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. In the last month, there were a number of interesting developments in FCPA cases, with mixed results for prosecutors and defendants. These and other matters from the last month are discussed in greater detail after the jump.
Two defendants in the Haiti Teleco case (both men were "foreign officials") received contrasting news in the last thirty days. Jean Rene Duperval and Robert Antoine each served as the director of international relations for Telecommunications D’Haiti S.A.M. ("Haiti Teleco"), the Haitian state-owned telecommunications company (during different time periods). Both men were the beneficiaries of bribes paid by two Miami-based telecommunications companies to obtain favorable contracts with Haiti Teleco. As a foreign officials, neither man could be charged with violating the FCPA (see, e.g., U.S. v. Blondek, 741 F. Supp. 116, 120 (N.D. Tex. 1990), aff’d sub. nom., U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991)). Instead, both men were charged with crimes relating to money laundering.
Mr. Duperval took his chances with a federal jury and, on March 12, 2012, he was convicted on two counts of conspiracy to commit money laundering and 19 counts of money laundering. The trial lasted a week, but the jury took only three hours to convict him. As discussed here, on May 21, 2012, Florida Federal Judge Jose E. Martinez sentenced him to nine years in prison. The length of his sentence fell between that of two of his U.S.-based co-conspirators: on October 25, 2011, Carlos Rodriguez was sentenced to seven years in prison and Joel Esquenazi received a 15-year sentence, which the U.S. Attorney’s Office for the Southern District of Florida described as "the longest sentence ever imposed in a case involving the Foreign Corrupt Practices Act."
Mr. Antoine selected a different path. In March 2010, he pled guilty to conspiracy to commit money laundering and agreed to cooperate with authorities. In June 2010, he was sentenced to 48 months in prison. His cooperation with the Government (which included two lengthy debriefing meetings with the Government prior to signing the Plea Agreement, nearly twenty meetings with the Government after his plea (often without counsel) and testimony against Messrs. Esquenazi Rodriguez and Duperval) paid dividends. As discussed here, on May 29, 2012, Judge Martinez granted a Government Motion to reduce his sentence from 48 months to 18 months.
Three thousand miles away from Judge Martinez’s courtroom in Florida, another long-running FCPA saga reached its end in California when the Government elected to dismiss its appeal in the Lindsey Manufacturing case. Back in May 2011, following a five-week trial, a federal jury convicted Lindsey Manufacturing, Keith Lindsey, and Steve Lee of one count of conspiracy to violate the FCPA and five counts of actually violating the Act, based on payments to employees of the Comisión Federal de Electricidad ("CFE"), an electric utility company owned by the government of Mexico, in exchange for contracts to Lindsey Manufacturing. However, on December 1, 2011, Judge A. Howard Matz entered an order vacating the convictions and dismissing the Superseding Indictment against the three defendants, stating that the Government conducted a "sloppy, incomplete and notably over-zealous investigation," and that "the multiple acts of misconduct … undoubtedly affected the verdicts and thus substantially prejudiced" the Defendants. Following the decision, the Government immediately filed what they later referred to as "a protective Notice of Appeal" of Judge Matz’s ruling. However, in a May 25, 2012 filing discussed here, the Government stated that "[a]fter consideration of this matter within the United States Attorney’s Office, the Criminal Division of the Department of Justice, and the Office of the Solicitor General," it was moving to dismiss the appeal, thereby bringing the case to a close.
Another FCPA case in California, moved toward trial when, following a May 14, 2012 hearing, Judge James Selna issued two Minute Orders on May 22, 2012 which denied two motions in the Carson FCPA cases. In a Motion to Suppress and a Motion to Dismiss, the defendants raised issues regarding DOJ’s relationship with Control Components, Inc. ("CCI"), the employer of defendants, who cooperated with the investigation and provided certain information.
In the Motion to Suppress, defendants argued that because CCI had collaborated with DOJ during the investigation, it was, in effect, a Government agent or a state actor who improperly compelled statements from the defendants during an internal investigation, violating their Fifth Amendment rights. In the Motion to Dismiss, defendants argued that "the impact of the cumulative impediments – unique investigation tactics preventing Defendants 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.
As discussed here, with respect to the Motion to Suppress, Judge Selna rejected the defendants’ theory that CCI had become a "state actor," concluding that "there is no basis to conclude on the basis of events that transpired prior to the interviews or in the aftermath that the [company’s] lawyers were acting as agents of the Government." Judge Selna also denied the Motion to Dismiss, stating that many of the arguments raised in the motion had "been previously presented and rejected."
While the motions were pending: two of the defendants who had filed the Motion to Dismiss and the Motion to Suppress – Stuart and Hong ("Rose") Carson – pled guilty to one count of violating the FCPA on April 16, 2012. The failure of the motions and the quickly approaching trial date may have contributed to the decision by the other two defendants to also plead guilty. On May 29, 2012 (after Judge Selna ruling’s on the motion), defendant Paul Cosgrove pled guilty. As discussed here, the remaining defendant, David Edmonds, entered into a plea agreement as well.
