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, events in the Citigroup matter continued to dominate the news, but there were some interesting developments in FCPA cases, insider trading cases and discovery issues. These cases and other matters from the last month are discussed in greater detail after the jump.
The SEC’s Appeal in the Citigroup Global Markets Appeal
It is remarkable to think that it has been less than three months since the SEC announced its $285 million settlement with Citigroup Global Markets, Inc. under the usual neither-admit-nor-deny standard. On November 28, 2011, Judge Jed Rakoff rejected the proposed settlement and was particularly critical of the policy of accepting settlements without an admission of liability. The last thirty days have seen a great deal of activity, building up to a hearing before the Second Circuit’s Motion panel on January 17 2012.
On December 15, 2011, the SEC appealed Judge Rakoff’s Opinion and Order rejecting the proposed settlement. 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."
On December 16, 2011, the SEC filed a Motion in front of Judge Rakoff, asking him to stay to proceedings 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.
In the week between Christmas and New Year’s Day, the case really heated up, as discussed here. Before noon on December 27, 2011, the SEC filed an emergency motion for a stay before the Second Circuit, arguing that "[i]f Citigroup files its answer, denying some or all of the allegations in the Complaint, or if Citigroup moves to dismiss, challenging the Complaint’s legal sufficiency, it will disrupt a central negotiated provision of the proposed consent judgment pursuant to which Citigroup agreed not to deny the allegations in the Complaint."
At approximately 4:20 pm that afternoon, the Second Circuit ruled that the emergency motion will be submitted to the Second Circuit’s motions panel on January 17, 2012 and that, "[i]n the interim, proceedings in the District Court are stayed until a ruling by the motions panel."
At approximately 4:21 pm, Judge Rakoff, who was "totally unaware" of the events in the Second Circuit, issued his own order, denying the motion for a stay, finding, among other things, that neither the SEC, nor Citigroup Global Markets had a statutory basis for their appeals.
On December 29, 2011, Judge Rakoff issued a supplemental order stating that the SEC’s statement to the Court of Appeals regarding the ramifications of Citigroup either filing an answer or a motion to dismiss was "materially misleading."
On the same day that Judge Rakoff issued his Supplemental Order, the SEC filed a Petition for a Writ of Mandamus with the Second Circuit, arguing that Judge Rakoff has overstepped his bounds and requesting that the Second Circuit order him "to enter [the] proposed consent judgment" between Citigroup and the Commission.
On December 30, 2011, the SEC filed a supplemental brief in the original appeal, responding to both of Judge Rakoff’s orders that week. The Commission also explained that it "filed a petition for a writ of mandamus in the event that this Court disagrees about appealability under Section 1292(a)(1), in which case this Court may exercise jurisdiction under 28 U.S.C. 1651."
On January 3, 2011, the Second Circuit issued an Order consolidating the two appeals (the one by the SEC and the one by Citigroup), along with the proceedings involving the petition for a writ of mandamus.
On January 12, 2012, Business Roundtable requested leave to file an Amicus Brief in the appeal, arguing that the Second Circuit should reject the "potentially dangerous, approach to reviewing settlement agreements" in Judge Rakoff’s decision.
The issues raised by Judge Rakoff’s decision began to have an impact elsewhere, too. In SEC v. Koss Corporation, No. 2:11-cv-00991 (E.D. Wis.), a federal judge in Wisconsin cited Judge Rakoff’s Opinion and Order as a basis to request that the SEC "provide a written factual predicate for why the agency believes the court should find that proposed final judgments in an enforcement action alleging that a company prepared materially inaccurate financial statements and lacked adequate financial controls are fair, reasonable, adequate, and in the public interest."
News regarding the "neither-admit-nor-deny" standard was not limited to the Courtroom. On 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 exact schedule for the Congressional Committee hearing has not been established, yet.
Finally, according to media reports discussed here, 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. The policy shift applies only in those cases where there has been an admission of guilt or if the company or an individual enters an agreement with a deferred prosecution agreement or a non-prosecution agreement, not in cases where there has been no plea or if there is only civil proceedings.
