Securities Law Prof Blog

Lawyer Charged with PIPES fraud

The SEC announced today it filed an injunctive  action  in U.S. District Court for the Southern District  of  New  York  alleging that from approximately January 2006 to February 2007, Louis W. Zehil, a corporate attorney, and two entities he  controlled engaged  in  a fraudulent scheme to sell   millions of shares of securities in violation of the antifraud and registration provisions of the federal securities laws. With  the  consent  of  the parties,  Judge  Preska  entered  an  order  granting  a   preliminary injunction, an asset freeze, the appointment of a receiver  and  other relief.  Zehil was until recently a  partner  with  the  law  firm  of McGuireWoods LLP.
   

The Complaint alleges that between January  2006  and  February  2007, Zehil represented seven public companies in  issuing  their  stock  in PIPE transactions (private investments in public  equity) and Zehil  personally  invested  in  the issuers'  PIPE  transactions.  In  the subscription agreements for  each  PIPE  transaction,  the  Defendants agreed (as all the PIPE subscribers did) that the shares they received would be issued with  restrictive  legends  until  such  time  as  the issuers filed registration statements  with  the  Commission  and  the Commission declared them effective. As counsel for the issuers,  Zehil then sent letters  to  the  issuers'  transfer  agents  directing  the issuance of shares to the PIPE subscribers. Zehil's letters instructed that all the shares should bear restrictive legends except the  shares issued to his entities.  As a result, the Defendants were able to receive shares without restrictive legends, which they quickly sold into the  public  market, and generated illicit profits of at least $17 million.

SEC Charges Former McAfee GC

This morning the news was that Kent Roberts, former GC at McAfee, was indicted in connection with the stock options backdating scandal.  Today the SEC announced that it is charging him with fraud as well.  The Commission's complaint alleges that Roberts, secretly and without authorization, changed the grant date of a February 2000 grant made to him in order to take advantage of McAfee's then-declining stock price, which increased the potential value of his option grant by approximately $197,500. Roberts concealed his fraudulent re-pricing by filing false stock ownership reports with the Commission, and by failing to properly disclose in a McAfee proxy statement, which he signed, that the grant had been illicitly re-priced to confer a potential benefit of approximately $197,500 on Roberts.

The complaint also alleges that in 2002, Roberts, in his capacity as secretary of the compensation committee of McAfee's board of directors, falsified the minutes of a compensation committee meeting, and directed the company to issue a 420,000 share option grant to McAfee's chief executive a day later than the committee had directed. By re-dating the grant to a day after the committee's intended grant date, Roberts gave the chief executive a potential benefit of approximately $739,200, due to an intervening decline in McAfee's stock price. Roberts later signed a company proxy statement that misleadingly described the chief executive's option grants, and failed to disclose that the CEO had received an extra $739,200 of potential value due to the unauthorized re-pricing.

Big News is Big Drop

The big news is yesterday's big drop in the U.S. stock markets, following the big drop in the Chinese markets.  There are too many stories and too many different angles to report in detail, but here are the major themes (as of now):  First, the Chinese markets are the wild west right now, topping even the US in the 1999-2000 era in irrational exuberance.  Stock traders there are not investors, they are speculators who view stocktrading as gambling and do so with very little information.  Second, recession fears are growing in the US, driven largely by the drop in durable goods orders and Alan Greenspan's warning of a recession, and also the continuing reports about the problems in the home mortgage market.  We will have to see how all this plays out.

NYSE-Nasdaq Battle for Listings

The competition for listings has intensified between NYSE and Nasdaq, as each is now a public company and the number of potential new listings is limited.  A Wall St. Journal article highlights E*Trade's jump last December from the NYSE to Nasdaq.  Apparently, Nasdaq agreed to push the brokerage firm's services as an administrator of stock option plans to its listed companies, while NYSE would not.NYSE, Nasdaq Drop Gloves To Battle for Stock Listings.

Former McAfee GC Indicted

Kent Roberts, the former GC at McAfee, becomes the third executive in two weeks (the others from Take-Two and Monster) to be indicted in the stock options backdating scandals.  See NY Times, McAfee’s Ex-Lawyer Indicted and WSJ, McAfee's Ex-Counsel Is Charged With Options Fraud.

Blockbuster Board Won't Pay CEO Full Bonus

A board with backbone?  The Blockbuster board, led by Carl Icahn, has told its CEO John Antioco that he won't get his full bonus of $ 7.65 million after the company reported a fourth quarter net income drop of 28%.  Instead, it said it will pay him a $ 2.28 million bonus, but only if he does not contest its decision. See WSJ, Icahn Seeks to Pare Bonus Of Blockbuster Chief.

