On Capital Hill, discussions continue about the possible revision or repeal of the Section 9291 of Dodd-Frank, the SEC FOIA exemption discussed here. The SEC filed three related financial fraud actions this week, two of which are in litigation. The agency and DOJ continued to bring FCPA actions, as FINRA fined Morgan Stanley for not complying with its disclosure rules regarding analyst conflicts. The circuit courts handed down decisions regarding forward looking statements and loss causation, while shareholders entered into a tentative settlement in a class action fraud case centered on the collapse of a major sub-prime lender.

SEC enforcement actions

Financial fraud: SEC v. International Commercial Television, Inc., Case No. 3:10-cv-05555 (W.D. Wash. Filed Aug. 9, 2010). The complaint, discussed here, centers on three key allegations. First, the company recognized revenue on sales of its primary product made through Home Shopping Network prior to the time the product was actually sold and before the expiration of the right of return. Under its arrangement with HSN, product was drop shipped and kept in its warehouse. When that product was sold HSN remitted the customer payments. ICT however recognized the revenue when the product was shipped to HSN. Second, under the same arrangement the company carried a receivable on its books from Home Shopping Network for product that was never sold through the HSN because it was defective. Third, on direct customer sales the ICT improperly recognized revenue from sales before the right of return expired. As a result, the company had to restate its financial statements for fiscal 2007 and the first two quarters of 2008. The company settled the action, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B).

A related action against Karlheinz Redekopp, the former CFO of ICT, is based on alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5), along with the pertinent rules. SEC v. Redekopp, Case No. 3:10-cv-05557 (W.D. Wash. Filed Aug. 9, 2010). This case is in litigation. In the Matter of Dohan + Company CPAs, Adm. Proc. File No. 3-13997 (Aug. 9, 2010) is a proceeding based on Rule 102(e) against the outside auditors of ICT, Dohan + Company CPA and its founding partner Steve Dohan, the engagement partner Nancy Brown and the manager of the audits Erez Bahar. This action is also in litigation.

Criminal cases

Investment fund fraud: U.S. v. Huber, Case No. 10-cr-1008 (C.D. Ill.) is a case in which William Huber pleaded guilty to mail fraud, money laundering and engaging in prohibited monetary transactions. This action follows an SEC case which alleged that Mr. Huber obtained over $1.9 million from investors by making a series of false representations regarding the trading by his fund, the account balances held by investors and about his fees. In fact, he operated the fund as a Ponzi scheme. The Commission’s action is settled, as discussed here. Sentencing is scheduled for December 10, 2010.

Obstruction: U.S. v. Ono, Case No. 10-0371 (N.D. Cal. Aug. 9, 2010) is an action against Alvin Ono. The indictment alleges that Mr. Ono intentionally destroyed files and data stored on the hard drive of his computer in response to document requests by the SEC in April and May 2008. At the time, the Commission was investigating possible FCPA violations by Mr. Ono and his company.


U.S. v. Mercator Corp., (S.D.N.Y. Filed Aug. 6, 2010) is an action in which the defendant merchant bank pleaded guilty to one count of making corrupt payments in violation of the FCPA. The bank acted as an adviser to the government of Kazakhstan in connection with the sale of part of the oil and gas wealth of the country. It was dependent on the good will of three senior government officials. Those officials had the ability to influence whether Mercator obtained and retained lucrative business and would be paid. To maintain its lucrative contacts, in November 1999 Mercator purchased two snowmobiles and shipped them to Kazakhstan for delivery to one of the officials.

In a related case, James Giffen, the Chairman of the bank, pleaded guilty to failing to indicate on his tax return that he had a Swiss bank account in 1997. U.S v. Giffen, 1:03-mj-06663 (S.D.N.Y. Filed April 2, 2003). In 2007, a civil forfeiture action was brought against $84 million on deposit in Switzerland. The complaint claimed the funds were traceable to unlawful payments to senior Kazakh officials in connection with oil and gas transactions arranged by Mercator for Kazakhstan. Under a 2007 agreement involving the United States, Switzerland and Kazakhstan, the funds were used by a non-government organization to benefit underprivileged Kazakh children. The dates for sentencing have not been set. See also (speculating about the predicate for the plea).