A lengthy sentence was also issued in an insider trading case. As discussed here, on June 4, 2012, New Jersey Judge Katharine Hayden sentenced Matthew Kluger (a former associate at several prominent law firms) to twelve years in prison for his role in a insider trading scheme. One of his co-conspirators, Garrett Bauer (a Wall Street trader who apparently earned $30 million in profits in the scheme), received a nine-year sentence. On Tuesday, June 5, 2012, Judge Hayden sentenced Kenneth Robinson, another co-conspirator (who cooperated and wore a wire to obtain evidence against Messrs. Kluger and Bauer) to 27 months in prison. As U.S. Attorney Paul Fishman pointed out, Mr. Kluger’s sentence "is the longest handed out for" insider trading. Following the sentencing, Mr. Kluger (who pled guilty and apparently recovered less than $1 million in the scheme) stated his punishment was too harsh, comparing it to Raj Rajaratnam’s case (who did not plead guilty and earned tens of millions of dollars in his scheme, but was given a shorter sentence of eleven years): "I guess it’s better to take $68 million and go to trial and be unwilling to accept responsibility for what you did."
One of Mr. Rajaratnam’s co-conspirators, Rajat Gupta, the former Managing Director of McKinsey & Company and board member at Goldman Sachs and Procter & Gamble, was convicted on four of six counts by a federal jury in New York on June 15, 2012 for providing nonpublic material information to Mr. Rajaratnam in 2008. Specifically, Mr. Gupta was convicted of conspiring to commit insider trading and three counts of insider trading (but was acquitted on two other counts of insider trading), as discussed here.
As discussed here, a May 21, 2012 New York Times article by Ben Protess and Azam Ahmed shed some light on the Kluger case and examined the new techniques used by the SEC to catch those engaging in insider trading. As the article (available here) explained, the Commission "is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator." As an example, the article detailed how these efforts paid dividends in criminal and civil cases against Messrs. Kluger, Bauer and Robinson. The men had allegedly engaged in insider trading between 1994 and 1999, but ceased doing due to fear of being detected. The scheme resumed when Mr. Kluger joined Wilson Sonsini in 2005 and the three took numerous steps to avoid detection. The article described how, when the SEC switched tactics in 2010, "[t]he agency found that many of Mr. Bauer’s trades had come ahead of mergers that were advised by Wilson Sonsini, the law firm of Matthew Kluger." Further investigation revealed that Mr. Robinson was trading in some of the same stocks as Mr. Bauer and then traded in two stocks linked to Wilson Sonsini. The FBI convinced Mr. Robinson to wear a wire, leading to further evidence against Messrs. Bauer and Kluger, and ultimately, guilty pleas by all three men.
In other insider trading news, Mark Cuban continued his vigorous defense of the SEC’s insider trading case against him, filing his third Motion to Compel in the case, requesting that the Court: (1) reconsider a prior ruling regarding the production of SEC interview notes and summaries taken in the course of investigating Mr. Cuban; (2) compel the production of SEC’s interview notes and summaries from interviews taken in the course of the Mamma.com investigation: and (3) compel the production of certain exhibits to the SEC Office of Inspector General Report into potential SEC misconduct during the investigation of Mr. Cuban. As discussed here, in support of his argument, Mr. Cuban that copies of notes of the SEC’s interview of Mr. Cuban in 2004 (which he recently obtained in discovery) reveal that that Mr. Cuban immediately and voluntarily informed the SEC that he spoke with the CEO of Mamma.com on June 28, 2004 and that he sold his Mamma.com shares after receiving information about the private placement. He also explained that one of the primary reasons he sold his shares was his concern that a convicted stock swindler was involved with Mamma.com. Mr. Cuban further argues that the "the notes serve as a prime example of why Mr. Cuban has substantial need for additional SEC interview notes and summaries." He points out that, because the events at issue were eight years ago, "the memories of the witnesses in this case are fading, key witnesses cannot fully recall critical events underlying this case, and these notes may be the best basis upon which to refresh their memories (or otherwise corroborate their statements)."
Stanford’s Prison Term for His Ponzi Scheme.
Even if one were to add up the prison terms received by Messrs. Kluger and Duperval (and their co-conspirators), it would seem pale in comparison to the one received by R. Allen Stanford. As discussed here, on June 14, 2012, Judge David Hittner sentenced Mr. Stanford to 110 years in prison for his decades-long Ponzi scheme that bilked investors of over $7 billion. The court also imposed a personal money judgment of $5.9 billion. The sentence was less than half of what the Government requested (230 years), but given that Mr. Stanford is already 62, today’s sentence means that he is destined to spend the rest of his life in prison.
SEC Guidance and Policy Statements.
As discussed here, on June 11, 2012, the SEC issued a policy statement describing the phase in of final rules regulating security-based swaps and security-based swap market participants. The policy statement covers final rules to be adopted by the SEC under Title VII of the 2010 Dodd-Frank Act, which establishes a comprehensive framework to regulate over-the-counter derivatives and authorizes the Commodity Futures Trading Commission to regulate "swaps" and the SEC to regulate "security-based swaps." The SEC is seeking public comment on its plan to phase in the final rules regulating security-based swaps and security-based swap market participants.
