Key issues raised about securities enforcement this week concern the vitality of the SEC enforcement program and the potential Supreme Court decision in Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc. and Motorola, Inc., No. 06-43. These issues arise from the Senate testimony of Chairman Christopher Cox and the filing of an amicus brief by two Congressmen in Stoneridge.

On July 31, 2007, SEC Chairman Cox testified before the Senate Committee on Banking, Housing and Urban Affairs. Mr. Cox has moved the SEC forward in important areas since becoming Chairman, such as the internationalization of the securities markets. There, he and the agency have initiated some potentially far reaching initiatives concerning the use of international accounting standards and potential use of company filings which meet the standards of a foreign regulator by the SEC.

At the same time, what some have called the “crown jewel” of the SEC over the years – the enforcement division – seems less than vigorous, despite the statements of Mr. Cox to the Senate this week. In his Senate testimony, Mr. Cox argued that the division is vigorously moving forward with investigations and enforcement actions. While this is clearly true in some instances, there are important questions about the overall vitality of the program. Consider the key cases brought this week by enforcement.

SEC v. Integrated Silicon Solution, Inc., Case No. C 07-3945 HRL (N.D. Ca. filed August 1, 2007). Here, the agency charged Silicon Solutions and its former CFO with engaging in a long-running options backdating scheme. To settle the action, both the company and its former CFO, Gary Fischer, consented to the entry of statutory injunctions prohibiting future violations of the antifraud and books and records provisions of the federal securities laws. In addition, Mr. Fischer also agreed to pay over $400,000 is disgorgement and interest, a $125,000 civil penalty and to an order barring him for five years from acting as an officer or director of a public company.

SEC v. Argo, Civil Action No. 07-1397 (JR) (D.D.C. Aug. 1, 2007). Here, the SEC brought an options backdating complaint against the former president, COO and CFO of SafeNet, Inc. The case is in litigation.

SEC v. Frohna, Civil Action No. 07-C-0702 (E.D. Wis. August 2, 2007). This is a settled insider trading case against Joseph Frohna, a former portfolio manager with U.S. Bancorp Asset Management. According to the SEC’s complaint, Mr. Frohna sold all of U.S. Bancorp’s shares in XOMA, Ltd. in 2002, based on inside information about that company that he learned from his brother, who was the leader of a key drug study for that company and another. To settle the action Mr. Frohna consented to the entry of a statutory injunction enjoining future violations of the antifraud provisions and to an order directing him to pay over $950,00 in disgorgement plus interest of over $315,000 and a civil penalty of $954,776.

These cases seem like good results for enforcement. But look further. The two option backdating cases are the latest to trickle out of the SEC’s inventory of investigations in the area which reportedly involves about 140 companies. This scandal has been going on for a considerable period of time. Many companies have conducted through internal investigations, which in many instances are far more probing than anything the SEC enforcement division typically conducts. Yet, only a comparative handful of those investigations have been resolved. Dozens remain in progress.

The insider trading case is based on trades from 2002. Not terribly old for an agency that earlier this year brought case rooted in before the turn of the century conduct. But still, the case is based on conduct that is five years old. Wine improves with age. Enforcement investigations do not.

Policing the securities markets is a key mission for the SEC. Today and tomorrow are key. Yesterday and long ago yesterday should be left to historians. The slow-moving enforcement division seems to need a healthy dose of the forward looking vision Mr. Cox has instilled in some of the SEC’s international initiatives.

Finally, the fact that two members of Congress, Representatives Barney Frank, Chairman of the House Financial Services Committee, and John Conyers, Jr., Chairman of the House Judiciary Committee, filed an amicus brief in Stoneridge this week revives the question of the SEC’s position on this key case. Stoneridge, as we have noted in earlier posts, is potentially the most important case regarding private securities actions in years. While the Bush administration apparently blocked the solicitor general from filing the amicus brief the SEC voted to prepare, that should not be the end of the matter. The SEC should seek and be permitted to file brief in its own right, as it has done in the past. This has nothing to do with the merits of whatever position the SEC want to argue. It has everything to do with the Supreme Court having the benefit of all views, as it makes the critical decision in Stoneridge. Indeed, it is only fitting and proper that the Court have the benefit of the agency Congress created to administer the federal securities laws when interpreting those statutes in a most important case.


This begins the second segment of a multipart occasional series reviewing the potential impact of three Supreme Court cases on securities fraud damage actions.  The first part, concluded in the July 24, 2007 entry, discussed Stoneridge Inv. Partners, LLC. v. Scientific-Atlanta, Inc. and Motorola, Inc., No. 06-43, which is to be decided next term, and involves the scope of Section 10(b).  The second part, beginning with this entry, discusses the Supreme Court’s recent decision in Tellabs, Inc.  v.  Makor Issues & Rights, Ltd., No. 06-484, 2007 WL 1773208 (June 21, 2007) (“Tellabs”) regarding the requirements for pleading a strong inference of scienter.  The third and concluding part, coming in the future, will discuss Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 345 (2005), which concerned loss causation.

Tellabs, decided by the Supreme Court on June 21, 2007, construed Section 21D(b)(2) of the Exchange Act. The Section requires the securities fraud plaintiff to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” in a complaint for damages.  While the question of what constitutes a “strong inference” may seem at first to be little more than an arcane pleading question, the decision in Tellabs belies this notion.  Indeed, the Court’s decision fundamentally alters the manner in which motions to dismiss are considered and may perhaps ultimately change the way in which securities cases are brought.  

In essence, Tellabs rewrites the procedural rules for considering a motion to dismiss and, in the process, reorients the entire procedure.  In typical civil cases, the motion to dismiss process is heavily skewed in favor of plaintiff and permitting the claim to move forward in discovery. Tellabs alters this process by reorienting the playing field to one which is level and keyed to the a careful examination of the available facts concerning a claim of securities fraud before the case can proceed.  This reorienting of the playing field and rewriting of the motion to dismiss procedures may have a far reaching impact on private securities litigation.

In coming segments of this series we will consider the origins of Section 21D(b)(2), the split in the circuit which led to the decision and the potential impact of the Tellabs decision.