On September 2, 2015, the North American Securities Administrators Association (NASAA) filed an amicus brief siding with Montana and Massachusetts in a bid to overturn the SEC’s new capital-raising rule, titled Regulation A but commonly referred to as Regulation A+. The NASAA, a non-profit association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, includes securities regulators from all 50 states and the District of Columbia. The organization’s purpose is to “protect investors from fraud and abuse in connection with the offer and sale of securities.”
Kenneth P. Herzinger, a partner in the San Francisco office, is Vice Chair of the Securities Litigation, Investigations and Enforcement Group. His practice focuses on SEC and related criminal investigations, internal investigations, securities class actions, and compliance counseling.
Prior to joining private practice, Mr. Herzinger served as an attorney in the Enforcement Division of the U.S. Securities and Exchange Commission in New York, where he was responsible for conducting investigations of accounting and financial statement fraud, insider trading, Ponzi schemes and market manipulation; and since entering private practice, he has represented numerous corporations, directors and officers, financial institutions, auditors, hedge funds, mutual funds and broker-dealers involved in investigations by the U.S. Attorney's Office, SEC, self-regulatory organizations such as FINRA, and the New York Attorney General's Office.
He is routinely engaged by public and private companies, and by audit and special committees of boards of directors, to conduct internal investigations; included are dozens of internal and special committee investigations regarding a myriad of issues including accounting fraud, insider trading, the Foreign Corrupt Practices Act, and whistleblower/retaliation claims.
Mr. Herzinger has served as trial counsel in federal and state court cases and arbitration proceedings, and was a member of the trial team which obtained a defense verdict in Howard v. Everex Systems, Inc.,(N.D. Cal. 2002), one of only several securities class action jury trials in the country to be tried to verdict.
He frequently lectures on accounting and auditing issues and insider trading, and provides training for publicly traded companies and directors and officers on regulatory matters, corporate governance and compliance matters. He has successfully defended numerous companies and individuals in connection with SEC and other regulatory investigations, and has conducted dozens of internal investigations.
Mr. Herzinger's clients include: Chesapeake Energy Corporation, Intel Corporation, Morgan Stanley Smith Barney, Oracle Corporation, PricewaterhouseCoopers LLP, and Tesoro Corporation.
Notable representations include the following.
- Chief Financial Officer in connection with SEC investigation arising out of restatement of financial statements.
- Publicly traded technology company in connection with internal investigation and parallel DOJ and SEC investigations of alleged insider trading scheme relating to Galleon case.
- Audit Committee of publicly traded financial services company in connection with internal investigation of whistleblower retaliation claim.
- Investment broker in connection with SEC investigation of alleged investor fraud.
- Publicly traded technology company in connection with internal investigation of whistleblower complaint.
- Financial services firm in connection with SEC investigation of alleged financial statement accruals and tax issues.
- Individuals in multiple DOJ and SEC insider trading investigations.
- Publicly traded companies in connection with internal investigations of alleged violations of the Foreign Corrupt Practices Act.
- Publicly traded technology company in connection with internal investigation of alleged accounting irregularities in China subsidiary.
- Publicly traded retail company in connection with internal investigation of whistleblower retaliation claim.
- Government municipality in connection with SEC investigation of accounting issues.
Additionally, Mr. Herzinger has represented numerous corporations, directors and officers, auditors, and financial institutions in federal securities class actions, mergers & acquisition litigation and derivative suits.
- Weinstein v. Chesapeake et al.
- In re Chesapeake 2012 ERISA Class Litigation.
- In re Chesapeake Energy Corp Securities Litigation.
- Metropolitan v. PricewaterhouseCoopers LLP.
- In re Metropolitan Securities Litigation.
- In re Retek Securities Litigation.
- In re Mutual Fund Trading Securities Litigation.
- Oracle/Sun Microsystems M&A Litigation.
- Furman v. Wal-Mart Derivative Litigation..
