This Week In Securities Litigation (January 23, 2009)
This week, SEC Chairman Christopher Cox resigned while the confirmation of his potential successor, Mary Schapiro, is still pending in the senate. New statistics released by NYSE Regulation demonstrate that insider trading is on the increase.
The SEC also filed a settled insider trading case this week. In addition, the Commission filed two settled financial fraud cases and resolved financial fraud claims with an individual defendant in an action filed last year.
The SEC
Chairman Christopher Cox stepped down this week after being at the helm of the agency since June 2005. Mr. Cox leaves an agency in crisis and at a crossroads. As Mr. Cox departs, many are calling for the merger of the SEC with other agencies. Congressional hearings also loom into alleged failures of the enforcement division. At the same time, many note that Mr. Cox made significant process in the push for greater global regulatory cooperation and the internationalization of accounting standards, as well as with the disclosure of executive compensation.
The successor for Mr. Cox, FINRA head Mary Schapiro, has yet to be confirmed by the Senate. During testimony, Ms. Schapiro has expressed interest in the regulation of hedge funds and reviewing the current schedule for adopting international accounting standards. Ms. Schapiro has also vowed to reinvigorate the enforcement division.
Insider trading
Insider trading in its classic form is up significantly, according to New York Stock Exchange Regulation, which monitors trading and listing compliance for NYSE Euronext’s U.S. operations. It referred 146 cases of suspected insider trading to the SEC in 2008, an increase of five cases over 2007. There was a significant drop in the number of cases involving hedge funds, however. In 2007 about 72% of the cases involved hedge funds. In 2008, the number dropped to about half. On the other hand, the classic type of insider trading – by insiders or those they tip – seems to be on the rise. Trends in trading show a marked spike at the end of the day in the last few minutes of trading and at midday when there tended to be large trading swings during 2008.
A new paper on insider trading suggests that there is a leakage of insider trading information within brokerages by market makers, a practice called piggybacking. The authors of the paper, two Wharton finance professors, suggest that this may be a new area for additional regulation. Christopher C. Geczy and Jinghua Yan, “Who are the Beneficiaries When Insiders Trade? An Examination of Piggybacking in the Brokerage Industry” (January 2009). The paper is published in Knowledge@Wharton.
SEC enforcement
SEC v. Cooksey, Civil Action No. 1:09-CV-044 (W.D. Tex. Filed Jan. 22, 2009) is a settled insider trading action against Aaron Cooksey, the manager of qualified plans at Freescale Semiconductor, Inc. According to the complaint, from November 2007 to early February 2008, Freescale negotiated to acquire SigmaTel, Inc. Mr. Cooksey learned about the transaction during those negotiations and traded in the shares of SigmaTel.
To resolve the transaction, Mr. Cooksey consented to the entry of a permanent injunction. He also agreed to pay disgorgement of about $23,000, prejudgment interest and a penalty equal to the amount of the disgorgement.
SEC v. General Motors Corporation, Civil Action No. 1:09-CV-00119 (D.D.C. Filed Jan. 22, 2009). The complaint alleged books, records and internal control violations beginning in 2000. Specifically, the SEC’s complaint alleged that in its 2002 Form 10-K GM made material misstatements regarding its pension discount rate selection and expected return on pension assets. The company also failed to disclose material information about the timing of its projected cash contributions to its pension plans to avoid variable rate premiums, as well as the impact the projected contributions might have on its liquidity and capital resources. The complaint also alleged that GM misstated its financial statements in 2000 by improperly accounting for a $97 million transaction involving the sale and repurchase of precious metals inventory. Likewise, GM is alleged to have improperly recognized a $100 million signing bonus in its 2001 Form 10-K and improperly accounted for two types of derivates in its 2004 Form 10-K.
The company settled the case by consenting to a books, records and internal controls injunction.
SEC v. McEnroe, Civil Action No. CV-09-0249 (E.D.N.Y. Filed Jan. 22, 2009); In the Matter of McEnroe, Adm. Proc. File No. 3-13348 (Jan. 22, 2009); In the Matter of Cablevision Systems Corporation, Adm. Proc. File No. 3-13347 (Jan. 22, 2009). The Commission filed three actions — two administrative proceedings and one civil action — relating to an alleged financial fraud at Cablevision Systems Corporation. The individual defendants are Catherine McEnroe, former president of AMC Networks, a Cablevision subsidiary; Noreen O’Loughlin, EVP and General Manager of AMC Networks, and Martin R. von Ruden, Senior VP and General Manager of Women’s Entertainment at AMC Networks.
The complaint and orders for proceedings alleged that from at least 1999 through mid-2003, Cablevision recognized certain costs as current expenses when in fact the costs should not have been recognized in those periods. This practice was called “prepays.” To facilitate the use of this practice, employees prepared and submitted inaccurate and misleading invoices and other supporting documents.
To resolve the cases, each individual defendant consented to the entry of a cease and desist order based on alleged violations of the internal controls and books and records provisions. In the civil case, defendants McEnroe, O’Loughlin and von Ruden consented to the entry of orders requiring them to pay civil penalties of, respectively, $30,000, $15,000 and $15,000.
In a related administrative proceeding the company consented to the entry of a cease and desist order based alleged violations of the internal controls and books and records provisions.
SEC v. Urs Kamber, Civil Action No. 1:07-CV-01967 (D.D.C. Filed May 30, 2008). This action was initially filed against three employees of Centerpulse, Ltd. based on an alleged financial fraud. Urs Kamber, the former CFO, settled with the Commission at filing. Stephan Husi, the former Head of Corporate Planning and Controlling for the company settled on January 21, 2009.
The complaint alleged that Mr. Husi, and others, fraudulently inflated the company’s income for the third quarter of 2002 by improperly deferring recognition of $25 million in expense and by approving a $3.6 improper reserve adjustment. In addition, the complaint alleged that the income for the fourth quarter of 2002 was improperly inflated by failing to increase a reserve to cover at least $18 million in liabilities, improperly using anticipated refund credits to offset other expenses and refusing to take certain write downs.
Mr. Husi resolved the case by consenting to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting and internal controls provisions of the securities laws. In addition, he agreed to pay disgorgement of about $14,000, prejudgment interest and a $30,000 civil penalty. Mr. Husi also consented to be the entry of an order suspending him from practice before the Commission for 5 years in a related administrative proceeding. Mr. Husi is a Swiss Certified Expert for Accounting and Controlling.