The Commission had a difficult week in court with the rejection of a settlement in one high profile case, while all if its claims against another defendant were dismissed. Rather than being settled, Bank of America is now set for trial, while the former general counsel of Mercury Interactive secured a dismissal of option backdating charges, although leave to re-file was granted.

The SEC fared better in other matters however, filing a settled financial fraud case and a settled insider trading action. The Commission also continued its reform efforts with the creation of a new Division of Risk, Strategy and Financial Innovation.

FCPA enforcement continues as a key enforcement priority with DOJ prevailing in its third trial this year based on violations of the Act. The Department also brought additional criminal charges based on the claimed Stanford Ponzi scheme. In private actions, Citibank won dismissal of a consolidated class action complaint based on ARS claims.

SEC reform

The SEC created a new Division of Risk, Strategy and Financial Innovation, which will be headed by former University of Texas Law School Professor Henry Hu. The new division combines the former Office of Economic Analysis and Office of Risk Assessment and adds five other functions: 1) strategic and long term analysis; 2) identifying new developments and trends in the financial markets and systemic risk; 3) providing recommendations on how these new trends impact the work of the Commission; 4) conducting research to support the functions of the Commission; and 5) providing training on new developments, trends and other matters.

SEC enforcement actions

Option backdating: SEC v. Mercury Interactive, LLC, Case No. C07-28822 (N.D.CA. Filed May 31, 2007) is an option backdating case brought against Mercury Interactive and four of its former officers. The company previously settled with the SEC as discussed here. See also Litig. Rel. 20136 (May 31, 2007). Essentially, the SEC’s complaint alleged that the individual defendant orchestrated the backdating of forty-five option grants between 1997 and 2002 while concealing the true nature of the transactions and the related expenses. One of the four individual defendants, former CFO Sharlene Abrams settled after the case was filed, leaving as defendant former Chairman Amnon Landan, former CEO Douglas Smith and former General Counsel Susan Skaer.

After filing an amended complaint and discovery, the court granted motions to dismiss two counts of the complaint as to Messrs. Smith and Landan, a third as to Mr. Smith and the entire action as to Ms. Skaer. As to the former chairman and CFO, the court dismissed counts based on Exchange Act Section 16(a) and SOX Section 304 for failure to plead the claims with sufficient detail. In ruling on the Section 304 claim, the court concluded that the Section could not be applied retroactively, but found that its application was governed by the filing of a periodic report with the incorrect information, not the date of the misconduct as claimed by defendants. The court also granted Mr. Smith’s motion to dismiss an Exchange Act Section 14(a) claim for failure to adequately plead supporting facts. Finally, the court rejected the SEC’s efforts to avoid dismissal as to Ms. Skaer despite an admission that she was only involved in three of the improper grants. The court concluded that the amended complaint was simply too vague to ascertain her role in the claimed scheme.

Proxy fraud: SEC v. Bank of America, discussed here, is set for trial after the court rejected the settlement of the SEC and the Bank. The SEC’s enforcement action alleged that the Bank deceived shareholders in the vote to approve its acquisition of Merrill Lynch by not telling them that up to $5.8 billion in bonuses had been approved for executives at the brokerage firm. The Bank agreed to settle by consenting to an injunction and the payment of a $33 million fine. No action was brought against any individuals as discussed here.

The court, however, had questions about the settlement. In two rounds of briefing the Commission tried to explain how privilege assertions blocked the identification of those who made the decision not to tell the shareholders about the bonuses – a disclosure issue delegated to outside counsel according to Bank witnesses. The Bank failed to explain to the court’s satisfaction the reason it was paying $33 million while claiming that it had done nothing wrong. In a scathing order, the court suggested that the SEC agreed to the settlement to cover its lack of any meaningful enforcement effort, while the Bank offered to pay a fine with money from the shareholders who had been defrauded to end a potentially embarrassing situation. Ultimately, the court concluded that the only way for the truth to emerge is to move the case to trial. In a parallel inquiry being conducted by the New York Attorney General, Mr. Cuomo reportedly issued subpoenas for selected members of the Bank’s board of directors, including the audit committee.

