Today, the Federal Securities Law Blog takes a look back at the last 30 days in the federal securities world in a regular feature which appears on approximately the 15th of each month. The last month saw our Blog turn five years old, but more importantly, the SEC continued to provide guidance relating to the Jumpstart Our Business Startups Act ("JOBS Act"), and there were a host of issues in insider trading cases and cases involving companies in China. These and other matters from the last month are discussed in greater detail after the jump.
The JOBS Act.
As discussed last month, on April 5, 2012, President Obama signed into law the JOBS Act. On April 16, 2012, the SEC Division of Corporation Finance issued additional Frequently Asked Questions to provide guidance on the implementation and application of the Act, addressing questions of general applicability under Title I of the JOBS Act (as discussed here). Title I provides scaled disclosure provisions for emerging growth companies and allows emerging growth companies to use test-the-waters communications with Qualified Institutional Buyers and institutional accredited investors. CorpFin supplemented that guidance on May 3, 2012 (as discussed here). The FAQs clarify how an issuer can qualify as an emerging growth company, applicable dates for qualification and registration, and various reporting and disclosure requirements.
Information on EDGAR.
As discussed here, the Commission announced that beginning on April 19, 2012, the SEC staff will begin to republish Commission orders pursuant to Exchange Act Section 12(j) revoking a company’s Exchange Act registration and Commission stop orders pursuant to § 8 of the 1933 Act on EDGAR. Although these orders are currently posted on the SEC’s website as administrative orders, they have not been posted on EDGAR. The SEC staff will begin with the most recently issued orders and go backwards through 2004. New orders will be published on EDGAR when issued going forward.
Commission Improvements in Economic Analysis in Rulemaking.
On Tuesday, April 17, 2012, SEC Chairman Mary Schapiro testified before the House Subcommittee on TARP, Financial Services and Bailouts about the steps the SEC has taken and is taking to strengthen our economic analyses in the rulemaking process. Chairman Schapiro acknowledged that "economic analysis is a critical element of the SEC’s rulemaking obligation," and that "the unprecedented rulemaking burden generated by passage of the Dodd-Frank Act has tested the resources and analytical capabilities of the agency." However, she explained, the Commission has "learned a great deal and our rulemaking processes have continued to evolve." As discussed here, she told the Subcommittee that the SEC’s "new guidance reflects many of the current best practices, which the agency will refine in the future as necessary to ensure high quality economic analysis in its rulemaking."
Insider Trading Issues.
News in the last thirty days provided some excellent insight into the SEC’s efforts to combat insider trading. Devin Leonard’s fine profile in BusinessWeek of Sanjay Wadhwa, a deputy chief of the SEC’s market abuse group, in took a close look at the insider trading investigation of Raj Rajaratnam (and the many leads that investigation has yielded) and was instructive in highlighting how the SEC overcomes disadvantages and what it has done to improve its investigative efforts in recent years. The article, discussed here, focused on the investigation into the Galleon Group and early key discoveries such as the remarkably similar trading by Mr. Rajaratnam and others and his instant messages with Roomy Khan (a witness who ultimately cooperated with prosecutors). As the article points out, the Galleon investigation has led to 56 arrests and 48 convictions, including the conviction of Mr. Rajaratnam, his subsequent sentencing to 11 years in prison and the SEC’s civil judgment against him for over $92 million. For those who follow matters investigated and litigated by the SEC, the BusinessWeek article provides a rare insight into how the SEC performs those tasks and what changes have occurred in their methodology in recent times.
The investigation which ensnared Mr. Rajaratnam continues and the Commission received a positive result on a procedural issues in its litigation against him and Rajat Gupta. Judge Jed Rakoff denied a motion to compel by the two defendants, who were seeking an order that the SEC produce documents concerning settlement negotiations between the Commission and cooperating witnesses. As discussed here, Judge Rakoff rejected the defendants’ argument that the information from the negotiations could be used to prove bias, stating that "[t]he best evidence of bias in a cooperator’s testimony comes from the actual agreement he struck with the SEC, not from his lawyer’s attempt to get him a good deal."
Another positive story arising from insider trading investigations was the May 3, 2012 announcement from DOJ that it "has returned approximately $44 million to victims of [the] securities fraud scheme" involving of Joseph Nacchio, the former CEO of Qwest Communications International Inc. Following a trial, a jury convicted Mr. Nacchio of 19 counts of insider trading on April 19, 2007 based on events which took place between 1999 and 2002. As discussed here, the long process of litigation in the District Court and the Appellate Court meant that those who invested in Qwest waited ten years to see any recovery (even though Mr. Nacchio paid the forfeiture amount in 2007). However, ultimately $44 million in forfeited funds is "being returned to 112,210 victims who incurred losses on Qwest securities purchased during the fraud scheme." The distribution of funds to victims was authorized and overseen by the Department of Justice’s Victim Asset Recovery Program in the Criminal Division’s Asset Forfeiture and Money Laundering Section.
