More Insider Trading; More Options Backdating

The SEC filed two more settled enforcement actions in the key insider trading and options backdating areas which have come to typify its enforcement efforts in recent months. One is an insider trading case against a lawyer, while the other is in options backdating case against an issuer and its officers. One case is consistent with prior enforcement actions and the other seems to chart a new course for a seemingly endless scandal.

In SEC v. Belcher, Case No. 07-CV-02507 (D. Colo. Filed December 3, 2007) (the Commission’s Litigation Release is here), the Commission brought another in what has become a long series of insider trading cases this year. The defendant, James Belcher, is an attorney and partner in the Cheyenne, Wyoming office of a large regional law firm. According to the complaint, Mr. Belcher was consulted by a client of the firm regarding the need for approval by a Wyoming state regulator for a merger. After Mr. Belcher was provided with detailed information concerning the pending merger, he purchased 800 shares of the target at just over $40 per share. When the merger was announced, the share price rose to about $60, yielding profits of over $15,000.

To resolve the action, Mr. Belcher consented to the entry of a statutory injunction. In addition, he agreed to the entry of an order requiring him to disgorge his profits and to pay prejudgment interest and a civil penalty equal to the amount of the disgorgement. This is the third insider trading case brought against an attorney this year. The prior two cases were against a former General Counsel (which is still in litigation) and against the managing partner of the Washington, D.C. office of a large Chicago law firm (which was settled). Both are discussed here. There is not much new in these cases – all appear consistent with earlier SEC insider trading cases.

The SEC also brought two related option backdating cases yesterday. One was against Maxim Integrated Products and its former CEO John F. Gifford, while the other was against former Maxim CFO Carl W. Jasper. In the first, the SEC alleged that Maxim routinely granted in-the-money options to its employees. Although the pertinent accounting principles require that the cost with granting such options be expensed, the company failed to take such charges. Rather, Maxim avoided reporting these expenses by backdating the paper work to make it appear that the options had been granted on an earlier date. By failing to properly account for the option grants, the company over sated net income by more than 10% for its fiscal years 2003 through 2005. The SEC’s complaint claims that former CEO Jasper should have known that the options had not been properly accounted for and that the required disclosure had not been made despite the fact that he ordered former CFO Jasper to record the expenses for the backdated options.

The company resolved the action by consenting to the entry of an injunction prohibiting future violations of the antifraud and books and records provisions of the securities laws. Mr. Gifford settled by consenting to the entry of an injunction baring future violations of Section 17(a)(3) of the Securities Act, as well as the books and records provisions of the Exchange Act. In addition, Mr. Gifford agreed to disgorge over $652,000 which represents a portion of his bonuses and pay a civil penalty of $150,000. SEC v. Maxim Integrated Products, Inc., Civil Action No. C-07-6121 RMW (N.D. Cal. Filed December 4, 2007).

The action against Mr. Jasper is based on similar allegations. In addition, the complaint alleges that he disregarded instructions from Mr. Gifford by failing to expense the options as required by generally accepted accounting principles as to certain options. This case is in litigation. SEC v. Jasper, Case No. C-07-6122 HRL (N.D. Ca. Filed December 4, 2007). The Commission’s Litigation Release regarding both cases is here.

While the SEC reportedly has about 140 companies under investigation in the option backdating scandal, only about 24 cases have actually been brought. Typically, those cases have been based on intentional conduct keyed to allegations such as falsified documents and cover ups. To be sure, these cases involve such allegations. At the same time it is clear, according to the SEC, that former CEO Gifford ordered the correct accounting and was done in by former CFO Jasper. Equally clear is the fact that the company was done in by its former CFO, despite a CEO that gave the correct orders. Just how Mr. Gifford and the company were suppose to know that Mr. Jasper had ignored instructions given in writing on at least four occasions, according to the complaint, and failed to take the proper expense charges, is unclear. It would seem that Maxim and Mr. Gifford should be entitled to rely on their CFO carrying out instructions properly without having to check the accounting.

These cases seem to signal a new vista of liability in the seemingly endless option backdating scandal, substituting negligence liability without fault for scienter-based conduct. Apparently just when everyone was getting comfortable with where the options backdating cases appeared to be going, a new and more expansive direction has been charted.