Wednesday, June 23, 2010
GUEST BLOGGER-SOLOMON L. WISENBERG
Here is the SDNY's press release regarding the civil forfeiture complaints filed yesterday against property "traceable" to Bernard Madoff's Ponzi scheme "and paid to or on behalf of" former Bernard L. Madoff Investment Securities LLC ("BLMIS") employees, Annette Bongiorno and Joann Crupi. Here is the Bongiorno-related complaint and here is the Crupi-related complaint.
It is clear from the complaints that the government believes Bongiorno and Crupi were knowing participants in Madoff's fraud. They each allegedly "knowingly perpetuated the fraud" by, among other things, overseeing, preparing, or assisting in the preparation of fabricated account statements and other documents.
By proceeding civilly against the properties at this time, the government lowers its burden of proof and puts the longtime, back-office BLMIS employees in the unenviable position of possibly incriminating themselves if they seek to retain their assets through the in rem forfeiture litigation. Hat tip to forfeiture expert David B. Smith of English and Smith for pointing out to me that invocation of the Fifth Amendment in the context of a civil forfeiture proceeding may not automatically result in the drawing of an adverse interest.
Friday, October 2, 2009
NACDL's 5th Annual Defending the White Collar Case Seminar - "Financial Fiasco - Prosecutions & Lawsuits Stemming from the Securities Market Meltdown," Friday, October 2, 2009
Guest Blogger: Ashish S. Joshi, Lorandos & Associates (Ann Arbor, MI / Washington, DC)
Moderator: Gerald B. Lefcourt
This was one of the most anticipated panels of the program as the panelists included Hon. Lewis Kaplan who has been roundly applauded by the white-collar defense bar for his insightful and game-changing KPMG decision, Ira Sorkin, the attorney for Bernard Madoff, Susan Brune, who is shortly going to trial to defend Bear Stearns hedge fund managers Cioffi and Tannin, who have been accused of securities fraud, and former SEC Enforcement Director Walter Ricciardi to provide perspective on the major developments taking place at the SEC.
Walter Ricciardi talked about the recent changes in the SEC. With the appointment of Mary Shapiro as the Chair of the Commission, the SEC has sent out a signal that it’s the “tough cop on the beat.” The Commission has strengthened its enforcement division. The new subpoena power given to its enforcement division has also given the SEC more bite. Contrary to its earlier culture where “everybody does everything,” now the SEC has created Specialized Units. These Units – such as the Asset Management Unit – will have a unit head and staff who will focus their attention on the unit’s activities, full time. Ricciardi also mentioned that while the SEC earlier used to go after the entities and left out the individuals who had been accused of wrongdoing, going forward, this will not be the case.
After Ricciardi, it was Ira Sorkin’s turn to speak. Sorkin acknowledged that there has been a major change in white-collar investigation and/or prosecution since his early days at the SEC. Now, the SEC is increasingly reaching out and cooperating with the U.S. Attorneys’ office. The approach appears to be: “Talk to us about case A, we will talk to you about case B.”
Sorkin remarked that in the last 15-20 years, parallel proceedings in a white-collar prosecution have mushroomed. Every regulator, criminal or civil, now wants a piece of these white-collar cases. It’s prestigious, it’s sexy and it garners media attention. As a result, “co-operation agreements” have increased. Agencies and departments are cooperating with each other like never before.
Sorkin also commented on FINRA – a self-regulatory organization. FINRA, during its investigation apparently does not recognize the 5th Amendment privilege against self-incrimination. Your client calls you and tells you that FINRA wants to talk to your client. Basically, you tell your client that you have bad news and worse news in this situation. Bad news: if your client doesn’t testify before FINRA, it can bring a 82(10) proceeding and take your client’s license away. Worse news: if your client does testify, FINRA can then take the transcript and share it with the DOJ or district attorney’s office and your client may end up with a much worse problem.
Sorkin also commented on the SEC and DOJ’s “queen for a day” proffer agreements. These offers are meaningless. They provide nothing to the clients but a lot to the government – and, they are quite dangerous. If you believe that a proffer is necessary, it would be better to go down the road with Rule 410 protections in place.
Sorkin ended his discussion by stating that it was quite alarming that more and more defense lawyers are acting as “junior G-men” for the government to do internal investigations.
After Ira Sorkin, it was the turn of Susan Brune. Brune commented that in this economy, there’s a common perception: why haven’t been people been charged for the collapse of stock market? There is an assumption that just because the stock market went down, there has to be underlying criminality behind this.
