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. The biggest (and certainly most recent) news may be the Second Circuit’s ruling on March 15, 2012 granting the SEC’s motion to stay the proceedings before Judge Rakoff in Citigroup litigation. In other news, the SEC identified priorities as it began making its case for its budget for next year, while the FBI reported on their financial fraud cases. Insider trading and FCPA cases remained in the news as well, and the head of one of the more infamous Ponzi schemes was found guilty by a Texas jury. These cases and other matters from the last month are discussed in greater detail after the jump.
The SEC v. Citigroup Appeal
As we have discussed previously, Judge Rakoff’s decision last November to reject the SEC’s "neither-admit-nor-deny" settlement with Citigroup could result in a significant shift in the way the SEC, defendants and the Courts look at settlements going forward. The SEC not only appealed Judge Rakoff’s decision, it filed a petition for a writ of mandamus against him and requested that the Second Circuit stay the proceedings before him. The Commission earned a temporary stay in late December, and as discussed in much greater detail here, had their motion to stay the proceedings for the duration of the appeal granted on March 15, 2012. The Court of Appeals found that the Commission and Citigroup "made a strong showing of likelihood of success" in their appeals and/or the Commission’s petition for a writ of mandamus, and that they had shown "serious, perhaps irreparable, harm sufficient to justify grant of a stay." In addition, the Court directed the Clerk of the Court "to appoint counsel, who will advocate for upholding the district court’s order."
The SEC’s Budget and its Priorities
It is that time of year in Washington when the federal agencies make the trip up to Capitol Hill to make those presentations regarding their budget for next year, Fiscal 2013. As discussed here, SEC Chairman Mary Schapiro was one those who made the trip to the Hill, appearing before the House Subcommittee on Financial Services and General Government on March 6, 2012 in support of the Administration’s budget request for the SEC for the 2013 fiscal year. The SEC is seeking a budget of $1.566 billion, an increase of $245 million over the agency’s FY 2012 appropriation. In her statement, Chairman Schapiro identified four "high-priority initiatives," which included: an increase in staffing (676 new hires); preventing "regulatory bottlenecks" as new rules are put in place; strengthening the agency’s oversight of market stability; and expanding the agency’s information technology systems.
Ms. Schapiro described the SEC’s efforts to revitalize and restructure the Division of Enforcement, which resulted in "735 enforcement actions – more than ever filed in a single year in SEC history." However, she did not address the issues raised in a recent Bloomberg.com article (discussed here) that the claimed increase in the number of enforcement actions was not supported by a detailed examination of the statistics, which revealed that 31% of actions filed in 2011 were not new, but were follow-on administrative proceedings to institute penalties in cases previously brought.
The FBI Reports on Corporate Fraud Cases and Brings in a Familiar Face for a PSA
On February 27, 2012, the FBI released its latest Financial Crimes Report to the Public which provided a snapshot of the issues on which the agency has focused. The Bureau stated that in fiscal year 2011 (the period from October 1, 2009 to September 30, 2011), corporate fraud cases resulted in 242 indictments or informations and 241 convictions. During the same period, the FBI’s securities/commodities fraud cases resulted in 520 indictments or informations and 394 convictions. As described here, the FBI discussed the various trends, and describes, including accounting schemes, self-dealing by corporate executives, obstruction of justice, market manipulation via cyber intrusion, the increase in commodities fraud, the continued rise of Ponzi schemes, foreign-based reverse merger market manipulation schemes, precious metals fraud, market manipulation or "pump-and-dump" schemes, broker embezzlement and late-day trading.
The FBI also released a Public Service Announcement (described here), starring Oscar winner Michael Douglas, including a clip from his famous "greed-is-good" speech (as corporate executive Gordon Gekko in the 1987 film "Wall Street"). The present day Mr. Douglas warned investors that "if a deal looks too good to be true, it probably is," and provided information on how you can prevent securities fraud by contacting the Bureau.
