A Brief Look At 2008

On this last day of the year it is appropriate to take a look back at some of the events and cases which shaped this year in securities litigation. A more comprehensive analysis of the year will be the subject of an occasional series early next year. For now however, here is a brief look at some events and cases of note from this year in chronological order by topic.

The market crisis

The market crisis has dominated most of the news for the year. Events related to that crisis have taken center stage. Perhaps none is larger than the Madoff cases and the revelation that former NASD chairman Bernard Madoff has conducted a years’ long Ponzi scheme which may be the largest in history, involving as much as $50 billion. The impact of this on the markets and investors around the world is just beginning to be understood. The effect on the SEC, whose Chairman took the unusual step of blaming the staff while forgetting Harry Truman’s adage that “the buck stops here” (i.e., at the top), is yet to be seen. Next month however, a U.S. House committee will begin hearings.

Naked shorts: The SEC issued a temporary rule essentially banning naked short selling in view of the market turmoil and concerns about possible bear raids. The controversial rule has now expired. Other regulators, such as those in the U.K., instituted similar bans which are still in effect.

ARS settlements: The SEC, in conjunction with the New York Attorney General’s office and other state regulators, settled with Citigroup, Merrill Lynch and number of other major participants in the auction rate securities markets. The settlements call for the firms to repurchase the auction rate securities of essentially small investors. Large market participants are offered little under the terms of the various agreements other an undertaking by the firms to use their best efforts to bring liquidity to the collapsed ARS market.

Fair value accounting: On December 30, 2008, the SEC delivered a report to Congress mandated by the Emergency Economic Stabilization Act of 2008 on fair value accounting, viewed by many as a culprit of the market collapse. The report recommends against a suspension of fair value accounting.

The future: Next year, Congress will undoubtedly hold hearings on the market crisis and the adequacy of current regulation. Those hearings hold the promise of significantly reshaping the laws and agencies that currently regulate the markets to try and avoid a repetition of the current crisis.

Policy initiatives

Two key policy initiatives this past year are the SEC’s publication of its Enforcement Manual and DOJ’s most recent revision of its cooperation standards.

The Enforcement Manual: For the first time, the SEC published a Enforcement Manual which details many, but not all, of the internal policies and procedures followed by the Enforcement Division when conducting an investigation. The Manual adds transparency to the work of the Division.

The Filip chapter: Under threat by Congress to pass the Attorney Client Protection Act, the Department again revised its cooperation policies. This revision, adding as a new chapter to the U.S. Attorney’s Manual, bars prosecutors from requesting privilege waivers. It also suggests that companies use non-lawyers to conduct internal investigations so that the facts can be furnished to the government without a privilege waiver.

Select SEC cases

SEC v. Lyon, Civil Action No. 06 CV 14338 (S.D.N.Y. Filed Dec. 12, 2006), is one of three litigated hedge fund cases where the court rejected the Commission’s Section 5 claim based on covering short sales made in connection with a PIPE offering.
SEC v. Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. Filed May 8, 2007) is a case in which a rapidly filed insider trading complaint based on the News Corp/Dow Jones merger lead to an asset freeze and later a significant settlement involving a director of New Corp.

SEC v. Talbot, Case No. 06-55561 (9th Cir. June 30, 2008) is a significant victory in the Circuit Court for the SEC. Here, the appellate court reversed the dismissal of an insider trading complaint, where a director of a company which owned 10% of another traded on non-public information about a potential acquisition of the 10% owned company.

SEC v. Kohavi, Case No. 08-43-48 (N.D. Cal Sept. 17, 2008) is a settled enforcement action based on allegations of option backdating at Mercury Interactive. The case is significant because the three defendants were former outside directors of the company.

SEC v. UnitedHealth Group, Inc., Case No. 08-CV-6455 (D. Minn. Filed Dec. 22, 2008), is a settled option backdating case which is noteworthy for its discussion of cooperation in the SEC’s release.

Criminal cases

U.S. v. Nacchio, No. 7-1311 (10th Cir. March 17, 2008) in which the Circuit Court reversed the insider trading and securities fraud conviction of former Quest CEO Joseph Nacchio. The court subsequently reheard the case en banc. A decision is pending.

U.S. v. Dreier, 1:08-mj-02676 (S.D.N.Y. Filed Dec. 4, 2008) and SEC v. Dreier, Civil Action No. 08-Civ. 10617 (S.D.N.Y. Filed Dec. 8, 2008), are perhaps the most unusual cases of the year. Here, an attorney is charged with implementing a scheme in which he sold phony promissory notes of a former client to hedge funds in an elaborate charade.

Parallel proceedings

In U.S. v. Stringer, No. 06-30100 (April 4, 2008), the Ninth Circuit Court of Appeals reversed the dismissal of a criminal case where the SEC essentially acted at the behest of the U.S. Attorney’s Office. The SEC concealed the criminal investigation while collecting evidence for the USAO. The court found the warnings in SEC Form 1662 adequate.


In the Mater of Faro Technologies, Inc., Adm. File No. 3-13059 (June 5 2008) is a settled administrative proceeding in which the Commission charged FCPA violations based on the conduct of an employee in a Chinese subsidiary who, contrary to instructions from superiors, paid bribes. A related DOJ case was settled with a non-prosecution agreement, a fine and the appointment of a monitor.

U.S. v. Siemens Aktiengesellschaft, Case No. 08-367 (D.D.C. Filed Dec. 15, 2008) (and related cases) in which Siemens and its subsidiaries agreed to a $1.6 billion payment of disgorgement and penalties to settle an FCPA case. This is the largest FCPA settlement of all time.

Private litigation

In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., Case No. 06-43 (Jan. 15, 2008), the Court rejected an SEC created theory of scheme liability which plaintiff invoked in a suit against third party vendors who allegedly helped the issuer cook the books.

The significant impact of the Supreme Court’s decision in Tellabs v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007) continues to evolve as evidenced by the following circuit court cases upholding the dismissal of complaints for failing to meet the Tellabs pleading requirements:

Bucks County Retirement Board v. Home Depot, Inc., Case No. 07-13810 (11th Cir. Oct. 8, 2008);

Elam v. Neidoff, Case No. 07-2833 (8th Cir. Oct. 16, 2008); and

Cozzarelli v. Inspire Pharmaceuticals, Inc., Case No. 07-1851 (4th Cir. Dec. 12, 2008).

But see Frank v. Dana Corp., No. 07-235 (6th Cir. Decided Nov. 19, 2008) where the circuit court concluded that Tellabs actually reduced the pleading burden on plaintiffs. This ruling is consistent with those in the First and Ninth Circuits.

Morrison v. National Australia Bank, Ltd., Case No. 07-0583-cv (2nd Cir. Oct. 23, 2008) is the circuit’s first “foreign cubed” decision in which it affirmed the dismissal on jurisdictional grounds of a securities fraud complaint.