Securities Law Prof Blog

Is There Consistency in Corporate Penalties?

The word for months was that the SEC was striving to achieve consensus and set a consistent policy in imposing penalties on corporations for violations of the federal securities laws.  This was the explanation for the long delay in finalizing settlements in the stock options backdating cases.  So, with the settlements in Mercury and Brocade, can we discern a consistent policy?  I confess that, on an initial quick glance, I do not see it.  Brocade was settled for $7 million civil penalty; the period of fraud lasted five years, and the SEC press release mentions that the company's audit committee conducted a thorough investigation when the abuses surfaced, surely a mitigating factor.  Mercury was settled for $28 million penalty.  In that case, the fraud lasted eight years, and the SEC press release emphasizes the "widespread and pernicious misconduct" in that case.  But identification of these factors does not make out a policy to account for the difference between $7 million and $28 million, to my mind.  Anyone have any additional insights?

SEC Settles Charges Involving Trading in Advance of Stolen Press Releases

The Securities and Exchange Commission announced settlement of charges against against Lohmus Haavel & Viisemann ("LHV"), an Estonian financial services company, and Oliver Peek, a former employee of LHV, who is a citizen and resident of Estonia. LHV and Peek are the remaining defendants in a fraud action filed by the Commission on November 1, 2005.  The Commission alleged in its Complaint that, from at least January 2005 until the scheme was halted by the Commission's filing of an emergency action in the District Court, the defendants conducted a fraudulent scheme involving the electronic theft and trading in advance of more than 360 confidential, non-public press releases issued by more than 200 U.S. public companies. The Commission alleged that the defendants illegally traded on confidential, non-public information fraudulently stolen from the website of Business Wire, a leading commercial disseminator of news releases and regulatory filings for companies and groups throughout the world.  Without admitting or denying the allegations in the Commission's Complaint, Peek and LHV consented to a permanent injunction; disgorgement by Peek of profits of $13,000,000, representing the illegal profits from the alleged scheme, together with a civil penalty of $1,350,000. LHV was also ordered to pay a civil penalty of $650,000.

SEC Settles Backdating Charges Against Mercury

The SEC announced a settlement of the stock options backdating charges against Mercury Interactive, LLC (formerly known as Mercury Interactive Corporation) for $28 million civil penalty.  The litigation against four former senior officers of Mercury — former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer-- is ongoing.  The SEC alleges that the former senior officers perpetrated a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock option grants, failing to record hundreds of millions of dollars of compensation expense, and falsifying documents to further this scheme.  The SEC also alleges that during this period Mercury, through Landan and at times Abrams, Smith or Skaer, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses. Mercury was acquired by Hewlett-Packard Company after the alleged misconduct.

SEC and Brocade Communications Settle Back Dating Charges

As earlier reported, in a much-anticipated settlement to show the agency's current thinking on corporate penalties, the Securities and Exchange Commission announced today the formal settlement of stock options backdating charges against Brocade Communications Systems, Inc., with a civil penalty of $7 million.  The Commission's complaint alleges that Brocade's former CEO, President and Chairman, Gregory L. Reyes, routinely provided extra compensation to employees by granting valuable in-the-money stock options for which a financial statement expense was required. In order to avoid reporting to investors the hundreds of millions of dollars in undisclosed compensation expenses, Brocade's former executives allegedly concealed the fact that the options had been granted in-the-money by creating records making it falsely appear that the options had been granted at a lower price on an earlier date.

Milberg Weiss Partner May Plead Guilty

Milberg Weiss & Bershad partner, David Bershad, is discussing with the government a settlement of the allegations involving kickbacks in class actions against him that could result in a guilty plea, according to the Wall St. Journal.  A trial against him, the firm and a former partner, Steven Schulman, is scheduled for January.  The three were indicted last May.  See WSJ, Milberg's Bershad Weighs Making
Guilty Plea in Talks With Prosecutors.

SEC and Brocade Communications Settlement of Backdating Charges Expected; $7 Million Penalty

The SEC will announce shortly that Brocade Communications has agreed to pay a $7 million civil penalty to settle stock options backdating charges, according to the Wall St. Journal.  People have been waiting for this settlement for months, to get an indication of the SEC's thinking on corporate penalties in the stock options backdating context.  According to the WSJ, Brocade agreed to the $7 million penalty over a year ago, but SEC approval was delayed as SEC attorneys opened numerous investigations into backdating charges and the Commissioners debated the appropriate policy on corporate penalties.  After the huge penalties paid by corporations in some of the financial fraud cases, some argued (including Commissioner Paul Atkins) that penalties on corporations imposed a hardship on current shareholders; penalties are more appropriately imposed on the executives who engaged in the wrongdoing.  The backdating cases present thorny questions of whether the anyone was harmed by the backdating (since in many cases the stock prices quickly recovered after disclosure) and, conversely, was there a corporate gain -- both factors taken into account in determining the level of penalties.  A few months ago, Chair Cox confirmed the SEC's new policy of requiring staff attorneys to seek Commission approval before beginning settlement talks that could result in a corporate penalty, in order to achieve some consistency in this area.  Some viewed this as a signal that corporate penalties would become less common and smaller in amount, although Cox denied this would necessarily be the outcome.  See WSJ, Backdating Fine May Set Model.

