by T. GormanPosted on Posted in SECActions

The world of securities enforcement seems to be devolving to repeating themes: options backdating and insider trading. In what almost seems like a repetition of last week, key SEC and DOJ securities enforcement cases focused on these two recurrent themes. Enforcers are working their way through the huge inventory of options backdating cases. This week, another high profile case ended with a jury verdict finding former Brocade human resources vice president Stephanie Jensen guilty, while another executive in the Broadcom inquiry pled guilty. The SEC filed another major case which is heading into litigation – at least for the moment – while it closed two other inquiries.

At the same time, insider trading cases were resolved against one couple with their sentencing, as another market professional from a major Wall Street house pled guilty. The SEC also brought two more cases, one against a father and son who is an attorney, and another against a Wall Street investment banker. These cases are part of a larger trend in which regulators worldwide are clamping down on insider trading.

Options Backdating

The second high profile criminal case arising from the options backdating scandal came to an end Wednesday when the jury returned a verdict of guilty against Stephanie Jensen, the former vice president of human resources at Brocade Communications in San Jose, California. The jury found Ms. Jensen guilty on two counts, one for falsifying company records and a second for conspiracy. The Government had dropped several counts against Ms. Jensen prior to trial as discussed here.

After little more than a day of deliberation, the jury rejected Ms. Jensen’s claim that company option practices were in place when she was hired in 1999 to work under Gregory Reyes and that she just did what she was told without realizing the accounting ramification. Her boss, Mr. Reyes, was previously convicted on ten counts (here) and will be sentenced later this month. The court has apparently received a substantial number of letters asking for leniency in sentencing Mr. Reyes (here).

Ms. Jensen is scheduled for sentencing in March. The court has requested that the parties submit briefs on the question of Ms. Jensen’s knowledge. Since her Rule 29 motion for acquittal arguing that she lacked knowledge was rejected by the court, the order for briefing appears to relate to the question of sentencing.

In another high profile options backdating case, the Government obtained a guilty plea and a promise of cooperation in the Broadcom inquiry. Former vice president of human resources Nancy Tullos pled guilty to one count of obstruction of justice based on a directive to an employee to destroy an e-mail. The indictment alleges that Ms. Tullos was involved with two others who were members of the stock option committee. At the time, the only other members of the committee were Henry Samueli and Henry T. Nicholas III. Mr. Samueli is currently the chairman of the company and its chief technical officer. Mr. Nicholas, a company founder, has resigned. Previously, an internal investigation cleared Mr. Samueli, but found that Mr. Nicholas had substantial involvement with backdated options. U.S. v. Tullos, Case No. 8:07-cr-00274 (C.D. Cal. Filed November 30, 2007).

The SEC filed two actions arising out of the option backing at Maxim Integrated Products. The first, a settled enforcement action, captioned SEC v. Maxim Integrated Products, Case No. C-0706121 (N.D. Cal. Filed December 4, 2007) names the company and its former CEO John Gifford as defendants. The complaint alleged that the company regularly back dated option grants so that they would be in the money. Mr. Gifford signed off on the grants and, according to the complaint, on at least four occasions instructed former CFO Jasper to make sure that the accounting was done properly. Nevertheless, as discussed here, the SEC concluded that Mr. Gifford should have know that the grants had been backdated. Both the company and Mr. Gifford settled. The company consented to a statutory injunction prohibiting future violations of the antifraud and reporting provisions (Section 17(a) of the 1933 Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the 1934 Act and the related rules thereunder). Mr. Gifford consented to the entry of a statutory injunction prohibiting future violations of Section 17(a)(3) of the 1933 Act and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the 1934 Act and the related rules thereunder. Gifford also agreed to disgorge a portion of his bonuses (totaling $652,681 with prejudgment interest) and pay a $150,000 civil penalty. Former Maxim CFO Jasper was named as a defendant in a separate action alleging essentially the same conduct. SEC v. Jasper, Civil Action No. C-07-6122 (N.D. Ca. December 4, 2007). This case is in litigation.

As discussed earlier here, these cases seem to suggest a shift in prosecution standards in the option backdating area. Prior cases typically focused on scienter based conduct. Charging Mr. Gifford with negligence and claiming that he should have somehow known that the CFO disregarded his written instructions and his professional obligations by improperly recording the grants suggests that the SEC is expanding the scope of prosecutions in this long simmering scandal.

