by T. GormanPosted on Posted in SECActions

The Commission concluded its litigation with two of the remaining defendants in its suit which centered on a financial fraud at Qwest Communications from early 1999 through 2002. The case gained notoriety because of the high profile insider trading conviction of defendant Joseph Nacchio. SEC v. Nacchio, Civil Action No 05-cv-480 (D. Colo.).

The action named as defendants Qwest’s chief executive officer Joseph Nacchio, CFO Robert Woodruff, president and COO Afshin Mohebi, director of financial reporting James Kozlowski and senior manager and then director of financial reporting Frank Noyes.

The complaint focused on what it called a massive fraud which concealed the true source and nature of Qwest’s revenue and earnings growth. During the time period Qwest touted its claimed growth in service contacts that were suppose to provide a continuing revenue stream. In fact the revenue of the company came from a one time sales of assets and certain equipment. The complaint also alleged that the performance and growth of the company was misrepresented to the public.

Perhaps the center piece of the action was the civil and criminal insider trading claims against Mr. Mr. Nacchio. In the criminal case Mr. Nacchio was convicted of insider trading and is currently in prison.

This week the Commission settled with Mr. Woodruff and dropped all charges against Frank Noyes. Mr. Woodruff consented to the entry of a permanent injunction without admitting or denying the allegations in the complaint, 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) and 13(b)(2). In addition, he agreed to pay disgorgement of $1,731,048 along with prejudgment interest and a civil penalty of $300,000. He will also be barred from serving as a director or officer of a public company.

The Commission took the unusual step of dismissing all charges against Mr. Noyes. The complaint alleged that he violated the same sections cited in the injunction entered against Mr. Woodruff. The lengthy complaint however barely mentions Mr. Noyes in its detailed description of the fraud. The few passages which reference Mr. Noyes claim that he failed to ensure that Qwest’s filings adequately disclosed certain revenue and that he did not implement proper procedures to ensure revenue from certain sales was appropriately recognized. Now after almost seven years the litigation has ended for Mr. Noyes.

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by T. GormanPosted on Posted in SECActions

Each year at the program “SEC Speaks,” the Commission’s and staff gather to discuss recent events at the agency and future directions. Comments by the Commissioners this year recapped past events and raised important issues for future discussion.

Chairman Schapiro reviewed recent reorganizational efforts and the agency as well as selected rule making. Those include:

  • Making better use of the available resources through a better hiring approach, increasing training, upgrading the case management system and improving systems;
  • Managing more effectively and improving agency operations;
  • Crafting a new approaches to try and head off threats by taking steps such as creating new groups in Corp Fin focused on the largest financial institutions, structured finance products and capital markets trends and reorganizing the enforcement division; and
  • Implementing segments of Dodd-Frank.

Commissioner Daniel Gallager focused his comments on issues regarding the question of failure to supervise:

  • A key question is frequently who is a supervisor and at what point can legal and compliance personnel be reasonably deemed “supervisors.” This issue has been raised in a number of Commission decisions which are not entirely clear, according to Commissioner Gallager. At the same time what those cases do stand for is the proposition that “once a person becomes involved in formulating management’s response to a problem, he or she is obligated to take affirmative steps to ensure that appropriate action is taken.”
  • The critical difficulty in this context is to encourage legal and compliance personnel to participate and lend their talents to the organization. “Unfortunately, robust engagement on the part of legal and compliance personnel raises the specter that such personnel could be deemed to be ‘supervisors’ subject to liability . . .”
  • This presents a challenge for the Commission and the SROs to create a framework to encourage participation by in-house legal and compliance officers.

Commissioner Luis Aguilar discussed the timely issue of political contributions and the Supreme Court’s decision in Citizens United in 2010. The Commissioner noted that “shareholders require uniform disclosures regarding corporate political expenditures for many reasons, including that it is impossible to have any corporate accountability or oversight without it.” The Commission has a responsibility to “ensure that investors are not left in the dark while their money is used without their knowledge or consent” the Commissioner stated.

Finally, Commissioner Tory Paredes voiced concerns regarding the Volker rule. Those include:

  • Investors could be disadvantaged by higher costs, fewer investment options, lower returns and less wealth;
  • The U.S. markets may become more volatile and less efficient;
  • Companies may find it more difficult to raise capital; and
  • Agencies, authorities, and instrumentalities of cities, counties, and states could end up struggling to raise funds to finance needed public works and infrastructure projects.
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