Company's Non-Response to NYSE Request for Statement

The following press release is posted on the NYSE Regulation website:

Pennsylvania Real Estate Investment Trust (PEI) 
 
In view of the unusual market activity in Pennsylvania Real Estate Investment Trust (PEI) stock, the Exchange has contacted the company and requested that the company issue a public statement indicating whether there are any corporate developments which may explain the unusual market activity.

The company stated that its policy is not to comment on unusual market activity or rumors.

It seems to me that the company's statement does not respond to the NYSE's request.  I wonder if it is customary for companies to fail to respond to NYSE's request for information.  This does not seem to comply with at least the spirit of the NYSE rules requiring prompt disclosure of material information (or a statement that there is none).

Barclays Bank and Trader Settle Insider Trading Charges

The SEC today settled a civil action against Barclays Bank PLC (Barclays) and Steven J. Landzberg (Landzberg), a former proprietary trader for Barclays' U.S. Distressed Debt Desk, alleging that Barclays and Landzberg engaged in securities fraud through a pattern of illegal insider trading.  The complaint included allegations that Barclays and Landzberg illegally traded millions of dollars of bond securities over eighteen months, while aware of material nonpublic information received through six creditors committees. Landzberg simultaneously served as Barclays' representative on the creditors committees and as its proprietary trader. The complaint also 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. 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.

Barclays and Landzberg each consented, without admitting or denying the allegations in the Commission's complaint, to entry of final judgments permanently enjoining them from federal securities law violations. Barclays also consented to payment of  $10.94 million: disgorgement of $3,971,736, prejudgment interest of $971,825, and a civil money penalty of $6,000,000. Landzberg further consented to be permanently enjoined from participation in any creditors committee in any federal bankruptcy proceeding involving an issuer of securities, and to pay a civil money penalty of $750,000.

Former Majority Leader of Connecticut Senate Found Guilty in Fraudulent Investment Scheme

The Securities and Exchange Commission announced today that on May 18, 2007, a federal jury found William A. DiBella, the former Majority Leader of the Connecticut State Senate, and his consulting firm, North Cove Ventures, L.L.C., liable for aiding and abetting then Treasurer of the State of Connecticut, Paul J. Silvester in a fraudulent investment scheme. Pursuant to the scheme, Silvester invested $75 million in state pension funds with Thayer Capital Partners, a Washington, DC-based private equity firm, and arranged for Thayer to pay DiBella a percentage of the investment, though he did not do work to justify the payment.

SEC's Atkins May Move to CFTC

Paul S. Atkins, an SEC Commissioner who regularly speaks out against what he perceives as excess regulation in the post-Enron era, may be nominated to serve as the next Chair of the CFTC.  See WPost, SEC's Atkins Tapped for Commodities Regulator.

Pakistani Banker Charged in Insider Trading Scheme

Prosecutors charged Ajaz Rahim, the country head of investment banking at Faysal Bank Limited, a Pakistan investment bank, with insider trading.  The government alleges that Rahim received tips about nine deals, including the takeover of TXU, from Hafiz Muhammed Zubair Naseem, a Credit Suisse energy analyst, from April 2006 through February 2007, for a total profit of $7.5 million.  The government has previously charged Naseem.  The SEC has also named both Rahim and Naseem in a civil complaint.  See NYTimes, Prosecutors Accuse Banker of Fraud and Conspiracy; WSJ, Pakistani Banker Charged.

IBM Buys Stock and Borrows Money

IBM is buying back $12.5 million of its own stock (about 8% of the outstanding) from three banks and borrowing $11.5 billion to make the purchase.  Since 1995 it has spent $80 billion on stock repurchases, and in April the board authorized $15 billion in new repurchases.  IBM has been spending $100 million a day on stock buybacks.   An unusual aspect of the buyback is that IBM is financing it through a Netherlands subsidiary, to avoid the higher US taxes that would result from repatriating the funds. See NYTimes, I.B.M. Borrows $11.5 Billion to Buy Back Stock; WSJ, IBM Hones the Stock Buyback.