Finally three companies announced that the SEC had completed its inquiry into their options backdating practices:

? Computer Sciences received a closing letter;

? Sepracor, Inc. also received a closing letter; and

? Sycamore Networks received a Wells notice indicating that the staff is considering a recommendation to the Commission that an enforcement action be filed.

Insider trading

There is an increasing emphasis on insider trading cases with both the SEC and DOJ bringing some of the most significant cases in this area in years.

In one high profile trading case involving a number of Wall Street professionals, former Bear Stearns analyst Ken Okada pled guilty to trading on inside information obtained from UBS. The defendant was one of thirteen named in criminal cases involving a Wall Street insider trading ring. Mr. Okada is the eighth person to have pled guilty in this case. The SEC has a related insider trading case, SEC v. Guttenberg, which has been repeatedly called the most significant since the 1980s and is discussed here.

One of the high profile “pillow talk” insider trading cases (discussed here) brought this year suggest that trading together may not mean that the couple will stay together. In U.S. v. Wang, Case No. 1:07CR 0073 (S.D.N.Y. Filed August 7, 2007), Mr. Chen, a former ING executive, and his wife, Ms. Wang, a former Morgan Stanley executive were each sentenced to a year and a half in prison following pleas to conspiracy and insider trading. In response to arguments that the couple should not be imprisoned because of their child, the court directed that the spouses serve the sentences consecutively – that is, one spouse will be imprisoned and following release the other will serve the sentence. The court also ordered the couple to forfeit their trading profits.

In another family insider trading case, a jury in New York returned a verdict in favor of the SEC and against the father and son defendants. SEC v. Drucker, Civil Action No. 06 Civ. 1644 (S.D.N.Y). Here, the SEC alleged that Mitchell Drucker, former associate general counsel of NBTY tipped his father, Ronald, a former New York City Police detective, about a negative earnings announcement. The father and son liquidated their position avoiding a loss of over $197,000. In addition, the father liquidated his position and that of his friend, avoiding losses, respectively of over $138,000 and $7,900. On Monday, a jury returned a verdict in favor of the SEC and against both defendants. The Commission’s Litigation Release on the Verdict is here.

In another action involving a market professional, the SEC filed a settled case against registered representative David Knall, SEC v. Knall, Case No. 07-cv-1562 (S.D. Ind. Filed Dec. 3, 2007). Here, the complaint alleged that Mr. Knall learned about the acquisition of Galyans Trading by Dicks Sporting Goods. Prior to the June 21, 2004 announcement of the deal, Mr. Knall, while in possession of material non-public information about the deal, purchased 10,000 shares to cover his existing short position. When the deal was announced, the share price increased by abut 50%. Mr. Knall avoided losses of over $55,000. To settle the action, Mr. Knall consented to the entry of a statutory injunction and an order requiring him to disgorge his trading profits, prejudgment interest and a civil penalty equal to the loss avoided. The Commission’s Litigation Release is here.

The SEC also brought another insider trading case against an attorney this week. In SEC v. Belcher, Case No. 07-CV-02507 (D. Colo. Filed December 3, 2007), defendant James Belcher, an attorney and partner in the Cheyenne, Wyoming office of a large regional law firm, is alleged to have traded on inside information obtained from a client who consulted him about state regulatory issues in advance of a merger. According to the complaint, which is discussed here, Mr. Belcher is alleged to have purchased 800 shares of the target at just over $40 per share and sold the shares following the announcement at about $60, yielding profits of over $15,000.

To resolve the action Mr. Belcher consented to the entry of a statutory injunction. In addition he agreed to the entry of an order requiring him to disgorge his profits and to pay prejudgment interest and a civil penalty equal to the amount of the disgorgement. This is one of several insider trading cases brought this year involving attorneys, which are discussed here.

