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SEC enforcement this week
brought another SOX claw back case, as well as actions alleging financial fraud
and another investment fund case. DOJ dropped their appeals in the two Broadcom
criminal option backdating cases which were dismissed for prosecutorial
misconduct. DOJ's action finally brought to an end two its highest profile
cases in that area. The Department also moved to intervene in and stay a
private action tied to FCPA violations pending the conclusion of its own probe.
A foreign official who pleaded guilty to money laundering charges in connection
with FCPA violations was sentenced to 48 months in prison.
Financial fraud: SEC v.
Forbes, 01 civ 987
(D.N.J. Filed Feb. 28, 2001) is an action against Walter Forbes, the former
Chairman of Cendant Corporation and E. Kirk Shelton, the former Vice Chairman
of the company. The complaint alleged that Mr. Shelton participated in a
fraudulent scheme which inflated the revenue of a predecessor of Cendant and
also of that company. Over a twelve year period Mr. Shelton is alleged to have
improperly inflated revenues. When the fraud was revealed, the stock price
dropped dramatically and investors lost billions of dollars. Mr. Shelton
settled the case with the Commission, consenting to the entry of a permanent
injunction prohibiting future violations of Securities Act Section 17(a) and
Exchange Act Sections 10(b) and 13(b)(5). Previously, Mr. Shelton was convicted
of conspiracy, securities fraud, mail fraud, wire fraud and making false
filings with the Commission. He was sentenced to 120 months in prison and ordered
to pay criminal restitution of $3.275 billion. See also Litig. Rel. 21548 (June 3, 2010).
Financial fraud: SEC v.
Civil Action No. 1:10-CV00908 (D.D.C. Filed June 2, 2010); SEC v. Geswein,
Civil Action No. 5:10-CV-01235 (N.D. Ohio Filed June 2, 2010). Both actions
allege that over a five-year period Diebold, a manufacturer and seller of
automated teller machines, engaged in fraud by: (1) improperly inflating revenue
on what were called "F-term" orders, or factory orders, when shipping products;
(2) improperly recognizing revenue on a lease transaction which was subject to
a side buy-back agreement; (3) manipulating its reserves and accruals; (4)
improperly delaying and capitalizing expenses; and (5) improperly increased the
value of inventory. In 2008, Diebold restated its financial statements for the
years 2003 through 2006 and the first quarter of 2007.
To resolve the Commission's
action, Diebold consented to the entry of a permanent injunction prohibiting
future violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B) and the related rules. The company also agreed to pay a $25 million
civil penalty. The second action, against the former CFO of the company,
Gregory Geswein, the former Controller and later CFO, Kevin Krakora, and the
former director of accounting, Sandra Miller, is in litigation. Both cases are discussed here.
Clawback: SEC v. O'Dell, Civil Action No. 1:10-CV-00909
(D.D.C. Filed June 2, 2010) is a settled action filed against Walden O'Dell,
former CEO of Diebold, Inc., also discussed here. The Commission's complaint centers on the
same financial fraud as the two actions listed above regarding the company and
its officers. Based on Section 304 of Sarbanes Oxley, this action seeks
repayment of $470,016 in cash bonuses, 30,000 shares of Diebold stock and stock
options for an additional 85,000 shares of stock. That compensation was paid to
Mr. O'Dell during the twelve month period following the issuance of the
Diebold's 2003 Form 10-K as incentive and equity based compensation. The
complaint does not allege that Mr. O'Dell participated in the wrong doing. Mr.
O'Dell settled the action by consenting to the entry of a judgment requiring
the repayment of the incentive and equity based compensation.
False statements: SEC
v. Dragon, Case
No. 20-CV-1186 (S.D. Cal. Filed June 2, 2010) is a settled action against
Elizabeth Dragon, the former Senior Vice President of Research and Development
at Sequenom, Inc. According to the SEC's complaint, Ms. Dragon presented
materially false and misleading scientific data about the prenatal screening test
for Down syndrome of the company. Ms. Dragon falsely claimed that the test was
highly accurate in predicting whether a fetus had Down syndrome when in fact
she had manipulated the results and lied about the manner in which the testing
was conducted. To resolve the action Ms. Dragon consented to the entry of a
permanent injunction prohibiting future violations of Exchange Act Section
10(b). The court will determine the amount of any financial penalty. See also Litig. Rel. 21545 (June 2, 2010).
