by T. GormanPosted on Posted in SECActions

The U.S. Attorney’s Office for the Eastern District of New York unsealed its latest indictment in an on-going investigation of fraudulent fees, sham transactions and kickbacks in the stock loan business. The case unsealed this week names as a defendant Ronald Garcia, who did business as Independent Investor Services, Inc., a stock loan finder. U.S. v. Garcia, No. 1:09 No. 1:09-cr-00675 (E.D.N.Y. Sept. 30, 2009).

Mr. Garcia is named in a six-count indictment that grows out of the stock loan business. The securities and wire fraud charges in the indictment center on what are alleged to be fraudulent loan fees and kickbacks. Specifically, Mr. Garcia is alleged to have received finders’ fees in connection with stock loan transactions involving Schonfeld Securities and Van Der Moolen Specialists despite the fact that no services were performed. To obtain the fees Mr. Garcia is alleged to have paid kickbacks to a trader at Van Der Moolen, who in turn paid a trader at Schonfeld.

Garcia is one of a series of cases stemming from an on-going industry wide investigation focused on allegations of bribery and kickbacks in the securities lending or stock loan industry. In that business, financial institutions and their customers frequently engage in transactions that require them to borrow securities from other institutions. The terms of the deal typically include an amount of collateral posted by the borrower, loaned securities and fees and other payments that the parties make to each other as part of the transaction. Typically, the borrower pays the cash or other collateral to the lender and receives the borrowed securities. The lender earns interest on the cash collateral by using it in low risk short term loans to other financial institutions. Finders such as Mr. Garcia claimed to be, facilitated the transactions and are paid a finders’ fee or other compensation for their services.

To date cases have brought have involved former securities lending traders from A.G. Edwards, Janney Montgomery Scott, JP Morgan Chase, Kellner Dileo, Oppenheimer, Morgan Stanley, National Investors Services, Nomura Securities, Pax Clearing, PFPC Worldwide, Schonfeld and Van der Moolen.

Previously, the SEC filed an action against Mr. Garcia and several others. SEC v. Suarez, Civil Action No. 08-3900 (E.D.N.Y. Filed Sept. 24, 2008); See also Litig. Rel. 20736 (Sept. 24, 2008). The Commission’s complaint alleges that over a period of about six years the six defendants defrauded Schonfeld Securities out of at least $1.66 million through the payment of sham finder fees and undisclosed kickbacks that ultimately were paid for by the firm.

by T. GormanPosted on Posted in SECActions

The nature of the relationship between attorneys conducting an internal investigation for the company and corporate officers, if any, can present difficult questions. All too often, a company seeking to waive privilege encounters a claim by the officer that he or she has a confidential and privileged relationship with the law firm which the company cannot waive. If Upjohn or corporate Miranda warnings are properly given and documented, the question should be quickly resolved. If not, the situation can become difficult. The privilege claim by former Broadcom CFO William J. Ruehle raised a significant question about attorney client privilege, a corporate officer and internal investigators. U.S. v. Ruehle, No. 09-50161 (9th Cir. Decided Sept. 30, 2009).

Mr. Ruehle was indicted on criminal charges stemming from the option backdating woes of his former company, Broadcom. Initially, when backdating questions arose in May 2006, the audit committee retained its long time outside counsel Irell and Manella to conduct an internal investigation. Early on, it was determined that the results of the inquiry would be shared with the firm’s outside auditors, E&Y, and that the company would cooperate with any government inquiries and self-report if necessary.

In late May 2006, a shareholders derivative suit was filed against Mr. Ruehle and other executives based on option backdating claims. At the same time, plaintiffs in a previously-filed class securities class action amended their complaint to include similar claims. Irell represented Mr. Ruehle and others in those suits

On June 1, lawyers from Irell met with Mr. Ruehle to discuss the stock option granting practices and his role as the CFO of the company. Mr. Ruehle had other meetings with the attorneys. The civil law suits were not discussed in any of these meetings. Mr. Ruehle did not indicate that he was seeking legal advice on an individual basis. While the attorneys from Irell claimed they gave Mr. Ruehle Upjohn warnings, the district court concluded otherwise, based in part on the lack of documentation. In late June, Irell did advise Mr. Ruehle to secure separate counsel.

The district court concluded that Mr. Ruehle had a reasonable belief that he had an attorney-client relationship with the law firm. Thus, the disclosure of his statements to the outside auditors and eventually the government was improper. Accordingly, that court suppressed all of the statements. The court also referred the Irell attorneys to the California bar association.

The Ninth Circuit reversed. In reaching its conclusion the court left largely undisturbed the findings of fact by the district court. Accordingly, there was no dispute that Broadcom had an existing attorney client relationship with Irell, that the internal investigation and the private suits both focused on option backdating and that the former CFO had a reasonable belief that he had an attorney-client relationship with the law firm. There was also no dispute that the Upjohn warnings had not been given.

Under federal law, the party asserting the attorney-client relationship has the burden of establishing it and that the particular communication is privileged the court held. This contrasts sharply with California law, under which communications made in the course of an attorney-client relationship are presumed privileged.

Here the district court made a critical legal error by applying state rather than federal law. Under federal law Mr. Ruehle was obligated to establish the privileged nature of the communications and “if necessary, to segregate the privileged information from the non-privileged information.” This he failed to do. The statements made by Mr. Ruehle were intended along with the other material to be disclosed to the outside auditors. Indeed, in one meeting he acknowledged that the statements would be disclosed to E&Y. In addition, the former CFO was not only keenly aware of the disclosure obligations of the company, but was also involved in all aspects of the internal investigation which, from the outset, the company intended to provide to E&Y and, if necessary the government. Mr. Ruehle never raised any concerns about these matters. Accordingly, he cannot now credibly claim that they should not be disclosed, the court stated in its opinion.

The court concluded that suppression would not be the proper remedy even assuming unprofessional conduct. In this case there is no allegation that the government was in any manner involved in any breach of ethical obligations. Accordingly, suppression would not be the correct remedy.

The decision here is not the first to deal with a situation where individual corporate officers claimed after an internal investigation that there was a privileged relationship between them and the investigators retained by the company. In part, the difficulty of resolving this question in Ruehle resulted from the fact that there was no written record of any Upjohn warnings being given to the defendant. Although the attorneys testified that they gave the warnings Mr. Ruehle claimed no recollection of the matters – a position the district court adopted. If those warnings were properly given and fully documented this case may have been quickly resolved.