The Butler Did It?
The SEC says the butler did it. Insider trading, that is.
Which raises the obvious question: What's the point of even being a butler these days if you aren't allowed to trade based on confidential faxes coming into your mansion regarding your master's acquisition of a dormant shell company that will be used as a vehicle to acquire and exploit the commercial rights to Elvis Presley's name and likeness?
I mean, once that's taken away from you, what's left?
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September 25, 2006 |
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Putting It Behind You
Way back in April 2004, I wrote an article entitled "Beware the No-Spin Zone," which discussed the days immediately following the conclusion of an SEC investigation or settlement in which companies must be particularly careful not to "spin" the resolution beyond its actual terms (or risk the wrath of the SEC).
To recap that article, on Wednesday, March 10, 2004, a company called AGCO Corp., which had been the subject of an informal SEC inquiry into its accounting practices, received great news in a letter from the SEC that stated: This [the previously announced] inquiry has been terminated, and no enforcement action has been recommended to the Commission. We are providing this information under the guidelines in the final paragraph of Securities Act Release No. 5310. Later that same day, the Atlanta Journal-Constitution reported that AGCO had publicly announced the end of the SEC's inquiry. The newspaper quoted the company's CEO as stating: "It's a good day…. When you're sure that you haven't done anything wrong--but to the outside world it looks like you're guilty of something--it's a real relief to be vindicated from any accusations." The CEO reportedly added that although AGCO was not going to make the SEC's letter public, "They confirmed that all procedures are accurate and in accordance with prescribed accounting procedures…. The issue, as far as we're concerned, is closed and we can now devote more time to the management of the business and the company." It is unclear what communications, if any, occurred between the SEC and AGCO following the Wednesday publication of the article in the Atlanta Journal-Constitution. By Thursday afternoon, however, AGCO had issued what must have been a painful press release titled, "AGCO Corrects Reports Regarding Letter Received from SEC." This press release included a very different quote from AGCO's CEO: The termination of the SEC inquiry does not indicate that our accounting procedures or disclosures are correct or that we have been vindicated. That is not what the SEC letter said, and I want to correct what was reported in the media. All the letter said was that the inquiry was terminated. Neither that letter nor anything else said by the SEC staff in any way suggested that AGCO's accounting or related disclosures are correct. Painful lessons such as this one have led corporations to respect the "No-Spin Zone" in recent years, and helped them to avoid turning what should be a positive development into a negative one. Indeed, a "default" corporate statement seems to have evolved in the past couple years in response to notice from the SEC of the termination of an investigation: companies now simply say that they are pleased that "the matter is behind us." For example, consider these four statements from the last 12 months announcing that the SEC had terminated investigations: Years later, the lesson still seems to be that if a company really wants to put an SEC investigation "behind it," it must respect the No-Spin Zone.
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September 22, 2006 |
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Options Backdating List Update and "Sixth Sense" Grants
Our options backdating securities class action list has been updated to add Jabil Circuit, Inc. The number of companies on the list now stands at 17.
While we are on the subject, check out this post by Pat McGurn on SLW's sister (father? big brother?) blog, the ISS Corporate Governance Blog. Commenting on reports of a bizarre grant of backdated options by Cablevision Systems to a deceased person, Pat says of these Sixth Sense grants ("I pay dead people") that:
In coming days, you should expect to see banner headlines screaming: "Pay For No Pulse" and "Can't Fog a Mirror Grant." Leading the parade, Columbia Law Professor John Coffee dryly quipped to the WSJ this am that "trying to incentivize a corpse suggests (the board) was not complying with the spirit of shareholder-approved stock-option plans." I checked the plan text and I can say that Jack is right, shareholders didn't authorize Sixth Sense grants.
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September 21, 2006 |
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"Dealbreaker" and "Above the Law"
Looking for a way to spend some of that spare non-billable time while still staying firmly on topic? Check out Dealbreaker.com and AbovetheLaw.com, two relatively new sister blogs that cover the "gossip"/cocktail party discussion-side of Wall Street and law, respectively. We're just getting to know Above the Law, but Dealbreaker is already firmly on our good side due to its blanket coverage of SLW-favorites David Pajcin and Eugene Plotkin.
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OK... Pretty Please?
Really? The answer to my request to the SEC back in July for an RSS feed on its Investor Claims Funds page is just "No"? Or maybe you're just still thinking it over? Maybe the RSS feed guy has been on vacation?
C'mon, SEC! It'll just take you a minute. Slap that RSS feed on there. Pretty please?
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September 19, 2006 |
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Fortune Article: "Partners in Crime"
"The correlation of volatilities, historical and implied in terms of the S&P and just a general strong dropoff in the five-day volatility, making new highs, so those are all things I look at."--David Pajcin, November 22, 2005
Barney Gimbel has an excellent and quite thorough article in the current issue of Fortune ("Partner in Crime," Oct. 2, 2006) about the exploits of David Pajcin and Eugene Plotkin, the brain trust behind "Insider Trading, Inc."
