Friday, August 10, 2007

SEC Files Securities Fraud Charges Against Former Executives for Revenue Inflation

The SEC filed civil fraud charges against three former senior executives of Nicor, Inc., an Illinois natural gas distribution company.  The alleged scheme involved manipulating the value of the company's natural gas inventory through the LIFO (last-in-first-out) method -- how's that for exciting accounting.  The defendants are the former CEO, CFO, and treasurer of the company, and according to the SEC Litigation Release (here):

[The defendants devised] a method by which Nicor could profit by accessing its low-cost last-in, first-out ("LIFO") layers of gas inventory. As a result, from 1999 through 2002, the former officer defendants engaged in or approved improper transactions, and made material misrepresentations in financial statements and documents filed with the Commission. They also failed to disclose material information regarding Nicor's rigged reductions in gas inventory levels that enabled it to improperly manipulate its earnings and to increase Nicor's revenues under a performance-based utility rate plan. In addition, the former officers materially understated Nicor's expenses during the first and second quarters of 2001 by improperly bundling a weather-insurance contract with an agreement to supply gas to Nicor's insurance provider at below-market prices. Moreover, they caused the losses on the supply agreement with the insurance provider to be improperly charged to Nicor's utility customers. These improper transactions enabled Nicor to understate its expenses and to manipulate its earnings to achieve its earnings targets. As a result of the manipulative scheme, Nicor materially overstated its reported income for the years ending 2000 and 2001, and for each of the quarters within those years and the financial statements filed with those reports.

Nicor settled an SEC complaint in March 2007 by agreeing to pay a $10 million civil penalty. (ph)

August 10, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (1) | TrackBack (0)

Saturday, August 4, 2007

SEC Identifies English Trader in Petco Insider Trading

The SEC filed an amended complaint (here) identifying a heretofore unknown purchaser of out-of-the-money call options in Petco in July 2006 before the company announced it was being taken private.  The SEC identified suspicious overseas trading in the weeks before the announcement, and filed an "unknown purchasers" complaint three days after the deal became public in order to freeze the proceeds from the transactions before they could leave the United States.  According to the Litigation Release (here):

The amended complaint alleges that Suterwalla entered into the transactions while aware of material nonpublic information regarding the pending acquisition of Petco, and that he took highly leveraged and speculative positions in the price of Petco's securities, which exposed him to the potential for millions of dollars in losses if Petco's price declined. The amended complaint further alleges that Suterwalla made all of his purchases within 17 days of Petco's acquisition announcement, that he made a number of his purchases the day before the announcement, and that his illicit profit from these transactions was more than $3 million.

No word yet on whether the newly identified defendant will show up to defend the SEC complaint and seek to regain his profits -- but I rather doubt it because there may well be a sealed indictment with his name floating around. (ph)

August 4, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, August 2, 2007

ISSI and Former CFO Settle Options Backdating Civil Charges

High tech circuit manufacturer Integrated Silicon Solution, Inc. (ISSI) and its former chief financial officer settled SEC civil fraud charges related to options backdating at the company from 1997 through 2005.  According to the SEC Litigation Release (here):

The Commission's complaint against ISSI and Fischer, filed in the Northern District of California, alleges that Fischer routinely used hindsight to select option grant dates when ISSI's stock traded at or near monthly or quarterly lows, and at prices below the closing price on the date when Fischer actually selected the grant date. According to the complaint, the dates Fischer selected were then incorporated into Stock Option Committee resolutions and Compensation Committee minutes, even though the committees rarely, if ever, met on the date listed on the minutes and resolutions.

The former CFO paid $414,830 in disgorgement and a civil penalty of $125,000.  In what may be a trend in SEC settlements in the options backdating cases, the company settled the case by agreeing to an injunction but will not pay any civil penalty, similar to the recent resolution of options backdating charges involving Silicon Valley company KLA-Tencor. (ph)

August 2, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, July 26, 2007

SEC Sues KLA-Tencor and Its Former CEO for Options Backdating

The SEC sued computer chipmaker KLA-Tencor and its former CEO for options backdating that occurred primarily from 1999 to 2002, although there is alleged to be one award in 2005.  The company settled the matter and, interestingly, there was no civil penalty and the allegations in the complaint (here) do not include any claims that the antifraud provisions were violated.  Unlike other companies that had to pay millions of dollars as part of the settlement, KLA-Tencor is getting off fairly lightly with only a "sin no more" injunction prohibiting future violations of the recordkeeping provisions.  Its former CEO, however, did not settle, and the SEC's separate complaint (here) against him alleges violations not only of the accounting and reporting requirements but also Rule 10b-5, the main antifraud provision.  According to the SEC Litigation Release (here):

