THE RENEWED CAMPAIGN ON INSIDER TRADING – Part IV: Pillow Talk Cases

A rising phenomena appears to be “pillow talk” cases, those involving spouses. In some instances, a husband and wife are alleged to have traded together on inside information. In others, one spouse is claimed to act contrary to the wishes of the other. A variation involves various family members trading. In all of these cases, there seems to be a new family dynamic at work.

The first group involves spouses trading together. In a prior installment of this series (here), we discussed SEC v. Kan King Wong, the case based on the News Corp. – Dow Jones transaction in which a husband and wife are alleged to have traded together.

A similar patter is evident in SEC v. Wang, Civil Action No. 07-3715 (S.D.N.Y. Filed May 10, 2007) and the related case U.S. v. Wang, Case No. 1:07:-cr-00730-CM (S.D.N.Y. May 9, 2007). According to the court papers in these cases, the couple traded on inside information obtained from the wife’s employment at Morgan Stanley. On three occasions the wife obtained M& A information from her employer and she, along with her husband, traded in advance of the public announcement of the deal. The trades were placed through an account in Beijing in the name of the wife’s mother. Computer records demonstrate that the brokerage account was accessed at ING where the husband was employed and from the couple’s New Jersey home. Both of these cases are pending.

A third case involving spouses is SEC v. Chaing, Civil Action No. 1: 07CV00285 (D.D.C. Filed Feb. 8, 2007). This is the only case in the group to settle. Here, the husband obtained the inside information from his position as former co-chairman of SINA. After learning that the company would have lower-than-expected earnings, the husband placed eight orders to sell short, as a result of which the couple avoided losses. After trading together, the couple settled together. Both consented to the entry of a statutory injunctions. The husband also agreed to the entry of an order requiring him to pay disgorgement of $257,833 and a penalty in the same amount. The wife agreed to the entry of an order requiring the payment of a civil penalty in the amount of $128, 916.

In other cases, only one spouse traded and, in some instances, contrary to the wishes of the other spouse. Consider for example, SEC v. Blakenhol, Civil Action No. C-07-2537 JCS (N.D. Cal. Filed May 14, 2007). In this case, both spouses worked at Oracle. The husband was a vice president while the wife was an executive assistant to the CEO and two other vice presidents. From her position, the wife had access to inside information apparently not available to the husband. In 2004 and 2005, according to the complaint, the husband, who previously was an active stock trader, only traded in Oracle targets. In one instance he invested about $450,000, far more than he had in any other single investment. The case was brought against the husband, but not the wife. The husband settled, consenting to the entry of a statutory injunction and an order requiring him to pay disgorgement, a civil penalty equal to the disgorgement and prejudgment interest.

A similar but perhaps more striking case is SEC v. Melton, Civil Action No. cv-7-2655 GHK (C.D. Cal. Filed April 23, 2007). There, the husband is alleged to have traded on inside information obtained from the wife, who is a vice president at Amgen. According to the complaint, the wife learned that Amgen was about to acquire Abgenix. Although the couple discussed the pending transaction, the wife specifically instructed the husband that he could not use the information to trade, according to the court papers. Nevertheless, the husband liquidated two other accounts and purchased over two thousand shares of Abgenix. After the transaction was announced, he liquidated the shares, yielding a profit of about $15,000. As in Blakenhol, the husband and not the wife was charged. The husband agreed to settle by consenting to the entry of a statutory injunction and an order requiring him to disgorge the trading profits and pay prejudgment interest along with a civil penalty equal to the amount of the trading profits.

Overall, one can only wonder about the impact of these cases on the spouses. In Wang and Chaing the couples are alleged to have traded together and apparently will go to trial together. A different dynamic appears to be at work in Blankenhol and Melton. In those cases the husband traded on information from the wife and settled without the wife being charged. Some may wonder if these cases are just a variation of Wang and Chaing with the couples acting together – but saving the wife by settling, rather than having a joint defense at trial. Only the couples know for sure.

Next: variations, family members and friends trading.

