Securities Lawyer Blog

WIth the varied allegations that have been prevalent from regulators over the past year, we return to the previously more common claim of insider trading in a case out of Texas.

Earlier this week, the Securities and Exchange Commission (SEC) charged Reza Saleh, a Richardson, Texas resident, with insider trading.

These allegations relate to Mr. Saleh's activities prior to Dell Inc.'s tender offer for Perot Systems. The agency alleges that Mr. Saleh "made increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment with, or duties for, two Perot-related private companies and Perot Systems."

Allegedly, immediately after the tender offer he sold all call option contracts and gained about $8.6 million in illicit profits.

The SEC picked-up on this quite rapidly with the help of the Options Regulatory Surveillance Authority, that identified him as a suspicious trader. The SEC has expressed its appreciation to the ORSA for their assistance in the case thus far. When asked, he disclosed to a Perot director that he had knowledge of the impending transaction during the trading.

The SEC's announcement on this case noted that "[t]he overwhelming evidence in this case allowed the SEC to move quickly against the trader before he could spend the huge profits from his illegal trading," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "The Commission is seeking a court order to freeze Saleh's assets."

The SEC claims that Saleh violated the Securities Exchange Act of 1934 anti-fraud provisions, including specific provisions that prohibit trading while in possession of material nonpublic information about tender offers. A co-holder of the brokerage accounts is also named as a relief defendant.

The agency's investigation is continuing. It has already sought an emergency asset freeze, a preliminary injunction and a final judgment permanently enjoining Mr. Saleh from future violations federal securities laws. The complaint also seeks an order that would require him to pay financial penalties and disgorge all the gains with prejudgment interest.

Related Web Resources

If you would like to learn more about regulations related to insider trading and related topics, please visit the SEC's website.

Continue reading "Perot No-No -- $8.6 million Insider Trading Allegations Against Employee" »

Unless you've been on a secluded island this past week, it's likely you are aware that Judge Jed Rakoff rejected Bank of America's $33 million settlement with the Securities and Exchange Commission (SEC) over Merrill Lynch bonuses.

Even those who are not "street wise" are talking about the case. Perhaps because the Judge took it upon himself to attempt to embrace the larger issues and to do so with, shall we say, very strong language.

As noted recently in the Securities Lawyer Blog, the proposed settlement was at risk after the Judge requested more briefing. The Judge was interested in understanding why the agency had not sued individual executives, among other things. He seemed to be headed in this direction and now the case will go to trial. But the parties likely were holding out hope that the deal they had struck would put the issue to rest.

Now the public will likely see the agency go to trial against BofA on the issue of executive bonuses. A subject that seems to fire everyone up -- from Main Street to Wall Street.

The Judge had some unusually caustic words for the parties in this case, finding that the settlement "suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."

Ouch.

In an interview with the Huffington Post after the Judge's ruling, James Cox, a Duke University law professor and securities law expert said that he had " 'never seen this' " adding that to him, " 'it's long overdue.' "

New York Attorney General Cuomo also continues to be interested in whether shareholders were kept in the dark about the facts so that they would be more likely to approve the merger proposal.

For over a year now, investors have had regulatory agency support getting their Auction Rate Securities (ARS) out of the deep freeze.

Recently, the Financial Industry Regulatory Authority (FINRA) announced a settlement with an additional three firms who sold these investments, only to have the auctions freeze-up in February 2008. FINRA has now settled with a total of 12 firms.

The dollar amounts are staggering. Investors have been guaranteed the return of $1.3 billion and the firms have been fined $3.2 million. In the most recent settlement, Northwestern Mutual Services, LLC, of Milwaukee was fined $200,000, City Securities Corporation of Indianapolis was fined $250,000 and Fifth Third Securities, Inc., of Cincinnati was fined $150,000.

The universal problem with the ARS investments appears to have been the way, and to whom, they were sold. FINRA's Executive Vice President and Chief of Enforcement, Susan L. Merrill, noted that the "failure of firms to adequately disclose the risks associated with auction rate securities left customers unprepared for the failure of the auction market last year and the resulting consequences."

Generally, the failures of firms who sold these securities involved marketing materials or communications with firm sales forces that did not inform internal personnel of the potential problems with liquidity with these investments. Investors often purchased these believing that they were similar to Certificates of Deposit and that their investments could be accessed on a regular basis in the event liquidity was needed.

That turned out to be wrong in theory and practice as the auctions completely dried-up in the financial crisis in early 2008 and investors were stuck holding frozen assets.

As part of this particular settlement and according to FINRA's announcement, the firms involved have agreed to participate in a "special FINRA-administered arbitration program to resolve investor claims for consequential damages - that is, damages investors may have suffered from their inability to access funds invested in ARS." This program includes expedited arbitration proceedings that will be paid for by the firms.

Related Web Resources

Detailed information on ARS procedures and background, for both investors and industry professionals, can be found on FINRA's website.

Continue reading "Thawing To Liquidity -- $128 Million in Auction Rate Securities Holdings Repurchased " »

Shareholders are putting up some big numbers on the board for stock options backdating claims. Broadcom has reached a proposed settlement in the stock options backdating derivative action filed against it. The $118 million settlement is subject to approval by United States District Judge Manuel Real in the Central District of California.

This settlement would be the second largest derivative action for stock options backdating, after the estimated $900 million settlement in the UnitedHealth Group Inc. backdating action in 2007.

Broadcom's shareholders claimed that individual defendants issued false and misleading statements to the Securities and Exchange Commission (SEC) for their own gain. The defendants are alleged to have manipulated the stock options for a period of ten years from 1997 to 2007. They ultimately were required to restate earnings downward in the amount of $2.2 billion.

The settling defendants include both current and former officers and directors, as well as Broadcom's former general counsel. These defendants deny wrongdoing as part of the settlement.

The settlement payment is to be covered by individual defendants' directors and officers liability insurance coverage. Plaintiffs' attorneys' fees and expenses in the amount of $11.5 is to be paid by Broadcom.

Several high-profile individuals are not part of this settlement. Those include former chief financial officer William Ruehle, co-founder and former chief executive Henry Nicolas, as well as co-founder Henry Samueli. Federal prosecutors filed criminal cases against Ruehle and Nicolas for stock options backdating. Samueli pled guilty last year for his role in making a false statement to the SEC.

This settlement stays a related shareholder class action against Broadcom pending the criminal trials against Ruehle and Nicolas.

Related Web Resources

If you would like to learn more about stock options backdating, visit the SEC's website.

Continue reading "$118 Million Settlement in Broadcom's Stock Option Backdating Claims" »