[T]he Commission charges that he repeatedly engaged in backdating after becoming CEO in 1999, including pricing large awards of options to himself that were "in the money" by millions of dollars -- a potential windfall never disclosed to KLA-Tencor's shareholders. According to the complaint, Schroeder received a legal memorandum in March 2001 cautioning that "the Board and its committees are limited in their ability to grant options at a retroactive price without exposing the company to risk of an accounting charge." The memo further warned that "[a]ny attempt to set a price before such a grant is made raises substantial risks under securities and tax laws [and] accounting rules and gives rise to disclosure obligations." The Commission alleges that Schroeder nonetheless continued to backdate options.

The company disclosed in May 2006 (here) that it had received grand jury subpoenas from the U.S. Attorney's Offices in Brooklyn and San Francisco, and it's not clear which office is controlling the investigation and whether any criminal charges are likely to follow the SEC complaint.  (ph)

July 26, 2007 in Civil Enforcement, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Saturday, June 30, 2007

Four Former ConAgra Execs Settle SEC Accounting Fraud Charges

Four former finance executives at ConAgra Foods, Inc., settled SEC civil enforcement and administrative actions for their roles in a variety of accounting entries that inflated the company's earnings and resulted in misstated financial statements being filed.  The executives served at one time as the CFO, controller, and vice president for taxes, and according to the SEC Litigation Release (here): "These enforcement actions variously address alleged improper accounting practices, inaccurate disclosure and income tax errors occurring between ConAgra's fiscal years 1999 and 2005 that resulted in ConAgra materially misstating its financial performance in its public statements and periodic filings with the Commission."  The defendants will pay a total of $1.7 million in disgorgement, prejudgment interest, and civil penalties. (ph)

June 30, 2007 in Civil Enforcement, Fraud, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Friday, June 22, 2007

Allied Capital Settles with the SEC

Business development and private lending company Allied Capital Corp. settled an administrative action with the SEC related to maintaining records for the valuation of the company's investments in the securities of other corporations.  According to the administrative order (here):

From the quarter ended June 30, 2001 through the quarter ended March 31, 2003, Allied violated recordkeeping and internal controls provisions of the federal securities laws relating to the valuation of certain securities in its private finance portfolio for which market quotations were not readily available. During the relevant period, Allied failed to make and keep books, records, and accounts which, in reasonable detail, supported or accurately and fairly reflected certain valuations it recorded on a quarterly basis for some of its securities. In addition, Allied’s internal controls failed to provide reasonable assurances that Allied would value these securities in accordance with generally accepted accounting principles. Further, from the quarter ended June 30, 2001 through the quarter ended March 31, 2002, Allied failed to provide reasonable assurances that the recorded accountability for certain securities in its private finance portfolio was compared with existing fair value of those same securities at reasonable intervals by failing to: (a) provide its board of directors ("Board") with sufficient contemporaneous valuation documentation during Allied’s March and September quarterly valuation processes; and (b) maintain, in reasonable detail, written documentation to support some of its valuations of certain portfolio companies that had gone into bankruptcy.

The settlement did not require the payment of a civil penalty or any sanctions, only than that Allied Capital continue to employ a chief valuation officer and independent valuation consultants.  The company has been involved in a long-term battle with a hedge fund regarding the valuation of its assets, and its most recent 10-Q (here) discusses a grand jury investigation of possible pretexting by an agent to obtain telephone records of the hedge fund manager:

In late December 2006, the Company received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by the Company or its agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, the Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company’s management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company’s management has stated that these allegations are not true. The Company is cooperating fully with the inquiry by the United States Attorney’s office.

