by T. GormanPosted on Posted in SECActions

Today the SEC filed civil fraud charges against bankrupt auto parts manufacturer Collins & Aikman Corporation; David A. Stockman, C&A’s former CEO and Chairman of the Board; and eight other former C&A directors and officers:  J. Michael Stepp, former CFO and Vice-Chairman of the Board of Directors; Elkin B. McCallum, former member of the Board of Directors; David R. Cosgrove, former Corporate Controller; John G. Galante, former Treasurer; Christopher M. Williams, former Executive VP of Business Development; Gerald E. Jones, former COO and Executive VP of Fabrics; Paul C. Barnaba, former VP and Director of Purchasing-Plastics Division; and Thomas V. Gougherty, former Controller-Plastics Division.  SEC v. Collins & Aikman Corp., et al., Civil Action No. 1:07-CV-2419(LAP) (S.D.N.Y. March 26, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20055.htm.  

Likewise, the US Attorney for the Southern District of New York unsealed charges of conspiracy, securities fraud, bank fraud, wire fraud, and obstruction of an agency proceeding, against Mr. Stockman.  The US Attorney also charged Messrs. Stepp, Cosgrove, and Barnaba.  Four felony Informations, filed today and last week, charge other C&A executives with related crimes.  http://www.usdoj.gov/usao/nys/pressreleases/March07/stockmanetalindictmentpr.pdf.  

Today’s charges stem from an alleged scheme perpetrated between 2001 and 2005 and directed by Mr. Stockman.  According to the SEC’s complaint, Mr. Stockman and others used various methods to conceal C&A’s true financial health, including wash sales or “round trip transactions” concerning false rebates, improper revenue recognition for the company’s actual rebates, and overstating its reported pre-tax operating income (or reduced its loss) by ten percent or more in eight different quarters. Also, the SEC alleges that Mr. Stockman and others “embarked on a public campaign to mislead investors, potential financiers and others by minimizing the extent of the fraudulent accounting and hiding C&A’s dire financial condition.”

The company simultaneously settled the charges today, without admitting or denying the SEC’s allegations.  C&A consented to a permanent injunction, although the settlement still requires court approval.  As to all of the individual defendants, the complaint seeks permanent injunctions against future violations of the securities laws, officer-and-director bars, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties.

by T. GormanPosted on Posted in SECActions

Market Timing/Late Trading is Winding Down, Permitting Enforcement to Focus on Other Areas

Last week we reviewed recent enforcement actions involving the Foreign Corrupt Practices Act in connection with the criminal action against Chiquita, although that case was not specifically based on the FPCA (post of 3/21/07).  Clearly the FPCA is an area of increasing focus for both the SEC and DOJ. 

The reverse is true of market timing/late trading.  Since the initial efforts of former New York Attorney General Eliot Spitzer several years ago, this has been a key focus for the SEC Enforcement Division.  Market timing of course is not in and of itself a violation of the federal securities laws.  Although the SEC has claimed repeatedly that late trading is a violation of the securities laws, its argument is questionable at best.  Nevertheless, in recent years the SEC enforcement staff has conducted a wide-ranging investigation into the practices, largely under an omnibus order of investigation.  From that investigation the SEC has brought a number of cases, typically tying the market timing/late trading conduct to some other practice that clearly violates the securities laws.  

Last year the SEC continued to bring cases in this area.  For example: 

In the Mater of Prudential Equity Group, (Aug. 28, 2006), www.sec.gov;/litigation/admin/2006/34-54371.pdf  Prudential consented to the entry of an order directing it to pay $600 million as a global settlement with the SEC, U.S. Attorney’s Office, the Mass. Securities Division, the NASD, the New Jersey Bureau of Securities, the New York Attorney Generals Office and the NYSE to resolve a claimed illegal market timing scheme.  This case is also a good example of the benefits of parallel proceedings for all parties (see Series: Part III, post dated 2/28/07).  A group of regulators were able to coordinate to investigate a common practice yielding obvious economies in the use of resources; the company was able to achieve a global settlement.  

SEC v. James Tambone and Robert Hussey, (D. Mass. Dec. 28, 2006), www.sedc.gov/litigation/litreleases/2007/lr19962.htm  In this case, the court dismissed claims brought by the SEC against two former executives of Columbia Funds Distributor Inc., in connection with a claimed undisclosed market timing scheme.  

In the matter of Flynn, (Aug. 2, 2006), www.sec.gov/litigation/aljdec/2006/id316rgm.pdf.  An ALJ dismissed aiding and abetting charges alleging that former CIBC director Paul Flynn aided a late trading and market timing scheme.  This was the second time Mr. Flynn prevailed in actions based on this conduct.  Earlier former New York Attorney General Spitzer dismissed criminal charges against Mr. Flynn based on the same conduct. 

In contrast to the FCPA, which will become an area of increasing focus in 2007, we can expect to see cases in the market timing/late trading area winding down.  While cases will still be brought in 2007 in this area, expect them to be the remnants of the earlier investigative efforts.  This will permit the Enforcement Division to shift resources to focus on other areas such as insider trading, financial fraud and the Foreign Corrupt Practices Act.  This suggests that issuers and their executives should carefully review their compliance procedures in those areas.