This Week In Securities Litigation (May 16, 2008)
A study published by NERA Economic Consulting last week stated that settlements to date in shareholder option backdating cases are lower than in other shareholder litigation. In fact, the study found that the typical settlement was less than half the amount predicted by a NERA model. The authors of the study suggested that the lower amounts may reflect a weakness on the merits or that less meritorious cases have settled first. Robert Patton, Branko Jovanovic and Svetlana Starykh, Do Options Backdating Class Actions Settle for Less? (NERA Economic Consulting May 2008).
The SEC filed another in a seemingly continuing series of options backdating cases involving Broadcom executives was filed last week. This time, the SEC named the former CEO of the company, Henry Nicholas, chairman and chief technology officer Henry Samueli, former CFO William Ruehle and general counsel David Dull. The complaint claims that, from 1998 to 2003, the defendants participated in a scheme to fraudulently backdate stock option grants. The option committee, composed of Messrs. Nicholas and Samueli, approved as many as 88 grants as part of the scheme. However, according to the complaint, Messrs. Nicholas, Samueli and Ruehle, rather than the compensation committee decided on grants for senior executives, with Mr. Ruehle selecting most of the dates. Messrs. Nicholas and Samueli are alleged to have concealed the backdating by signing false committee meeting documents. SEC v. Nicholas, Civil Action No. SACV 080539 (C.D. CA. May 14, 2008). The Commission’s Litigation Release is here.
Under the scheme, the company failed to record billions of dollars of compensation expense and falsified documents to further the fraud. As a result, in January 2007 Broadcom restated its financial statements and reported more than $2 million in additional compensation expense. The complaint alleges violations of the antifraud, reporting and proxy sections as well as false SOX certifications.
An internal investigation into this matter concluded that David Dull and Henry Samueli were not involved in the option backdating. However, former human resources director Nancy Tullos, stated at the time of her guilty plea that Mr. Samueli was involved, along with Mr. Nicholas. Previously, the SEC brought an action against the company and Ms. Tullos.
This case is in litigation.
In another option backdating case, the SEC suffered a setback. In SEC v. Berry, Case No 07-4431 (N.D. Cal. May 7,2007) brought against former KLA-Tencor Corp. and Juniper Networks, Inc. executive Lisa Berry, the court granted in part and denied in part a defense motion to dismiss. The court concluded that the SEC’s fraud claims, for the most part, were not pled with particularity. In addition, the court found that the Commission’s request for a penalty was time barred unless it could plead facts sufficient to toll the statute of limitation. This case is discussed in more detail here.
The SEC resolved two insider trading cases this week and filed another.
On Monday, the SEC filed an insider trading action against Drs. Zachariah P. Zachariah, Mammen P. Zachariah and Sheldon Nasseberg. The complaint alleged Dr. Z. P. Zachariah, a director of IVAX pharmaceutical traded, and tipped his brother M.P. Zachariah who traded, in the shares of the company after learning it had entered into a tentative agreement to be acquired. In addition, Dr. Z.P. Zachariah had previously traded on, or misappropriated, inside information about the acquisition of Correctional Services Corp., as discussed in more detail here. SEC v. Zachariah, Civil Action No. 08-60690 (S.D. Fl. May 12, 2008). This case is in litigation.
The SEC also settled an insider trading case filed in 2005 which arose out of the takeover of Charger One Financial by Citizens Bank. That case had been brought against a hedge fund, an investment adviser and its portfolio manager and principal, Michael Tom, who was also a former employee of Citizens. Also named as defendant were former Citizens employee Shengnan Wang and her husband who had invested in Mr. Tom’s hedge fund and Mr. Tom’s brother. The action was resolved when Michael Tom, the fund and investment advisor consented to the entry of injunctions prohibiting future violations of Section 10(b) and Rule 10b-5, and the payment of disgorgement, prejudgment interest and a penalty, as also discussed in more detail here. SEC v. Tom, Civil Action No. 05-CV-11966 (D. Mass. Sept. 29, 2005).
The Commission also resolved SEC v. Gad, Case No. 07-CV-8385 (S.D.N.Y. Sept. 27, 2007), an insider trading case brought against Nathan Rosenblatt, former director of NBTY, Inc. and a member of its audit committee. The complaint claimed Mr. Rosenblatt tipped his close friend Morris Gad after learning that the company would have a significant earnings shortfall. To settle the case Mr. Rosenblatt consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions and an order requiring him to pay an almost $400,000 penalty and barring him form acting as an officer or director of any public company.
The SEC and DOJ resolved another FCPA case. This action was brought against Willbros Group, Inc. and four former employees. The SEC’s complaint alleged four schemes: One in Nigeria, a second in Ecuador, a third in Bolivia and a fourth to create false documents to obtain the funds for bribes. The action with the SEC was settled by the company with a consent to a permanent injunction of the FCPA anti-bribery and books and record provisions and the payment of disgorgement by the company. The four individuals resolved the case by consenting to the entry of permanent injunctions and the payment of civil fines, as discussed here. SEC v. Willbros Group, Inc., Civil Action No. 4:08-CV-01494 (S.D. TX. May 14, 2008).
The DOJ case was resolved with a deferred prosecution agreement. Under the agreement, the information will be dismissed in three year and, in the interim, an independent compliance monitor will review policies and procedures. The company also agreed to pay a $22 million penalty.