Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, June 3, 2010

FSA Loses Inside-Trading Prosecution

In some news from across the Pond -- the Wall St. Journal reports that the UK's equivalent of the SEC, the FSA, was stunned when a jury acquitted (after less than 2 hours) two individuals of trading on inside information.  FSA has been known as a "toothless tiger," but has been trying to beef up its reputation as a tough enforcer.  In this era of regulatory reform, it is under some pressure to show it can win a big case.  WSJ, Loss of Insider Case Is Blow to FSA

June 3, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Statement on Modified FASB-IASB Timetable for Standards

On June 2, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) announced modifications to their timetable for and prioritization of standards being developed under those boards' joint agenda.

In response, SEC Chairman Mary L. Schapiro issued the following statement:

"The boards believe that the modified plan will contribute to increased quality in the standards because it provides additional time for stakeholders to thoroughly consider the proposals and give both boards quality feedback. I view this as time that is well invested.

"Quality financial reporting standards established through an independent process are threshold criteria against which the Commission's future consideration of the role of IFRS in the U.S. reporting system will be based. I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff's analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff's analyses.

"Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers."

June 3, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 2, 2010

Crisis Commission Holds Hearing on Credit Ratings

The Financial Crisis Inquiry Commission held a hearing today on Credibility of Credit Ratings, the Investment Decisions Made Based on those Ratings, and the Financial Crisis.  The Commission's website contains written testimony, exhibits and press coverage of the event.  Warren Buffett was one of the key witnesses; according to the press accounts, he provided a "tepid" defense of the rating agencies, while Moody's employees expressed appropriate mea culpas.  See WSJ, Buffett Defends Moody's Managers; NYTimes, Buffett Defends Moody’s at Hearing.

June 2, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Officer of Biotech Company with Lying about Downs Syndrome Test

The SEC charged Elizabeth A. Dragon, the former Senior Vice President of Research and Development at Sequenom, Inc., a biotechnology company, with making false statements to investors about her company's prenatal test for Down syndrome.  The SEC alleges that Dragon lied during at least three public events where she made presentations to analysts and investors. She claimed that the test could predict whether a fetus had Down syndrome with almost 100 percent accuracy. However, the SEC alleges that Dragon knew the test was far less accurate than she claimed publicly. When Sequenom later announced that it was no longer relying on the data that Dragon presented and the test would not be launched as planned, the company's stock price plummeted by approximately 76 percent.

Dragon has consented to a judgment permanently enjoining her from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and barring her from serving as an officer or director of a public company. The court will determine the amount of a financial penalty to be paid by Dragon at a later date.

June 2, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Diebold and Former Officers with Accounting Fraud

The SEC filed fraud and other charges against Diebold, Inc. ("Diebold"), Gregory Geswein, the company's former Chief Financial Officer, Kevin Krakora, the company's former Controller and later CFO, and Sandra Miller, the company's former Director of Corporate Accounting. Diebold is an Ohio corporation that manufactures and sells automated teller machines, bank security systems, and electronic voting machines.

The Commission alleges that Diebold, Geswein, Krakora, and Miller engaged in fraudulent accounting practices to inflate the company's earnings to meet forecasts. As alleged in the complaints, from at least 2002 through 2007, these fraudulent practices included (i) improper use of "bill-and-hold" accounting; (ii) improper recognition of revenue on a lease agreement subject to an undisclosed buy-back agreement; (iii) manipulating reserves and accruals; (iv) improperly delaying and capitalizing expenses; and (v) improperly writing up the value of used inventory.  According to the SEC, Diebold filed at least 40 annual, quarterly, and other reports with the Commission, and issued dozens of press releases, that contained material misstatements and omissions concerning the company's financial performance. According to the complaints, Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million.

Diebold agreed to settle the charges and pay a $25 million civil penalty.  In the contested action against Geswein, Krakora, and Miller, the SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, civil monetary penalties, and, with respect to Geswein and Krakora, officer-and-director bars and reimbursement of bonuses and other compensation.

In addition, the Commission filed an action against Walden O'Dell, the former Chief Executive Officer of Diebold, seeking reimbursement for bonuses and other incentive-based and equity-based compensation pursuant Section 304 of the Sarbanes-Oxley Act of 2002. The Commission's complaint alleges that Diebold was required to restate its annual financial statements for 2003, as well as other reporting periods, as a result of fraud and other misconduct. The complaint further alleges that O'Dell received from Diebold cash bonuses, shares of Diebold stock, and stock options during the 12-month period following the issuance of Diebold's 2003 financial statements, and that O'Dell failed to reimburse Diebold for that compensation. The complaint does not allege that O'Dell engaged in the fraud. Without admitting or denying the Commission's allegations, O'Dell has agreed to consent to a final judgment ordering him to reimburse $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

The SEC's complaints in all three actions are posted at its website.

