GAO Flags SEC Security Holes
As discussed in this Reuters article, the GAO announced last month that its audit of the SEC showed that the SEC had "failed to limit remote access to its servers, establish controls over passwords, securely configure all network devices, and adopt security monitoring procedures." The article posits that "a successful hacker could use nonpublic information to make trouble for a targeted company or rival" and offers this "nightmare scenario:"
A hacker accesses e-mails in U.S. Securities and Exchange Commission computers and splashes them across the Internet, revealing an inquiry into a company that shakes investor confidence before the probe is complete.
Such an attack has never happened at the SEC, but computer experts say it could if the agency fails to tighten security.
"Splashing information" actually would be a fortunate and much less embarrassing outcome for the SEC compared to what greedier hackers might choose to do with such information. For instance, what do you think the Estonian Spider Hackers would do with that information? What would Plotkin and Pajcin do with it? You guessed it.
In fact, "hacking into the SEC" was probably already on the Plotkin/Pajcin business plan, somewhere between stealing Business Week and hiring "exotic dancers" to extract information from investment bankers.
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April 25, 2006 |
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The Arrival of the CEO Blog
Way, way down the list of notable items about the departure of Sun Microsystems CEO Scott McNealy and the announcement of Jonathan Schwartz as his replacement is this: there is now at least one high-profile CEO with an active blog. As discussed here and here, Schwartz is the author of Jonathan's Blog, which actively discusses goings-on over at Sun.
The naming of Schwartz as CEO leads to entertaining leads such as this one in the CNN article linked to above:
"In a Hail Mary move to save the company, Sun Microsystems has just appointed a ponytailed blogger as its CEO."
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Still More on Internal Investigations--The "Whitewash"
The WSJ Law Blog tips us to this article in today's WSJ about a looming trial in the Enron case against law firm Vinson & Elkins that is now set for October 2006. The article notes that the lawsuit alleges that V&E "defrauded Enron investors by structuring 'phony' transactions used to inflate revenue and hide debt."
Beyond that, however, the article discusses yet another internal investigation conducted by V&E that is now the subject of some scrutiny. Just last week we discussed here an article reporting the San Diego city attorney's intention to sue the law firm Vinson & Elkins for an internal investigation report that he says was a "whitewash" that failed to hold city officials fully accountable.
The WSJ describes testimony about another V&E internal investigation of Enron Corp. that is being scrutinized in the criminal trial of Ken Lay and Jeffrey Skilling, and whether or not it was--here's that word again-- a "whitewash":
Testimony about Vinson at the trial mostly has been prompted by questions from defense lawyers, who are trying to persuade the jury that accountants and lawyers fully vetted Enron's operations.
Vinson in 2001 conducted an investigation for Enron of complaints raised by Sherron Watkins, a finance executive who fretted in a letter to Mr. Lay that the company might "implode in a wave of accounting scandals." Vinson partner Max Hendrick III testified that the probe was "professional" but limited in scope. The inquiry cleared Enron of wrongdoing. Asked if it was a "whitewash," Mr. Hendrick testified that it wasn't.
The article adds that Bill Lerach, whose firm is lead counsel in the trial against Enron (and V&E),
says evidence in the criminal trial that shows that Vinson signed off on allegedly fraudulent transactions "will be useful in the civil suit." He has had a lawyer from his firm attending every day of the trial. His firm is Lerach Coughlin Stoia Geller Rudman & Robbins LLP.
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April 21, 2006 |
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More on Insider Trading Bounty Hunters
William P. Barrett of Forbes has this article updating the SEC's seldom-used insider trading "bounty" program. The bounty program began in 1988, when Congress optimistically passed Section 21A(e) of the '34 Act, which authorizes the SEC, in its discretion, to award a bounty to a person who provides information leading to recovery of a civil penalty from an insider trader, a person who "tipped" information to an insider trader, or a person who directly or indirectly controls an insider trader. The bounty may be up to 10% of the civil penalty actually recovered in the SEC's action.
As discussed in this SLW post from December 2003, however, only three bounties had ever been awarded at that time, and only one known recipient existed: one "John L. Skipper," who received a check in the amount of $29,000 according to this SEC Litigation Release.
The Forbes article notes that an an additional $17,000 bounty was paid in 2005, and that the grand total for the four payments to date under the bounty program is now at a not-so-whopping $67,570.
According to SEC spokesman John J. Nester, the four payments since 1988 are as follows:
1989: $3,500
2002: $18,000
2002: $29,000 (to Mr. Skipper)
2005: $17,000
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April 19, 2006 |
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More on the Perils of Conducting the Internal Investigation
Not too long ago, a lawyer or firm getting hired to conduct an internal investigation into a company's possible securities law violations was the beginning of a usually lengthy, no-lose gravy train. Get a team together, map out all the documents and witnesses from which to gather information, bill heavily while collecting all of this information (and then while writing up a brilliant report), collect a big check, and move on.
Lately, however, some downside seems to be emerging in the internal investigation business. We first observed in November 2004 that prosecutors in the Computer Associates criminal case charged the former CEO of the company with obstruction of justice based on statements he made not to any government official but rather to the company's outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter. In a sense, the prosecutors' "deputized" the lawyers conducting the internal investigation by taking the position that a false statement made to an outside lawyer conducting an internal investigation is obstruction of justice when the outside lawyer is doing the investigation with the purpose of giving that information to the government.
