by T. GormanPosted on Posted in SECActions

The theory of “broken windows,” the enforcement approach being pursued by the SEC, is that prosecuting all violations large and small creates deterrence. That comes from a kind of omnipresence, or a cop on the beat impact. In the SEC’s case of course there is no beat or cop so it is the publicity of cases that helps create deterrence.

That approach seems to have been lost on Dimitry Braverman, a senior IT employee at Wilson Sonsini Goodrich & Rosati. Indeed, not even a cop in the office deterred him. Mr. Braverman is now accused of trading on inside information he obtained from his employer before another firm employee was charged with insider trading and after by both the Manhattan U.S. Attorney’s Office and the Commission. SEC v. Braverman, Case No. 14 CV 7482 (S.D.N.Y. Filed September 16, 2014).

For a period of three years, beginning in 2013, Mr. Braverman is accused of trading on inside information obtained from Wilson Sonsini. As a senior IT employee Mr. Braverman worked on programing and maintaining software for the law firm. His position gave him access to firm databases that contained information about new client matters, client conflict checks, billings and attorney time sheets. He also had access to material non-public information about impending M&A deals in which the firm represented one party. The information included the existence and nature of the pending deals and the identity of the parties and counterparties to the transactions.

Prior to April 2011 Mr. Braverman is charged with trading on inside information in four deals in which Wilson Sonsini represented one of the parties. The trades were placed in his personal account in his name.

In April 2011 the SEC charged a Wilson Sonsini lawyer with insider trading. Mr. Braverman then liquidated his remaining securities positions which were based on firm information. Two days later Mr. Braverman’s brother, who he tipped, liquidated his positions.

About eighteen months later Mr. Braverman opened a new brokerage account in the name of a relative and Russian citizen and resident, Vitaly Pupynin. The e-mail address associated with the account initially was the same one he used to open other accounts. Later it was changed to one associated with Mr. Pupynin. From November 2012 through December 2013 he continued his to trade on inside information obtained from the firm.

The deals on which Mr. Braverman traded were:

  • The acquisition by Bain Capital Partners, LLC of Gymboree Corporation, announced on November 23, 2010;
  • The acquisition by Walgreen Company of drugstore.com, Inc., announced on June 3, 2012;
  • The acquisition by Apax Partners L.P. of Epicor Software Corporation, announced on May 16, 2011;
  • An equity transaction involving Seagate Technology PLC and Samsung Electronics Co., Ltd.;
  • The acquisition by Gilead Sciences, Inc. of YM Biosciences, Inc., announced on February 8, 2013;
  • The acquisition by Astrex Pharmaceuticals, Inc. of Otsuka Pharmaceutical Co., Ltd.;
  • The acquisition by Dealer.com of Dealertrack Technologies, Inc.; and
  • The acquisition by Seagate of Xyratex Ltd. , announced on March 31, 2014.

Overall Mr. Braverman had trading profits of about $300,000. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). This action, along with the parallel criminal case, is pending.

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by T. GormanPosted on Posted in SECActions

This is the third part of an occasional series. The first part is available here, while the second is here. The entire paper will be published by Securities Regulation Law Journal early next year. .

The foreign payments cases held the organization and the individuals involved accountable while improving corporate governance for the benefit of the shareholders in the future. A series of cases followed the initial filings. Examples include:

· SEC v. Gulf Oil Corporation, Civil Action No. 75-00563 (Filed March 11, 1975) in which the complaint alleged that the company disbursed over $10 million to various subsidiaries, including the Bahamas Exploration Company, through false book entries in therecords of the company. About $5.4 million was converted to cash and returned to the United States to make domestic political contributions or to disburse overseas.

· SEC v. Lockheed Aircraft Corporation, Civil Action No. 76-0611 (D.D.C. Filed April 13, 1976) in which the complaint alleged that the company paid at least $25 million in corporate funds to foreign government officials, including officials in Japan and Italy. In addition, over $200 million was paid to various consultants and agents without adequate records or controls to ensure that the payments were used for the purpose indicated in the records and that the services were received. The complaint also alleged that the company maintained a secret cash fund of at least $750,000 which was used in part to make payments to foreign government officials.

· SEC v. Foremost-McKesson, Inc., Civil Action No. 76-1257 (D.D.C. Filed July 7, 1976) in which the complaint alleged that the firm made payments of $6 million in cash and merchandise to retailers and wholesalers to induce the purchase of wine and spirits distributed by the company. It also alleged that at least $213,000 was paid to various government officials to impact government policy and that the books and records were falsified.

