Reg FD Lightning Strikes Siebel Systems...Again!
Just minutes after exiting the Safeway check-out line where I saw the tabloid World Weekly News headline proclaiming "Pope Struck by Meteor Again!" (with accompanying "photo"), I was nearly as stunned to learn that Siebel Systems was sued by the SEC today for violating Reg FD... again!
As discussed in this post, the SEC filed a Complaint against Siebel Systems in November 2002 in which, according to the SEC, Siebel consented to pay a $250,000 civil penalty. According to the SEC's Litigation Release, just 6 months later the company violated Reg FD once again
during two private events ... in New York on April 30, 2003, a "one-on-one" meeting with an institutional investor and an invitation-only dinner hosted by Morgan Stanley. The Commission charges that, at both the meeting and the dinner, [Siebel's CFO] made positive comments about the Company's business activity levels and transaction pipeline that materially contrasted with negative public statements Siebel made about its business in the preceding several weeks.
In this article in Bloomberg, the SEC's Scott Friestad, an Assistant Director in the Enforcement Division, was quoted as stating
We thought that the first case against Siebel sent a very strong message about the importance of complying with Reg FD, and apparently the message didn't have its intended effect, because only six months later the company committed another violation.
Mr. Friestad added that today's case is just the SEC's fifth Reg FD lawsuit filed since the rule took effect in October 2000. Which means that Siebel is now 2 for 5!
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June 23, 2004 |
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Again with the Noncooperation!
Add yet another "SEC noncooperation" case to the list that seems to grow weekly these days. The SEC announced today that it had filed a settled enforcement action charging Gemstar-TV Guide International, Inc. with improperly reporting its interactive program guide licensing and advertising revenues in its financial statements from 1999 through 2002. Gemstar agreed to paying a $10 million civil penalty, which will be distributed to shareholders pursuant to the Fair Funds provision in Section 308 of the Sarbanes-Oxley Act of 2002.
The SEC stated in its press release that in assessing the penalty amount, it considered both Gemstar's "initial failure to cooperate in the Commission's investigation or undertake remedial actions," as well as the company's "significant cooperation and remediation following a change in senior management and restructuring of its corporate governance."
According to the SEC, Gemstar's "initial failure to cooperate" included the following:
--In April 2002, immediately after Gemstar filed its 2001 Form 10-K, the Commission contacted Gemstar and commenced an investigation. For nearly the next eight months, while Gemstar's former CEO and other senior officers remained in place, the company did not conduct a thorough or comprehensive internal investigation and did not take other appropriate remedial action, even when presented by the Commission with specific evidence of fraudulent conduct.
--As a result of its inadequate investigation, in August 2002 Gemstar issued a restatement reversing only approximately $20 million in revenue. Gemstar consequently continued to report overstated revenues to the investing public even after the Commission's investigation began.
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June 18, 2004 |
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Oregon Back in Business
Merix Corp. was named as a defendant in a securities class action lawsuit filed yesterday in the U.S. District Court for the District of Oregon. According to the SCAS database, the case is just the ninth securities class action filed in that court since the passage of the PSLRA and, following the tentative settlement recently announced in the Electro Scientific case, is the only active securities class action on that court's docket.
The nine securities class actions filed in the District of Oregon since the passage of the PSLRA are:
· Assisted Living Concepts Inc. (Settled--total of $43.5 million)
· Capital Consultants, LLC (Settled 6/19/02--$100 million)
· Computerized Thermal Imaging, Inc. (Dismissed 4/17/03)
· Electro Scientific Industries, Inc. (Tentative Settlement 4/22/04--$9.25 million)
· FLIR Systems Inc. (Settled; Disbursed 3/27/02--$6 million)
· Merix Corp. (Active)
· Microfield Graphics Inc. (Settled; Disbursed 3/27/02)
· Nike, Inc. (Settled 2/24/03--$8.9 million)
· Southern Pacific Funding Corp. (Settled; Disbursed 1/10/02--$19.5 million)
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June 15, 2004 |
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Should In-House Counsel's VP Title Cause Waiver of Privilege?
Back in the day, when I was a practicing litigator, a very senior federal judge who I will just refer to as "Judge Elderly" was complicating my life and the lives of my co-counsel by being extremely slow to rule on certain important motions. Leaving the courtroom one day after the judge's delays created yet another procedural quagmire, my co-counsel somberly deadpanned, "None of this would have happened if Judge Elderly was still alive."
I kind of feel the same way after learning, two months late, about the crazy factual scenario playing out in the case of Jasmine Networks v. Marvell Semiconductor in state court in California: I would have known about this long ago if Corp Law Blog was still alive! (just kidding, Mike!).
