The Week in Securities Litigation (August 27-31, 2007): Options Backdating and Insider Trading
This week, one on-going scandal continued, while another expanded. The seemingly endless options backdating scandal continued. For months, the SEC has reportedly had over 140 companies and untold numbers of individuals under scrutiny from for options back dating practices. While criminal prosecutors probably have a lesser number of issuers and individuals in their sights, no doubt the number is substantial. Cases have been dribbling out since last year. Last week, the SEC filed a settled civil acting against Juniper Networks, Inc. Simultaneous with the filing of the complaint, the company consented to the entry of a statutory injection. No penalty was assessed. SEC v. Juniper Networks, Inc., Case No. C 07-4430 JW (N.D. Cal. Filed August 28, 2007). The SEC’s Litigation release regarding this case is here.
The SEC also filed suit against Lisa Berry, the former General Counsel of KLA-Tencor and Juniper Networks. The complaint alleges that Ms. Berry routinely used hindsight to identify dates for stock options when the prices were at historic lows while at KLA. Ms. Berry moved to Juniper shortly before its 1999 IPO. While at that company, the complaint alleges this she continued her backdating activities. The complaint alleges violations of the antifraud and reporting provisions of the federal securities laws. SEC v. Berry, Civil Action No. C 07 4431 (N.D. Cal. Filed August 28, 2007).
Finally, the California federal court denied a post verdict motion for acquittal of former Brocade CEO Gregory Reyes on Monday. The court held that there was sufficient evidence to support the verdict.
As the options backdating scandal continues another seems to be picking up speed: insider trading. This year the SEC and the Department of Justice seem to be bringing more and more insider trading cases. The cases being brought here reflect a growing concern among regulators worldwide about insider trading. This fact is reflected in the increasing number of cases being brought such as:
1) Those involving major Wall Street players such as:
? SEC v. Guttenberg, Case No. 1:07-cv-01774 (S.D. N.Y. filed March 1, 2007) and U.S. v. Jurman, Case No. 1:07-140-TPG (S.D.N.Y. Filed February 26, 2007) (and related cases) which involve over trading by insiders at UBS and Morgan Stanley; and
? SEC v. Barclays Bank, Civil Action No. 07-CV-044427 (S.D.N.Y. filed May 30, 2007) which involved trading by the bank and the use of so-called “Big Boy” letters;
2) Those involving trading in advance of take over announcements such as:
? SEC v. One or More Unknown Purchasers, Civil Action No. 1:07-cv-01208 (N.D. Ill March 2, 2007) involving trading in the call options of TXU prior to its takeover;
? SEC v. Kan King Wong, Civil Action No. 07 CIV 3628 (SAS)(S.D.N.Y. filed May 8, 2007), involving alleged trading in advance of the News Corp. / Dow Jones deal; and
? SEC v. One or More Unknown Purchases, Case No. 06 CV 11446 DMS (S.D. Cal. Filed July 18, 2007) involving alleged trading in advance of the Petco takeover;
3) Trading in advance of earnings announcements, such as:
? SEC v. Kevin J. Heron, Civil Action No. 07-CV-01542-HB (E.D. Pa. filed April 18, 2007) and U.S. v. Heron, Case No. 2:06-cr-00674-SD (E.D. Pa. Filed April 3, 2006) charging a former general counsel and corporate compliance officer with insider trading largely during black out periods;
4) Spouses or the “pillow talk” cases such as:
? SEC v. Wang, Civil Action No. 07-3715 (S.D. N.Y. filed May 10, 2007) and U.S. v. Wang, case No. 1:07-cr-00730-CM (S.D.N.Y. May 9, 2007) alleging that spouses traded together based on information taken from Morgan Stanley;
? SEC v. Balkendhol, Civil Action No. C-07-2537 JCS (N.D. Cal. Filed May 14, 2007) which alleges that a husband traded based on inside information obtained from his wife where she told him not to trade; and
5) Family and friends such as:
? SEC v. Aragon Capital Management LLC, Case No. 1:07-cv-00919-FM (S.D.N.Y. Feb. 2, 007) which alleges that a father and his sons, along with their friends, traded on inside information obtained by the father.
These cases, which are just examples of the increasing number of cases being brought clearly demonstrate the increasing focus of the SEC and DOJ on insider trading. This increasing focus suggests that it would be prudent for issuers and executives to carefully review their insider trading compliance programs and any Rule 10b5-1 trading programs.
For an interesting chronology of insider trading case brought this year visit the Reuters article here.