The Week in Review (November 9-15, 2007): Backdated Options, the FCPA and Cooperation Credit in Congress

Securities enforcement litigation this week echoed with familiar themes: Backdated options, the FCPA and cooperation credit and privilege waivers.

Closing Option Investigations

Perhaps the backdated options crisis is finally winding down. The SEC staff continued informing companies under scrutiny for their options issuances practices that an enforcement action would not be recommended. Recently Electronic Arts, Linear Technology Corp., Nvidia Corp, PMC-Sierra Inc. and Zoran Corp. were informed that the investigations involving their options granting practices were being closed. Undoubtedly this is good news, not only for these issuers, but perhaps dozens of others who are waiting to hear whether an action will be brought against them by the SEC. While it is clear that the SEC still has a large inventory of backdated option cases and that more will be brought, this wave of closing letters may suggest that it is the beginning of the end of this scandal.

The Brocade Criminal Case

Stephanie Jensen, former Brocade Communications Human Resources director, also received some good news in her backdated options case. The government is dropping more counts in the indictment.

Ms. Jensen was named as a defendant in an SEC enforcement action, and indicted on criminal charges along with former Brocade CEO Gregory Reyes, who was convicted on all ten counts in September. Significant fanfare surrounded the filing of the civil and criminal charges against Ms. Jensen and Mr. Reyes in July 2006. At that time, there was a joint press conference with SEC Chairman Cox and representatives of the U.S. Attorney’s office for the Northern District of California, among other, joining in the announcement.

The notice that the government was dropping four of the remaining six counts was contained in a single sentence in a recently filed government brief. The charges dropped include securities fraud and making false filings with the SEC. Previously, other counts had been dropped. Two counts remain, conspiracy to falsify books and falsification of the books.

The FCPA Again

The SEC also brought another in a series of Foreign Corrupt Practices Act (“FCPA”) cases. This time, Chevron Corp. was named as a defendant in a settled action based on improper payments to Iraq under the U.N. Oil for Food Program. According to the complaint, over a two year period third parties that contracted with Chevron paid about $20 million in illegal kickback payments in connection with Chevron’s purchases of crude oil under the U.N. program. Surcharges paid by the third parties in connection with Chevron’s purchases of oil bypassed the escrow account and were paid to Iraqi-controlled bank accounts. Chevron consented to the entry of a statutory injunction to settle the action. In addition, the company agreed to the entry of an order directing it to pay disgorgement of $25 million and a civil penalty of $3 million. The company also has to pay $5 million in disgorgement under an agreement with the U.S. Attorney’s Office for the Southern District of New York and a $2 million penalty to the Office of Foreign Asset Controls of the U.S. Department of Treasury. SEC v. Chevron Corp., Civil Action No. 07 CIV 10299 (S.D.N.Y. Filed November 14, 2007). The Commission’s Litigation Release appears here.

Legislation, Cooperation and Waiver

Finally, the Attorney Client Protection Act of 2007 passed in the House of Representatives this week as discussed here. That Act is designed to end the so-called “culture of waiver” that has resulted from government cooperation standards in the SEC’s Seaboard Release and DOJ’s Thompson and McNulty memos. The proposed legislation would bar officials such as SEC enforcement staff and attorneys at DOJ from seeking the waiver of an organization’s attorney client privilege or work product protection. In addition, the proposed legislation would bar SEC enforcement officials and criminal prosecutors from considering matters such as the indemnification payments and common interest agreements in the charging process.

Unfortunately, the proposed legislation will probably have little impact on the SEC or DOJ. Under the Act, companies can voluntarily waive their rights in the name of cooperation and receive credit in the charging process. While passage of the Act may bar enforcement officials from making specific requests, it will not require any alteration to statements such as those made by SEC Enforcement Chief Linda Thomsen earlier this year. In her remarks Ms. Thomsen gave two examples of cooperation: in one the company cooperated, waived privilege and was not prosecuted. In the second the company cooperated, did not waive privilege and was prosecuted. Ms Thomsen’s remarks before the Mutual Fund Directors Forum 7th Annual Policy Conference are available here. Given these examples what else needs to be said?