Hewlett-Packard learned its pretexting message the hard way, and the course of this investigation remains to be seen. (ph)

June 22, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, June 21, 2007

Former Enron Finance Officer Settles SEC Securities Fraud Action

Former Enron treasurer Jeffrey McMahon, who later became its CFO and then president, settled an SEC civil enforcement action related to the company's accounting for the Nigerian Barge transaction in 1999 designed to boost its income and other financial disclosure issues.  McMahon succeeded former CFO Andrew Fastow in October 2001, and became Enron's president and chief operating officer after it entered bankruptcy in 2002.  According to the SEC Litigation Release (here):

[T]he Commission's Complaint alleges that McMahon participated in a fraudulent transaction involving the "sale" of an interest in Nigerian power generating barges to Merrill Lynch that allowed Enron to improperly report $12 million in earnings in the fourth quarter of 1999. Enron never should have recorded profits from this purported sale because the risks and rewards of ownership in the barges never passed to Merrill Lynch due to an oral side agreement made by McMahon and others. The Complaint also alleges that while serving as Enron's Treasurer from April 1998 through March 2000, McMahon made false and misleading statements to the national credit rating agencies regarding Enron's financial position and cash flow. The Complaint alleges that the false and misleading statements included statements about Enron's cash flow from operations that failed to disclose that a portion of such cash flow was a result of structured financings and debt-like obligations that had nothing to do with Enron's operations or trading business. In addition, the Complaint alleges that McMahon made additional false and misleading statements to the rating agencies after he became Enron's Chief Financial Officer on October 24, 2001 through Enron's bankruptcy filing in December 2001.

McMahon agreed to disgorge profits of $150,000 and to pay an equal amount as a civil penalty, along with an administrative bar from appearing before the Commission as an accountant with a right to reapply in three years.  McMahon was not charged with any crimes, one of the few senior executives to avoid criminal prosecution.  He was removed as treasurer in 2000 after he complained about conflicts of interest related to Fastow's various investment vehicles that played such a key role in the company's collapse.  A Houston Chronicle story (here) discusses the settlement. (ph)

June 21, 2007 in Civil Enforcement, Enron, Settlement | Permalink | Comments (0) | TrackBack (0)

Thursday, June 14, 2007

Former Law Firm Managing Partner Settles Insider Trading Case

The former managing partner at Katten Muchin Rosenman's D.C. office, David A. Schwinger, settled an SEC civil enforcement action alleging insider trading in Vastera,  Inc.  According to the complaint (here), Schwinger learned about an impending merger of Vastera when he interviewed the company's general counsel, who was seeking a new job because of the transaction.  Schwinger bought 10,000 shares and made a profit of a shade over $13,000 after the announcement of the deal.  According to the complaint, Schwinger violated a duty of trust and confidence he owed to Katten Muchin to maintain the confidentiality of firm information, especially because Vastera was a client of the firm.  The case shows how hard the SEC is pushing insider trading cases these days.  Schwinger settled the action by disgorging his profits, prejudgment interest, and a double penalty based on the profits.  Lawyers certainly pay a price for trading on inside information far beyond the amount at issue.  Whether the D.C. Bar will impose sanctions on Schwinger for possible misuse of confidential firm information remains to be seen. (ph)

June 14, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 6, 2007

Former Red Robin CEO Settles SEC Case over Improper Expenses

Michael J. Snyder, former CEO of Red Robin Gourmet Burgers, Inc., settled an SEC enforcement action over his receiving reimbursements from the company for personal travel, entertainment, and meal expenses.  According to the SEC Litigation Release (here):

The Commission's complaint alleges that, during 2002, 2003 and 2004, Snyder incurred personal travel expenses of roughly $1.2 million for charter jet travel, and hotel and dinner expenses. The Complaint further alleges that Snyder submitted expense reports and invoices to Red Robin for payment of these personal expenses, misrepresenting that a business purpose existed for the charter jet trips and hotel and dinner expenses, failing to report the presence of personal guests on the trips, and failing to accurately report the destinations of the charter flights.