Brune also acknowledged that a typical white-collar case is a “resource problem.” It requires tremendous resources. Emails, documents, reports, papers - millions of documents are involved in defending a white-collar criminal case. Just the resources needed to review emails alone are, at times, overwhelming.
Judge Lewis Kaplan stated that maybe the current debate concerning the attorney-client privilege should be re-focused. Judge Kaplan commented that the incessant talk about the Holder-Thompson-McNulty-Filip memorandums might be irrelevant. Instead, the focus should be on the underlying corporate criminal liability. When would a criminal investigation and/or prosecution of a corporate entity be appropriate? If a CFO commits fraud, there should be no issue when the company is made civilly liable for the CFO’s acts. But when the DOJ launches a criminal investigation, it raises other issues. The government often is in a place where it can make the corporations do things to the individual employees that the government otherwise is not in a position to do directly. Be it indemnification, attorney fees, advancement of defense costs… the list is endless.
Judge Kaplan stated that some legal commentators have justified the government’s actions by taking the position that: the society should not be made to expand its finite resources to root out criminal behavior when this burden could easily be shifted to the companies where the alleged criminal behavior has said to have occurred. But, the Judge stated, this was an empirical question.
Thursday, May 28, 2009
FERA makes many changes to the False Claims Act, 31 U.S.C. ss 3729-3733. FriedFrank (with many thanks to John T. Bose) has done a wonderful analysis here (Download 090521), and has a redline copy here that lets one see the changes that were made to these statutes. Finally, the statute with the provisions incorporated is here (again, thanks to FriedFrank).
When examining the money laundering statute changes (here), it was apparent that a key change was to address the recent Supreme Court ruling in the Santos case. The changes in the False Claims Act also address some Court rulings, most noteably Allison Engine Co. v. United States ex re. Sanders. FERA, overall, makes the government job of obtaining convictions and getting civil remedies easier. The False Claim Act provisions do that with a reduced intent requirement. But the government and relators do not get everything here, as FERA provides for a materiality requirement.(see Download 090521, supra).
Wednesday, May 6, 2009
The Securities Exchange Commission filed a civil complaint against "two California-based attorneys as well as a California corporation and its owner for preparing and issuing fraudulent legal opinions involving unregistered stock that enabled promoters and others to sell shares in an illegal pump-and-dump scheme." The SEC Press Release states:
"The market relies on lawyers to act as gatekeepers who exercise their function in good faith," said Katherine S. Addleman, Regional Director of the SEC's Atlanta Regional Office. "As alleged in our complaint, these defendants disregarded the investing public by operating a legal opinion mill of fraudulent letters that misrepresented critical facts and cited to non-existent documents."
See also Joe Palazzolo, SEC Charges Lawyers in Pump-and-Dump Scheme
Thursday, July 31, 2008
With a few modifications to its opinion, the Ninth Circuit entered an order in United States v. Stringer denying the defendant's petition for rehearing and suggestion for rehearing en banc.
This means that the Ninth Circuit reversal of the district court dismissal of the indictments in the Stringer case remains the court's ruling. The district court had dismissed the indictments concluding "that the government had engaged in deceitful conduct, in violation of defendants' due process rights, by simultaneously pursuing civil and criminal investigations of defendants' alleged falsification of the financial records of their high-tech camera sales company." The lower court had also stated that "should there be a criminal trial, all evidence provided by the individual defendants in response to Securities and Exchange (SEC) subpoenas should be suppressed." For discussion of the 9th circuit reversal of the district court opinion, see here.
(esp)(blogging from SEALS '08 in Palm Beach, Florida)
Tuesday, April 15, 2008
Howard M. Shapiro and David Z. Seide of Wilmer Cutler Pickering Hale and Dorr have an important commentary piece on Stringer in Legal Times. One can access it here via the site's free registration. They provide an important piece of advice to defense counsel - "Defense counsel should keep pushing for a detailed record of communications and interaction between civil and criminal agencies because prosecutors and civil enforcement attorneys will continue to risk crossing the line every time they coordinate their investigations."
Friday, April 4, 2008
The defense suffered a major loss today as a result of a reversal by the Ninth Circuit Court of Appeals. In United States v. Stringer, the district court had dismissed indictments concluding "that the government had engaged in deceitful conduct, in violation of defendants' due process rights, by simultaneously pursuing civil and criminal investigations of defendants' alleged falsification of the financial records of their high-tech camera sales company." The lower court had also stated that "should there be a criminal trial, all evidence provided by the individual defendants in response to Securities and Exchange (SEC) subpoenas should be suppressed."
