THIS WEEK IN SECURITIES LITIGATION (August 14, 2009)
Proposed regulation of the OTC derivatives market moved forward this week with Treasury delivering its draft bill to Capitol Hill. In SEC enforcement, the Commission was back in court this week trying to explain its settlement with Bank of America. Rather than executing the consent decree negotiated by the parties, the court established a schedule for the filing of papers to explain the case.
The SEC is not going to amend its dismissed insider trading complaint against Mark Cuban. It did however settle a long running action against hedge fund operator Edwin Lyon centered on trading keyed to a PIPE offering settled as it moved to trial. DOJ obtained a guilty plea, and the Commission a partial settlement, in cases against a chief Madoff assistant which provided the most comprehensive view yet into the Ponzi scheme of the ages.
Regulatory reform
Derivatives: Treasury delivered the proposed text of the Over-the-Counter Derivatives Markets Act of 2009 to Capitol Hill this week. The draft legislation is designed to implement the principles regarding the regulation of the over-the-counter derivatives market outlined in the White Paper issued in mid-June 2009 and discussed here.
Mortgage securities market: S. 1592, titled a bill to establish a Federal Board of Certification to enhance the transparency, credibility, and stability of the financial markets, was introduced in the Senate this week. The purpose of the bill, according to one of its sponsors, Senator Snowe, is to create a Federal Board of Certification that “would certify that the mortgages within a security instrument would meet the underlying standards they claim in regards to documentation, loan to value ratios, debt service to income rations, and borrowers’ credit standards.” The bill is intended to create incentives for improving industry rating practices.
SEC enforcement
SEC v. Bank of America, Case No. 09 cv 6829 (S.D.N.Y. Filed Aug. 3, 2009), a tentatively settled enforcement action based on an alleged proxy fraud in connection with the acquisition of Merrill Lynch by the bank was back in court this week. To date, the judge has declined to execute the consent decree negotiated by the parties. Rather the court has requested that the parties file papers explaining the predicate for the action and the settlement. The case is discussed here.
SEC v. Brantley Capital Management, LLC, Case No. 1:09-CV-01906 (N.D. Ohio Filed Aug. 13, 2009) is an action against investment adviser Robert Pinkas and his firm, Brantley Capital Management, along with CFO Tab Keplinger. The complaint claims the defendants incorrectly valued assets in the portfolio to earn larger fees. Specifically, the complaint alleges that 50% of the assets in the portfolio were an investment in Flight Options International. That company, a private airline, was losing millions of dollars and remained in business based on loans from a related entity. This was not disclosed to the board. The defendants also overstated the value of certain debt investments. Mr. Keplinger settled with the SEC, consenting to the entry of an injunction prohibiting future violations of the antifraud and other provisions of the securities laws, agreeing to pay a civil penalty of $50,000 and to the entry of an order precluding him from serving as an officer or director of a public company for five years. The other defendants are litigating the case. See also Lit. Rel. 21178 (Aug. 13, 2009).
In the Matter of Douglas K. Hutchins, Adm. Proc. File No. 3-13578 (Filed Aug. 12, 2009) named as a respondent Douglas Hutchins, former director of finance for Qwest Communications International’s Global Business Markets. In 2001, Mr. Hutchins drafted letter agreements which incorrectly concluded that a company transaction met the requirements of a bill and hold arrangement and that $34 million in revenue could be recognized on the sale of equipment. As a result, the books and records of Qwest were incorrect and Mr. Hutchins was the cause. The respondent consented to the entry of a cease and desist order based on Sections 13(b)(2)(A) and (B).
SEC v. Cuban, Case No. 3:08-cv-02050 (N.D. Tex. Filed Nov. 17, 2008) is an insider trading case against Mark Cuban in which the court granted the defendant’s motion to dismiss as discussed here. The SEC, which had been given leave to amend its complaint, reportedly has declined. The time in which to file an appeal has not yet expired.
SEC v. Lyon, Civil Action No. 06 Civ. 14338 (S.D.N.Y. Filed Dec. 12, 2006) is an action against fund operator Edwin Lyon and several funds and related entities he controlled known collectively as Gryphon Partners. The case was based on insider trading and Section 5 claims in connection with four PIPE offerings. The SEC alleged that Mr. Lyon, after being solicited to participate in the PIPE offerings, sold the shares of the company involved short thereby engaging in insider trading. He later covered the short position with the shares from the resale registration statements. Previously the court dismissed the Section 5 claims. Mr. Lyon and Gryphon Partners settled the insider trading claims which were scheduled to start trial shortly by consenting to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. Mr. Lyon and Gryphon Advisors agreed to pay jointly and severally disgorgement and prejudgment interest of over $100,000 and a civil of over $310,000. In addition, other entities in the group agreed to pay disgorgement and prejudgment interest of over $360,000. Previous rulings in the case are discussed here. See also Lit. Rel. 21175 (Aug. 12, 2009).
SEC v. Terex Corporation, Civil Action No. 21177 (D. Conn. Filed Aug. 12, 2009), discussed here, is one of a series of cases filed by the Commission centered on a financial fraud involving Terex Corporation, a global manufacturer of heavy equipment, and United Rentals, Inc., a large equipment rental company. The complaint is based on two sets of transactions in 2000 and 2001. First, it alleges that Terex aided and abetted a financial fraud at United Rentals in two year end sale-leaseback transactions used to falsely inflate the revenue of each company. Second, the Terex accounting staff failed to resolve certain imbalances arising from the improper accounting regarding certain inter-company transactions. Rather than correct the imbalances, Terex created unsupported and improper entries for the pertinent accounts resulting in costs not being recorded as expenses.
The company resolved the case by consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint and agreeing to pay a civil penalty of $8 million. It also agreed to pay an $8 million penalty. See also Lit. Rel. 21177 (Aug. 12, 2009). This is one of a series of actions brought by the SEC and DOJ as discussed here.
Criminal cases
U.S. v. DiPascali, Case No. 1:09-cr-00764 (S.D.N.Y. Filed Aug. 11, 2009) names Bernard Madoff’s finance chief Frank DiPascali, Jr. as a defendant as discussed here. Mr. DiPascali pleaded guilty to a ten-count information on Tuesday. The charges include conspiracy, securities fraud, investment adviser fraud, falsifying books and records, mail and wire fraud, money laundering, perjury and tax evasion. The defendant, who is cooperating with the government, stated at the time of his plea that the Madoff operation was “all fake.” In the related SEC case Mr. DiPascali consented to the entry of an injunction but the parties reserved the resolution of other issued until later. SEC v. DiPascali, Case No. 09 CV 7085 (S.D.N.Y. Filed Aug. 11, 2009).
Private actions
Police and Fire Retirement of the City of Detroit v. SafeNet, Inc., Case No. 1:06-cv-06115 (S.D.N.Y. Filed Aug. 1, 2006) is a suit against SafeNet, its former CEO Anthony Cuputo, former interim CFO Carole Argo and a group of directors and officers. The complaint is based on option backdating claims. The court, in ruling on a motion to dismiss, concluded that the plaintiffs had adequately pleaded loss causation, since the complaint pointed to three corrective disclosures over a period of four months which resulted in a drop in the price of the stock. The court went on to conclude that scienter was only pled as to the former CEO, Mr. Caputo, and the former CFO, Ms. Argo, who previously pleaded guilty to securities fraud in connection with the scheme.