A California federal jury sided against the U.S. Securities and Exchange Commission on Friday, June 6, finding the founder of storage device maker STEC Inc. not guilty on insider trading charges. This is the second insider trading loss in a week for the SEC, following a May 30 defeat in which a New York federal jury rejected insider trading allegations against three defendants, including hedge fund manager Nelson Obus.
In STEC, the SEC alleged that founder Manouchehr Moshayedi made a secret deal with a customer to conceal a drop in demand in advance of a secondary offering. According to the complaint, Moshayedi knew that one of STEC’s key customers, EMC Inc., would demand fewer of STEC’s most profitable products than analysts expected. The SEC alleged that he then made a secret deal that allowed EMC to take a larger share of inventory in exchange for a steep, undisclosed discount.
Summer is coming, but this is probably not the vacation Southern District of New York Judge Jed Rakoff had in mind. On June 4, 2014, the Second Circuit vacated Judge Rakoff’s order refusing to approve the SEC’s $285 million settlement with Citigroup regarding a 2007 collateralized debt obligation (“CDO”) offering. The highly anticipated opinion – the decision did not come down until more than a year after oral argument – sharply limits the instances in which a court may reject or even modify a Commission settlement, even when the SEC does not extract an admission of facts or liability. The decision, which comes at a time when the SEC has been seeking and obtaining more admissions from public companies in connection with settlements, is sure to have a significant impact on the agency’s future approach toward settlements and admissions.
Though the facts of the underlying case are almost a footnote at this point, the SEC had alleged that in 2007, Citigroup negligently represented its role and economic interest in structuring a fund made up of tranches of CDOs. As with similar allegations against Goldman Sachs and its ABACUS CDO, the SEC alleged that Citigroup hand-picked many of the mortgage-related assets in the fund while telling investors that the assets were selected by an independent advisor. The SEC further alleged that Citigroup chose mortgage-backed assets that it projected would decline in value and in which it had taken short positions. Thus, according to the SEC, Citigroup sold investors assets on the hope the CDOs would increase in value, while Citigroup had selected and bet against these same assets on the belief they would actually decrease in value. The SEC alleged that Citigroup was able to reap a substantial profit from shorting the assets it selected for the fund, while fund investors lost millions.
The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds. SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014). The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.
In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties. According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme. After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013. The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains. The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims. Section 2462 states, “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued ….”
ATP Tour: The Little Case That Could
On May 8, 2014 the Delaware Supreme Court upheld a “loser pays” fee-shifting bylaw for a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund. While the decision was released with little heralding, if ATP Tour’s “loser pays” provisions are widely adopted by public corporations and held also to be valid, the decisionmay create a significant impediment to the ubiquitous lawsuits alleging that directors have breached their fiduciary duties of loyalty and care to the corporation.
The board of ATP Tour, a membership organization that operates men’s professional tennis competitions, enacted a fee-shifting bylaw which provides that a “Claiming Party,” i.e. a member organization, would be liable for the corporation’s attorneys’ fees and other litigation expenses if it loses in an intra-corporation claim against the company. The fee-shifting bylaw obligates any Claiming Party to reimburse the League and any member or owner of ATP Tour that the Claiming Party also sued. Read More
On Monday, May 19, 2014, the Commodity Futures Trading Commission (“CFTC”) issued its first award to a whistleblower under its Dodd-Frank bounty program.
The Commission will pay $240,000 to an unidentified whistleblower who “voluntarily provided original information that caused the Commission to launch an investigation that led to an enforcement action” in which the judgment and sanctions exceeded $1 million. The heavily redacted award determination on the CFTC’s website does not reveal the name of the implicated company, the nature of the wrongdoing involved, the percentage of bounty the whistleblower received (which is required to be between 10 and 30 percent pursuant to the statute), or the factors considered in determining the percentage of the bounty.
Prior to this first grant of an award to a whistleblower under the CFTC’s Dodd-Frank bounty program, there were 25 denials of award claims. The reasons for the denials primarily fell into one or more of several categories:
- the individuals provided information before the passage of Dodd-Frank;
- they did not file a form TCR as required by the regulations;
- they did not provide information “voluntarily” but rather in response to a Commission request; and/or
- the information did not cause the Commission to open or expand an investigation or significantly contribute to a success of a Commission matter.
