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.

Here is the List, in the form of a countdown, starting, of course, at Number Ten …

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders’ Rights to Include Board Nominee on Proxy Materials.

Exchange Act Rule 14a-11 (finalized in 2010, as discussed here) allowed 3% (or larger) shareholders to use the company proxy statement to nominate directors. The Rule was challenged by Business Roundtable and the U.S. Chamber of Commerce, who filed a petition with the D.C. Circuit, arguing that it was promulgated in violation of the Administrative Procedures Act ("APA") because, among other things, "the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation," as required under provisions of the Exchange Act and the Investment Company Act of 1940.

As discussed here, on July 22, 2011, the D.C. Circuit Court of Appeals issued an Opinion vacating the Rule. The Court found that "the Commission acted arbitrarily and capriciously for having failed once again … adequately to assess the economic effects of a new rule." Specifically, the Court found that the SEC "inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters."

One of the intriguing aspects of this story was the fact that SEC did not appeal. Like many individuals and agencies in Washington (and elsewhere for that matter), the SEC does not like being told by the Courts that cannot do something. Moreover, the agency is willing to appeal matters to a higher court when necessary (as seen in the Citigroup case to be discussed elsewhere in this list). However, in this matter, the SEC announced on September 6 that it was not seeking rehearing of the decision, as discussed here. Chairman Mary Schapiro stated that she "remain[ed] committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards," but also noted that "I want to be sure that we carefully consider and learn from the Court’s objections as we determine the best path forward."

In a world where litigants seem to exhaust all appeals before stopping, it was, to this blogger, a remarkable response.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

Another remarkable turn of events occurred when the SEC’s Division of Enforcement Staff agreed to resolve a case with Maynard Jenkins, the former CEO of CSK Auto Corporation, only to have the five SEC Commissioners reject the settlement. Although the case was ultimately settled, the path the parties took to reach that resolution was unusual.

In July 2009, the SEC filed suit against Mr. Jenkins, asking that he be ordered under Section 304 of the Sarbanes-Oxley Act to reimburse the company and its shareholders the more than $4 million that he received in bonuses and stock sale profits while CSK Auto was committing accounting fraud (although the complaint did not allege that Mr. Jenkins engaged in the conduct resulting in the fraudulent accounting). SEC v. Jenkins, No. 09-cv-01510 (D. Ariz. filed Jul. 22, 2009). At the time the Complaint was filed, the SEC announced: "[i]t is the first action seeking reimbursement under Section 304 from an individual who is not alleged to have otherwise violated the securities laws."

As discussed here, on March 24, 2011, the parties advised the Court that "Mr. Jenkins and the Staff of the Securities and Exchange Commission have reached a tentative settlement agreement to resolve this matter," noting that "such tentative settlement agreement is subject to approval by the Securities and Exchange Commissioners." According to the Washington Post, "the proposed settlement was for less than half the amount the SEC originally sought." However, in July 2011, the Commissioners rejected the proposal. According to a source "close to the matter," the combination of two contrasting views resulted in the lack of support for the settlement. In the view of some Commissioners, the amount of the settlement was too low. However, a second view was that the case should not have been brought at all.

Rather than litigate, on November 15, 2011, the SEC announced that it had reached a new settlement with Mr. Jenkins, as discussed here. The Commission did not settle for the entire amount (over $4 million) which was demanded in the Complaint. Instead, the Commission agreed to accept approximately $2.8 million of bonus compensation and stock profits that Mr. Jenkins received while the company was committing accounting fraud. While there is likely a reason for accepting the lower amount, it was not disclosed. The settlement was approved by the Court the following day.

The story was odd enough when the Commission’s rejection of the staff’s proposed settlement became public, but it became even more unique when the Commission accepted a settlement for quite a bit less than the amount demanded.

8. The SEC’s Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

Prior to this summer, when a witness in an SEC Investigation exercised his or her right not to testify under the Fifth Amendment (and given the increase in the number of cases with parallel criminal investigations, the issue is occurring more and more), the Enforcement Staff would typically advise the witness that they did not have the authority to compel his or her testimony by granting him or her immunity from prosecution. That was slightly amended in January 2010, when the Enforcement Director was granted authority to submit witness immunity requests to the Department of Justice, in connection with judicial proceedings, to compel testimony or the production of other information.

However, as discussed here, on 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 in either investigations or related enforcement proceedings. This rule went into effect on June 17, 2011 for an 18-month period.

The Director of the Division of Enforcement, Robert Khuzami, was formerly was with the U.S. Attorney’s Office in the Southern District of New York. He has already taken steps to organize his investigative teams along the lines of a prosecutor’s office. Granting him this immunity authority seems to continue that trend.

Because the Commission’s investigations are non-public, it is difficult to know whether Mr. Khuzami has exercised that option during an SEC investigation, yet. When the end of the 18-month period approaches in December 2012, we may learn more as the Commission evaluates whether it wants to extend the delegation of that authority.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

There were two sets of stories in 2011 regarding the SEC and its documents. One stemmed from a line of inquiries (from Congress and from the Commission’s Inspector General) about whether the Commission was destroying some of its files. The second arose in litigation in two different matters (one a FOIA request, the other an SEC civil action).

