This Week In Securities Litigation (September 5, 2008)
This week, the Department of Justice and the SEC continued their renewed emphasis on FCPA enforcement. In addition, two brokers were charged with fraud in connection with the sale of auction rate securities by the SEC and DOJ. Finally, in the Oracle securities litigation, the court ruled that the company had intentionally failed to produce materials after being notified that they should be preserved.
DOJ and the SEC brought FCPA actions against Albert Jackson Stanley, the former CEO of Kellogg, Brown & Root, Inc., now a subsidiary of Halliburton Company, for bribery and books and records violations discussed here. The SEC’s complaint claims that between 1995 and 2004 Mr. Stanley engaged in a scheme to bribe Nigerian government officials in payments funneled through two intermediaries to obtain multiple contracts with to build liquefied natural gas production facilities in Bonny Island, Nigeria.
Mr. Stanley settled the SEC action by consenting to the entry of a permanent injunction prohibiting future violations of FCPA anti-bribery and books and records provisions. SEC v. Stanley, 08-cv-02680 (S.D. Tex. Filed Sept. 3, 2008). In a related criminal case, Mr. Stanley pled guilty to one count of conspiring to violate the FCPA and one count of conspiring to commit mail and wire fraud unrelated to the FCPA charge. Mr. Stanley is awaiting sentencing. U.S. v. Stanley, 4:08-cr-00597 (S.D. Tex. Filed Aug. 29, 2008).
The Department of Justice concluded two FCPA cases this week with the sentencing of two former ITXC officials: Roger Young, former managing director of the company; and Steven Ott, a former vice president. As discussed here, Mr. Young pled guilty in 2007 to conspiring to violate the anti-bribery provisions of the FCPA as well as the Travel Act. Mr. Young was sentenced to five years probation including three months of home confinement and three months in a community confinement center. He was also ordered to pay a fine of $7,000. Mr. Young’s sentence was reduced for cooperation. U.S. v. Young, No. 07-609 (D. N.J. Sept. 25, 2007).
Mr. Ott pled guilt to the same charges. He was sentenced to serve five years probation, including six months in a community confinement center and six months home confinement. He was ordered to pay a $10,000 fine. Mr. Ott also received a reduced sentence based on his cooperation with the investigation. U.S. v. Ott, No 07-608 (D.N.Y. July 27, 2007).
A third defendant, Ya Osei Amoak, was sentenced on August 1, 2007 to 18 months in prison, a $7,500 fine and to serve two years of supervised release following release from prison. U.S. v. Amoak, No. 05-1122 (D.N.J. June 28, 2006).
Auction Rate Securities
Two former Credit Suisse brokers were charged with fraud by DOJ and the SEC, discussed here. The two brokers, Julian Tzolov and Eric Butler, are charged with defrauding customers by selling them auction rate securities backed by subprime mortgages, collateralized debt obligations and similar collateral rather than the federally guaranteed student loans the customers were led to believe backed the securities. In total, customers of the two brokers held over $800 million in illiquid securities. The cases are in litigation. SEC v. Tzolov, Case No. 08 Civ. 7699 (S.D.N.Y. Filed Sept. 3, 2008); U.S. v. Tzolov, No. 1:08-cr-00370 (E.D.N.Y. Aug. 26, 2008).
Nursing Home Pension Fund v. Oracle Corp., No. 3:01-cv-00988 (N.D. Ca. Filed March 9, 2001) is a securities suit against Oracle and its Chief Executive Larry Ellison. The case is based on claims that Mr. Ellison misled investors and engaged in insider trading. In rejecting a motion by plaintiffs for summary judgment, the court noted that it was clear that the company had failed to turn over key evidence and that, in some instances, the company had permitted materials to be destroyed after it was notified that it should preserve them for the litigation. The case is set for trial in March 2009.
Donald C. Langevoort, “The SEC, Retail Investors, and the Institutionalization of the Securities Markets” (Sept. 2, 2008). Georgetown Law Faculty Working Papers, Paper 80 (Abstract available here). This paper discusses the question of whether the SEC is fit to be the market regulator today, in view of the fact that it originated and is tied to a time when the markets were largely for retail customer compared to today when those markets are dominated by institutional investors.