by T. GormanPosted on Posted in SECActions

Yesterday, the SEC settled one of its leading “pillow talk” insider trading cases, SEC v. Rockledge, Civil Action No. 05-10074 (D. Mass. Filed Jan. 12, 2005).  In this case, the SEC’s complaint alleged that Scott M. Rockledge, Chairman and CEO of Cubist told his wife Patricia about negative clinical trial results on a key product.  Mr. Rockledge did not know at the time of the conversation that his wife had an agreement with her brother, William Beaver, to provide him with information about the company which might impact his stock.  Despite requests by Mr. Rockledge to keep the information confidential, his wife gave a “wink and a nod” to her brother, thus informing him of the negative news.  The brother traded the next day, prior to the news announcement by the company.  Mr. Beaver thereby avoided a potential loss when the stock price dropped after the company announcement. 

After losing a motion to dismiss and unsuccessfully appealing that ruling to the First Circuit, the defendants settled with the SEC.  Both defendants consented to the entry of statutory injunctions and orders requiring them to pay disgorgement, prejudgment interest and civil penalties.  The SEC’s Litigation Release appears here.     

While the settlement ended the litigation for Mrs. Rockledge and her brother, no doubt it has had a substantial impact on the family relationships.  Mr. Rockledge, of course, was not prosecuted and undoubtedly gave testimony that at a minimum was not helpful to his wife and her brother.  No doubt that many corporate executives talk about confidential information with their spouse at home (despite the fact that most compliance officers would counsel otherwise) at the same time most preserve the confidentiality of the information. 

At the same time, there seems to be a growing number of “pillow talk” cases.  Just this year the SEC has brought two cases alleging that one spouse traded on information furnished by another.  SEC v. Melton, Civil Action No. cv 07-2655 GHK (JCX) (C.D. Cal. Filed April 23, 2007); and SEC v. Balkenhol, Civil Action No. C-07-2537 JCS (N.D. Cal. Filed May 14, 2007). 

In four other cases brought this year the SEC has alleged that the spouses traded together.  SEC v. Daniel Fongnien Chiang, Civil Action No. 1:07CV00285 (D.D.C. Filed February 8, 2007); SEC v. Kan King Wong, Civil Action No. 07 CIV. 3628 (SAS) (S.D.N.Y Filed May 8, 2007); SEC v. Wang, Civil Action No. 07-3715 (S.D. N.Y. Filed May 10, 2007); (and related criminal case, U. S. v. Wang, Case No. 1:07-cr-00730-CM (S.D.N.Y. May 9, 2007)); and SEC v. Shane Bashir Suman and Monie Rahman, Civil Action No. 07-CV 6625 (S.D.N.Y. Filed July 24, 2007).

Finally, in four cases this year the SEC has alleged that various family members traded together on inside information.  SEC v. Arrgon Capital Management LLC, Case No. 1:07-cv-00919-FM (S.D.N.Y. Feb. 2, 2007); SEC v. Matthew E. Kopsky, Civil Action No. 4:07-CV-00379 (E.D. Mo. Filed February 26, 2007); SEC v. Terese Dearmin, Civil Action No. 1:07-CV-01089 (D.D.C. Filed June 18, 2007); and SEC v. Joseph A Frohna, Civil Action No. 07-C-0702 (E.D. Wis. Filed August 1, 2007).

Once can only wonder what the impact is on all of these family relations. 

by T. GormanPosted on Posted in SECActions

This week, one on-going scandal continued, while another expanded.  The seemingly endless options backdating scandal continued.  For months, the SEC has reportedly had over 140 companies and untold numbers of individuals under scrutiny from for options back dating practices. While criminal prosecutors probably have a lesser number of issuers and individuals in their sights, no doubt the number is substantial.  Cases have been dribbling out since last year.  Last week, the SEC filed a settled civil acting against Juniper Networks, Inc.  Simultaneous with the filing of the complaint, the company consented to the entry of a statutory injection.  No penalty was assessed.  SEC v. Juniper Networks, Inc., Case No. C 07-4430 JW (N.D. Cal. Filed August 28, 2007).  The SEC’s Litigation release regarding this case is here.     