In a short 22 pages the Ninth Circuit penned an opinion that completely reverses this position. Circuit Judge Schroeder stated:
"We vacate the dismissal of the indictments because in a standard form it sent to the defendants, the government fully disclosed the possibility that information received in the course of the civil investigation could be used for criminal proceedings. There was no deceit; rather, at most, there was a government decision not to conduct the criminal investigation openly, a decision we hold the government was free to make. There is nothing improper about the government undertaking simultaneous criminal and civil investigations, and nothing in the government’s actual conduct of those investigations amounted to deceit or an affirmative misrepresentation justifying the rare sanction of dismissal of criminal charges or suppression of evidence received in the course of the investigations.
We also reverse the order excluding evidence received from the conflicted attorney. We do so because the government advised the attorney of the existence of a potential conflict and did not interfere with the attorney-client relationship."
The Decision - Download Stringer.pdf
Thursday, February 7, 2008
That's an easy question: with one you pay out money (and take an injunction prohibiting future violations) while the other sends you to jail. But two insider trading cases this week raise the issue of why some go criminal while others remain only as civil enforcement actions. The SEC announced on February 5, 2008, the filing of a settled insider trading complaint against a former director of Dow Jones, David Li, who tipped a close friend about a potential offer by News Corp. for the owner of the Wall Street Journal and other publications. According to the Commission's Litigation Release (here):
On May 8, 2007, the Commission filed an emergency action in the United States District Court for the Southern District of New York against Kan King Wong ("K.K. Wong") and Charlotte Ka On Wong Leung ("Charlotte Wong"), alleging that the husband-wife couple traded Dow Jones securities based on inside information. Specifically, the Wongs purchased approximately $15 million worth of Dow Jones securities in their account at Merrill Lynch and, after the Offer became public, made approximately $8.1 million in trading profits. The court entered a Temporary Restraining Order freezing those assets and imposing other relief. See LR-20106 (May 8, 2007). Today the Commission filed an amended complaint alleging that Dow Jones board member David Li tipped his close friend, Michael Leung Kai Hung ("Michael Leung"), before the Offer's public disclosure, and Michael Leung, with the Wongs' assistance, traded Dow Jones stock in their Merrill Lynch account. The Commission further alleged that K.K. Wong bought 2,000 Dow Jones shares in his TD-Ameritrade account and made approximately $40,000 in profits. Charlotte Wong is Michael Leung's daughter, and K.K. Wong is his son-in-law.
Li is quite prominent in the Hong Kong business community, serving as the CEO of Bank of East Asia and as a member of Hong Kong's Legislative Counsel and Executive Committee. This was not a small case as Mr. Li paid a civil penalty of $8.1 million and Michael Leung, the main trader, disgorged $8.1 million and paid a one-time penalty of the same amount, so that total from the case was over $24 million. There is no indication that any criminal charges will be brought because of the trading, which involved the purchase of over 400,000 Dow Jones shares through a third party's account to hide the identity of the actual purchaser. Of course, there is a chance that a sealed indictment was returned and prosecutors could be seeking to arrest either David Li or Michael Leung if they return to the United States, but it does not sound like that's the case given the civil settlement.
Meanwhile, on February 4, 2008, the U.S. Attorney's Office for the Southern District of New York announced that a jury convicted Hafiz Naseem of twenty-eight counts of insider trading and one count of conspiracy based on tipping a Pakistani banker, Ajaz Rahim, about impending deals that he learned about while working at J.P. Morgan and then Credit Suisse. According to a press release (here):
Credit Suisse was engaged to advise either the target company or the acquiring entity in connection with business combination transactions involving the Issuers (the "Subject Transactions"). NASEEM, who was not assigned to work on any of the Subject Transactions, repeatedly searched Credit Suisse’s internal computer databases for confidential documents relating to the Subject Transactions, opened and read these documents, and passed the material non-public information concerning the Subject Transactions in these documents to RAHIM (the "Credit Suisse Inside Information"). NASEEM also was observed rummaging through papers on the desks of several analysts when the analysts were not present.
Naseem is not a U.S. citizen, and after the conviction the court revoked his bail and he was remanded into custody, most likely because he was a flight risk. The total profits realized from the various tips was $7.9 million, the bulk of it from trading in TXU call options. Under the Federal Sentencing Guidelines, Naseem is looking at a sentencing range of at least 78-97 months based only on the gain before any other enhancements that could easily take him up to a ten-year prison term.
