SEC Chairman Schapiro and
others appeared before congress this week to testify about the recent market
disruption. At the same time the SEC, while joining yet another financial fraud
task force, took the unprecedented step of designating the deputy director of
the division of enforcement as lead litigation counsel in its action against
Goldman Sachs. The circuit courts handed down two important decisions, one on
double jeopardy and a second on the type of cautionary language necessary to
invoke the safe harbor for forward looking statements. In London the FSA may
have become a victim of its own success. The financial regulator is going to be
merged with other agencies to form a single white-collar crime agency.
Financial fraud task
force: On Friday
officials will announce the formation of the Virginia Financial and Securities
Fraud Task Force. This group will be composed of the U.S. Attorneys Office for
the Eastern District of Virginia, the SEC, CFTC and Virginia state securities
regulators. The purpose of the task force is to investigate and prosecute
complex financial fraud cases in the nation and in Virginia.
Financial reform: The House Oversight and Government
Reform Committee Ranking Member, Darrell Issa, released a report which is
highly critical of the SEC. According to the report the Commission's securities
disclosure processes are technologically backward, reviewing filings manually
since it never developed the proper tools. In addition, the Commission has not
only failed to properly investigate some of the most significant frauds, it has
also failed to govern itself according to the report. Despite a budget that has
nearly tripled over the last decade current Commissioners claim that they need
more money. Overall the Commission suffers from a "silo problem" the report
claims. The Commission's fragmentation into operational silos has had
devastating effect and generates bureaucratic rivalries.
Financial fraud: SEC v.
McCall, Case No.
C-03-2603 (N.D. Cal. Filed June 4, 2003) is an action against, among others,
Charles McCall, the former CEO and Chairman of HBOC and then Chairman of
McKesson HBOC following a merger. The complaint claims that he engaged in a
years long financial fraud scheme with other executives to inflate earnings. To
settle with the Commission Mr. McCall consented to the entry of a permanent
injunction prohibiting future violations of Securities Act Section 17(a) and
Exchange Act Sections 10(b), 13(b)(5) and 20(a). He also agreed to be
permanently barred from serving as an officer or director of a public company
and was directed to pay a total of $1,878,128 in disgorgement and prejudgment
interest. Previously Mr. McCall was convicted of securities fraud and other
related charges and sentenced to ten years in prison and ordered to pay a $1
million criminal fine.
Insider trading: SEC v. Galleon Management, LP, Civil Action No. 09-CV-8811
(S.D.N.Y.) is the insider trading case against the founder of Galleon,
discussed here. This week the Commission settled with defendant Anil Kumar, a
friend of the founder of Galleon, Raj Rajaratnam. Mr. Kumar, a former director
of consulting giant McKinsey & Co., was alleged to have provided Mr.
Rajaratnam with inside information on which he traded several times. In the
settlement Mr. Kumar agreed to the entry of an order which permanently enjoins
him from violating the antifraud provisions of the federal securities laws. He
also consented to the entry of an order requiring him to pay disgorgement in
the amount of $2.6 million along with prejudgment interest. The court will
determine the amount of a penalty at a later date. Mr. Kumar is cooperating
with the SEC. Previously he pleaded guilty in the parallel criminal action,
Investment fund fraud:
U.S. v. Green,
Case No. 1:09-mj-01880 (S.D.N.Y. Filed Dec. 14 2009) is an action against the
former chairman of Mayfair Capital Group, Stephen Green, discussed here. This
week Mr. Green was sentenced to 41 months in prison for investment fund fraud.
Previously he pleaded guilty two counts of securities fraud. The information
was based on allegations that over a period of four years Mr. Green had raised
over $5.75 million from investors based on a series of fraudulent claims. The
money was diverted to his personal use.
Double jeopardy: U.S. v. Rigas, No. 08-3218 (3rd Cir. Decided May
12, 2010) is the second criminal action brought against John Rigas, founder of
Adelphia Communications Corporation and his son Timothy who was a member of the
board and CFO as discussed here. The first action centered on claims that the
father and son looted the company prior to its collapse. Both were convicted of
conspiracy and several substantive counts. Subsequently, both men were indicted
in the Middle District of Pennsylvania on one count of conspiracy and six
counts of tax evasion. The conspiracy count claimed the two defendants
attempted to defraud the United States by evading millions of dollars in taxes
on the money and property they took from Adelphia which was at the center of
the looting charges in the first case.
The key question in the
case focused on whether the second conspiracy claim could be brought under the
double jeopardy clause of the Fifth Amendment. The government claimed that
Section 371 provides alternative grounds for conspiracy claims while defendants
argued that congress had only created one crime. Third circuit concluded that
the question was one of statutory construction. In view of the text of Section
371, the court held that while there are alternative grounds stated in the
statute, congress only created one crime. Accordingly, the case was remanded to
the district court for an evidentiary hearing on the double jeopardy claim.
statements: Slayton v. American Express Co., Case No. 08-5442-cv (2nd Cir.
Decided May 18, 2010) is a securities fraud damage action. The appeal centered
on the question of whether cautionary statements made by an issuer were
sufficient to bring a forward looking statement within the safe harbor from
liability created by the PSLRA as discussed here. The complaint centered on a
statement in a quarterly report regarding a rapidly deteriorating portfolio of
high-yield debt held by the company. In that report American Express announced
significant losses from the portfolio but went on to note that future losses
were expected to be lower. Several pages later the quarterly report noted it
contained forward looking statements that were subject to various risks and
uncertainties and that one factor could be further deterioration in the high
Plaintiffs argued that the
cautionary language was boilerplate. The court agreed. After examining the
legislative history of the section the second circuit concluded that congress
expected meaningful and specific cautionary language, not boilerplate. Here the
same warning using the same language appeared in several reports both before
and after the challenged statement was made. This lead the court to conclude
the warning was not meaningful but boilerplate. While the statement was thus
not entitled to the protection of the PSLRA safe harbor, the action was
dismissed because plaintiffs failed to adequately plead facts demonstrating
knowing falsity, the requisite standard for forward looking statements.
For more cutting edge
commentary on developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.