To begin the new year and decade, the SEC won an important ruling in its Bank of America case, concluded settlements in two insider trading cases and wrapped up the “Enron Barge” case. At the same time, the Galleon insider trading case continued to move forward with another guilty plea. The Commission and DOJ also continued their focus on the FCPA, concluding another case.

The litigation with Bank of America

SEC v. Bank of America, Case No. 09 Civ. 6829 (S.D.N.Y. Filed Aug. 3, 2009) is the Commission’s action alleging proxy fraud by the bank during its solicitation regarding the acquisition of Merrill Lynch. Specifically, the complaint claims that a key schedule attached to the acquisition agreement showing that billions of dollars in bonuses had been approved for Merrill executives had been omitted while the materials furnished to shareholders suggested that bonuses would not be paid. Although the parities tried to settle this action, Judge Rakoff rejected it in a scathing order as discussed here.

Bank of America has contended since the rejection of the settlement that it did not defraud shareholders. This claim is based on the bank’s contention that information about the bonuses was widely available to shareholders from many sources. As the case moves toward trial, the bank has indicated it will offer testimony from several experts based in part on those sources. The SEC moved to exclude all evidence regarding reports about the bonuses that are outside the proxy materials.

In a January 4, 2010 ruling, Judge Rakoff granted the SEC’s motion. The court’s order is predicated on the fact that at the beginning and end of the Proxy Statement, shareholders were told to only rely on the information contained in the materials they were furnished. In reaching its conclusion the court stated that: “[I]n effect, the Bank is arguing that, even though it expressly warned its shareholders to disregard the media, it can now defend itself by asserting that a reasonable shareholder would have disregarded these warnings and, by consulting the media, perceived that the Bank’s alleged lies were immaterial. Even a zealous advocate might perceive that such an argument hints at hypocrisy.”

SEC enforcement actions

Aiding and abetting: SEC v. Bayly, Civil Action No. H-0300946 (S.D. Tex. March 17, 2003) is an action against former Merrill Lynch investment banking head Daniel Bayly. The complaint is based on the infamous “Enron barge” deal in which Enron allegedly sold an interest in certain Nigerian barges to Merrill in late 1999. The deal permitted Enron to book $28 million in revenue and $12 million in pre-tax income. In fact, the deal was a sham (see also U.S. v. Brown discussed here).

To resolve the case, Mr. Bayly consented to the entry of a permanent injunction prohibiting future violations of the antifraud, aiding and abetting and books and records and internal control provisions of the federal securities laws. He also agreed to the entry of an officer/director bar for five years and to pay $300,001 in disgorgement and civil penalties.

Insider trading: SEC v. Saleh, Case No. 3:09-CV-01778 (N.D. Tex. Filed Sept. 23, 2009) is an insider trading case centered on the plan of Dell Inc. to acquire Perot Systems, discussed here. According to the SEC, defendant Reza Saleh, an employee of Perot Systems, purchased call options in Perot shortly before the announcement based on inside information. On January 5, Mr. Saleh agreed to settle the action with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e) and the pertinent rules thereunder. Mr. Saleh also agreed to the entry of an order baring him from associating with an investment adviser in a related administrative proceeding. Under the terms of the settlement, the SEC will request that the court enter an order to distribute the frozen trading profits and determine an appropriate penalty. See Litig. Rel. 21361 (Jan. 6, 2010).

Insider trading: SEC v. Guttenberg, Case No. 07 CV 1774 (S.D.N.Y. March 1, 2007) was the blockbuster insider trading case of 2007. It was brought against a number of market professionals as discussed here. There were also parallel criminal actions. On January 5, the Commission settled with the last remaining defendant in its complaint. That defendant, Ken Okada, consented to the entry of a permanent injunction prohibiting future violations of Section 10(b). In addition, he agreed to disgorge trading profits of $327,191, payment of which was waived except as to $45,000 based on financial condition. See Litig. Rel. 21359 (Jan. 5, 2010). In a related administrative proceeding, Mr. Okada consented to the entry of an order barring him from associating from any broker, dealer or investment adviser. All of the parallel criminal cases have been resolved with pleas or convictions.


