SEC Injunctions: When Is This Extraordinary Remedy Necessary?

Injunctions are extraordinary remedies, invoking the equitable power of the courts to prevent future violations of the law in SEC cases. The Commission, at times, uses them to halt claimed fraudulent conduct. In its recent campaign against insider trading for example, it has brought several actions within days of the corporate announcement which triggered the claimed insider trading — typically a merger — and obtained emergency injunctive relief to halt the dissipation of the claimed illegal trading profits. Typical of these cases is SEC v. De Colli, filed in May 2008 and discussed here. There, the Commission brought the action and won an asset freeze order within days of the announcement of the corporate transaction involved in the Wall Street Journal and after interviewing Mr. De Colli, an Italian national residing in Italy. No doubt, injunctive relief was necessary and appropriate.

Financial fraud cases are a different story. All too often, the conduct is these cases is years and years old, not infrequently dating to last century or the very early years of this one. By the time of the SEC’s case, frequently a restatement giving anyone who cares to look a road map to the fraud has been on file for years and the executives involved are gone. SEC v. El Paso, filed earlier this year and discussed here, is not untypical. In that financial fraud case, the books were cooked between 1999 and 2003. The company restated is financial statements in 2004. Four years after that restatement, five years after the fraud ended and nine years after it began, the SEC filed a settled civil case with an injunction. Just why this case took so long to investigate and resolve and, even more importantly, the reason an injunction was necessary, is something of a mystery.

Now consider SEC v. Crowley, Civil Action No. 08-cv-1388 (S.D. Cal. Filed Aug. 1, 2008) and SEC v. Burdick, Civil Action No. 08-cv-1390 (S.D. Cal. Filed Aug. 1, 2008). Both of these cases are based on a financial fraud at SeraCare Life Sciences, Inc. a supplier and manufacture of biological product for the biotechnology and pharmaceutical industry. Defendant Michael Crowley was the former chief executive officer of the company. Defendant Jerry Burdick was a member of the board and the interim chief financial officer.

The complaints allege that Mr. Crowley failed to disclose in a Form 10Q and an earnings release that the day before the earnings call the company learned that a bill and hold sale representing about 11% of the company’s pretax quarterly income had been cancelled. Nevertheless, Mr. Crowley subsequently executed the SOX certification covering the incorrect earnings.

Mr. Burdick, according to the complaint, improperly released reserves in two quarters. As a result, the quarterly earnings were improperly inflated by 20% in one quarter and 17% in another.

Both men settled the actions, consenting to the payment of financial penalties and Section 17(a)(2)&(3) and books and records injunctions. Mr. Burdick also agreed to a Rule 102(e) one-year suspension from practice before the Commission. Neither was barred from being an officer and director.

Now what is perhaps most interesting about these cases is the fact that the conduct involved occurred in 2005 — only three years ago. And, there was no restatement to give the Commission a roadmap to the improper accounting as in so many cases. Of course, by the time of the action both men were gone and the company had moved from the west coast in Oceanside, California to Milford, Massachusetts. Nevertheless, three years is far quicker than in many financial fraud cases — but one still has to wonder if an injunction was really necessary under the circumstances, particularly one based on negligent conduct.