by T. GormanPosted on Posted in SECActions

As part of its campaign on insider trading the SEC has brought two cases against attorneys this year. The first was against Kevin J. Heron, former general counsel, corporate secretary and chief insider trading compliance officer of Amkor Technology. In this case the SEC claims that Mr. Heron traded in advance of financial releases on five occasions between October 2003 to June 2004. During that period Mr. Heron is alleged to have placed more than 50 trades netting him about $290,000 in illegal profits. Many of the trades were placed during black out periods mandated by policies that were administered by Mr. Heron. SEC v. Kevin J. Heron, Civil Action No. 07-CV-01542-HB (E.D. Pa. Filed April 18, 2007).

Mr. Heron has also been charged in a criminal case. The charges alleged that he engaged in a conspiracy with an employee of another company to exchange material non-public information. Like the SEC case, the criminal case claims that Mr. Heron traded while in possession of material non-public information during black out periods he instituted. The case also seeks forfeiture of proceeds traceable to each offense. U.S. v. Heron, Case No. 2006-cr-00674 (E.D. Pa. Filed April 3, 2006). Both of these cases are in litigation.

The SEC also brought a case against the managing partner of the Washington, D.C. office of Katten Muchin. In this case the Commission alleged that while interviewing a potential lateral partner candidate defendant Schwinger learned that Vastera would be acquired by JP Morgan. The partner candidate was the former general counsel of Vastra. Following the interview Mr. Schwinger purchased 10,000 shares of Vastra. The share price rose about 50% following the announcement of the takeover yielding a profit of $13,027. Mr. Schwinger settled the action by consenting to the entry of a statutory injunction and the entry of an order requiring him to disgorge the trading profits and pay prejudgment interest plus a civil penalty equal to twice the trading profits. SEC v. Schwinger, Civil Action No. 1:07-CV-01047 (D.D.C. filed June 13, 2007).

These two cases, along with the others we have discussed in prior segments of this series, are the leading edge of a renewed emphasis on insider trading by the SEC. While insider trading has long been a staple of the Commission’s enforcement program, in recent months there has been a world wide emphasis among regulators on insider trading. Regulators from the U.K. to China have repeatedly expressed concern about what has frequently been called rampant insider trading. Speculation about the reasons for the swell of insider trading include theories that a new generation on Wall Street does not remember the scandals of the 1980s and simple greed. Whatever the reason, it is clear that regulators around the globe are concerned about the riding tide of insider trading and are banding together to try and quell it.

As part of this world wide campaign, the SEC is renewing its efforts in this traditional enforcement area. This year the Commission has, as we have seen, initiated a number of high profile insider trading cases. Some of these cases are perhaps the most significant since the days of the insider trading scandals of the 1980s. In many instances the SEC has acted quickly, bringing cases within a matter of days of a take over announcement. This speed permitted the SEC to freeze the claimed trading profits before the trader had the opportunity to remove them from the account. Speed has its cost however. Many of those cases are in litigation where the SEC will have to use civil discovery to try and obtain the proof necessary to prevail at trial rather that its broad investigative powers. As these cases proceed to trial we will see if the speed was appropriate.

In the coming weeks we can expect to see not only past cases going to trial but more insider trading investigations and cases. As the SEC moves past the options backdating scandal in which it has been mired for months we can expect the emphasis on insider trading to continue. This will include increased scrutiny on 10b-5-1 plans which have been the subject of repeated comments by senior enforcement staff. There should be little doubt that in the months to come the SEC will continue its increased emphasis on insider trading, carefully scrutinizing not only safe harbors such as 10b-5-1 but all compliance plans. All of this suggests that general counsels and corporate officials should not only carefully review their compliance plans but continue to actively monitor them.

by T. GormanPosted on Posted in SECActions

The SEC and a corporate defendant and its former officers won securities cases in court last week, as another high profile options backdating trial began, and one of the more significant insider trading cases moved closer to trial after the government increased the stakes. At the same time, the options backdating scandal inched closer to conclusion with the termination of two more probes.

