The Commission adopted its controversial "proxy access"
rules this week by what is becoming the standard 3-2 vote. SEC enforcement
brought an insider trading case against two residents of Spain just days after
the announcement of the take over bid on which it centers and obtained a
partial settlement in an international financial fraud case. Option backdating
cases continued to move toward resolution with the settlement of two more derivative
actions.
Market reform
The Commission adopted its new "proxy access" rules by a 3-2
vote this week. Under the new rules, which take effect 60 days after
publication, shareholders who own at least 3% of the total voting power of the
company's securities and have held those shares for at least three years will
be eligible to nominate directors and have proposals included in the company
proxy materials sent to all shareholders. Shareholders can nominate one
director or a number up to 25% of the board, which ever is greater. Nominees
must not violate applicable laws and regulations. Shareholders cannot use the
rules if the securities are held for purposes of changing control. The rules will
apply to all Exchange Act reporting companies but be phased in for small
issuers. They do not apply to foreign private issuers.
SEC enforcement actions
Insider trading: SEC v. Garcia,
Civil Action No. 10C 5268 (N.D. Ill. Filed Aug. 20, 2010). The case names as
defendants Juan Jose Fernandez Garcia, the Head of European Equity Derivatives
at Banco Santander, S.A., and Luis Martin Caro Sanchez, both of Madrid, Spain (discussed here).
It centers on the unsolicited bid for Potash Corporation of Saskatchewan, Inc.
by BHP Billiton Plc, announced on August 17, 2010. In the bid, BHP offered a
16% premium to market or $130 per share for the stock of Potash. Potash was
advised on the bid by Banco Santander, S.A. The day after the bid the share
price of Potash rose over 27%.
Shortly before the deal announcement, Mr. Garcia
purchased 282 Potash call options for approximately $13,669 through Interactive
Brokers. On August 17, 2010, after the take over announcement, Mr. Garcia sold
his holdings for a profit of $576,033. Mr. Sanchez purchased 331 call options
in Potash in mid-August at a cost of $47,499 through Interactive Brokers. Mr.
Sanchez sold his position just after the announcement at a profit of
$496,953.33. The complaint alleges violations of Exchange Act Sections 10(b)
and 14(e). The case is in litigation.
Financial fraud: SEC v. Escala Group, Inc.,
Case No. 09 CV 2646 (S.D.N.Y. March 23, 2009). The Commission settled with the
founder and former chairman of Escala, Gregory Manning (here). Escala is
an international company whose business centers on the collectibles market.
Through a series of transactions involving collectable stamps with related
parties, the Commission claims that Mr. Manning and the other defendant
fraudulently boosted the revenues of Escala just prior to a merger. The related
party transactions were disclosed as being at arms length. The scheme also
included round trip transactions and improperly recorded expenses. Overall
revenues were improperly increased by over $80 million. Mr. Manning resolved
the case with the Commission by consenting to the entry of a permanent
injunction prohibiting future violations of Exchange Act Sections 10(b) and 13(b)(5)
and from aiding and abetting Escala's violations of Sections 13(a), 13(b)(2)(A)
and 13(b)(2)(B). He also agreed to pay $669,489 in disgorgement, prejudgment
interest and penalties and to the entry of an officer and director bar for ten
years.
FINRA
Undisclosed conflict of interest: Zions
Direct, Inc. was fined $225,000 by FINRA in connection with its failure to
disclose a potential conflict of interest in auctioning certificates of deposit
through its website. The potential conflict stems from the fact that Liquid
Asset Management, an affiliate, participated in the auctions. From the
commencement of the auctions in February 2007 through November 2008 LAM's
participation was not disclosed. Even following disclosure of its
participation, the potential conflict was not disclosed. FINRA determined that
customers were potentially disadvantaged in the auctions. The regulator also
concluded that Zions Direct advertisements in connection with the auctions were
misleading.
Private actions
Option backdating: In re Blue Coat Systems,
Inc. Derivative Litig., Case No. 5:06-cv-04809 (N.D. Cal.); In
re Blue Coat Systems, Inc. Derivative Litig., Case No. 1:05-cv-041436 (Sup.
Ct. Cal., Santa Clara). The complaints, filed in 2007, against the directors,
former directors and outside auditors Ernst & Young, alleged that the
company had backdated and used spring loaded options since 1999. It was based
on a report from an internal investigation. To settle the
action, the company will adopt certain corporate governance provisions.
Insurers and E&Y will pay about $3.9 million and certain former executives
will repay about $170,000 in compensation. Plaintiffs counsel will be given
$1.775 million worth of Blue Coat stock and $225,000 in cash from E&Y as
attorney fees and costs.
FSA
The U.K. Financial Services Authority fined Societe Generale
approximately $2.25 million (£ 1.575 million) for filing inaccurate reports on
80% of its trades over a two year period. From November 2007 through
February 2010, the bank failed to report 320,000 trades and furnished
inaccurate data on 531,000 transactions. Other reports had inaccurate
counterparty data. The bank is the sixth institution to be fined in connection
with inaccurate reports. Previously, Barclays, Getco, Instinet and Commerzbank
were fined for similar irregularities. The difficulty stems from the 2007
adoption of the Markets in Financial Instruments Directive which imposed new
reporting requirements on European Union financial institutions.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
Gorman.