This Week In Securities Litigation (September 26, 2008)

The market crisis continued to dominate Commission actions and the news last week, as it began to spin off litigation. The Commission brought actions against fund advisors, two financial fraud cases and an insider trading action. There was also a sentencing in another FCPA case and the conclusion of an options backdating derivative suit in which the court accepted the settlement and rejected plaintiffs’ claims for fees and expenses, despite the fact that they would be paid by the D&O carrier.

The market crisis

Hearings on the proposed $700 billion market bailout continued to dominate the headlines this week. During the hearings, SEC Chairman Cox reiterated his request for regulatory authority over investment banks and the credit default swaps as discussed here. The state of New York, through its Department of Insurance, began regulating part of that market as also discussed here.

The Divisions of Corporation Finance, Investment Management and Trading and Markets responded to a series of seventeen questions focused on compliance with the Commission’s Emergency Order Concerning Disclosure of Short Selling in a release. Those short selling rules, put, in place last week and discussed here, continue to be the subject of significant criticism. Some critics are calling for the reinstatement of the uptick rule. Despite the criticisms, markets regulator in Australia, Taiwan and the Netherlands adopted variations of the SEC’s short sale rules. The FSA in the U.K. instituted a short sale ban, as discussed here, the day before the SEC’s actions last week.

The market crisis began to spawn litigation this week. Ameriprise Financial Services filed suit against Reserve Fund, claiming that the originator of money market funds had tipped off certain large investors about its deteriorating financial condition. By the time its shares had “broken the buck,” or were no longer worth one dollar, investors had withdrawn billions of dollars from the fund. Ameriprise Financial Services, Inc., v. Reserve Fund, Case No. 0:08-cv-05219 (D. Minn. Sept. 19, 2008).

Insider trading

The Commission filed another settled insider trading case on Thursday, naming as defendants a financial consultant and his relative tippee. SEC v. Norelid, Case No. 08-61524 (S.D. Fla. Sept. 25, 2008). Jan Norelid, a financial consultant to Services Acquisition, learned that the company intended to acquire Jamba Juice. Mr. Norelid was assigned by his company to assist with the due diligence for the merger. Subsequently Mr. Norelid tipped a relative, Pedro Gil Simoes. Both men traded in advance of the public announcement which caused the share price of Services Acquisition to increase by 34% that day.

To resolve the case, both defendants consented to the entry of a permanent injunction prohibiting future violations of Section 10(b). Mr. Norelid agreed to pay disgorgement of $5,102 and prejudgment interest of $906 plus a penalty of $8,865. Mr. Simoes agreed to pay $3,763 in disgorgement and prejudgment interest of $646 plus a $3,763 penalty.

Fund advisors

Earlier this week, the Commission filed its first action against a mutual fund advisor for failing to disclose that it used part of its administrative fees to pay for marketing and other expenses as discussed here. In In the Matter of AmSouth Bank, N.A., Adm. Proc. File No. 3-13230 (Sept. 23, 2008), the Order for Proceedings alleged that AmSouth entered into two undisclosed side agreements with BISYS Funds, the administrator of AmSouth Funds. Under the first, it rebated about $16 million of its administrative fee, which was used to pay expenses unrelated to marketing, including a country club membership for the president of AmSouth Funds. Under the second, BISYS paid AmSouth about $1.16 million in what was called consulting fees in exchange for AmSouth recommending to the trustees that BISYS provide securities lending services to the AmSouth Funds.

The matter was resolved with a cease and desist order and an agreement to pay disgorgement, prejudgment interest and a civil penalty.

The Commission also filed a civil injunctive action against an investment advisor and its owner for failing to disclose kickbacks. In SEC v. WealthWise, LLC, Case No. CV 08-06278 (C.D. Cal. Sept. 24, 2008), discussed here, the Commission alleged that investment advisor WealthWise LLC, and its principal Jeffrey A. Forrest, failed to disclose a side agreement they had under which Apex Equity Options Fund, a hedge fund managed by Thompson Consulting, Inc., kicked back about $350,000 of its fees to WealthWise and Mr. Forrest. Nevertheless, WealthWise and Mr. Forrest recommended to more than 60 clients that they invest about $40 million in Apex Equity Options Fund. The complaint alleged violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Sections 206(1) and 206(2) of the Investment Advisors Act.

