It's not quite as thought-provoking as the insider trading scenario discussed in this post from way back when, but the SEC announced a settled insider trading case today against an attorney named David Shlansky that presents an interesting set of facts.  According to the SEC's complaint:

• Shlansky was a friend and former law school classmate of the CFO of a company called Applied Molecular.

• Shlansky owned stock in Applied Molecular when it was still private.

• Shlansky received shares in Applied Molecular's IPO under a “friends and family” program when Applied Molecular went public.

• Shlansky purchased additional stock in the Company over the next few years, including numerous purchases throughout 2003.

• On November 17, 2003, Shlansky purchased 6,000 shares of Applied Molecular stock.

• On November 18, 2003, Shlansky purchased another 6,000 shares of Applied Molecular stock.

• Apparently, later that same day following his Nov. 18 purchase, Shlansky learned of a proposed acquisition of Applied Molecular when the CFO asked if Shlansky would represent him as his personal attorney in connection with the acquisition.  Shlansky agreed to represent the CFO.

• On November 19, 2003, Shlansky purchased another 6,000 shares of Applied Molecular stock.

• Two days later, on November 21, 2003, Applied Molecular publicly announced that it had entered into a merger agreement under which Eli Lilly would acquire the Company.  That day, Applied Molecular’s stock price rose 50% over the previous day’s closing price.

The SEC sued Shlansky over the November 19 purchase of stock only.  Notwithstanding his history with the stock and his purchases of the stock on the day prior to (and the day of) his gaining knowledge of the proposed acquisition, the SEC alleged that Shlansky "knew or was reckless in not knowing that the information about the merger was material and nonpublic ... [and] had a duty not to trade in the securities of Applied Molecular while in possession of this material, nonpublic information."

Assuming the facts above, this case shows that even a lengthy and immediate history of purchasing a stock will not prevent the SEC from suing you for insider trading if, in the middle of a pattern of trading in a stock, you come into possession of material, nonpublic information.  Presumably, the best Shlansky could have done in this situation would have been to draft a written Rule 10b5-1 trading plan (prior to coming into possession of the information) which would have given him an affirmative defense to any allegations of insider trading.

"The Corporate Crime Lottery"

Professor Larry Ribstein poses an interesting question (and simultaneously appears to have turned a clever new phrase--"the corporate crime lottery" (total Google hits = 0))--in this post on his Ideoblog.  In this post, he asks where the "magic bright line is between criminal and non-criminal fraud?"  Looking at the recently announced accounting shenanigans at Krispy Kreme, Prof. Ribstein observes that "this is the sort of thing that just got Scott Sullivan five years at MCI."  But will there even be a criminal case?  When, exactly, is securities fraud a criminal matter?

Technically, all violations of the securities laws are criminal violations as well--insider trading, accounting fraud, Ponzi schemes, etc.   But quite often, such violations are met only with civil actions by the SEC, and not criminal prosecutions.  The SEC's Enforcement Division has broad discretion in whether to refer matters that it is investigating to the US Attorney's office for possible prosecution, as well.  My sense when I was in the SEC's Enforcement Division was that the "magic bright line" was not bright at all, and that referrals to the DOJ were, at least at that time, reserved for conduct that the SEC deemed to be particularly egregious and where the evidence was particularly strong (given the higher burden of proof that must be met in criminal cases).

In any event, Prof. Ribstein makes a good point that corporate executives engaging in financial fraud are also entering a "corporate crime lottery" where lottery losers get a call from the DOJ as well as the SEC.

Permalink | Comments (1) | TrackBacks (1) | Print Article

Back To Top

August 9, 2005

Poll Results: PSLRA Benefits Do Not Outweigh Costs

The people have spoken, and the final results of the SLW poll question we first posted here are now available.  In response to the question, "In hindsight, have the benefits of the PSLRA outweighed the costs?," the 145 votes cast came in as follows:

Yes: 59  (41%)
No: 86  (59%)

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

Enron: Plaintiffs' Counsel's Legal Fees $700 Million and Climbing

According to the August 8 Legal Times, the settlements to date in the Enron securities class action will, if approved, pay the plaintiffs' law firms nearly $700 million in legal fees.  And we're still just getting started. 