With respect to inquiries, in a letter dated August 17, 2011, Senator Chuck Grassley of the Senate’s Judiciary Committee 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 (discussed here) was based on the allegations in a letter from Darcy Flynn, a thirteen-year veteran of the staff. According to a September 7 report in the Wall Street Journal discussed here, Mr. Flynn, through counsel, advised the SEC that documents were still being destroyed and "that ‘we may need to seek injunctive relief’ in federal court if the SEC doesn’t freeze its document-destruction policy." As a result, according to the Wall Street Journal’s report, "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."

In a second inquiry, the SEC’s Inspector General investigated the policy, resulting in the November 1, 2011 release of a Report, discussed here. Specifically, the Inspector General examined 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 the 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. Although his office did not conduct an exhaustive audit, the Inspector General was "not aware of a particular investigation that was hampered by the destruction of records for a MUI." The Inspector General made a series of recommendations for the SEC to address these issues.

While all of this was taking place, the SEC found time to resolve a case against FINRA for altering its documents. As discussed here, on 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.

The production of SEC documents was litigated as well. In one example, a dispute arose when the lawyers for Walter Forbes, the former CEO of Cendant Corporation who was facing criminal charges for securities fraud, sent Freedom of Information Act ("FOIA") requests to the SEC seeking all of the notes taken by the SEC staff members during the Commission’s investigation of two individuals who were subsequently Government witnesses in a criminal prosecution of Mr. Forbes. The SEC refused to disclose the notes and the attorneys sued the SEC to compel production. The District Court refused to order the production of the documents and the D.C. Circuit, in a December 9, 2011 Opinion discussed here, affirmed a lower court’s decision.

A second matter being litigated, which is on-going, is the SEC’s insider trading case against Mark Cuban (who sold shares of shortly before the announcement of a PIPE offering). While a whole slew of issues have been raised by the parties in that case, one of the most interesting issues is whether Mr. Cuban is entitled to the production of notes of the SEC staff members taken during the investigation. As discussed here, Mr. Cuban has argued that the notes are discoverable because they would be relevant to: (1) the credibility of the witnesses (and their possible bias in favor of the SEC); (2) Mr. Cuban’s scienter with respect to his sale of stock; and (3) whether the statements made by witnesses may have changed over time. His motion is still pending.

If 2011 is any indication, there will be some focus on SEC records and notes, as defendants hope to obtain them.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

One of the FCPA cases being followed closely this year has been the "FCPA Sting" or "Shot Show" case in the District of Columbia. The first trial, involving 4 of the 22 defendants, resulted in a mistrial in July. The second trial resulted in the dismissal of the DOJ’s central conspiracy charge and acquittal of one defendant, but is still on-going as to five other defendants. It was, according to the Department of Justice, the first sting operation in an FCPA case.

The case began in December 2009 when the Government filed 16 sealed indictments in (which were unsealed in January 2010), charging 22 defendants with conspiring to violate the FCPA, violating the FCPA and conspiring to launder money. The Government alleged that the defendants met an informant who claimed to be an agent for the Minister of Defense of Gabon and arranged an introduction. The Government further alleged that the defendants met with and agreed to bribe the Minister, with the payments disguised as sales commissions. However, the "Minister" was, in reality, an undercover FBI agent. In April 2010, the Government filed a superseding indictment in U.S. v. Goncalves, No. 09-cr-00335 (D.D.C.), naming all 22 defendants in a single case. Three of the defendants pled guilty to conspiracy charges in March and April 2011.

The case has been divided into four groups for the purposes of trial. On May 16, 2011, the trial commenced against the first four defendants (Trial Group No. 1). The testimony included that of the informant, Richard Bistrong, who had pled guilty to conspiring to violate the FCPA himself. The Jury began deliberating on June 27, 2011. As discussed here, on July 7, 2011, D.C. Federal Judge Richard Leon declared a mistrial in a criminal case against four defendants who were accused of conspiracy and FCPA violations when the jury was unable to reach an unanimous verdict on all charges.

As discussed here, on August 4, 2011, the Court set a new schedule for the four groups of defendants (with each trial expected to last eight weeks). The next trial, involving six defendants (known as Trial Group No. 2) began on September 26, 2011. It has already gone well beyond the eight-week estimate, with the Government not finishing its case-in-chief until December 19.

As discussed here, on December 22, 2011, Judge Leon dismissed Count 1 (conspiracy to violate the FCPA) as to all six defendants in Trial Group No. 2 and dismissed the Government’s case in its entirety against one defendant, Stephen Giordanella. The trial will resume on January 3, 2012 with the remaining five defendants having their opportunity to put on their defense.

The next group (consisting of five defendants) was scheduled to be on December 12, 2011, a date that has already been postponed. The four defendants from the original case which resulted in the July mistrial and the remaining four defendants will be tried at some point in 2012.

Bringing a case against 22 defendants is ambitious. Using a sting operation to gather than evidence made it even more so. Thus far, there have been three guilty pleas, but there has also been one hung jury, and a second trial that has taken 12 weeks for the Government to put on its evidence, which resulted in the acquittal of one defendant already and the central conspiracy charge being dismissed. The developments in this case in 2012 will undoubtedly be interesting as well.


On Friday, the Top 10 list continues …