THIS WEEK IN SECURITIES LITIGATION (November 20, 2009)
The Financial Fraud Task Force replaced the 2002 Corporate Fraud Task Force this week. The new group, created by executive order, is composed of a broad array of federal departments and regulatory agencies. Like its predecessor, it is charged with rooting out and prosecuting financial fraud.
The SEC continued to focus on insider trading, offering fraud and Ponzi schemes. The agency also brought an action against two former Madoff computer programmers which tracks criminal charges filed in the Southern District of New York.
FCPA enforcement continued to be a key DOJ enforcement priority, with another guilty plea. At the same time the Department cautioned big pharma, in a speech by an assistant AG, that is will be carefully scrutinized in view of the extensive involvement of foreign governments in healthcare systems and the potential for corrupt payments.
The President issued an executive order this week establishing the Interagency Financial Fraud Task Force. The Order was announced by AG Eric Holder, treasury Secretary Tim Geithner, HUD Secretary Shaun Donovan and SEC Chairwoman Mary Schapiro. The task force, which brings together a broad range of federal agencies and state and local partners, is charged with investigating and prosecuting significant financial crimes. It replaces the Corporate Fraud Task Force, established in 2002. It is composed of senior officials from 23 departments and agencies including DOJ, Treasury, Commerce, Labor, HUD, Education, Homeland Security, the SEC, the CFTC, the FTC, the FDIC, the Fed and others. The group also includes the relevant Offices of Inspectors General and additional executive branch agencies, offices and departments designated by the President or the Attorney General. The first meeting will be called in the next thirty days.
SEC enforcement actions
Insider trading: SEC v. Hashemi, Case No. 09-CV-6650 (S.D.N.Y. July 27, 2009 ) is an insider trading case brought against Khaled Al Hashemi, a citizen and resident of Abu Dhabi, UAE, discussed here. Mr. Hashemi, alleged to have traded in advance of the announcement that Nova Chemicals would merge with International Petroleum Investment Co., settled with the Commission. In addition to consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b), the defendant agreed to pay disgorgement of about $450,000, prejudgment interest and a penalty of just over $400,000. See also Litig. Rel. 21307 (Nov. 19, 2009).
Insider trading: SEC v. Axiaq, Case No. C-08-CV-4637 (N.D. Cal. Filed Oct. 7, 2008) is an insider trading case based on the acquisition in 2007 of Restoration Hardware, Inc. by a private equity firm. The SEC claimed that company vice president Ciriaco Rivor learned about the deal and tipped his friend Emmanuel Axiaq who was told to pass the information to his father, Francis Axiaq. Francis Axiaq had potential trading profits after the announcement of the transaction of over $880,000, but later sold the stock, realizing profits of about $400,000. This week, he consented to the entry of a permanent injunction. Mr. Axiaq also agreed to the entry of an order requiring him to pay disgorgement of over $880,000, prejudgment interest and a civil penalty of $250,000. See also Litig. Rel 21303 (Nov. 18, 2009). The other defendants previously settled.
Financial fraud/unregistered securities: SEC v. Big Apple Consulting USA, Case No 6:09-cv-1963 (M.D. Fla. Filed Nov 18, 2009), discussed here, is an action against a public relations firm and its principals and CyberKey Solutions, Inc. and its principals. The complaint alleges that Big Apple and its principals participated in a scheme through which millions of unregistered shares of CyberKey stock were sold to the public over an almost two-year period, beginning in 2005. The sales were predicated on the false claim that CyberKey had obtained a $25 million purchase order from the U.S. Department of Homeland Security. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See also SEC v. Grocock, Civil Action No. 09-cv-1833 (M.D. Fla. Filed Oct. 29, 2009).
Financial fraud: SEV v. Silva, Case No. 09-5395 (N.D. CA. Filed Nov. 17, 2009), discussed here, names as a defendant Benjamin Silva, III, VP of world sales for Silicon Valley semiconductor company Tvia, Inc. The complaint claims that Mr. Silva caused the company to falsify its financial books and records in two ways. First, over a period of almost two years, beginning in September 2005, he caused the company to improperly report millions of dollars in revenue on sales where there were undisclosed side agreements precluding recognition. Second, he had the company misapply about $300,000 in payments from new customers to past due accounts avoid the reversal of those transactions by the auditors. As a result, Tvia materially overstated revenue for the second and third quarters of fiscal 2006, for fiscal year end 2006 and for the first quarter of fiscal 2007. The complaint alleges violations of the antifraud provisions. The case is in litigation.
Ponzi scheme: SEC v. Mantria Corporation, Case No. 09-CV-02676 (D. Colo. Filed Nov. 16, 2009) named as defendants the company, its principals, Speed of Wealth, LLC and its principals. According to the complaint, the defendant raised about $30 million from more than 300 investors with claims that the money would be invested in “green” initiatives such as supposed “carbon negative” housing. Investors were also promised returns which ranged from 17% to “hundreds of percent.” The claims were false. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See also Litig. Rel. 21301 (Nov. 17, 2009).
