August 4, 2008
SEC Obtains Emergency Freeze of Assets in Alleged Insider Trading in Options of DRS Technologies and American Power Conversion
On July 25 the SEC filed an emergency action in the United States District Court for the Southern District of New York against one or more unknown purchasers of the call options for the common stock of DRS Technologies, Inc. and American Power Conversion Corp. ("Unknown Purchaser"). The Commission's complaint alleges that the Unknown Purchaser reaped more than $3 million in profits by engaging in illegal insider trading, prior to announcements related to the acquisitions of DRS and APCC, through an account with UBS AG ("UBS"). The court issued a temporary restraining order freezing the Unknown Purchaser's assets.
The Commission's complaint alleges that while in possession of material, nonpublic information regarding merger talks between DRS and Finmeccanica S.p.A, the Unknown Purchaser acquired DRS call options. According to the complaint, between April 29, 2008 and May 7, 2008, the Unknown Purchaser bought 1,820 DRS call options that were out-of-the-money and set to expire in the near term for slightly more than $456,200. The complaint alleges these purchases constituted a very significant percentage of the series volume for DRS call options on the days in question.
The Commission's complaint further alleges that immediately following a May 8th Wall Street Journal article reporting the advanced merger negotiations between Finmeccanica and DRS, and after confirmation by DRS that it was engaged in talks regarding a potential strategic transaction, the Unknown Purchaser liquidated all DRS call options and made an ill-gotten profit of approximately $1.6 million. Finmeccanica later announced on May 12, 2008 that it would acquire DRS for $5.2 billion, or $81 a share.
Additionally, the Commission's complaint alleges that, while in possession of material, nonpublic information regarding Schneider Electric SA's plans to acquire APCC, the Unknown Purchaser acquired APCC call options. According to the complaint, between September 21 and October 20, 2006, the Unknown Purchaser bought 2,830 APCC call options at a cost of approximately $343,000. The complaint alleges these purchases constituted a very significant percentage of the series volume for APCC call options on the days in question.
The Commission's complaint further alleges that following Schneider's announcement on October 30, 2006, that it would acquire all of APCC's outstanding shares for $31 a share, the Unknown Purchaser liquidated all APCC call options and made an ill-gotten profit of approximately $1.7 million.
The Commission previously filed a complaint alleging that an Italian citizen engaged in insider trading in DRS securities ahead of the same May 8th disclosure of the merger negotiations between DRS and Finmeccanica. See SEC v. Cristian De Colli, 08 Civ. 4520 (PAC) (S.D.N.Y. May 15, 2008).
ALJ Finds Broker Gave Cash Kickbacks to New Mexico State Treasurer
On July 28 an Administrative Law Judge issued an Initial Decision in the matter of Guy P. Riordan finding that Guy P. Riordan (Riordan) violated the antifraud provisions of the federal securities statutes by giving cash kickbacks to the State Treasurer of New Mexico for securities transactions by the Treasurer's Office, and by participating in what he knew to be a non-competitive bidding process in the period 1996 through 2002. Based on the findings of illegal conduct and public interest factors, Chief Administrative Law Judge Brenda P. Murray has barred Riordan from association with any broker or dealer; ordered him to cease and desist from committing future violations; ordered him to disgorge $1,017,278.78, and prejudgment interest in the amount of $699,804.18; and ordered him to pay a civil money penalty in the amount of $500,000. The amount of disgorgement and civil money penalties shall be collected and placed in a Fair Fund and used for the benefit of the Treasurer's Office of the State of New Mexico that was harmed by the violations found in this decision.
