by T. GormanPosted on Posted in SECActions

Defending a company or an individual in an SEC investigation is, like representing a client in court, more often than not about credibility. The approach and tactics must be credible. Counsel and the client must be credible. Good, well prepared and forceful advocacy should fortify credibility and ultimately the position of the client. Unscrupulous and improper tactics do not. Credibility can help win a point or a case. When credibility is compromised the case is lost whether it is in court or in an SEC investigation.

SEC Enforcement Director Robert Khuzami recently made this point in Remarks to Criminal Law Group of the UJA-Federation of New York (June 1, 2011)(here). This should be an obvious point to any experienced practitioner. Yet the Director’s remarks are replete with examples of tactics which are in inappropriate and compromise credibility.

Good advocacy facilitates the investigative process Mr. Khuzami noted. Inappropriate tactics do not. These include:

  • Multiple representations: This can present difficulties where there is a significant potential for conflicts or actual conflicts exist. When representing those who may be culpable, the Commission’s recently adopted cooperation procedures can enhance the difficulties here.
  • Lack of recollection: Witnesses who repeatedly claim a lack of recollection to even basic facts, repeatedly refuse to permit their recollection to be refreshed with documents or who have detailed memories of all matters except those where there may be culpability raise questions about their credibility and the manner in which they were prepared for testimony by counsel.
  • Signaling: Repeatedly signaling or coaching the witness during testimony is inappropriate. This includes repeatedly having a witness recant or qualify testimony after a break.
  • Problems with documents: Producing documents on the eve of testimony and withholding large groups of material under the guise of a privilege review and then producing that material toward the end of an investigation after key witnesses have testified can only serve to unnecessarily delay the investigation.
  • Internal investigations: Improper investigative techniques such as interviewing multiple witnesses at once, aggressively promoting exculpatory evidence while ignoring obvious red flags, throwing lower level employees under the bus to protect senior executives and not acknowledging limitations on the scope of the inquiry compromises the investigation.

The staff has a number of tools to deal with these issues according to the Director. They range from pointing out the conflicts to referring possible obstruction and perjury to the Department of Justice.

Nobody can argue that representing clients where there are clear conflicts, playing games with a document production or ignoring red flags while conducting an internal investigation is inappropriate and compromises the client and counsel. Mr. Khuzami’s conclusion seems equally apparent: “Counsel serves as a kind of prism through which the staff invariably assesses certain evidence developed in the investigation, including that based on representations of counsel.” When the tactic used to defend the investigation are more than questionable and become inappropriate – and that does not mean hard fought advocacy – it can compromise credibility. At that point counsel has failed the client who is the ultimate loser.

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by T. GormanPosted on Posted in SECActions

Insider trading continues to be a key enforcement priority for the SEC as reflected in the two recently filed cases. One is a “suspicious trading” case filed against unknown purchasers. The other is a “friends and family” against a lawyer father who misappropriated inside information from his attorney daughter.

SEC v. One or More Unknown Purchasers of Securities of Telvent GIT S.A., Civil Action 11 Civ. 3794 9S.D.N.Y. Filed June 3, 2011) is one of a series of “suspicious trading” cases the Commission has brought in recent years. This action centers on the June 1, 2011 announcement that Schneider Electric S.A., a French company, would acquire Telvent, a company based in Madrid, Spain.

Between April 29, 2011 and May 27, 2011 unknown purchasers bought 1,200 Telvent call options through an account at Pershing LLC. About two thirds of the options were purchased within two trading days of the announcement, representing in one instance about 52% of the daily volume for a series. Following the purchases the price of the call options increased significantly. In one instance it was up 480%.

After the deal announcement the account had trading profits of about $475,000. The Commission filed its action two days later, obtaining an order freezing the assets and directing the account holders to identify themselves. Expedited discovery was also ordered.

This is one of a series of very aggressive insider trading cases the Commission has brought based on little more than the trading. Typically the trading in these cases is more than suspicious, involving huge option purchases just before the deal announcement. Last December for example, the SEC filed two similar actions. In the past it has had considerable success with these cases (here).

SEC v. Goetz, Case No. 11 CV 1220 (S.D. Cal. June 3, 2011) is an insider trading case against Dean Goetz, an attorney who practices in Solana Beach, California. His practice focuses on personal injury litigation. His daughter is a corporate associate in the Los Angeles office of an international law firm.

The case centers on the acquisition of Advanced Medical Optics, Inc. by Abbott Laboratories. The deal was announced on January 12, 2009.

From mid-December 2008 through the end of the year the daughter stayed at her parents home. During that time she could not participate in the family holiday activities because of her work on the deal. During this period she worked on various deal schedules which were not coded – the name of her firm’s client, Advanced Medical, was on the schedules. On December 31 the daughter learned that the deal announcement date had been accelerated to January 8, 2009. Accordingly, she cut her visit short, telling her parents that she thought the deal she was working on would close soon.

On January 8, 2009 Mr. Goetz purchased 500 shares of Advanced Medical through his on-line brokerage account. This was the first time he had used the account in about one year. Following the deal announcement, which was not actually made until January 12, the share price increased about 143%. He liquidated his account on February 19, 2009 at a profit of $11, 418.

The complaint alleges that Mr. Goetz misappropriated the inside information from his daughter in violation of Exchange Act Sections 10(b) and 14(e). To settle the action Mr. Goetz consented to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. He also agreed to disgorge his trading profits along with prejudgment interest and pay a penalty equal to the amount of the trading profits.

The Commission has brought a number of similar cases. Some involve family members trading together. Others are based on one family member misappropriating information from another as in this case (here). As with the “suspicious trading” action, the Commission has typically been successful with these cases.

Seminar: June 8, 2011, 12:00 — 1:30, Trends In DOJ and SEC Financial Fraud Cases, ABA Program, Live in Washington, D.C. and webcast nationally. Co-Chairs: Thomas Gorman and Frank Razzano. Panel: Lorin Reisner, Deputy Director, Division of Enforcement, SEC: Patrick Stokes, Deputy Chief, Fraud Section, Department of Justice; Stephen Gannon, Deputy General Counsel and V.P., Capital One. The program is live, and will be broadcast from, the Metropolitan Club of Washington, D.C. (dress code — jacket and tie for gentlemen, similar for ladies; cell phone use not permitted in the club; lunch served).

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