Investment fraud: CFTC v. Capital Funding Consultants, LLC, Case No. 2:09-cv-7409 (E.D. La. 2009) is an action against Matthew Pizzolato, William Guidry and Capital funding. The complaint alleges that Mr. Pizzolato solicited about $19 million and obtained over $3.1 million primarily from elderly investors based on claims that the funds would be invested safely. In fact, the money was put in high risk commodity futures and other instruments. Portions were misappropriated. The CFTC obtained a temporary freeze order followed by a preliminary injunction. Mr. Pizzolato was also named as a defendant in a criminal case based on the same conduct. U.S. v. Pizzolato, No. 2:09-cr-00378 (E.D. La. 2009).


SEC v. UTStarcom, Inc., Case No. CV-09-6094 (N.D. Cal. Filed Dec. 31, 2009) alleges that UTStarcom, a telecommunications company based in California, paid about $7 million for 225 foreign trips by employees of a Chinese state owned company. While the trips, made between 2002 and 2007, were alleged to be for training, the SEC claims that in fact there were largely entertainment. The complaint also alleges that there were expenditures for executive training programs in the U.S and field trips to nearby tourist destinations. In addition, the company provided $10,000 in French wine and $13,000 in other entertainment expenditures to employees of a government owned telecommunications customer in Thailand. In Mongolia, $1.5 million was paid to an agent for a so-called “license fee” when in fact the actual fee was only $50,000 and the balance was used to make improper payments to a government official.

The action was settled with the consent of the company to the entry of a permanent injunction prohibiting future violations of the anti-bribery, books and records and internal control provisions of the FCPA. The company also agreed to pay a $1.5 million penalty. See Litig. Rel. 21357 (Dec. 31, 2009).

To resolve the parallel criminal investigation, UTStarcom entered into an agreement with the Department of Justice under which it will pay a fine of $1.5 million. This payment is in addition to the one made as part of the settlement with the SEC.


U.S. v. Kumar, ( S.D.N.Y) is one of the “Galleon” insider trading cases, discussed here. Mr. Kumar is a former director of McKinsey & Company who is alleged to have tipped Raj Rajaratnam about the acquisition of ATI Technologies by Advanced Micro Devices. On Thursday Mr. Kumar pleaded guilty to one count of securities fraud and one count of conspiracy to committee securities fraud. During his plea Mr. Kumar stated that he was paid by Mr. Rajaratnam for inside information. Mr. Kumar will now cooperate with the government. To date, seven people have pleaded guilty as part of the Galleon investigation.

Circuit courts

SEC v. ING USA, Case No. 09-35250 (9th Cir. Dec. 29, 2009) is an appeal brought by creditors involved in the Commission’s enforcement action, SEC v. Sunwest Management, Inc., Case No. CV 06056 (D. Ore. Filed March 2, 2009). That case was brought against the operator of retirement facilities in 34 states. The complaint, discussed here, alleges that investors were defrauded in a securities offering. As the market crisis deepened and the company began to unravel, it was operated like a Ponzi scheme, according to the SEC. An asset freeze was obtained and a preliminary injunction entered.

The circuit court reversed the entry of the preliminary injunction. Since the district court failed to make any findings beyond stating that “good cause” was shown at the time the preliminary injunction was entered, the circuit court held that the order failed to comply with Federal Civil Rule 52 requiring that appropriate finds be made.

Private actions

A new report by Cornerstone Research concludes that the number securities fraud class actions filed last year fell by about 24% compared to the year before. Specifically. the number of suits filed dropped from 223 in 2008 to 169 in 2009. The annual average is 197, according to Cornerstone. The drop is attributed to the decline in the number of credit market suits tied to the subprime mortgage losses. The report is consistent with the one issued earlier by NERA, discussed here.

Seminar sponsored by the ABA Criminal Justice Section: January 13, 2010, Enforcement Trends in Securities & Commodities Actions 2010, in person in Washington, D.C. at 600 14th St. N.W. 9th Floor and webcast nationally.

Speakers: Adam Safwat, Deputy Chief, Fraud Section, Department of Justice; Steve Obie, Director, Division of Enforcement, CFTC; Laura Josephs, Assistant Director, SEC Division of Enforcement and Cheryl Evans, Special Counsel U.S. Chamber Initiatives For Legal Reform.

Series on Trends in Securities Litigation: This series will be concluded next week.