Securities Lawyer Blog

Last week some names were named inadvertently by defense counsel trying to get more from the government in what could become a very very big antitrust action.

By way of background, the Department of Justice filed a criminal antitrust action, U.S. v. Rubin/Chambers, Dunhill Insurance Services Inc., in the U.S. District Court, Southern District of New York naming over a dozen Wall Street firms. The indictment issued in October 2009.

In the antitrust case, the government alleges that various firms conspired to pay below-market interest rates to U.S. state and local governments on investments. The alleged conspiracy is also claimed to have provided the opportunity to the firms to reap profits at the expense of taxpayers.

In addition to naming such firms as UBS and JPMorgan Chase & Co. in the action, last week counsel for a former employee of the indicted advisory firm CDR Financial Products Inc., included a list of "co-conspirators" who have not been charged. Seeking more specific evidence from the government, they apparently "inadvertently" included the names of companies and individuals - but the list has now been stricken from the exhibit after a request to the court.

The DOJ case involves guaranteed investment contracts that are purchased by governmental entities such as cities, states and school districts with funds derived from the sale of municipal bonds. These contracts are then used to secure a return on funds needed for projects such as construction.

The earnings on such investment contracts can be collected by the Internal Revenue service. These contracts are supposed to be subject to competitive bidding so that the governmental entities are assured of receiving a fair return.

The advisory firm, CDR, and several current and former executives were indicted last October, and recently several former CDR employees have agreed to cooperate with the DOJ. The firm was the subject of a government raid in 2006.

This alleged "conspiracy" may also involve some of the bailed-out banks and individual defendants at those institutions.

For more information and details on the history and developments in the case, please go to bloombergnews.com.

Continue reading "Inadvertent List Hits in DOJ Antitrust Action" »

The Financial Industry Regulatory Authority (FINRA) is examining and investigating broker-dealers involved with retail sales of private placement interests and those affiliated with private placement issuers.

The first result of this initiative was announced last week with the expulsion of Dallas broker-dealer Provident Asset Management, LLC. The expulsion of this firm is stated to be "for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme." The firm is settling with FINRA without admitting or denying the allegations.

According to FINRA, this particular broker-dealer engaged in misrepresentation to investors leading them to believe that their investments were going to oil and gas investments and exploration. In fact, the funds were funneled to an affiliate to make dividend payments and principal return to other investors.

FINRA has deemed this to be a "classic Ponzi scheme" and is continuing to review private placement issuers and sales across the country for compliance with suitability, supervision and advertising rules.

The initiative was prompted by increased investor complaints as well as Securities and Exchange Commission actions stopping the sale of particular private placement offerings.

In this case, the expelled entities raised over $480 million through approximately 7,700 individual investments made by thousands of investors. Investors had been promised an 18% return. FINRA is also investigating broker-dealers across the country that sold Provident and other private placement offerings.

The SEC had already filed for injunctive relief last year in the Northern District of Texas naming Provident Asset Management, Provident Royalties among other entities. In that action, the SEC sought a temporary restraining order and an emergency asset freeze as well as the appointment of a federal equity receiver to take control of the entities and preserve their assets for the benefit of the defrauded investors.

Related Web Resources

To learn more about broker-dealer status, go to the broker-dealer check service at FINRA.

Continue reading "Expulsion for Provident Asset After $480 Million Raised for Private Placement" »

The Securities Lawyer Blog has posted several times about the Securities and Exchange Commission's (SEC) prosecution of backdating cases and the difficulties the SEC has encountered in these proceedings.

Last month, we posted on the SEC's decision not to go forward with a civil action when former Broadcom executives were acquitted and criminal cases dismissed.

In another case the Securities Lawyer Blog has been following, the Ninth Circuit overturned the conviction of Gregory Reyes, who had been CEO of Brocade Communications Systems. The court found that prosecutors in the case had knowingly made false statements during closing arguments.

The SEC's woes with backdating prosecutions appear to be continuing. The Reyes retrial has been moving forward for the past two weeks in the United States Federal DIstrict Court, Northern District and defense counsel have requested that the trial court declare a mistrial.

The basis for the request is alleged prosecutorial misconduct. The defense is claiming that the prosecution "knew or should have known" that a key witness Stephen Beyer, formerly with Brocade's human resources department, provided false testimony.

The testimony at issue centers on Mr. Beyer's statements that his former employer, KLA-Tencor's stock options "auto-pricing" practice differed drastically from that at Brocade. The defense is claiming that this testimony is central to the prosecution's case as they have sought to establish that Brocade's employees had concern about the options backdating practices and that human resources employees had tried to suppress the audit trail.

