by T. GormanPosted on Posted in SECActions

SEC enforcement statistics for the first half of this fiscal year may reflect changing trends. The number of cases the Commission settled during the period puts it on track to slightly exceed the number from last year, according to a report released by NERA Economic Consulting (here). To date the SEC has settled with 344 defendants. If this trend continues 688 cases will be settled this year, up slightly compared to the 681 for the prior year.

While a the Commission obtained a number of large monetary judgments in the first six months, only one would make the list of the ten largest post SOX judgments. Those range from the $800 million paid by AIG in 2006 to the $300 million paid by Time Warner in 2005. Heading the list for the first six months of the year is a $310 million judgment against Messrs. Brost and Sorenson in a Ponzi scheme case. That judgment was entered by default however. The second largest is from the misappropriation case against U.S. Pension Trust Company the Commission won after trial.

Several of the other largest judgments obtained last year stem cases that parallel those of DOJ and, in some instances, other regulators. Number 3 on the list, the judgment against Jacob Alexander ($54 million) from an option backdating case, is tied to a DOJ forfeiture action while the one against Joseph Nacchio ($45 million) in an insider trading case, which is number 5, followed his criminal conviction. Two of the others in the top ten, numbers 5 and 10 respectively, come from the FCPA cases against Alcatel-Lucent ($45 million) and Pride International ($24 million), both of which parallel DOJ actions. Likewise, number 7, Banc of America Securities ($36 million) in a bid rigging case, stems from an overall settlement with DOJ and state regulators.

The composition of the Commission’s cases and the related financial judgments appear to be shifting based on the first half statistics. During that period the number of settlements with business organizations increased 43% to 114. If this pace continues the agency would settle 228 cases with corporations. In 2010 the SEC settled with 160 companies. In contrast settlements with individuals decreased by 12% in the first half of the year to 230 for an annual rate of 460. That compares with 521 for fiscal 2010. This may reflect the fact that individuals are more likely to proceed to trial.

The financial component in these cases suggests a different trend. The amount of the average corporate settlement declined to $6.0 million compared to $18.5 million the prior year. The median corporate settlement however increased to $1.4 million compared to $0.8 million a year earlier.

For individuals the trend differs. The median amount was $310,000 while the average was $4.48 million. Both values are larger than in any post SOX year. These values may however have been skewed by the inclusion of the default judgment from the Ponzi scheme case.

Perhaps the most significant statistics are those regarding FCPA and insider trading cases. In the first half of the year the SEC settled 26 FCPA cases. If this trend continues it will be the largest number of post SOX FCPA settlements. The median settlement value also increased, up 40% relative to the post-SOX average. This is consistent with the increased emphasis in this area and the continually spiraling amounts paid in settlement.

Settlements in insider trading cases however declined significantly. In the first half of the year the Commission settled 25 insider trading cases which projects to 50 for the year. This would be the lowest post-SOX year if the trend continues. In contrast the median settlement value for cases with individuals is $203,000. If this trend continues it would be the largest since 2002. Overall the trend in these case appears contrary to the increased emphasis on insider trading. At the same time it may reflect the difficulty of the cases being brought and the willingness of defendants to challenge the Commission in such cases.

by T. GormanPosted on Posted in SECActions

The SEC prevailed in then Ninth Circuit in its long running action against three former executives of Gateway, a computer manufacturer. SEC v. Todd, No. 07-56098 (9th Cir. June 23, 2011). The Circuit Court reversed the ruling of the district court setting aside a jury verdict which found that defendants John Todd and Robert Manza violated the antifraud provisions with respect to certain financial transactions and made misrepresentations to the auditors. The court rejected a claim by Messrs. Todd and Manza that the district court should have set aside a jury verdict finding that they had aided and abetted certain filing violations by their former employer, Gateway. The Court also overturned a grant of summary judgment in favor of defendant Jeffrey Weitzen on Section 10(b) and 20(a) claims.

The complaint centers on a claimed financial fraud and misstatements which trace to 2000. According to the SEC, former CEO Jeffrey Weitzen, former CFO John Todd and former controller Robert Manza participated in a scheme in which they misrepresented the financial condition of the company in the third quarter of 2000 to meet analyst expectations. At the time the computer market was weakening. At one point in the quarter the company had a gap of over $100 million between revenue and street projections. Nevertheless, Gateway reported earnings which met analyst expectations and Defendant Witzen reported in an earnings call and the related release that Gateway had “accelerated year-over-year revenue growth.”