Next, we discussed in this post the SEC's reported Wells call threatening enforcement action against a lawyer who conducted an internal investigation into possible financial fraud at Endocare. The underlying article did not say exactly what the lawyer did to provoke the SEC, but the company had earlier issued a press release last year saying the probe the lawyer conducted found no "intentional wrongdoing by management.'' The article referenced a speech by then SEC Enforcement Director Stephen Cutler, in which he stated that he was "concerned'' that some lawyers hired to investigate signs of fraud might have helped cover it up.
As also discussed in the article, one former SEC assistant enforcement director noted that if the SEC proceeded with this case, other lawyers might think very hard before taking on company investigations and "there will be some firms who look at this and say we will never do another...." Notably, the SEC does not appear to have proceeded with any lawsuit against the lawyer in the nearly year and a half since the Wells call was reported.
Most recently, an article by Lynn Hume in today's Bond Buyer states that the San Diego city attorney intends to sue the law firm Vinson & Elkins for an internal investigation report that he says was a "whitewash" that failed to hold city officials fully accountable. The city attorney claims that V&E was part of an effort to "help the people that were under investigation escape responsibility because that's where the money was."
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April 12, 2006 |
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Business Week: The Next Frontier
If you've read this blog for any period of time you know of our three-year losing battle to rid the world of the menace to society known as "Insider Trading Based on Advance Copies of Business Week." As I put it back on Thanksgiving Day in this post entitled "All Roads Lead Back to Business Week,"
Trading on advance copies of Business Week--the doomed insider trading scheme that I have blogged about since August 2003. The "legendarily unsuccessful" tactic that I listed as #1 on my original "Do Not Use" list for securities fraudsters, and which I most recently labeled the "gold standard of what not to do." It's back again, when and where I least expected it.
Like a Whack-a-Mole, this scourge is back. Again. Yesterday, the SEC announced that it had named 5 new defendants in a BW-related case (the WSJ Law Blog has this post with links to a separate criminal complaint and a video press conference).
Incredibly, this case takes the BW saga to a new level: The ringleaders of this scheme actually infiltrated one the magazine's printing plants by persuading two individuals to obtain jobs at the plant that printed BW!! According to the SEC,
Plotkin and Pajcin also infiltrated one of the printing plants utilized by BusinessWeek, repeatedly obtaining advance copies of the market-moving Inside Wall Street (IWS) column in BusinessWeek. Plotkin and Pajcin recruited two individuals — first, Nickolaus Shuster, and later Juan C. Renteria, Jr. — to obtain employment at Quad/Graphics, Inc., one of four printing plants that print BusinessWeek magazine, for the sole purpose of stealing copies of upcoming editions of the magazine, and calling Plotkin or Pajcin to read them key portions of IWS — a widely-read column in the magazine that generally moves the price of the securities of companies mentioned in it — prior to the time the column became available to the public.
Wow.
I've entitled this post the "Next Frontier" as opposed to the "Final Frontier" because there must be some still-unused tactic out there that could be used to steal information from BW. For instance, the next case could revolve around defendants who fund a high school student's education at journalism school in order to help him get a job at Business Week writing the Inside Wall Street column.
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April 6, 2006 |
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SLW Denies Defunctness
Saw this post on Point of Law about a blog called Epiphany that compiled this list of defunct/inactive legal blogs and I visited the Epiphany site to see if the sorely-missed Corp Law Blog was on the list. Corp Law Blog was on the list...but Securities Litigation Watch was also on their list of "inactive legal blogs" that supposedly have had no new postings for more than a month!
Objection!
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April 5, 2006 |
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The Truth is Out There, Part II
Back in 2004, SLW wrote about the mysterious disappearance of FAQ 19--the securities equivalent of "Area 51"--from the SEC's website. FAQ 19, of course, was the following playful (?) Q&A about a time-traveling insider trader that read as follows:
"Question: Is the Andrew Carlssin case for real?
Your Answer: Many investors and other members of the public have asked us about news reports concerning the Andrew Carlssin, an alleged "time-traveler" who supposedly made a fortune in the stock market by trading in the year 2003 based on information gleaned from his travels to the future. The reports appear to be a hoax. The SEC has not, in fact, brought an enforcement action against any such person."
FAQ 19 vanished from the SEC's website at some point in 2004 (but can be seen here on this cached version if you are patient enough to let it load), prompting me to joke in this post that "Clearly something is going on. If the SEC has now confirmed the existence of this time-traveling insider trader, then doggone it, just tell us. We can handle it. I think." (That post from November 2004, in turn, prompted MANY people interested in time-travel to visit the SLW blog then and to this day, helping me to realize that the number of people interested in time-travel exceeds the number of people interested in securities litigation).
All of this is a long-winded way of saying that the SEC should not shut down its time-travel enforcement program just yet. According to this article, a professor at U. Conn. has designed a time machine and he says that, after he completes about a decade's-worth of experiments "and depending on breakthroughs, technology, and funding, I believe that human time travel could happen this century.”
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