by T. GormanPosted on Posted in SECActions

Insider trading continues to be a key focus for SEC enforcement. Yesterday, the Commission filed a an action centered on an accountant who is alleged to have furnished material non-public information he misappropriated from a client about an upcoming tender offer to four friends who then tipped others. Four of the defendants settled with the Commission while four others are litigating the charges. SEC v. Melvin (N.D. Ga. Filed Aug. 28, 2012); SEC v. Berry (N.D. Ga. Filed Aug. 28, 2012); SEC v. Coots (N.D. Ga. Filed Aug. 28, 2012); SEC v. Jackson (N.D. Ga. Filed Aug. 28, 2012); SEC v. Rooks (N.D. Ga. Filed Aug. 28, 2012).

Each of the actions is based on the tender offer by French pharmaceutical company Sanofi-Aventis for Chattem, Inc., a health and beauty product manufacturer, announced on December 21, 2009. The offer was for $93.50 per share, a 32.60% premium over the closing share price the day before the announcement.

In November 2009 the Chattem board members were informed that Sanofi had a serious interest in acquiring the company. The next month one of its board members consulted with his personal accountant, defendant Thomas D. Melvin, Jr., a principal at Melvin, Rooks, and Howell PC. At the time the board member owned about 50,000 Chattem options that would be automatically exercised if there was a change in the ownership of the company. In seeking tax advice from Mr. Melvin, the board member told the accountant that his options would likely increase in value by about $20 to $25 in the immediate future. Mr. Melvin knew that his client was a member of Chattem’s board. He was told the information was confidential. Nevertheless, Mr. Melvin is alleged to have told four individuals, each named as a defendant, about the pending deal. Each traded:

  • Charles Cain, his long time broker, was told within an hour of the meeting with the board member; later that day he began purchasing securities, eventually accumulating 1,500 shares of Chattem which yielded $36,680.10 in trading profits following the announcement;
  • Joel C. Jenks, a close friend, was told within two hours of the meeting with the board member; he purchased 1,000 shares of Chattem which yielded $24,337.43 in trading profits following the announcement of the tender offer;
  • R. Jeffrey Rooks, his partner at the accounting firm, purchased $16,000 in Chattem shares, yielding trading profits after the announcement of $6,020.39; and
  • C. Roan Barry, a close friend, purchased 1,700 shares which yielded $41,859.71 in trading profits following the announcement.

Generally, the complaint states that each person was told the information came from a board member. Each is alleged to have either known, or was reckless in not knowing, that they were being furnished material non-public information. In each instance the complaint claims Mr. Melvin received a benefit in the form of furthering his personal and/or professional relationship with the person.

Each person tipped by accountant Melvin is alleged to have tipped another:

  • Mr. Cain told his friend, defendant Peter Doffing, and an unidentified individual; Mr. Doffling purchased out of the money call options which yielded trading profits of $378,979.32 following the deal announcement; the unidentified individual bought 250 shares which yielded $5,877.35 in illicit trading profits;
  • Mr. Jenks is alleged to have tipped another unidentified individual who purchased call options which yielded trading profits of $38,802.71;
  • Mr. Rooks tipped another unidentified individual who purchased 725 shares of stock which resulted in $12,461.75 in illicit trading profits; and
  • Mr. Berry tipped defendant Ashley J. Coots, a friend and neighbor who, in turn tipped defendant Casey D. Jackson and another person. Mr. Coots p urchased 540 shares of Chattem which resulted in $13,231.40 in illicit trading profits while Mr. Jackson bought 100 shares which yielded $2,369.78 in trading profits; the other person tipped by Mr. Coots bought 165 shares yielding $4,128.63 in profits following the deal announcement.

The complaint against defendants Melvin, Cain, Jinks and Doffing alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending.

Defendants Berry, Coots, and Rooks settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Jackson also settled, consenting to the entry of an injunction based on Exchange Act Section 10(b). In addition, each agreed to pay disgorgement, prejudgment interest, and a penalty as follows: Mr. Barry, $55,091.51 and a penalty in the same amount; Mr. Coots $17,360.51 and a penalty of $13,231.80; Mr. Jackson $2,369.78 and a penalty of $1,184.89; and Mr. Rooks $18,482.14 and a penalty of $4,620.54. Mr. Rooks also agreed to be barred from appearing and practicing before the Commission as an accountant. His settlement reflects his cooperation with the Commission.

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by T. GormanPosted on Posted in SECActions

The Securities and Futures Commission of Hong Kong instituted a proceeding against Ernst & Young Hong Kong for failing to produce audit work papers. The proceeding, which is virtually identical to one brought by the SEC earlier this year, is another involving a Chinese company that entered a market requiring transparency but whose audit papers are inaccessible under PRC law.

The SFC requested that EY produce the audit work papers for Standard Water, a company which applied for listing to the Stock Exchange of Hong Kong in November 2009. In March 2010 E&Y told the Exchange that it was resigning as the reporting auditors for Standard after discovering certain inconsistencies in documentation provided by the company. Later the company withdrew its application for listing.

Subsequently, the SFC issued a formal notice to E&Y for the audit work papers. The firm failed to produce the papers since they are held by an affiliate in the Peoples Republic of China. A request to the PRC firm, Ernst & Young Hau Ming, also proved fruitless. Under an October 2009 statement by PRC authorities accounting records, including audit working papers, may be subject to claims of state secrecy. That law specifies that Hong Kong accountants are required to obtain the consent of the relevant PRC authorities before producing any accounting records to regulator even, even those in Hong Kong.

The SFC has applied to the court, seeking an order against E&Y. The court may, under the articles invoked, order the firm to comply with the request if it is satisfied that the audit firm does not have any reasonable excuse for not complying. The regulator is also continuing discussions with the mainland authorities who were consulted prior to the initiation of this its court proceeding.

The SFC proceeding is virtually identical one brought earlier this year by the SEC involving the PRC based affiliate of Deloitte. SEC v. Deloitte Touche Tohmatsu CPA, Ltd., File No. 1:11-MC-00512 (D.D.C. Filed Sept. 8, 2011). There the Commission alleged that the PCAOB registered firm served as the outside auditors for Longtop Financial Technologies Ltd., a Cayman entity based in Shanghai. In May 2011 the firm resigned from the engagement after discovering numerous improprieties during a year end audit.

The SEC issued an investigative subpoena for documents to the audit firm. To date no documents have been produced. Initially, the Commission sought to move forward with the court action, requesting an order the documents produced. In July 2012, however, the SEC asked the court to stay the proceeding for six months because of “ongoing negotiations with a foreign regulator that could impact the appropriate resolution of this case. The stay was granted. The Commission informed the court it would file a status report no later than January 18, 2013 regarding the status of the discussion.

To date the SEC’s efforts to obtain audit work held papers in the PRC have yielded the same results as those of its Hong Kong counterpart. Both regulators have sought to investigate companies that chose to enter their respective jurisdiction. Both regulators sought to review audit work papers that are supposed to be available when questions arise. Both regulators have held talks with the appropriate officials in the PRC. Neither regulator has been able to obtain the requested audit work papers.

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