According to Red Robin's 2005 proxy statement (here), Snyder's compensation for those years was approximately $700,000, $955,000, and $1,060,000, so his personal expenses of $1.2 million were a significant portion of his overall compensation.  Snyder settled the case by agreeing to a director and officer bar and will pay a $250,000 civil penalty.  Snyder retired from Red Robin in August 2005, and the company's 8-K (here) filed regarding his resignation stated that "Mr. Snyder will reimburse the Company in full for certain expenses determined to be inconsistent with Company policies or lacking sufficient documentation."  It's not clear where he incurred the meal expenses, and it seems a bit odd that the CEO of a restaurant chain would run up a tab at other eateries.  (ph)   

June 6, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, June 1, 2007

SEC Files Securities Fraud Complaint Against Four Former Mercury Interactive Officers

The SEC filed a civil enforcement action alleging securities fraud against four former officers of Mercury Interactive, Inc. for their role in options backdating from 1997 to 2003, and for two defendants allegedly manipulating revenues.  The defendants are former CEO Amnon Landan, two former CFOs, Sharlene Abrams and Douglas Smith, and the company's former general counsel, Susan Skaer (SEC Litigation Release here).  The company, now a division of H-P after being acquired in 2006, settled the case by agreeing to pay a $28 million civil penalty.  This comes on the heels of the Brocade Communications settlement of an options timing complaint for $7 million (see earlier post here), and in Mercury Interactive's case the accounting violations likely triggered the higher fine.  One particularly notable piece of evidence cited by the SEC in its complaint (here) regarding the revenue recognition issue is a slide in a PowerPoint presentation prepared by Abrams that discussed how the company treated order backlogs that stated, "Our Hidden Backlog . . . What Any Analyst Would Love to Get Their Hands On!"  This is probably worse than some of the e-mails we've seen in cases, regardless of whether there's an innocent explanation for the statement.

The role of Skaer as general counsel fits into a pattern seen with increasing frequency lately.  The SEC -- along with federal prosecutors -- has shown a greater willingness to pursue charges against a company's lawyers, particularly in-house counsel, for their role as a gatekeeper who is responsible for ensuring the paper-flow is correct and that the requirements of the law are fulfilled.  The number of general counsels accused of securities violations for options backdating continues to grow.

With the civil case filed, the next issue is whether federal prosecutors will file charges.  The U.S. Attorney's Office for the Northern District of California has been looking at the company.  The SEC's allegations of false filings, including knowing false certifications of the financial statements, is the type of violation that is more likely to trigger criminal charges.  Whether the turmoil in the U.S. Attorney's Office explains why the Commission acted alone, or whether the decision was made not to pursue charges, is unknown at this point, but a criminal case can't be ruled out just yet. (ph)

June 1, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, May 31, 2007

SEC Settles with Brocade Over Options Backdating

The SEC settled a civil enforcement action with Brocade Communications Systems, Inc., over options backdating by the company's CEO, Gregory Reyes.  The case became the poster child for Chairman Christopher Cox's new procedure that requires the SEC staff to get authorization from the full Commission before negotiating a corporate penalty rather than presenting an agreed amount for approval.  This is part of Cox's plan to exert greater control over the Enforcement Division and to address the issue of what fines are appropriate when a company's shareholders bear the burden of the harm from the underlying securities fraud and then the company pays a fine on top of those losses.  In the Brocade settlement (SEC Litigation Release here and complaint here), the company agreed to pay a $7 million civil penalty, which now sets the benchmark for future cases that can be compared to the amount of options issued and the level of executive involvement.  Reyes and Brocade's former human resources director were indicted on conspiracy and securities fraud charged, and sued by the SEC, in July 2006, so this case is likely viewed as a fairly egregious one.  I suspect that future settlements of pure options backdating cases, i.e. ones that do not also involve accounting fraud aside from the misstated income and expenses due to the backdated options issuance, will likely come in at a lower amount absent significant personal gains by executives. (ph)

May 31, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (1)

Barclays Settles SEC Insider Trading Case

Insider trading can happen in lots of different ways, and Barclays Bank PLC chose an interesting one: using information from the creditors committees of bankrupt companies to trade in their debt securities.  Steven Landzberg, a defendant in the case along with Barclays, was the bank's representative on the creditors committees for six different companies, and as a member received private information about the financial condition of the debtors.  Landzberg's more important job at Barclays was as head of its U.S. Distressed Debt Desk, which traded the bonds of companies in bankruptcy, making it very hard to resist the opportunity to trade.  According to the SEC Litigation Release (here):

The complaint alleges that Barclays and Landzberg misappropriated material nonpublic information by failing to disclose any of their trades to the creditors committees, issuers, or other sources of such information. In a few instances, Landzberg used purported "big boy letters" to advise his bond trading counterparties that Barclays may have possessed material nonpublic information. However, in no instance did Barclays or Landzberg disclose the material nonpublic information received from creditors committees to their bond trading counterparties. Three of the six committees were official unsecured creditors committees appointed by the Office of the United States Trustee under the auspices of the federal bankruptcy courts. Barclays served as "Chair" of two of these bankruptcy committees at the time of its illegal insider trading.