However, the defense in the Brocade case claims that the two options pricing systems were not different, as evidenced by the SEC's suit against KLA-Tencor.

Judge Breyer has now been asked either to declare a mistrial or to strike Mr. Beyer's testimony from the record in the Brocade matter, which would fairly well disassemble the prosecution's case.

Related Web Resources

Background on options backdating can be found at the SEC's spotlight section on this issue.

Continue reading "Mistrial at Retrial? Government Woes May Continue in Backdating Prosecution" »

Last week, the Securities and Exchange Commission (SEC) announced that Kmart Corporation's former Chief Executive Officer, Charles C. Conaway, has been ordered to pay in excess of $10 million in disgorgement, prejudgment interest and civil penalties.

This matter dates back to August 2005, when the SEC filed an action against Mr. Conaway, alleging that prior to the company's bankruptcy, he misled investors with regard to Kmart's financial condition.

In June 2009, after a three-week trial held in the United States District Court for the Eastern District of Michigan, the jury returned a verdict in favor of the SEC. The SEC had alleged that Mr. Conaway engaged in material misrepresentations and omissions with regard to the liquidity of the company. Specifically, he was alleged to have been responsible for making these misrepresentations in the Management's Discussion and Analysis ("MD&A") section of Kmart's Form 10-Q for the third quarter and nine months ended October 31, 2001, and in an earnings conference call with analysts and investors.

The SEC had argued in the case that Mr. Conaway, along with Kmart's former Chief Financial Officer, John T. McDonald, failed to disclose why the company had engaged in a huge overbuy in 2001 and how that had impacted the company's liquidity. The jury agreed with the SEC's allegation that the MD&A disclosure misstated the reasons for this inventory build-up. The company claimed this was due to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The SEC's position was that this was materially misleading since the actual reason for much of this inventory mess was due to "reckless and unilateral purchase of $850 million of excess inventory."

After this occurred the company began to pull back on timely payments to vendors and by the end of the third quarter 2001, in essence had borrowed $570 from its vendors in slow payments. Then the executives misrepresented the reasons behind the failure to pay vendors and its impact on liquidity. Many vendors stopped shipping products to the company in late 2001 and the company filed for bankruptcy in January 2002.

The court's order will require Conaway to pay disgorgement in the amount of $5,000,000, prejudgment interest of $2,853,432 and a civil penalty of $2,500,000. Additional specifics are currently being negotiated by the parties with regard to the handling of a stay, pending the appeal of this matter.

Related Web Resources

Click here for more information on disclosure requirements in Form 10Q and related filings.

Continue reading "Court Orders Former Kmart CEO to Pay $10 Million " »

Last week, the Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for the Southern District of New York against Daniel Bonventre. Mr. Bonventre is alleged to have made a career of falsifying records in Bernard Madoff's back room operations.

The purpose of the alleged fraud was not only to create enrichment for Madoff's key players, but also to create a false appearance of legitimate income. Apparently, for about three decades, Mr. Bonventre was responsible for the back office operations of the now infamous Ponzi scheme -- also known as Bernard L. Madoff Investment Securities LLC (BMIS). Specifically, he managed the accounting and securities clearing functions.

The SEC claims that Bonventre not only knew investors' monies were not being used to purchase securities, but lined his own pockets to the tune of $1.9 million placing false backdated so-called trades in his own account.

Not surprisingly, this latest filing is the seventh enforcement matter brought in the Madoff matter. Prior SEC actions include those against Madoff, auditors, computer programmers and others involved in the elaborate scheme. Guilty pleas have been entered for criminal charges brought in these matters.

According to the SEC's litigation release Mr. Bonventre hid the liabilities to investors and assets received from them. Mr. Bonventre is alleged by the SEC to have assisted Madoff and his close advisor Frank DiPascali, Jr., in lying to investors and regulators when BMIS operations came under review. The operational losses of BMIS were kept secreted behind a wall of $750 million in investor funds employed to "artificially improve reported revenue and income."

In the words of the SEC, "[w]ith Bonventre's assistance, they made serial misrepresentations to external reviewers by manufacturing reams of false reports and data."

Related Web Resources

Information on SEC Madoff-related matters can be located at accounting and auditing enforcement releases and litigation releases at www.sec.gov.

Continue reading "More Guilty Please? $1.9 Million Illicit Profits for Madoff's Chief Back Room Operator" »