Insider Trading Cases
The fictional Mr. Gekko knew a little bit about insider trading in the 1980s, and another character in that film (Bud Fox, played by Charlie Sheen) ultimately cooperated with authorities and wore a wire to a meeting with Mr. Gekko. That tactic is still being used in white collar crime cases today. John Kinnucan, the President of Broadband Research Corporation, was reportedly approached in November 2010 by federal agents and asked to cooperate with their insider trading investigation by wearing a wire (and told that he would face prosecution). Mr. Kinnucan refused to cooperate. As discussed here, 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 him for insider trading in another "Expert Network" case. The criminal charges alleged 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.
In another development which reflected that the SEC will not just pursue hedge funds and investment advisory firms, the Commission announced on March 5, 2012 that it had filed separate cases (discussed here) for insider trading in the shares of Hi-Shear Technology Corporation, which was acquired by Chemring Group PLC in September 2009. The Commission charged William Duncan, a California-based insurance broker (who purchased 10,000 shares of Hi-Shear and made a profit of $85,525), and John Williams, a Pennsylvania-based tax manager (who purchased 850 shares of Hi-Shear and made a profit of $6,803.18). Both men agreed to settle with the Commission, reflecting the Commission’s commitment to pursue insider trading cases, large or small.
The Stanford Ponzi Case
On March 6, 2012, Robert Allen Stanford was convicted for his decades-long Ponzi scheme that bilked investors of over $7 billion. As described here, the jury convicted him of conspiracy to commit mail fraud, launder money, obstruct justice and all but one count of wire fraud after hearing testimony Mr. Stanford, who told investors that the money was placed in certificates of deposit at the Stanford International Bank based in Antigua, used the money to, among other things, fund his luxurious lifestyle. Mr. Stanford’s scheme was one of those rare cases that rivaled the Bernie Madoff case.
Market Crisis Case
On March 13, 2012, the SEC announced that it had brought charges against the CEO, CFO and Chief Accounting Officer of Thornburg Mortgage Inc., alleging that the three executives hid "the company’s deteriorating financial condition at the onset of the financial crisis" and did not disclose severe liquidity problems in the company’s Annual Report, as discussed here. Specifically, the three arranged for a series of margin call payments to be made and then had the Annual Report filed during a very brief window before the next series of margin calls were made (and did not disclose the issue to auditors or in the report). The scheme "backfired and the company lost 90 percent of its value in two weeks." The SEC touted the case as one of many it has brought – according to the SEC, it has sued 98 individuals and entities (including over 50 CEOs, CFOs and senior officers) in cases related to the financial crisis.
In the FCPA arena, prosecutors had some successes, some disappointments and continued litigating in some cases in the last month. One of the successes occurred on March 12, 2012, when (as described here) a federal jury in Florida convicted Jean Rene Duperval on two counts of conspiracy to commit money laundering and 19 counts of money laundering related to an FCPA scheme involving Telecommunications D’Haiti S.A.M. ("Haiti Teleco"), the Haitian state-owned telecommunications company. As a foreign official, Mr. Duperval could not be charged with violating the FCPA, but the Government alleged that the funds he received and laundered were the proceeds of violations of the FCPA and Haitian bribery law, as well as the U.S. wire fraud statute. The jury took only three hours to convict Mr. Duperval, a former director of international relations for Haiti Teleco and it marked the second conviction of a foreign official in the matter – Robert Antoine, who previously pled guilty to conspiracy charges, was Mr. Duperval’s predecessor.
In late February, 2012, three of the executives who were prosecuted for their role in the TSKJ Joint Venture (which was formed to secure engineering procurement and construction contracts for oil and gas projects on Bonny Island, Nigeria) learned their fate when Texas federal Judge Keith P. Ellison pronounced their sentences, as discussed here. All three men were participated in events concerning Kellogg Brown & Root (the "K" in the TSKJ Joint Venture). Former KBR executive Albert "Jack" Stanley was sentenced to 30 months, while Jeffrey Tesler, who controlled an entity through which payments were funneled, was sentenced to 21 months in prison. Wojciech Chodan, the former Vice President of M.W. Kellogg, Ltd., received a sentence of one year unsupervised probation.