Wachovia broker Mark Michel was found liable on Tuesday, November 27, 2007 in an insider trading case. Mr. Michel was one of four defendants named by the SEC in an insider trading complaint filed last year. The case centered on the merger of Blue Rhino Corp. with Ferrellgas Partners, L.P., which was announced on February 9, 2004.

According to the complaint, the CFO of Blue Rhino misappropriated inside information from a director about the pending merger and traded. Subsequently, the CFO obtained additional inside information and tipped others, one of whom in turn tipped Mr. Michel. After obtaining the information Mr. Michel purchased $90,000 of Blue Rhino stock and borrowed another $70,000 from a client in violation of Wachovia policy to purchase additional shares. In total, Mr. Michel purchase more than $1.2 million in Blue Rhino stock for himself and his clients. While the other defendants settled the matter by consenting to statutory injunctions and orders requiring the payment of disgorgement, prejudgment interest and a penalty, Mr. Michel chose to take the case to trial. The court ruled in favor of the SEC, ordering Mr. Michel to pay over $346,000. SEC v. Roszak, Civil Action No. 06C-3166 (N.D. Ill. Filed June 8, 2006).

At the same time, JDS Uniphase Corp. and four of its former executives were found not liable by a jury in one of the few class action securities fraud suits to be tried to a jury, and the first securities class action to proceed to verdict in the Northern District of California since 2002. The class action, which was led by the Connecticut Retirement Plans and Trust Funds, alleged financial fraud and insider trading. Specifically, the complaint claimed that JDS Uniphase made material misrepresentations to investors when it continued to offer upbeat sales projections in the face of declining demand for its products. Plaintiffs claimed that the company had secret internal sales data which foreshadowed what later turned out to be a meltdown of the company. At the same time, four former executives – two former CEOs and the former CFO and COO – were alleged to have sold more than $500 million of their own stock during the time period. After more than three weeks in trial, it took the jury two days to conclude that plaintiffs had failed to prove their case and that defendants were not liable. Pipefitters Local 522 633 Pension Trust Fund v. JDS Uniphase Corp., Case No. 4:02-cv-01486 (N.D. CA. Filed March 27, 2002, verdict Nov. 28, 2007).

As these two cases came to an end, two other major criminal securities cases were moving forward. In the Northern District of California the option backdating trial of former Brocade Communications Systems vice president of human resources Stephanie Jensen began. Ms. Jensen faces trial on one count of conspiracy to falsify company books and one count of falsifying books. All other charges against here were previously dismissed as reported here.

In the trial, Ms. Jensen claims that the option systems were in place when she came to work for former Brocade CEO Gregory Reyes. According to Ms. Jensen, she was only following standard company practice under the direction of Mr. Reyes and had no responsibility for the financial reporting practices of the company. The government contends, however, that it will prove Ms. Jensen in fact knew the option practices were wrong.

Previously, Mr. Reyes was convicted on all counts. He is currently awaiting sentencing. In preparation for the sentencing, over 300 letters have been sent to the court requesting leniency for Mr. Reyes. Former San Francisco 49er football star Ronnie Lott and the CEO of Motorola are among those petitioning the court on behalf of Mr. Reyes.

As U.S. v. Naseem, CASE No. 1:07-cr-00610-RMB (S.D.N.Y.) the first of the blockbuster insider trading cases brought this year and previously discussed here, moved toward trial, the government increased the stakes. Last week, a superseding indictment was handed up, adding three counts related to trading in shares of Caremark Rx and in the options of TXU, both in advance of take over announcements. Trial is currently scheduled to begin on December 10. This will be the first of the large high profile insider trading cases brought earlier this year to go to trial, making the stakes very high for the government and the SEC.

Finally, the options backdating scandal continues to move slowly to a conclusion. Last week, Computer Sciences Corp. and Sepracor, Inc. announced that the SEC had closed the inquires into their options practices.