by T. GormanPosted on Posted in SECActions

$65 million to settle one options backdating case

Despite agreeing to pay what is reported to be one of the largest settlements in a securities class action based on backdating, semiconductor process control company KLA-Tencor Corp. still faces a tangle of litigation. The company recently agreed to pay $65 million to settle a securities class action suit based on stock option backdating. Lead plaintiffs in the case are three institutional investors, the Philadelphia Board of Pensions and Retirement, the Police and Fire Retirement System of the City of Detroit and Louisiana Municipal Police Employee’s Retirement System.

Despite the settlement, the company still faces a maze of litigation. Five derivative suits are pending. The U.S. Attorney’s Office, the Department of Labor and the Internal Revenue Service are also conducting investigations.

Last July, the company settled with the SEC by consenting to the entry of a statutory injunction prohibiting future violations of the books and records provisions of the Exchange Act. SEC v. KLA–Tencor Corp., Case No. C07 3799 (N.D. Cal. Filed July 25, 2007). A separate suit filed by the SEC against Kenneth L. Schroeder, the former CEO of the company, is still pending. SEC v. Schroeder, Case No. C07 3798 (N.D. Cal. Filed July 25, 2007).

A conviction in the TXU insider trading case

The government resolved two significant insider trading cases last week. On Monday, the jury returned a guilty verdict in the insider trading case of Hafiz Muhammad Zubair Naseem, U.S. v. Naseem, Case No. 1:07-cr-00610 (S.D.N.Y. Filed May 3, 2007). The jury returned guilty verdicts on all 28 counts.

The case against Mr. Naseem is one of the actions discussed here, stemming from the KKR lead takeover of TXU announced on February 26, 2007. Within days of that announcement, the SEC brought an action claiming that then unknown traders had purchased 8,020 call options for TXU prior to the announcement through Credit Suisse, Zurich and Firmat Banque, Frankfurt. The SEC subsequently amended its complaint twice, each time naming additional defendants. The second amendment on May 3, 2007 named Mr. Naseem as a defendant, alleging that the Credit Suisse investment banker tipped a Pakistani banker who bought 6,700 call options and made a profit of about $5 million. At the same time, the U.S. Attorney’s office filed criminal charges against Mr. Naseem. The SEC’s case is still pending. SEC v. One or More Unknown Option Purchasers, Civil Action No. 1:07-cv-01208 (N.D. Ill. Filed March 2, 2007).

The SEC settles the News Corp/Dow Jones case

The SEC did however settle another significant insider trading case it brought last year – the News Corp – Dow Jones case, SEC v. Kan King Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. Filed May 8, 2007). After amending its complaint and adding defendants, the SEC settled the case with four defendants who agreed to pay about $24 million to resolve the case, in addition to consenting to statutory injunctions. The resolution of that case, discussed here, is particularly significant since the SEC brought the it within days of the announcement of News Corps’ takeover bid for Dow Jones apparently based on little more than the trading records and brokerage information.

Continued war on insider trading

As the SEC and DOJ intensify their war on insider trading, a new target has emerged: Société Générale, the subject of a huge scandal stemming from huge trading losses. Since the scandal broke, there has been speculation that the French financial institution might be taken over. A flurry of investigations have also been opened. The SEC and DOJ are reportedly now investigating whether there was insider trading in advance of the announcement of the scandal.

Finally, SEC Enforcement Director Linda Thomsen indicated in testimony before the U.S. China Economic and Security Review Commission on February 7, 2008 that the Commission is expanding its war on insider trading. In addition to traditional targets, like trading in advance of takeovers and other public announcements, hedge funds or the much talked about review of executive Rule 10b5-1 plans (here), the staff is now concerned about insider trading and sovereign wealth funds. According to Ms. Thomsen, the staff also has other compliance concerns about these funds.

by T. GormanPosted on Posted in SECActions

Yesterday, the SEC settled one of the high profile insider trading cases it brought last year: the New Corp-Dow Jones case, SEC v. Kan King Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. Filed May 8, 2007) (the SEC’s Press Release is here). The case centers on trading in advance of the May 1 public announcement of New Corp’s bid for Dow Jones. The Commission’s initial complaint, filed just seven days after the announcement of the bid, was long on allegations and short on facts. The initial complaint named Kan King Wong and wife Charlotte Ka On Wong Leug, both residents of Hong Kong, as defendants. It alleged that the couple purchased 415,000 shares through a Merrill Lynch Hong Kong account between from April 13 to April 30. Funds for a portion of the purchase were wired in from another account. By May 4, when the husband ordered the sale, the account had an $8.1 million profit from the share price increase that followed the public announcement of the takeover bid.

The SEC’s quick action permitted it to freeze the defendants’ account and keep the trading profits from perhaps disappearing. At the same time, that swift action deprived the SEC of one of its best weapons – a through and complete investigation. Careful examination of the initial complaint suggests that at the time of filing, the SEC had little more than the information which was available from Merrill Lynch: the account statements and the account opening documents which would show the trades, cash flows in and out of account and the identity of those who owned and controlled the account. The complaint did not specify how the defendants received any inside information or even suggest a possible source of such information. Indeed, it is likely that the allegations of insider trading in the complaint were little more than inferences drawn from the trading.

Yesterday, however the SEC amended its complaint. The First Amended Complaint identifies the source of the information and lays out in detail how the insider trading scheme took place: News Corp board member David Li, a well respected business man in Hong Kong, told his close friend and business associate Michael Leung, who in turn told his daughter and son-in-law: the defendants in the initial complaint. The amended complaint adds David Li and Michael Leung as defendants and details how Mr. Leung traded through the account of his daughter and son-in-law with their assistance.

Simultaneous with the filing of the amended complaint, each defendant consented to the entry of an order enjoining them from future violations of Section 10(b) and Rule 10b-5. In addition, David Li was ordered to pay an $8.1 million civil penalty, Michael Leung to pay $8.1 million in disgorgement plus pre-judgment interest and an $8.1 million penalty and K. K. Wong to pay $40,000 in disgorgement plus prejudgment interest and a $40,000 civil penalty. This is a significant result for the Commission and the staff in a major insider trading case.