Today, the Federal Securities Law Blog takes a look back at the last 30 days in the world of securities-related litigation in a regular feature which appears on approximately the 15th of each month. In the last month, the most discussed issues have been two losses suffered by the federal regulators – one by the SEC where the Court refused to approve the settlement in the Citigroup matter and the other by criminal prosecutors, who saw the conviction in the Lindsey Manufacturing case vacated. These cases and other matters from the last month are discussed in greater detail after the jump.

Two Significant Setbacks

As discussed here, in a very sharp worded Opinion and Order issued on Monday, November 28, 2011, Judge Jed Rakoff rejected the SEC proposed settlement with Citigroup Global Markets for $285 million (consisting of $160 million in disgorgement, $30 million in prejudgment interest and a $95 million civil penalty), 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." He also ruled that the SEC had argued the wrong legal standard, criticized the long-standing policy of accepting settlements without an admission of liability as "hallowed by history, but not by reason," and called the Commission’s request that the Court assert its authority without knowing the facts "worse than mindless, it is inherently dangerous." The Judge consolidated the Citigroup case with a related matter and set a trial date of July 16, 2012. As described here, Robert Khuzami, the SEC Director of the Division of Enforcement, issued a statement that day (available here) claiming that Judge Rakoff "ignore[d] decades of established practice throughout federal agencies and decisions of the federal courts."

As discussed here, at a hearing on November 29, 2011, Judge A. Howard Matz stated that he would be granting the motion to dismiss for prosecutorial misconduct filed by Lindsey Manufacturing Company (a privately-held company), its President Keith Lindsey, and its Vice President Steve Lee in the criminal FCPA case against them. In the Order entered on December 1, 2011 discussed in greater detail here, the Court said that the Government conducted a "sloppy, incomplete and notably over-zealous investigation … that was so flawed that the Government’s lawyers tried to prevent inquiry into it." The Court’s decision was based, in part, on: the untruthful testimony of an FBI agent to the grand jury; the provision of false information in applications for search and seizure warrants; the improper review of e-mail communications between a defendant and her lawyer; the failure to comply with discovery obligations and other court rulings; and misrepresentations to the Court. The Court held that "the multiple acts of misconduct … undoubtedly affected the verdicts and thus substantially prejudiced" the Defendants, necessitating the decision – made with what the Court called "deep regret" – to vacate the convictions and dismiss the Superseding Indictment. The Government immediately appealed the ruling.

Congress and the SEC

The last thirty days have seen personnel from the Commission interact with Congress on a variety of subjects. In one such instance discussed here, in what appears to be a direct response to Judge Rakoff’s ruling in Citigroup, SEC Chairman Mary Schapiro 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 in a letter dated November 28, 2011 to Senators Jack Reed and Larry Crapo. According to Jim Hamilton’s World of Securities Regulation Blog, "[t]he SEC seeks five specific statutory enhancements to its enforcement authority that collectively would allow the Commission to impose appropriate monetary penalties for serious violations and authorize greater penalties for recidivists." 

As described here, on November 16, 2011, six SEC Directors appeared before the Senate 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 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." Robert Khuzami, Director, Division of Enforcement, emphasized the structural reforms at Enforcement, reviewed the results of the Commission’s enforcement activities (reiterating that it had filed 735 enforcement actions in the fiscal year ending September 30, 2011 which were the most enforcement actions filed in a single year) and identified the upcoming challenges faced by the Division of Enforcement, which include "securing the necessary expertise, human capital and technology resources" to fulfill its mission, and improving its "ability to analyze large volumes of information, including both structured and unstructured data."

In a related new development, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness a Report on December 14, 2011, stating that the structural reforms "are largely positive and should, over time, improve the effectiveness of SEC enforcement," but noted that it "is too soon to conclude that they are already successful." The Chamber had its own recommendations, including increasing the number of specialty units and increasing the size of those units.