ICE May Gain Advantage in Competition for CBOT

Intercontinental Exchange (ICE) and Chicago Mercantile Exchange (CME) are competing to acquire the Chicago Board of Trade (CBOT).  The CBOT board currently favors CME, and the deal is scheduled for a shareholder vote on July 7.  However, ICE is expected to announce today that it has agreed to a settlement of a longstanding dispute between the Chicago Board Options Exchange and CBOT's parent, on condition that CBOT becomes part of ICE, which would give ICE a competitive advantage over CME.  See WSJ, ICE Finds a Chicago Ally.

Cox on IFRS

An excerpt from SEC Chair Cox's April 26 address about convergence of accounting rules at the American Academy in Berlin and the American Chamber of Commerce in Germany:

Let's consider a concrete example: the move that's afoot here in Germany, throughout Europe, and around the world for a truly global set of high quality accounting standards. The vision behind International Financial Reporting Standards is that a single worldwide set of standards will permit investors around the world to benefit from a high level of comparability and a consistently high level of quality in financial reporting. It would eliminate the need for investors and analysts to try to understand financial statements that are prepared using the different accounting standards of many jurisdictions. And it would eliminate one of the significant barriers to raising capital outside one's borders.

IFRS promises to integrate our markets. But that promise is jeopardized if IFRS isn't applied faithfully and consistently across jurisdictions. Regulators must beware the impulse to develop nationally-tailored versions of IFRS, and we must cooperate with one another in implementing

Cox Speaks at Senior Investor Protection Symposium

On May 18, SEC Chair Cox also discussed the SEC's efforts to protect senior citizens from securities fraud at the Senior Investor Protection Symposium in Chicago.

Cox Discusses Bank Broker Exceptions

In a Speech to the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition on May 18, Chairman Christopher Cox addressed the prolonged, and not yet concluded, process to adopt bank broker exceptions to implement Gramm-Leach-Bliley, adopted eight years ago.

SEC Announces Round Table on Rule 12b-1 Fees

The Securities and Exchange Commission announced today that it will host a roundtable discussion next month on issues surrounding Rule 12b-1 under the Investment Company Act of 1940. Rule 12b-1 permits mutual funds to use fund assets to finance the distribution of their shares.  The roundtable will take place on June 19, 2007, and will consist of panels addressing

the historical circumstances that led to the promulgation of Rule 12b-1, and the original intended purpose of the rule;
the evolution of the uses of Rule 12b-1 and the rule's current role in fund distribution practices;
the costs and benefits of the current use of Rule 12b-1; and
the options for reform or rescission of Rule 12b-1.

NASD Fines HSBC Brokerage Regarding Government Securities Transactions

NASD today announced that it has fined New York's HSBC Brokerage (HBI) $250,000 for failure to have adequate systems in place to supervise government securities transactions to ensure best execution.  In addition, the firm routed orders to HSBC Securities (HSI), an affiliated firm, without taking adequate steps to ensure that customers would not be harmed in the pricing of these securities. HBI's inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD's ability to review transactions for best execution.  In April 2005, HBI merged with HSI.  See NASD Fines HSBC Brokerage for Failure to Supervise Government Securities Transactions for Best Execution.

Spitzer Establishes Commission to Review New York Capital Markets

New York Governor Eliot Spitzer signed an executive order establishing a commission to identify ways for New York to maintain its position as the center of the financial markets.  The panel, known as the New York State Commission to Modernize the Regulation of Financial Services, will review all current financial-services statutes, regulations, rules and policies and propose legislative and other necessary changes, Mr. Spitzer's office said Tuesday.  WSJ, Spitzer Seeks Review Of Financial Regulations.

SEC Urged to Take Pro-Investor Position in Supreme Court Cases

Next term the Supreme Court will hear argument, in the Charter Communications case, whether third parties can be liable as primary violators by participating in a scheme to defraud under Rule 10b-5(2), or or they simply aiders and abetters whom private parties cannot sue under Central Banks. Plaintiffs in a similar suit charging the investment banks involved in some Enron financings with fraud have asked the Supreme Court to take up their case as well.  In the past few weeks William Lerach, attorney for the plaintiffs in the Enron case, and others have waged an intense lobbying campaign to persuade the SEC to file an amicus brief on the side of the investors.  The SEC supported imposing scheme liability on the bankers at the district court level in the the Enron case, but the agency has taken positions contrary to private plaintiffs in Supreme Court amicus briefs in several major recent Supreme Court cases, including Tellabs. See WSJ, SEC's Allegiances Are Put to Test.