The complaint further alleges that Barclays' senior management authorized Landzberg to buy and sell securities for Barclays' account while he served on bankruptcy creditors committees. Barclays' Compliance personnel failed to prevent the illegal insider trading, despite receiving notice that the proprietary desk had nonpublic information and should have been restricted from trading.

The reference to "big boy letters" concerns an agreement between parties to a private securities transaction in which they acknowledge that one side may have superior information and the counter-party will hold them harmless for taking advantage of the informational disparity -- it has nothing to do with hamburgers.  The letters do not bind the SEC, however, and whether such an agreement could protect against a claim for illegal conduct in a transaction is very much an open question.  As trading becomes more sophisticated, the use of such devices is likely to increase, although how much cover they provide is something that will only be clarified over time.

Barclays settled the case by agreeing to pay over $10.9 million: $3,971,736 in disgorgement plus prejudgment interest of $971,825, and a civil penalty of $6 million. The bank has a strong incentive to settle the case because it is pursuing a deal to buy global bank ABN Amro, and will need clearance from U.S. regulators and the SEC, among others, if it wants to move forward with that deal.  Landzberg agreed to a permanent injunction barring him from participating in creditor committees in federal bankruptcy proceedings for companies that have issued securities and to pay a $750,000 civil penalty. (ph)

May 31, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, May 25, 2007

H-P Gets a Slap on the Wrist

The internal investigation of boardroom leaks at Hewlett-Packard turned into a major controversy in September 2006, garnering significant negative publicity for the company when it came out that private investigators engaged in pretexting to obtain private telephone records of employees and journalists.  All those negative headlines did not translate into any significant regulatory actions against the company, however.  In December 2006, H-P agreed to a civil settlement with the California Attorney General that involved a payment of $14.5 million to a law enforcement fund to fight privacy violations (press release here).  The SEC announced the issuance of a Cease-and-Desist Order (here) -- the lightest penalty the Commission can impose -- for the company's faulty disclosure of the reason why board member Tom Perkins resigned his position in May 2006.  Perkins objected strongly to H-P's internal investigation of a leak by another board member who was asked to resign.  The 8-K (here) filed by the company on May 22, 2006, disclosing the Perkins resignation did not discuss the reasons for it, a violation of the disclosure rules, as described in the Order:

HP concluded, with the advice of outside legal counsel and the General Counsel, that it need not disclose the reasons for Mr. Perkins’ resignation because he merely had a disagreement with the company’s Chairman, and not a disagreement with the company on a matter relating to its operations, policies, or practices. Contrary to HP’s conclusion, the disagreement and the reasons for Mr. Perkins’ resignation should have been disclosed, pursuant to Item 5.02(a), in the May 22 Form 8-K. Mr. Perkins resigned as a result of a disagreement with HP on the following matters: (1) the decision to present the leak investigation findings to the full Board; and (2) the decision by majority vote of the Board of Directors to ask the director identified in the leak investigation to resign. Mr. Perkins’ disagreement related to important corporate governance matters and HP policies regarding handling sensitive information, and thus constituted a disagreement over HP’s operations, policies or practices. (Italics added)

The outside counsel referred to in the Order is Larry Sonsini, the leading lawyer in Silicon Valley, and H-P's general counsel at the time was Ann Baskins, who resigned after the revelation of the details of the internal investigation overseen by her office.  Only the company is the subject of the Commission action, and it involves no penalty other than another small dose of bad publicity that dredges up headlines from 2006.  A quiet ending to a series of bad decisions that cost a number of officers and directors their reputations. (ph)

May 25, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, May 21, 2007

Biovail's Travails

Canadian pharmaceutical company Biovail Corp. and its former CEO have been running into a bit of trouble with securities regulators in the U.S. and Canada recently.  On May 14, the company disclosed (here) that the SEC had sent a Wells Notice that the Enforcement Division staff intends to seek authorization from the Commission to file a civil action related to accounting problems.  According to Biovail's 6-K (foreign Issuer) filing:

