This week there were several criminal and civil securities actions of note:
Options backdating: U. S. v. Reyes (N.D. Cal.). The trial of former Brocade CEO Greg Reyes continued, with closing arguments being made on Thursday. The jury is expected to begin deliberations on Friday. This is the first options backdating case – criminal or civil – to go to trial. The criminal charges, as well as the SEC’s parallel civil complaint are based on allegations involving intentional fraud centered on falsified documents and a cover-up. At mid-trial, the Court reserved ruling on defense Rule 29 motions for acquittal for a number of days, leading to speculation that the case might be dismissed. While the Court may still consider those motions, the case seems poised to go to the jury shortly. The result in this case should help define the future course of possible criminal and civil prosecutions which could involve the dozens of companies still under investigation, as well as directors, officers and others who may have been involved.
Options backdating: U.S. v. Argo (S.D.N.Y.). The former president and COO of SafeNet was indicted on securities fraud charges in connection with the alleged backdating of millions of dollars in stock options grants. According to the indictment, the defendant routinely backdated options grants to coincide with points in time when SafeNet’s stock price was low between 2000 and 2006.
Corporate penalties/financial fraud: SEC v. ConAgra Foods, Inc., Case no. 07cv01557-MSK-MEH (D. Col., filed July 25, 2007). ConAgra agreed to pay $45 million in penalties and to the entry of a statutory injunction prohibiting future violations of the antifraud and reporting provisions of the federal securities laws. The complaint alleged improper and, in some instances, fraudulent accounting practices from 1999 through 2005. Those practices involved the misuse of reserves to manipulate reported earnings, premature revenue recognition, and numerous tax errors, which resulted in misstated reported income. See www.sec.gov/litigation/litreleases/2007/lr20206.htm.
Corporate penalties/financial fraud: SEC v. Cardinal Health, Inc., Case No 07CV6709 (S.D.N.Y., filed July 26, 2007). Cardinal Health agreed to pay a $35 million civil penalty and consented to the entry of a statutory injunction prohibiting future violations of the antifraud and reporting provisions of the federal securities laws to settle an SEC enforcement action. The complaint in the case alleged that Cardinal engaged in a variety of improper practices to manage its reported revenue and earnings over a period of four years. The improper practices included misclassifying revenue, selectively accelerating payment of vendor invoices without disclosure to prematurely record millions in cash discount income, improperly adjusting reserve accounts and improperly classifying expected litigation settlement proceeds to increase operating earnings. See www.sec.gov/litigation/litreleases/2007/lr20121.htm.
Foreign Corrupt Practices Act: SEC v. Delta & Pine Land Company, Civil Action No. 1:06-CV-1260 (E.D. Va., filed July 25, 2007). An civil injunctive action and an administrative proceeding was filed and settled against Delta & Pine Land Co. and its former subsidiary, Turk Deltapine, for violations of the FCPA. The administrative proceeding (filed July 26, 2007) charged violations of the books and records, internal controls and anti-bribery provisions of the FCPA. Each case centered on claims that from 2001 to 2006 Turk Deltapine made payments of about $43,000 to officials of the Turkish Ministry of Agricultural and Rural Affairs to obtain government reports and certificates necessary to operate its business in Turkey. In the administrative proceeding, respondents agreed to the entry of a cease-and-desist order and the appointment of an independent consultant to make recommendations regarding FCPA compliance provisions. In the Court action, defendants agreed to the entry of an order requiring them to pay a penalty of $300,000. See www.sec.gov/litigation/litreleases/2007/lr20214.htm.
Options backdating: SEC v. KLA-Tencor Corp., Case No. C07 3798 HRL (N.D. Cal.. filed July 25, 2007); and SEC v. Schroeder, Case No. C07 3798 JW (N.D. Cal., filed July 25, 2007). The SEC filed complaints against KLA-Tencor and its former CEO Kenneth Schroeder, based on claims of option backdating. According to the SEC allegations, KLA concealed over $200 million in stock option compensations by providing employees with potentially in-the-money options. The company consented to the entry of a statutory injunction prohibiting future violations of the reporting provisions of the federal securities laws. The complaint is pending against Mr. Schroeder. See www.sec.gov/litigation/litreleases/2007/lr20207.htm.
Option backdating: SEC v Therrien, Civil Action No. 07 CA 11364 RCL (D. Mass., filed July 24, 2007). The SEC filed a complaint alleging violations of the antifraud and books and records provisions of the federal securities laws against Robert Therrien, former President and CEO of Brooks Automation, Inc., a software company. According to the complaint Mr. Therrin engaged in an option backdating scheme between 1999 and 2005 in which documents were falsified, resulting in and overstatement of income on the financial statements of at least $54 million. The company has restated its financial statements as a result of these actions. www.sec.gv/litigation/litreleases/2007/lr20210.htm.
Insider trading: SEC v. Suman, No. 07-CV 6625 (S.D.N.Y.) The SEC charged former MDS Inc. employee Shane Bashir Suman with stealing confidential information about his company’s impending tender offer for the shares of Molecular Devices. Mr. Suman and his wife then traded based on the information. According to the complaint, the couple purchased 12,000 shares and 900 options in Molecular (which were financed with a margin loan) prior to the announcement. Following the announcement of the tender offer, Molecular’s share price increased almost $24, making defendants’ trades worth more than $1 million. See www.sec.gov.litigation.litreleases.2997lr29293.htm.