The SEC also achieved success in a pair of cases discussed here involving families that engaged in insider trading. In both cases, the insider and the tippees settled with the Commission, paying far more than the profit they earned. In one case, the SEC filed a case against Mohammed Mark Amin, a Hollywood movie producer ("the producer or executive producer for more than 75 Hollywood movies including Frida, Eve’s Bayou, and four movies in the Leprechaun series," according to the Commission) and his brother, cousin, and three other friends and business partners for insider trading in the shares of DuPont Fabros Technology Inc., a company in which Mr. Amin served on the board of directors. Those who traded earned approximately $618,000, but the six defendants settled by paying nearly $2 million. The same week, the Commission filed a case against Angela Milliard, a former paralegal at Semitool Inc., a semiconductor company in Montana, and her father for trading on inside information about the 2009 acquisition of the company. The daughter and father (who earned $67,000) agreed to settle the SEC’s case by paying more than $175,000.
An April 25, 2012 article by Scott Patterson and Jenny Strasburg in the Wall Street Journal revealed that, during an investigation of Pipeline Trading Systems LLC, an SEC attorney showed a witness a notebook which included handwritten notes from a whistleblower, and the witness recognized the handwriting and was able to tell his employers who the whistleblower was. As discussed here, the Whistleblower spoke to the Journal and agreed to be identified (and provided some insight on how he was treated both before and after he blew the whistle on Pipeline’s activities). The Journal also published a letter from a letter from George S. Canellos, the Director of the SEC’s New York regional office, which stated that the SEC did not expose the whistleblower and stated that the agency’s use of notebooks with his handwriting was not "inadvertent" and not a "gaffe."
The last thirty days saw developments in several cases involving Chinese companies, including a case filed yesterday against China Natural Gas, Inc. and its former CEO Qinan Ji for having the corporation make loans to Mr. Ji’s family and failing to disclose the transactions.
In another case against a Chinese company discussed here, on April 23, 2012, the SEC filed a case against SinoTech Energy Limited, an oil field services company, with intentionally misleading investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC also charged CEO Guoqiang Xin and former CFO Boxun Zhang for their involvement in the fraud. The Complaint, filed in federal court in Louisiana, alleges that the company’s IPO registration statement misled investors about the acquisition and value of a key asset lateral hydraulic drilling units ("LHD Units") that are central to its business. In addition, the SEC charged Qingzeng Liu, SinoTech’s chairman and controlling shareholder, with misappropriating at least $40 million of SinoTech’s cash between June, 2011 and August 2011. The SEC’s complaint seeks permanent injunctive relief against all defendants, and disgorgement of ill-gotten gains by SinoTech and Mr. Liu, as well as civil penalties against the three individuals. The Commission also director-and-officer bars against each of the individual defendants.
As discussed here, on April 25, 2012, DOJ announced that Garth Peterson, a former managing director for Morgan Stanley’s real estate business in China, pled guilty in federal court in Brooklyn, New York for participating in a conspiracy to evade the internal accounting controls which the company was required to maintain under the FCPA. The SEC also announced that it brought and settled a case against Mr. Peterson. However, in announcing the case against Mr. Peterson, DOJ stated that it was not bringing any enforcement action against Morgan Stanley related to this conduct (noting that "Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials").
On May 9, 2012, the SEC announced that it has filed an Administrative Proceeding against Deloitte Touche Tohmatsu CPA Ltd. ("D&T Shanghai") for its refusal to provide the agency with audit work papers in connection with the Commission’s investigation of the firm’s client for alleged fraud. The Administrative Proceeding was filed while the Commission is in the midst of a subpoena enforcement action against the same accounting firm, that is scheduled to be heard in federal court in early June. The new matter is latest proceeding in the dispute over whether the SEC can compel the Chinese accounting firm to respond to its subpoena – the penalty which D&T Shanghai could face for its failure to comply is censure or being denied the ability to appear before the Commission.
Class Action Settlement.
In the In re: Lehman Bros. Sec. and ERISA Litig., Judge Lewis Kaplan issued a May 3, 2012 Memorandum and Order directing certain defendants (five officers, who had already allowed a retired Judge specially retained to assist in the parties’ discussions to review information regarding their assets), to provide that same financial information to the Court for an in camera review. As discussed here, Judge Kaplan will review that information in order to make a determination regarding the fairness a $90 million settlement (which was to be paid by insurance coverage) between class action plaintiffs and the directors and officers.