This Week In Securities Litigation (February 20, 2009)

New SEC Chairman Mary Schapiro continued to assemble her team this week, naming a new enforcement director. Nevertheless, controversy and scandal continued to follow the Commission’s enforcement program.

The SEC filed three significant cases this week. One is a settled civil injunctive action against UBS AG. Although the complaint cites violations of the broker and investment advisor registration provisions, it centers on what is essentially a tax evasion scheme. The Commission also brought an action against financier Robert Allan Sanford, alleging essentially that his banking operations are a Ponzi scheme and a settled option backdating case against Blackberry maker Research in Motion and four of its officers.

Wholesaler Costco disclosed that the U.S. Attorney’s Office in Seattle closed criminal probe into the options issuance practices of the company. STMicroelectronics NV prevailed in an arbitration against Credit Suisse, recovering over $400 million because of the improper sales practices used to market auction rate securities it purchased.


The SEC continued to remake itself this week. On Thursday, Chairman Mary Schapiro appointed a new enforcement chief. Robert Khuzami will become the new Director of the Division of Enforcement, charged with rejuvenating a division with an illustrious past but facing current difficulties. Mr. Khuzami was the General Counsel for the Americas at Deutsche Bank AG. Prior to joining the bank he served for 11 years with the United States Attorney’s Office for the Southern District of New York.

While Ms. Schapiro assembles her team, scandals continue to engulf the agency.

• The Madoff scandal continues to haunt the Commission following congressional hearings where officials refused to discuss past investigative efforts as discussed here. More suits were filed by investors this week scrambling to try and recover funds. This week’s new cases include a suit by a pension fund against an asset management fund that invested with Mr. Madoff. Pension Fund for Hospital and Health Care Employees v. Austin Capital Management, Civil Case No. 2:09-cv-00615 (E.D. Pa. Filed Feb. 12, 2009).

• The alleged scam by financier Robert Allen Stanford (see below) is raising new questions about why this billion fraud was not found earlier. See, e.g., Stephen Labaton and Charlie Savage, SEC Fines Didn’t Avert Stanford Group Case,” New York Times (Feb. 19, 2009) (here, registration required). On Thursday the financier was served with papers by the FBI from the SEC’s suit in Virginia. No criminal charges have been brought to date.

• The Pequot scandal refuses to die. The SEC’s initial investigation ended amid claims of improper conduct followed by a congressional hearing and report which was highly critical of the Commission and a whistleblower suit by a former staff member as discussed here. Now, there is a criminal probe into the activities of the hedge fund, in addition to a renewed SEC inquiry, focused on the same conduct as the earlier investigation.

SEC enforcement

SEC v. UBS, AG, Case No. 1:09-CV-00316 (D.D.C. Filed Feb. 18, 2009). The SEC filed a settled civil injunctive action yesterday against financial giant UBS, alleging violations of Section 15(a) of the Exchange Act and Section 203(a) of the Investment Advisers Act. The SEC’s complaint alleges that from 1999 through 2008 UBS acted as an unregistered broker dealer and investment adviser to thousands of U.S. person and offshore entities with U.S. citizens as beneficial owners. The firm held billions of dollars worth of assets for these clients in what is essentially a tax evasion case.

UBS settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 15(a) and Section 203(a) of the Investment Advisers Act. The bank also agreed to pay $200 million in disgorgement, to be paid together with an additional $180 million in disgorgement that will be paid in the criminal case. The firm also agreed to terminate its U.S. cross-border business and to retain a consultant to conduct an examination of its termination of that business.

At the same time the bank entered into a deferred prosecution agreement with DOJ which described the case essentially as a tax fraud. As part of its agreement with DOJ, and based on an order by the Swiss Financial Markets Supervisory Authority, UBS agreed to identify its cross-border customers and terminate the business. The company also agreed to pay $780 million in fines, penalties, interest and restitution.

The day after the announcement of these settlements, the government filed suit against UBS seeking the disclosure of as many as 52,000 U.S. customers who allegedly had secret Swiss accounts concealed from tax authorities. The suit claims that U.S. customers have thousands of accounts at the bank which hold billions of dollars in assets. U.S. v. UBS, AG., Case No. 09-20423 (S.D. Fla.); see also Christian Baumgaertel, “UBS Falls as U.S. Sues to Get Names of More Accounts,”, (Feb. 19, 2009).