Financial fraud

In the Matter of Beazer Homes USA, Inc., Adm. Proc. File No. 3-13234 (Filed Sept. 24, 2008), is a settled financial fraud case. The Order for Proceedings alleged that between 2000 and 2007 the builder Beazer Homes managed its earnings first by understating income and improperly adding to reserves and later, during a downturn, supplementing its income from those reserves as discussed here. The Commission’s action followed a 2008 restatement by the company.

To resolve the case, the Commission accepted an offer of settlement by the company. In its undertakings the company essentially pledged to use its best efforts to make its employees available to be interviewed and to appear for testimony or at any trial. In addition, the company agreed to cease and desist from violations of the antifraud and reporting provisions. The Commission acknowledged the remedial efforts of the company and its cooperation without discussing either.

In another financial fraud case, SEC v. Lauer, Civil Action No. 03-80612-CIV (S.D. Fla. Filed July 8, 2003), the Commission was granted summary judgment against defendant Michael Lauer for defrauding the shareholders of two funds. In its order the Court, concluded that Mr. Lauer materially overstated the valuation of the funds, manipulated the prices of several securities, failed to provide any basis of the valuations of shell corporations held in the portfolios of the finds and concealed the actual value of the assets of the funds by furnishing investors with false statements and news letters. Based on its findings, the court entered a permanent injunction against Mr. Lauer prohibiting future violations of the antifraud provisions of the Securities Act and the Exchange Act and Sections 206 of the Investment Advisers Act. The court did not rule on the SEC’s request for disgorgement and a civil penalty.


In U.S. v. Richman, No. 08-10282 (D. Mass. Sept. 25, 2008), Howard Richman, the former head of regulatory affairs of Biopure Corp. was indicted for making false statements and obstruction of justice in an SEC enforcement action against him. Specifically, the indictment claims that Mr. Richman falsely represented to the court in a Commission enforcement action that he was terminally ill in an effort to avoid discovery and obtain a favorable settlement. According to the indictment M, . Richman furnished the court with false affidavits and letters from a physician. Mr. Richman subsequently settled the SEC’s action against him. See also SEC v. Biopure Corporation, Civil Action No. 05-11853 (D. Mass. Filed Sept. 14, 2005) and Litigation Release No. 20672, Aug. 7, 2008 (settlement).


In U.S. v. Sapsizian, Case No. 1:06-mj-03314 (S.D. Fla. Filed Dec. 19, 2006), former Alcatel CIT executive Cristian Sapsizian was sentenced to 30 months in prison for engaging in a bribery scheme in violation of the FCPA. Mr. Sapsizian, in his plea, admitted that between February 2000 and September 2004 he conspired with a Costa Rican citizen who was the senior officer of the company in Costa Rica, and others, to make more than $2.5 million in bribes to Costa Rican officials to obtain a telecommunications contract. The payments were made to the board of directors of a state run telecommunications authority in Costa Rica that was responsible for awarding all telecommunications. Alcatel, a French telecommunications company who’s ADRs are traded on the New York Stock Exchange, was awarded a mobile telephone contract in August 2001 valued at $149 million.

Derivative suits

The court accepted a settlement in an options backdating derivative suit, but rejected a claim for attorney fees plaintiffs’ counsel in In re Maxim Integrated Products, Inc., Derivative Litig., Case No. 5:06-cv-03344 (N.D. Ca. May 22, 2006). In that case, a special litigation committee appointed by the board of directors found that none of the options involved in the case had been exercised. The committee also concluded that none of the named defendants had engaged in any wrong doing, although certain company systems were deficient. In the settlement, plaintiffs noted that there efforts benefited the company because they had been involved in certain corporate governance improvements. The court accepted the settlement, but rejected the request for fees, concluding that the benefits to the company were minimal. The fact that the fees would be paid by the D&O carrier was not significant to the court. The company previously settled a Commission enforcement action, discussed here, based on allegations of option backdating.