- McAfee/Secure Computing M&A Litigation.
- Oracle/Siebel Systems M&A Litigation.
- Oracle/Portal Systems M&A Litigation.
- In re Enron Corporation Securities Litigation.
- In re Initial Public Offering Securities Litigation.
On July 17, 2015, the SEC announced a whistleblower award of over $3 million to a company insider who provided information that “helped the SEC crack a complex fraud.” This payout represents the third highest award under the SEC’s whistleblower program to date. The SEC has made two of the three highest payments to clients of the same law firm – Phillips & Cohen LLP. (The SEC paid roughly $14 million to a whistleblower in October 2013, and nearly $30 million to a foreign whistleblower represented by Phillips & Cohen in September 2014.). This latest multi-million dollar payout suggests that the SEC’s whistleblower program is in full swing, and that legal representation of whistleblowers may be on the rise.
Last week, the Securities and Exchange Commission announced an award payout of between $475,000 and $575,000 to a former company officer who reported information about an alleged securities fraud. While this is by no means the largest of the 15 payouts the SEC has made since the inception of the whistleblower program in fiscal year 2012 (the SEC awarded approximately $14 million to a whistleblower in October 2013, and roughly $30 million to a foreign whistleblower almost a year later), it is the first time that the SEC provided a whistleblower bounty award under the new program to an officer who learned about the alleged fraud through another employee, rather than firsthand.
The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C. The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers. In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference. During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.
From a litigation and enforcement perspective, key takeaways from the conference include the following: Read More
On January 7, 2014 the SEC lost an insider trading bench trial before Judge William Duffey of the U.S. District Court for the Northern District of Georgia. In a thorough opinion, Judge Duffey found the SEC’s case to be entirely circumstantial, founded on no more than a pattern of trades that were made in close proximity to communications between the purported tipper and tippee. This case shows how difficult insider trading claims are to prove, especially without wire taps, and may give the Commission pause in bringing cases to trial that rest on such circumstantial evidence.
On trial was Larry Schvacho, a retiree who spent much of his free time investing. The SEC alleged Schvacho had misappropriated material, nonpublic information from Larry Enterline, a long time friend, who was then CEO and director of Comsys IT. Although Schvacho had traded in Comsys stock for many years, the SEC’s case focused on trades Schvacho made during the run-up to an acquisition of Comsys by Manpower in early 2010. As the SEC established at trial, Schvacho and Enterline had repeatedly communicated and socialized together during the period, and there were numerous phone calls, text messages, car rides, sailing trips, and dinners where Enterline could have given Schvacho information about the acquisition. When news of the acquisition was eventually made public to the market, Schvacho made over $500,000 on his trades. Read More
That was the Second Circuit’s message to companies in a September 25, 2013 order by upholding dismissal of claims against defendant Royal Bank of Scotland (“RBS”) for alleged failure to disclose enough information about its exposure to subprime mortgages. In so doing, the Court reaffirmed longstanding principles at the heart the securities laws and issued an opinion as applicable to technology companies as it is to banks.
RBS had issued five offering documents in 2005 and 2006, which plaintiff alleged contained a number of misstatements and omissions. Among others, the complaint alleged RBS had misstated its exposure to subprime mortgages, falsely claimed it had effective risk controls, and failed to disclose an inadequate capital base. Read More
Executive compensation decisions are core functions of a board of directors and, absent unusual circumstances, are protected by the business judgment rule. As Delaware courts have repeatedly recognized, the size and structure of executive compensation are inherently matters of business judgment, and so, appropriately, directors have broad discretion in their executive compensation decisions. In light of the broad deference given to directors’ executive compensation decisions, courts rarely second-guess those decisions. That is particularly so when the board or committee setting executive compensation retains and relies on the advice of an independent compensation consultant.
