New statistics from NERA show that in the first fiscal quarter of 2010 the number of SEC enforcement settlements increased significantly. This week, the Commission continues to struggle with the settlement of its actions against Bank of America, with more inquiries coming from the court. Enforcement focused on insider trading and option backdating. The SEC prevailed on a summary judgment motion in one insider trading case, but lost on a directed verdict in an options backdating action. In a criminal case arising out of the Stanford Ponzi scheme case the court entered a motion for acquittal on criminal obstruction charges while the jury was deliberating. The parties in another private damage action based on option backdating claims reached a tentative settlement.

SEC statistics

A new report by NERA Economic Consulting notes that the number of SEC enforcement settlements increased for the first fiscal quarter of 2010. In that quarter, there were 205 settlements compared to 181 in the prior quarter and 123 in the same quarter in 2009. The report also notes that the settlement amounts were modest. The average and mean were lower than those for 2009. NERA’s reports regarding settlement amounts are based on the total dollars involved, adding together disgorgement, prejudgment interest and penalties.

SEC v. Bank of America

Since the SEC and Bank of America filed their new proposed settlement of the Commission’s cases, and the NYAG brought a parallel action, the court has been evaluating the proposed settlement as discussed here. Initially, the court asked for certain specific discovery materials which focused largely on the decision making process about whether to disclose the mounting losses at Merrill Lynch and the bonuses. In that request, the court also asked if the parties would approve certain modifications which would potentially give the court more control over the corporate governance provisions in the settlement.

This week the SEC and the bank filed responses. Both agreed with the proposed corporate governance changes requested by the court, although the bank objected to modifying the proposal regarding the compensation specialist.

The SEC and the bank also filed a joint chronology which essentially refutes a suggestion in the papers of the NYAG that the bank’s general counsel was dismissed because of decisions regarding the Merrill deal. Essentially, the new chronology contradicts claims in the NYAG complaint noting that disclosure of the Merrill losses was recommended by a number of persons. The chronology is backed up by an appendix of discovery materials. The NYAG declined a request from the court for certain deposition transcripts which supposedly support its position on the termination of the bank’s general counsel in December 2008. The court has requested additional discovery materials and promised a ruling on the settlement by Monday.

SEC enforcement actions

Insider trading: SEC v. Scoppetuolo, Civil Action No. 1:10-CV-20475 (S.D. Fla. Filed Feb. 16, 2010 named as defendants Steven Scoppetulo, Robert Tocci, Sarang Ahuja, Richard White and Eric Gordon. The complaint centers on two separate groups of traders who traded in the securities of World Fuel Services Corporation while in possession of inside information. Group one involves Messrs. Scoppetuolo, a World Fuel executive, his best friend Mr. Tocci, the former CFO of the company, and their broker Mr. Ahuja. Mr. Scoppetuolo is alleged to have tipped Mr. Tocci regarding upcoming earnings information and then one or both men tipped their broker. Mr. Tocci sold options and shorted the stock prior to the announcement, making profits of about $262,000 and avoided a $34,000 loss. The broker and his customers made about $170,000.

The second group involved Mr. White, the vice president of tax for the company, along with Mr. Gordon and two of his friends. Mr. White tipped Mr. Gordon who in turn tipped his two friends. Defendant Gordon and his friends bought options and made about $659,000. The case is in litigation. See also Litig. Rel. 21415 (Feb. 16, 2010).

Insider trading: SEC v. Horn, Civil Action No. 1:10-CV-00955 (N.D. Ill. Feb. 16, 2010) is an action against Gerald Horn, a medical director for one of the facilities of LCA Visions, Inc., for insider trading in the securities of his company. According to the SEC, from December 2005 through August 2006 the defendant traded while in possession of inside information when he made six separate purchases of LCA options resulting in gains of abut $869,629. In addition, he also was in possession of inside information when he exercised his company stock options and avoided a loss of about $533,603. The inside information came from internal reports about the number of laser eye surgeries done. Those reports permitted the defendant to estimate if the company would meet guidance. Although defendant Horn never traded in options other than for his company, when trading those he never lost. The case is in litigation. See also Litig. Rel. 21414 (Feb. 16, 2010).

Options backdating: SEC v. Shanahan, Case No. 4:07-cv-1262 (E.D. Mo. Filed July 12, 2007) is an options backdating case brought against a father and son, Michael F. Shanahan and Michael F. Shanahan, Jr. The father is the former CEO of Engineered Support Systems, Inc. The son was a member of the board’s compensation committee. According to the SEC, both defendants participated in an option backdating scheme from 1997 through 2002. During that time, about $20 million in options were issued to senior executives and employees. Overall the father obtained about $8.9 million from backdated grants while the son made approximately $379,000.

The father settled with the SEC earlier this year. The son went to trial. At the conclusion of the evidence, the court dismissed the jury and directed a verdict in favor of the son. Essentially the court held that on each of its claims the SEC failed to present evidence regarding the appropriate standards. This failure of proof would leave the jury to speculate as to the proper standard and ultimately the outcome as discussed here.