SEC v. Universal Corporation, Inc., Civil Action No. 01:10-cv-01318 (D.D.C. Filed Aug. 6, 2010); SEC v. Alliance One International, Inc., Civil Action No. 01:10-cv-01319 (D.D.C. Filed Aug. 6, 2010). Each case centers on an agreement between Universal and Alliance One to obtain business from the Thailand Tobacco Monopoly as discussed here. Universal, in coordination with Alliance, paid about $800,000 million in bribes to the Thailand Tobacco Monopoly to secure approximately $11.5 million in sales contracts between 2000 and 2004. During the same period Dimon and Standard (which later merged to form Alliance One) paid bribes to government officials of the Thailand Tobacco Monopoly of $1.2 million to obtain about $18.3 million in sales contracts. Each company failed to properly record the payments in its books and records.

Each case is also to have engaged in additional FCPA violations. Universal is alleged to have made a series of payments from 2004 through 2007 totaling about $165,000 to government officials in Mozambique. The company also paid about $850,000 to high ranking officials of the Malawian government between 2002 and 2003. Alliance One is alleged to have violated the FCPA by making payments totaling more than $3 million to officials of the Kyrgyzstan government to purchase Kyrgyz tobacco from 1996 through 2004. The company is also alleged to have made improper payments to tax officials in Greece to avoid certain tax difficulties and in Indonesia to obtain a tax refund.

Each company agreed to settle with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). Universal also agreed to pay disgorgement of $4,581,276. 51 while Alliance One agreed to pay $10,000,000.00. Each company will also retain an independent monitor.

Universal and Alliance One settled criminal charges with DOJ by entering into a non-prosecution agreement. In addition, Universal agreed to pay a $4.4 million criminal fine while Alliance One will pay a $9,450,000 fine. Each company will retain an independent monitor for three years.

The Commission previously filed a settled enforcement action against four former employees of Dimon, Inc., discussed here.


Morgan Stanley resolved an inquiry focused on its failure to make the disclosures required by FINRA rules regarding research analyst conflicts of interest. The firm also violated the terms of its 2003 settlement with the SEC on analyst conflicts. Morgan Stanley was censured and directed to pay a fine of $800,000. The firm is also required to review a sample of its research reports and certify compliance with the research analyst conflict of interest rules every six months for the next two years.

Court of appeals

Forward looking statements: In re Aetna, Inc. Sec. Litig., No. 09-2970 (3rd Cir. Aug. 11, 2010) is an appeal from the dismissal of a securities class action complaint. Plaintiffs alleged that Aetna and its officers made materially false statements in a number of filings and releases which described their insurance pricing policy as “disciplined,” when in fact it was not. Following an earnings release and a significant price drop, suit was filed. The district court dismissed the complaint concluding that the statements were forward looking and therefore protected by the statutory safe harbor of the PSLRA. The Third Circuit affirmed. Generally, the safe harbor requires proof of actual knowledge of falsity. Here, plaintiffs claimed that the statements were not forward looking. The term “disciplined” in the context of the pricing policy referred to Aetna’s expectation of achieving premium yields in line with its medical cost trends. This clearly is based on future trends and is thus a forward looking statement the court concluded. In any event, when read in context, the statements were mere vague puffery and not material. At the conclusion of its opinion, the court chastised plaintiffs for failing to submit most of the transcripts of conference calls which contained the statements. This hindered review of the specific statements alleged to have been false.

Loss causation: Miller v. Thane International, Inc., Case No. 09-55474 (9th Cir. Aug. 9, 2010) is a case in which the court affirmed the dismissal of a class action for failure to establish loss causation. The complaint centers on the merger of Thane International with another company in a stock-for-stock deal valued at $7 per share. The prospectus stated that at the conclusion of the merger, the shares would be listed for trading on the NASDAQ National Market. In fact, they were listed on the OTC Bulletin Board. For nineteen days following the merger the share price remained above $7. One day before a disappointing earnings release the price fell to about $6. Following the earnings release the price continued to drop. The court held that although the market was inefficient the share prices could still be used to establish loss causation. Here, the record and testimony establish that the misrepresentation about the listing emerged and was absorbed into the price while the share price remained above the $7 exchange price. On this record, plaintiffs have failed to establish loss causation.

Private actions

In re New Century, Case No. CV 07-00931 (C.D. CA.) is a securities class action arising out of the collapse of sub-prime lender New Century. The defendants include a group of the former officers and directors of the company, its outside auditors KPMG LLP and underwriters J.P. Morgan Securities, Inc., Deutsche Bank Securities, Inc. and Morgan Stanley & Co. This week the court gave preliminary approval to a $125 million settlement. The officers and directors will pay $65 million, KPMG $44.75 million and the underwriters $15 million.