Investment fund fraud:
SEC v. Perez,
Civil Action No. 1:10-CV-21804 (S.D. Fla. Filed June 2, 2010) is an action
against Luis Felipe Perez alleging violations of Securities Act Section 17(a)
and Exchange Act Section 10(b). According to the complaint, Mr. Perez raised
over $40 million beginning in 2006 and continuing through 2009 from investors
based on false claims that he would arrange no-risk loan agreements. Some
investors were falsely told that they would be paid returns ranging from 18% to
120% and that their money would be invested in New York pawn shops,
collateralized by diamonds and that some would be beneficiaries on his life
insurance. In fact, the defendant used portions of the funds to repay investors
and misappropriated a large part of the money for his personal use. The case is
in litigation. See also Litig. Rel. 21544 (June 2, 2010).
Option backdating: SEC
v. Bonica, Civil
Action No. 08 CV 4052 (S.D.N.Y. June 1, 2010) is a settled option backdating
case against the former controller of Monster Worldwide, Inc., Anthony Bonica, discussed here.
The complaint alleges that Mr. Bonica participated in a scheme at Monster
between 1997 and 2003 in connection with option backdating. Specifically,
during that period, in-the-money options were granted without reporting the
compensation expense. Papers were prepared which made it appear that the
options had been granted earlier when in fact they were not. This resulted in
the public filings of the company with the SEC being false. On December 13,
2006, the company restated its financial statements for the period 1997 - 2005 in
a cumulative pre-tax amount of about $339.5 million. Mr. Bonica is alleged to
have received backdated options.
Mr. Bonica settled the
action, consenting to the entry of a permanent injunction prohibiting future
violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and
13(b)(5) and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A)
and 14(a). He also agreed to pay disgorgement of $115,736.71, along with
prejudgment interest and a civil penalty of $60,000. In a separate
administrative proceeding, he consented to the entry of an order suspending him
from appearing or practicing before the Commission as an accountant with a
right to request reinstatement after three years.
Option backdating: U.S.
v. Samueli, Case
No. 10-50024 (C.D. Cal.) and U.S. v.
Nicholas, Case No. 10-50005 (C.D. Cal.) are the criminal stock
option backdating cases brought against Broadcom Corp. co-founders Henry
Samueli and Henry Nicholas. Previously the guilty plea by Mr. Samueli was vacated
and the case dismissed and the charges against Mr. Nicholas were dismissed by
the court. The dismissals were based on prosecutorial misconduct as discussed here. In
filings made on May 28, 2010 in each case, the government dismissed its appeals
of those rulings.
Aluminum Bahrain B.S.C.
v. Sojitz Corp.,
Case No. 4:09-cv-04031 (S.D. Tex.) is a suit filed by Bahrain's state owned
aluminum producer against Japanese commodities trading giant Sojitz Group. The
complaint, which alleges violations of the Federal Civil Rico statute, 18
U.S.C. § 1962(c) and others, claims that the defendant paid about $15 million
in bribes over 13 years to obtain discounts on aluminum prices in violation of
the FCPA and other statutes. On May 29, 2010, the Department of Justice filed a
motion requesting it be permitted to intervene and that the suit be stayed
pending the resolution of its criminal investigation and any resulting criminal
charges against the defendants.
U.S. v. Antoine, Case No. 09-CR-21010 (S.D. Fla.)
is an action in which Robert Antoine pleaded guilty to conspiracy to commit
money laundering. Mr. Antoine, a director of international affairs for Haiti's
state owned national telecommunications company, admitted in connection with
his plea that from May 2001 to April 2003 he accepted bribes from three U.S.
telecommunications companies, defrauding Haiti Teleco. To disguise the origin
of the funds, he laundered them through intermediary companies. The court sentenced
Mr. Antoine to 48 months in prison. He was also ordered to serve three years of
supervised release following the prison term and to pay $1,852,209 in
restitution and to forfeit $1,580,771.
"Warning The Witness" by
Gary Collins and David Seide is a new guide to issues of attorney client
privilege in internal investigation. The book is available from the ABA.
cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas