by T. GormanPosted on Posted in SECActions

As the market crisis continues, two new bills were introduced in Congress, the International Organization of Securities Commissioners Technical Committee set up three task forces and there were renewed calls to reinstate the uptick rule. One bill would, in part, revamp the regulatory landscape, giving the CFTC and the Fed new powers. It also calls for a study of the current regulatory structure. The other would create a commission to study the market crisis. The IOSC task forces will also study specific aspects of the crisis. The proposed legislation prompted New York insurance regulators to halt their planned efforts to regulate credit default swaps.

DOJ continued to focus on FCPA enforcement, obtaining a plea from Aibel Group, based on violations of the anti-bribery provisions in connection with payments to Nigerian customs officials. Aibel Group, a subsidiary of Vetco International, Ltd., admitted it was not in compliance with an earlier FCPA-based deferred prosecution agreement. Other subsidiaries of Vetco International previously entered into FCPA based plea agreements.

The D.C. Circuit upheld an SEC order barring an investment advisor. The court rejected an argument that the sanction was disproportionate since it was within those authorized by the statute.

The SEC concluded two insider trading cases this week which had been in litigation. In one, the Commission agreed with the defendants to a dismissal without prejudice. In a second, the defendant consented to the entry of an injunction and a disgorgement order after pleading guilty in a related criminal case.

Finally, Monster Worldwide moved closer to resolving the actions based on option backdating allegations at the company with the settlement of a shareholder suit. Final approval was given to a settlement in a shareholder suit against the company and two of its former officers.

The market crisis

Two new bills were introduced in Congress focused on the market crisis. In the Senate, the Financial Regulation Reform Act of 2008 was introduced on November 19, 2008. The bill, which proposes to amend the Commodity Exchange Act, seeks, among other things, to extend regulations over credit default swaps and give the Federal Reserve Board authority over investment bank holding companies. SEC Chairman Cox previously requested that Congress give this authority to the SEC.

The Senate bill contains several key sections, including:

• Section 2, which would impose record keeping requirements for positions involving credit default swaps – the CFTC would have rule making authority to implement this section;

• Section 3, which grants the Federal Reserve authority over investment bank holding companies;

• Section 4, which directs the SEC, in consultation with the Federal Reserve System and the CFTC to issue rules regarding the designation of clearing houses for credit default swaps and to prevent fraudulent practices in connection therewith; and

• Section 5, which creates the Commission on Financial Regulatory Reform, a twelve-member body which would conduct a complete review of the current financial regulatory structure, hold public hearings and file a final report with the President and Congress within six months.

The bill in the House of Representatives is titled the Financial Oversight Commission. It was also introduced on November 19, 2008. This Commission, unlike the one in the Senate bill, is designed to investigate the causes of the financial crisis. Specifically, the ten-member Commission would be directed to examine and report on the causes of the financial crisis of 2008, “ascertain, evaluate, and report on the evidence developed by all relevant governmental agencies regarding the facts and circumstances surrounding the crisis,” and to make a full and complete accounting of the circumstances surrounding the crisis to the President and Congress within twelve months.

New York State Insurance Superintendent Eric Dinallo announced in testimony before the House Agricultural Committee this week that the state would halt its plans to regulate in part credit default swaps as discussed here.

The International Organization of Securities Commissioners Technical Committee created three task forces at its recent meeting convened by Chairman Cox. The three task forces will focus on short selling, unregulated financial products and unregulated entities. The task forces are due to report at the next meeting of the Technical Committee in February 2009.

Finally, there were new calls this week for the reinstitution of the uptick rule. Citi and perhaps others are reportedly lobbying the SEC to bring back the rule. Citi, whose shares have been trading at penny stock levels, and others are apparently concerned that short sellers will push their share price even lower.

The uptick rule, which until last year had been in effect since the 1930s, prevents selling short except on an uptick or upward movement in the price. Last year it was abolished as unnecessary. Earlier this year, the SEC temporarily banned short selling as the market crisis unfolded. While the agency still imposes certain disclosure obligations on short sellers unlike its U.K. counterpart, the SEC terminated its ban in October. The prohibition on short selling in the U.K will continue until mid-January as discussed here.