Financial fraud: SEC v. Bjorkstrom, Case No. 09-5394 (N.D. Cal. Filed Nov. 17, 2009), also discussed here, is the companion case to Silva. The action is against Diane Bjorkstrom, former CFO of the company. The complaint alleges she participated in the misconduct at the company in two ways. First, by causing $325,000 in revenue to be improperly recognized. Second, by failing to “stand up” to efforts by Mr. Silva when he manipulated the accounting records and misapplied customer payments to deceive the outside auditors. The complaint alleged violations of Securities Act, Sections 17(a)(2)&(3) and aiding and abetting violations of the books and records and internal control provisions. It also claims that she signed false CFO certifications.
To settle Ms. Bjorkstrom consented to the entry of a permanent injunction. The defendant also agreed to pay a civil penalty of $20,000 and to the entry of an order barring her from appearing or practicing before the Commission as an account for two years.
False financial statements: SEC v. Bancinsurance Corp., Case No. 1:09-CV-02155 (D.D.C. Filed Nov. 16, 2009) is an action against an Ohio insurance company and its CEO, John Sokol. The complaint claims that the Form 10-K filed with the SEC for fiscal 2003 was false and misleading because it failed to properly account for more than $2 million of reinsurance claims. Mr. Sokol also filed to ensure that the CFO and auditors were aware of this fact. The defendants settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Section 10(b) as well as the books and records provisions. See also Litig. Rel. 21300 (Nov. 16, 2009).
Offering fraud: SEC v. Kaleta, Civil Action No. 4:09-cv-3674 (S.D. Tex. Filed Nov. 13, 2009) names as defendants Albert Kaleta and his company Kaleta Capital Management. The complaint alleges that the defendants raised about $10 million from 50 investors through a fraudulent offering of promissory note securities. Investors were told that their funds would be invested in credit worthy businesses. In fact, a significant portion of the proceeds were placed in affiliate companies with no prospect of repayment. The complaint alleges violations of Sections 17(a), 10(b) and Adviser Act Section 206. The defendant consented to the entry of a permanent injunction and the appointment of a receiver. See also Litig. Rel. 21293 (Nov. 13, 2009).
U.S. v. O’Hara, Case No. 1:09-mj-02484 (S.D.N.Y. Filed Nov. 12, 2009) names as defendants computer programmers Jerome O’Hara and George Perez, who worked for Bernard Madoff and helped him cover up his scheme. The two are alleged to have facilitated the Ponzi scheme by creating and maintaining false trading records, DTC records and other phantom books and documents to cover up the scheme. See also, SEC v. O’Hara, Civil Action No. 09 CV 9425 (S.D.N.Y. Filed Nov. 13, 2009). See also Litig. Rel. 21292 (Nov. 13, 2009).
U.S v. Jumet, Case No. 09-cr-0397 (E.D. Va. Filed Nov. 13, 2009). Charles Jumet pleaded guilty to a two-count information based on participating in a conspiracy to bribe Panamanian officials in connection with obtaining business under a maritime contract. Beginning in December 1997 and continuing through July 2003, as discussed here, Mr. Jumet made a series of corrupt payments to officials in Panama to obtain a no-bid 20-year concession to perform the work along a waterway. Payments were made through Panama company Ports Engineering, which is affiliated with Overman Associates, an engineering firm based in Virginia Beach, Va. Mr. Jumet is cooperating with the on-going DOJ investigation. His sentencing is scheduled for February 12, 2010.
Speech by Asst. AG Lanny Breuer: In his remarks to the Tenth Annual Pharmaceutical Regulatory and Compliance Congress, Mr. Breuer stated that the Department is focusing FCPA compliance in the pharmaceutical industry. This is based on the depth of government involvement in foreign health care systems and the significant risk that corrupt payments will infect the process.
Janvey v. Adams, Case No. 09-10761 and Janvey v. Letsos, Case No. 09-10765, discussed here, consider the question of whether a receiver for the Stanford companies can file claw back claims against investors who held CDs. The court held that a person can only be named as a relief defendant if two conditions are met: (1) the person has received ill-gotten funds; and (2) that person does not have a legitimate claim to those funds. Here, the relief defendants were paid from ill-gotten gains, but they had a legitimate claim on the money invested in the CDs.
MetLife and three of its affiliates were fined $1.2 million this week for failing to establish an adequate supervisory system for the review of broker’s email with the public. The failures permitted brokers to engage in undisclosed outside business activities and private securities transactions without detection by the firm. This resulted in significant losses for firm customers. While the firm and its affiliates had a policy in place, it relied on brokers to monitor the email traffic and report it to supervisors. Brokers were also able to delete email from their assigned computers, rendering spot-checks unreliable.
Fiala v. Metropolitan Life Ins. Co., Case No. 9:00 cv 02258 (E.D.N.Y) is a securities class action based on claims that the company misled policy holders when it became a public company in 2000. In April 2000, the company completed its demutualization from an insurer owned by policyholders to a stock insurance company. There were alleged misrepresentations and omissions in connection with this process. To resolve the long running suit the company agreed to pay $50 million.
Plichta v. Sunpower Corp., Case No. 3:09-cv005473 (N.D.CA. Nov. 18, 2009) is a class action which claims that the company issued false financial statements in its quarterly reports in 2008 and 2009 and in its annual report for 2008. The false statements are alleged to relate to unsubstantiated accounting entries regarding the cost of goods sold to the company subsidiary in the Philippines and to the SOX certifications made regarding internal controls.