The Commission adopted its controversial “proxy access” rules this week by what is becoming the standard 3-2 vote. SEC enforcement brought an insider trading case against two residents of Spain just days after the announcement of the take over bid on which it centers and obtained a partial settlement in an international financial fraud case. Option backdating cases continued to move toward resolution with the settlement of two more derivative actions.

Market reform

The Commission adopted its new “proxy access” rules by a 3-2 vote this week. Under the new rules, which take effect 60 days after publication, shareholders who own at least 3% of the total voting power of the company’s securities and have held those shares for at least three years will be eligible to nominate directors and have proposals included in the company proxy materials sent to all shareholders. Shareholders can nominate one director or a number up to 25% of the board, which ever is greater. Nominees must not violate applicable laws and regulations. Shareholders cannot use the rules if the securities are held for purposes of changing control. The rules will apply to all Exchange Act reporting companies but be phased in for small issuers. They do not apply to foreign private issuers.

SEC enforcement actions

Insider trading: SEC v. Garcia, Civil Action No. 10C 5268 (N.D. Ill. Filed Aug. 20, 2010). The case names as defendants Juan Jose Fernandez Garcia, the Head of European Equity Derivatives at Banco Santander, S.A., and Luis Martin Caro Sanchez, both of Madrid, Spain (discussed here). It centers on the unsolicited bid for Potash Corporation of Saskatchewan by BHP Billiton Plc, announced on August 17, 2010. In the bid, BHP offered a 16% premium to market or $130 per share for the stock of Potash. Potash was advised on the bid by Banco Santander, S.A. The day after the bid the share price of Potash rose over 27%.

Shortly before the deal announcement, Mr. Garcia purchased 282 Potash call options for approximately $13,669 through Interactive Brokers. On August 17, 2010, after the take over announcement, Mr. Garcia sold his holdings for a profit of $576,033. Mr. Sanchez purchased 331 call options in Potash in mid-August at a cost of $47,499 through Interactive Brokers. Mr. Sanchez sold his position just after the announcement at a profit of $496,953.33. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.

Financial fraud: SEC v. Escala Group, Inc., Case No. 09 CV 2646 (S.D.N.Y. March 23, 2009). The Commission settled with the founder and former chairman of Escala, Gregory Manning (here). Escala is an international company whose business centers on the collectibles market. Through a series of transactions involving collectable stamps with related parties, the Commission claims that Mr. Manning and the other defendant fraudulently boosted the revenues of Escala just prior to a merger. The related party transactions were disclosed as being at arms length. The scheme also included round trip transactions and improperly recorded expenses. Overall revenues were improperly increased by over $80 million. Mr. Manning resolved the case with the Commission by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting Escala’s violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). He also agreed to pay $669,489 in disgorgement, prejudgment interest and penalties and to the entry of an officer and director bar for ten years.


Undisclosed conflict of interest: Zions Direct, Inc. was fined $225,000 by FINRA in connection with its failure to disclose a potential conflict of interest in auctioning certificates of deposit through its website. The potential conflict stems from the fact that Liquid Asset Management, an affiliate, participated in the auctions. From the commencement of the auctions in February 2007 through November 2008 LAM’s participation was not disclosed. Even following disclosure of its participation, the potential conflict was not disclosed. FINRA determined that customers were potentially disadvantaged in the auctions. The regulator also concluded that Zions Direct advertisements in connection with the auctions were misleading.

Private actions

Option backdating: In re Blue Coat Systems, Inc. Derivative Litig., Case No. 5:06-cv-04809 (N.D. Cal.); In re Blue Coat Systems, Inc. Derivative Litig., Case No. 1:05-cv-041436 (Sup. Ct. Cal., Santa Clara). The complaints, filed in 2007, against the directors, former directors and outside auditors Ernst & Young, alleged that the company had backdated and used spring loaded options since 1999. It was based on a report from an internal investigation. To settle the action, the company will adopt certain corporate governance provisions. Insurers and E&Y will pay about $3.9 million and certain former executives will repay about $170,000 in compensation. Plaintiffs counsel will be given $1.775 million worth of Blue Coat stock and $225,000 in cash from E&Y as attorney fees and costs.


The U.K. Financial Services Authority fined Societe Generale approximately $2.25 million (£ 1.575 million) for filing inaccurate reports on 80% of its trades over a two year period. From November 2007 through February 2010, the bank failed to report 320,000 trades and furnished inaccurate data on 531,000 transactions. Other reports had inaccurate counterparty data. The bank is the sixth institution to be fined in connection with inaccurate reports. Previously, Barclays, Getco, Instinet and Commerzbank were fined for similar irregularities. The difficulty stems from the 2007 adoption of the Markets in Financial Instruments Directive which imposed new reporting requirements on European Union financial institutions.