The case stems from the following lawyer-nightmare scenario, which I think blows right by the Seventh Circle of Document Review Hell in terms of sheer lawyer anguish: Three Marvell employees--Marvell's general counsel; its VP of engineering, and in-house patent attorney--gathered to call a person at Jasmine, a company with which Marvell was negotiating to purchase some technology. Using a speakerphone, the three left a message on the Jasmine employee's voicemail. However, after leaving the initial message, they failed to hang up the speakerphone, and proceeded to have a conversation that also was recorded on the voicemail.
To put the inadvertently left message in context, Marvell and Jasmine had entered into a nondisclosure agreement that protected the secrecy of Jasmine's trade secrets and employee information. To that end, Marvell was given an opportunity to look at the trade secret information, but not to remove it. Patent disclosures, among the most important of Jasmine's intellectual property, could be reviewed but not copied. Enough was to be shown Marvell to demonstrate the value without disclosing the secret. As summarized by the California Court of Appeals (Sixth District), the contents of the inadvertent voicemail "demonstrate[d] the theft of Jasmine's trade secret, the potential consequences and the planned cover up."
The lower court granted Marvell's request for a preliminary injunction enjoining Jasmine from disclosing, disseminating or referring to the contents of the recorded voicemail conversation. Marvell had argued that because the conversation involved its attorneys, its contents were subject to the attorney-client privilege. Jasmine appealed this ruling.
The Sixth District Court of Appeals reversed, finding that the privilege had been waived by Marvell because although an attorney's inadvertent disclosure does not waive the privilege absent the privilege holder's intent to waive, this rule did not apply because Marvell's general counsel was acting not only in that capacity, but also as the vice-president of business affairs and an officer of the corporation. In short, the appeals court held that because the general counsel also held the title of vice president and was an officer of the company, the fact that Marvell did not intend to waive the privilege through the inadvertent disclosure was immaterial.
This decision apparently has now been appealed to the Supreme Court of California, and has prompted the Association of Corporate Counsel to submit this amicus curiae letter. The ACC argues that the opinion, "if left standing, means that an in-house lawyer who is providing legal services, but who does so with a corporate title (such as 'vice president') attached to his business card, can inadvertently waive the privilege, contrary to the rule for all other attorneys." The ACC noted that more than 4,000 of its 16,000 members hold the title of "vice president," while many others hold similar titles such as Chief Legal Officer.
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June 10, 2004 |
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The Cost of Indemnification
The following article appeared in the June 2004 edition of ISS's SCAS Alert:
The Cost of Indemnification
By Bruce Carton, Executive Director
The cost to public companies of indemnifying officers and directors against liability rose sharply last week, but not necessarily in the way these companies might have expected. On May 17, Lucent Technologies Inc. agreed to pay the U.S. Securities and Exchange Commission $25 million to settle an enforcement action resulting from Lucent's alleged "lack of cooperation" with the SEC's investigation into certain accounting issues at Lucent.
According to the SEC's press release and its public statements, a critical component of Lucent's perceived lack of cooperation was its decision to indemnify certain employees who were also the subject of SEC scrutiny.
The SEC's press release stated:
After reaching an agreement in principle with the staff to settle the case, and without being required to do so by state law or its corporate charter, Lucent expanded the scope of employees that could be indemnified against the consequences of this SEC enforcement action. Such conduct is contrary to the public interest.
In a news article about the settlement, an SEC official further explained that, in the SEC's view, Lucent's offer to pick up the legal tab for employees who would not normally be covered by such benefits was equivalent to handing these employees "a blank check to litigate with us, with no consequences." The SEC's action turned these consequences around on Lucent, requiring a $25 million payment for lack of cooperation even though no payment had been required under the initial settlement agreement in principle between the SEC and Lucent. The SEC did not specify whether Lucent's offer to indemnify certain employees violated its prior agreement in principle with the SEC.
The SEC first adopted its policy requiring settling parties to forgo any rights they may have to indemnification, reimbursement by insurers, or favorable tax treatment of penalties in 2003, following high-profile settlements in its cases against research analysts and with executives of Xerox where defendants were able to obtain indemnification for the SEC's civil fines. Following these cases, the SEC began including language in its settlement agreements preventing defendants from using insurance or indemnification for any civil fines. At the May 2004 ALI-ABA Securities Litigation conference, SEC officials stated that they were not aware of any court that had ruled on the legality of this policy.
The SEC's action against Lucent should be a real eye-opener for public companies in similar situations as it reveals the SEC's position that companies indemnifying employees that they are not required to indemnify are (a) outright failing to cooperate with the SEC, (b) acting contrary to the public interest, and (c) subject to extremely stiff fines. The case also highlights several other interesting questions, the answers to which may begin to take shape in the second half of 2004. These include:
--Will companies have increased difficulty getting qualified individuals to serve as officers and directors because the SEC's policy against indemnification will leave these individuals personally exposed to significant liability? Common sense suggests they will, as the risks will begin to outweigh the rewards for some candidates.