Financial fraud: SEC v. Fuhlendorf, Case No. C-09-1292 (W.D. Wash. Filed Sept. 14, 2009), discussed here, is an action against the former CFO of Isilon Systems, Inc. The complaint claims that following a successful IPO after which the share price increased by 77% there was significant concern that the company could not enter into sufficient deals to generate the revenue to meet street expectations. Accordingly, the defendant personally negotiated a number of contracts with side arrangements to induce purchasers to take product but which should have prevented the revenue from being recognized. Nevertheless, the revenue was booked. Mr. Fuhlendorf also authorized the recognition of revenue from other transactions, including one fraudulent round trip deal about which he lied to the audit committee.

In February 2008 the company restated its financial statements following an internal investigation. The case against Mr. Fuhlendorf, which alleges violations of the antifraud and reporting provisions, is in litigation. See also Litig. Rel. 21210 (Sept. 14, 2009). A related case based on the same conduct but only alleging violations of the reporting provisions against the company was settled with a consent injunction. SEC v. Isilon Systems, Inc., Case No. C-09-1292 (W.D. Wash. Filed Sept. 14, 2009)

Insider trading: SEC v. Moss, Case 1:09-cv-01611 (W.D. La. Filed Sept. 14, 2009) is a settled insider trading action against Allen Moss. According to the complaint, Mr. Moss traded in the securities of Callon Petroleum based on inside information prior to the announcement that it was suspending development of a significant drilling project. Mr. Moss obtained the information from his long time live-in girlfriend after which he sold short 19,000 Callon shares, realizing a profit of over $75,000. To resolve the case, Mr. Moss consented to the entry of a permanent injunction and agreed to pay disgorgement, prejudgment interest and a civil penalty equal to the amount of the disgorgement. See also Litig. Rel. 21209 (Sept. 14, 2009).

Financial fraud: SEC v. Cole, Civil Action No. 3:09-CV-2107 (N.D. Ohio Filed Sept. 11, 2009) and In the Matter of Dana Holding Corporation, Adm. Proc. File No. 3-13614 (Sept. 11, 2009), discussed here, are two related settled financial fraud cases. Both center on a financial fraud and the inadequate internal controls at the predecessor of Dana Holdings from 2004 through mid-2005. The civil injunctive action names as defendants four former senior executives of Dana’s Heavy Vehicle Technologies and Systems Groups. The administrative proceeding names the company as a respondent in a books and records action.

Both actions are based on efforts to improve the operating results in the Commercial Vehicle Systems subdivision of Dana’s Heavy Vehicle business unit. The complaint and Order for proceedings allege that the financial statements of the company were misstated in part as a result of a scheme carried out by the individual defendants to inflate income. Key elements of the scheme included: 1) the recognition of income on transaction where assets were never transferred or the risk of ownership never passed; 2) the recognition of revenue for price increases on parts sales without agreement from the customers; 3) improperly deferring recognition of certain surcharges; and 4) making a series of improper accounting entries that lacked proper support. In addition, from 2004 through the first two quarters of 2005, the books and records of the company contained errors amounting to $56.4 million.

To resolve the civil injunctive action, the individual defendants each consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions of the securities laws. Each of the defendants also agreed to pay disgorgement and prejudgment interest while three of the four consented to pay a civil penalty. To resolve the administrative proceeding the company agreed to the entry of an order directing it to cease and desist from committing or causing any violations of the reporting provisions and the related rules.

Investment fund fraud: SEC v. Poetter, Civil Action No. 6:09CV398 (E.D. Tex. Filed Sept. 11, 2009) is a settled investment fund fraud action alleging that Paul Poetter and his affiliated entities raised about $5.2 million from more than 2,300 investor with false promises that they could exchange their shares for those of a publicly traded company and that his related companies had acquired or were acquiring valuable assets. In fact, they had not and defendant Poetter misappropriated millions of investor dollars. The action was settled with a consent injunction prohibiting future violations of the antifraud and reporting provisions and an order that the defendants collectively disgorge $5.2 million along with prejudgment interest. Mr. Poetter also agreed to the entry of an officer director bar and to pay a $150,000 civil penalty. All of the defendants consented to the appointment of a receiver. See also Litig. Rel. 21206 (Sept. 11, 2009).