FCPA

On November 21, 2008 U.K.-based Aibel Group Ltd. pled guilty to a two-count information based on violations of the anti-bribery provisions of the FCPA. U.S. v. Aibel Group Ltd., Case No. 4:07-cr-00005 (S.D. Tex. Filed Jan. 5, 2007).

According to the court documents, beginning in September 2002 and continuing through April 2005, Aibel Group conspired with others to make at least 378 corrupt payments totaling about $2.1 million to Nigerian customs service officials. The payments were intended to induce officials to give the defendants preferential treatment during the customs process. These actions were taken in connection with the Bonga Project, Nigeria’s first deepwater oil drilling operation.

As part of the resolution of the case, which resulted from voluntarily disclosures to DOJ made by the company, Aibel Group is to pay a $4.2 million criminal fine. The company has also been ordered to serve a two-year term of organizational probation. That requires the company to submit periodic reports regarding its progress in implementing anti-bribery compliance measures.

Aibel Group is a wholly owned subsidiary of Vetco International Ltd. In February 2007, Vetco Gray Controls, Inc., Vetco Gray Controls Ltd. and Vetco Gray UK, all subsidiaries of Vetco International, pled guilty to violating the anti-bribery provisions of the FCPA as discussed here. In 2004, Aibel Group entered into a deferred prosecution agreement with which it failed to comply.

Circuit courts

The D.C. Circuit rejected claims by an investment advisor that an SEC order permanently barring him from future association with any investment advisor should be overturned because it was disproportionate. The order, entered in an administrative proceeding, was based on findings by a district court in an enforcement action following a jury trial. The case was based on claims that Conrad Segheres, the advisor, participated in misrepresentations about the value of three funds to investors. In affirming the Commission order, the DC Circuit held that “disproportionate penalties are irrelevant to the appropriateness of a sanction if the sanction is within the SEC’s discretion.” Segheres v. SEC, Case No. 07-1478 (D.C. Cir. Nov. 21, 2008).

SEC enforcement

The Commission dismissed without prejudice an insider trading case it brought in 2005 where it had obtained an emergency freeze order over about $3 million in assets and which required expedited discovery. SEC v. Boutraille Corp., Case No. 05 CV 9300 (S.D.N.Y. Filed Nov. 4. 2005).

The initial complaint was brought against unknown purchasers of call options of the common stock of Placer Dome, Inc. On October 31, 2005, Barrick Gold Corp., a Canadian-based gold mining company announced an offer to purchase Placer Dome, also a Canadian-based gold mining company. Shortly prior to that announcement the SEC’s complaint claimed unknown purchasers, while in possession of inside information, and through oversees brokers, bought over 10,000 call options for Placer stock. The purchases were made in an account at a U.S broker dealer. At the time, over 5,000 of the call options were out of the money and set to expire in November within weeks of the purchase. Purportedly the account had over $1.9 million in illegal profits after the announcement. Subsequently, the complaint was amended to name Boutraille Corporation, Trinity Partners Ltd., and John C. Fraleigh as defendants.

The Commission settled with defendant Robert C. Cole in another insider trading case, SEC v. Cole, Civ. 08-265 C (W.D. Okla. Filed March 13, 2008). The settlement followed the entry of a guilty plea by Mr. Cole in a related criminal case, U.S. v. Cole, No. 5:08-CR-327 (N.D. Ohio).

The Commission’s complaint alleged that Mr. Cole, then an employee of Diebold, Inc., purchased about $70,000 worth of put option contracts for Diebold shares after learning from his sales manager that the earnings forecast was going to be lowered. Following the announcement of the revised and reduced earnings forecast, the share price dropped about 16% compare to the close the prior day. Mr. Cole made a 700% return on his investment.

To settle with the Commission, Mr. Cole consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. He also agreed to the entry of an order disgorging about $509,000 in trading profits which is satisfied by complying with a similar order in the related criminal case. There, Mr. Cole pled guilty to securities fraud and was sentenced to a year and a day in prison, two years of supervised release, forfeiture of $509,000 and a fine of $180,000.