--Will the SEC's policy deter officers and directors from settling in significant numbers, thereby taxing the SEC's litigation resources? This potential problem is exacerbated by the record-high settlement amounts currently being demanded by the SEC, a development which itself may begin to deter settlements. SEC officials at the ALI-ABA Securities Litigation conference indicated that the percentage of SEC enforcement actions filed without pre-arranged settlements stood at 44% thus far in 2004, up slightly from past years.
--Will lead plaintiffs in private class actions, a role increasingly filled by institutions seeking to make an impact through their participation, begin to insist as a matter of policy that their private settlements with officers and directors sued in such cases also prohibit indemnification? Doug McKeige of the law firm Bernstein Litowitz Berger & Grossmann LLP, which frequently represents institutional investors in securities class actions, indicated that certain institutions have attempted for years to obtain settlement dollars, where possible, directly from the pockets of individuals. Indeed, he noted that some institutions have agreed to pay their attorneys higher fees on dollars obtained from individuals. McKeige observed that the number of institutions attempting to obtain unindemnified settlement contributions from directors and officers appears to be growing.
We will be interested to see what, if any, impact the SEC's anti-indemnification policy has on these and other issues in the near future.
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Chart: Top 5 Settlements Since Passage of PSLRA
This chart, which first appeared in the June SCAS Alert, is based on settlement information from the SCAS database. It reflects the top 5 final or tentative settlements in securities class actions since the passage of the Private Securities Litigation Reform Act of 1995.
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June 9, 2004 |
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American Business Financial Services: Individuals Prevail Over Pension Funds for Lead Plaintiff
Judge Oneill's June 3, 2004 opinion in In re: American Business Financial Services, Inc. Securities Litigation (E.D. Pa.) provides an interesting look at what the PSLRA requires when individual investors have a larger financial interest in a case than an institutional investor that is competing for lead plaintiff. In the American Business Financial case, pension funds that lost $28,000 and a group of individual investors that lost over $69,000 filed competing motions for appointment as lead plaintiff. Although they did not suffer the greatest loss, the pension funds argued that as sophisticated, institutional investors, they were in a better position to prosecute securities fraud claims and to negotiate with and supervise counsel.
The court noted that under the PSLRA, it was required to adopt a presumption that the individual investors--who had the "largest financial interest in the relief sought by the class"--were the most adequate plaintiffs. It was up to the pension funds, therefore, to rebut that presumption with "proof that such plaintiff will not fairly and adequately protect the interests of the class or is subject to unique defenses that render such plaintiff incapable of adequately representing the class."
The pension funds argued that they were particularly well-equipped to serve as lead counsel and that the PSLRA specifically encourages institutions to function in this role. The court, however, ruled that while the PSLRA may encourage such a role, "the language of the Act does not require that institutional investors take precedence over individual plaintiffs who are otherwise qualified to serve in a lead capacity." The court concluded that the pension funds had failed to rebut the presumption that the individual investors were the most adequate plaintiff, and granted the individuals' motion for appointment as lead plaintiff.
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June 8, 2004 |
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SEC-Symbol Technologies Settlement: Another "Noncooperation" Case
In its June 3, 2004 press release announcing a $37 million settlement with Symbol Technologies (all of which will be distributed to injured investors under the Fair Funds provision in SOX), the SEC made it clear that Symbol's initial lack of cooperation was a factor in the amount of the penalty. The SEC stated that:
In assessing the penalty amount, the Commission considered the scope and severity of the fraud, Symbol's initial efforts to cover up the misconduct and impede two internal investigations and the Commission's investigation, and the company's eventual cooperation and remediation."The scope and magnitude of the fraud at Symbol Technologies warrant the imposition of significant penalties — not just against individual wrongdoers, but also against the company responsible for having created and fostered the environment in which the wrongdoing took place," said Stephen M. Cutler, Director of the Commission's Division of Enforcement. "And while the company ultimately did cooperate with the government -- and received credit for having done so — its initial response to our investigation further harmed investors by delaying exposure of the fraud and allowing it to continue longer than it otherwise might have."
This makes three SEC "noncooperation" cases in the last three months: Banc of America; Lucent; and now this case against Symbol.
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June 4, 2004 |
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Don't Jump the Gun
It doesn't happen too often, but every year or so a company preparing to go public derails itself, at least temporarily, by getting too close to conduct known as "gun-jumping." The most recent example of this is salesforce.com, which apparently had planned to go public on May 13.
