by T. GormanPosted on Posted in SECActions

Last week the Commission declined to prosecute a senior executive at AXA Rosenberg who entered into a cooperation agreement. The announcement detailed the reasons for the action, including his assistance to the staff as well as the fact that he had a limited role in the fraud and had retired from the securities business.

The Commission this week acknowledged that John Cinderey has also entered into a cooperation agreement and assisted the staff. Unlike the AXA Rosenberg executive however, Mr. Cinderey was named as a defendant in an enforcement action and settled. SEC v. Cinderey, Civil Case No. CV 12-1519 (N.D. Cal. Filed March 27, 2012).

Mr. Cinderey was an executive vice president of United Commercial Bank, a wholly owned subsidiary of publically traded UCBH Holdings, Inc. He headed the commercial banking division.

As the market crisis unfolded in 2008 the real estate market declined resulting in increasing loan delinquencies and decreasing collateral values for the bank’s portfolio of commercial and construction loans. In the second half of the year overdue loans and defaults increased. The bank sought and received funds from TARP. Nevertheless, by November 6, 2009 the bank was closed and an FDIC receiver was appointed.

Prior to the failure of the bank, its former CEO Thomas Wu, former COO Ebrahim Shabudin and former EVP Thomas Yu deliberately delayed the proper recording of loan losses as the company prepared its 2008 financial statements, according to a Commission enforcement action. SEC v. Wu, Civil Case No. CV-11-4988 (Oct. 11, 2011). Mr. Cinderey, was responsible for answering a number of requests from the auditors for additional information about risk ratings and collateral valuations for certain large commercial and construction loans. During that process Mr. Cinderey is alleged to have altered memoranda addressing the risks associated with certain large loans and potential losses the bank faced which were furnished to the auditors. In one instance, after consulting with his superiors, Mr. Cinderey furnished a requested memorandum to the auditors about a large construction loan, omitting certain information and adding misleading statements regarding the borrowers. In another instance he furnished the auditors incomplete or misleading information to support the risk rating for a loan to developers building a large block of condominiums.

In taking these and other actions Mr. Cinderey circumvented the internal controls of the bank, according to the complaint. The complaint alleges that the defendant aided and abetted violations of Exchange Act Section 13(b)(2)(A) and violated Exchange Act Section 13(b)(5) and the related Rules.

Mr. Cinderey resolved the charges, consenting to the entry of an injunction based on the Sections and Rules cited in the complaint, without admitting or denying its allegations. He did not pay a civil penalty in part based on a $40,000 civil penalty paid in an FDIC administrative proceeding. The terms of the settlement also reflect his cooperation and the fact that he entered into a cooperation agreement, according to the Commission’s Litigation Release. Lit. Rel. No. 22309 (March 27, 2012).

Tagged with: , ,

by T. GormanPosted on Posted in SECActions

The Supreme Court rejected the approaches of two Circuit Courts to tolling the limitation period for bringing an Exchange Act Section 16(b) claim while failing to decide if that period can be tolled. The High Court rejected the conclusion of the Ninth Circuit that the two year statute of limitations for filing a Section 16(b) claims for short swing profits does not begin to run until after the covered person filed the report required by Section 16(a). In a footnote the Court also rejected the actual knowledge rule of the Second Circuit. The eight Justices participating, however, were equally divided on the question of whether the two year period could be extended at all and thus affirmed that portion of the Ninth Circuit’s ruling without precedential value. Chief Justice Roberts did not participate in the decision. Credit Suisse Securities (USA) LLC v. Simmons, No. 10-1261 (March 26, 2012).

The case is based on 55 nearly identical actions filed under Exchange Act Section 16(b) in 2007 against financial institutions that had underwritten various IPOs in the late 1990s and in 2000. Plaintiff claimed that the defendants inflated the price of the shares in the aftermarket. She also alleged that as a group the underwriters and insiders owned in excess of 10% of the outstanding shares. This brought them within the purview of Section 16(b) which applies to officers, directors and 10% shareholders, according to the complaint. That group is required to disclose changes in its ownership on Form 4 under Section 16(a). It also makes them subject to the short swing provisions of Section 16(b) which provides a derivative cause of action to recoup profits from the any purchase and sale which occurs within a six month period. The district court dismissed the complaints based in part on the statute of limitations.

The Ninth Circuit reversed. The Circuit Court concluded that Section 16(b)’s two year statute of limitation is tolled until the insider discloses his or her transactions in a 16(a) filing regardless of whether the plaintiff knew or should have known of the conduct in question.

The Supreme Court, in an opinion authored by Justice Scalia, began by noting that if Congress wanted to provide that the two year limitation period did not begin until the Section 16(a) report was filed it could have said so. The fact that it did not demonstrates that the premise of the Ninth Circuit’s decision is wrong.

Even if its ruling is grounded in principles of equitable tolling, the Court noted, the Ninth Circuit’s conclusion is contrary to the long standing principles of that doctrine. Under those principles the proponent of tolling must establish two points: 1) That he or she has pursued his or her rights diligently; and 2) that some extraordinary circumstances stood in his or her way. In this regard it is well established that when “a limitations period is tolled because of fraudulent concealment of facts, the tolling ceases when those facts are, or should have been, discovered by the plaintiff.” Under those principles the statute does not begin to run while the injured party remains ignorant of the fraud. To continue the tolling after that time as the rule adopted by the Ninth Circuit would do, would be inequitable. This is particularly true here where the defendants can, according to the Court, “plausibly claim” as here that they are not subject to Section 16(a) and thus the statute would never commence.

The Court also rejected plaintiff’s claim that an equitable tolling rule would be contrary to Section 16(b). This is because the principle is fact based while the statute has long been applied in a mechanical, bright line fashion, according to plaintiff. The Court rejected this claim, noting that it also argues for the two year limitation to be read as a statute of repose, that is, no tolling. In any event “assuming some form of tolling does apply, it is preferable to apply that form which Congress was certainly aware of, as opposed to the rule the Ninth Circuit has fashioned.” For this reason, in a footnote, the Court also rejected the approach of the Second Circuit under which the two year period is tolled until a plaintiff has actual notice that the person has short swing profits. The case was remanded to the Court of Appeals.

Tagged with: , , ,