cooperate with their investigation by wearing a wire, but refused to do so.
Continue Reading...In a February 10, 2012 Memorandum Opinion and Order, Chief Judge Sidney Fitzwater ruled on the motions to compel pending in the SEC's lawsuit against Mark Cuban. Although these disputes in the insider trading case are largely procedural, they are significant in that the Court considered whether the SEC would be required to produce certain materials from its investigative files. Judge Fitzwater ruled that the SEC would be required to produce non-privileged documents from a related investigation into Mamma.com and documents relating to the relationship between the Mamma.com and Mark Cuban investigations. The Court denied Mr. Cuban's request for documents relating to the involvement of another group of witnesses, as well as the request for the SEC's notes and summaries of witness interviews. Finally, the Court ordered both sides to produce certain privilege logs.
Continue Reading...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's friend and neighbor, Roomy Khan, provided Mr. Whitman with the same information that she provided Raj Rajaratnam of Galleon Management, who was convicted of insider trading in May 2011, sentenced to twelve years in prison and had a $92 million civil judgment imposed upon him.
Continue Reading...On Monday, February 6, 2012, the SEC and DOJ resolved their respective investigations with a medical device company and its subsidiary by entering into settlements 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.
Continue Reading...An article in today's New York Times reports that over the last decade a number of 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. According to Edward Wyatt's article, there have been "nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions."
Continue Reading...In a letter dated February 1, 2012 to the parties, Judge Rudolph Randa stated that the SEC's Brief responding to certain questions the Court had raised regarding the language of the proposed settlement with Koss Corporation ("Koss") and Michael Koss "largely satisfies the Court’s concerns." As a result, the SEC will avoid the issues it has faced in the Citigroup litigation, where Judge Jed Rakoff rejected the proposed settlement between the parties and the SEC has appealed. Judge Randa Court 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."
Continue Reading...In the on-going dispute as to whether the SEC can enforce an investigative subpoena on an accounting firm in China, Magistrate Judge Deborah Robinson issued a Minute Order on Wednesday February 1, 2012 which reiterated that the SEC can serve the Order to Show Cause on counsel for Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") by e-mail. The accounting firm has argued that service should have been done through the Hague Convention. Although the dispute is largely procedural, the matter has the potential to establish precedent in future cases when entities located abroad receive SEC investigative subpoenas.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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."
Continue Reading...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."
Continue Reading...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).
Continue Reading...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.
Continue Reading...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.
Continue Reading...Following yesterday's sharply worded Opinion from Judge Rakoff rejecting the $285 million settlement with Citigroup Global Markets (discussed here), Robert Khuzami, the SEC Director of the Division of Enforcement, issued a statement (available here) claiming that Court "ignore[d] decades of established practice throughout federal agencies and decisions of the federal courts." Mr. Khuzami stated that the SEC respected the opinion, but it would "continue to review the court's ruling and take those steps that best serve the interests of investors."
Continue Reading...In a scathing Opinion and Order issued on Monday, November 28, 2011, Judge Jed Rakoff rejected the SEC proposed settlement with Citigroup Global Markets for $285 million, suggesting the SEC was hoping for "a quick headline" and finding "that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest." Instead, the Judge consolidated the Citigroup case with a related matter, SEC v. Stoker , No. 11-civ-7388 (S.D.N.Y. Filed Oct. 19, 2011), and set a trial date of July 16, 2012. The decision could have a significant impact on how the SEC will approach and settle cases and what defendants who want to settle will be forced to consider.
Continue Reading...A Thursday, November 24, 2011 article from Bob Van Voris on Bloomerg.com states that Citigroup Global Markets, Inc. may have to pay more than the proposed $285 million settlement with the SEC to satisfy Judge Jed Rakoff that the accord is fair. The article hints that Judge Rakoff may be displeased with the settlement because Citigroup is not admitting or denying liability and quotes several attorneys as saying that Citigroup may have to pay more to avoid such an omission.
Continue Reading...On Tuesday, November 22, 2011, the SEC struck the latest blow in its long-standing dispute with Mark Cuban by filing a Motion to Compel, asking the Court to order Mr. Cuban to produce a privilege log of documents (from the period the SEC was investigating him) which were withheld on privilege grounds. According to the Commission, he has refused to do so because it "it would be burdensome to log a large number of plainly privileged communications." Mr. Cuban has previously filed a Motion to Compel against the SEC seeking, among other things a voluminous log of what the Commission also calls "plainly privileged documents." As previously noted, Mr. Cuban is one of the rare individual defendants who has the financial ability to mount a defense in such litigation against the SEC, making the developments in this case worth watching. Moreover, one of the central issues in the SEC's motion and Mr. Cuban's prior motion focus on the events and information from the period of the SEC's investigation and the now on-going litigation – not during the events in dispute.
Continue Reading...On Tuesday, November 16, 2011, six SEC Directors appeared before the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance, and Investment to provide a progress report on Management and Structural Reforms at each of their respective divisions at the SEC (their testimony is available here). The witnesses acknowledged the comments made in a report by the Boston Consulting Group (previously discussed here) who examined internal operations, structure and need for reform at the SEC (which has also resulted in a report from the SEC's Chief Operating Officer, described here). The testimony discussed "a number of significant steps that [the SEC has] taken over the past few years in our divisions and offices to reform and improve [its] operations."
