by T. GormanPosted on Posted in SECActions

This week, SEC Chairman Cox adopted a new, aggressive stance regarding the prospect of rewriting regulatory authority in the wake of the current market crisis, arguing that the SEC should be given jurisdiction over investment banks. In addition to the SEC settlement with the former Refco chairman who is appealing his sixteen-year prison sentence, litigation was dominated by insider trading cases: the new hearing ordered in the Nacchio appeal by the Tenth Circuit, three new SEC insider trading cases and yet another criminal insider trading case by the U.K.’s FSA, this time a “pillow talk” case.

The market crisis

As the market crisis continues to unfold there have been repeated calls for reform, beginning perhaps with Treasury Secretary Paulson’s plan several weeks ago. Now, SEC Chairman Cox, who many have accused of being lackluster during the crisis, has weighed in with a proposed new role for the SEC: the regulator over investment banks.

In testimony before the House Committee on Financial Services, the SEC Chairman sketched the history of regulation in the financial services area noting the different approaches used for banks and brokers and highlighting the Commission’s efforts to bridge the gap, while noting that Congress should not adopt regulation that crushes investment banks. Rather, the SEC should be given authority over them. This appears to be a new and more aggressive approach for Chairman Cox. Testimony by Chairman Christopher Cox Concerning Reform of the Financial Regulatory System (July 24, 2008).

The Nacchio insider trading case

Earlier this year, the Tenth Circuit Court of Appeals reversed the insider trading conviction of former Quest Communications CEO Joseph P. Nacchio. U.S. v. Nacchio, Case No. 07-1311 (10th Cir. March 17, 2008) (discussed here). Now the court has granted the government’s petition for a rehearing.

In March, the Court reversed Mr. Nacchio’s conviction in a 2-1 decision. The decision turned on the conclusion of the appeals court that a key defense expert witness was improperly precluded from testifying by the district court. The erroneous ruling was based on the district court’s incorrect conclusions about the amount of disclosure required regarding an expert witness under Federal Criminal Rule 16. Although the defense had disclosed the vitae of the witness and the areas of possible testimony, the district court, without any hearing, concluded that disclosure should have been made of the witness’ methodology. The Tenth Circuit reversed, concluding that the district court had improperly confused the dictates of Criminal Rule 16 and that of the Civil Rules regarding expert disclosure.

Now the Tenth Circuit wants four questions addressed:

1) Did the defense have sufficient notice that it was required to present the methodology or request a hearing?
2) Did Nacchio have adequate opportunity to present the methodology or request a hearing?
3) Was the burden to request a hearing Nacchio’s?
4) Did Jude Nottingham abuse his discretion and, if so, would a new trial be the appropriate remedy or could a new evidentiary hearing be held?

Mr. Nacchio remains free on bond.

Refco

Phillip R. Bennett, the former CEO of the company, settled with the SEC this week. The Commission’ complaint was based on the collapse of Refco and Mr. Bennett’s role in concealing the millions of dollars in losses the company had suffered. SEC v. Bennett, 08-cv-1631 (S.D.N.Y. Filed Feb. 19, 2008).

The settlement was somewhat anti-climactic in the wake of the sixteen-year sentence given to Mr. Bennett after he pled guilty to all twenty counts of the indictment returned against him. To settle with the SEC, Mr. Bennett consented to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions and the entry of an order in a related administrative proceeding which bars him from associating with any broker, dealer, or investment advisor. Mr. Bennett is appealing the sentence in his criminal case.

Insider trading

The SEC filed three insider trading cases last week. The first is based in part on the merger between DRS Technologies, Inc and Finmeccanica S.p.A. Prior to an announcement of discussions between the two companies, one or more unknown traders purchased 1,820 DRS options which, following a Wall Street Journal article discussing the talks, yielded the trader a $1.6 million profit. The same trader also made about $343,000 by trading in the call options of American Power prior the announcement in 2006 that the company would be acquired by Schneider Electric SA. SEC v. One or More Unknown Purchasers of the Call Options for the Common Stock of DRS Technologies, Inc., Civil Action No. 08-cv-6609 (S.D.N.Y. Filed July 25, 2008). The SEC obtained a freeze order over the assets in a UBS AG account used to place the trades.