Finally, the SEC and DOJ are not the only officials investigating insider trading. Regulators around the globe are reportedly conducting similar probes. Regulators in the Netherlands, Germany, South Africa, New Zealand and China, among others, are looking into allegations of insider trading. Despite the increasing focus of regulators here and abroad, the tide of insider trading seems to be rising.

by T. GormanPosted on Posted in SECActions

The SEC filed two more settled enforcement actions in the key insider trading and options backdating areas which have come to typify its enforcement efforts in recent months. One is an insider trading case against a lawyer, while the other is in options backdating case against an issuer and its officers. One case is consistent with prior enforcement actions and the other seems to chart a new course for a seemingly endless scandal.

In SEC v. Belcher, Case No. 07-CV-02507 (D. Colo. Filed December 3, 2007) (the Commission’s Litigation Release is here), the Commission brought another in what has become a long series of insider trading cases this year. The defendant, James Belcher, is an attorney and partner in the Cheyenne, Wyoming office of a large regional law firm. According to the complaint, Mr. Belcher was consulted by a client of the firm regarding the need for approval by a Wyoming state regulator for a merger. After Mr. Belcher was provided with detailed information concerning the pending merger, he purchased 800 shares of the target at just over $40 per share. When the merger was announced, the share price rose to about $60, yielding profits of over $15,000.

To resolve the action, Mr. Belcher consented to the entry of a statutory injunction. In addition, he agreed to the entry of an order requiring him to disgorge his profits and to pay prejudgment interest and a civil penalty equal to the amount of the disgorgement. This is the third insider trading case brought against an attorney this year. The prior two cases were against a former General Counsel (which is still in litigation) and against the managing partner of the Washington, D.C. office of a large Chicago law firm (which was settled). Both are discussed here. There is not much new in these cases – all appear consistent with earlier SEC insider trading cases.

The SEC also brought two related option backdating cases yesterday. One was against Maxim Integrated Products and its former CEO John F. Gifford, while the other was against former Maxim CFO Carl W. Jasper. In the first, the SEC alleged that Maxim routinely granted in-the-money options to its employees. Although the pertinent accounting principles require that the cost with granting such options be expensed, the company failed to take such charges. Rather, Maxim avoided reporting these expenses by backdating the paper work to make it appear that the options had been granted on an earlier date. By failing to properly account for the option grants, the company over sated net income by more than 10% for its fiscal years 2003 through 2005. The SEC’s complaint claims that former CEO Jasper should have known that the options had not been properly accounted for and that the required disclosure had not been made despite the fact that he ordered former CFO Jasper to record the expenses for the backdated options.

The company resolved the action by consenting to the entry of an injunction prohibiting future violations of the antifraud and books and records provisions of the securities laws. Mr. Gifford settled by consenting to the entry of an injunction baring future violations of Section 17(a)(3) of the Securities Act, as well as the books and records provisions of the Exchange Act. In addition, Mr. Gifford agreed to disgorge over $652,000 which represents a portion of his bonuses and pay a civil penalty of $150,000. SEC v. Maxim Integrated Products, Inc., Civil Action No. C-07-6121 RMW (N.D. Cal. Filed December 4, 2007).

The action against Mr. Jasper is based on similar allegations. In addition, the complaint alleges that he disregarded instructions from Mr. Gifford by failing to expense the options as required by generally accepted accounting principles as to certain options. This case is in litigation. SEC v. Jasper, Case No. C-07-6122 HRL (N.D. Ca. Filed December 4, 2007). The Commission’s Litigation Release regarding both cases is here.

While the SEC reportedly has about 140 companies under investigation in the option backdating scandal, only about 24 cases have actually been brought. Typically, those cases have been based on intentional conduct keyed to allegations such as falsified documents and cover ups. To be sure, these cases involve such allegations. At the same time it is clear, according to the SEC, that former CEO Gifford ordered the correct accounting and was done in by former CFO Jasper. Equally clear is the fact that the company was done in by its former CFO, despite a CEO that gave the correct orders. Just how Mr. Gifford and the company were suppose to know that Mr. Jasper had ignored instructions given in writing on at least four occasions, according to the complaint, and failed to take the proper expense charges, is unclear. It would seem that Maxim and Mr. Gifford should be entitled to rely on their CFO carrying out instructions properly without having to check the accounting.

These cases seem to signal a new vista of liability in the seemingly endless option backdating scandal, substituting negligence liability without fault for scienter-based conduct. Apparently just when everyone was getting comfortable with where the options backdating cases appeared to be going, a new and more expansive direction has been charted.