Continue Reading...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).
Continue Reading...On Wednesday, November 9, 2011, the SEC issued a Press Release announcing that it had filed 735 enforcement actions in the fiscal year ending September 30, 2011, touting it as the "most enforcement actions filed in a single year." The Commission also highlighted the fact that "more than $2.8 billion in penalties and disgorgement [was] ordered in FY 2011 SEC enforcement actions."
Continue Reading...On Tuesday, November 8, 2011, Judge Jed Rakoff issued an Opinion and Order and entered a final Judgment against Raj Rajaratnam, bringing a close to the SEC's first civil case against the former head of Galleon Management. Mr. Rajaratnam, who was previously convicted of insider trading charges (as discussed here) and sentenced to twelve years in prison (as discussed here), now has a $92 million civil judgment against him.
Continue Reading...On Monday, November 7, 2011, the SEC filed its Brief in response to questions posed by the Court regarding the proposed settlement in SEC v. Citigroup, No. 11-cv-7387 (S.D.N.Y.). In answering the Court's questions, the Commission emphasized that "[t]he proposed consent judgment embodying this settlement is fair, adequate, and reasonable, and should be entered by this Court." The brief submitted by the Commission provided a broader-than-normal look at the Commission's approach to settling cases (although the SEC did argue that the Court was not entitled to consider some of the issues it had raised). Judge Jed Rakoff has scheduled a hearing for Wednesday, November 9, 2011 to consider the proposed settlement.
Continue Reading...The Federal Securities Law Blog is pleased to announce its second e-Book: "Insider Trading: A Look At Some Of The Key Civil And Criminal Cases In 2011."
The last few years have seen a remarkable number of insider trading cases brought by both the SEC and federal prosecutors. In the criminal cases, many Wall Street professionals and lawyers who have been very successful will now spend years in prison. On the civil side, the SEC has pursued defendants very aggressively, although in some cases, where the defendants have had the ability to fight back, they have vigorously defended themselves. This eBook will focus on several of these cases, the events in 2011 and discuss some of the trends that have developed.
First, we will look at the criminal cases by focusing on some of the Galleon Management and the "Expert Network" cases as examples where the prosecutors pursued, tried and convicted significant Wall Street players. We also will consider the cases involving Rajat Gupta (who was also part of the Galleon Management circle) including the administrative case against him, his suit against the SEC in federal court, the dismissal of both of those actions and the subsequent indictment and civil suit against him. Finally, we will examine the recent events in the SEC's case against Mark Cuban, which is worth watching closely because he has fought the SEC every step of the way, raising a number of theories and utilizing different tactics.
The e-book is available here.
On Friday, October 28, 2011, Chief Administrative Law Judge Brenda Murray dismissed the administrative proceeding against John Flannery and James Hopkins of State Street Bank and Trust. The SEC had alleged that Messrs. Flannery and Hopkins "engaged in a course of business and made material misrepresentations and omissions that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under State Street’s management," which caused investors to continue to purchase or continue to hold their investments in these funds and lose hundreds of millions of dollars during the subprime market meltdown in mid-2007. In her 58-page opinion (available here), Judge Murray found that "that neither Flannery nor Hopkins was responsible for, or had ultimate authority over, the allegedly false and materially misleading documents at issue in this proceeding."
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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.
Continue Reading...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."
Continue Reading...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.
Continue Reading...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.
Continue Reading...The SEC announced on Tuesday, September 27 that it had filed a settled administrative proceeding against RBC Capital Markets LLC for misconduct relating to the sale of unsuitable investments (credit-linked notes that were tied to the performance of synthetic collateralized debt obligations or "CDOs") to five Wisconsin school districts. The action is the latest in the SEC's cases arising out of the Financial Crisis of 2008 (the Senate's study of the causes of this crisis is discussed here).
Continue Reading...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.
Continue Reading...According to a report in the Wall Street Journal, "SEC General Counsel Mark Cahn issued a memo to Division of Enforcement staff telling them to stop existing record-destruction procedures for closed cases, until further notice." This issue originally arose in mid-August (as discussed here) when Senator Chuck Grassley (R. Iowa) asked SEC Chairman Mary Schapiro whether the Commission destroyed files relating to some of its more high-profile and controversial matters, such as its investigations of Bernie Madoff, Goldman Sachs, Bank of America, Lehman Brothers and others. The Senator's inquiry was based on allegations he had received in a letter from Darcy Flynn, a thirteen-year veteran of the staff.
Continue Reading...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.
Continue Reading...On Wednesday, August 24, the SEC announced its latest result in its case relating to Galleon Management, this time obtaining a default judgment against Deep Shah, a former lodging industry analyst at Moody's. The Court entered a permanent injunction from future violations of Section 10(b) and Rules 10b-5, and disgorgement, prejudgment interest and civil penalty totaling over $34.5 million. The events involving Galleon Management, which had previously resulted in the criminal convictions of Raj Rajaratnam (discussed here) and Zvi Goffer (here), has also led to a number of settlements with the SEC.