SEC v. Stanford International Bank, Case No. 3-09CV0298-L (N.D. Tex. Filed Feb. 17, 2009) alleges that the defendants committed an $8 billion fraud which apparently has gone on for years. The defendants are Robert Allen Stanford, Stanford International Bank, an Antigua based company, Stanford Group Company, a Huston based broker-dealer and investment adviser and Stanford Capital Management, an investment advisor. The court granted a temporary freeze order at the SEC’s request.

The alleged scheme centered on the sale of “certificates of deposit” which promised “high return rates that exceed those available through true certificates of deposits offered by traditional banks.” Those returns were achieved through what was supposed to be a unique investment strategy that yielded double-digit returns over the past 15 years.

In a second part of the scheme Stanford Allocation Strategy, a so-called proprietary mutual fund wrap program, took in over $1 billion in investor funds. This program was marketed based on false investment data, according to the SEC.

Financier Robert Allen Stanford, recently interviewed by CNBC about how it feels to be a billionaire, was served with the SEC’s papers on Thursday in Virginia. No criminal charges have been filed to date.

The ABA journal on line reported on Thursday that the SEC filed its action against Mr. Stanford and his entities days after outside counsel for the affiliated investment firm made a “noisy withdrawal.” Counsel reportedly disaffirmed information he had given to investigators and withdrew from his representation.

SEC v. Research in Motion Ltd., Case No. 1:09-cv-00301 (D.D.C. Filed Feb. 17, 2009) is an option backdating case brought against the company and four of its senior executives. The executives are former CFO Dennis Kavelman, former VP of finance Angelo Loberto, and CEOs James Balsillie and Mike Lazaridis.

The suit alleges that millions of stock options were backdated so that they would be in the money over a period from 1998 through 2006. Specifically, some 1,400 option grants for nearly seven million shares were backdated. This resulted in false disclosures in the annual reports of the company as well as in registration statements. The financial statements of the company also materially understated the compensation expenses of the company as a result of the scheme.

To resolve the case, the company consented to the entry of permanent injunction prohibiting future violations of the antifraud and books and records provisions. The settlement with the company takes into account its cooperation.

The injunctive orders regarding Messrs. Kavelman and Loberto prohibit future violations of the antifraud provisions along with the internal control sections and included Exchange Act Section 13(b)(5) and Rule 13b2-1, the misrepresentation to auditors provision of Rule 13b2-2. In addition, Mr. Kavelman consented to an order prohibiting him from violating the certification provision of Rule 13a-14. Messrs. Kavelman and Loberto also agreed to the entry of an officer director bar for five years and, in of an anticipated administrative proceeding, from appearing and practicing before the Commission as accountants for five years.

Messrs. Balsillie and Lazaridis consented to the entry of injunctions prohibiting future violations of Securities Act Sections 17(a)(2) and (3), along with the internal controls and books and records provisions of Section 13(b)(5) and Rule 13b2-1.

The individuals will pay civil penalties of: $500,000 for Mr. Kavelman; $425,000 for Mr. Loberto; $350,000 for Mr. Balsillie; and $150,000 for Mr. Lazaridis. Each also agreed to disgorge the in the money value of the backdated options they had exercised plus interest. The disgorgement is satisfied by their previous payments to RIM. A similar action was brought against the defendants by the Ontario Securities Commission.

Other actions

Options backdating probe closed: Costco Wholesale Corporation released a statement noting that the U.S. Attorney’s Office for the Western District of Washington has closed its criminal investigation into the stock option practices of the company.

Auction rate securities: STMicroelectronics NV prevailed in an arbitration against Credit Suisse Group AG based on claims relating to its purchase of auction rate securities. Credit Suisse will pay more than $400 million to resolve claims that it misled the STMicroelectronics regarding the purchase of the securities.


The PCAOB issued staff questions and answers on the registration of auditors of nonpublic broker dealers on February 19, 2009.

Web cast

On Tuesday, February 24, 2009, at noon, West Legal Education Center will air a web cast entitled Current Trends in SEC Enforcement — 2009.