Mr. Khuzami also appeared before two Congressional committees to testify about the Commission’s recent work in the area of insider trading. He reviewed the "new initiatives" instituted by the SEC to combat insider trading (the establishment of a Market Abuse Unit, which focuses on abusive market strategies and practices, including complex insider trading schemes, the use of the Automated Bluesheet Analysis Project to recognize suspicious trading patterns and identify relationships and connections among multiple traders and across multiple securities, and the benefits of a newly-established cooperation program to encourage key fact witnesses to provide information, and preserve resources). Mr. Khuzami also provided information on how the current law of insider trading applies to securities trading by members of Congress and their staffs, emphasizing that "there is no reason why trading by Members of Congress or their staff members would be considered ‘exempt’ from the federal securities laws, including the insider trading prohibitions," while pointing out that there are several "fact-intensive questions – including the existence and nature of the duty being breached and both the materiality and nonpublic nature of the information – that would drive the analysis" of whether illegal insider trading has occurred.

Discovery Issues

The last two months saw developments in two cases concerning the SEC’s discovery obligations and whether defendants would be able to obtain copies of the notes of staff members of the Division of Enforcement’s interviews of witnesses. In one case discussed here, the D.C. Circuit, in a December 9, 2011 Opinion, affirmed a lower court’s decision that the SEC was not required to produce certain notes taken during an investigation. The Department of Justice had produced some of the notes in connection with the criminal trial of former Cendant CEO Walter Forbes, leading Mr. Forbes’ counsel to make a Freedom of Information Act ("FOIA") request for additional notes. The Court noted that the "decision of the Justice Department to disclose the eleven sets of notes in the criminal proceeding has no bearing on whether FOIA permits the SEC to withhold the remaining 103 documents," because the disclosure was based on different legal standards.

In another case, the on-going insider trading dispute between Mark Cuban and the SEC, Mr. Cuban has also sought the production of, among other things, the notes of the SEC attorneys taken during the investigations and filed motions to compel with the Court. As discussed here, on November 22, 2011, the SEC struck back, 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.


As discussed here, on 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. Assistant Attorney General Lanny Breuer said that "[t]his indictment reflects our commitment to holding individuals, as well as companies, accountable for violations of the FCPA," which has yielded mixed results in 2011, including a sentence of record length in one case, but a hung jury in another and the decision in the Lindsey Manufacturing case discussed above.

Municipal Bond Case

As described here, 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. Wachovia used practices known as "last looks" (where Wachovia secured information from the bidding agents about competing bids) and "set-ups" (where the bidding agent rigged the field in Wachovia’s favor by deliberately obtaining non-winning bids from others, while Wachovia deliberately submitting non-winning bids for others to win different transactions by the same method).

Clawback Case

As described here, on 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 came 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. It was approved by the Court the following day.

Business Dealings in Countries That Are Deemed State Sponsors of Terror

A December 12, 2011 article from Lina Saigol and Kara Scannell in the Financial Times reports that the SEC’s Division of Corporate Finance has sent letters to at least a dozen companies instructing them to "disclose business activity in and with Syria, Iran and others deemed ‘state sponsors’ of terror by the State Department." The article, which is discussed here, also states that letters have been sent to several companies in recent months "asking why [the companies] had not disclosed business dealings in Syria, Iran, Sudan and Cuba." According to the Financial Times, the inquiries from Corp Fin "are part of SEC reviews of companies’ investment risks to shareholders."

Obstruction Case

As described here, on December 8, 2011, the U.S. Attorney for the Central District of California announced that it had indicted the David Tamman, outside counsel for New Point Financial Services, for conspiring with the company’s investment fund manager, who was also indicted, to obstruct an SEC investigation. The indictment alleges that that the two conspired to alter and backdate various documents, remove incriminating documents from investor files before they were produced, and provide false testimony to the SEC.

Whistleblower Issues

Finally, as discussed here, in mid-November, the SEC’s Office of Whistleblower has released its first Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2011. The Report (available here) points out that there were only seven weeks of whistleblower tip data available for fiscal year 2011. The Report includes an Appendix, which list by subject matter and month, the 334 whistleblower tips received from August 12, 2011 through September 30, 2011. The most common complaint categories were market manipulation (16.2%), corporate disclosures and financial statements (15.3%), and offering fraud (15.6%).

In another interesting development involving Whistleblowers, Jim Hamilton’s World of Securities Regulation Blog reports that the House Capital Markets Subcommittee has approved legislation amending the Dodd-Frank Act to require whistleblowers "to first report the information to the company before reporting it to the SEC or CFTC." The text of the bill, H.R. 2483, known as the Whistleblower Improvement Act of 2011, is available here.