Insider trading: SEC v. Suman, Case No. 07 Civ. 6625 (S.D.N.Y. Filed July 24, 2007) is a pillow talk insider trading case brought against a husband and wife, Shane Bashir Suman and Monie Rahman. The couple maintained separate residences. Mr. Suman worked for a division of Ontario based MDS, Inc. On January 29, 2007 MDS announced a friendly tender offer for Molecular Devices at $35 per share. Following the announcement the share price increased by 45%.

Prior to the deal announcement, Mr. Suman learned information about the acquisition from a variety of sources. During the negotiations he had access to internal e-mails regarding the deal. Just before the deal announcement the couple purchased options for $103,516 and 12,000 equity shares for $287,758.54. Following the announcement, the couple had profits of $1,039,440. At the conclusion of discovery, the court granted summary judgment in favor of the SEC. The ruling is based on the fact that the defendants invoked the Fifth Amendment, the access to information of the husband, and the atypical trading pattern. The court entered an injunction against both defendants and directed disgorgement on a joint and several basis. The penalty was apportioned to reflect the role of each defendant with Mr. Suman being ordered to pay $2 million and his wife a $1 million.

Option backdating: SEC v. Byrd, Case No. C 07-4223 (N.D. Cal. Filed Aug. 17, 2007) is an options backdating case against Michael Byrd, the former CFO and later COO and President of Brocade Communications. The complaint alleges that Mr. Byrd obtained information suggesting that former Chairman Gregory Reyes, who is awaiting re-trial on criminal charges, was improperly backdating stock options and later that he was involved in the process.

Mr. Byrd settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a)(2) & (3) and Exchange Act Sections 13(b)(5) and 16(a) as well as the pertinent rules. Mr. Byrd also agreed to pay a fine of $175,000 and disgorgement and prejudgment interest of $249,843. The Release does not indicate that Mr. Byrd agreed to be barred from practice before the Commission under Rule 102(e). See also Litig. Rel. 21412 (Feb. 12, 2010).

Criminal cases

Document destruction: U.S. v. Perraud, Case No. 09-cr-60129 (S.D. Fla.) is the document shredding case arising out of the Stanford investment fraud action. The case was brought against Thomas Raffanello and Bruce Perraud, respectively, the former head of security and a security specialist. The men were accused of obstructing the SEC’s investigation into the alleged Stanford Ponzi scheme by destroying documents. While the jury was deliberating, the court granted a motion for acquittal made by the defendants.


BAE Systems PLC resolved FCPA charges with the UK Serious Fraud office and DOJ. In the U.S., the company will plead guilty to one count of conspiracy to make false statements about having an internal compliance program regarding the FCPA and pay a $400 million fine. The charges stem from undisclosed payments made in connection with defense materials that were leased to the Czech Republic and Hungary and sold to Saudi Arabia. In the U.K., the company will pay a penalty of about $47.26 million and plead guilty to failing to keep reasonably accurate accounting records in connection with the supply of an air traffic control system to Tanzania. The investigation into the actions of the company was at one time halted by the British prime minister.


H&R Block Financial Advisors and one of its brokers resolved an inquiry with FINRA for having inadequate supervision of reverse convertible notes. The inquiry determined that one broker sold the structured product, which consists of a high yield short term note of an issuer and effectively a put option linked to the performance of an unrelated or linked asset such as common stock, to a retired couple. The couple had, based on the recommendation of the broker, invested nearly 40% of their total liquid net worth in nine reverse convertible notes or RCNs. This exposed the customers to a risk of loss that was inconsistent with their objectives and which ultimately resulted in a substantial loss. The firm failed to have adequate procedures to supervise the concentration of RCNs. To resole the matter the firm agreed to pay a $200,000 fine and pay restitution to the couple. The broker was suspended for 15 days, fined $10,000 and ordered to disgorge $2,023 in commissions.

New York AG

The New York Attorney General settled an insider trading action former senior UBS executive David Shulman. According to the AG, between August 2006 and August 2008 Mr. Shulman was UBS’ highest ranking executive with day to day responsibility for the ARS program. Between December 11 and 13, 2007 he learned that the program was in distress and that the upcoming auction in student loan ARS could fail. On December 13 Mr. Shulman instructed his broker liquidate his $1.45 million in holdings in these securities. To resolve the Martin Act claims Mr. Shulman agreed to pay $2.75 million as a civil penalty and to be suspended from association with a broker or dealer for a period of 30 months.

Private actions

Options backdating: In re Juniper Sec. Litig., Case No. 06-4327 (N.D. Cal.) is a shareholder suit against the networking equipment manufacturer which was filed in 2006 based on option backdating claims. The complaint alleged that options were backdated over a three year period beginning in 2003. The suit also named several executives as defendants. The company has agreed to pay $169 million to resolve the case. The settlement is subject to court approval. The company previously settled similar claims with the SEC as well as a derivative action.