Today, the Federal Securities Law Blog takes a look back at the last 30 days in the world of securities-related litigation in a regular feature which appears on approximately the 15th of each month. Recent issues which have appeared in the news include the SEC’s case against Citigroup Global Markets, Inc. and Judge Rakoff’s probing questions about the proposed settlement (which has not yet been approved), as well as several events regarding the SEC’s investigative techniques. These issues, and others, are discussed in greater detail after the jump.
The Citigroup Litigation
As discussed here, 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 stemmed from the 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. The case was assigned to Judge Jed Rakoff in New York.
As described here, Judge Rakoff issued an Order on Thursday, October 27, 2011 scheduling a hearing for November 9, 2011 to " ascertain whether the proposed judgment is fair, reasonable, adequate, and in the public interest." He raised a series of questions that he wanted answered at that hearing before he would approve the settlement, continuing his pattern of carefully considering each settlement proposed by the SEC in cases assigned to his docket.
On Monday, November 7, 2011, the SEC answered the Court’s questions, emphasizing that "[t]he proposed consent judgment embodying this settlement is fair, adequate, and reasonable, and should be entered by this Court" (as discussed here). 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). The hearing was held on Wednesday, November 9, 2011. Judge Rakoff has not yet ruled on the Commission’s request to approve the settlement.
Other Bumps and Bruises for the Commission
The last 30 days saw several other developments which brought attention to perceived weaknesses in the SEC’s investigations. According a November 12, 2011 article in the Washington Post (discussed here), the SEC disciplined eight employees for their handling of the investigation of Bernie Madoff. The punishments imposed included suspensions, pay cuts and demotions. However, David Becker, the Commission’s former General Counsel received some good news when (as discussed here), the Department of Justice decided that it will not investigate whether he violated ethics laws during the SEC’s handling of issues related to Bernie Madoff’s Ponzi scheme.
As described here, on Tuesday, November 1, 2011, the Inspector General released its report regarding the investigation into the SEC’s policy of destroying documents gathered in pre-investigation inquiries known as Matters Under Inquiry ("MUI"), as well as statements made by the Commission to the National Archives and Records Administration ("NARA") regarding that policy. The Inspector General found that the SEC had a policy in place for nearly 30 years which called for the destruction of such documents and that certain documents that should have been preserved were destroyed. The Inspector General also found that, when asked about NARA about the destruction of documents, the SEC did not disclose the existence of the policy and stated it did not know if such documents had been destroyed. Ironically, less than a week before that, the SEC disciplined another agency for its handling of records by entering a Cease-and-Desist Order against FINRA for altering documents (as described here).
The Commission also suffered a loss in an administrative proceeding which it brought against executives from State Street Bank and Trust. In a 58-page opinion on Friday, October 28, 2011, Chief Administrative Law Judge Brenda Murray dismissed the SEC’s administrative proceeding against John Flannery and James Hopkins of State Street regarding subprime mortgage-backed securities finding 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" (discussed in greater detail here).
Record Setting Number of Cases for SEC
The Commission received some good news in the last month. On Wednesday, November 9, 2011, it SEC issued a Press Release (discussed here) 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."
Insider Trading
In addition, on Tuesday, November 8, 2011, the busy Judge Rakoff issued an Opinion and Order and entered a $92 million final civil judgment against Raj Rajaratnam (described here), bringing a close to the SEC’s first civil case against the former head of Galleon Management. Mr. Rajaratnam was named as a defendant in a second civil case – along with Rajat Gupta. 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 – not only was he named in the civil case with Mr. Rajaratnam, he was also indicted by the U.S. Attorney’s Office for the Southern District of New York (as described here).
Record-Setting Sentence in FCPA Case
As discussed here, on Tuesday, October 25, 2011, defendants Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corporation who were convicted in August 2011 for their roles in a conspiracy to violate the FCPA and commit money laundering, were sentenced to 15 years and 7 years in prison, respectively. With respect to Mr. Esquenazi, a Press Release from the U.S. Attorney’s Office for the Southern District of Florida pointed out that "[t]his is the longest sentence ever imposed in a case involving the Foreign Corrupt Practices Act."
Interesting Civil Cases: A Settlement, An Opinion, and an Appellate Argument
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 (discussed here), 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.
In an October 13, 2011 Opinion (discussed here) 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.
On November 1, 2011, the Ohio Supreme Court heard oral argument in an unusual case (discussed here) where the Director of the Ohio Department of Commerce has sued to recover the proceeds of insurance policies from the family of Roy Dillabaugh, who operated a Ponzi scheme. The Second District Court of Appeals for Montgomery County previously held that the Director cannot seek to recover the proceeds, but a court-appointed Receiver has the authority to file such a suit (although the Court did not address any potential limits to the Receiver’s authority on the grounds that the issue was not ripe for decision).