The SEC also filed suit against Lisa Berry, the former General Counsel of KLA-Tencor and Juniper Networks.  The complaint alleges that Ms. Berry routinely used hindsight to identify dates for stock options when the prices were at historic lows while at KLA.  Ms. Berry moved to Juniper shortly before its 1999 IPO.  While at that company, the complaint alleges this she continued her backdating activities.  The complaint alleges violations of the antifraud and reporting provisions of the federal securities laws.  SEC v. Berry, Civil Action No. C 07 4431 (N.D. Cal. Filed August 28, 2007).  

Finally, the California federal court denied a post verdict motion for acquittal of former Brocade CEO Gregory Reyes on Monday.  The court held that there was sufficient evidence to support the verdict. 

As the options backdating scandal continues another seems to be picking up speed:  insider trading.  This year the SEC and the Department of Justice seem to be bringing more and more insider trading cases.  The cases being brought here reflect a growing concern among regulators worldwide about insider trading.  This fact is reflected in the increasing number of cases being brought such as: 

1) Those involving major Wall Street players such as:

?          SEC v. Guttenberg, Case No. 1:07-cv-01774 (S.D. N.Y. filed March 1, 2007) and U.S. v. Jurman, Case No. 1:07-140-TPG (S.D.N.Y. Filed February 26, 2007) (and related cases) which involve over trading by insiders at UBS and Morgan Stanley; and

?          SEC v. Barclays Bank, Civil Action No. 07-CV-044427 (S.D.N.Y. filed May 30, 2007) which involved trading by the bank and the use of so-called “Big Boy” letters;
 

2)         Those involving trading in advance of take over announcements such as:

?          SEC v. One or More Unknown Purchasers, Civil Action No. 1:07-cv-01208 (N.D. Ill March 2, 2007) involving trading in the call options of TXU prior to its takeover;

?          SEC v. Kan King Wong, Civil Action No. 07 CIV 3628 (SAS)(S.D.N.Y. filed May 8, 2007), involving alleged trading in advance of the News Corp. / Dow Jones deal; and

?          SEC v. One or More Unknown Purchases, Case No. 06 CV 11446 DMS (S.D. Cal. Filed July 18, 2007) involving alleged trading in advance of the Petco takeover; 

3)         Trading in advance of earnings announcements, such as:

?          SEC v. Kevin J. Heron, Civil Action No. 07-CV-01542-HB (E.D. Pa. filed April 18, 2007) and U.S. v. Heron, Case No. 2:06-cr-00674-SD (E.D. Pa. Filed April 3, 2006) charging a former general counsel and corporate compliance officer with insider trading largely during black out periods; 

4)         Spouses or the “pillow talk” cases such as:

?          SEC v. Wang, Civil Action No. 07-3715 (S.D. N.Y. filed May 10, 2007) and U.S. v. Wang, case No. 1:07-cr-00730-CM (S.D.N.Y. May 9, 2007) alleging that spouses traded together based on information taken from Morgan Stanley;

?          SEC v. Balkendhol, Civil Action No. C-07-2537 JCS (N.D. Cal. Filed May 14, 2007) which alleges that a husband traded based on inside information obtained from his wife where she told him not to trade; and

5)         Family and friends such as:

?          SEC v. Aragon Capital Management LLC, Case No. 1:07-cv-00919-FM (S.D.N.Y. Feb. 2, 007) which alleges that a father and his sons, along with their friends, traded on inside information obtained by the father.  

These cases, which are just examples of the increasing number of cases being brought clearly demonstrate the increasing focus of the SEC and DOJ on insider trading.  This increasing focus suggests that it would be prudent for issuers and executives to carefully review their insider trading compliance programs and any Rule 10b5-1 trading programs. 

For an interesting chronology of insider trading case brought this year visit the Reuters article here.