While there are some differences between the two cases, there are many similarities, so it's not clear to me why one is criminal and the other only civil. The loss amount is the roughly the same in each, and the violation of a fiduciary duty is clear for both tippers. Each involved trading overseas, a particular problem that can threaten the integrity of the U.S. securities markets. While Naseem was involved in a systematic course of conduct, Li was a director of a major corporation tipping a close friend. The trading by the tippees was similar in the sense that each tried to hide his true identity, and substantial profits were made.
Could it be that the decision was influenced by the fact that Li and Leung are prominent businessmen while Naseem is a lower-level investment bank employee who tipped a less-prominent Pakistani banker? While it may be a consideration that Li and Leung might not be extraditable to the U.S., the U.S. Attorney's Office did indict Rahim despite the fact that it has not yet been able to get him into this country yet to face charges. It may just have been the timing of the discovery, because Naseem was nabbed around the same time that the U.S. Attorney's Office was cracking down on others on Wall Street engaged in insider trading -- he was in the wrong place at the wrong time. There may also be considerations about the strength of the government's evidence relating to Li and Leung that influenced the decision not to pursue criminal charges. While the SEC complaint (here) presents the case in stark terms that makes it appear to be a straightforward insider trading case, the Commission does not have to test its evidence in court, and may only have a circumstantial case that the defendants were willing to settle so long as no criminal charges were filed. But from the outside, at least, it is difficult to distinguish between them, and raises the question about what the appropriate criteria are for determining whether a criminal prosecution is used in addition to the civil enforcement mechanism. That it could just be who wins or loses the criminal prosecution lottery is not very comforting. (ph)
Friday, February 1, 2008
Preparing your client for a hearing is a must for every attorney. But offering to have your client's memory fade in exchange for favors is a major problem, as illustrated in a recent SEC case. The SEC filed an administrative action (here) to bar an attorney licensed in New York from appearing before the Commission because of what he told the attorney for a brokerage firm and its president who were being investigated. The attorney's client came to the SEC's attention as a potential witness, and so the attorney began dealing with the investigators seeking to arrange her testimony. At the same time, the attorney also had some conversations with the brokerage firm's lawyer that were rather revealing. How did the SEC learn what was said, you might ask? Well, it seems that the brokerage firm's attorney taped the conversations, as summarized in the administrative filing:
During the taped conversations, Respondent requested that Blumer [the brokerage firm's president] arrange for a "severance package" (i.e., removing his client as the co-signer on two car leases with Blumer and paying her salary) for his client. In return for this severance package, Respondent indicated that his client might not cooperate with the Commission and/or that her recollection of the relevant events might "fade." In the last of these conversations, Blumer’s attorney asked Respondent "what package" his client wanted to "not cooperate." Respondent stated, "Get her off those leases and, you know, your salary, and you can even pay it out over a year." Blumer’s attorney then asked, "what will we get if they do that, she won't cooperate or she won't remember?" Respondent stated "probably both."
New York is a one-party consent state for taping telephone calls, so there's no problem on that front. Can't you trust the attorney you're trying to extort in exchange for having your client's memory "fade" a little bit? It seems not, and the New York attorney may find himself in a bit of hot water with the Bar authorities who tend to take a dim view of such conduct. Whether the U.S. Attorney's Office takes an interest in a possible obstruction of justice case remains to be seen. Be careful what you offer in exchange for favorable testimony, it can cost you your career. (ph)
Sunday, December 2, 2007
One of the defendants in the SEC's civil lawsuit (amended complaint here) against a number of former Nortel Networks defendants for alleged accounting fraud has filed a motion to dismiss based on the claim that the Commission sought to improperly pressured the company to deny her the payment of attorney's fees. The argument is reminiscent of the KPMG case, which is cited in the brief, in which the indictment of thirteen defendants was dismissed because of pressure from prosecutors on the accounting firm to deny attorney's fees to a number of former partners and employees later charged for their work on tax shelters. A Globe & Mail article (here) discusses the filing, and notes the connection with the KPMG case. Whether the two are the same is questionable because there are differences between the cases that may be crucial.
