On capital hill a bill was introduced in the Senate to
expand the definition of Honest Services fraud in the wake of the Supreme
Court's ruling in Skilling and legislation was sent to the President for
signature repealing Dodd-Frank Section 9291, an FOIA exemption long sought by
the Commission. SEC Enforcement brought three insider trading cases, a market
crisis action against employees of a bank and finally won approval of its
settlement with Citigroup. The SEC and DOJ continued to emphasize FCPA
enforcement, filing settled actions against ABB. In private actions Apple
resolved shareholder suits based on option backdating claims.
Capital hill and regulatory reform
Honest
services fraud: The Senate Judiciary Committee heard
testimony regarding proposed legislation to amend the honest services fraud
statute in the wake of the Supreme Court's decision last term in Skilling v.
U.S., 130 S. Ct. 2896 (2010)(here). There the Court limited Section 1346 to
bribes and kickbacks as defined in earlier case law and rejected the
government's suggestion that it includes undisclosed conflicts of interest.
In testimony Assistant Attorney General Lanny Breuer
urged the Senate Committee to move forward with a legislative fix which would
permit the government to bring honest services fraud claims against public
officials based on undisclosed conflicts of interest. While Mr. Breuer noted
that a legislative fix to reach conduct in the private sector is also necessary
the Department he stated that the Department is not prepared at this time to
advance a specific proposal. Other witnesses agreed that in the wake of Skilling
legislation is necessary but urged caution and careful drafting to avoid the
vagueness difficulties of the past (here).
S. 3854 was also introduced this week. This bill would
expand the definition of scheme or artifice to defraud in the mail and wire
fraud statutes. Under the proposed legislation the phase would include "a
scheme or artifice by a public official to engage in undisclosed self-dealing .
. . [and] a scheme or artifice by officers and directors to engage in
undisclosed private self-dealing. . . " Essentially, the draft legislation
seeks to extend Honest Services Fraud to encompass self-dealing, an argument
the Supreme Court specifically rejected in its U.S. v. Skilling (here).
Disclosure: Legislation
repealing Dodd-Frank Section 9291 has passed both the House and the Senate. It
is being forwarded to the President's desk for signature. Section 9291, long
sought by the SEC, would have provided a broad FOIA exemption for proprietary
materials gathered during inspections as discussed here
Proxy rules: The U.S. Chamber of
Commerce and the Business Roundtable filed suit against the SEC to block the
new proxy rules. Those rules were adopted August 25 by a 3-2 vote of the
Commission. Business Roundtable v. U.S. Securities and Exchange Commission
(D.C. Cir. Filed Sept. 29, 2010).
SEC enforcement actions
Insider trading: SEC v. Steffes,
Case No. 1:10-cv-06266 (N.D. Ill. Filed Sept. 30, 2010) names as defendants Rex
Steffes, Cliff Steffes, Rex R. Steffes, Bret W. Steffes, Robert J. Steffes and
W. Gary Griffiths. In the complaint the SEC alleged that Gary Griffiths and
Cliff Steffes obtained inside information about the upcoming acquisition of
Florida East Coast Industries Inc which owned the freight railway where they
were employed. The two men then tipped Rex C. Steffes, Cliff's father and Gary
Griffiths' brother-in-law. Other family members were also tipped. Collectively
the traders purchase over $1.6 million in stock and option prior to the May 8,
2007 acquisition date. More than $1 million in illicit profits were made
following the public announcement of the deal. The complaint alleges violations
of Exchange Act Section 10(b). Robert J. Steffes settled the action, consenting
to the entry of a permanent injunction prohibiting future violations of Section
10(b). The order also requires him to disgorge $104,981 in trading profits, pay
prejudgment interest and a civil penalty equal to the trading profits. The case
is in litigation as to the other defendants. See also Lit. Rel. No.
21678 (Sept. 30, 2010).
False statements: In the Matter of John P.
Flannery, Adm. Proc. File No. 3-14081 (Sept. 30, 2010) is an
action against former State Street Bank employees John Flannery and James
Hopkins. The Order alleges that the Respondents marketed State Street's Limited
Duration Bond Fund as an "enhanced cash" investment strategy that was an
alternative to money market funds. By 2007 however the fund was largely
invested in sub-prime residential mortgaged backed securities and derivatives
but the marketing continued. In July 2007 many investors were unaware of this
exposure. In late July a series of shareholder communications regarding the
impact of the turmoil in the sub-prime market on the fund failed to disclose
its concentration in that market. Investors were misled. Respondent played an
instrumental role in drafting these communications according to the Order.
Other communications sent to select shareholders accurately described the
situation. One of the internal advisory groups which reported directly to Mr.
Flannery decided to redeem or recommend redemption from the fund. At the
direction of Mr. Flannery and the bank's investment committee, the most liquid
assets in the fund were sold and the cash used to meet the redemption demands
of the better informed customers. The Order alleges violations of Securities
Act Sections 17(a)(1), (2) and(3) The action is in litigation. The bank
previously settled (here).
