THIS WEEK IN SECURITIES LITIGATION (April 30, 2010)
This week, the Supreme Court handed down its decision in Merck on the statute of limitations in securities fraud damages actions. Nevertheless, the spotlight remains on Goldman and the SEC’s case against the firm. Congressional hearings were held. The SEC received a letter requesting information regarding the timing of filing the suit. New reports note that a criminal inquiry is being initiated. No doubt the turmoil over the SEC’s suit and the charges will continue in the weeks to come.
Statute of limitations: Merck & Co. v. Reynolds, Case No. 08-905 S.Ct. (April 27, 2010). All nine justices concurred in affirming the decision of the third circuit which held that the district court improperly dismissed a securities fraud suit against the pharmaceutical giant based on the statute of limitations. The case centers on alleged fraud in connection with the sale of pain killing drug Vioxx. The statute of limitations issue turned on when the two year limitation period of 28 U.S.C. § 1658(b) for securities fraud suits begins to run. The high court concluded that the limitation period begins when the plaintiff in fact discovers, or with reasonable diligence would have discovered, the facts constituting a violation, which ever comes first as discussed here.
Initially, the court concluded that the word “discovery” in Section 1685(b)(1) referred not just to the actual discovery of certain facts by the plaintiff, but also to those which could have been discovered with reasonable diligence. This conclusion was based largely on an analysis of decisions regarding the application of the statute of limitations in fraud cases. The court concluded that Congress must have had this body of law in mind when it wrote the statute.
In reaching its conclusion, the court rejected the key arguments raised by Merck, contending that the statute barred the suit. First, the company claimed that the statute did not require the plaintiffs to discover scienter-related facts. Since the question under the statute however, is when plaintiff discovered a violation and scienter is a key part of a claim, the court rejected Merck’s argument. The court also rejected Merck’s contention that the discovery of false statements is sufficient since that may not demonstrate scienter. Likewise, Merck’s claim that “inquiry notice” was sufficient to trigger the running of the statute was rejected since that could mean the limitations period would begin to run before facts sufficient to state a claim were discovered. On the record before it, the court held the court of appeals had correctly concluded that the action was not time barred.
SEC v. Goldman Sachs
Eight Republican congressmen from the Committee on Oversight and Government Reform have sent a letter to Chairman Schapiro demanding information regarding the Goldman suit. Specifically, an April 20, 2010 letter from Representative Darrell Issa and seven of his collogues states in part that the case “has created serious questions about the Commission’s independence and impartiality . . . events of the past five days have fueled legitimate suspicion on the part of the American people that the Commission has attempted to assist the White House, the Democratic Party, and Congressional Democrats by timing the suit to coincide with the Senate’s consideration of financial regulatory legislation . . .”
After reciting what are claimed to be a number of information leaks, the letter requests documents and information including:
• A statement as to whether the Commission or its employees gave advance notice to the White House, the Democratic National Committee or Democratic members of Congress;
• All communications between the Commission and news outlets about the matter; and
• All records regarding any such communications.
SEC enforcement actions
Investment fund fraud: SEC v. Shapiro, Civil Action No. 1:10-CV-21281 (S.D. Fla. April 21, 2010) is an action against Nevin Shapiro which charges him with operating a $900 million fraud and Ponzi scheme. Mr. Shapiro operated Capital Investments USA, a Miami Beach based grocery diverter. That company purchased groceries in one part of the country and resold them in another. From 2003 through 2009 Mr. Shapiro sold promissory notes which promised annual returns of 10 to 26% which purportedly backed by purchase orders and receivables from Capital’s business. In fact, Capital had been operating at a loss and much of the money was diverted to other interests of Mr. Shapiro. The complaint alleges violations of the antifraud provisions. The case is in litigation. A related criminal case is pending in New Jersey.
