SEC enforcement this week brought another SOX claw back case, as well as actions alleging financial fraud and another investment fund case. DOJ dropped their appeals in the two Broadcom criminal option backdating cases which were dismissed for prosecutorial misconduct. DOJ’s action finally brought to an end two its highest profile cases in that area. The Department also moved to intervene in and stay a private action tied to FCPA violations pending the conclusion of its own probe. A foreign official who pleaded guilty to money laundering charges in connection with FCPA violations was sentenced to 48 months in prison.

SEC enforcement actions

Financial fraud: SEC v. Forbes, 01 civ 987 (D.N.J. Filed Feb. 28, 2001) is an action against Walter Forbes, the former Chairman of Cendant Corporation and E. Kirk Shelton, the former Vice Chairman of the company. The complaint alleged that Mr. Shelton participated in a fraudulent scheme which inflated the revenue of a predecessor of Cendant and also of that company. Over a twelve year period Mr. Shelton is alleged to have improperly inflated revenues. When the fraud was revealed, the stock price dropped dramatically and investors lost billions of dollars. Mr. Shelton settled the case with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5). Previously, Mr. Shelton was convicted of conspiracy, securities fraud, mail fraud, wire fraud and making false filings with the Commission. He was sentenced to 120 months in prison and ordered to pay criminal restitution of $3.275 billion. See also Litig. Rel. 21548 (June 3, 2010).

Financial fraud: SEC v. Diebold, Inc., Civil Action No. 1:10-CV00908 (D.D.C. Filed June 2, 2010); SEC v. Geswein, Civil Action No. 5:10-CV-01235 (N.D. Ohio Filed June 2, 2010). Both actions allege that over a five-year period Diebold, a manufacturer and seller of automated teller machines, engaged in fraud by: (1) improperly inflating revenue on what were called “F-term” orders, or factory orders, when shipping products; (2) improperly recognizing revenue on a lease transaction which was subject to a side buy-back agreement; (3) manipulating its reserves and accruals; (4) improperly delaying and capitalizing expenses; and (5) improperly increased the value of inventory. In 2008, Diebold restated its financial statements for the years 2003 through 2006 and the first quarter of 2007.

To resolve the Commission’s action, Diebold consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and the related rules. The company also agreed to pay a $25 million civil penalty. The second action, against the former CFO of the company, Gregory Geswein, the former Controller and later CFO, Kevin Krakora, and the former director of accounting, Sandra Miller, is in litigation. Both cases are discussed here.

Clawback: SEC v. O’Dell, Civil Action No. 1:10-CV-00909 (D.D.C. Filed June 2, 2010) is a settled action filed against Walden O’Dell, former CEO of Diebold, Inc., also discussed here. The Commission’s complaint centers on the same financial fraud as the two actions listed above regarding the company and its officers. Based on Section 304 of Sarbanes Oxley, this action seeks repayment of $470,016 in cash bonuses, 30,000 shares of Diebold stock and stock options for an additional 85,000 shares of stock. That compensation was paid to Mr. O’Dell during the twelve month period following the issuance of the Diebold’s 2003 Form 10-K as incentive and equity based compensation. The complaint does not allege that Mr. O’Dell participated in the wrong doing. Mr. O’Dell settled the action by consenting to the entry of a judgment requiring the repayment of the incentive and equity based compensation.

False statements: SEC v. Dragon, Case No. 20-CV-1186 (S.D. Cal. Filed June 2, 2010) is a settled action against Elizabeth Dragon, the former Senior Vice President of Research and Development at Sequenom, Inc. According to the SEC’s complaint, Ms. Dragon presented materially false and misleading scientific data about the prenatal screening test for Down syndrome of the company. Ms. Dragon falsely claimed that the test was highly accurate in predicting whether a fetus had Down syndrome when in fact she had manipulated the results and lied about the manner in which the testing was conducted. To resolve the action Ms. Dragon consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The court will determine the amount of any financial penalty. See also Litig. Rel. 21545 (June 2, 2010).