· SEC v. General Tire & Rubber Co., Civil Action No. 76-0799 (D.D.C. Filed May 10, 1976) in which the Commission alleged that under the direction of the president of the company funds were diverted for political purposes by purporting to increase bonuses and salaries. Slush funds were created, including one with the knowledge and approval of senior management of the international division, which totaled $3.9 million. It was used to pay foreign government officials. Another fund maintained by a foreign subsidiary was used in conjunction with five major tire companies to finance efforts to secure a price increase from a foreign government. See also SEC Report at 7.

The Commission’s illicit payment actions were brought against some of the most prominent corporations in the U.S. They included: Minnesota Mining & Manufacturing Co. (1975); Phillips Petroleum Co. (1975); Northrop Corporation (1975); Gulf Oil Corporation (1975); United Brands Company (1975); Ashland Oil, Inc. (1975); General Refractories Co. (1975); Braniff Airways, Inc. (1976); Waste Management, Inc. (1976); Lockheed Aircraft Corporation (1976); General Tire & Rubber Company (1976); Firestone Tire & Rubber Company (1976); and Foremost-McKesson (1976). Herlihy & Levine at 578 n. 185 (collecting cases); see also SEC Report at 3.

Many of the cases brought named senior corporate officials as defendants in addition to the company. The following are examples of actions brought against the firm where one or more senior executives were named as defendants:

· American Shipbuilding Company — George M. Steinbrenner, III, CEO;

· Minnesota Mining & Manufacturing — Harry Heltzer, CEO; Irwin Hansen, Director and former vice president; Bert Cross, former Chairman of the board;

· Phillips Petroleum — William Keeler, former Chairman of the Board of Directors and CEO; John Houchin, former president and chairman of the board; William Martin, Chairman of the Board and CEO; Carstens Slack, vice president;

· Gulf Oil Corporation – Claude Wilde, Jr. former vice president; and

· Northrop Corporation — Thomas Jones, President and CEO; James Allen Director and former vice president.

The naming of the executives was consistent with the overall approach of these cases. Each action centered on the notion that corporate officials were the stewards of shareholder funds. In that capacity they had an obligation to account to the shareholders whose money they utilized, and tell them how their funds were used. See generallySporkin at 274.

The remedies in these cases were driven by Director Sporkin’s vision of what the cases were about: I “always tried to look at how to create something for the overall good; to create something with a purpose. The purpose was if we could get all companies to have honest books and records and what not that would be a good purpose,” the Director later noted. Transcript at 17. Thus the consent decrees typically included an injunction based on the Sections of the securities laws cited in the complaint. The injunction was implemented and given meaning through a series of court ordered undertakings which were carefully crafted to ensure that shareholders were informed how their funds were being utilized to strengthen corporate governance. Typically a special board committee would be created, chaired by independent director since many firms did not have an audit committee. A report would be prepared under the direction of the committee with the assistance of outside counsel and the auditors. That report would be filed with the SEC and distributed to the board of directors. It would contain recommendations for improving corporate governance systems. Those recommendations would be implemented by the company as ordered by the court. Summaries of these reports are available in Appendix B to the SEC Report.

The reports generated in these actions served as models for other companies and the future. One of the most comprehensive was that of Gulf Oil.

· The report was prepared by a special committee headed by John J. McCoy, Esq.

· The nearly 300 page report was supported by six appendices;

· It analyzed more than $12 million of corporate funds for payments to government officials in the U.S. and overseas;

· The report detailed the responsibility of corporate management for years of misusing funds;

· It contained recommendations to avoid the reoccurrence of the improper conduct; and

· Following the completion of the report the independent directors on the Gulf board replaced senior management.

The reports prepared in other cases were similar. The specific recommendations were tailored in those reports to the facts and circumstances at the company. They included revisions to corporate policies and procedures, requirements that restitution be made by those involved and directives that employees be discharged. Summaries of these reports are available in Appendix B to the SEC Report. In each instance the focus was on using the equitable powers of the court – the SEC did not have the authority to impose fines and did not seek disgorgement – to “make sure things went well” according to Director Sporkin. Transcript at 6.

The approach to remedies centered on halting violations and preventing a reoccurrence of wrongful conduct. A central point was the impact on long-term corporate practice and governance. In this regard what two SEC officials stated at the time regarding the Gulf report applies equally to the significance of the program: “Long after the present furor in reaction to overseas corporate payments has passed, the Gulf report will survive as an invaluable resource tool providing a revealing portrayal of the operations of a major company, the evolution of ethical practices in business, and as a model for remedial action in the future.” Herlihy & Levine at 584.

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