The SEC May Get New Authority Over Fair Value Accounting

As the market crisis continues, Congress went back to work with the Senate passing the Emergency Economic Stabilization Act. At its, core the bill is essentially the one which the House failed to pass earlier in the week – with a few additions.

Two little noticed provisions are Sections 132 and 133, which represent a significant and potentially far-reaching intrusion by Congress into the process by which accounting principles are formulated and implemented. Section 132 gives the SEC the authority to “suspend … Statement Number 157 of the Financial Accounting Standards Board for any issuer … or with respect to any class or category of transaction if the Commission determines that it is necessary or appropriate ….” Critical to this provision is the fact that it gives the SEC the authority to suspend FAS 157 on a case-by-case basis as well as for all. Many critics of the statement contend that fair value accounting has contributed at least in part to the current market crisis.

Section 133 directs the SEC to prepare a study on the application of FAS 157 and report to Congress within 90 days. The study is to include an analysis of the effects of the standard on financial institutions, its impact on bank failures in 2008, the process used by the FASB in developing accounting standards, the “advisability and feasibility of modifications to such standards,” and alternatives to FAS 157. The report is to include whatever administrative and legislative recommendations the SEC deems appropriate.

This provision was added to the bill just one day after the SEC staff and the FASB staff issued clarifying guidance on the application of FAS 157. That guidance focused questions concerning difficult or illiquid markets as discussed here. Many considered that guidance an easing of the FAS 157 requirements.

The SEC’s War On Insider Trading Continues

The focus on insider trading continued this week with the Commission filing three new cases. Two involve multiple tippees, one of which raises questions about how each element of tipping will be established. In two, the settlements reflect cooperation, according to the Commission.

SEC v. Queri, Case No. 2:08-cv-01361 (W.D. Penn. Oct. 1, 2008) is a partially settled insider trading action brought against sixteen defendants. The action focus on trading in advance of the June 21, 2004 announcement that Dick’s Sporting Goods would acquire Galyan’s Trading Company, Inc. in a tender offer. Following that announcement Galyan’s stock price increased over 50%.

According to the SEC’s complaint Joseph J. Queri, Jr., senior vice president of real estate at Dick’s Sporting Goods, kicked off a long chain of tipping. Mr. Queri, Jr. is alleged to have tipped his close friend Gary Gosson and his father, Joseph Queri, Sr. This set off a series of tips:

• Mr. Gosson is alleged to have tipped six of his friends including Alan Johnston;

• Mr. Johnston is alleged to have tipped family members and friends;

• Mr. Queri Sr. is alleged to have tipped five of his friends including James Jerome, Gino Ferraro, Thomas Heller, Felix Crisafulli and Kyle Kaczowski;

• Mr. Jerome in is alleged to have tipped Brandt England;

• Mr. Kaczowski tipped two friends;

• Mr. Ferraro tipped his son-in-law and defendant Franko Marretti; and

• Mr. Marretti tipped his business colleague.

The trading of all of these defendants yielded profits of $620,000.

Five defendants settled. Each consented to permanent injunctions prohibiting future violations of the antifraud and tender offer provisions. In addition, consent orders were entered requiring: Mr. Queri Sr. to pay disgorgement of $2,600 and prejudgment interest of about $700, jointly and severally with Mr. Ferraro (which whom he is alleged to have shared profits) and a civil penalty of $105,647; Mr. Ferraro to pay disgorgement of about $13,000 and prejudgment interest along with a civil penalty of about $22,0000; Mr. Crisafulli to pay disgorgement of about $13,300 plus prejudgment interest and a civil penalty equal to the amount of his disgorgement; Mr. Heller to pay disgorgement of about $7,600 plus prejudgment interest and a penalty equal to the amount of his disgorgement; and Mr. Santaro to pay disgorgement of about $18,700 and prejudgment interest along with a penalty equal to his disgorgement. See also SEC v. Joseph Queri Jr., Case No. 2:08-cv-21367 (W.D. Penn. Oct. 1, 2008).

In SEC v. Abed, Case No. C-0804548 (N.D. Ca. Sept. 30, 2008), the Commission filed a settled insider trading action against the President and CEO of Genesis Microchip, Inc., Ellas Antoun, and his friend Samir Abed. This case centers on the acquisition of Genesis, a manufacturer of flat panel TVs, by STMicroelectronics of Geneva Switzerland. After the execution of a letter of intent, Mr. Antoun began purchasing shares of Genesis in brokerage accounts of a relative and friend. He also told his long time friend, Mr. Abed, about the deal in confidence. Nevertheless, Mr. Abed also purchased shares. Following the announcement of the deal the shares of Genesis increased about 57%.

Both defendants consented to the entry of a permanent injunction. In addition, Mr. Antoun agreed to pay about $37,000 in disgorgement, prejudgment interest and a penalty which approximated his trading profits. Mr. Abed also agreed to disgorge his trading profits of about $53,000 along with prejudgment interest. Mr. Abed consented to a penalty of $25,000. The Commission acknowledged the cooperation of Mr. Abed.

Finally, in SEC v. Leone, Civil Action No. 3-08-cv-1686 (N.D. Tex. Sept. 30, 2008) the Commission filed a settled insider trading case against defendants Randolph Leone and Randall Wall. In this case, which is based on the acquisition of Watsco, Inc. by ACR Group, each defendant is alleged to have acquired inside information about the deal from a different source. The complaint claims that Mr. Leone overheard a telephone conversation between his wife and her sister, the wife of ACR’s general counsel, about the deal. Subsequently he traded in ACR stock and, following the announcement, made abut $7,800 in illicit profits.

Mr. Wall learned about the deal from his supervisor who, in turn, had learned about the deal in confidence from a Watsco senior vice president. After he learned about the deal Mr. Wall purchased shares of ACR on which he made a profit after the deal announcement of about $6,200.

Both defendants settled with the Commission by consenting to the entry of permanent injunctions prohibiting future violations of the antifraud and tender offer provisions and to orders requiring the trading profits be disgorged along with prejudgment interest. In addition, Mr. Leone agreed to pay a penalty of about $3,900 while Mr. Wall agreed to pay penalty equal to his trading profits. The settlement with Mr. Leone reflected the fact that he voluntarily came forward before being contacted by the SEC and cooperated with the staff to resolve the matter.