The motion by Mary Anne Poland (available below), a former assistant controller at Nortel, makes two interconnected arguments. First, Nortel Networks cut off payment of her attorney's fees when the SEC indicated that it was looking at her as a possible defendant in an enforcement action. Unlike the company's former CEO and CFO, also defendants in the suit, she does not have the deep pockets necessary to fight an SEC securities fraud case, which usually involves significant discovery and a long trial if it gets that far. The motion states that Nortel's counsel, who was the former head of the Enforcement Division at the SEC, counseled the company to terminate the payment so that it could appear cooperative with the SEC in the case. Nortel eventually settled the accounting case by paying a $35 million civil penalty.
Poland's motion points to the company's cooperation as evidence of the Commission's involvement in the decision to terminate the attorney's fees. The SEC's Litigation Release (here) announcing the settlement with Nortel states that "the Commission acknowledges Nortel's substantial remedial efforts and cooperation." In addition, the motion notes that the SEC announced in another case -- involving telecom equipment manufacturer Lucent -- the Commission highlighted the company's cooperation that involved terminating attorney's fee payments for employees. The argument is that the Commission, at least indirectly, caused Nortel to terminate Poland's attorney's fees. Hence, the specter of the KPMG case, in which such governmental pressure led the firm to cut off the attorney's fees that eventually triggered the dismissal of the indictment.
The problem for Poland is that the SEC's policy was not as explicit as the Thompson Memo that the defendants pointed to in the KPMG case as the basis for terminating the attorney's fees. The motion leads off with the district court decision in United States v. Stein that found the violation of the defendant's rights based on the governmental pressure to deny attorney's fees. While the SEC's policy certainly emphasizes a company's cooperation, it is not nearly as explicit at the Thompson Memo was on the attorney's fee issue -- a point changed in the current iteration of the Department of Justice's policy on charging corporation, the McNulty Memo. It is not clear whether there is any direct evidence of pressure by the Commission staff on Nortel to cut off attorney's fees, and pointing to the company's lawyer as the source of that decision may be a crucial distinction from the KPMG case. Moreover, unlike Stein, a criminal case, there is no Sixth Amendment right to counsel in a civil case, so that ground is unavailable to dismiss the complaint.
The second related claim is that while Poland did not have counsel, the SEC sought and obtained two tolling agreements that allowed the investigation to continue beyond the five year limitations period. The motion argues that the denial of attorney's fees was related to these requests because the Commission took advantage of Poland's position of acting without legal advice. She claims that the SEC staff pressured her to agree to the tolling, once even saying that an FBI agent might join the interview. Because there is no Sixth Amendment claim, the argument is that the government violated Poland's due process rights. That was one basis for the Stein decision, but the due process concerns in criminal cases are different from those in a civil case. Poland could have refused to sign the tolling agreement, or could have hired counsel with her own resources to advise on that issue. Moreover, she is now represented again by lawyers. Unlike a criminal case, the SEC cannot seek a prison term, so the decision to sign the tolling agreement may be viewed by the courts as less significant under the Due Process Clause.
The motion relies largely on the overtones of the governmental policy that was castigated in the KPMG case and has led to significant criticism of the Department of Justice on Capitol Hill. The connection, however, between Nortel's decision to cut off the attorney's fees and any particular pressure from the SEC is less clear in this case. The fact that a company decides to terminate the payment of fees, even if it is based on the hope that it will curry favor with the SEC, does not necessarily mean the Commission acted improperly. Whether the dismissal motion gains any traction remains to be seen, but the damage from the government's actions in the KPMG case show how widely felt its effects will be for other cases and agencies. (ph -- thanks to YH for passing along the information)
Thursday, November 15, 2007
Oil giant Chevron Corp. settled civil and criminal investigations related to illegal kickbacks paid into Iraqi-controlled accounts in 2001 and 2002 as part of the UN's Iraq Oil-for-Food program that has turned out to be a cesspool of corruption. According to the SEC Litigation Release (here):
The Commission's complaint alleges that from approximately April 2001 through May 2002, third parties with which Chevron contracted paid approximately $20 million in illegal kickback payments in connection with Chevron's purchases of crude oil under the U.N. Oil for Food Program. Chevron knew or should have known that third parties paid a portion of the premiums they received from Chevron to Iraq as illegal surcharges. The Oil for Food Program provided humanitarian relief to the Iraqi population during the time that Iraq was subject to international trade sanctions. However, the surcharges paid by third parties in connection with Chevron's purchases of oil bypassed the escrow account and were instead paid to Iraqi-controlled bank accounts in Jordan and Lebanon.