As noted in the article, CIBC's $2.4 billion settlement last week to settle allegations that it helped disguise losses at Enron Corp. has raised the stakes for the seven remaining banks involved in the massive securities class action, as well as for law firm defendant Vinson & Elkins.   The article states that "Lead plaintiffs attorney William Lerach of Lerach, Coughlin, Stoia, Geller, Rudman & Robbins says his legal team is 'taking depositions daily' in the case and that his firm is pursuing a policy of escalating the cost of settling through 'brute force' negotiations."

The trial is currently scheduled for October 2006 in the U.S. District Court for the Southern District of Texas.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

More on Securities Class Action Trials

The National Law Journal has this interesting article following up on some of the data and analysis we have been presenting at SLW about the recent surge in securities class action trials.  The article notes that:

But this year, an unusual thing is happening. Six securities class actions have gone to trial, out of a total of nine such trials involving alleged misconduct after the law took effect a decade ago, according to figures compiled by Bruce Carton, director of Institutional Shareholders Services. This is out of roughly 1,733 federal securities class actions that were filed between 1996 and 2004, according to Cornerstone Research in Menlo Park, Calif.

I think it's actually 6 out of 10, but you get the point. 

Why the surge?  The article offers some insights from lawyers who have been involved:

• Michael Tu, a partner at Orrick who recently tried the Thane International case, believes that trials are increasing because settlement amounts are skyrocketing. "It is causing a shift in the settlement landscape and a shift in the way both sides look at a case," he said.
  
  The article adds that "A whole generation of cases that began after the stock market bubble burst has reached the point of maturity, surviving dismissal or summary judgment motions, Tu said, and people now have to make decisions about whether to go to trial. And regulators such as New York Attorney General Eliot Spitzer have been much more aggressive, which generates a lot of discoverable material that plaintiffs can use in their civil suits, he said."
• Ron Miller, an economist at NERA Economic Consulting, "suspects that the cases with bigger market losses are more likely to go to trial because of the cost-benefit analysis. Trials are expensive, and a small case is not worth anyone spending all that time or money in court....'My suspicion is that there have been so few of these trials that a few people have gotten the same idea at the same time; it is time to test the waters,' he said."
• Michael Young of Willkie Farr & Gallagher recalled being the first lawyer to take a case to trial based on post-litigation reform act conduct by a client-- a four-week trial that absolved Chicago accounting firm BDO Seidman LLP of wrongdoing in its audit of Health Management Inc. of Holbrook, N.Y.   When he started looking for sample jury instructions, "the judge in New York said there were no models available because his 1999 trial was the first. "

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

August 8, 2005

The Formula Still Works, Part II: Stolen Identity?

Yes, the formula still works, but here's a twist no one saw coming:  According to this story from the AP, Sonja Anticevic, the Croatian woman whose account the SEC froze because of suspicious options trading in advance of the Adidas-Reebok takeover announcement, said she has never bought any stock and has no clue about how the stock exchange functions.  Although $130,000 worth of speculative, out-of-the-money call options were purchased in her account,

Croatian media suggested Monday that 63-year-old Sonja Anticevic, a retired tailor who sometimes works as a cleaning lady to supplement her monthly pension of 1,600 kuna ($263), could be a victim of stolen identity.

Briefly appearing at the doorstep of her apartment in a working-class suburb of the southern city of Omis on Sunday, Anticevic, wearing a plain, sleeveless black cotton dress, told The Associated Press she "never bought a stock and I have no idea how that works.

Leave me alone, please. I'm in shock," she said before closing the doors. She refused to comment further.

