This Week In Securities Litigation (February 1-7, 2008): Record Settlement, Option Backdating and Insider Trading
$65 million to settle one options backdating case
Despite agreeing to pay what is reported to be one of the largest settlements in a securities class action based on backdating, semiconductor process control company KLA-Tencor Corp. still faces a tangle of litigation. The company recently agreed to pay $65 million to settle a securities class action suit based on stock option backdating. Lead plaintiffs in the case are three institutional investors, the Philadelphia Board of Pensions and Retirement, the Police and Fire Retirement System of the City of Detroit and Louisiana Municipal Police Employee’s Retirement System.
Despite the settlement, the company still faces a maze of litigation. Five derivative suits are pending. The U.S. Attorney’s Office, the Department of Labor and the Internal Revenue Service are also conducting investigations.
Last July, the company settled with the SEC by consenting to the entry of a statutory injunction prohibiting future violations of the books and records provisions of the Exchange Act. SEC v. KLA–Tencor Corp., Case No. C07 3799 (N.D. Cal. Filed July 25, 2007). A separate suit filed by the SEC against Kenneth L. Schroeder, the former CEO of the company, is still pending. SEC v. Schroeder, Case No. C07 3798 (N.D. Cal. Filed July 25, 2007).
A conviction in the TXU insider trading case
The government resolved two significant insider trading cases last week. On Monday, the jury returned a guilty verdict in the insider trading case of Hafiz Muhammad Zubair Naseem, U.S. v. Naseem, Case No. 1:07-cr-00610 (S.D.N.Y. Filed May 3, 2007). The jury returned guilty verdicts on all 28 counts.
The case against Mr. Naseem is one of the actions discussed here, stemming from the KKR lead takeover of TXU announced on February 26, 2007. Within days of that announcement, the SEC brought an action claiming that then unknown traders had purchased 8,020 call options for TXU prior to the announcement through Credit Suisse, Zurich and Firmat Banque, Frankfurt. The SEC subsequently amended its complaint twice, each time naming additional defendants. The second amendment on May 3, 2007 named Mr. Naseem as a defendant, alleging that the Credit Suisse investment banker tipped a Pakistani banker who bought 6,700 call options and made a profit of about $5 million. At the same time, the U.S. Attorney’s office filed criminal charges against Mr. Naseem. The SEC’s case is still pending. SEC v. One or More Unknown Option Purchasers, Civil Action No. 1:07-cv-01208 (N.D. Ill. Filed March 2, 2007).
The SEC settles the News Corp/Dow Jones case
The SEC did however settle another significant insider trading case it brought last year – the News Corp – Dow Jones case, SEC v. Kan King Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. Filed May 8, 2007). After amending its complaint and adding defendants, the SEC settled the case with four defendants who agreed to pay about $24 million to resolve the case, in addition to consenting to statutory injunctions. The resolution of that case, discussed here, is particularly significant since the SEC brought the it within days of the announcement of News Corps’ takeover bid for Dow Jones apparently based on little more than the trading records and brokerage information.
Continued war on insider trading
As the SEC and DOJ intensify their war on insider trading, a new target has emerged: Société Générale, the subject of a huge scandal stemming from huge trading losses. Since the scandal broke, there has been speculation that the French financial institution might be taken over. A flurry of investigations have also been opened. The SEC and DOJ are reportedly now investigating whether there was insider trading in advance of the announcement of the scandal.
Finally, SEC Enforcement Director Linda Thomsen indicated in testimony before the U.S. China Economic and Security Review Commission on February 7, 2008 that the Commission is expanding its war on insider trading. In addition to traditional targets, like trading in advance of takeovers and other public announcements, hedge funds or the much talked about review of executive Rule 10b5-1 plans (here), the staff is now concerned about insider trading and sovereign wealth funds. According to Ms. Thomsen, the staff also has other compliance concerns about these funds.