Monday, May 28, 2007

Sterling Financial Uncovers Fraud

Sterling Financial Corporation, which owns banks in Pennsylvania, disclosed that an internal investigation uncovered a loan fraud scheme at its equipment leasing division.  The company had disclosed on April 30 that its financial statements were no longer reliable, and the reason now is clear.  According to the company's 8-K (here):

[The company] has been conducting an investigation into financing contract irregularities at its financial services group affiliate, Equipment Finance LLC ("EFI"). As of this date, the preliminary results of that investigation have revealed evidence of a sophisticated loan scheme, orchestrated deliberately by certain EFI officers and employees over an extended period of time, to conceal credit delinquencies, falsify financing contracts and related documents, and subvert the Corporation's established internal controls and reporting systems. (Italics added)

The company terminated five officers from the subsidiary, including its chief operating office and a vice president.  The company's stock took a significant hit from the disclosure, dropping 35%, and it disclosed that the fraud would result in a charge of $145 million to $165 million, causing it to suspend its dividend.  A press release (here) from Sterling Financial states that it "is working closely with its regulators and all appropriate federal authorities on the ongoing investigation."  Needless to say, federal prosecutors will be on the scene very quickly to pursue a fraud case. (ph) 

May 28, 2007 in Fraud, Investigations | Permalink | Comments (0) | TrackBack (0)

Nacchio Fights With Qwest Over Attorney's Fees

Since his conviction on nineteen counts of insider trading, former Qwest CEO Joseph Nacchio has now run into problems with his former employer over payment of his attorney's fees.  The company has asked Nacchio's attorneys to meet with its general counsel to discuss payment of his April legal bills, according to an AP story (here).  Nacchio has filed a lawsuit in Delaware Chancery Court seeking payment of the fees under a 2002 separation agreement when he left the company.  Qwest is a Delaware corporation, and that state's indemnification laws are quite liberal in allowing companies to reimburse officers and directors for their attorney's fees in litigation -- including criminal prosecutions -- brought for conduct on behalf of the corporation.  Delaware General Corporation Law Sec. 145(f) authorizes a company to agree to reimburse costs beyond what the law requires, subject to a requirement that the officer or director act in good faith:

The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office.

The "good faith" requirement has been read into this provision.  See Waltuch v. ContiCommodity Services, 88 F.3d 87 (2d Cir. 1996).

The cost of putting on a defense in a complex white collar crime case like Nacchio's runs into the millions of dollars, and it is not uncommon for lawyers to submit bills totaling over $25 million when all is said and done; former Enron CEO Jeff Skilling's defense reportedly cost almost $80 million.  Nacchio faces a July 27 sentencing date, and preparing for that proceeding will involve a substantial amount of time by his legal team in addition to putting together the appeal to the Tenth Circuit of the conviction.  Moreover, Nacchio still faces an SEC civil securities fraud action and shareholder lawsuits, so the meter on his attorney's fees will not stop any time soon.  The litigation over attorney's fees just adds to the melange of judicial proceedings Nacchio faces. (ph)

May 28, 2007 in Defense Counsel | Permalink | Comments (0) | TrackBack (0)

Keeping a Lid on Dow

First Dow Chemical fired a senior executive and a board member purportedly for holding secret talks with private investors about a possible buy-out of the company.  That has triggered dueling law suits in federal and state courts in Michigan and New York, and the centerpiece of the case is likely to be J.P Morgan Chase CEO Jamie Dimon, who tipped Dow's CEO, Andrew Liveris, that a couple of his company's investment bankers were part of the unauthorized discussion.  Now comes word that the SEC is probing trading in Dow shares and those of DuPont (actually E.I. DuPont de Nemours & Co.), which Dow approached in September 2006 about acquiring.  Even though no information about the talks was ever disclosed publicly, DuPont's stock popped up by about $10 per share during the period when the discussions took place, which may indicate a leak of inside information.  While most deal-based insider trading cases involve purchases of stock and call options in companies about which a transaction is at least announced (e.g. Rupert Murdoch's offer for Dow Jones) that causes the price to jump, Section 10(b) and Rule 10b-5 reach any scheme or artifice to defraud, which does not require the success of a particular trade.  With the SEC knocking on Dow's door, that opens another front for distracting litigation for the company.  A Reuters story (here) discusses the SEC's informal investigation. (ph)

May 28, 2007 in Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Sunday, May 27, 2007

No Insider Trading Is Too Small for the SEC These Days

The SEC's crackdown on insider trading is bringing in some fairly small cases.  In one case, the two defendants learned about the buy-out of Serologicals and the next day bought 500 and 400 shares.  When the deal was announced the following day, the stock jumped 34%, and the defendants made $3,785 and $2,897.  Not a bad gain on a one-day investment, but still fairly small potatoes for the SEC.  Nevertheless, the defendants settled a civil enforcement action by disgorging their profits and paying a one-time penalty plus interest, for a total of a bit less than $14,000.  The SEC Litigation Release (here) discusses the filing. In a second case, the Commission settled an insider trading claim for trading by the son of former Ohio State University business professor Roger Blackwell, who was convicted on insider trading charges and sentenced to six years (see earlier post here).  The son made $4,317.01 based on a tip from his father, and will disgorge his profits plus pay the usual one-time penalty plus interest (Litigation Release here).  The SEC's push on insider trading seems to know no minimum, so beware. (ph)

May 27, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (1)

Insider Trading Investigation of Sallie Mae Chairman

The House Education & Labor Committee released information that representatives from student loan giant Sallie Mae met with the Office of Management & Budget in December 2006, less than two months before President Bush's budget called for a significant cut in support for student loans that caused a significant drop in the company's shares.  Three days before the President announced the budget proposal, Sallie Mae's chairman sold 400,000 shares, about 1/3 of his holdings, over a two-day period (Form 4 here).  If the sale had taken place after the budget announcement, it would have resulted in about $1.4 million less in proceeds.  A Washington Post article (here) notes that a Sallie Mae representative asserted that the transaction was coincidental and there was no prior notice of what the budget proposal entailed; the chairman was not involved in the meeting with OMB.  Sallie Mae is being taken private in a $25 billion transaction, and has been subject to heavy criticism from Democrats on Capitol Hill.  The Post article notes that the SEC is looking into the trades. (ph)

May 27, 2007 in Insider Trading | Permalink | Comments (1) | TrackBack (0)