Nevertheless, despite the high hurdle to challenging compensation packages, shareholder plaintiffs continue to aggressively challenge executive compensation decisions, in particular at companies that have performed poorly and received negative or low say-on-pay advisory votes. Read More
High profile schemes perpetrated by Bernie Madoff, Allen Stanford, Nevin Shapiro, and others have brought, or at least reinforced, a general understanding of the term “Ponzi scheme” into the public lexicon. But what, legally, is a Ponzi scheme? In SEC v. Management Solutions, Inc., 2013 WL 4501088 (D. Utah Aug. 22, 2013), Judge Bruce Jenkins endeavored to answer that question and, in the process, authored an encyclopedic account of the term and key court opinions, from seven federal circuits, that have construed it.
Management Solutions was an SEC enforcement action against a father-and-son team that had allegedly raised over $200 million through a “classic Ponzi scheme.” According to the SEC’s complaint, investors in the scheme were sold “membership interests” in an apartment-flipping business and were guaranteed a return of five to eight percent. In reality, the funds were allegedly deposited into a general account and were used to pay a variety of expenses, including returns to other investors. Each of the defendants in the SEC case settled without admitting or denying the allegations.
A hearing was held in 2013 to determine whether, as argued by the court-appointed receiver, the scheme was properly classified as a “Ponzi scheme” and, if so, at what point that designation became applicable. The receiver sought such a finding in order to obtain the so-called “Ponzi presumption,” which is sufficient to establish actual intent to defraud. Read More
As we previously detailed, a shareholder’s request for corporate books and records can raise competing concerns for the company and its directors. On the one hand, shareholders have a legal right under Section 220 to seek company records, and have been repeatedly encouraged by Delaware courts to exercise that right. On the other hand, because Section 220 requests are often a precursor to litigation – and because even innocuous documents can sometimes be used to bolster an otherwise baseless lawsuit – fiduciaries must ensure their response protects shareholder interests as a whole.
A string of recent Delaware decisions have added a new layer of complexity to these concerns. Going forward, Section 220 requests will likely become more common, and will potentially carry a larger downside for companies that fail to properly respond.
First, Delaware courts are increasingly insistent that shareholders seek corporate records before filing suit. In fact, the Delaware Court of Chancery recently went so far as to hold that if a shareholder fails to seek books and records before filing a derivative complaint, the court can assume that shareholder is unable to “provide adequate representation for the corporation.” That decision was later overturned by the Delaware Supreme Court, but by acknowledging “the trial court’s concerns,” the Supreme Court yet again reiterated its expectation that shareholders should request company records as a matter of first course. Read More
A Texas federal judge denied defendants ArthoCare CEO Michael A. Baker and CFO Michael T. Gluk’s motion to dismiss the SEC’s claim against them under Sarbanes-Oxley (“SOX”) Section 304’s clawback provision. Section 304 requires CEOs and CFOs to reimburse their company for any bonus or similar compensations, or any profits realized from the sale of company stock, for the 12-month period following a financial report, if the company is required to prepare an accounting restatement due to material noncompliance committed as a result of misconduct.
Baker and Gluk, who were not alleged to have participated in the misconduct that led to ArthoCare’s restatement, challenged Section 304 as unconstitutional, arguing that the SEC could not require them to repay bonus compensation and profits from stock sales for merely holding CEO and CFO positions during the time of the alleged misconduct. In particular, they argued that Section 304 is vague and is unconstitutional because it does not require a reasonable relationship between the triggering conduct and the penalty as is required by the Due Process Clause.
Judge Sam Sparks of the Western District of Texas rejected the Officer-Defendants’ constitutional arguments. Judge Sparks first held that Section 304 was not vague because it clearly referred to misconduct on behalf of the issuer of the allegedly false financial statement. Judge Sparks noted that Defendants “should have been monitoring the various internal controls to guard against such misconduct; they signed the SEC filings in question, and represented they in fact were actively guarding against noncompliance. As such, they shouldered the risk of Section 304 reimbursement when noncompliance nevertheless occurred.” Read More