June 2, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 1, 2010

Former Monsters Controller Settles Backdating Charges

The SEC announced that on May 28, 2010, the U.S. District Court for the Southern District of New York entered a Final Judgment by consent in a previously-filed enforcement action alleging backdating stock options against Anthony Bonica (Bonica), a certified public accountant who formerly served as the controller of Monster Worldwide, Inc. (Monster). The Final Judgment enjoined Bonica from direct and indirect violations of the federal securities laws and ordered him to pay a total of $209,537.60 in disgorgement of ill-gotten gains, interest and penalties.

The Commission's complaint alleged, among other things, that Bonica participated in a fraudulent stock option backdating scheme; that Bonica's fraudulent conduct caused Monster's periodic filings and proxy statements to falsely portray Monster's options as having been granted at exercise prices equal to the fair market value of Monster's common stock on the date of the grant, when, in fact, Monster was granting in-the-money options; and that Bonica understood the accounting consequences of granting in-the-money options but did nothing to ensure that Monster properly accounted for these options in its financial statements. The complaint alleged that Bonica's conduct caused Monster to file materially false and misleading public reports that contained financial statements that materially understated Monster's compensation expenses and materially overstated its quarterly and annual net income. On December 13, 2006, Monster restated its historical financial results for 1997-2005 in a cumulative pre-tax amount of approximately $339.5 million to record additional non-cash charges for option related compensation. The complaint further alleged that Bonica benefited from the scheme, including the receipt and exercise of backdated grants of in-the-money options.

June 1, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New York Appellate Court Bars Holder Claims as Inconsistent with Out-of-Pocket Rule

A New York appellate court (First Dept.) recently held, in Starr Foundation v. American International Group, Inc. (Download StarrFdnvAIG) that holder claims are not recognized in New York law because they violate the "out-of-pocket" rule governing losses recoverable for fraud.  Starr Foundation, whose primary assets are AIG stock, sought to diversify its portfolio and, beginning in 2006, began gradual sales of its stock. In its complaint against AIG, the Foundation alleges that, in reliance on AIG's fraudulent representations minimizing the degree of risk represented by AIG's credit default swap portfolio, it suspended its sales of stock in October 2007.  But for AIG's misrepresentations, alleged the Foundation, it would have continued to sell 15.5 million shares.  Instead, when the value of AIG stock declined upon revelation of its financial condition, the Foundation continued to hold approximately 15.5 million shares.  Thus it sought to recover the value it would have realized for those shares had defendants accurately made disclosures about the risks, less the stock's value after the fraud was exposed.

The court held that "[m]anifestly, such a recovery would violate New York's longstanding out-of-pocket rule," under which the true measure of damages for fraud is "indemnity for the actual pecuniary loss substained as a direct result of the wrong."  Indeed, the court believed that this action was "virtually the paradigm of the kind of claim that is barred by the out-of-pocket rule," because "a lost bargain more 'undeterminable and speculative' than this is difficult to imagine."

One justice dissented, relying on a 1927 decision by the Appellate Division that allowed a claim for fraudulent inducement to retain securities.

June 1, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Historical Society Presents Program on Self-Regulation in Securities Industry

The SEC Historical Society presents a panel discussion on Self-Regulation in the Securities Industry at noon on June 3, which will be webcast from the Society's webpage.

The program is moderated by Professor Donna M. Nagy (Indiana-Bloomington). 

Presenters are:

  • James A. Brigagliano, Deputy Director, Division of Trading and Markets, U.S. Securities and Exchange Commission
  • James F. Duffy, Interim Chief Executive Officer, NYSE Regulation, Inc.
  • Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA
  • Joanne Moffic-Silver, General Counsel, Chicago Board Options Exchange

June 3, 2010 • 12:00 noon ET
Free and accessible worldwide without prior registration

June 1, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Arbitration Panel Awards Merkin Investor $1.75 Million for Madoff Losses

An investor in a feeder fund for Bernard Madoff run by Ezra Merkin was awarded $1.75 million in a AAA arbitration.  An unusual aspect is that both the majority and the dissenting arbitrator provided a written explanation for their decisions, which have become publicly available.  The Chair stated that because the claimant requested a reasoned award and given the substantial damages sought and the time and resources put into the case, he felt the parties deserve to know how the panel evaluated the evidence and came to its award.  The majority found that Merkin intentionally breached his fiduciary duties to the claimant by failing to disclose the fund's integral association with Madoff.  It found that Merkin was negligent (but not grossly negligent) in his oversight over the investment and so was not liable under the investment agreement.(Download 1 75M ARBITRAL AWARD V EZRA MERKIN)

June 1, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)