Government authorities announced a $26 billion settlement
with five of the largest banks arising out of the market crisis and its impact
on home owners. In announcing the deal, the Attorney General noted that the
resolution would not impact other market crisis litigation including criminal
and civil charges that might be brought.
In other litigation, the PCAOB announced that it resolved
a proceeding against E&Y and four of its partners by, in part, imposing a
record setting fine as well as a censure on the audit firm. The SEC filed
another insider trading case and an action centered on an offering fraud.
Finally, the "new era" of FCPA enforcement had mixed results
this week. The DOJ and the SEC filed another settled action arising out of one
of their industry wide inquiries. The Department however informed the Court in
the SHOT-Show or African Sting cases that it was reconsidering its position
after the latest trial ended with two acquittals and a hung jury as to the
other defendants.
Litigation trends abroad
Securities litigation in Canada, the U.K. and Australia
generally is on the rise, according to recent reports by NERA Economic
Consulting.
Canada: The filing of
securities class actions in Canada increased significantly in 2011 to fifteen
new cases compared to ten in 2010 and nine in 2009. The largest number of cases
filed in 2011 were so-called Bill 198 actions which relate to the adoption of a
continuous disclosure system in late 2005. In addition, in 2011 five Canadian
domiciled companies were named as defendants in six securities class action
filings in the U.S., an increase from the three cases filed each year in 2009
and 2010. Since Bill 198 was instituted 46% of the U.S. class actions filed
against Canadian domiciled companies have had a parallel action filed in
Canada.
United Kingdom: For
fiscal 2010/2011 fines were at record levels. Total fines for that period were
₤98.6 million compared to ₤33.3 million for the prior fiscal year. Of the total
fines imposed in fiscal 2010/2011 however, ₤64 million were in four cases. For
individuals during that period, the number of fines imposed was more than ten
times the average over the six years prior to fiscal 2008/2009.
Japan: Enforcement actions
by the Securities and Exchange Surveillance Commission centered on claimed
misstatements which reached a record high of 12 in 2010, up from nine in the
prior year. In private litigation the number of judgments increased to a record
56 cases in 2010, up from 14 in 2009. The 56 civil and criminal judgment cases
in 2010 more than doubled the average of 25 per year from 1998 through 2009.
The number of judgments centered on alleged misstatements, however, decrease to
seven in 2010 in contrast to fourteen in the prior year.
Australia: In 2009 six actions
were filed compared to five in 2008 and three each year in 2006 and 2007. A key
to the increase in the number of cases is the manner of funding. The emergence
of commercial litigation funding has altered the incentives for, and ability
of, investors to participate.
SEC Enforcement: Filings and settlements
Insider trading: SEC v. Bankosky, Civil
Action No. 12 CIV 1012 (S.D.N.Y. Filed Feb. 9, 2012) is an action against Brent
Bankosky, formerly a Director in Takeda Pharmaceuticals International, Inc.'s
business development group. Through his position with the company Mr. Bankosky
obtained material, non-public information regarding two pending deal and then
traded. One was announced on March 31, 2008 and involved a strategic alliance
with Cell Genesys, Inc. The second centered on the April 10, 2008 announcement
that his employer had agreed to acquire Millenium Pharmaceuticals, Inc. through
a cash tender offer. After acquiring the information regarding each
transaction, Mr. Bankosky purchased out of the money call options in the
securities of, respectively, Cell Genesys and Millennium. Overall he made
profits of over $63,000 on an initial investment of $37,500. He also traded on
inside information obtained from his employer in two other instances regarding
proposed deals but was not successful. The complaint alleges violations of
Exchange Act Section 10(b) and 14(e). The case is in litigation.
Offering fraud: SEC v. Dachman, Case
No. 1:12-cv-00821 (N.D. Ill. Filed Feb. 6, 2012) names as defendants Kenneth
Dachman, Scott Wold and his company Stone Lion Management. Between July 2008
and June 2010 Mr. Dachman raised almost $3.6 million from investors in 13
states and 12 foreign countries for his controlled companies. The funds were
suppose to be for outpatient diagnostic sleep studies. From December 2008
through April 2010 Mr. Dachman raised an additional $567,399 on behalf of
another controlled entity. Investors were solicited using materials which were
false and misleading, including misrepresentations regarding the financial
condition of the company and Mr. Dachman's background. Defendants Wolf and
Stone Lion assisted in marketing the shares for a 6% commission despite the fact
that they were never registered. According to the complaint, Mr. Dachman
diverted at least $1,875,739 or over 45% of the total, to his own use. The
complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Sections 10(b) and 15(a)(1).
Mr. Wolf and Stone Lion settled, consenting to the entry
of permanent injunctions prohibiting future violations of Securities Act
Sections 5(a) and (5)(c) and Exchange Act Section 15(a)(1). Mr. Wolf also
agreed to pay disgorgement of $335,216 along with prejudgment interest and a
penalty of $20,000. Mr. Wolf will be barred from participating in any penny
stock offering for one year. Mr. Dachman did not settle.
