The Week In Review (October 5 -11, 2007): A Potential Landmark Supreme Court Case, Insider Trading and Backdated Options
Stoneridge – On Tuesday, what has been billed by many as the most important securities case to be decided in years was argued before the Supreme Court, Stoneridge Investment Partners v. Scientific-America, Inc. To be sure, Stoneridge has the potential to be a blockbuster decision, redefining liability under Section 10(b) – the weapon of choice in most securities class actions – and perhaps even the way corporate America does business. The question in Stoneridge is whether business partners of a public company can be held liable when that company uses a three-way barter transaction to falsify its books and defraud its shareholders. Plaintiffs claim the business partners are accountable based on “scheme liability,” a concept crafted by the SEC which posits that third parties involved with public companies that commit securities fraud can be held liable under Section 10(b) as primary violators under certain circumstances. Defendants claim they were just involved in a business transaction and any fraud was committed by Charter Communications against its shareholders.
While adopting either of the positions advocated by the parties could produce the landmark decision many have speculated about for months, questions from the Justices during the argument suggest that result is unlikely. Rather, a middle position construing the scope of Section 10(b) and vesting substantial discretion in the District Courts to evaluate fraud claims seems the more likely result as previously discussed (here).
Insider trading – Last week, another chapter in the “pillow talk” insider trading cases was written, while the enforcement spotlight was again focused on executive trading or Rule 10b5-1 plans.
This pillow talk insider trading case seems to prove that the couple that trades together stays together – at least most of the time. Randi Collota, a former Morgan Stanley lawyer, and her lawyer husband Christopher, were sentenced on October 5 following their guilty pleas last spring to criminal charges on an insider trading scheme which some have labeled the largest since the 1980s (here). Ms. Collota was order to serve four years probation with only 60 days in custody, primarily on nights and weekends. Mr. Collota was ordered to serve three years probation. Each defendant is required to pay a fine of $3,000 and forfeit $4,500. Both defendants accepted full responsibility for their actions. Prior to being sentenced, Ms. Collota requested that she be permitted to remain out of prison with her husband, who has a heart condition, and so she can continue to work.
The misuse of executive trading or Rule 10b5-1 plans may again be the focus of SEC scrutiny for insider trading. Last spring, SEC Enforcement Director Linda Thomsen stated that the staff was reviewing these plans to see if they were being abused (discussed here). In an October 8, 2007 letter to SEC Chairman Christopher Cox, Richard H. Moore, treasurer of North Carolina, asked the Commission to investigate the abuse of such plans by Countrywide CEO Angelo Mozilo. According to Mr. Moore, “CEO Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide’s fortunes were cooling off. It has been reported that Mr. Mozilo unloaded 4.9 million Countrywide shares – worth more than $138 million – between November 2006 and August 2000. He reportedly changed the plans outlining how many of his shares would be sold monthly at least three times in a five-month period beginning in October 2006, allowing him to sell the stock before its price fell dramatically.” While the SEC, in accord with its policy, would not comment on what action, if any, it would take, Ms. Thomsen noted the next day in a speech to the National Association of Stock Plan Professionals that the staff was looking closely at Rule 10b5-1 plans. If Mr. Moore’s allegations are correct, the SEC may have found the case it has been looking for since at least last spring.
Option backdating – For months, the SEC has had in excess of one hundred companies and a host of related individuals under the investigative microscope for backdating options. DOJ has done the same, although it appears to have a lesser number of persons under scrutiny. Last week, another of these cases dribbled out. Former SafeNet Inc. CFO Carole D. Argo pled guilty to securities fraud in connection with her role in backdating option grants worth millions of dollars for herself and others at the company. Sentencing is scheduled for January 21, 2008. Since most issuers conduct an internal investigation to determine what happed when a question about the backdating and the SEC has been investigating these same companies for months, one can only wonder when these cases will be resolved. U.S. v. Argo is a continuation of the trickle of cases brought to date. One can only wonder when the dozens of remaining cases will be resolved.