This week, the Supreme
Court handed down its decision in Merck
on the statute of limitations in securities fraud damages actions.
Nevertheless, the spotlight remains on Goldman and the SEC's case against the
firm. Congressional hearings were held. The SEC received a letter requesting
information regarding the timing of filing the suit. New reports note that a
criminal inquiry is being initiated. No doubt the turmoil over the SEC's suit
and the charges will continue in the weeks to come.
Supreme Court
Statute of limitations:
Merck & Co. v. Reynolds, Case No. 08-905 S.Ct. (April 27, 2010). All nine justices
concurred in affirming the decision of the third circuit which held that the
district court improperly dismissed a securities fraud suit against the
pharmaceutical giant based on the statute of limitations. The case centers on
alleged fraud in connection with the sale of pain killing drug Vioxx. The
statute of limitations issue turned on when the two year limitation period of
28 U.S.C. § 1658(b) for securities fraud suits begins to run. The high court
concluded that the limitation period begins when the plaintiff in fact
discovers, or with reasonable diligence would have discovered, the facts
constituting a violation, which ever comes first as discussed here.
Initially, the court
concluded that the word "discovery" in Section 1685(b)(1) referred not just to
the actual discovery of certain facts by the plaintiff, but also to those which
could have been discovered with reasonable diligence. This conclusion was based
largely on an analysis of decisions regarding the application of the statute of
limitations in fraud cases. The court concluded that Congress must have had
this body of law in mind when it wrote the statute.
In reaching its conclusion,
the court rejected the key arguments raised by Merck, contending that the
statute barred the suit. First, the company claimed that the statute did not
require the plaintiffs to discover scienter-related facts. Since the question
under the statute however, is when plaintiff discovered a violation and
scienter is a key part of a claim, the court rejected Merck's argument. The
court also rejected Merck's contention that the discovery of false statements
is sufficient since that may not demonstrate scienter. Likewise, Merck's claim
that "inquiry notice" was sufficient to trigger the running of the statute was
rejected since that could mean the limitations period would begin to run before
facts sufficient to state a claim were discovered. On the record before it, the
court held the court of appeals had correctly concluded that the action was not
time barred.
SEC v. Goldman
Sachs
Eight Republican
congressmen from the Committee on Oversight and Government Reform have sent a
letter to Chairman Schapiro demanding information regarding the Goldman suit.
Specifically, an April 20, 2010 letter from Representative Darrell Issa and
seven of his collogues states in part that the case "has created serious
questions about the Commission's independence and impartiality . . . events of
the past five days have fueled legitimate suspicion on the part of the American
people that the Commission has attempted to assist the White House, the
Democratic Party, and Congressional Democrats by timing the suit to coincide
with the Senate's consideration of financial regulatory legislation . . ."
After reciting what are
claimed to be a number of information leaks, the letter requests documents and
information including:
- A statement as to whether
the Commission or its employees gave advance notice to the White House, the
Democratic National Committee or Democratic members of Congress;
- All communications
between the Commission and news outlets about the matter; and
- All records regarding any
such communications.
SEC enforcement
actions
Investment fund fraud:
SEC v. Shapiro,
Civil Action No. 1:10-CV-21281 (S.D. Fla. April 21, 2010) is an action against
Nevin Shapiro which charges him with operating a $900 million fraud and Ponzi
scheme. Mr. Shapiro operated Capital Investments USA, a Miami Beach based
grocery diverter. That company purchased groceries in one part of the country
and resold them in another. From 2003 through 2009 Mr. Shapiro sold promissory
notes which promised annual returns of 10 to 26% which purportedly backed by
purchase orders and receivables from Capital's business. In fact, Capital had
been operating at a loss and much of the money was diverted to other interests
of Mr. Shapiro. The complaint alleges violations of the antifraud provisions.
The case is in litigation.
Option backdating: SEC
v. Jasper, Case
No. CV 07-6122 (N.D. Cal. Filed Dec. 4, 2007) is an option backdating case
against the former CFO of Maxim Integrated Products, Inc., Carl W. Jasper. The
Commission prevailed on most of its counts following an eight-day trial as discussed here. The SEC's
complaint alleged that over a five-year period beginning in 2000 Mr. Jasper
engaged in a scheme to illegally backdate stock options granted by the company
to employees and directors. In order to provide those persons with in-the-money
options the complaint alleges that the company routinely backdated the option
grants to dates which corresponded to historical lows for Maxim's stock price.