Insider trading: SEC v. Hansen,
Civil Action No. 10-CV-5050 (E.D.Pa. Filed Sept. 27, 2010) is an insider
trading action against Richard Hansen, a registered representative and former
chairman of a regional investment bank and his long time friend Stuart
Kobrovky. According to the complaint Mr. Hansel obtained inside information
from business associate Donna Murdoch who, in turn, obtained it from James
Gansman, then an EY partner in their Transaction Advisory Services Department.
The information concerned several upcoming acquisitions as described in the
action against Mr. Gansman (here). As a result Messrs. Hansen and Kobrovsky
made trading profits of abut $215,000. Mr. Kobrosky settled the action,
consenting to the entry of a permanent injunction prohibiting future violations
of Exchange Act Section 10(b). He also agreed to disgorge trading profits of
$160,000 along with prejudgment interest. A civil penalty was not imposed based
on his financial condition. The case against Mr. Hansen is pending along with
the parallel criminal case, U.S. v. Hansen, 10 Crim. 875 (S.D.N.Y.).
Financial fraud: SEC v. Forman,
Civil Action No. 07-1151 (D. Mass.) is an action against Steven Forman,
formerly the controller of Speechworks International, Inc. It alleges that he
and others engaged in a scheme which improperly inflated the revenue and
financial condition of the company. Specifically, the SEC claimed that Mr.
Forman participated in the improper recognition of $2 million of royalty
repayments as revenue. To resolve the action Mr. Forman consented to the entry
of a permanent injunction prohibiting future violations of the books and
records and internal control provisions of the Exchange Act. He also agreed to
pay a civil penalty of $20,000. The fraud charges, based on claimed violations
of Securities Act Section 17(a) and Exchange Act Section 10(b), were dropped
without explanation in the settlement.
Financial fraud: SEC v. Huff,
Civil Action No. 08-06315 (S.D. Fla. Filed Sept. 30, 2010) is an action in
which the Commission prevailed against defendant W. Anthony Huff following a
seven day bench trial. The claims were based on Exchange Act Sections 10(b) and
20(a) and Securities Act Section 17(a). The court concluded that Mr. Huff
engaged in a scheme to overstate the financial results of Certified Services,
Inc., then of Fort Lauderdale. From the third quarter of 2002 through the third
quarter of 2004 Mr. Huff and others recorded $47 million in bogus letters of
credit on Certified's books and records. The public filings for the company
also failed to disclose Mr. Huff's criminal background and control. Through the
scheme Mr. Huff was able to fraudulently obtain over $10 million for himself
and his family. In addition to entering an injunction prohibiting future
violations, the court imposed an officer and director bar and ordered the
payment of more than $10 million in disgorgement along with prejudgment
interest and a civil penalty of $600,000.
Undisclosed conflicts: In the Matter of
Valentine Capital Asset Management, Inc, Adm. Proc. File No.
3-14072 (Sept. 29, 2010) is a settled administrative proceeding against
registered investment adviser Valentine Capital and its founder John Valentine.
The Order claims that after having made about $3 million in fees from his
clients who invested in Series A limited partnership units Respondents
recommended that they switch to Series B. According to the Order there is
little difference between Series A and Series B. In making the recommendations
Respondents did not tell clients that switching would cause them to pay
significant additional fees. The Order alleges a breach of fiduciary duty in
violation of Advisers Act Section 206(2). To resolve the matter the Respondents
each consented to the entry of a cease and desist order from further violations
of Section 206(2). Both were censured. In addition, Valentine Capital agreed to
disgorge $394,710.82 in commissions along with prejudgment interest. Mr. Valentine
also agreed to pay a civil penalty of $70,000. As part of the settlement
Respondents undertook to post the summary portion of the Order on the Fund's
website and distribute it to clients.
Cherry picking scheme: In the Matter of Ark
Asset Management Co., Inc., Adm. Proc. File No. 3-13174 (Sept. 29,
2010) is a settled proceeding against a registered investment adviser that is
in involuntary bankruptcy under Chapter 7. According to the Order, Respondent
fraudulently allocated trades by "cherry-picking," that is favoring proprietary
accounts over client account. As a result Ark realized over $19 million in
ill-gotten gains. The firm also made false statements in its form ADV and
failed to comply with the books and records provisions. To resolve the matter
Respondent undertook to ensure that all assets are liquidated for the benefit
of its creditors and consented to the entry of an order requiring compliance
with that undertaking. The order also requires the payment of $750,000 in
disgorgement, an amount limited because of the firm's financial circumstances.
