Month: July 2014

SEC Gives Itself the Home Court Advantage in an Accounting Fraud / Internal Controls Action Against a Corporate CEO

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Matrix

An otherwise mundane SEC announcement on July 30, 2014 of an enforcement action charging a public company CEO and CFO with accounting fraud and internal controls violations is significant because the SEC is proceeding against the non-settling individual (the CEO) in an administrative proceeding rather than in federal court.  While not unprecedented, it has been, to date, exceedingly rare for the Commission to proceed against an unregulated entity or person administratively rather than in federal court.  This decision reflects the Commission’s and Enforcement Division’s recently, but frequently, stated intent to bring more administrative proceedings that previously would have been brought in federal court, now that the Commission has expanded remedies under Dodd-Frank Act.  The decision also raises significant due process issues.

The action itself charges Marc Sherman and Edward Cummings, CEO and former CFO, respectively, of QSGI Inc., a Florida-based computer equipment company, with violation of the antifraud and other provisions of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002.  According to the Commission’s press release, Sherman and Cummings claimed they had disclosed all significant deficiencies in internal controls over financial reporting to the company’s independent auditors, but in fact did not disclose or direct anyone else to disclose ongoing inventory and accounts receivable issues or improper acceleration of recognition and the resulting falsification of QSGI’s books and records.  The Commission also alleges that the executives signed SEC filings and Sarbanes-Oxley certifications that were rendered false and misleading due to the above issues.  Cummings entered into an administrative settlement with the SEC, agreeing to a cease and desist order, a $23,000 civil penalty, a 5-year officer and director bar, and a 5-year bar on appearing or practicing before the Commission as an accountant.  Sherman did not settle, and will instead litigate against the Division of Enforcement in an administrative proceeding. READ MORE →

Better Keep Your Opinions to Yourselves for Now: Second Circuit Doubles Down in Deutsche Bank Ruling in Advance of Supreme Court Review of Omnicare

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Gavel and Hundred-Dollar Bill

On July 16, 2014, a three-judge Second Circuit panel affirmed the dismissal of a securities class action against Deutsche Bank AG and several underwriters.  The case was brought on behalf of investors who purchased approximately $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that defendants misled them about the bank’s exposure to mortgage-backed securities and other risks in a registration statement filed in October of 2006.  Plaintiffs alleged that the registration statement omitted details about Deutsche Bank’s business, including that the company failed to properly record provisions for RMBS, commercial real estate loans and exposure to monoline insurers.

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Have Your Directors Met Their Revlon Duties? Delaware Court Dismisses Strike-Suit Allegations as Merely Cosmetic

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People at a Table

In a virtual course on how to bring—or not bring—an M&A strike suit, on June 30, a Delaware Chancery Court dismissed all shareholder claims against a merger target and its acquirer, ending nearly two years of litigation.  Though the allegations are familiar in the strike-suit context, the 45-page opinion which this ~$100 million merger yielded is notable for its methodical tour of Delaware fiduciary-duty law, 102(b)(7) exculpatory provisions, and so-called Revlon duties.  The roadmap opinion should be required reading for directors considering a merger.

Defendants Ramtron International and Cypress Semiconductor both work in the technology industry and the two began their courtship in 2011.  Though shareholder-plaintiff Paul Dent couldn’t prevent the 2012 Ramtron-Cypress marriage, he continued to hold out for a better dowry, naming Ramtron’s board and Cypress in a suit alleging that Cypress aided and abetted Ramtron’s board in breaching its duty to shareholders, and seeking quasi-appraisal of his shares.  Vice Chancellor Parsons disposed of these claims, taking the time to explain in unusual detail why the allegations utterly failed. READ MORE →

Insider Trading Gets Political: Trading on Political Intelligence

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Some things are better left unsaid. Especially, it seems, when they involve political intelligence shared by a congressional aide with a lobbyist linked to a political intelligence firm serving Wall Street traders.

The sharing of political-insider scoop has recently caused Congress to be subpoenaed for an insider trading investigation that will likely test recent legislation enacted to curb trading on non-public political information. The SEC subpoenaed Rep. David Camp (R., Mich.) for records, and the Justice Department subpoenaed Camp’s aide Brian Sutter, staff director of the House Ways and Means Committee’s healthcare subpanel, to testify before a federal grand jury. READ MORE →