This Week In Securities Litigation (May 30, 2008)
This week featured more familiar themes in securities litigation: options backdating and insider trading. One company announced the end of government inquiries into its options practices, while another obtained dismissal of portions of an options backdating based derivative suit. And, the SEC settled one insider trading case which it has been litigating for two years, while filing another which is now in litigation.
The SEC and DOJ continued to work through their inventory of option backdating cases. Applied Micro Circuits Corp. noted in a recent filing that the Department of Justice has closed its inquiry into the historical option granting practices of the company. While the SEC has not closed its investigation, the company asserts that termination of the probe is “imminent.” The inquiries began back in 2006. The company has also resolved federal shareholders derivative suits based on option backdating. Similar state court actions are still pending, however.
In Bussing v. Schwartz, Civil Action No. 3:06-cv-04669 (N.D.Ca. Aug. 1, 2006), a shareholders derivative suit based on claims of option backdating at Asyst Tech, the court dismissed the complaint for failure to adequately plead demand futility. In addition, the court concluded that claims brought under Section 10(b) and 14(a), as well as certain state law claims, were time barred, but not those under Section 20(a). Plaintiffs will be permitted to replead.
The SEC settled an insider trading case which has been in litigation for two years, SEC v. Yaroshinsky, Civil Action No. 06-CV2401 (S.D.N.Y. March 28, 2006). Here, the Commission alleged that Alexander Yaroshinsky, a vice president of Connetics Corp., traded in the stock of the company after learning the FDA’s preliminary reactions to a study on a new drug. Specifically, the complaint alleged that, after participating in a telephone call with the FDA in which the agency indicated that the drug would not be approved, Mr. Yaroshinsky tipped a friend, Victor Zak, who sold his position in the shares of the company and both men purchased put options. After the public announcement that the drug was unsuccessful the share price dropped 27%. Mr. Yaroshinsky made profits of over $680,000. Mr. Zak made profits of over $860,000.
Mr. Zak settled last year, consenting to the entry of a permanent injunction and agreeing to pay disgorgement of over $860,000. The Commission waived payment of about $216,000 based on a sworn financial statement and other documents.
To resolve the case against him, Mr. Yaroshinsky consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he agreed to the entry of an order under which he would pay $138,569 in disgorgement for his trades, plus prejudgment interest and a civil penalty equal to the amount of the disgorgement. Mr. Yaroshinsky also agreed to pay the approximately $216,000 in disgorgement Victor Zak was unable to pay, plus prejudgment interest thereon and an additional civil penalty of $145,220. The total amount Mr. Yaroshinsky agreed to pay exceeds his trading profits, but not the total of those profits plus a civil penalty in the same amount.
The SEC also filed an insider trading action against James E. Gansman, a lawyer and former partner in Ernst & Young and his friend and tippee, Donna B. Murdoch, a registered securities professional and Managing Director of a Philadelphia broker dealer. In at least seven different instances, according to the complaint, Mr. Gansman provided material non-public information about potential acquisitions he learned from his work at EY’s Transaction Advisory Services department in New York to Ms. Murdoch. Based on this information, Ms. Murdoch placed trades which have yielded her illegal profits of over $596,000. The U.S. Attorney’s Office for the Southern District of New York, the FBI, the Options Regulatory Surveillance Authority, and the Financial Industry Regulatory Authority assisted the SEC. The case is in litigation. SEC. v. Gansman, Civil Action No. 08-CV-4918 (S.D.N.Y. May 29, 2008).