The Week In Review (November 23-29, 2007): Trials End and Begin as the Options Scandal Trudges To Conclusion

The SEC and a corporate defendant and its former officers won securities cases in court last week, as another high profile options backdating trial began, and one of the more significant insider trading cases moved closer to trial after the government increased the stakes. At the same time, the options backdating scandal inched closer to conclusion with the termination of two more probes.

Wachovia broker Mark Michel was found liable on Tuesday, November 27, 2007 in an insider trading case. Mr. Michel was one of four defendants named by the SEC in an insider trading complaint filed last year. The case centered on the merger of Blue Rhino Corp. with Ferrellgas Partners, L.P., which was announced on February 9, 2004.

According to the complaint, the CFO of Blue Rhino misappropriated inside information from a director about the pending merger and traded. Subsequently, the CFO obtained additional inside information and tipped others, one of whom in turn tipped Mr. Michel. After obtaining the information Mr. Michel purchased $90,000 of Blue Rhino stock and borrowed another $70,000 from a client in violation of Wachovia policy to purchase additional shares. In total, Mr. Michel purchase more than $1.2 million in Blue Rhino stock for himself and his clients. While the other defendants settled the matter by consenting to statutory injunctions and orders requiring the payment of disgorgement, prejudgment interest and a penalty, Mr. Michel chose to take the case to trial. The court ruled in favor of the SEC, ordering Mr. Michel to pay over $346,000. SEC v. Roszak, Civil Action No. 06C-3166 (N.D. Ill. Filed June 8, 2006).

At the same time, JDS Uniphase Corp. and four of its former executives were found not liable by a jury in one of the few class action securities fraud suits to be tried to a jury, and the first securities class action to proceed to verdict in the Northern District of California since 2002. The class action, which was led by the Connecticut Retirement Plans and Trust Funds, alleged financial fraud and insider trading. Specifically, the complaint claimed that JDS Uniphase made material misrepresentations to investors when it continued to offer upbeat sales projections in the face of declining demand for its products. Plaintiffs claimed that the company had secret internal sales data which foreshadowed what later turned out to be a meltdown of the company. At the same time, four former executives – two former CEOs and the former CFO and COO – were alleged to have sold more than $500 million of their own stock during the time period. After more than three weeks in trial, it took the jury two days to conclude that plaintiffs had failed to prove their case and that defendants were not liable. Pipefitters Local 522 633 Pension Trust Fund v. JDS Uniphase Corp., Case No. 4:02-cv-01486 (N.D. CA. Filed March 27, 2002, verdict Nov. 28, 2007).

As these two cases came to an end, two other major criminal securities cases were moving forward. In the Northern District of California the option backdating trial of former Brocade Communications Systems vice president of human resources Stephanie Jensen began. Ms. Jensen faces trial on one count of conspiracy to falsify company books and one count of falsifying books. All other charges against here were previously dismissed as reported here.

In the trial, Ms. Jensen claims that the option systems were in place when she came to work for former Brocade CEO Gregory Reyes. According to Ms. Jensen, she was only following standard company practice under the direction of Mr. Reyes and had no responsibility for the financial reporting practices of the company. The government contends, however, that it will prove Ms. Jensen in fact knew the option practices were wrong.

Previously, Mr. Reyes was convicted on all counts. He is currently awaiting sentencing. In preparation for the sentencing, over 300 letters have been sent to the court requesting leniency for Mr. Reyes. Former San Francisco 49er football star Ronnie Lott and the CEO of Motorola are among those petitioning the court on behalf of Mr. Reyes.

As U.S. v. Naseem, CASE No. 1:07-cr-00610-RMB (S.D.N.Y.) the first of the blockbuster insider trading cases brought this year and previously discussed here, moved toward trial, the government increased the stakes. Last week, a superseding indictment was handed up, adding three counts related to trading in shares of Caremark Rx and in the options of TXU, both in advance of take over announcements. Trial is currently scheduled to begin on December 10. This will be the first of the large high profile insider trading cases brought earlier this year to go to trial, making the stakes very high for the government and the SEC.

Finally, the options backdating scandal continues to move slowly to a conclusion. Last week, Computer Sciences Corp. and Sepracor, Inc. announced that the SEC had closed the inquires into their options practices.