THIS WEEK IN SECURITIES LITIGATION (December 18, 2009)
While lawmakers on Capital Hill continued to struggle with financial reform, prosecutors lost two key criminal option backdating cases, as the SEC worked through an inventory of old cases. In the Broadcom criminal option backdating cases, the court took the extraordinary step of dismissing the cases because of prosecutorial witness tampering which tainted the fact-finding process. The court also dismissed the parallel SEC case and strongly suggested it not be re-filed.
The SEC this week completed the resolution of a financial fraud case stemming from its investigation of Bally, with whom it settled in 2008, by filing settled actions against to former company officials involved in the fraud. The Commission also filed settled administrative and Rule 102(e) proceedings against E&Y and the professionals involved. In addition, the SEC filed a partially settled insider trading case involving two market professionals and two of their friends and brought more investment fund fraud actions.
Finally, both DOJ and the SEC filed FCPA cases this week. DOJ’s action is pending. The SEC’s case settled.
SEC enforcement actions
Financial fraud: SEC v. Dwyer, Case No. 09-CV-2386 (D.D.C. Filed Dec. 17 2009); SEC v. Noncek, Case No. 09-CV-2387 (D.D.C. Filed Dec. 17, 2009) are two cases brought against, respectively, the former CFO and controller of Bally Total Fitness Holding Corporation. Bally settled accounting fraud charges with the Commission in 2008. The complaint against the company claimed that Bally fraudulently accounted for three types of revenue from its members: initiation fees, prepaid dues and reactivation fees. The company also improperly recorded membership acquisition costs. As a result of these and other improprieties, the company substantially overbooked revenue for the period 2001-2003. Mr. Dwyer is alleged to have violated the antifraud provisions and aided and abetted violations of the reporting provisions. Mr. Noncek, according to the Commission, violated various provisions of the securities laws.
To resolve the case against him, Mr. Dwyer consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions and from aiding and abetting the reporting sections of the securities laws. In addition, he agreed to the payment of a $250,000 penalty and the entry of a permanent bar from practicing before the Commission in a related Rule 102(e) proceeding. Mr. Noncek consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a)(2) & (3) and the reporting provisions. He also agreed to a two year bar from practice before the Commission in a related Rule 102(e) proceeding. See also Litig. Rel. 21342 (Dec. 17, 2009).
In related proceedings, the Commission filed a settled cease and desist and Rule 102(e) action against Bally’s outside auditors, Ernst & Young, LLP. In addition, Rule 102(e) proceedings were brought against three current E&Y partners in the firm’s national office and three former partners involved with the engagement at Bally:
• In the Matter of Ernst & Young LLP, Adm. Proc. File No. 3-13725 (Filed Dec. 17, 2009) alleges that the audit firm either knew or should have known for the years 2001-2003 that Bally’s financial statements were fraudulent and the related disclosures were false and misleading because the company had engaged in fraudulent accounting practices which included prematurely recognizing revenue and improperly deferring costs. Nevertheless, the firm issued unqualified audit opinions. By issuing those false and misleading audit opinions, the firm was a cause of and aided and abetted Bally’s violations of the securities laws, according to the SEC’s Order. In addition, the audit firm violated Section 10A of the Exchange Act by failing to inform the Audit Committee about Bally’s false and misleading disclosures regarding a $55 million special charge. The firm’s offer of settlement proposed it would adopt a series of undertakings including an agreement to pay $8.5 million in the nature of a penalty. In addition, the firm consented to the entry of a cease and desist order from committing or causing any violations of Exchange Act Sections 10A and Sections 17(a)(2)&(3) of the Securities Act and from causing future violations of the reporting provisions. The firm was also censured under Rule 102(e) and directed to comply with its undertakings.
• In the Matter of Thomas D. Vogelsinger, CPA, Adm. Proc. File No. 3-13724 (Dec. 17, 2009). Mr. Vogelsinger was the Area Managing Partner for E&Y’s Lake Michigan Area during the time period. Under the SEC’s order, he may not appear or practice before the Commission for nine months.
• In the Matter of William J. Carpenter, CPA, Adm. Proc. File No. 3-13719 (Dec. 17, 2009). Mr. Carpenter was the firm engagement partner for the 2003 audit. Under the SEC’s order, he may not appear or practice before the Commission for two years.