The two other insider trading cases were settled at the time of filing. In SEC v. Pai, Civil Action No. H-08-2338 (S.D. Tex. Filed July 29, 2008), the Commission filed a settled insider trading case against the former Chairman and Chief Executive Officer of Enron Financial Services. Mr. Pai sold over 338,000 shares of Enron and exercised and sold over 572,000 options when he learned negative information about the company after leaving. The action was settled with the entry of a permanent injunction prohibiting future violations of the antifraud provisions and Mr. Pai’s agreement to the entry of an order requiring him to pay over $30 million is disgorgement, about $11.5 million in prejudgment interest and a $1.5 million penalty.

SEC v. Simchuk, Civil Action No. 08-cv-5728 (S.D.N.Y. July 29, 200) is another settled insider trading case. This action was brought against George Simchuk, the former General Director of Glamis de Mexico, a subsidiary of Glamis Gold, Inc. Mr. Simchuk, a member of the due diligence team for the acquisition of Western Silver, Inc., traded in advance of the deal announcement. He resolved the action by consenting to an antifraud injunction and an order requiring him to pay disgorgement of over $58,000, prejudgment interest of over $10,000 and a civil penalty equal to the disgorgement.

Finally, the U.K. Financial Services Board continued its campaign against insider trading, bringing its third criminal insider trading case (the first and second cases are discussed here). Taking a page for the SEC, the FSA filed a “pillow talk” insider trading case (discussed here as to the SEC) against Matthew and Neel Uberoi. According to the FSA, the couple placed 11 separate trades in May and June 2006 on inside information prior to the announcement that NeuTec Pharma Plc was going to be acquired. Earlier the couple had placed six separate trades on inside information that Gulf Keystone Petroleum Ltd. was going to expand and enter into a partnership with a major oil and gas company. Those trades were placed in August 2006. The case is pending.

by T. GormanPosted on Posted in SECActions

The Refco saga continued yesterday as Phillip R. Bennett, the former CEO of the company, settled with the SEC. The Commission initially filed a complaint in February of this year alleging that Mr. Bennett orchestrated a fraud that concealed millions of dollars of owed to Refco by a private company that he controlled. The debt came largely from trading losses and operating expenses that Refco had moved into the private company. For over seven years the debt was concealed with short term transactions at the end of accounting periods that shuffled the debt back and forth between the two companies. Shortly after an IPO, the fraudulent transactions came to light and Refco collapsed into bankruptcy and scandal. The SEC’s complaint alleged violations of the antifraud and reporting provisions of the securities laws. SEC v. Bennett, 08-cv-1631 (S.D.N.Y. Filed Feb. 19, 2008).

To settle with the SEC, Mr. Bennett consented to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions. Mr. Bennett also agreed to the entry of an order in a related administrative proceeding which bars him from associating with any broker, dealer, or investment advisor.

The SEC’s action, of course, is of little real consequence. In the related criminal case, Mr. Bennett pled guilty to all twenty counts of the indictment. Mr. Bennett cooperated with the plaintiffs in the related private actions in an effort to mitigate his sentence and avoid spending the remainder of his life in prison. The government opposed any cooperation credit, claiming that Mr. Bennett’s legal fees were paid for under an indemnification agreement from the company’s D&O carrier. Subsequently, Mr. Bennett was sentenced to sixteen years in prison and order to forfeit assets up to $2.4 billion.

Private suits arising out of the Refco scandal are still pending. One action was brought by Thomas H. Lee Equity Fund against Refco’s outside counsel Mayer Brown in New York. Others are pending in Chicago. These suits are discussed here.