This Week In Securities Litigation (June 20, 2008)
This week, another option backdating derivative case settled with payments made personally by two senior executives. The SEC filed a complaint alleging securities fraud against two former Bear Stearns hedge fund executives based on the collapse of two hedge funds last summer. At the same time, the U.S. Attorney’s Office for the Eastern District of New York reportedly has issued arrest warrants for the same two executives based on sealed indictments.
Finally, the SEC is continuing its war on insider trading. The agency brought an insider trading case against five individuals which, unlike many of its cases, did not settle simultaneous with filing. The Commission also has reportedly opened a number of new insider trading investigations.
The derivative suit against Zoran Corporation, centered on option backdating claims, appears to have settled based in part on personal payments to the company by two senior executives. This is the second time the parties have tried to settle this derivative case. Pfeiffer v. Zoran Corp., Civil Action No. 3:06-cv-05503 (N.D.Ca.).
The first proposed settlement was rejected as inadequate by the court. The first proposed settlement was based on three key elements: 1) certain backdated options were canceled; 2) the company agreed to specific corporate governance chances, some of which had been instituted during the term of the litigation; and 3) plaintiffs’ counsel would receive $1.2 million in fees and expenses.
The revised settlement has been tentatively approved by the district court. Under the new proposal the company would receive $3.4 million, certain options would be canceled or re-priced and lead counsel for the plaintiffs agreed to limit fee requests to no more than $1 million plus actual expenses.
A key provision of the settlement involves out of pocket payments by two senior executives. CEO Levy Gerzberg agreed to pay $296,250 to the company, while CFO Karl Schmeider agreed to pay $98,750. These amounts reflect the value received by each executive from exercising backdated options. Both executives agreed to re-price options with a total value of $256,920 and cancel others valued at $482,310. The other cash amounts paid to the company were from insurance.
On Thursday, the SEC filed civil fraud charges against two former Bear Stearns hedge funds executives. The action is based on the collapse last summer of two Bear Stearns hedge funds. SEC v. Croffi, Civil Action No. 08-2457 (E.D.N.Y. June 19, 2008).
According to the SEC’s complaint, the two executives, Ralph Croffi and Matthew Tannin, misled fund investors repeatedly about the financial condition of the two hedge funds in an effort to stave off redemptions. Specifically, the complaint alleges that as the financial condition of the funds deteriorated, the defendants misrepresented its financial condition and the level of redemptions. In addition, the defendants misrepresented in periodic reports the level of investment of the funds in sub-prime mortgage backed securities. Those reports represented that exposure to sub-prime loans was only about 6-8% when in fact it was about 60%.
Defendant Croffi also misrepresented his investment activities regarding the funds, claiming he continued to buy shares, when in fact he did not. In addition, by the end of March 2007 Mr. Tannin had redeemed about $2 million worth of shares of the funds.
The Commission thanked the U.S. Attorney’s office and the FBI for assistance. In an unusual step, the Release stated that the matter was investigated by Enforcement’s sub-prime task force which is “aggressively” investigating that market.
The U.S. attorney’s office for the Eastern District of New York has issued arrest warrants for Messrs. Croffi and Tannin based on similar charges in indictments which have not yet been unsealed. The two men were arrested late Thursday.
The SEC filed an insider trading case against five individuals this week. SEC v. Tedder, Civil Action No. 3-08-CV-1013-G (N.D. Tex. June 17, 2008). The complaint is based on trading in advance of a business combination, the acquisition of Aviall, Inc. by The Boeing Company. It names Robert Tedder and Brian Carr, two company employees as defendants. It also names two alleged tippees of Mr. Tedder, his father Joseph, and business associate Philip Gunn, and a claimed tippee of Mr. Gunn, his brother Gregory as defendants.
The Commission’s complaint centers on a claims that defendants Tedder and Carr learned inside information about the merger talks because of an extension of the company trading blackout, an e-mail inadvertently directed to over 160 employees by the CEO which discussed the merger, observations that the general counsel was continually in meetings, a plant tour by Boeing executives and rumors. The SEC alleges that these events constitute material non-public information as discussed in more detail here. The case is in litigation.
Finally, there are reports that the SEC has recently opened a number of new insider trading investigations. These include inquiries into trading around the Microsoft bid for Yahoo. The Commission is also reportedly investigation trading in the securities of Lehman Brothers Holding, H&R Block, Boeing, NYMEX Holdings, Zoltek, Clear Channel Communications, National City Corp., Safeco Corp., Thornbury Mortgage and Nationwide Financial Services.