This Week In Securities Litigation (September 12, 2008)

This week, the Securities Act of 2008 moved one step closer to passage by moving through the House. At the same time, DOJ brought another FCPA bribery case, Apple resolved derivative litigation based on option backdating and the court tentatively rejected the guilty plea of Broadcom founder Henry Samueli, which is related to the option backdating scandal at that company. Finally, the SEC prevailed in a jury trial of a financial fraud case, while it filed three others.


The Securities Act of 2008 passed in the House this week. The Act has several key provisions including: Section 2, which would give the Commission the authority to impose civil penalties in cease and desist proceedings; Section 6, which amends Exchange Act Section 15(b)(6)(A) by expanding the bar provision from being associated with a broker or dealer to include an investment adviser, municipal securities dealer or transfer agent; Section 15 for protecting the confidentiality of materials submitted to the Commission; Section 16, which provides for the sharing of privileged information with other authorities; and Section 19, which provides for the nationwide service of subpoenas in SEC enforcement actions filed in district court in a manner which is similar to criminal cases. The bill now goes to the Senate for consideration.


Four individuals were indicted on charges that they and their company, Nexus Technologies, Inc., paid bribes to various Vietnamese government officials to obtain contracts to supply equipment and technology to various government agencies. U.S. V. Nyugen, Case No. 2:08-cr-00522 (E.D. Pa. Sept. 4, 2008). The defendants are Nam Nguyen, Joseph Lukas, Kim Nguyen, An Nguyen and the company.

According to the indictment, the defendants engaged in a conspiracy from 1999 through 2008 to pay Vietnamese government officials bribes in the amount of $150,000 to secure contracts from a variety of Vietnamese government agencies. The customers in Vietnam are claimed to include a number of government agencies, including the Ministries of Transport, Industry and Public Safety.

Option backdating

Apple: The court gave preliminary approval to a settlement in the Apple derivative litigation, which is based on claims of option backdating. Under the terms of the settlement, plaintiffs in the federal action will be paid $7.6 million in fees and expenses, while those in the state action will be paid $1.25 million. In addition, the company agreed to adopt a number of corporate governance provisions. In re Apple, Inc. Derivative Litig., Case No. 5:06-cv-04128 (N.D. Cal. June 30, 2006).

Previously, former Apple general counsel Nancy Heinen settled a case brought by the SEC as discussed here. The Justice Department ended its criminal probe in July without filing any charges.

Broadcom: The district court has tentatively rejected the plea deal of Broadcom co-founder Henry Samueli grew out of the option backdating probe at the company. Under the terms of the deal Mr. Samueli pled guilty to making false statements to the SEC. Under the terms of the deal Mr. Samueli was to receive a sentence of five years of probation and a fine.

The company previously settled its case with the SEC as discussed here.

Financial fraud

Embarcodero Technologies: The Commission filed two cases based on option backdating at Embarcodero Technologies this week. SEC v. Wong, Case No. CV 08 4239 (N.D. Cal. Sept. 9, 2008); SEC v. Sabhlok, Case No. CV 08 4238 (N.D. Cal. Sept. 9, 2008). These cases named as defendants Stephen Wong, former CEO, president and chairman, Raj Sabhlok, former CFO and Michael Pattison, former controller of the company. These cases are discussed here.

The complaints allege that over sixteen consecutive quarters the defendants routinely backdated options, including about $1.5 million issued to them. Mr. Wong settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions and an order requiring him to pay a civil penalty of $250,000. The other cases are in litigation.

Miller: In SEC v. Miller, Civil Action No. 1:04-cv-1655 (N.D. Ga. Filed June 14, 2004), the jury returned a verdict in favor of the Commission, concluding that Mr. Miller violated the antifraud and books and records provisions of the securities laws. The SEC’s complaint alleged that while CEO and COB of Master Graphics, Inc., Mr. Miller inflated the income of the company by reclassifying rent and salary expense that had been paid to division presidents as assets in the quarter after payment. The verdict is discussed here.

United Rentals: SEC v. United Rentals, Civil Action No. 3:08-c-1354 (D. Con. Filed Sept. 8, 2008) is a settled financial fraud case also discussed here. According to the complaint, the company improperly inflated revenue through a series of interlocking three-party sale-leaseback transactions. To resolve the case, the company consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions of the securities laws and an order requiring it pay a $14 million civil penalty.

Retail Pro: SEC v. Retail Pro, Inc., Case No. CV 08-1620 (S.D. Cal. Sept. 5, 2008) is another settled financial fraud case, discussed here. Named as defendants were the company and three of its executives, Barry Schechter, at times an officer of the company and during the pertinent period effectively an officer, Ran Furman, a former CFO and Harvey Braun, another former CFO. The SEC’s complaint alleged that the company entered into a sham barter transaction to inflate its revenue and income to meet Wall Street expectations. The company settled the action by consenting to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions. The two settling executives each consented to the entry of permanent injunctions prohibiting future violations of the antifraud and reporting provisions. In addition, Mr. Schechter agreed to pay over $480,000 in disgorgement and a $120,000 civil penalty while Mr. Braun agreed to pay a $75,000 civil penalty.