On May 14, 2007, the Company issued a press release acknowledging that it had received a "Wells Notice" from the staff of the SEC alleging violations of federal securities laws. The notice relates to the staff's investigation of the Company's accounting and disclosure practices for the fiscal year 2003 and certain transactions associated with a corporate entity acquired by the Company in 2002, as described above. These issues include whether the Company improperly recognized revenue and expenses for accounting purposes in relation to its financial statements in certain periods, disclosure related to those statements, and whether the Company provided misleading disclosure concerning the reasons for Biovail's forecast of a revenue shortfall in respect of the three-month period ending September 30, 2003. Under the Wells process established by the SEC, the Company has the opportunity to respond to the "Wells Notice" before the staff makes a formal recommendation regarding what action, if any, should be brought against the Company by the SEC. The Company continues to cooperate with the SEC. The Company cannot predict either the outcome or the timing of when this matter may be resolved.

Biovail noted that it had agreed to toll the five-year statute of limitations until July 31, 2007.  Along with the potential civil charges comes a bit more ominous disclosure about a criminal investigation: "Recently, the Company was contacted by the United States Attorney's Office for the Eastern District of New York ("EDNY"), who informed the Company that they were conducting an investigation into the same matters that the SEC is investigating. The EDNY has also recently requested interviews of several Biovail employees. The Company intends to cooperate with the investigation. The Company cannot predict the outcome or timing of when this matter may be resolved."

Biovail's former CEO and chairman of the board, Eugene Melnyk, agreed to an administrative settlement with the Ontario Securities Commission (here) on May 18, 2007, regarding trading in company shares through four trusts set up by Melnyk in the Cayman Islands during a time when Biovail executives were not permitted to trade.  The company's shares are listed on the Toronto Stock Exchange, and the settlement with the OSC requires Melnyk to pay $1 million (Cdn.) in a penalty and costs, and imposes a one-year ban on serving on the board of directors of a publicly-traded company.  Melnyk resigned as Biovail's CEO in 2004, and announced recently his retirement from the board as of June 30. 

If it's any consolation for Melnyk, the NHL team he owns, the Ottawa Senators, made the Stanley Cup finals for the first time in the history of this iteration of the Senators, overcoming years of underachievement in the playoffs.  Getting your name on what is probably the most famous trophy in professional sports can make a lot of bad thoughts disappear. (ph)

May 21, 2007 in Civil Enforcement, International, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 9, 2007

SEC Files Insider Trading Charges Against Hong Kong Couple for Dow Jones Trades

The offer by Rupert Murdoch's News Corp. for Dow Jones may come to naught, but it has triggered another insider trading case against foreign purchasers.  The SEC filed a complaint (here) in the U.S. District Court for the Southern District of New York against Kan King Wong and Charlotte Ka On Wang Leung, a husband and wife, for their purchase of 415,000 shares of Dow Jones from April 13 through April 30 in an account at Merrill Lynch.  After the announcement, the value of the shares increased by over $8 million.  Trading in Dow Jones garnered significant attention after News Corp.'s announcement (see earlier post here), but it was in the out-of-the-money call options that the real profits occurred.  The trading here shows that buying stock is not as cost effective as buying options because the defendants had to commit over $15 million to the trades, a far higher amount than would be necessary to buy call options for a comparable amount of shares -- not that I'm advocating any trading on material non-public information, of course.  The SEC's complaint does not connect the defendants to any identified source of information, but it does note that one of the defendants put in a sell order and inquired when the money would be available.  The Commission needed to act quickly to keep the money in the United States, and the District Court entered a freeze order (here) to ensure that the proceeds do not disappear.  As always, the challenge now is to link the defendants to the information. And look for the SEC to move on the options trading at some point. (ph)

May 9, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, May 4, 2007

Credit Suisse Investment Banker Charged With Insider Trading

Federal prosecutors and the SEC filed criminal and civil insider trading charges against Hafiz Naseem, who worked in the Global Energy Group at Credit Suisse.  Naseem is accused of tipping an unnamed Pakistani banker about the impending buy-out of TXU by private equity funds in early March 2007.  In addition, he is accused of tipping the banker about a number of other deals in which Credit Suisse acted as an investment adviser.  An SEC press release (here) states:

According to the SEC's complaint, after receiving the insider information from Naseem, the Pakistani banker purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and made profits of approximately $5 million following public announcement of the buyout.

