A New Mutual Assistance Agreement; A Challenge to PCAOB Rejected

Australian agreement: The SEC announced another mutual recognition agreement on Monday, this time with the Australian Minister for Superannuation and Corporate Law and the Australian Securities and Investments Commission (“ASIC”). Under the terms of the mutual recognition agreement, the SEC and the Australian authorities agreed to consider giving exemptions to exchanges and securities brokers in their respective countries. Pursuant to this arrangement, U.S. brokers may be able to offer their services, subject to conditions, in Australia. The converse may also be true.

A key facet of the arrangement is an Enhanced Enforcement Memorandum of Understanding and a new Supervisory MOU. These agreements will allow for greater regulatory and enforcement cooperation between the SEC and the ASIC.

The SEC has frequently utilized international agreements to facilitate its enforcement investigations. This is particularly true in the insider trading areas where the Commission has had success bringing a number of cases involving trading in the U.S. securities markets from outside the country as discussed here.

As the same time the Australian markets have a less than favorable reputation among the local business community. Recent reports, discussed here, suggest that insider trading is so rampant as to be almost common place thus undermining confidence in those markets.

PCAOB: Last week, the D.C. Circuit rejected a constitutional challenge to the PCAOB, created as part of the Sarbanes Oxley Act. Free Enterprise Fun and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, No. 07-527 (D.C. Cir. Aug. 22, 2008). In a two to one decision, the court rejected a facial claim to the statute alleging that it violated the constitutional appointment power of the President and separation of powers because it does not permit adequate Presidential control of the PCAOB. Rather, Congress made the Board’s exercise of its duties subject to what the court called “comprehensive control” by the SEC. In reaching its decision, the court upheld a grant of summary judgment by the district court in favor of the Board.

THREE NEW ARS SETTLEMENTS; THE CONCLUSION OF A FINANCIAL FRAUD CASE

On Thursday, the multi-state ARS Task Force announced three additional settlements in the auction rate securities market. The SEC, a participant in one of those settlements, also announced the conclusion of its 2004 financial fraud enforcement action involving the Fleming Companies, Inc., and its executives and vendors.

ARS settlements

The multi-state ARS Task Force and New York Attorney General Andrew Cuomo announced three new settlements in the auction rate securities market probes. These agreements are with Merrill Lynch, Goldman Sachs and Deutsche Bank.

The terms of the three settlements are similar to those of earlier ARS settlements, discussed here. Essentially, the three firms agreed to buy back all auction rate securities held by retail investors – individuals, charities and non-profits and those of small to medium size businesses.

The Merrill settlement calls for the repurchase of securities held by retail investors with accounts of $4 million or less in assets by October 1, 2008 and by January 2, 2009 for all other retail customers and businesses with accounts of $100 million or less. Goldman agreed to repurchase the securities from its retail investors by November 12, 2008, while Deutsche Bank agreed to a 90 day time period. Other terms of the settlements call for public arbitration procedures to resolve claims of consequential damages suffered by retail investors and for the firms to expeditiously provide liquidity to institutional investors.

The three settling firms also undertook to make whole investors who sold securities for a loss after the crash of the market. In addition, each firm agreed to pay a fine to the states as follows: Merrill, $125 million; Goldman, $22.54 million; and Deutsche Bank, $15 million. Merrill also entered into a tentative settlement with the SEC under which it consented to the entry of a permanent in injunction prohibiting future violations of Exchange Act Section 15(c).

Financial fraud

The SEC concluded its long running enforcement action involving the Fleming Companies with settlements against former company executives Mark Shapiro, Albert Abbood and James Thatcher. SEC v. Shapiro, Civil Action No. 4:05-CV-0364 (E.D. Tex. Filed Sept. 15, 2005). Previously, the Commission had settled its financial fraud case with the company, other executives and certain vendors alleged to have been involved in the fraud. Litigation Release No. 18884 (Sept. 14, 2004) (listing the other actions).

According to the SEC’s complaint, over several quarters beginning in late 2001 and continuing into 2002, Fleming improperly accounted for a number of transactions in order to sustain an illusion of growth and meet Wall Street expectations. The defendants participated in the scheme by obtaining misleading side letters from company vendors that were used to improperly accelerate recognition of the vendor’s up-front payments. In addition, Mr. Shapiro, then Fleming’s chief accounting officer, furnished false information to the outside auditors and signed a false Form 10-K and false Forms 10-Q. Mr. Shapiro also inflated earnings by executing large quarter-end inventory purchases to generate discounts that Fleming could immediately recognize as earnings.

To resolve the case, the three former executives consented to the entry of permanent injunctions prohibiting future violations of the antifraud and reporting provisions of he securities laws. In addition, Messrs. Abbood and Thatcher consented to the entry of orders requiring each of them to pay civil penalty of $25,000. Mr. Shapiro agreed to pay a penalty of $135,000. Mr. Shapiro also consented to the entry of an order under Rule 102(e) prohibiting him from appearing and practicing before the Commission.