One chapter of the Government’s FCPA prosecution efforts came to a close in the last month when the government dropped the charges in the FCPA Sting Case. Specifically, as discussed here, on February 21, 2012, the Government moved to dismiss with prejudice the Superseding Indictment against the remaining defendants. In doing so, the Government cited the two mistrials, as well as the acquittal of three defendants, and other rulings in the case. Three of the original twenty-two defendants, however, pled guilty before the first trial and await sentencing.
In the U.S. v. Carson litigation, one of the FCPA cases that is slowly moving toward trial, the Court provided some guidance on jury instructions, while the defendants raised a new defense in a motion to dismiss. At an in Chambers hearing on February 16, 2012, Judge James Selna issued an Order addressing the jury instructions regarding the terms "foreign official" and "instrumentality." In that case, the Government alleged that that the defendants, six former executives of Control Components, Inc. ("CCI"), conspired to pay bribes to officials of foreign state-owned companies in China, Malaysia, and the United Arab Emirates in order to secure contracts which yielded approximately $46.5 million in profits. The defendants moved to dismiss the Indictment, arguing, among other things, that the FCPA does not extend to payments made to employees of foreign state-owned companies. In May 2011, Judge Selna denied the motion to dismiss, holding that "the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact," and identified several non-dispositive factors that must be considered. He also directed the parties to submit proposed jury instructions regarding the "instrumentality" issue. In his February 16, 2011 order, Judge Selna rejected a number of the proposed instructions submitted by the defendants, sticking closing to the list of non-exclusive factors he identified in his prior decision on this issue (as discussed here).
In two sets of motion papers filed on March 5, 2012, several of the defendants in the Carson case in California raised a new set of interesting issues. In both motions, the defendants raised issues regarding DOJ’s relationship with CCI, as discussed here. In a Motion to Dismiss, defendants argued that "the impact of the cumulative impediments – unique investigation tactics" which prevented access to certain evidence deprived them of their Due Process and Sixth Amendment rights, ("including the right to present a complete defense") and that "dismissal is the only appropriate remedy" for such severe prejudice. In a Motion to Suppress, defendants argued that because CCI had collaborated with DOJ during the investigation, the company was, in effect, a Government agent whom improperly compelled statements from the defendants during an internal investigation in violation of their Fifth Amendment rights. As a result, defendants argue that the statements should be suppressed. The case is presently scheduled to go to trial on June 5, 2012.
Shareholder Proxy Access Issues
On March 7, 2012, the SEC’s Division of Corporate Finance responded to a series of No-Action Requests regarding issues under Exchange Act Rule 14a-8 (under which eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials). As described here, CorpFin: (1) stated that there would be no action for omitting portions of proposals that contain something "separate and distinct" from shareholder nominations; (2) stated that there would be no action for omitting proposals that are vague and indefinite; (3) rejected the argument by certain corporations that a proposal was false and misleading; and (4) rejected the argument that a proposal to amend the by-laws had already been substantially implemented.
Dismissal of "Say-on-Pay" Lawsuit
In an Opinion and Order dated February 23, 2012 described here, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation for breach of fiduciary duty. Magistrate Judge Acosta’s recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs’ failure to make a presuit demand was not excused under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.
The Morrison Extraterritoriality Issue
On March 1, 2012, as discussed here, the Second Circuit Court of Appeals affirmed in part and reversed in part a District Court decision dismissing a complaint for securities fraud filed by nine Cayman Islands hedge funds against entities and individuals involved in an alleged pump-and-dump scheme, as discussed here. The Court, reviewing the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), concluded that plaintiffs had failed to allege the existence of a domestic purchase or sale of securities. The Court concluded that a plaintiff must allege facts suggesting that irrevocable liability was incurred ("the point at which the parties obligated themselves to perform what they had agreed to perform [the purchase or sale of the securities] even if the formal performance of their agreement is to be after a lapse of time) in the United States or that or title was transferred within the United States. The Court rejected other theories argued by the parties to determine whether a purchase or sale was "domestic," including basing the determination on: (1) the location of the broker-dealer; (2) the fact that the securities were issued by United States companies and registered with the SEC; and (3) the identity of the buyer. The Court also ruled that since the complaint was filed before the Supreme Court’s ruling in Morrison, plaintiffs would be permitted to amend their complaint.