FCPA/Anti-corruption
SHOT-Show/Africa sting cases: The
DOJ informed the Court that it is evaluating the future of these cases which
stem from the largest FCPA sting operation in history. The decision followed
the second in what has been scheduled to be a series of trials. In the most
recent case two defendants were found not guilty and the jury hung as to three
others. Prior to submitting the case to the jury the Court dismissed the
conspiracy count as to each defendant. That ended the prosecution for one
defendant who was only charged in that count. The first trial ended in a hung
jury. Prior to submitting that case to the jury the Court dismissed a
substantive FCPA count as to two defendants and the money laundering charge as
to each defendant. U.S. v. Goncalves, No. 09-cr-335 (D.D.C.)(and related
cases).
Smith & Nephew: The
DOJ and the SEC settled FCPA investigations with Smith & Nephew, a medical
device company. See, e.g., SEC v. Smith & Nephew Plc, Civil Action
No. 1;1-CV-00187 (D.D.C. Feb. 6, 2012). Smith & Nephew PLC is a U.K. based
company whose ADRs are traded in New York. One of its wholly owned subsidiaries
is Smith & Nephew, Inc., based in Memphis, Tenn. From 1998 through 2008
Smith & Nephew, through two of its subsidiaries, authorized the payment of
bribes to Greek health care providers to secure business. In the first part of
the scheme the two subsidiaries sold their devices to a Greek Distributor at
full price. Discounts due the distributors, and totaling over $19 million, were
then funneled off to shell entities controlled by the distributor. Portions of
the funds were used to pay bribes.
To resolve the criminal inquiry the U.S. subsidiary
entered into a deferred prosecution agreement under which a $16.8 million
criminal fine will be paid and a monitor appointed for eighteen months. The DOJ
acknowledge the cooperation of the company. To settle with the SEC, the parent
company consented, without admitting or denying the allegations in the
complaint, to the entry of a permanent injunction prohibiting future violations
of Exchange Act Sections 30A, 13(b)(2)(A) & 13(b)(2)(B) and agreed to
retain an independent consultant and to pay disgorgement of $4,028,000 along
with prejudgment interest.
Criminal cases
Investment fund fraud: U.S. v. Pettibone (E.D.Va.)
is an action in which Richard Pettibone pleaded guilty to operating a Ponzi
scheme. From 2002 through 2006 he operated Benten Investors which he claimed
was an investment company in the real estate and private lending business.
During its operation Mr. Pettibone raised at least $2 million from investors
based on misrepresentations about the operations of the company and a claimed
guaranteed return. In fact much of the money was diverted to his personal use.
As the scheme collapsed Mr. Pettibone wired over $500,000 to Costa Rica to
which he fled. Eventually he was captured and held in jail for eleven months
prior to extradition. Following his plea he was sentenced to an additional 36
months in prison based on his recommendation as well as that of the government.
PCAOB
Reserves: In the Matter of Ernst & Young
LLP, PCAOB Release No. 105-2012-001 (February 8, 2012) is a
proceeding against the firm and four of its partners Jeffrey Anderson, Robert
Thibault, Ronald Butler and Thomas Christie. The Order centers on the audits
for the fiscal years ended December 31, 2005, 2006 and 2007 of Medicis Pharmaceutical
Corporation based in Scottsdale, Arizona. In the audits for those years the
Board concluded that the firm failed to properly evaluate the sales returns
reserve which is a material part of the financial statements. The company
essentially utilized replacement cost rather than sales price thereby
materially understating the reserves. Although E&Y personnel conducted a
2006 AQR and questioned Medicis' reliance on the exchange exception, Messrs.
Anderson, Thibault and Butler altered their rationale as to the method the
company used, adopting an inappropriate analogy to warranty accounting. In 2006
and 2007 Messrs. Anderson, Butler and Christie also failed to appropriately
test, or ensure the performance of adequate procedures to test, key assumptions
for management's new estimation methodology for units-in-channel for the year
end reserve. Rather, they placed undue reliance on the estimations of
management.
On November 10, 2008 Medicis filed with the SEC restated
financial statements for the years ended December 31, 2007 and 2006, the six
months ended December 31, 2005 and the fiscal year ended June 30, 2005. In
those statements the return reserve increased $94.6 million or 585% as of
December 31, 2005, $52.1 million or 148% as of December 31, 2006 and $58.9
million or 600% as of December 31, 2007.
In resolving the proceeding, which the Board made public,
E&Y was fined a record $2 million and censured. In addition, the following
sanctions were imposed on the partners: Mr. Anderson, who served as the lead
partner on the 2005 and 2007 engagements and participated in the audit quality
review and consultation, was barred from associating with a PCAOB registered
firm with a right to petition for removal of the bar after two years and fined
$50,000; Mr. Thibault, who served as the independent review partner for the
2005 and 2006 audits and participated in the consultation in a National Office
role as a member of the firm's Professional Practice Group, was barred with a
right to petition for removal after one year and fined $25,000; Mr. Butler, who
was the second partner on the 2005 audit, led the 2006 engagement and concurred
with the consultation conclusion, was fined $25,000; and Mr. Christie, who was
the second partner on the 2007 audit, was censured.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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