Shareholder suits

The district court granted final approval to the settlement in a shareholder suit against Monster Worldwide, Inc., Andrew J. McKelvey, the founder of the company, and Myron F. Olesnychyj, its former general counsel. The suit was based on option backdating claims. The $47.5 million settlement will be funded by a $46.9 million payment from the company and a $550,000 personal contribution from Mr. McKelvey. In Re Monster Worldwide, Inc. Sec. Litig., Case No. 1:07-cv-02237 (S.D.N.Y. Filed March 15, 2007).

Previously, Mr. McKelvey entered into a deferred prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York based on similar claims. Mr. Olesnychyj pled guilty to criminal charges based on option backdating. In addition, James J. Treacy, Monster’s former president and COO, was indicted in April 2008 based on similar claims.

by T. GormanPosted on Posted in SECActions

Prior installments of this occasional series on the SEC’s new Enforcement Manual have discussed the Wells Process and Cooperation. The segment considers parallel proceedings.

Section 5.2.1 of the Manual discusses parallel proceedings. The term, as used here, typically refers to situations in which the SEC and another agency are investigating the same or a similar matter. The Supreme Court has upheld the use of these types of inquiries. Indeed, provisions in the securities laws such as Exchange Act Section 21(d) seem to contemplate such proceedings. Parallel proceedings offer law enforcement and the potential defendant certain efficiencies. At the same time, they also present potential pitfalls for the unwary.

The Manual discusses parallel proceedings primarily in the context of Department of Justice inquiries. In contrast, other sections dealing with references by the SEC of information to other agencies cover a wide variety of government and private organizations. In essence, the Manual encourages the staff to coordinate with other agencies.

In coordinating with other agencies, the Manual directs the staff to “keep in mind” certain considerations. These include:

• The investigation must be independent;

• The staff should make its own decisions on what testimony and documents to seek; and

• The staff should not seek testimony and documents solely for DOJ.

These factors are reminiscent of those on which the district court findings were based in U.S. v. Stringer, 408 F. Supp. 2d 1093 (D. Or. 2006), where the court dismissed an indictment based on parallel proceedings violations. Those findings were later reversed by the Ninth Circuit Court of Appeals.

If counsel for the witness inquires about the existence of a parallel inquiry, the staff is to direct counsel’s attention to Form 1662. If counsel asks who to contact at the U.S. Attorney’s Office, Section 5.2.1 directs the staff not to answer unless the U.S. Attorney’s Office has specifically authorized disclosure. This is consistent with standard procedure. At the same time, the refusal of the staff to disclose which U.S. Attorney’s Office is conducting the criminal investigation, or who at that office to contact, affords counsel some insight into the parallel criminal inquiry and how it is being conducted.

Two other sections on parallel proceedings are of interest. The first concerns proceedings being conducted by the Division itself. Here, Section 3.13 of the Manual specifies that the Division may continue to investigate under a formal order while simultaneously litigating a related civil action if there is an independent, good faith basis for continuing the inquiry. Where however, there is a pending court proceeding, the Manual cautions that the staff should use “judgment” in issuing investigative subpoenas, taking into consideration:

• The degree of factual and legal overlap;

• The prior course of the litigation;

• The likely response of defense counsel; and

• The likely views of the particular judge assigned to the case.

If the staff obtains “testimony or documents in the investigation that are properly discoverable in the litigation, the SEC must produce them in the litigation in accordance with the Federal Rules of Civil Procedure.”

If there is a pending administrative proceeding, the Division is required to notify the hearing officer and each party regarding the issuance of a subpoena. The hearing officer is authorized to take whatever steps are necessary to ensure that the investigative subpoena is not issued for the purpose of obtaining evidence for the proceeding. In addition, the hearing officer can provide documents obtained through such a subpoena to each respondent in the proceeding on a “timely basis.”

Finally, Section 3.1.4 deals with parallel investigations with SROs and the state actor doctrine. Essentially, this section cautions the staff about allowing its inquiry to become intertwined with an SRO investigation. This could impact the ability of witnesses to invoke the Fifth Amendment (typically, SRO Rules require cooperation). In this regard, the staff is cautioned about either “joint actions” or situations where there is “government compulsion.” Under the former, the SEC and the SRO act in concert. Under the latter, the SRO is encouraged to take certain actions at the request of the SEC. Under either, the SRO could be viewed as a state actor, which would permit the witness to invoke a constitutional privilege in response to a request to testify.