Former Sycamore Networks CFO Suspended from Appearing Before SEC
On July 25 the SEC issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against Frances M. Jewels, an attorney and licensed CPA who served as Chief Financial Officer, Vice President of Finance and Administration, Secretary and Treasurer of Sycamore Networks, Inc. (Sycamore) from approximately mid-1999 until October 2004. The Order finds that on July 10, 2008, a final judgment was entered by consent against Jewels, permanently enjoining her from future securities law violations in connection with allegations of backdating stock options (Securities and Exchange Commission v. Sycamore Networks, Inc., et al., Civil Action Number 08-CA-11166(DPW), in the United States District Court for the District of Massachusetts). In that action Jewels was also ordered to pay $30,000 in disgorgement, together with prejudgment interest thereon in the amount of $4,980.04; to reimburse Sycamore in the amount of $190,000, consisting of certain cash bonuses she received; to pay a $230,000 civil money penalty; and was barred from serving as an officer or director of a public company for five years. The Order suspends Jewels from appearing or practicing before the Commission as an attorney or an accountant for a period of five years. After five years from the date of the Order, Jewels has the right to request reinstatement to appear or practice before the Commission as an attorney or accountant. Jewels consented to the issuance of the Order without admitting or denying any of the findings therein except as to the final judgment entered against her, which she admits. (Rel. 34-58232; AAE Rel. 2848; File No. 3-13102)
SEC Settles Backdating Charges Against HCC Insurance Holdings, Former CEO and Former GC
On July 21 the SEC settled backdating charges against HCC Insurance Holdings, Inc. (HCC), a Houston, Tex. insurance company; its former Chief Executive Officer, Stephen L. Way; and its former General Counsel, Christopher L. Martin. The complaint alleged that, on at least 38 and as many as 58 occasions from 1997 through 2005, Way looked back at HCC's historical stock prices and chose grant dates for the options that coincided with the dates of low closing prices for the stock, and, at Way's direction or with his knowledge, Martin prepared the documentation for the purported option grants, including written actions of HCC's compensation committee, stock option agreements, and Forms 4 and 5 reporting the grants to the SEC. The backdating of options caused the company to understate its compensation expense by approximately $26.6 million.
HCC consented to a permanent injunction from violations of the issuer-reporting, books-and-records, and internal-controls provisions of the federal securities laws. The SEC explained that it did not allege fraud claims and did not seek a monetary penalty against HCC based in part on the Company's remedial measures and its extraordinary cooperation in the Commission's investigation.
Way consented to a permanent injunction from violations of anti-fraud provisions of the federal securities laws and multiple other provisions, and agreed to pay a $200,000 penalty and to be barred from serving as an officer or director of a public reporting company for five years.
Martin consented to a permanent injunction from violations of anti-fraud provisions of the federal securities laws and multiple other provisions, and agreed to pay a $50,000 penalty. Martin also settled a related administrative proceeding pursuant to Rule 102(e) of the Commission's Rules of Practice by consenting, without admitting or denying the Commission's findings, to the entry of an order suspending him from appearing or practicing before the Commission as an attorney for two years. Settlement of the civil action is pending final approval by the court.
SEC Staff Issues ComplianceAlert on Common Deficiencies
On July 22 the SEC staff released a new ComplianceAlert letter identifying common deficiencies and weaknesses that SEC examiners have recently found during compliance examinations of firms registered with the SEC (which includes investment advisers, investment companies, broker-dealers, and transfer agents). The ComplianceAlert is intended to foster compliance in the securities industry by providing information about deficiencies and encouraging chief compliance officers to take steps to address any similar issues at their firms. The SEC staff last year issued its first ComplianceAlert letter.
The new ComplianceAlert letter describes examination findings in several areas:
Personal trading by investment advisory employees.
Soft dollar practices by advisers.
Mutual funds' proxy voting practices.
Valuation and liquidity issues for high-yield municipal bond funds.
"Free lunch" sales seminars.
Broker-dealers' valuation and collateral management processes.
Issues identified at broker-dealers affiliated with insurance companies.
Supervision of solicitations for advisory services.
Use of mortgage financing as credit for the purchase of securities.
Broker-dealers' supervisory and compliance controls over offices of supervisory jurisdiction.
Transfer agents' practices regarding "lost securityholders"