The Croatian media also reported that "Anticevic's 25-year-old nephew is a broker in New York and that Anticevic keeps contact with him. It was unclear whether the nephew played any role in the trading and if he did, if he did so with Anticevic's approval."

Anticevic reportedly retired a few years ago after working all her life in a local underwear factory.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

August 5, 2005

The Formula Still Works

Back in October 2003 I posted a handy 5-point formula for anyone looking to get some real quick action out of the SEC's Division of Enforcement.  Based on this announcement today from the SEC about an emergency federal court action it filed freezing a securities account in the name of Sonja Anticevic following "highly suspicious" trades in Reebok International, it looks like the formula still works.  Let's compare our prior guidance against Anticevic's alleged conduct:

Step 1. Purchase massive quantities of a company's out-of-the-money, soon-to-expire call options (over 50% of the total trading volume in the particular series of call options that day).   

[The complaint alleges that on August 1 and August 2, 2005, the Anticevic account purchased a total of 1,997 out-of-the-money call options for the shares of Reebok at a cost of approximately $130,000].

Step 2. Make these purchases late in the afternoon on the trading day before an announcement of a takeover of the company at a rich premium;

[The Reebok acquisition was announced prior to the opening of the market on Wednesday, August 3, 2005.  Not quite the same day as the trades, but close enough].

Step 3. Have the value of your options increase 48-fold following the takeover announcement (from $11,000 to $528,000);

[The complaint states that on August 3, the Anticevic account sold all of the call options, realizing profits of over $2.04 million.  By my math, that means that the value of her options went from $130,000 to roughly $2.17 million, or a 16-fold increase.  Not quite 48-fold, but 16 is nothing to sneeze at].

Step 4. Have these purchases be the first options you have purchased in the account in over a year.

[TBD--Unknown at this point]

Step 5. Be a former employee of the company being taken over.

[TBD--Unknown at this point]

All in all, pretty close adherence to the 5-point plan.  There were some deviations, which may explain the slight delay by the SEC in "reaching out" to Anticevic--it took them a whole 48 hours this time, versus same-day action back in 2003.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

Betty Vinson Gets 5 Months in Prison

Betty Vinson, a former WorldCom mid-level accounting manager who pleaded guilty in October 2002  to participating in the financial fraud at the company, was sentenced today to five months in prison and five months of house arrest.   Although her sentence won't get even one-thousandth of the press coverage that Martha Stewart's sentence did, it is far more important in terms of the impact it may have on deterring fraud in the future.

Vinson represents the typical "pawn" in a financial fraud--a lower or mid-level accounting person who by all accounts had no interest and no desire to commit fraud.  Nonetheless, the fraud came to her.  She was instructed by her boss, former CFO Scott Sullivan, to make improper accounting entries to make WorldCom's numbers appear better than they really were, supposedly at the ultimate direction of CEO Bernie Ebbers.  Vinson testified that "I felt like if I didn't make the entries, I wouldn't be working there."

Vinson was deeply troubled by this instruction and went so far as to draft a letter of resignation in protest.  But at this key juncture in her life, she did not quit.  Instead, she stayed with the company and made many of the fraudulent accounting entries that enabled the financial fraud at WorldCom.  She apparently did so for personal financial reasons  and because of the personal appeals from Sullivan "not to jump out of the plane . . . [to] hang in there and help him get through the situation for the third quarter."   Vinson chose to believe Sullivan that this was a "one-time thing" that he would correct.

People placed in the excruciating position that Vinson found herself in need to know that the issue is not merely whether they should quit their job.  They need to know that the consequences for participating in and enabling a financial fraud are severe--you may well go to prison as a convicted felon.  As Judge Barbara Jones who sentenced her correctly observed,

"Ms. Vinson was among the least culpable members of the conspiracy at WorldCom," Jones said. Still, she said, "Had Ms. Vinson refused to do what she was asked, it's possible this conspiracy might have been nipped in the bud."