The settlement requires Chevron to pay $30 million, to be divided between a $20 million forfeiture payable as part of a settlement with the U.S. Attorney's Office for the Southern District of New York, $5 million in disgorgement in a settlement with the Manhattan D.A.'s office, a civil penalty to the SEC of $3 million, and another $2 million civil penalty to the Treasury Department's Office of Foreign Asset Controls. Looks like everyone gets to claim a piece of this settlement. (ph)
Thursday, October 25, 2007
The SEC filed a civil fraud action that includes a temporary asset freeze for what is describes as a Ponzi scheme executed by Calypso Financial, LLC and related entities. The lure to purchase the notes was the promise of monthly returns of 4% to 15%, which works out to a compound annual rate of return of over 50% to an amount in excess of 200%. You can't get those types of returns from any legitimate investment, at least not on a regular basis. The SEC Litigation Release (here) describes the case:
The complaint alleges the defendants have obtained investments of at least $20 million from the fraudulent offering of notes issued by Calypso and the other six entities, all of which are controlled by Petersen. The defendants allegedly promised returns to investors of 4% to 15% a month ostensibly through investments in real estate. However, it is alleged that the defendants actually operated a Ponzi scheme in which returns paid to earlier investors were paid from funds invested by new investors.
It's not clear how much money was frozen by the court, but it is usually the case that any amount recovered will not come close to covering the investor losses, especially the late-comers to the party. (ph)
Thursday, October 18, 2007
Nothing goes better with the great American pastime than passing a little inside information to your friend about a pending corporate transaction. The SEC filed a settled civil enforcement action against a former director of of NSD Bancorp who disclosed a pending merger of the company with F.N.B. Corp. that was announced in October 2004. The tippee bought 2,000 shares, and after the announcement NSD's stock price jumped 52%, allowing him to reap over $25,000 in profits. According to the SEC Litigation Release (here), the director provided the information at or before the September 22 Pittsburgh Pirates game. According to Baseball-Reference.Com (here), the Pirates lost to the Chicago Cubs 1-0 that evening -- the type of pitcher's duel that has a lot of down time to discuss a proposed buyout, no doubt. The SEC alleges that "the morning of September 23, 2004, Pitterich, who had no prior history of trading in the securities of NSD Bancorp, purchased 1,000 shares of NSD Bancorp's stock on the basis of the material, nonpublic information provided to him by Lenzner. On October 1, 2004, Pitterich, on the basis of the same information, purchased an additional 1,000 shares." The tippee disgorged his profits plus payed a one-time penalty, and the director/tipper also payed a one-time penalty. Given that the Bucs haven't had a winning season since 1992, when Barry Bonds was on the team -- with a much smaller head -- there's got to be some reason to attend a late-season game. (ph)
Friday, October 5, 2007
The SEC filed a settled insider trading enforcement action accusing the defendant of trading on information about the impending takeover of Commercial Federal Corp. According to the Commission's complaint (here), the defendant learned about the transaction from his brother, who received the information from his wife, an administrative assistant to Commercial Federal's CEO at the time who discussed her concerns about job losses from an acquisition of the bank. The SEC asserts that by trading on the information, the defendant breached a fiduciary duty to his brother, based on the fact that they "had a history of sharing and maintaining confidences." The defendant is a self-employed farmer/rancher, and the nature of the confidences the brothers shared is not described in the complaint.
That's not the classic duty of trust and confidence described by the Supreme Court in Chiarella v. United States, 445 U.S. 222 (1980), which discussed legal fiduciaries like trustees and lawyers as examples of those with the duty of confidentiality. But it does fit within the SEC's more expansive definition of such a duty in Rule 10b5-2(b)(3), which covers, inter alia, any person who "receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling." The broader definition of "duty of trust and confidence" in the SEC rule has never been tested in court, and won't be in this case because it is a settled matter. But it's an open question whether a court would find the requisite duty based solely on the familial relationship and the trading of confidences. The defendant settled the matter by disgorging over $39,000 in profits from his trading and a tippee's, and a civil penalty of $31.150 based on his profits.