Time will tell whether this first award will have any effect on the number of whistleblowers who report to the CFTC or the quality of information the Commission receives.
A lack of sweaty models trying on yoga pants may be problematic, but does it give rise to securities fraud? Not in the Southern District of New York. In In re lululemon Securities Litigation, decided on April 18, 2014, Judge Katherine B. Forrest dismissed in its entirety a class action complaint against lululemon based on sheer yoga pants alleging violations of Section 10(b) and Section 20(a) of the Exchange Act and SEC Rule 10b-5. As summarized by the court, lead plaintiff alleged, “if only lululemon had someone try on its black luon yoga pants before they shipped, it would have realized they were sheer; similarly, if lulumeon had only had someone exercise in certain athletic wear (enough to produce sweat), it would have realized that the colors bled.” Based on these purported shortcomings, plaintiff alleged that statements touting the high quality of the company’s products were materially false and misleading. The court, however, disagreed: “This narrative requires the Court to stretch allegations of, at most, corporate mismanagement into actionable federal securities fraud. This is not the law.” Read More
A recent decision dismissing an RMBS lawsuit in the Los Angeles County Superior Court highlights the critical importance of filing your claims in the correct court whenever there is a jurisdictional issue. By rejecting the plaintiff’s equitable tolling arguments and applying the appropriate statutory limitations periods, the decision is notable because it arguably conflicts with similar decisions by other state courts involving similar RMBS claims. We have previously written about the application of statutes of limitations to RMBS claims, which may be viewed here. Read More
This is the second post in our series on the Supreme Court’s coming ruling in Halliburton Co. v. Erica P. John Fund, Inc., Case No. 13-317. Here’s our post from last week concerning background information about the case.
As the securities litigation bar holds its breath while the Supreme Court deliberates the fate of the fraud-on-the-market presumption of reliance, we take a moment to review some of the positions submitted by amici in Halliburton v. Erica P. John Fund, Inc.
Judge John L. Kane of the United States District Court for the District of Colorado is uninterested in oxymoronic gimmicks, that much is clear. In a fiery April 24, 2014 opinion, Judge Kane rejected settlements between the SEC and two individual defendants in an insider trading case. Judge Kane evoked—both in style and via explicit citation—Judge Jed Rakoff’s well-known rejection of the proposed settlement in SEC v. Citigroup Global Markets and similarly rejected the proposed settlements because they included numerous “provisions and recitations that [he would] not endorse.”
Judge Kane’s ire was focused on the SEC’s proposed settlement with Michael Van Gilder, the individual who allegedly traded based on inside information in advance of a high-stakes acquisition and tipped friends and family in an email titled “Xmas present.” The SEC’s proposed settlement with Van Gilder included a permanent injunction prohibiting future violations of Section 10(b) or Rule 10b-5, a $109,265 disgorgement payment (credited in part by a payment already made in a parallel criminal proceeding), and another $109,265 in civil penalties. The proposal included a number of standard provisions for SEC settlements, including a waiver of the entry of findings of fact and conclusions of law, a waiver of the right to appeal from the entry of final judgment, “a statement that Van Gilder neither admits nor denies the allegations of the Complaint,” and enjoining Van Gilder from future violations of existing statutory law. Judge Kane decisively rejected each of these in turn. Read More
On April 14, 2014, a divided panel of the U.S. Court of Appeals for the District of Columbia held in National Assoc. of Mfg., et al. v. SEC that the required disclosures pursuant to the SEC’s Conflict Minerals Rule violated the First Amendment’s prohibition against compelled speech, throwing that rule into uncertainty and possibly opening the door to constitutional challenges to similar disclosure rules.
The Conflict Minerals Rule requires companies and foreign private issuers in the U.S. to disclose their use of “conflict minerals” both to the SEC and on their websites. The Rule, which was adopted pursuant to Section 1502 of the Dodd-Frank Act as a response to the Congo War, defines “conflict minerals” as gold, tantalum, tin, and tungsten from the Democratic Republic of Congo (“DRC”) or an adjoining country, which directly or indirectly financed or benefited armed groups in those countries. The deadline for satisfying the Rule, which became effective in November 2012, is May 31, 2014. The National Association of Manufacturers, along with Business Roundtable and the U.S. Chamber of Commerce, challenged the Rule in the district court and then appealed to the Circuit Court. Read More