Another Supermarket Merger in the Works

A&P is negotiating to buy Pathmark for $12.50 per share in cash and stock, a 3.7% premium over its market price, for a total price of $652.5 million.  The planned merger of the two New Jersey-based supermarket chains continues a trend of consolidation in the industry, following last week's announcement of a merger between Whole Foods and Wild Oats.  See NY Times, A.& P. Negotiating to Acquire Pathmark and WSJ, A&P Bid for Pathmark May Forge Regional Giant.

SEC Alleges Investment Adviser Engaged in Cherry-Picking

On February 26, the SEC instituted proceedings against Melhado, Flynn & Associates, Inc. (MFA), George M. Motz (Motz) and  Jeanne  McCarthy  (McCarthy), alleging that, from at least January 2001  through  April 2005, George M. Motz, the President, CEO and Chairman of the Executive Committee of MFA, engaged in fraudulent trade  allocation  -  "cherry-picking" - at MFA, a registered investment adviser and  broker-dealer.  During the initial period of the scheme, from at  least  January  2001 until approximately September 2003,  Motz  allegedly unfairly  allocated  trades that had appreciated in value during the course of the  day  to  MFA's proprietary  trading  account  and  allocated   purchases   that   had depreciated in value during the day to the accounts  of  his  advisory  clients. Beginning in the summer of  2003,  Motz allegedly engaged  in  cherry- picking to favor one of the firm's  advisory  clients,  a  hedge  fund  affiliated with MFA, over his other advisory clients. In addition,  in the fall of 2003, Motz, with the assistance of McCarthy, altered order tickets in an attempt to cover-up these fraudulent trade  allocations.  As  a  result  of  this  fraud,  MFA  realized  ill-gotten  gains   of  approximately  $1.4  million.  In  addition,  MFA  and   Motz   earned commissions and fees from advisory clients who were  disadvantaged  by the cherry-picking scheme.

Roundtable on Int'l Financial Reporting

On March 6, 2007,  the  SEC will  hold  a  roundtable discussion  on  the  "roadmap"   regarding   International   Financial Reporting Standards (IFRS). The  roadmap  describes  the  path  toward   eliminating the need for non-U.S. companies to reconcile to U.S.  GAAP financial statements they prepare  pursuant  to  IFRS  issued  by  the  International  Accounting  Standards  Board  in   filings   with   the Commission. The subject matter of the roundtable will be the effect of the roadmap on the capital raising process , the effect on investors ,and the effect  on  issuers.Representative(s) of  the    following  have  been  invited  to  participate:  issuers,  investors, securities  counsel,  underwriters,  credit  rating  agencies,   stock exchanges, academia, and audit firms.

NASD Arbitrators Must Take Training

Because of the SEC’s recent approval of NASD’s revised Code of Arbitration Procedure , NASD requires all active arbitrators on its roster to complete an online training course. The mandatory course – which is FREE to all NASD arbitrators – provides background information about the Code revision project and discusses the key, substantive changes of the Customer Code with complementary Industry Code highlights.

The revised Code is effective for all cases filed on or after April 16, 2007. Arbitrators are encouraged to complete the training within the next 30 days. Arbitrators who fail to complete this mandatory training course may be made unavailable for future service as an NASD arbitrator.

SEC Case against 2 former Citicorp Officers Dismissed

A judge dismissed the SEC's lawsuit against 2 former Citicorp officers.  The agency alleged that millions of dollars saved from a contract negotiated with First Data Investment Services should have been used to reduce mutual fund fees.  The judge said the SEC waited too long and didn't have the facts.  See NY Times, Suit Against Ex-Citi Officers Is Dismissed and WSJ, Judge Dismisses Suit Over Transfer Agent.

Another Investigation into Hedge Funds

The SEC and DOJ are investigating whether a UBS employee sold advance information about ratings changes to traders at hedge funds. See WSJ, Inquiry Asks If UBS Ratings Were Leaked.

Big Bucks for Lehman CEO

Richard S. Fuld, Chair and CEO of the brokerage firm Lehman Brothers Holding, earned $40.6 million in salary and bonus, after the firm had record profits last year.  See NY Times, $40.6 Million in Pay for Lehman’s Chief.  That's low by Wall St. standards, according to WSJ, Lehman Trio Earns A 'Low' $92.3 Million.