Investment fund fraud: SEC v. Perez, Civil Action No. 1:10-CV-21804 (S.D. Fla. Filed June 2, 2010) is an action against Luis Felipe Perez alleging violations of Securities Act Section 17(a) and Exchange Act Section 10(b). According to the complaint, Mr. Perez raised over $40 million beginning in 2006 and continuing through 2009 from investors based on false claims that he would arrange no-risk loan agreements. Some investors were falsely told that they would be paid returns ranging from 18% to 120% and that their money would be invested in New York pawn shops, collateralized by diamonds and that some would be beneficiaries on his life insurance. In fact, the defendant used portions of the funds to repay investors and misappropriated a large part of the money for his personal use. The case is in litigation. See also Litig. Rel. 21544 (June 2, 2010).

Option backdating: SEC v. Bonica, Civil Action No. 08 CV 4052 (S.D.N.Y. June 1, 2010) is a settled option backdating case against the former controller of Monster Worldwide, Inc., Anthony Bonica, discussed here. The complaint alleges that Mr. Bonica participated in a scheme at Monster between 1997 and 2003 in connection with option backdating. Specifically, during that period, in-the-money options were granted without reporting the compensation expense. Papers were prepared which made it appear that the options had been granted earlier when in fact they were not. This resulted in the public filings of the company with the SEC being false. On December 13, 2006, the company restated its financial statements for the period 1997 – 2005 in a cumulative pre-tax amount of about $339.5 million. Mr. Bonica is alleged to have received backdated options.

Mr. Bonica settled the action, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 14(a). He also agreed to pay disgorgement of $115,736.71, along with prejudgment interest and a civil penalty of $60,000. In a separate administrative proceeding, he consented to the entry of an order suspending him from appearing or practicing before the Commission as an accountant with a right to request reinstatement after three years.

Criminal cases

Option backdating: U.S. v. Samueli, Case No. 10-50024 (C.D. Cal.) and U.S. v. Nicholas, Case No. 10-50005 (C.D. Cal.) are the criminal stock option backdating cases brought against Broadcom Corp. co-founders Henry Samueli and Henry Nicholas. Previously the guilty plea by Mr. Samueli was vacated and the case dismissed and the charges against Mr. Nicholas were dismissed by the court. The dismissals were based on prosecutorial misconduct as discussed here. In filings made on May 28, 2010 in each case, the government dismissed its appeals of those rulings.


Aluminum Bahrain B.S.C. v. Sojitz Corp., Case No. 4:09-cv-04031 (S.D. Tex.) is a suit filed by Bahrain’s state owned aluminum producer against Japanese commodities trading giant Sojitz Group. The complaint, which alleges violations of the Federal Civil Rico statute, 18 U.S.C. § 1962(c) and others, claims that the defendant paid about $15 million in bribes over 13 years to obtain discounts on aluminum prices in violation of the FCPA and other statutes. On May 29, 2010, the Department of Justice filed a motion requesting it be permitted to intervene and that the suit be stayed pending the resolution of its criminal investigation and any resulting criminal charges against the defendants.

U.S. v. Antoine, Case No. 09-CR-21010 (S.D. Fla.) is an action in which Robert Antoine pleaded guilty to conspiracy to commit money laundering. Mr. Antoine, a director of international affairs for Haiti’s state owned national telecommunications company, admitted in connection with his plea that from May 2001 to April 2003 he accepted bribes from three U.S. telecommunications companies, defrauding Haiti Teleco. To disguise the origin of the funds, he laundered them through intermediary companies. The court sentenced Mr. Antoine to 48 months in prison. He was also ordered to serve three years of supervised release following the prison term and to pay $1,852,209 in restitution and to forfeit $1,580,771.

New book

“Warning The Witness” by Gary Collins and David Seide is a new guide to issues of attorney client privilege in internal investigation. The book is available from the ABA.