by T. GormanPosted on Posted in SECActions

The DOJ resolved a financial fraud action involving O’Reilly Automotive Inc. and CSK Auto Corporation by entering into a deferred prosecution agreement. Under the terms of the agreement CSK Auto took responsibility for the conduct of its employees who perpetrated a large financial fraud which falsified the financial results of the company and ended with bankruptcy. CSK Auto also agreed to pay a criminal fine of $20.9 million.

The underlying fraud took place from 2001 through 2006. During that period, senior executives at the company conspired to manipulate its earnings, according to the court papers. That was done by manipulating certain vendor allowances the company received in connection with the purchase of auto parts. Specifically, suppliers of auto parts provided rebates in return for the company marketing their products. As part of the scheme millions of dollars in rebates were recognized on anticipated sales which never in fact occurred. The executives involved concealed this by using collections from later years to cover shortfalls in earlier years and then moving uncollectible balances to subsequent years. As a result, about $52 million in uncollectable receivables were concealed for fiscal years 2002 through 2004. In a further effort to conceal the scheme by the executives in July 2005 by billing the vendors for about $30 million in allowances, about half of which they knew were not owed.

O’Reilly Automotive acquired CSK after the scheme was disclosed to the government. It is also a party to the non-prosecution agreement. That agreement reflects the extensive cooperation and remedial efforts of the company.

Criminal charges were also brought against Don Watson, the former CFO of the company, Edward O’Brien, the former controller and Gary Opper, the former director of credits and receivables. Mr. Watson pleaded guilty to conspiracy to commit securities and mail fraud. Messrs. O’Brien and Opper each pleaded guilty to obstruction of justice for making material false statements during an internal investigation of CSK’s accounting practices. Each is due to be sentenced later this year. See, e.g., U.S. v. Watson, CR 09-372-2 (D. Ariz.).

The SEC, which originally referred this matter to the Justice Department, brought an action against the executives involved. SEC v. Fraser, CV 09-00443 (D. Ariz. Filed March 6, 2009). That case is pending.

The Commission also brought an action under SOX 304 against the former CEO of the company, Maynard Jenkins, to recover certain incentive based compensation he was paid. The action does not claim that Mr. Jenkins was involved in the fraud. The SEC recently rejected a recommendation by the Enforcement Division to settle the case for less than half of the amount claimed in the complaint. Further settlement discussions are scheduled. SEC v. Jenkins, CV-09-01510 (D Ariz. Filed July 22, 2009).

Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For furhter information please click here.

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

The Sixth Circuit Court of Appeals affirmed the dismissal of a securities class action tied to the market crisis and brought against three mutual funds issued by Morgan Keegan Select Fund, Inc., an open-ended investment company. Atkinson v. Morgan Asset Management, Inc., No. 09-6265 (6th Cir. Sept. 8, 2011). The decision is based on the Securities Litigation Uniform Standards Act of 1998 or SLUSA.

Plaintiffs filed suit in state court against the funds’ advisers, officers, directors, distributor, auditor, and affiliated trust company. The complaints asserted thirteen state law claims for breach of contract, violations of the Maryland Securities Act, breach of fiduciary duty, negligence and negligent misrepresentation. The complaint centers on the claim that in 2007 and 2008 the defendants took unjustified risks in allocating fund assets which were concealed from the shareholders. If plaintiffs had known about the mismanagement, they would have redeemed their shares prior to the drop in value according to the complaint.

Defendants removed the state court action to federal court under SLUSA. Plaintiffs moved for remand. The district court concluded that SLUSA precludes the action and dismissed the action with prejudice.

SLUSA was enacted with the purpose of preventing class action plaintiffs from evading the requirements of the Private Securities Litigation Reform Act of 1995, or the PSLRA, by bringing the case in state rather than federal court. Accordingly, the Act precludes plaintiffs from filing a class action in state court if four elements are met: 1) the case consists of more than fifty prospective members; 2) it asserts state law claims; 3) it involves a nationally listed security; and 4) the complaint alleges “an untrue statement or omission of a material fact in connection with the purchase or sale of” that security. If these elements are met SLUSA authorizes the removal of the suit to federal court. A subsequent motion to remand raises a jurisdictional issue. Accordingly, if the court determines that the suit is precluded the proper course is to dismiss it.

Here plaintiffs claim that their suit is not precluded based on what is known as the Delaware carve-out. Under this section the action can go forward and is not precluded if it “involves . . .the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer.” In this case however plaintiffs are neither purchasers or sellers. Rather, they are “holders,” that is, they claim they did not sell but held their securities because of the acts of the defendants. While plaintiffs claim that the term purchase should be construed to include contracts to purchase securities, this argument would not save them the Court held. This is because in that instance the relevant purchase under the Delaware carve-out is the acquisition of their contract. Here the complaint does not allege any acquisition misconduct.

Likewise, plaintiffs’ supposition that their claims are based on state law and do not involve any “untrue statement or omission of a material fact” is inconsistent with the complaint, the Court concluded. It is true that SLUSA is only aimed at fraud based claims. The critical question here is whether “the complaint includes these types of allegations, pure and simple.” To make this determination the court must analyze the substance of the claims asserted in the complaint. Artful pleading will not save a complaint the Court cautioned. An analysis of the complaint in this case demonstrates that it is grounded in allegations of fraud. While the Court noted that it had not previously decided if SLUSA precludes only the fraud based claims or the entire complaint, that issue need not be resolved here since all of the allegations are tied to fraud.

Finally, the Court rejected plaintiffs’ suggestion that the action could be amended by reducing the number of plaintiffs or deleting the fraud claims. This point was not raised in the district court. Nevertheless, these modifications will not save this case the Court held because “SLUSA cannot be tricked.”

Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For furhter information please click here.

Tagged with: , , ,