The company met expectations by booking over $100 million as revenue from three transactions. The first was a sale-lease back of fixed assets to Lockheed Martin. The transaction recorded $47.2 million. While the parties agreed that the transaction was unusual, they disputed whether under GAAP it was properly recorded as revenue.

The second involved $21 million from an incomplete sale of computers to VenServ. It was recorded as revenue. The parties agree that the transaction was improperly booked because it was incomplete. The third involved a change in contact terms with AOL regarding the payment of certain fees to Gateway. The modified agreement permitted Gateway to recognize those fees earlier giving it a revenue boost of $72 million.

Initially, the Court considered the SEC’s challenge to the district court’s ruling setting aside the jury verdict against Messrs. Todd and Manza. On the Lockheed transaction each side presented expert testimony that the transaction had been recorded in accord with GAAP. A dispute of fact is normally within the province of the jury the Court noted. Here however there is more. Regardless of its treatment under GAAP, Gateway’s internal polices which had been disclosed specified that a sale of fixed assets is not booked as revenue. Furthermore, while the defendants’ claim that the transaction was disclosed to the auditors is correct, in fact PWC did not learn about it until after the close of the period and the publication of the financial statements. Ultimately Gateway restated the transaction. Based on the delayed disclosure to PWC there is evidence to support the jury’s verdict that the two defendants acted with scienter the Court found.

Similarly, the Court concluded that there is sufficient evidence to support the jury’s findings as to the VenServ transaction. A violation of GAAP as all agree occurred with respect to this transaction is not sufficient to establish scienter and a Section 10(b) claim. Here however the evidence demonstrated that the two defendants acted recklessly by improperly recording the revenue while knowing the transaction terms and that the deal was not complete.

The Court also found that there was sufficient evidence to support the findings of the jury that Messrs. Todd and Manza made false statements to the auditors although it rejected the SEC’s claims about the applicable standard. Rule 13b2-2 prohibits an officer or director from making a materially false or misleading statement to an accountant. To be liable one must “knowingly” make the false statement, meaning the person must be aware of the falsification and that it was not the result of accident, mistake or ignorance. While acknowledging that the Rule does not impose strict liability the SEC argued that the standard is “closer to negligence or reasonableness.” The Court rejected this argument in favor of the knowing standard. Here since there is sufficient evidence to establish scienter for the Section 10(b) violations, the Court concluded that the evidence supported the jury’s verdict of liability.

Finally, the Court overturned the district court’s grant of summary judgment in favor of former CEO Weitzen on the Section 10(b) claim, concluding that there were genuine issues of material fact in dispute. Here the question focused on whether the statement of Mr. Weitzen about the earnings was false. Generally, such an issue is a mixed question of law and fact. In this instance the Court concluded that a rational fact finder could determine that Mr. Weitzen misled investors by publically describing Gateway’s growth as “accelerated” without disclosing the unusual nature of the Lockheed and AOL transactions. Indeed, there is evidence in the record which demonstrates that Mr. Weitzen participated in a “gap filling” program when the company realized it might miss analyst expectations. The evidence also demonstrates that the former CEO understood the significance of the transactions and that the revenue gap would not be closed without them.

The Court also concluded that there were genuine issues of material fact with respect to the Commission’s Section 20(a) claim against Mr. Weitzen which precluded summary judgment. Under this Section the defendant can be liable if there is a violation of the Act and if he directly or indirectly controls any person liable for it. There is no liability however if the controlling person acted in good faith and did not directly or indirectly induce the violation. The critical question here is control. The fact that Mr. Weitzen is the CEO does not create a presumption that he is a controlling person. In the context of this case actual authority over the preparation and presentation of the financial statements is sufficient. In this case there is a dispute of fact regarding the control of Mr. Weitzen which precluded granting summary judgment in his favor. Accordingly, the Section 10(b) and 20(a) claims against Mr. Weitzen were sent back to the trial court. The jury verdicts against Messrs. Todd and Manza were reinstated.

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