Financial fraud: A settlement in SEC v. Tenet Healthcare Corp., Civil Action No. CV 07-2144 (C.D. Cal. Filed Sept. 11, 2009) is the latest in a series of cases based on the inflation of earnings at Tenet Healthcare through a scheme which exploited Medicare’s outlier reimbursement regulations as discussed here. Thomas Mackey, the settling defendant here, is the former co-president and COO of the company. According to the Commission he was the principal architect of the scheme which inflated the revenues of the company by taking advantage of regulations which provided additional reimbursement to hospitals to cover the additional costs for treating extraordinarily sick patients. To resolve the action, Mr. Mackey consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions. He also agreed to disgorge over $1.7 million obtained by exercising his stock options during the period revenues were artificially inflated along with prejudgment interest and to pay a $500,000 civil penalty. In addition Mr. Mackey consented to the entry of an officer director bar. See also Litig. Rel. 21205 (Sept. 11, 2009).

Criminal cases

Ponzi schemes: U.S. v. Lipton, Case No. 05-cr-0316 (C.D. Cal. Filed May 13, 2005) is a case in which defendant Teresa Vogt pleaded guilty to one count of obstruction of justice. The case, based on an indictment returned in 2005, centers on the operations of a Ponzi scheme called the Genesis Fund. Ms. Vogt and her co-defendants told investors that Genesis operated as foreign currency exchange investment fund which paid monthly returns of 4%. Ms. Vogt was the primary administrator and later manager for the fund. She is cooperating with the government and will testify at trial.

Ponzi schemes: U.S. v. Perraud, Case No. 0:09-cr-60129 (S.D. Fla. Filed May 7, 2009) is a case in which Thomas Raffanello, former global director of security at the Fort Lauderdale, Fla. Office of Stanford Financial Group, was charged in a superseding indictment with conspiring to obstruct the SEC’s investigation into the Group. The superseding indictment naming Mr. Raffanello was brought in a case initially filed against Bruce Perraud, a former global security specialist for that group. The indictment alleges that the U.S. District Court for the Northern District of Texas issued an order instructing all Stanford Group employees to preserve all documents and records. Six days after Mr. Perraud informed Mr. Raffanello about the order, defendant Raffanello directed and then supervised the shredding of Stanford Group documents.


U.S. v. Green, Case No. 2:08-cr-00059 (C.D. Cal. Filed Jan. 16, 2008) is an FCPA case which named Mr. and Mrs. Green, the owners of Film Festival Management, Inc., as defendants. Last week a jury returned a verdict finding the couple guilty on nineteen of twenty one counts of conspiracy, FCPA charges and money laundering as discussed here. The superseding indictment claimed that Mr. and Mrs. Green paid about $1.8 million in bribes to the former governor of the Tourism Authority of Thailand. In turn, the defendants received contracts to manage and operate Thailand’s yearly Bangkok International Film Festival and others to provide an elite tourism privilege card marketed to wealthy foreigners. The payments, disguised as sales commissions, were channeled through foreign bank accounts of intermediaries, including those of the former governor’s daughter and friend. A date for sentencing has not been set.

Private actions

Auction rate securities: In re Citigroup Auction Rate Securities Litig., Case No. 08Civ. 3095 (S.D.N.Y.) is a consolidated putative class action brought on behalf of purchasers of auction rate securities from Citigroup, Inc. and its related entities. The complaint, which consolidated five actions, alleged fraud and market manipulation in connection with the sale of ARS from August 1, 2007 through February 11, 2008. In essence, the court dismissed the action for failure to plead market manipulation and the elements of fraud with the requisite specificity. The court concluded that the generalized allegations were insufficient.


On September 24, 2009 at noon there will be a webcast sponsored by West Legal Ed tilted “The Uncertainties Surrounding Honest Services Mail Fraud: The Supreme Court and U.S. v. Black The speakers for this seminar are: Frank Razzano, Pepper Hamilton; Ray Banoun, Cadwalader Wickersham & Taft; Alice Fisher, Latham & Watkins LLP; and Thomas Gorman, Porter Wright.