Sunday, October 2, 2005
An analyst for Citizens Bank and her husband are among the defendants in parallel criminal and civil insider trading cases filed by the U.S. Attorney for the District of Massachusetts and the Securities & Exchange Commission. Shengnan Wang worked in a division responsible for conducting the due diligence on possible acquisitions, and she became aware of Citizens' pending acquisition of Charter One in 2004. Wang tipped the manager of a hedge fund in which she and her husband, Hai Liu, had invested, about the pending deal. Michael Tom then purchased Charter One shares on behalf of a hedge fund he managed for Global Time Capital Management, LLC. According to the SEC's Litigation Release (here):
[B]etween April 29, 2004 and May 4, 2004, Michael Tom purchased numerous Charter One call options, which increase in value with a rise in the stock price, for his personal account and for his hedge fund, GTC Growth Fund. Michael Tom also traded Charter One securities prior to Citizens' announcement in a joint account he held with his wife and in accounts he managed for his wife and in-laws. According to the complaint, Michael Tom's illegal insider trading in Charter One securities resulted in total imputed profits of approximately $743,505.
The Complaint also alleges that Michael Tom and Wang's husband, Hai Liu, tipped their brothers, David Tom and Zheng Liu, respectively, about Citizens' acquisition plan. As a result, both David Tom and Zheng Liu traded in Charter One securities prior to Citizens' announcement. David Tom's trading resulted in imputed profits of approximately $39,089, while Hai Liu's brother, Zheng Liu, made imputed profits of approximately $2,736.
The SEC complaint names Wang, Liu, Tom, Global Time Capital, and the two brothers as defendants, while the criminal case involves a one-count criminal complaint against Wang and Liu charging securities fraud (U.S. Attorney's press release here). The filing of a criminal complaint usually indicates that the defendants will enter a guilty plea, and look for criminal charges against Tom and the hedge fund in the near future, perhaps by way of an indictment if he chooses to fight the charges. Once again, even if it looks like free money by trading in a stock before news hits the market, it just doesn't seem to work out that way once the SEC and U.S. Attorney's Office connect the dots -- and this does not sound like a particularly tough puzzle to put together. (ph)
A Reuters report (here) discusses the involvement of the Food & Drug Administration's Office of Criminal Investigations in the review of Guidant Corp.'s disclosure of potential problems with its heart defibrillator and pacemaker devices. According to Guidant's most recent 10-Q:
Additionally, in the second quarter of 2005, the Company voluntarily issued a series of field actions advising physicians of important safety information and corrective actions for certain of its implantable defibrillator and pacemaker systems. The FDA subsequently classified certain of these field actions as recalls. The Company has elected to provide supplemental warranty programs for the devices covered under certain of these field actions. The supplemental programs cover the product and certain costs should a physician determine replacement of a patient’s device is appropriate, as well as the return of any unused inventory. A charge of $94.0 million was recorded in the second quarter of 2005 covering the current and anticipated future costs associated with these supplemental warranty programs.
It is unclear what is the focus of the government's investigation, and once the FDA completes its review, the agency will decide whether to forward the results to the Department of Justice for further action. A criminal investigation is unlikely to throw a wrench into the pending acquisition of Guidant by Johnson & Johnson, but there will be pressure to resolve any outstanding issues with the heart devices as soon as possible. No one likes to buy a criminal case. (ph)
The SEC instituted administrative proceedings under Rule 102(e) against two Deloitte & Touche accountants related to their work on the audit of Adelphia Communcations involving the failure to properly account for transactions involving the Rigas family, which controlled Adelphia. Adelphia eventually collapsed amid a widespread accounting fraud that included a number of transactions with the controlling shareholders that were not properly disclosed. The engagement partner, Gregory Dearlove, is fighting the Commission's charges (Order here), which allege the following:
Adelphia’s 2000 Financial Statements were materially false and misleading and failed to comply with Generally Accepted Accounting Principles ("GAAP"). In its Form 10-K for the year-ended December 31, 2000 (the "2000 Form 10-K"), Adelphia understated its coborrowing debt by $1.6 billion, overstated equity by at least $368 million and improperly netted and failed to disclose related party receivables and payables between Adelphia and entities owned or controlled by members of Adelphia’s controlling shareholders, the Rigases. Adelphia also failed to disclose the nature and extent of material related party transactions between Adelphia and the Rigases and the entities owned or controlled by them.
Dearlove knew or should have known that Adelphia’s 2000 Financial Statements had not been prepared in conformity with GAAP and that the audit he planned, directed and supervised of the 2000 Financial Statements (the "2000 Audit") had not been conducted in accordance with Generally Accepted Auditing Standards ("GAAS"). Dearlove nonetheless signed an audit report containing an unqualified opinion on the 2000 Financial Statements, stating falsely that the audit was conducted in accordance with GAAS, that the financial statements were prepared in conformity with GAAP, and that they fairly presented Adelphia’s financial condition.
Another Deloitte accountant, William Caswell, who served as a non-partner director of the Adelphia audit, settled the SEC administrative proceeding by agreeing to a two-year bar on appearing before the Commission (Order here). (ph)
Lawrence Franklin, who was charged with conspiracy and improper disclosure of classified information, will enter a guilty plea this week. Franklin was charged (indictment here) with leaking information to two members of the American Israel Public Affairs Committee, Steven Rosen and Keith Weissman, who were also charged related to terrorist activities emanating from Iran and the involvement of al Qaeda in terrorist acts. The three men were not charged with espionage, a much more serious offense, and Franklin's goal in disseminating the information is not entirely clear, although his plea hearing will likely shed light on his motives. An AP story (here) discusses the case. (ph)