Option backdating: SEC v. Jasper, Case No. CV 07-6122 (N.D. Cal. Filed Dec. 4, 2007) is an option backdating case against the former CFO of Maxim Integrated Products, Inc., Carl W. Jasper. The Commission prevailed on most of its counts following an eight-day trial as discussed here. The SEC’s complaint alleged that over a five-year period beginning in 2000 Mr. Jasper engaged in a scheme to illegally backdate stock options granted by the company to employees and directors. In order to provide those persons with in-the-money options the complaint alleges that the company routinely backdated the option grants to dates which corresponded to historical lows for Maxim’s stock price.
Mr. Jasper was aware that Maxim granted backdated options and repeatedly prepared falsely dated option grant approval documents for the signature of the CEO. Since the company also failed to properly account for the options its income was overstated by millions of dollars.
Previously, the Commission brought an action against the company and its former CEO, John Gifford. SEC v. Maxim Integrated Products, Inc., Case No. C-07-6122 (N.D. Cal. Filed Dec. 4, 2007). The company and its former CEO settled as discussed here.
SEC v. Elkin, Civil Action No. 1:10-cv-0061 (D.D.C. Filed April 28, 2010) charges four former employees of Dimon, Inc., now Alliance One International, Inc. with violating the anti-bribery provisions of the FCPA. The employees are Bobby Elkin, Jr., former country manager for Kyrgyzstan, Baxter Myers, former Regional Finance Director, Thomas Reynolds, former corporate controller and Tommy Williams, a former Senior Vice President of Sales. According to the complaint, from 1996 through 2004 Mr. Elkin authorized $ 3 million in bribes paid to various Kyrgystan officials. The bribes were signed off on by Messrs. Myers and Reynolds. In addition, from 2000 to 2003 Dimon paid about $542,590 to government officials of the Thailand Tobacco Monopoly to obtain $9.4 million in sales contracts. Tommy Williams directed the sales of tobacco from Brazil and Malawi to the Thailand Tobacco Monopoly through the company agent in Thailand. He authorized the payment of bribes to officials of the Thailand Tobacco Monopoly.
Each defendant settled the action by consenting to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books, records and internal control provisions of the Exchange Act. Defendants Myers and Reynolds also agreed to pay civil penalties of $40,000 each.
DOJ Opinion: The Department of Justice issued FCPA Opinion Procedure Release No. 10-01, dated April 19, 2010. In the letter, the department concluded that it did not intend to take any enforcement action regarding a proposed service contract under which a foreign official within the meaning of the Act received compensation as a Facility Director through a subcontractor from a U.S. company. That individual was hired under an agreement between a U.S. Government Agency and the Foreign Country. Under the arrangement the Facility Director would not be in a position to influence any act or decision affecting the requesting company.
The facts outlined in the request provided that the U.S. and the Foreign Country had executed an agreement under which a U.S. Agency would furnish assistance. As part of that arrangement the agency entered into a contract with the requesting company to design, develop and construct a facility in the Foreign Country. That requires the U.S. company requestor to hire and compensate individuals to work at the facility as directed by the agency. The Foreign Country has appointed a person to serve as Facility Director and is hiring others. The U.S. agency directed the requesting company to hire the selected individual. Accordingly the requesting company, through a subcontract with another company, will hire and compensate the individuals selected to work at the facility. The employment contracts are for one year and at their end will be taken over by the Foreign Country.
Tod Bretton, former Chief Compliance Officer and Head Trader for Prestige Financial, Inc. was permanently barred from the industry by FINRA. Mr. Bretton engaged in a fraudulent trading scheme in which he adjusted the prices on large trades and kept the proceeds for the firm. To cover up his scheme Mr. Bretton falsified the order tickets to cover the adjusted prices. The scheme is alleged to have yielded $1.3 million in trading profits.
Alaska Electrical Pension Fund v. Olofson, Case No. 08-cv-02344 (D. Kan.) is a derivative suit against Epiq CEO Thom Olofson, COO Christopher Olofson and seven other current and former executives of the company. The complaint alleges that the defendants backdated stock options at the company. Specifically the complaint alleges that in 17 instances between 1997 and 2006 stock option grants were backdated. Under the terms of the settlement the company will implement certain corporate governance reforms. Counsel for the plaintiffs will seek an amount of attorney fees of up to $3.5 million.