Insider trading: SEC v. Jobe,
Civil Action No. 4:10-cv-711 (N.D.TX Filed Sept. 24, 2010) is an action against
Michael Jobe and Richard Vlasich. The complaint claims that in December 2009
Mr. Jobe learned from an XTO Energy, Inc. employee that the company would be
acquired by Exxon. Mr. Jobe told Mr. Vlasich about the pending deal. Both
purchased XTO securities prior to December 14, 2009 when the deal was
announced. Mr. Jobe earned profits of $107,220 while Mr. Vlasich made
$466,295.90. To settle the action each defendant consented to the entry of a
permanent injunction prohibiting future violations of Exchange Act Section
10(b). Each also agreed to disgorge his trading profits and pay prejudgment
interest. Mr. Jobe paid a $100,000 civil penalty. The Commission did not seek a
penalty against Mr. Vlasich because he agreed to cooperate in the Commission's
investigation and in any related enforcement action. See also Lit. Rel.
No. 21665 (Sept. 24, 2010).
Settlement: SEC v. Citigroup,
Civil Action No. 10-cv-127 (D.D.C. Filed July 29, 2010) is an action in which
the Commission claimed the bank made false statements regarding its exposure to
the sub-prime market as discussed here. Initially the Court declined to accept
the settlement which called for the entry of an injunction, the payment of a
$75 million fine and the adoption of certain procedures by the bank. After
additional briefing and directing the Commission to certify the implementation
of the proposed procedures (here) the Court accepted the settlement. Two
related administrative proceedings, one against a current and another against a
former bank officer, each alleged to have been involved in the underlying
conduct, were previously settled.
FCPA
U.S. v. ABB Inc.,
No. H-10-664 (S.D. TX. Filed Sept. 29, 2010); U.S. v. ABB Ltd. -Jordan,
No. H-10-665 (S.D. TX. Filed Sept. 29, 2010); and SEC v. ABB Ltd, Civil
Action No. 1:10-CV-01648 (D.D.C. Filed Sept. 29, 2010) are three FCPA actions
which have been resolved. ABB is a Swiss based provider of power and automation
products and services around the world. According to the court papers the
company, through various subsidiaries, engaged in two schemes. First, from 1999
through 2004 a business unit of the U.S. subsidiary bribed officials in Mexico
to obtain and retain business with two government owned electric utilities. As
a result of the scheme the business unit was awarded contracts that generated
over $90 million in revenues and $13 million in profits. The second involved
the U.N. Oil for Food Program on the humanitarian side. Through six different
subsidiaries ABB obtained contracts by making kickback payments to Iraqi
officials. The kickbacks were funneled through ABB's Jordanian subsidiary. They
were recorded on the books and records as legitimate payments for after sales
services, consultation costs and commissions.
With DOJ, ABB entered into a deferred prosecution
agreement, consenting to the filing of a criminal information charging its
Jordanian subsidiary, ABB Ltd. - Jordan. That information alleges one count of
conspiracy to commit wire fraud and violate the books and records provisions of
the FCPA. The company agreed to pay a criminal penalty of $1.9 million. In
addition, ABB's U.S. subsidiary pleaded guilty to a criminal information
charging one count of violating the anti-bribery provisions of the FCPA and one
count of conspiracy to violate the FCPA. The company will pay a criminal fine
of $17.1 million. To resolve the SEC case the company consented to the entry of
a permanent injunction prohibiting future violations of the anti-bribery and
books and records and internal control provisions of the FCPA. In addition, the
company agreed to pay disgorgement of $22,804,262 along with prejudgment
interest and a civil penalty of $16,510,000. See also Lit. Rel. No. 3191
(Sept. 29, 2010).
Court of appeals
Insider trading: SEC v. Rajaratnam,
Case No. 10-462-cv (2nd Cir. Sept. 29, 2010) is an appeal relating to the
Galleon insider trading cases (here). Here the defendants, Raj Rajaratnam and
Danielle Chiesi appealed a discovery order in which Judge Rakoff directed them
to turn over to the SEC evidence obtained from wiretaps. The defendants had
obtained that information in the parallel criminal insider trading case.
Specifically, the court directed the defendants to furnish the SEC with
evidence regarding 18,150 communications involving 550 separate individuals
which was intercepted from ten separate telephones over a sixteen month period.
The district court declined to certify the appeal. Initially the court held
that it did not have jurisdiction over the matter as a final order. However,
the matter could be reviewed on a writ of mandamus.
On the merits, the court held that the materials need not
be turned over to the SEC at the moment. First the questions raised by the
defendants motion to suppress needed to be resolved. If that motion of
defendants is not granted then in the civil case the SEC has a valid claim to
the materials which must be evaluated in view of the privacy interests of
defendants and after determining which recordings may be relevant to the civil
case.
Private actions
Option backdating: In re: Apple Inc.
Securities Litigation, No. 5:06-cv-05208 (N.D. CA) is a
shareholder action against Apple Inc. based on claims of illegal option
backdating. The suit settled this week with the company paying $14 million to
the shareholders. Apple also agreed to donate $2.5 million to 12 university
corporate governance programs and amend its governance policies.
Program: Fifth Annual
Securities Fraud National Institute, October 7-8, 2010 in New Orleans. For
further information on this excellent program please click here: http://www.abanet.org/cle/programs/securitiesfraud/
For more news involving securities issues, visit SEC Actions, a blog by Thomas
Gorman