SEC Files Two Settled Insider Trading Cases

The SEC continued its campaign against insider trading, filing two additional settled insider trading cases on Tuesday. The first named Lou L. Pai, the former Chairman and Chief Executive Officer of Enron Financial Services, as a defendant. According to the Commission’s complaint, after Mr. Pai left the company he learned from insiders that the subsidiary where he had been employed was experiencing certain financial and operational difficulties and contract losses. For the quarter however, the unit reported a profit of about $60 million based on falsified financials rather than the $40 million loss which should have been reported.

In May and June 2001 Mr. Pai sold over 338,000 shares of Enron. In addition, he exercised options he held and sold an additional 572,818 shares. At the time Mr. Pai sold his shares, the average share price was over $53. Subsequently, the share price fell to about $0.40 when the company filed for bankruptcy in December 2001.

To resolve the action, Mr. Pai consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he agreed to the entry of an order directing that he pay over $30 million in disgorgement, about $11.5 million in prejudgment interest and a $1.5 million penalty. Mr. Pai was given a $6 million credit based on his waiver of certain insurance coverage. SEC v. Pai, Civil Action No. H-08-2338 (S.D. Tex. Filed July 29, 2008).

A second settled insider trading action was filed against George Simchuk, the former General Director of Glamis de Mexico, a subsidiary of Glamis Gold, Inc. In that action, Mr. Simchuk, according to the complaint, traded in advance of the announcement that the company would acquire Western Silver, Inc. Defendant Simchuk led the due diligence team which worked on the acquisition. Nevertheless, prior to the public announcement, Mr. Simchuk purchased 6,000 shares of Western Silver. After the acquisition announcement, the share price of that company increased about 27%.

To resolve the case, Mr. Simchuk consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he agreed to the entry of an order requiring that he pay disgorgement of over $58,000, prejudgment interest of over $10,000 and a civil penalty equal to the amount of the disgorgement. SEC v. Simchuk, Civil Action No. 08-cv-6728 (S.D.N.Y. July 29, 2008).

New Series: Self-reporting And Cooperation: Key Issues

Today begins a new occasional series on self-reporting and cooperation, a critical issue faced by many discovering a possible malfeasance. Almost immediately upon making this discovery the business organization is confronted with critical questions regarding self-reporting, cooperation, privilege waivers and others, all of which can have far reaching and significant consequences. Yet many of these questions must be at least tentatively resolved while the facts and circumstances about the situation are only beginning to unfold.

The Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) have long encouraged business organizations to self-report conduct which may be a violation of law and fully cooperate with any ensuing law enforcement inquiry. To encourage business organizations to take these steps, the SEC and DOJ offer the prospect cooperation credit in the charging decision in the form of amnesty or some lesser charge or sanction than might otherwise be imposed.

Despite SEC and DOJ encouragement and releases discussing these questions, the issues for the company and its advisors are often ill-defined, guided only by vague standards which reduce decision-making to guessing and projecting the consequences to speculation. In a few instances, there is a clear duty to self report. In others, the legal framework may encourage and virtually compel such a decision. Assessing the potential consequences however, is hazardous in view of virtually open ended organizational liability, broad prosecutorial charging discretion and vague cooperation standards which reserve all discretion to the SEC and DOJ.

Yet, it is critical for any organization confronted with the question of self- reporting to carefully assess its options and the potential consequences prior to making the initial decisions. To analyze the questions a business organization must consider when confronted with questions of self-reporting and cooperation, this series will consider four key points: (1) the obligation to self report; (2) prosecutorial charging and cooperation standards; (3) the potential impact of cooperation credit; and (4) cross currents which undercut offers of cooperation credit. The final segment of the series will analyze the collective impact of these considerations.