Prison time for Betty Vinson was the right outcome, and public companies should be training their employees that prison is a realistic outcome for anyone--not just the ringleaders--who would betray the integrity of the company's financial reporting.

Permalink | Comments (2) | TrackBacks (0) | Print Article

Back To Top

August 4, 2005

Enron Settlements Starting to Line Up, Part II

Following CIBC's $2.4 billion settlement in the Enron case (discussed here), Bill Lerach continues to turn up the heat on the remaining defendants in the case (reported to include Barclays PLC, Credit Suisse First Boston, Merrill Lynch & Co., Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland Group).   In this interview with MarketWatch, Lerach laid down the gauntlet for the remaining defendants:

Q. CIBC was considered a smaller player in this matter. What message does its settlement send to companies that allegedly had larger roles?

Part of the enormous significance of the CIBC settlement is that it came from a bank that's 1/20 the size of Citibank and J.P. Morgan. It is the smallest of all the defendant banks. So while we cannot and will not predict the future, the pattern of escalating settlements is clearly established and is something that we will pursue.

The banks are in a tough spot. Every settlement that occurs puts more pressure on the non-settling banks because they have less banks to share the remaining liability with. So the litigation dynamic and pressure is very negative for the banks.

Q. Still, can you see a defendant going to trial rather than settle?

I don't think any of them will. The case is too dangerous, too large, too risky. And especially the prospect of standing trial along with confessed or convicted felons in Houston in the Enron scandal is a most unappetizing dish for any of these banks to consume.

Lerach is correct that it will take some serious "bet the company" guts for any of the remaining defendants to stay in this case to the end--which is unlikely.  So look for a flurry of big settlements soon....

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

Enron Settlements Starting to Line Up, Part II

Following CIBC's $2.4 billion settlement in the Enron case (discussed here), Bill Lerach continues to turn up the heat on the remaining defendants in the case (reported to include Barclays PLC, Credit Suisse First Boston, Merrill Lynch & Co., Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland Group).   In this interview with MarketWatch, Lerach laid down the gauntlet for the remaining defendants:

Q. CIBC was considered a smaller player in this matter. What message does its settlement send to companies that allegedly had larger roles?

Part of the enormous significance of the CIBC settlement is that it came from a bank that's 1/20 the size of Citibank and J.P. Morgan. It is the smallest of all the defendant banks. So while we cannot and will not predict the future, the pattern of escalating settlements is clearly established and is something that we will pursue.

The banks are in a tough spot. Every settlement that occurs puts more pressure on the non-settling banks because they have less banks to share the remaining liability with. So the litigation dynamic and pressure is very negative for the banks.

Q. Still, can you see a defendant going to trial rather than settle?

I don't think any of them will. The case is too dangerous, too large, too risky. And especially the prospect of standing trial along with confessed or convicted felons in Houston in the Enron scandal is a most unappetizing dish for any of these banks to consume.

Lerach is correct that it will take some serious "bet the company" guts for any of the remaining defendants to stay in this case to the end--which is unlikely.  So look for a series of big settlements soon....

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

Note to Self: Must Blog Earlier

This securities litigation blogging stuff is getting to be competitive.  Two items that I was going to post about this morning have already been highlighted by the blogosphere, so I'll just flag them here and point you in the right direction.

1.  Bad Martha! --ATVs, yoga = 3 more weeks with the irritating anklet.

2.  135,685 years --Former Cendant Vice Chairman ordered to personally pay back $3.27 billion to shareholders.  Doh!!

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

August 3, 2005

"StopCox" Fails to Stop Cox

In case you haven't heard, Christopher Cox was confirmed late last week as the next Chairman of the SEC.  We assume that this news did not go over well at all over at the Foundation for Taxpayer and Consumer Rights, which acquired the domain name StopCox.org and apparently produced this video clip trying to defeat Cox's nomination. 