Mr. Jasper was aware that
Maxim granted backdated options and repeatedly prepared falsely dated option
grant approval documents for the signature of the CEO. Since the company also
failed to properly account for the options its income was overstated by
millions of dollars. A related criminal case was brought in the District of New
Jersey.
Previously, the Commission
brought an action against the company and its former CEO, John Gifford. SEC v. Maxim Integrated Products, Inc.,
Case No. C-07-6122 (N.D. Cal. Filed Dec. 4, 2007). The company and its former
CEO settled as discussed here.
FCPA
SEC v. Elkin, Civil Action No. 1:10-cv-0061
(D.D.C. Filed April 28, 2010) charges four former employees of Dimon, Inc., now
Alliance One International, Inc. with violating the anti-bribery provisions of
the FCPA. The employees are Bobby Elkin, Jr., former country manager for
Kyrgyzstan, Baxter Myers, former Regional Finance Director, Thomas Reynolds,
former corporate controller and Tommy Williams, a former Senior Vice President
of Sales. According to the complaint, from 1996 through 2004 Mr. Elkin
authorized $ 3 million in bribes paid to various Kyrgystan officials. The
bribes were signed off on by Messrs. Myers and Reynolds. In addition, from 2000
to 2003 Dimon paid about $542,590 to government officials of the Thailand
Tobacco Monopoly to obtain $9.4 million in sales contracts. Tommy Williams
directed the sales of tobacco from Brazil and Malawi to the Thailand Tobacco
Monopoly through the company agent in Thailand. He authorized the payment of
bribes to officials of the Thailand Tobacco Monopoly.
Each defendant settled the
action by consenting to the entry of a permanent injunction prohibiting future
violations of the anti-bribery and books, records and internal control
provisions of the Exchange Act. Defendants Myers and Reynolds also agreed to
pay civil penalties of $40,000 each.
DOJ Opinion: The Department of Justice issued
FCPA Opinion Procedure Release No. 10-01, dated April 19, 2010. In the letter,
the department concluded that it did not intend to take any enforcement action
regarding a proposed service contract under which a foreign official within the
meaning of the Act received compensation as a Facility Director through a
subcontractor from a U.S. company. That individual was hired under an agreement
between a U.S. Government Agency and the Foreign Country. Under the arrangement
the Facility Director would not be in a position to influence any act or
decision affecting the requesting company.
The facts outlined in the
request provided that the U.S. and the Foreign Country had executed an
agreement under which a U.S. Agency would furnish assistance. As part of that
arrangement the agency entered into a contract with the requesting company to
design, develop and construct a facility in the Foreign Country. That requires
the U.S. company requestor to hire and compensate individuals to work at the
facility as directed by the agency. The Foreign Country has appointed a person
to serve as Facility Director and is hiring others. The U.S. agency directed
the requesting company to hire the selected individual. Accordingly the
requesting company, through a subcontract with another company, will hire and
compensate the individuals selected to work at the facility. The employment
contracts are for one year and at their end will be taken over by the Foreign
Country.
FINRA
Tod Bretton, former Chief
Compliance Officer and Head Trader for Prestige Financial, Inc. was permanently
barred from the industry by FINRA. Mr. Bretton engaged in a fraudulent trading
scheme in which he adjusted the prices on large trades and kept the proceeds
for the firm. To cover up his scheme Mr. Bretton falsified the order tickets to
cover the adjusted prices. The scheme is alleged to have yielded $1.3 million
in trading profits.
Private actions
Alaska Electrical
Pension Fund v. Olofson, Case No. 08-cv-02344 (D. Kan.) is a derivative suit against Epiq CEO
Thom Olofson, COO Christopher Olofson and seven other current and former
executives of the company. The complaint alleges that the defendants backdated
stock options at the company. Specifically the complaint alleges that in 17
instances between 1997 and 2006 stock option grants were backdated. Under the
terms of the settlement the company will implement certain corporate governance
reforms. Counsel for the plaintiffs will seek an amount of attorney fees of up
to $3.5 million.
For more cutting edge
commentary on developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.