Friday, September 28, 2007
With the end of the fiscal year nearly upon us, the SEC seems to be clearing its docket of insider trading cases, announcing three new ones on the second to the last day of FY 2007. Last year, the Commission was criticized for the decrease in enforcement actions, specifically insider trading cases, and it's unlikely that criticism will be leveled again with the increase in the number of such cases filed. Note when the trading involved in the three cases occurred:
- A father and son were accused of trading in the shares of Aspen Technology, Inc., Regeneration Technologies, Inc., and Triangle Pharmaceuticals, Inc. in 2001 and 2002 based on information the son obtained while working for Banc of America Securities and passed on to his father. The father comes with quite a pedigree, having been "a founding member and Director of the Chicago Board of Options Exchange, Director of the American Stock Exchange, a Board member of the Securities Industry Automation Corporation, and a Director of the New York Institute of Finance." The two defendants settled the matter by agreeing to be jointly and severally liable to disgorge profits of $204,476 plus prejudgment interest of $72,511.48. The son will pay a one-time civil penalty, while the father agreed to a double penalty. The SEC Litigation Release is here.
- A former director and member of the audit committee at NBTY, Inc. is accused of tipping a friend about an impending announcement of an earnings shortfall in the third quarter of 2004. Based on the information, the friend "sold his entire position of NBTY stock, sold the stock short, purchased put contracts, and sold call contracts through the custodial accounts of his three children," realizing $400,000 in gains and losses avoided. The SEC complaint is here.
- A tippee of a vice president of LendingTree, Inc., traded and tipped others before the announcement of a buyout of the company in May 2003. The defendant realized profits of $14,078 himself, and his tippees made $74,516. In settling the matter,the defendant agreed to disgorge his profits and pay a $88,594 penalty, equal to the total profits made through his and his tippees trading. The SEC Litigation Release is here.
Just like the auto companies, the SEC needs to clear the lot for next year's models. (ph)
Thursday, September 27, 2007
The SEC filed a settled insider trading case against a consultant for Frederick's of Hollywood for buying stock in Movie Star, Inc., before the announcement of a deal. The two firms are leaders in the intimate apparel market -- I will abjure further comments -- and the merger was announced on December 19, 2006. The defendant participated in the merger negotiations, and according to the SEC Litigation Release (here):
[B]etween September 14 and November 20, 2006, Keeney made over a dozen purchases totaling 157,000 Movie Star shares at an average cost basis of $0.97 per share, on the basis of material, nonpublic information concerning both the possible merger as well as the financial projections for Movie Star he had received in the course of the merger discussions. On December 19, 2006, both Movie Star and Frederick's publicly announced that the two companies had entered into a merger agreement. That same day, the price of Movie Star shares increased to close at $1.46. As a result, the complaint alleges, Keeney had imputed illicit profits of $77,540.50 from his unlawful trading.
The defendant agreed to disgorge profits (plus interest) of $81,210.96 and pay a one-time civil penalty. (ph)
Friday, September 21, 2007
Federal prosecutors and the SEC filed criminal and civil charges against a number of Wall Street defendants for abuses in the "stock loan" business that resulted in estimated gains of over $12 million. The transactions involving loaning shares to brokers who need them so that clients can "short" the stock, i.e. sell shares they do not own, a bet the price will go down so they can be repurchased at a lower price and then returned to the lender. With the rise in shorting, propelled by hedge funds and other investment vehicles that try to maintain positions on both sides of the market, demand for shares has increased, and so has the temptation to scoop a little extra money off the top by creating cut-outs to charge an extra commission. According to the SEC press release (here):
The defendants include 17 current and former "stock loan" traders employed at several major Wall Street brokerage firms, including Morgan Stanley, Van der Moolen (VDM), Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. These traders conspired in various schemes with 21 purported stock loan "finders" to skim profits on stock loan transactions. The defendants pocketed more than $12 million from their unlawful schemes over a period of nearly a decade.
In two separate complaints filed in federal court in Brooklyn, N.Y., the SEC alleges that from 1998 until June 2006, the stock loan traders named as defendants routinely defrauded the brokerage firms that employed them and others by engaging in collusive loan transactions and causing the firms to pay sham finder fees to companies controlled by the traders themselves or by their friends and relatives. Acting as fronts for the traders, these companies received hefty finder fees on several thousand stock loan transactions even though they did not provide any legitimate finding services and, in many cases, were simply shell companies that were not even involved in the stock loan business. These phony finders included a mailman, a perfume salesman, a pharmacist and a dental receptionist. The defendants shared in the sham finder fees through secret kickback arrangements. In some cases, defendants met monthly at New York City bars and restaurants to exchange thousands of dollars in cash, often wrapped in newspapers or stuffed into envelopes.