The article includes information from a Fortune interview with Plotkin (the first interview with him to date), as well as some priceless material from the SEC's questioning of Pajcin. According to the article, the SEC brought Pajcin in for testimony on November 22, 2005, and asked him, among other things, about the purchase by numerous people connected to him (including his Croatian aunt) of out-of-the money call options in Reebok. Although Pajcin did not know it at the time, the SEC had already figured out that the securities Pajcin and his contacts purchased were consistently either (1) merger or acquisition targets in deals worked on by Merrill Lynch (a Merrill Lynch analyst has already pleaded guilty to insider trading in this case) or (2) companies that were about to be profiled in Business Week's market-moving Inside Wall Street column.
The article states that in response to the SEC's question, Pajcin
admitted advising many of the people involved in the case to buy Reebok, but only because he thought the stock was a bargain, not because he knew anything about a pending merger.
Plotkin held forth for the better part of seven hours on that subject, talking at mind-numbing length about the metrics he said he had applied to the stock. The SEC's Black then summarized this at length, concluding, "Have we covered all the components of your analysis with respect to Reebok specifically that you can remember, sitting here today?"
Pajcin added a few things: "The correlation of volatilities, historical and implied in terms of the S&P and just a general strong dropoff in the five-day volatility, making new highs, so those are all things I look at."
About half an hour later, Black changed the subject to Business Week. Pajcin said he didn't read it often. His answers became short. When he was shown some copies of the Inside Wall Street column, he said he wasn't familiar with it. Then when he was shown articles that had appeared the day he had sold stocks of the companies mentioned, he looked like "a deer in headlights," according to a lawyer who was present. His explanation? He had probably gotten the tips from two guys he had met in Croatian nightclubs, whom he knew only as "Carlo" and "Vladimir."
UPDATE: The Fortune article is available online here.
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September 14, 2006 |
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Must Be a Technical Glitch
Hmphhh.... Now this certainly is odd.... For some reason, when the SEC wins a case on summary judgment (like this one against Paul R. Johnson), the decision shows up on the SEC Litigation Releases page. But when the SEC loses a case on summary judgment, and in the process has its misuse of quotation marks compared to Britney Spears, the decision does not show up on the SEC Litigation Releases page. Very curious.
I think it must just be some kind of technical glitch. Yeah, the server must be down. I'll keep checking.
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September 13, 2006 |
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The Milberg Effect? Not So Much
The WSJ had a Review and Outlook piece yesterday entitled "The Milberg Effect," which argues that the projected drop-off in securities class action cases in 2006 suggested by a recent study is due to a reduction in the number of cases filed by the law firm Milberg Weiss. According to the WSJ piece,
According to Cornerstone, a research firm that tracks litigation, law firms filed 179 class actions last year. The first six months of this year saw only 61, a rate that would result in about 123 class actions for the year -- or a decrease from 2005 of 56 suits. Meanwhile, according to publicly available press releases, Milberg Weiss filed 91 of last year's suits. Yet in the first six months of this year, having come under prosecutorial scrutiny and lost many lawyers, the firm has filed only 17. At this rate, Milberg would tally about 34 suits for the year -- or 57 fewer than 2005.
These numbers are more than a coincidence, and should put to rest the assumption that Sarbanes-Oxley or better corporate governance standards are producing fewer causes of legal action. Securities lawyers have long understood that most class actions have little or no substance but are manufactured by the plaintiffs bar to pad their own pocketbooks.
This is simply wrong. Contrary to the conclusion in the piece above, the projected overall drop-off of 56 class actions in 2006 and the projected Milberg drop-off of 57 class actions filings is a coincidence. The flaw in the WSJ's analysis is that it rests on the false assumption that each of the companies that are the subject of a securities class action are sued by only one law firm. That is not the case.
To develop this point a bit, the Cornerstone study projects that at the current rate, 123 companies will be the subject of a securities class action lawsuit this year--56 fewer than in 2005. It is critical to note here, however, that virtually all (let's conservatively go with 90%) of these 123 cases will involve multiple complaints filed by multiple law firms. Indeed, many companies will be sued by a dozen or more different law firms. Using this conservative 90% figure, if Milberg does file 57 fewer complaints in 2006, this drop-off will only impact the total number of companies that are the subject of a securities class action in the 10% of Milberg's filings where it is the only law firm to file a complaint. So we're looking at a possible reduction of 5 or 6 cases (5.7 to be exact), not 57 cases.
The Milberg Effect? Not so much.
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MD&A Risk Factors (Nelson Rocks Preserve-style)
Courtesy of Overlawyered.com, I found this inspiring Disclaimer on the Nelson Rocks Preserve website. Nelson Rocks Preserve is an outdoor recreation area located in West Virginia that is apparently tired of people suing them when they fall off cliffs, get bit by snakes, etc. They are responding with a disclaimer that reminds would-be users of the preserve of important things like "a whole rock formation might collapse on you and squash you like a bug" or
...climbing is extremely dangerous. If you don't like it, stay at home. You really shouldn't be doing it anyway. We do not provide supervision or instruction. We are not responsible for, and do not inspect or maintain, climbing anchors (including bolts, pitons, slings, trees, etc.) As far as we know, any of them can and will fail and send you plunging to your death. There are countless tons of loose rock ready to be dislodged and fall on you or someone else. There are any number of extremely and unusually dangerous conditions existing on and around the rocks, and elsewhere on the property. We may or may not know about any specific hazard, but even if we do, don't expect us to try to warn you. You're on your own.