"Gun-jumping" generally refers to actions that condition the public mind or arouse public interest in an issuer or in the securities of an issuer in advance of a public offering. As I discussed in this article several years ago, gun-jumping can occur after a company has filed a registration statement and is in the waiting period between filing and effectiveness. Although oral offers may be made during this period, Section 5(b)(1) of the Securities Act requires that written offers be made through the preliminary prospectus filed with the registration statement. Thus, written "offers" that do not meet the requirements of a preliminary prospectus (or a tombstone ad pursuant to Rule 134 under the Securities Act) may be in violation of Section 5(b)(1). Notably, the SEC takes a broad view of what constitutes an "offer," and has stated that any publicity that has the effect of "conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer" may be deemed part of the selling effort.
When the SEC comes across conduct such as interviews or news stories that it deems to be gun-jumping, it typically requires the company that is poised to go public to delay its IPO through a so-called "cooling-off" period. The cooling-off period theoretically allows the "aroused public interest" to dissipate, and permits the company to argue that its IPO, when it finally does occur, is "offered" only through the prospectus and not through some other written materials such as a news article.
In addition, as discussed by Broc Romanek in his blog on May 25, the SEC also commonly requires that a risk factor be included in the company's IPO prospectus regarding the potential gun-jumping violation. The reason for this risk factor is that the consequences of gun-jumping can be dramatic: Under Section 12 of the Securities Act, any person who offers or sells a security in violation of Section 5 is civilly liable to the purchaser of that security for the full amount paid for the security, plus interest. Thus, a company that violates Section 5 may have unwittingly written the equivalent of a "put" contract guaranteeing that it will buy back its securities at the price at which it sold them.
Indeed, as discussed in this article, salesforce.com delayed its IPO following certain comments by its CEO in the New York Times in the days leading up to the offering, and then added a risk factor in this amended prospectus explaining that:
If our involvement in a lengthy May 9th New York Times article about salesforce.com or any other publicity regarding salesforce.com or the offering during the waiting period were held to be “gun jumping” in violation of the Securities Act of 1933, we could be required to repurchase securities sold in this offering. You should only rely on statements made in this prospectus in determining whether to purchase our shares.
The disclosure added:
In order to reduce the risk of investors’ possible reliance on the New York Times article and other news reports and articles, we stopped our offering on May 13, 2004. We then allowed a “cooling off” period to pass so that the effect of this article and other reports, articles and information would be dissipated.It is uncertain whether our involvement in the May 9th New York Times article or any of our other publicity related activities could be held to be a violation of Section 5 of the Securities Act of 1933. If our involvement or such activities were held by a court to be in violation of the Securities Act, we could be required to repurchase the shares sold to purchasers in this offering at the original purchase price for a period of one year following the date of the violation. We would contest vigorously any claim that a violation of the Securities Act occurred.
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June 1, 2004 |
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SEC Seeking In-House Psychologist
Attention psychologists! You have just 9 more days to respond to the SEC's job posting seeking an in-house psychologist to help "improve employee attitudes and satisfaction related to employee retention, job satisfaction, burnout, conflict and stress."
The SEC's decision to hire a psychologist for its employees, discussed in this article by Judith Burns of the AP, was reportedly met with a steady stream of one-liners from former SEC officials, including:
Bill McLucas (former Director of the SEC's Division of Enforcement): "Just one? They should get a couple." McLucas also figured "it's going to take more than two years" to buck up morale at the federal securities agency. "This is a long-term job." McLucas also was quoted as saying said he'd like current Enforcement director Stephen Cutler to get the first appointment once the psychologist is on board so that "he can take out his hostilities with that person instead of my clients."
David Becker (former SEC General Counsel): "Working for the SEC in the current media climate is enough to drive anybody nuts." Becker also wondered if the SEC is "about to introduce the group hug as a regulatory technique."
Harvey Pitt (former SEC Chairman): "The SEC is a great place to work, but it is not for the faint of heart." Asked if the SEC is a very stressful place to work, he joked: "Certainly, if you're chairman."
Laura Unger (former acting SEC Chairman): Asked whether SEC employees would line up to talk to a psychologist, Unger said "I have this picture of Charlie Brown sitting at his window with a 'doctor is in' sign and nobody showing up."
Personally, I don't know what to make of this other than I predict that a lot of heated discussions with SEC staff are going to end with the following salvo by defense counsel: "I think you need to see the SEC shrink!"
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Superseding Ebbers Indictment
On May 24, 2004, federal prosecutors in New York announced a new, superseding indictment against former WorldCom CEO Bernie Ebbers which added six charges of securities fraud. The superseding indictment does not expand the nature of the government's charges, but rather contends that the accounting scheme described in the original indictment in March 2004 resulted in six additional false filings with the Securities and Exchange Commission. A copy of the new indictment is available here.
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