Please Submit Suggestions for "Best and Worst of 2004"
We will be putting out our first "Best and Worst of 2004" column this year, to be published here, in the January SCAS Alert and possibly elsewhere. Please email me any nominees you may have (in any securities-related category you would like: Best Settlement; Best Result Defending an SEC Action; Best Friend of the Plaintiffs' Bar; Best Quote from a Judicial Opinion; Worst New Trend; etc.). All nominations and ideas will be kept anonymous.
Thanks!
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December 13, 2004 |
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What a Relief
In case anyone was concerned, the Associated Press broke this story on Sunday: "SEC expected to keep watching out for investors."
In other news, the FDA is expected to keep regulating food and drugs. But hey--these are just expectations. Anything could happen.
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December 9, 2004 |
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Investigating the Investigator
On the heels of the "New Obstruction" we discussed here (the indictment of executives for alleged false statements made to the company's outside counsel which was conducting an internal investigation of possible financial fraud) comes a development that will no doubt cause great concern on the lawyer side of the internal investigation world. According to this article from Bloomberg, SEC staff recently notified a former Brobeck, Phleger & Harrison partner that the SEC may file an action against him for his role in an investigation at Endocare Inc. The article states:
Exactly what [the lawyer] did to provoke the SEC isn't clear. Endocare issued a press release last year saying the probe he conducted found no "intentional wrongdoing by management.'' About a month later, Endocare said it was under investigation by the U.S. Justice Department and the SEC, which has since threatened to sue the company and its former managers.
The article notes that in a Sept. 20 speech, SEC Enforcement Director Stephen Cutler said that he was "concerned'' that some lawyers hired to investigate signs of fraud might have helped cover it up.
We will be watching with great interest to see if the SEC decides to pursue this case and, if so, what exactly the lawyer-investigator allegedly did (or did not do) to prompt action by the SEC. As noted in the article, if the SEC proceeds with this case, other lawyers may think very hard before taking on company investigations. As one former SEC assistant enforcement director was quoted in the article as saying, "There will be some firms who look at this and say we will never do another. They'll think this forces them to choose between being defense counsel and doing these investigations, which are very difficult and messy.''
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December 6, 2004 |
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Uncovering "Buried Notice"
"Buried notice." That is the phrase many plaintiffs' securities class action lawyers use to describe the practice of "burying" the notice to class members of a new case required under the PSLRA , i.e., publishing it in a place that it is unlikely (or at least less likely) to be seen by class members.
The PSLRA requires that
"Not later than 20 days after the date on which the complaint is filed, the plaintiff or plaintiffs shall cause to be published, in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class---
I. of the pendency of the action, the claims asserted therein, and the purported class period; and
II. that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class. (Emphasis added).
Although the PSLRA provides this choice in the method of providing notice, in practice nearly all law firms today publish notice of a new case by issuing a press release over a national business wire such as PR Newswire or Business Wire. There are numerous reasons why these national wire services have become the de facto industry standard. First, they are less expensive, quicker and simpler than arranging for a notice to be printed in a hard copy publication. Second, such services are publicly available and searchable via internet sources such as Yahoo! and Google, thus offering maximum exposure. Third, it is obviously inefficient and unrealistic to flip through hard copies of random "business-oriented publications" on the hope that you might stumble upon notice of a class action in which you are interested.
Why then do some law firms opt only to publish the required notice in places like the back pages of the print edition of Investors Business Daily? This article by ISS's Ted Allen in the December 2004 SCAS Alert addresses that question.
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December 3, 2004 |
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When a Dollar (of Disgorgement) Is Worth Millions
The following article first appeared in the December 2004 SCAS Alert:
When a Dollar (of Disgorgement) Is Worth Millions
By Bruce Carton, Executive Director
More and more often, SEC settlements for odd-looking amounts like "$150,000,001" or "$50,000,001" have been generating questions and interests among our clients: Are these typos? What's up with the extra dollar? The answer is that this one dollar of "disgorgement" is the difference between investors receiving hundreds of millions of dollars a year from SEC enforcement actions or absolutely nothing.
Defendants who settle SEC enforcement actions typically agree to pay disgorgement, civil penalties or both. Disgorgement is the surrender of a defendant's "ill-gotten gains," such as the profits made by a person who has engaged in insider trading. Civil penalties are additional fines imposed by the SEC. Using the insider trading example, a person settling an SEC action who made $100,000 in illegal profits would typically be required to pay an additional $100,000 as a "1X" civil penalty, i.e., one times the amount of the ill-gotten gains. Thus, the defendant would pay $100,000 in disgorgement plus a $100,000 civil penalty, for a total of $200,000.
Prior to the Sarbanes-Oxley Act (SOX), the SEC distributed disgorgement funds from settlements to investors, but sent civil penalties to the U.S. Treasury. Thus, in the example above, the $100,000 paid in disgorgement would have gone to investors and the $100,000 in civil penalties would have gone to the Treasury. If a case involved only a civil penalty, investors received no money from the settlement.
Section 308 of SOX ("Fair Funds for Investors") changed this practice in an important way. Under this Fair Funds provision, if a settlement involving a civil penalty also contains disgorgement, "the amount of such civil penalty shall, on the motion or at the direction of the Commission, be added to and become part of the disgorgement fund for the benefit of the victims of such violation." In cases falling under the Fair Funds provision since its enactment as part of SOX in July 2002, the SEC has routinely directed that the entire civil penalty be distributed to investors.
In many SEC settlements of financial fraud cases, however, there is no clear or calculable element of "disgorgement." As the SEC explained in a January 2003 report to Congress, "some issuer financial fraud and reporting cases do not result in any disgorgement orders because no defendant received a tangible profit causally connected to the fraud." For this reason, the SEC recommended that Congress amend Section 308 so that the SEC may distribute civil penalty monies to injured investors regardless of whether disgorgement is ordered. To date, Congress has elected not to do so.
Recent Settlements
The SEC, however, appears to have found a way around the limitations of the Fair Funds provision to the benefit of investors. In mid-2004, the SEC began to order disgorgement of $1.00 in many cases involving large civil penalties that otherwise would not have benefited injured shareholders, thereby triggering the Fair Funds provision. Indeed, $1.00 disgorgements can be found in high-profile SEC cases including Symbol Technologies ($37,000,000 civil penalty; $1.00 disgorgement), i2 Technologies ($10,000,000 civil penalty; $1.00 disgorgement), Royal Dutch Petroleum ($120,000,000 civil penalty; $1.00 disgorgement), Bristol-Myers Squibb Co. ($150,000,000 civil penalty; $1.00 disgorgement) and Qwest Communications ($250,000,000 civil penalty; $1.00 disgorgement). Thus, as a result of the combined five dollars of disgorgement in these five cases alone, the SEC will be able to distribute a total of $567 million to investors.
So, keep an eye open for those odd-looking SEC settlement amounts--often they will be your cue that big money is on the way to investors.
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December 1, 2004 |
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Still More on the Settlement Pipeline
Pensions and Investments magazine has a good article (yes, we're biased here) breaking down the $5 billion+ Settlement Pipeline. As of last week the SCAS Settlement Pipeline stood at $5.75 billion.
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