Inspired by Nelson Rocks, I have come up with a securities disclosure version of their disclaimer, designed to meet all of the MD&A "Risk Factors" needs of your favorite public company. It looks like this:
ITEM 1A: RISK FACTORS
Risks Related to our Business and Ownership of our Securities
Our business is unpredictable and unsafe. The stock market, including the market for our securities, is dangerous. Many books have been written about these dangers, and there's no way we can list them all here. Read the books.
The path to success for our business is littered with land mines. Seriously—anything could happen. Our competitors try their best every day to crush us, and they could succeed. We could get rich and complacent following our IPO and fail to innovate. Our customers could abandon us. Key members of our management team could quit to sail their yachts around the world for a decade. We could grow so fast that our business spirals out of control. Any or all of these could occur and our business would go down the toilet, along with your investment.
Real dangers are present even if none of the above occurs. New technologies may be developed that will render ours obsolete. A patent troll could come along who claims to own the intellectual property rights to our technology, costing us tens of millions of dollars in defense costs (best case) or destroying our entire business (worst case). Third parties such as malicious hackers could emerge to undercut our business. Even the government could torpedo us by passing new laws that hurt our business. The bottom line is that our business and the stock market are unsafe, period. Live with it or stay away.
Totally unforeseen things can happen. There could be a SARS epidemic. There could be a terrorist attack. There could be a natural disaster, such as a hurricane. A herd of elephants could escape from the zoo and trample our headquarters, squashing our business and your investment like a bug. Don't think it can't happen.
Even if none of these things happen, the stock market could go down for no reason whatsoever. That is to say, you may make a wise investment, we may work our tails off, our business may thrive, and you may still lose all of your money. It happens all the time.
If you engage in particularly dangerous trading such as uncovered options or naked short selling, you may lose everything you own. This is true whether you are experienced or not, trained or not, educated or not, or intelligent or not. It's a fact, such trading is extremely dangerous. If you don't like that, don’t do it. You really shouldn't be doing it anyway. We do not provide supervision or instruction. We are not responsible for the financial ruin that may result. As far as we know, any of these types of trades can and will fail and send you plunging to your financial death. You're on your own.
Financial bail-out services are not provided by our company. If you lose your shirt investing in our company after reading all this, don’t come running to us (or your class action lawyers). We assume no responsibility.
By investing in our business, you are agreeing that we owe you no duty of care other than not being crooks. We promise you nothing else. This is no joke. We won't even try to warn you about any dangerous or hazardous conditions not required of us by the SEC, whether we know about it or not. If we do decide to warn you about something, that doesn't mean we will try to warn you about anything else. We and our employees or agents may do things that are unwise and dangerous. In fact, we probably will. Sorry, we're not responsible. We may make bad decisions or give out mistaken guidance. Don't listen to us. In short, INVEST IN OUR COMPANY AT YOUR OWN RISK. And have fun!
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September 12, 2006 |
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Pop Quiz
Quick--
What is the difference between the following allegations:
1. "company insiders noticed the revenue and earnings shortfall by the start of the Class Period-in very late April 2004"
and...
2. "company insiders noticed the revenue and earnings shortfall by the start of the Class Period-in very late April 2004"
The PSLRA Nugget has the answer here.
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September 11, 2006 |
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Options Backdating Securities Class Actions: The List--Update
Our options backdating securities class action list has been updated to add Aspen Technology. The number of companies on the list now stands at 16.
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September 7, 2006 |
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SEC and Britney: Not So Good on the "Quotations"
There's simply no way to sugarcoat it. It's just a reeeeeeeeeaaaallllllly bad day as an SEC attorney when:
(a) you lose your insider trading case on summary judgment because the court finds that the SEC's complaint fails even to raise a genuine issue of material fact worth taking to a jury, and
(b) a federal judge writes (see footnote 3 in this opinion) that your inability to use quotation marks properly is "not unlike Britney Spears...." According to the Honorable C.N. Clevert, Jr. of the U.S. District Court for the Eastern District of Wisconsin,
By putting the word “tour” in quotes, the SEC indicates that Krueger used that word in his testimony – a misleading indication, at best. Perhaps the SEC is not unlike Britney Spears in its inability to use quotation marks correctly. In her now-infamous interview with Matt Lauer, the erstwhile pop star said, “I think 90 percent of the world agrees that the tabloids have kind of gone a little ‘far’ with me lately.” Interview by Matt Lauer with Britney Spears in L.A., Cal. (June 15, 2006) (putting the word “far” in air quotes). See also US Weekly Magazine, http://www.usmagazine.com/blog/category/air-quotes/ (“As evidenced in her Dateline interview, [Britney Spears] has a knack for misusing air quotes, placing them in between words or around the wrong ones.”)
Thanks to the WSJ Law Blog for tracking this down.
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September 1, 2006 |
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Blogging in Earnest
SLW will resume blogging in earnest following Labor Day. Apologies for the extended break!
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