More on the TXU Buyout

The talk is all about the $45 Billion LBO of TXU Corp., the Texas utility, by KKR and Texas Pacific.  The New York Times focuses on the role of the investment banks.  Not only are they supplying $24 billion in debt financing, but another $1 billion as an "equity bridge."  See NY Times, Private Equity Buyout of TXU Is Enormous in Size and in Its Complexity.   The Wall St. Journal focuses on the likelihood of competing bids and the reaction in Texas. See WSJ, In TXU Deal, Texas Regulator
Has Few Levers to Pull

New President at NYSE

NYSE Group named Duncan L. Niederauer its new President and co-operating officer.  He is currently a managing director at Goldman Sachs.  See NYTimes, NYSE Group Names New President.  The Wall St. Journal speculates that this may mean that CEO John Thain will be moving on shortly.  See WSJ, Another Goldman Man Joins NYSE, as President.

Former Engineered Support Systems officer charged with insider trading

The SEC filed civil injunctive actions against Ronald W. Davis, the former President of Business Development of Engineered Support Systems, Inc., and his friend and former broker, Matthew E. Kopsky, for insider trading in the securities of Engineered Support Systems. The complaint alleges that Davis repeatedly tipped Kopsky before each of Engineered Support Systems's first three   quarterly earnings announcements in 2003. According to the complaint, Kopsky purchased Engineered Support securities for himself, family members, and/or his clients and earned an aggregate profit of $276,259, including $107,062 for himself and his wife, and $169,197 for his clients.         

Insider Trading Through Hacking Alleged

In an emergency federal court action filed on February 26 in S.D.N.Y., the SEC obtained a court order temporarily restraining Blue Bottle Limited, a Hong Kong company, and Matthew Charles Stokes, a citizen of Guernsey, from violating the antifraud provisions of the federal securities laws. The Judge also ordered a freeze of Blue Bottle's and Stokes's assets, as well as an order requiring them to repatriate funds transferred to overseas accounts.

The Commission's complaint alleges that Blue Bottle and Stokes, immediately prior to the publication of news releases by 12 different U.S. public companies, repeatedly traded in the securities of those companies, including options and equities trading. The Commission alleges that the defendants fraudulently gained access to material nonpublic information through hacking into computer networks or otherwise improperly obtaining electronic access to systems that contain information about imminent news releases and traded ahead of the public dissemination of that information, realizing profits of $2,707,177. The Commission further alleges that Blue Bottle and Stokes provided false information and used fake documents to open an account at the U.S. broker-dealer through which they executed the illegal trades.

The Commission alleges that the illegal trading, which began in early January 2007, was in the securities of the following 12 U.S. companies: AllianceBernstein Holding L.P., Allscripts Healthcare Solutions Inc., Achillion Pharmaceuticals Inc., BJ's Wholesale Club Inc., Brady Corporation, CACI International, Inc., Hornbeck Offshore Services, Inc., LeCroy Corporation, Millipore Corporation, Odyssey Healthcare Inc., Symantec Corporation, and RealNetworks, Inc.
   

Settled Fraud Charges Against Hedge Fund Adviser

The SEC filed a settled civil injunctive action against a hedge fund adviser, Crestview Capital Partners, LLC (Crestview), and one of its managing members, Stewart R. Flink, charging them with making fraudulent representations in connection with investments by Crestview-managed funds (Crestview funds) in two registered direct offerings. Registered direct offerings generally are characterized as privately negotiated sales of securities by public companies pursuant to an effective shelf registration statement. Crestview and Flink made false representations in the offering documentation for the two registered direct offerings that Crestview funds had not shorted the respective issuer's stock in the ten trading days preceding the signing of the documentation. Without admitting or denying the Commission's allegations, Crestview and Flink agreed to a civil injunction for violations of the federal securities laws. In addition, Crestview agreed to pay $394,640 in disgorgement and civil penalties and to retain an independent consultant to monitor Crestview's compliance procedures. Flink agreed to pay $120,000 in civil penalties.

Sixty Companies Have Advisory Votes on Exec Pay on Ballot

Shareholder activists are putting proposals for a shareholder advisory vote on executive compensation on the ballot at 60 companies this proxy season.  The Wall St. Journal looks at the British experience, which has had shareholder advisory votes since 2003.  The result there is predictable: more information, but not less money for execs.  See WSJ, Shareholders Push For Vote on Executive Pay.

Sam Zell and Tribune are Dancing

The Tribune, the Chicago newspaper company that is looking for ways to restructure itself and buy out the Chandler family, is considering a last-minute offer from Sam Zell, who has a lot of cash after the EOP LBO of a few weeks ago.  See NYTimes, Tribune Considering Late Offer From Real Estate Magnate.  The Wall St. Journal predicts that Tribune will decide on a spin-off of the newspaper and a special cash dividend.  See WSJ, Tribune Mulls Revamp As Auction Founders.