This Week In Securities Litigation (May 23, 2008)

The FCPA, option backdating and insider trading were again the key themes in securities litigation. DOJ continued a high profile and potentially politically charged FCPA inquiry, while the SEC filed a settled options backdating case and the Commission brought two insider trading cases, one settled and one in litigation.

FCPA

DOJ continued its FCPA investigation of British arms dealer BAE. The Department served subpoenas on Mike Turner, the chief executive of the company and Sir Nigel Rudd, a BAE non-executive director, when they landed in Huston. According to news reports, DOJ officials examined the laptops and wireless handheld devices of both men before returning them.

Last year, BAE acknowledged a notice from DOJ that it was investigating the company’s compliance with the FCPA. The investigation apparently focuses on Britain’s biggest arms deal – a series of warplane sales to Saudi Arabia in the mid-1980s. The deal had a value of up to $80 billion.

In December 2006, Britain’s Serious Fraud Office halted a two year old investigation into this matter at the request of then Prime Minister Tony Blair, who cited national security. Mr. Blair said at the time that the Saudis had threatened to cancel the deal and stop cooperating on terrorism.

Subsequently, Britain’s High Court ruled that the Serious Fraud Office decision to halt the inquiry was unlawful. The court criticized the determination to drop the inquiry under public pressure. The House of Lords has been requested to review the decision.

Option backdating

Rambus, Inc, several of its executives, and its auditor PricewaterhouseCoopers PLC obtained final court approval for the settlement of five consolidated option backdating cases. The cases settled for $18.3 million, above what many similar cases are settling at according to the court. The judge awarded plaintiff’s counsel $4.5 million in fees plus expenses. In re Rambus Inc., Securities Litigation, Case No. 5:06-cv-04346 (N.D. CA. July 17, 2006). Last August, a Special Litigation Committee agreed to let a derivate suit to move forward.

Brooks Automation, Inc. settled an option backdating case with the SEC, SEC v. Brooks Automation, Inc., Civil Action No. 08 CA 10834 (D. Mass. May 19, 2008). According to the SEC’s complaint, former company president and CEO Robert Therrien backdated an option grant for himself after learning that the initial grant expired. In connection with the in-the-money grant Mr. Therrien created and executed false documents. The company did not account for the grant correctly. Brooks also issued several company wide option grants for which the grant dates were inaccurate.

To resolve the matter, Brooks consented to the entry of a permanent injunction prohibiting future violations of the reporting provisions of the Exchange Act. The settlement reflected the cooperation of the company. A separate action was filed against Mr. Therrien.

Insider trading

The SEC filed two insider trading cases last week. One case was filed against Cristian De Colli, a machinery engineer residing in Rome, Italy. The complaint alleged that Mr. De Colli made more than $2.1 million in illegal profits trading in the securities of DRS Technologies, Inc. prior to the public disclosure of merger negotiations. Mr. De Colli purchases 5,700 shares and 3,116 call options of DRS between April 15, 2008 and May 7, 2008. To establish these positions Mr. De Colli liquidated holdings in two other companies. Just before the public announcement all of his holdings were in DRS. After the pubic disclosure of the merger talks he liquidated his position.

Subsequently, during an interview with the SEC staff Mr. De Colli stated that he did not have any family members or friends who had worked for Finmeccanica, the other company involved in the discussions. The Commission claims that this is a false statement because the defendant’s brother worked for the company between 2004 and 2005.

The court granted a freeze order over the defendant’s U.S. brokerage accounts. This case is in litigation. SEC v. De Colli, Case No. 1:08-cv-04520 (S.D.N.Y. May 15, 2008).

A second case settled at the time of filing. In SEC v. Bigler, Case No. 08 CV-0888 (S.D. Cal. May 20, 2008), the Commission brought an action against the former director of corporate finance and investor relations for Provide Commerce. Mr. Bigler is alleged to have traded in the shares of his company within one hour of learning confidential information about the pending acquisition of the company by Liberty Media. Mr. Bigler purchased 4,500 shares of the company. On the first trading day after the public announcement he liquidated his position for a profit of over $41,000.

To settle the case, Mr. Bigler consented to the permanent injunction prohibiting future violations of the antifraud provisions and an order requiring him to disgorge his trading profits and prejudgment interest and pay a penalty in an equal amount. The Commission’s Litigation Release is here.

For more information and commentary regarding these matters, see the latest entry on SECActions.com here.

Part XVI: SEC Enforcement Trends And Priorities, 2008

In the Spring 2007, the SEC’s Enforcement Division formed a subprime task force as the market crises deepened. Initially, Chairman Cox told Congress that the SEC is investigation whether sellers of portfolios of subprime mortgages packed into securities provided proper disclosure to buyers.

In February 2008, the Chairman again discussed the subprime task force with Congress. This time Chairman Cox stated that the Enforcement group was investigating several issues. Those include questions relating to securitization, as well as disclosure and valuation issues and sales to investors.

The SEC is coordinating its inquires with banking regulators as well as the International Organization of Securities Commissioners Subprime Task Force. The IOSCO has also formed a Credit Rating Agencies Task Force that Mr. Cox chairs.

To date, the most detailed description of subprime lending practices is contained in the 581 page reported prepared by investigators working for the Trustee of New Century, in In re New Century TRS Holdings, Inc., Case No. 07-10416 (Bankr. Del). The report details the manner in which the lender engaged in increasingly risky practices. It also discussed several improper accounting practices used by the lender.

Earlier this year it was reported that the SEC has approximately 36 open investigations in this area. “SEC Juggling Three Dozen Subprime Probes,” Financial Week (Mar. 27, 2008). Undoubtedly there are more by now.

To date, these investigations have resulted in one case: SEC v. Cao, Civil Action No. CV 06-1269 (C.D. Ca. Oct. 29, 2007). This is a settled insider trading case against a former vice president of Countrywide Financial Corp.

In the future, we can expect that there will be more cases brought. In view of the complexity of this area it may take some time for the Task Force to sort through these matters and start bringing enforcement actions.

Next: The conclusion to this series