The SEC named 38 defendants in two separate civil enforcement actions, a number of whom settled the case, while the U.S. Attorney's Office for the Eastern District of New York announced the indictment of five defendants on securities fraud and conspiracy charges. Ten defendants already have entered guilty pleas in the case (see press release here). (ph)
Thursday, September 13, 2007
While former Comverse Technology CEO Kobi Alexander has been successful in fighting off extradition from Namibia on charges related to options backdating at the company, he lost on the government's civil asset forfeiture action that may well result in the seizure of nearly $50 million from two brokerage accounts. In July 2006, after Alexander fled the U.S., the federal government filed a civil asset forfeiture action to obtain the money from two Citigroup accounts on the ground that they represented a portion of the proceeds of the options backdating and one account had been used to launder the funds. Shortly before the government declared him a fugitive, Alexander wired $57 million from the accounts to Israel, and he has since been living with his family off that money, along with other overseas assets.
The district court granted summary judgment (opinion below) to the government by applying 28 U.S.C. Sec. 2466(a) , which enacted the fugitive disentitlement doctrine for civil asset forfeiture cases after the Supreme Court rejected its application in such cases in the 1996 in Degen v. U.S, 517 U.S. 820 (1996). The statute provides:
a) A judicial officer may disallow a person from using the resources of the courts of the United States in furtherance of a claim in any related civil forfeiture action or a claim in third party proceedings in any related criminal forfeiture action upon a finding that such person--
(1) after notice or knowledge of the fact that a warrant or process has been issued for his apprehension, in order to avoid criminal prosecution--
(A) purposely leaves the jurisdiction of the United States;
(B) declines to enter or reenter the United States to submit to its jurisdiction; or
(C) otherwise evades the jurisdiction of the court in which a criminal case is pending against the person; and
(2) is not confined or held in custody in any other jurisdiction for commission of criminal conduct in that jurisdiction.
In applying Sec. 2466, the district court held that "[t]here is absolutely no basis for concluding that Kobi is not free to return to the United States to face the criminal charges against him" -- except that he would be put in jail until trial so quickly it would make his head spin. Perhaps more ominously for Alexander, the district court noted that "there is no basis for concluding that the government's case is weak considering the early stage of this litigation." Also rejected were arguments that the fugitive disentitlement provision violates the Constitutional due process and the excessive fines provisions.
While Alexander lost his claim to the $50 million, his wife fared slightly better -- but just slightly. Mrs. Alexander asserted that she had standing to claim the money in a filing by her counsel, Goodwin Proctor. The district court noted that "[o]rdinarily, I might simply find that when such a law firm submits a standing allegation as vague and conclusory as this one, the claim should be dismissed as a matter of law." Yet, "despite the flagrant shortcomings of this allegation," the court did order discovery on her claim to the account, although simply being the spouse of the account owner will not be sufficient to give her standing to fight the civil asset forfeiture action. While the government does not have the $50 million quite yet, it moved a big step closer to it. (ph)
Monday, September 10, 2007
Bush commuted I. Lewis "Scooter" Libby's sentence, but left the conviction in place. The collateral consequences of a conviction, at least to one who holds a law license, can be devastating. A felony conviction often results in a suspension or disbarment of one's law license. The Report and Recommendation of the DC Board of Professional Responsibility can be found here. The key will be whether the conviction is affirmed.
Friday, September 7, 2007
A former executive and co-founder of telecommunications company UTStarcom Inc. settled an SEC civil complaint alleging he and his wife sold shares of the company shortly before it planned to announce that it would not meet its earnings target for the quarter. The SEC Litigation Release (here) states that
In late September 2005, UTStarcom failed to finalize a significant deal and the company was preparing to pre-announce to the market that it would not be able to meet its earnings guidance for the quarter. According to the Commission, Shey spoke to the UTStarcom executive by phone the weekend before the public announcement. Shortly after that conversation, Shey contacted his broker and began the process of liquidating his extensive UTStarcom stock holdings.
According to the complaint, just minutes after the market opened on Monday, October 3, Shey began selling his UTStarcom stock, and Shey's wife began selling UTStarcom stock in accounts of her family members. Shey sold more than 600,000 shares over the following days, making his final sale less than an hour before UTStarcom announced the revenue shortfall on October 6. Following that announcement, the company's stock price fell by more than 26 percent.
The defendant settled the SEC action by disgorging $420,226.60 representing the losses avoided by the sales, plus prejudgment interest of $31,909.96, and payment of a one-time civil money penalty. (ph)