The FCPA Cases – Trials Proceed as the Government Wins Some Issues, But Loses Some
By the end of the last thirty days, two high profile FCPA cases were underway – one just beginning, the other entering its fourth month. In the older case, the FCPA Sting case, Judge Richard Leon dismissed Count 1 (on the grounds that there was not sufficient evidence to that the six defendants participated in the overarching conspiracy to violate the FCPA) as to all six defendants in Trial Group No. 2. In addition, Judge Leon dismissed the Government’s case against defendant Stephen Giordanella in its entirety. The December 22, 2011 rulings are considerable setback for the Government in its first-of-a-kind sting operation in an FCPA case.
The trial resumed on January 3, 2012 with the remaining five defendants having their opportunity to put on their defense. Those defendants moved for a mistrial, arguing that they were prejudiced by the admission of evidence regarding the now-dismissed conspiracy count. Judge Leon denied the Motion on January 9, 2012, and the trial continues.
The newer case, pending in Texas against John O’Shea, saw Judge Lynn Hughes deny his Motion to Dismiss the Indictment, which had been pending since March 2011 and argued that the Indictment failed to alleged that he bribed a "foreign official" because it only alleged that he bribed employees of a state-owned entity. Judge Hughes’ January 3, 2012 decision marked the fifth time the argument has been rejected. The trial against Mr. O’Shea commenced on January 11, 2012.
Insider Trading Cases
Two interesting insider trading cases were in the news in the last month. One case, discussed here, was unique in that it was brought against a company and its former CEO for defrauding shareholders by buying back stock at severely undervalued stock prices – at a time when the company was privately held, a reminder that the SEC regulates securities – not just those publicly traded over an exchange.
The second case, brought against the former CEO of company and his friend, seemed to be a straightforward case of the CEO tipping his friend about an acquisition of the company. The case became notable, as also discussed here, when a report in the Atlanta Business Chronicle quoted defense counsel as saying that the CEO took and passed a polygraph test and, more remarkably, was then asked by the SEC to take a second polygraph test (but was sued instead).
Discovery and Investigative Issues
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 2102 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. D&T Shanghai is required to file responsive papers by January 20, 2012, addressing why it should not be ordered to respond to the Commission’s subpoena. The SEC will file its reply brief by January 27, 2012 and Judge Robinson will hear the motion on February 1, 2012.
The long-standing discovery disputes between Mark Cuban and the SEC continued, as discussed here. Mr. Cuban has a pending motion requesting the SEC’s files from the Investigation (and/or a privilege log), arguing that it would be relevant to (1) the credibility of the witnesses (and their possible bias in favor of the SEC) and (2) Mr. Cuban’s scienter with respect to his sale of the stock at issue. The SEC filed a motion which asked the Court to order Mr. Cuban to produce a privilege log of his documents. On December 13, 2011, Mr. Cuban responded to the Commission’s Motion to Compel 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 (i.e., during the SEC’s investigation) without explaining why. The SEC then filed its another 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). The Court has not yet ruled on the document issues, but did rule on December 30, 2011 that Mr. Cuban "shall appear for his deposition on a date between February 1 and 16, 2012 that is mutually agreeable to the parties," and that if the SEC needed to take certain depositions after Mr. Cuban’s testimony, it could seek relief to do so.
U.S. Chamber of Commerce Wants to "Transform" the SEC
As discussed here, on December 14, 2011, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness issued a 135-page report entitled "U.S. Securities and Exchange Commission: A Roadmap for Transformational Reform," expanding on its 2009 report and saying that "extraordinary steps are needed to achieve change." The Report, which was authored by Jonathan Katz (who was Secretary of the SEC for twenty years), contains 28 separate recommendations on how to reform the Commission as a whole, and specifically addresses the Division of Enforcement.
The Chamber made a group of 15 recommendations intended to address the Commission’s leadership structure. Those recommendations included: "Congress should increase the number of Commissioners from five to seven and specify that at least one Commissioner must be an accountant, one an economist, and one an attorney."
The Chamber also examined the SEC’s Enforcement Division. The Chamber stated that recent structural reforms in the SEC’s Enforcement Division "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, which included increasing the number of specialty units and the staffing of those units, as well as adding a specialty unit for complex accounting frauds or misstatements. The Chamber also recommended that the Commission update the Seaboard principles on voluntary cooperation and criticized the SEC for "issuing press releases that evaluate its performance based on the total number of cases and the amount of money ordered to be paid," as opposed to the actual amounts paid.