Part VII: SEC Enforcement Trends and Priorities, 2008 – Insider Trading (cont)

Last year the SEC also brought insider trading cases against corporate executives, a group of “pillow talk” cases and against attorneys. Examples of cases brought against corporate executives include:

–NSD Bancorp director: SEC Lenzner, Civil Action No. 07-cv-01404 (W.D. P.A. Oct. 17, 2007), a settled insider trading action against bank director Charles Lenzner and a person he tipped, Michael Pitterich, about a merger.

–Corporate director: SEC v. Keeney, Case No. 1:07CV010 (D.D.C. Sept. 25, 2007), settled case against a director of Frederick’s of Hollywood for tipping.

–Bank VP: SEC v. Glamb, Civil Action No. 07-CV-2743 (D.N.J. June 13, 2007), settled insider trading case against former Hudson United Bankcorp Asst. VP who traded on inside information obtained from a co-worker.

A number of “pillow talk” cases involving spouses and family member were brought last year. In some instances the spouses traded together while in others one spouse traded on information obtained from the other. In still other cases family members traded together. Examples of these cases include:

–Spouses trading together: SEC v. Wang, Civil Action No. 07-3715 (S.D.N.Y. May 10, 2007); U.S. v. Wang, Case No. 1:07-cr-00730-CM (S.D.N.Y. May 9, 2007), an insider trading case in which two married Wall Street professionals traded on information obtained from the wife’s employment at Morgan Stanley through her mother’s account in Beijing. The couple has pled guilty; the SEC case is pending.

–Husband & wife: SEC v. Suman, No. 07-C-6625 (S.D.N.Y. July 24, 2007), insider trading case in litigation which alleges that husband misappropriated inside information that he and his wife used to trade.

–Husband: SEC v. Melton, Civil Action No. cv 07-2655 GHK (C.D. Cal. April 23, 2007), settled insider trading case where husband traded on information obtained from his wife and she instructed him not to trade.

–Father & sons: SEC v. Aragon Capital Management, LLC, Case No. 1:07-cv-00919 (S.D.N.Y. Feb. 2, 2007) an insider trading case in litigation involving a father and his sons.

Finally, three cases were brought against attorneys last year:

—SEC v. Belcher, Case No. 07-CV-02507 (D. Col. Dec. 3, 2007), settled case against attorney who obtained the information from his client.

—SEC v. Heron, Civil Action No. 07-CV-01542 (E.D. Pa. April 3, 2007), insider trading case in litigation against a former general counsel of a company.

—SEC v. Schwinger, Civil Action No. 1:07-CV-01047 (D.D.C. June 13, 2007), settled insider trading action against managing partner of law firm who learned the information from a lateral partner candidate.

Next: The FCPA, another new enforcement priority

The Broadcom Option Backdating Case: Raising More Questions Than It Settles

Yesterday, the SEC filed a settled enforcement action. Normally, a settled case ends matters. This settlement however, raises more questions than it resolves.

The SEC filed its long-anticipated action against Broadcom Corp., SEC v. Broadcom Corp., Civil Action No. SACV 08-00430 JVS (C.D. Cal. April 22, 2008). The Commission’s complaint, much of which has been previously reported, detailed a five year option backdating scheme. The authority over those grants was held, according to the complaint, by a two-person committee composed of the company’s Chairman and Chief Technology Officer and its former CEO. While the committee approved 88 grants, frequently there was no meeting or decision by the committee on the dates those grants supposedly were approved. Rather, Broadcom’s former CFO allegedly selected many of the dates retroactively and matched them to historical stock prices. The committee however, executed consents which stated that the grants had been approved “as of” a prior date. Broadcom’s general counsel directed the preparation of what the complaint calls false board and compensation committee consents.

To resolve the case, the company consented to the entry of an injunction prohibiting future violations of the antifraud, books and records and proxy provisions of the federal securities laws. The company also agreed to pay a civil penalty of $12 million.

Broadcom settles the action as to the company and returns the SEC’s backdating cases to the standards used in the initial cases such as Reyes – intentional conduct. In view of the allegations of false documents and cover-ups it is still an open question however as to whether the SEC will continue to use this standard to resolve its inventory of cases or return to the negligence standard used in SEC v. Maxim Integrated Pds., Inc., Civil Action No. C-07-65121 (N.D. Cal. Dec. 4, 2007) against the CEO of that company, Mr. Gifford.

There are other key liability questions. As the Commission’s Release on the case makes clear, its investigation is continuing. Key questions involve the potential criminal and civil executives such as company founder Henry T. Nicholas III, Henry Samueli and others. Although Mr. Nicholas did not receive any of the backdated options, he sat on the committee cited in the SEC’s complaint. He was also mentioned, along with Henry Samueli, as an “unindicted potential co-conspirator” in the plea to obstruction of justice by former Broadcom H.R. executive Nancy M. Tullos. Also unresolved is the question of civil and perhaps criminal liability for Broadcom’s general counsel whose conduct is cited in the complaint and perhaps other executives. Overall, the not unexpected resolution of this case raises more questions than it solves.