As discussed here, on May 11, 2012, the SEC issued Instructions for Emerging Growth Companies ("EGC") to submit confidential draft registration statements or foreign private issuer non-public draft registration statements to the SEC. Until those submissions can be made on EDGAR, EGCs must submit draft registration statements to the SEC in a text searchable PDF format via a secure e-mail system. The SEC will also use the secure e-mail system to send comment letters to EGCs and EGCs must use this system to submit their correspondence regarding their draft submissions to the SEC.
NYSE and the Jobs Act.
As discussed here, in response to the enactment of the Jumpstart Our Business Startups Act (the "JOBS Act"), the New York Stock Exchange ("NYSE") proposes to amend Sections 102.01C and 103.01B of the NYSE’s Listed Company Manual (the "Manual") to permit the listing of companies on the basis of two years of reported financial data as permitted under the JOBS Act. Specifically, these amendments provide that a company which qualifies as an EGC may choose to include only two years of audited financial data in the registration statement used in connection with the "first sale of common equity securities of the issuer pursuant to an effective registration statement" under the Securities Act, rather than the three years of audited financial data that had previously been required. In addition, for as long as a company remains an EGC, it is not required to file selected financial data for any period prior to the earliest period for which it had included audited financial statements in its initial public offering registration statement. The proposed NYSE Rule is similar to approach taken by Nasdaq.
The SEC’s Neither-Admit-Nor-Deny Settlement Policy.
The issue of the SEC’s policy to allow defendants to settle without admitting or denying the allegations in the Commission’s Complaints was in the news again, as the briefing began in the Citigroup Global Markets appeal and Robert Khuzami, the SEC Director of Enforcement, defended the policy on Capital Hill.
As discussed here, on May 14, 2012, both the SEC and the Citigroup Global Markets, Inc. filed their appellate briefs in the three consolidated appeals regarding Judge Jed Rakoff’s November 28, 2011 Opinion and Order rejecting the SEC’s proposed settlement with Citigroup. Both entities argued that Judge Rakoff committed error in his Opinion and Order, arguing, among other things, that it was contrary to well-established law to reject a consent settlement with a federal agency because it was not supported by admitted or judicially established facts. Both parties also argued that the settlement between them was fair, reasonable and adequate. A Brief in support of the district court’s position will be filed in August 2012.
Several days later, on Thursday, May 17, 2012, Robert Khuzami testified before the House Committee on Financial Services about the SEC’s policy. In doing so, Mr. Khuzami discussed the Commission’s policy and approach to settling matters and defended the policy and the settlement in the Citigroup Global Markets litigation, as discussed here. He explained that the SEC’s settlement policies "serve the critical enforcement goals of accountability, deterrence, investor protection, and compensation to harmed investors." He identified the many factors which the SEC considers, including: (i) the strength of the evidence and the potential defenses, (ii) the delay in returning funds to harmed investors while a case is litigated; and (iii) the resources required for a trial. Mr. Khuzami explained what might happen if the policy was eliminated, asserting that "many companies likely would refuse to settle cases if they were required to affirmatively admit unlawful conduct or facts related to that conduct." He concluded by acknowledging that the policy "may require some measure of reasonable compromise," but stressed that it "is calibrated to redress wrongs committed by securities law violators, preclude wrongdoers from working with the investing public in the future, reform company practices, deter similar misconduct by others, and return funds directly to harmed investors in a timely manner."
On June 11, 2012, the Supreme Court ruled that it would consider an issue regarding class actions based on the fraud-on-the-market theory when it granted a Writ of Certiorari in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (U.S. Jun. 11, 2012). By doing so, the Court will now hear argument and decide whether, in a misrepresentation case under SEC Rule l0b-5, the court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory (and whether the court must allow the defendants to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying the class). As discussed here, the Third, Seventh and Ninth Circuits have ruled that during class certification the plaintiff must plausibly allege – but need not prove – that the claimed misrepresentations were material. However, the First, Second and Fifth Circuits require a plaintiff to prove materiality at the class certification stage. Given the split between the circuits, the Supreme Court elected to hear the case, which it will do next term.
As discussed here, on May 22, 2012, the law firm of Glancy Binkow & Goldberg LLP filed a class action complaint against Facebook, Mark Zuckerberg, nine other individuals defendants (Facebook directors and officers) and sixteen underwriters, alleging that Registration Statement for the Facebook IPO was inaccurate and misleading. According to the Complaint, Facebook was offering over 420 million shares for sale at a price of $38 per share. The IPO was expected to yield net proceeds of approximately $6.8 billion. The Complaint alleges that during the IPO roadshow, the lead underwriters "cut their earnings forecasts and the news of that estimate was passed on only to a handful large investors, not the public." The Complaint was filed in Superior Court in San Mateo County, California and alleges violations of Section 11 of the Securities Act for the inaccurate and misleading statements in the IPO Registration Statement and Section 15 of the Securities Act (against the individuals for controlling person liability).