The SEC's complaint further alleges that Naseem also divulged pending, but unannounced, business combinations and deals involving eight other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. The complaint notes that Credit Suisse served as an investment banker or financial advisor in all of these deals, and Naseem's phone calls from his work phone to the Pakistani banker's home and cell phones were made immediately before announcements of the proposed deals. The complaint alleges that the Pakistani banker also purchased securities in those companies in advance of public merger announcements, obtaining additional profits of more than $2.4 million.

Nothing like trying to cover your tracks by using your office telephone to make the tips.  The SEC initially filed a complaint against "unknown purchasers" because of the use of overseas accounts to buy TXU options, so it needed to move quickly before the money left the country, never to be seen again.  The criminal complaint filed against Naseem charges him with one count of conspiracy and twenty-five counts of securities fraud.  A Reuters story (here) discusses the criminal charges. (ph)

May 4, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (1) | TrackBack (0)

Saturday, April 28, 2007

Baker Hughes Settles Criminal and Civil FCPA Charges

Oil-field services company Baker Hughes Inc. settled charges that it paid bribes to obtain business from the state-owned oil company in Kazakhstan.  A subsidiary of the company agreed to plead guilty to charges of conspiracy, violation of the FCPA, and aiding and abetting a violation of the books-and-records provisions of the federal securities laws; Baker Hughes also settled an SEC civil enforcement action.  The company had agreed to a cease-and-desist order covering FCPA violations in 2001, so this is a second strike against the company because some of the conduct occurred after entry of that order.  In settling the criminal and civil actions, Baker Hughes agreed to pay an $11 million criminal fine, disgorge profits and interest of $23 million, and pay a civil penalty of $10 million.  The $44 million in payments is the largest in an FCPA case, according to a Department of Justice press release (here).  The SEC Litigation Release (here) describes the payments to agents of Kazakhoil:

Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. The complaint alleges that one agent was hired in September 2000 on the understanding that Kazakhoil, Kazakhstan's national oil company at that time, had demanded that the agent be hired to influence senior level employees of Kazakhoil to approve the award of business to the company. Baker Hughes retained the agent principally at the urging of Fearnley. According to the complaint, Fearnley told his bosses that the "agent for Kazakhoil" told him that unless the agent was retained, Baker Hughes could "say goodbye to this and future business." Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006. Baker Hughes, the complaint alleges, paid the agent $4.1 million to its bank account in London but received no identifiable services from the agent. The complaint also alleges that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid over $1 million to the agent's Swiss bank account, despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil.

The SEC complaint (here) also alleges FCPA violations from bribe payments in "Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes' books and records." 

Baker Hughes also entered into a deferred prosecution agreement with the Department of Justice that requires the company to continue its cooperation with the Department of Justice, appoint a compliance monitor, and stay clear for two years.  Unlike most cases involving such an agreement in which criminal charges are dropped after a certain period, the subsidiary entered a guilty plea and the deferred prosecution agreement only precludes additional charges against Baker Hughes for other conduct, most likely related to the payments in the other countries identified in the SEC complaint.  This case involves more than just an isolated payment, but instead what appears to be part of a culture of foreign bribery, and it will be interesting to see whether Baker Hughes will be able to reform its overseas operations.  The government did acknowledge Baker Hughes' cooperation, which likely saved it from even more severe penalties.  The SEC action also named a former business development manager from the company as a defendant, and he did not settle the case.  (ph)

April 28, 2007 in Civil Enforcement, FCPA, Prosecutions, Settlement | Permalink | Comments (0) | TrackBack (0)

Thursday, April 26, 2007

Former Utility Officers Settle SEC Accounting Case

Four former senior executives with South Dakota-based utility NorthWestern Corp. agreed to settle SEC civil charges that they overstated the performance of the company and its telecommunications unit, Expanets, in 2002.  The four defendants are former CEO Merle D. Lewis, former chief operating officer Richard R. Hylland, former CFO Kipp D. Orme,and former controller Kurt D. Whitesel.  According to the SEC Litigation Release (here):

