Under former Chairman Harvey L. Pitt, the SEC in October 2001 issued a Section 21(a) report which outlined the factors taken into account in evaluating cooperation with enforcement investigations. Much has been written about the standards for cooperation. In this era of ever increasing fines and sanctions, however, many have wondered if Seaboard lives.
See, e.g.
SEA Release No. 44969 (October 23, 2001);
http://www.sec.gov/litigation/investreport/34-44969.htm

Recent action by the Commission in three cases suggests that the policy adopted under Mr. Pitt may still be viable. On April 13, 2006, the Commission announced an enforcement action against three former officers of a MetLife, Inc. subsidiary for a multiyear financial fraud which caused the financial statements of MetLife and its subsidiary to be materially false. At the end of the release, the Commission announced that it was not brining any enforcement action against MetLife because of its cooperation which, “consisted of prompt self-reporting, an independent internal investigation, sharing the results of that investigation with the government, disciplining responsible wrongdoers, and implementing new controls designed to prevent the recurrence of the improper conduct.” Litigation Release No. 196556 (April 13, 2006).

The previous week, additional issuers announced that the staff is recommending to the Commission that it close two other enforcement investigations, apparently because of cooperation by the issuers. Officials at Catalina Marketing Corporation announced that the SEC staff is recommending closure of the SEC investigation into questions regarding its financial statements. The staff had been investigating revenue recognition timing issues at a subsidiary of the company. Catalina reported that it has cooperated with the SEC. Similarly, Career Education Corporation announced that the staff at the SEC’s Midwest Regional Office is recommending that the investigation into certain financial reporting issues be closed. Career Education had previously reported that an internal investigation concluded that the company had not violated the federal securities laws but that employees had engaged in wrongful activity. The company took steps to improve its internal controls and expand its compliance infrastructure. Both of these actions were reported in E-Corporation Compliance News, Vol. 3, No. 15, April 13, 2006.

While the SEC’s decision in the MetLife matter is clearly based on Seaboard, it is not clear whether Seaboard is also the basis for the recommendation to not take action against Catalina and Career Education. Nevertheless, the three releases are encouraging because they suggest that the SEC will reward efforts by issuers to cooperate and promptly resolve matters by not brining enforcement actions and also that Seaboard lives.

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A complaint (“criminal complaint”) filed in the United States District Court for the Southern District of New York on April 11, 2006 to obtain an arrest warrant details the operations of an insider trading ring which engaged in two schemes netting over $6 million in trading profits. According to the criminal complaint, those involved included Eugene Plotkin, an associate in the Fixed Income Research Division at Goldman, Sachs & Co., David Pajcin, a former analyst at Goldman, Sachs and Stanislav Shpigelman, an investment banking analyst in the mergers and acquisition division of Merrill Lynch & Co. The criminal complaint was filed to obtain arrest warrants for Shpigelman, Plotkin and Juan Renteria, an employee of a printing plant where Business Week is produced. The criminal complaint states that it is based on information from the investigation conducted by the FBI, the SEC and Pajcin. On the same date, the SEC moved to amend a complaint (SEC complaint) it filed in August 2005 and amended later that month. The proposed second amended SEC complaint is based on the same insider trading schemes detailed in the criminal complaint but charges 13 individuals in the U.S. and Europe. The initial SEC complaint sought and obtained an order freezing a securities account in the name of Sonja Anticevic, a Croatian national and resident which had traded in Reebok call options prior to the announcement that company was being acquired Adidas. That SEC complaint was amended shortly after it was filed to include other accounts that traded on the same deal. A freeze order was also obtained as to those accounts.

In one scheme Shpigelman in return for cash and future payments gave Plotkin and Pajcin inside information on six different pending mergers or acquisitions being handled by Merrill Lynch in 2004 and 2005. Those transactions included the Procter & Gamble acquisition of The Gillette Company, the acquisition of Eon Labs by Novartis AG, the merger of Cinergy and Duke Energy, the attempt by Amgen to acquire Celgene, the acquisition of Reebok by Adidas and the acquisition of LabOne by Quest. Trading in advance of the announcement on these transactions yielded about $6.4 million in profits according to the complaint.

A second scheme involved the acquisition of advance information from the Business Week column, Inside Wall Street. According to the complaint, Plotkin and Pajcin bribed two employees of a printing plant where the magazine was produced. One of those employees is alleged to be Juan Renteria. As a result they were able to obtain advance information about stocks that would be mentioned in the column and traded in approximately 20 different stocks (the proposed second amended SEC complaint alleges at least 25 stocks) one day prior to publication. The list of stocks in the complaint include The Street.com, Alltel Corp., IMAX, PriceSmart, Federal Express, Spectrum Pharm., Inc., and Symbol Technologies. This scheme netted at least $340,000 in profits according to the complaint.

A third scheme apparently involved helping others get jobs at investment banks in the hopes that they could later misappropriate inside information according to the complaint. The results of this scheme are not detailed. A number of the tipees are not specifically identified.

The SEC press release can be found at http://www.sec.gov/news/press/2006/2006-53.htm, the SEC complaint can be found at http://www.sec.gov/litigation/complaints/2006/comp19650.pdf, and the criminal complaint can be found at https://www.secactions.com/pdf/complaint.pdf

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