• In the Matter of John M. Kiss, CPA, Adm. Proc. File No. 3-13-723 (Dec. 17, 2009). Mr. Kiss was the firm engagement partner for the 2001 and 2002 audits. Under the SEC’s order, he may not appear or practice before the Commission for three years.
• In the Matter of Randy G. Fletchall, CPA, Adm. Proc. File No. 3-13720 (Dec. 17, 2009). Mr. Fletchall was the partner in charge of the firm’s national office. Under the SEC’s order, Mr. Fletchall was censured.
• In the Matter of Mark Sever, CPA, Adm. Proc. File No. 3-13722 (Dec. 17, 2009). Mr. Sever was E&Y’s national director of area professional practice. Under the SEC’s order, he may not appear or practice before the Commission for three years.
• In the Matter of Kenneth W. Peterson, CPA, Adm. Proc. File No. 3-13721 (Dec. 17, 2009). Mr. Peterson was the professional practice director for the Lake Michigan Area office. Under the SEC’s order, he may not appear or practice before the Commission for two years.
Insider trading: SEC v. Gowrish, Case No. 09-CV-5883 (N.D. Cal. Filed Dec. 16, 2009) is an action against Vinayak Gowrish, a former associate at TPG Capital LP, Adnan Zaman, former V.P. and investment banker at Lazard Feress & Co. LP and their two friends Pascal Vaghar and Sameer Khoury. According to the SEC’s complaint, Mr. Gowrish illegally tipped Mr. Zaman about the acquisition negotiations involving his firm and three others: Sabre Holdings Corp., TX Corp and Alliance Data Systems Corp. Mr. Zaman then furnished the information to Messrs. Vaghar and Khoury who in turn traded. Mr. Zaman is also alleged to have misappropriated information from his firm regarding negotiations to acquire webMethods, Inc. and Myogen, Inc. and furnishing it to the same two individuals who again traded. Collectively Messrs. Vaghar and Khoury made approximately $500,000 in trading profits. Kickbacks were paid for the information to the Messrs. Gowrish and Zaman. The trading took place in 2006 and 2007.
Messrs. Zaman, Vaghar and Khoury settled, consenting to the entry of permanent injunctions prohibiting future violations of Sections 10(b) and 14(e) and the pertinent Rules thereunder. Mr. Zaman also agreed to disgorge over $78,000 along with prejudgment interest and to a bar from associating with a broker dealer. Mr. Vaghar agreed to disgorge over $366,000 along with prejudgment interest most of which was waived based on his financial condition. Mr. Khoury agreed to disgorge about $198,000 along with prejudgment interest, payment of which was waived based on financial condition. The case is in litigation as to Mr. Gowrish. See also Litig. Rel. 21339 (Dec. 16, 2009).
Investment fund scheme: SEC v. Gross, Case No. CV 09-9144 (C.D. Cal. Filed Dec. 16, 2009) is a fraud action against Dean Gross and Gregory Laser which alleges they were operating a Ponzi scheme. The complaint claims that the defendants raised about $18 million from investors by guaranteeing them returns of up to 40%. Investors were solicited to buy shares in Bridon Entertainment which supposedly sold advertising to well known companies. Instead, the company was operated as a classic Ponzi scheme. The SEC obtained a freeze order over the assets. The complaint alleges violations of the antifraud and registration provisions of the securities laws. See also Litig. Rel. 21338 (Dec. 16, 2009).
Investment fund scheme: SEC v. Eagle Development Enterprises, Inc., Case No. SACV09-1470 (C.D. Cal. Filed Dec. 14, 2009) is an action against the company, Michael Bowen and two other entities he controlled. The complaint, which alleges violations of the registration and antifraud provisions, alleges that, beginning in 2003, the defendants raised about $28 million from approximately 500 investors by telling them that there was an up-coming IPO in the U.K. Investors were also given predictions about the performance of the shares following that IPO. In fact, no steps had been taken toward commencing such an offering and a significant part of the funds were diverted to the personal use of the defendants. The SEC obtained a freeze order. The case is in litigation. See also Litig. Rel. 21337 (Dec. 14, 2009).
