by T. GormanPosted on Posted in Financial Fraud

In Litigation Release No.19504, December 20, 2005 (www.sec.gov/litigation/litreleases/lr19504.htm) the SEC announced that it was voluntarily dismissing with prejudice all claims against the former officers of TenFold Corporation that it had named along with the company in a fraud complaint. The SEC did not offer any explanation for the unusual action. New accounts suggest that there may have been new materials produced which prompted the dismissal. See, e.g, New York Times, at C4 (December 20, 2005). The company previously settled with the SEC. The announcement did not state that the SEC planned to request that the settlement be vacated.

In 2002, the SEC in SEC v. TenFold Corp., et al, (www.sec.gov/litigation.complaints/comp17852.htm) charged the defendant company and several of its officers with financial fraud. Specifically, the complaint alleged that in its initial registration statement the company failed to disclose two unusual transactions that had a significant impact on its financial statements. In one, the terms of a contract were manipulated so that revenue could be recognized at an earlier date. In another, an unusually large allotment of shares from the IPO was granted to a customer in return for the deletion of a contract term that permitted earlier recognition of revenue. The company also failed to disclose pervasive operating problems according to the complaint. The company had previously settled.

by T. GormanPosted on Posted in SECActions

SEC Settlements/Cooperation: Who got fired? A standard question these days when the SEC or DOJ investigates a claimed impropriety at a company is, “who got fired?” Demonstrating that those involved have been terminated is typically taken as an indication that the under investigation issuer is cooperating with the government probe. Indeed, the practice of discharging suspected employees has become so wide spread in the wake of government investigations that some firms which conduct internal investigations are reputed to routinely recommend the termination of all top tier management including the general counsel regardless of whether the executive was actually involved in the reputed illegal conduct. Is this really in the best interest of the company and shareholders?

There was a time when the policies were different. Before the SEC’s current Release regarding corporate penalties, its Section 21A report on cooperation and before the Sentencing Guidelines and the DOJ Thompson Memorandum, companies took the brunt of the sanctions for wrongful conduct and acted to protect top management. Management was considered a valuable corporate asset and loyalty was important. Some companies still stand by their executives until there is proof of malfeasance rather than just throwing employees “under the buss” at the outset to claim “cooperation.”

In the wake of a recent arbitration ruling against Merrill Lynch however, issuers (and internal investigative teams) may want to rethink their strategy. The Wall Street Journal reports (January 5, 2006) that an NYSE arbitration panel awarded $14 million in back pay and damages to three Merrill Lynch brokers who were fired in the wake of a late trading scandal. The former employees claimed that Merrill knew their clients engaged in market timing and not late trading when they joined the firm after leaving UBS and that their actions were in accord with company policy. Merrill denies this, claiming that it has always prohibited market timing. While Merrill is moving to vacate the award in court, the standards for doing so are difficult.

At a minimum the award suggests that before companies summarily terminate employees, they should check the evidence. Perhaps at the same time companies will also start to consider whether it is really in the best interests of the shareholders to terminate executives once viewed as valuable and possibly sacrifice employee good will in its zeal to be viewed as “cooperative.”