by T. GormanPosted on Posted in SECActions

The casualties among corporate executives keep mounting in the ever-expanding options scandal.  Yesterday the government got its first guilty plea when David Kreinberg, former CFO of Comverse Technology, plead guilty to securities fraud charges.  Specifically, Mr. Kreinberg waived indictment and plead guilty to one felony count of conspiracy to commit securities fraud, mail fraud and wire fraud and a second count of securities fraud.  The charges stem from the stock options backdating and slush fund schemes that the government claims took place at Comverse from 1998 to 2006.  The conspiracy charges have a maximum sentence of five years in prison and a fine of up to $250,000 or twice the gain or loss from the offense.  The securities fraud charge has a maximum sentence of ten years in prison and a fine of up to $1,000,000.   The charges also require the payment of restitution according to the press release from the U.S. Attorney’s Office for the Eastern District of New York.  http://www.usdoj.gov/usao/nye/pr/2006/2006Oct24a.htm

Mr. Kreinberg also settled civil charges with the SEC.  Specifically, Mr. Kreinberg consented to the entry of a permanent injunction enjoining him from violating or aiding and abetting the violation of the antifraud, reporting, record keeping, internal controls, false statements to auditors, SOX certification, and securities ownership reporting provisions of the federal securities laws.  Mr. Kreinberg also consented to the entry of an order  which requires him to pay nearly $2.4 million in disgorgement and prejudgment interest and which bars him from being an officer or director and suspends him from practice before the SEC as an accountant.  The disgorgement ordered is based on the in the money benefit from the backdated option grants which was $1,789,255.80.  http://www.sec.gov/news/press/2006/2006-180.htm

To date thirty eight executives from nineteen companies have resigned, retired, been terminated or suspended in the wake of the expanding options backdating scandal.  Mr. Kreinberg is the first to plead guilt to criminal charges and settle with the SEC on civil charges based on claims of option backdating.  Since the option scandal is a priority of the Financial Frauds Task Force and criminal prosecutors and the SEC seem to be expanding their inquiries, more of the same can be expected in the future.

by T. GormanPosted on Posted in SECActions

For months the standards for evaluating cooperation used by the Department of Justice in the Thompson memo and those of the SEC in the Seaboard Report have been under fire for creating a “culture of waiver” which has eroded the attorney client privilege and the work product doctrine and unduly interfered with the rights of corporations and their employees. The ABA has passed resolutions decrying the impact of the standards used by DOJ and the SEC. Organizations such as the U.S. Chamber of Commerce have issued reports heavily criticizing what it called the increasing harshness of SEC enforcement efforts. The court in U.S. v. Stein, held portions of the Thompson memo unconstitutional. Congress followed up on this with hearings in which virtually every witness, including former high ranking justice department officials, criticized DOJ and SEC cooperation policies.

Through all of this DOJ and the SEC have stood largely mute, at least implying that they stood by their policies. It was refreshing to see SEC Commissioner Paul S. Atkins address this important issue in his recent speech and suggest a review of Commission policies while noting that he would be very critical of any requests from the staff for privilege waivers. Specifically, Commissioner Atkins stated that “I strongly believe that the Commission should not view a company’s waiver of privilege as a factor that will afford cooperation credit. . . . Maybe it is time for the Commission to revisit this issue in a formal way and to clarify that waiver . . . [of] fundamental rights and protection will not result in lesser allegations and/or remedies.” The Commissioner went on to note that while waivers may make it easier for the staff — a point specifically discussed in the Thompson memo — this does not justify seeking the waiver of fundamental rights. Indeed, Commissioner Atkins noted that if internal investigations are not privileged it may undermine their effectiveness. Remarks before the Federalist Society, September 21, 2006. http://www.sec.gov/news/speech/2006/spch092106psa.htm

Commissioner Atkin’s comments are a welcome relief from the cold silence of DOJ and the SEC on this important topic. As has been previously noted in this blog, there is no need for DOJ or the SEC to seek waivers in most cases. What the government needs when making a prosecutorial decision — which is what the Thompson memo and the Seaboard Report are suppose to be about — is the facts. A self reporting company can furnish the facts without privilege waivers. What DOJ and the SEC should be looking for as indicia of cooperation is self reporting, a full presentation of the facts to the extent known by the company including facts about persons who may be involved in the wrongful conduct being reported and the adoption of reasonable procedures which will prevent a reoccurrence in the future. If DOJ and the SEC focused on these points they should be able to assess cooperation. If DOJ and the SEC focus on encouraging cooperation rather than stripping persons of their rights they may find that their law enforcement policies are more effective. The remarks of SEC Commissioner Atkins are a welcome first step in reforming cooperation standards to do what they should be: standards which encourage cooperation and aid law enforcement in a manner which conforms with the law.