SEC v. Rorech, Case No. 1:09-cv-04329 (S.D.N.Y. Filed May 5, 2009) is the first insider trading case filed by the SEC based on CDS, discussed here. On December 10, 2009, the court denied a motion to dismiss filed by defendants. Trial is currently scheduled for April 5, 2010.
U.S. v. Nicholas, Case No. SACR 08-139 (C.D. CA.) is the criminal options backdating case brought against Broadcom co-founder Henry Nicholas and former company CFO William Ruehle. Mr. Nicholas was scheduled to stand trial early next year. During Mr. Ruehle’s trial, the court granted a defense motion for dismissal based on prosecutorial misconduct.
The defense motion detailed a series of wrongful acts by the government which included interfering with defense witnesses, intimidating other witnesses, entering into invalid plea agreements, leaking grand jury information to try to coerce a witness to cooperate, eliciting false testimony and failing to produce material helpful to the defense.
The court granted the motion, concluding that the misconduct goes to the heart of the truth finding process. Accordingly, the court dismissed all charges against Mr. Ruehle, as well as Mr. Nicholas. Previously, the court had vacated the guilty plea of company co-founder Henry Samueli as discussed here. In making its ruling the court also noted that it was dismissing the parallel SEC enforcement action which had been stayed without prejudice. The court strongly suggested that the Commission not re-file the case.
U.S. v. Green, Case No. (1:09-mj-01880 (S.D.N.Y. Filed Dec. 14, 2009) names as a defendant Stephen Green, former Chairman and CEO of Mayfair Capital Group and founder and former Chairman of NoonMark Advisors, LLC. Mr. Green pleaded guilty to two counts of securities fraud in connection with making false representations to investors to induce them to purchase shares in Mayfair. Those false representations included claims that the fund would invest in the hospitality industry and that it would conduct an IPO in London. As part of the plea agreement, Mr. Green will forfeit approximately $5.75 million. A date for sentencing has not been set.
U.S. v. Warwick, Case No. 3:09CR449 (E.D. Va. Filed Dec. 15, 2009) was brought against John Warwick, the president of Panama based Ports Engineering Consultants Corporation and Virginia based Overman Associates as discussed here. The indictment charges Mr. Warwick with one count of conspiracy to violate the FCPA based on approximately $200,000 in corrupt payments to Panamanian officials to secure a contract. The payments were made from 1997 through 2003. As a result the firm, secured a twenty year no bid contract for Ports Engineering. Under the contract the company maintained lighthouses and buoys along Panama’s water ways. The case is in litigation. Previously, Charles Jumet, an alleged co-conspirator, pleaded guilty in connection with this matter as discussed here.
SEC v. Benton, Civil Action No. 4:09-cv-03953 (S.D. Tex. Filed Dec. 11, 2009 is an action which names as a defendant Bobby Benton, the Vice President, Western Hemisphere Operations of Pride International, Inc. Mr. Benton was responsible for FCPA compliance in his region. Pride is one of the world’s largest offshore drilling companies.
The complaint, discussed here, alleges that Mr. Benton covered up evidence of bribes, authorized another and executed false FCPA certifications. Specifically, Mr. Benton is alleged to have covered up payments made to officials of the state owned oil company of Venezuela, Petroleos de Venezuela S.A. The payments were to secure a contract and ensure it continued. The complaint also claims that he failed to report certain corrupt payments made to Mexican officials. The case is in litigation.
NY AG Andrew Cuomo brought an action against Unlimited Wealth Associates and Robert Donald and his wife Annette Donald alleging that they were operating a Ponzi scheme. According to the papers, the scheme raised over $7 million nationwide from over 1,000 investors. Essentially the so-called fund was a pyramid scheme which promised investors a return of 2% per business day payable every 60 days for the first 180 day under one program. Other programs made similar spectacular offers. All were false. The AG obtained a freeze order over the fund. Mr. Cuomo acknowledged the assistance of the SEC and the U.S. Postal Inspection Service.
In France, the Financial Markets Authority concluded a two and one half year investigation into trading by seventeen executives of Airbus and its parent EADS, discussed here. The focus of the inquiry was whether the executives had traded in inside information when selling shares. At the time the newest airliner being built, the company was suffering production problems. The market regulator concluded that the executives had not violated insider trading laws.