Continue Reading...In a letter dated August 17, 2011, Senator Chuck Grassley (R. Iowa) of the Senate's Committee on the Judiciary, asked SEC Chairman Mary Schapiro whether the Commission has destroyed files relating to some of its more high-profile and controversial matters, such as its investigations of Bernie Madoff, Goldman Sachs, Bank of America, Lehman Brothers and others. Senator Grassley's inquiry is based on the allegations in a letter from Darcy Flynn, a thirteen-year veteran of the staff.
Continue Reading...The SEC and Rajat Gupta have agreed to settle their dispute regarding the forum in which they should litigate the allegations of insider trading by the former Goldman Sachs director by dismissing the pending actions against each other. Specifically, the SEC has dismissed its Administrative Proceeding against Mr. Gupta alleging insider trading and the parties have advised Judge Jed Rakoff (who is presiding over the lawsuit filed in federal court in New York by Mr. Gutpa against the Commission) that they will be entering a Joint Stipulation of Dismissal. In doing so, the parties agreed that, if the SEC elects to bring action against Mr. Gupta, it will do so in federal court in New York and designate it as related to the other Galleon cases pending before Judge Rakoff.
Continue Reading...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).
Continue Reading...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.
Continue Reading...On Monday, July 18, 2011, a Federal Judge in Texas, Sidney Fitzwater, granted a Motion to Strike by the SEC in its case against Mark Cuban, the owner of the Dallas Mavericks, eliminating his affirmative defense of "unclean hands" in the Commission's case against him. Notably, although it did strike the defense in Mr. Cuban's case, the Court rejected the SEC's argument that the defense is barred in SEC enforcement actions as a matter of law, and held that it is available, but "only in strictly limited circumstances."
Continue Reading...On Monday, July 11, 2011, New York federal Judge Jed Rakoff denied the SEC's Motion to Dismiss in Gupta v. SEC, No. 11-cv-1900 (S.D.N.Y.). The Plaintiff, Rajat Gupta, a former director at Goldman Sachs, has been accused by the SEC of having provided material nonpublic information to Raj Rajaratnam of Galleon Management, who was recently convicted of insider trading (discussed here). Unlike the 28 other defendants named in lawsuits relating to Galleon, the SEC commenced an Administrative Proceeding against Mr. Gupta. Mr. Gupta's complaint in federal court (discussed here) alleged that the SEC unconstitutionally deprived him to a jury trial in federal court and that it was necessary to have the question of whether the Dodd-Frank Act provisions could be applied retroactively (which the SEC seeks to do in the Administrative Proceeding) decided in federal court. By denying the SEC's motion to dismiss, Judge Rakoff allowed Mr. Gupta's case to proceed, but ruled that "the theory of the Complaint is narrowed to one of equal protection."
Continue Reading...On Monday June 13, 2011, the SEC announced that it was amending its rules to delegate authority to the Director of the Division of Enforcement to issue witness immunity orders to compel individuals to give testimony or provide other information. This rule will go into effect for an 18-month period once it is published in the Federal Register.
Continue Reading...In January 2010, the SEC announced "a series of measures to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency's investigations and enforcement actions." One of those measures included the use of Deferred Prosecution Agreements ("DPA"). On Tuesday May 17, the SEC announced that it has entered into its first such agreement, settling an FCPA matter with Tenaris S.A., a global manufacturer of steel pipes. In announcing the settlement, the Commission provided some guidance as to what cooperation was provided by Tenaris in order to earn such the first DPA.
Continue Reading...On Wednesday, April 6, 2011, authorities arrested Matthew Kluger (a former associate at Wilson Sonsini Goodrich and Rosati) and Garrett Bauer (a Wall Street trader) and charged them with conspiracy, insider trading and obstruction of justice in connection a years-long scheme to capitalize on material nonpublic information obtained from Mr. Kluger's law firm. The two men were also named in a case brought by the SEC based on the same events. The authorities allege that a unnamed third co-conspirator (or "the Middleman" as the SEC called him) participated in the scheme by receiving information from Mr. Kluger and passing it along to Mr. Bauer. Both Mr. Bauer and the Middleman conducted trading based on that information. In eleven transactions between 2006 and 2011, the men invested $109 million and made over $32 million in profits. Although the men had detailed plans to avoid being detected by authorities, Mr. Kluger and Mr. Bauer were after arrested telephone conversations between them and the Middleman discussing the scheme were recorded in March 2011.
Continue Reading...In March 2011, an individual accused of participating in an insider trading scheme filed a Complaint against the SEC in federal court in New York, arguing, among other things, that the SEC should be enjoined from retroactively applying the provisions of the Dodd-Frank Act in an administrative proceeding against him. On Friday April 1, 2011, the SEC filed a brief requesting that the Court dismiss that complaint for lack of subject matter jurisdiction, arguing, in part, that the retroactivity claim was not "ripe" and the individual had not exhausted his administrative remedies. In short, the Commission argued that the federal court cannot consider this issue until the administrative proceeding is completed and the SEC decides whether or not to impose civil penalties under the Act.
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