The Commission alleges that, in NorthWestern's quarterly filings, debt and equity offering filings, and other public information, these four defendants were responsible for overstating performance and concealing problems at Expanets and NorthWestern. The Commission alleges that each defendant knew or was reckless in not knowing about the inaccuracy of NorthWestern's public claims that Expanets' new computer system was "operational" or "fully operational." The Commission further alleges that each defendant knew or was reckless in not knowing that Expanets had failed to take appropriate charges for uncollectible accounts receivable and billing adjustments related to the computer system problems, resulting in the overstatement of NorthWestern's income from continuing operations by 90% in the second quarter of 2002 and 109% in the third quarter of 2002. The Commission also alleges that each defendant was responsible for NorthWestern's failure to disclose that a material portion of Expanets' and NorthWestern's income was derived from the reduction of various accounting reserves and through Expanets' receipt of unusual non-compete payments. Finally, the Commission alleges that each defendant was responsible for NorthWestern's failure to disclose significant intercompany cash advances to its subsidiaries during the first half of 2002, which impacted the company's liquidity position and demonstrated the subsidiaries' continuing financial difficulties.

The four defendants settled the case, with Lewis and Hylland paying a $150,000 civil penalty, Orme paying $100,000, and Whitesel paying $25,000.  NorthWestern agreed to be acquired by Babcock & Brown Infrastructure Ltd. in April 2006. (ph)

April 26, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 25, 2007

An Odd Twist in the Apple Options Timing Case

The SEC's filing against two former Apple executives related to options backdating had all the hallmarks of a typical civil enforcement action, with one defendant, former CFO Fred Anderson, settling the matter and another, former general counsel Nancy Heinen, stating through her lawyers that she will fight.  Anderson's settlement came with the usual caveat that he neither admitted nor denied liability, and in most such instances the defendant takes the one-day news hit and moves on.  In an interesting development, however, Anderson's attorney, Jerome Roth of Munger Tolles, released a statement regarding his client's roll in the backdating that seems to take a shot at CEO Steve Jobs' role in the transactions.  Jobs was not charged by the SEC, and appears at this point to have avoided any enforcement action even though the company disclosed his involvement in the selection of the dates for pricing the options grants.  The press release (available here) states:

Fred [Anderson] was told by Steve Jobs in late January 2001 that Mr. Jobs had the agreement of the Board of Directors for the Executive Team grant on January 2, 2001. At the time Mr. Jobs provided Fred this assurance, Fred cautioned Mr. Jobs that the Executive Team grant would have to be priced based on the date of the actual Board agreement or there could be an accounting charge.  He further advised Mr. Jobs that the Board would have to confirm its prior approval in a legally satisfactory method. He was told by Mr. Jobs that the Board had given its prior approval and the Board would verify it. Fred relied on these statements by Mr. Jobs and from them concluded the grant was being properly handled.

It's unclear what reason Anderson has for making these statements, at least if he wants to avoid having his role in the backdating dragged through the news even further.  The SEC is concerned about post-settlement statements that call into question the defendant's role in the underlying conduct, although Anderson has not done that directly.  Instead, the statement deflects attention toward Jobs as a way to show that Anderson's culpability is perhaps not quite as significant, which could draw a rebuke from the SEC.

Whether Anderson's statement is enough to lead to civil -- or even criminal -- charges against Jobs is questionable.  I have to believe the SEC knew Anderson's position on Jobs' involvement in the backdating, and chose not to go forward with a case against one of an icon CEO of the high tech industry, perhaps because there was no documentary evidence to back up the claims.  Filing civil fraud charges against Jobs would require the Commission to have a very strong case because the effect on the company, and indeed the industry, would be so significant that the government could not take a chance on a weaker case.  For those who remember the bank crisis of the 1980s, it could be an example of the "too big to fail" approach: you can't charge Steve Jobs with fraud because of the devastating consequences on shareholders and employees if he were brought down.  While no one is above the law, some may be slightly elevated.  (ph)

April 25, 2007 in Civil Enforcement, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

More Settlements in Student Loan Investigation

New York Attorney General Andrew Cuomo announced (press release here) additional settlements with schools as part of the wide-ranging investigation of ties between lenders and student loan offices.  The settlement involved Washington University in St. Louis and two for-profit schools, DeVry University and Career Education Corporation, which runs secondary schools in New York and is based in Illinois.  The case involves the first settlement by multiple state AG offices, with Missouri and Illinois joining with New York in entering the agreements.  Although Wash U. entered into the settlement, the school did not receive any money from a revenue-sharing arrangement with a lender. (ph)

April 25, 2007 in Civil Enforcement, Investigations, Settlement | Permalink | Comments (0) | TrackBack (1)