As Broc Romanek, aka the Mayor of Blog City, put it in this post at the TheCorporateCounsel.net,

Reading this blog claiming that Chris Cox only faced light questioning, I came across this wacky Web movie attacking Chris Cox on StopCox.org (which now claims Cox perjured himself during his testimony), featuring one of the main characters - Richard Fish - from the Ally McBeal TV series. I guess "Fish" is what passes for a spokesperson for the legal profession these days...and I guess "Fish" is hurting for work to be doing these Web commercials...

I wonder who else was at that casting call competing to be the wacky public face of StopCox.org.   In any event, if there is some "Cox" in your world that requires stopping, you can probably acquire this domain name at a discount now from the FTCR.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

$4.8 Billion in Settlements in Two Days

Between the settlement yesterday by CIBC in the Enron securities litigation for $2.4 billion and the settlement by Time Warner this morning for $2.4 billion with the lead group of shareholders who sued the media company after its merger with AOL we have seen $4.8 billion in settlements in the last two days.

To put that in perspective, the settlements announced in this 48-hour period exceed the total amount of final securities class action settlements in any single year other than 2004.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

August 2, 2005

Fooled Again

Would it be too much to ask for the countries of the Philippines, Thailand, Bangladesh, Nigeria, etc. to refer to their governments'  securities regulator as something other than the "Securities and Exchange Commission" so that I don't constantly get false news alerts like this about the [insert country here] "SEC" pumped into my computer?  Doesn't the U.S. have some kind of trademark on that name?

UPDATE: See, look at Germany.  Did it name its securities regulator the "Securities and Exchange Commission?" Of course not--it is called BaFin.  Perfectly good, untaken name.  Thank you, Germany.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

August 1, 2005

Former WorldCom CFO Settles Class Action, Forfeits Sweet House

As widely reported last week, former WorldCom CFO Scott Sullivan agreed to "forfeit his lavish Florida estate and his retirement fund to settle a class-action lawsuit.  To settle a case brought by the New York State Common Retirement Fund, Mr. Sullivan will hand over his 30,000-square-foot mansion in Boca Raton, Fla., which is now being offered for sale at $10.9 million."

And just take a look at the sweet pad Sullivan is forfeiting (amazing photos and full Internet listing are on his realtor's website here).  As his realtor states on the listing, "This is a once-in-a-lifetime opportunity, embodying the ultimate lifestyle envisaged."  Of course, as discussed here, Sullivan soon will be "envisaging" quite a different lifestyle.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

Nine Securities Lawyers Jump to Mayer, Brown

The Washington Post reports that a group of 9 partners specializing in securities enforcement and regulation (and an indentified number of associates) has jumped from Crowell & Moring to Mayer, Brown, Rowe & Maw's DC office.  The group includes Richard Morvillo, Joe Goldstein and Pat Conti--all of whom were formerly attorneys in the SEC's Division of Enforcement.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

Seymour Lazar Indictment, Part III

The San Diego Union-Tribune has this interesting article about the Lazar-Milberg investigation.  It begins with this interesting observation by the author:

A few years ago, San Diego lawyer Bill Lerach proudly displayed a series of remarkable pictures on the wall of his spacious downtown office.

The photos were taken during a trip by Lerach and some of his partners to a Canadian resort. Lerach told visitors he was reeling in a big lake trout when another fish, a predatory Muskie, attacked the lunker at the end of his line.

Muskies are big fish known for their ferocity. They can sometimes devour a hooked trout before it can be reeled in, Lerach explained.

In his case, though, the stubborn Muskie condemned itself by refusing to let go. The photos show the voracious, unrelenting Muskie being reeled in and netted – along with the mangled, half-eaten trout.

Now Lerach's fish story may serve as a parable for his own potential woes.

Permalink | Comments (1) | TrackBacks (0) | Print Article

Back To Top