The Campaign Against Insider Trading Continues

The SEC’s campaign against insider trading continued this week, extending trends from last year. Two cases filed this week based on trading in advance of take-over announcements involved, respectively, a father and son and a corporate director and an attorney in private practice.

Another family trading together. In SEC v. Norton, Civil Action No. 2:08-CV-541 (D. Nev. April 29, 2008), the Commission filed a settled insider trading case against a father and a son. The SEC’s complaint focuses on trading in advance of the take-over announcement of Valley Bancorp by Community Bancorp. Community Bancorp director Charles R. Norton learned that the bank was about to acquire Valley Bancorp at a board meeting. Subsequently, Chad Norton, the son of Charles Norton, purchased 7,000 shares of Valley Bancorp stock prior to the announcement of the take-over. After the announcement the shares were sold yielding a profit of $35,064.71.

To settle the action, the father and son consented to the entry of permanent injunctions prohibiting future violations of the anti-fraud provisions. Chad Norton also agreed to the entry of an order directing that the trading profits be disgorged and requiring the payment of prejudgment interest and a civil penalty equal to the trading profits. Charles Norton also consented to the entry of an order requiring that he pay a penalty equal to the trading profits and a five year officer/director bar. This is the latest in a series of family insider trading cases. Last year, the SEC brought a number of actions frequently referred to as “pillow talk” cases which involved allegations of insider trading by spouses and in some instances family members that were insider trading rings as discussed here.

Another director and attorney. In SEC v. Boshell, Civil Action No. 08-CV-2392 (N.D. Ill. April 28, 2008) the Commission filed a settled insider trading case against a corporate director and outside counsel. This case is also based on trading in advance of the public announcement of a takeover, in this instance the acquisition of Laserscope by American Medical Systems Holding, Inc.

According to the complaint, defendant Edward Boshell, a director of American Medical Systems, learned during a board meeting that the company would acquire Laserscope. Defendant Donald Pochopien was a shareholder of a Chicago law firm that served as counsel to American Medical in the due diligence review of the potential Laserscope acquisition. Prior to the public announcement of the acquisition, both defendants traded in the securities of Laserscope. Mr. Boshell made profits of over $85,000 while Mr. Pochopien is alleged to have made profits of over $134,000.

To settle this action, both defendants consented to the entry of statutory injunctions prohibiting future violations of the antifraud provisions and orders requiring the payment of disgorgement, prejudgment interest and civil penalties equal to the amount of the disgorgement. This case, like the Norton case, continues a trend from last year when a number of insider trading cases were brought against corporate directors and attorneys as also discussed here.

Part IX: SEC Enforcement Trends And Priorities, 2008 – The FCPA (cont)

Recent enforcement cases in this area have focused on industry-wide investigations, individuals and those deriving from pre-merger due diligence. Perhaps the most significant industry-wide actions are based on the U.N. Oil for Food Program (“OFFP”). A report on that program from a group chaired by former Fed Chairman Paul Volker concluded that 2,253 companies had paid over $1.8 billion in illicit income to the Iraqi government. About two dozen companies have disclosed inquiries. The SEC and DOJ have a number of open, on-going investigations in this area.

The SEC and DOJ filed a number of settled cases related to OFFP. Typically, the actions have focused on either the oil side or the humanitarian side of the program. Cases involving the former are usually based on “surcharges” added to contracts. For example, in the El Paso Corp. case the SEC claimed that, beginning in 2001, the company paid about $2.1 million in surcharges to Iraq’s State Oil Marketing Organization. Those surcharges were booked as “cost of goods sold.”

To settle with the SEC, El Paso agreed to the entry of an injunction, prohibiting future violations of the books and records provisions of the FCPA, and the payment of disgorgement and a fine. SEC v. El Paso Corp., Civil Action No. 07-00899 (S.D.N.Y. Feb. 7, 2007). To settle with DOJ, the company entered into a non-prosecution agreement requiring the forfeiture of about $5.8 million, which was transferred to the Development Fund Of Iraq sanctioned by a U.N. resolution. The SEC disgorgement order was deemed satisfied by paying the forfeiture order in the DOJ case. As in several other cases, the Office of Foreign Asset Control also participated in the resolution of the case.

On the humanitarian side, kickbacks are often paid as “after sales service fees.” The Textron, Inc. case is typical of these actions. There, the SEC alleged that two French subs paid over $650,000 in kickbacks on humanitarian aid contracts. Those kickbacks, added to the contracts as after sales service fees, were booked as “commissions” and “consulting fees.”

To resolve the action with the SEC, Textron consented to the entry of an injunction prohibiting future violations of the books and records provisions of the FCPA, the payment of disgorgement and prejudgment interest, a civil penalty to compliance with undertakings regarding future FCPA compliance. SEC v. Textron, Inc., Civil Action No. 07-01505 (D.D.C. Aug 23, 2007). To settle with DOJ, the company entered into a non-prosecution agreement under which it agreed to pay a $1.5 million fine.

Both the SEC and DOJ have announced that they are focusing on actions against individuals in the FCPA area, in contrast to the more traditional approach keyed to business organizations. Recently, the SEC and DOJ have brought a number of cases against corporate executives, examples of which include an action against:

• A former executive of Schnitzer Steel based on claimed bribes and gifts given to managers of government owned steel mills, SEC v. Wooh, No. 07-975 (D. Or. June 29, 2007); U.S. v. Wooh, No. 07-244 (D. Or. June 26, 2007);

• Three executives of ITXC Corp, alleged to have paid bribes to foreign telecommunications officials in Nigeria, Rwanda and Senegal, SEC v. Ott, Civil Action No. 06-4195 (D.N.Y. Sept. 6, 2006); SEC v. Amoako, Civil Action No. 05-4284 (D.N.Y. Sept. 2005); U.S. v. Young, No. 07-609 (D.N.J. Sept. 25, 2007); U.S. v. Ott, No. 07-608 (D.N.U. July 25, 2007); U.S. v. Amoako, No. 05-1122 (D.N.J. June 28, 2006); and

• A former government affairs director of Asia for Monsanto alleged to have paid a bribe to a senior Indonesian Ministry of Environment to try and repeal a consent decree, SEC v. Martin, No. 07-0434 (D.D.C. March 26, 2007).

A number of FCPA cases also arose out of pre-merger due diligence. SEC v. Delta & Pine Land Co., No. 07-01352 (D.D.C. July 25, 2007) is a settled FCPA action which arose from self-reporting by Monsanto following pre-merger due diligence. The case involved a parent and sub alleged to have made about $43,000 in payment to Turkish officials to obtain reports and certifications.

Next: The SEC and DOJ expand the reach of the FCPA