The cover of the March 7 issue of Newsweek features a smiling Martha Stewart and the headline "Martha’s Last Laugh" (here). The magazine is reporting that Stewart’s attorneys (she continues to reside in an FCI in West Virginia for the rest of the week) are negotiating a settlement with the SEC regarding the civil insider trading charges related to her sale of ImClone Systems stock based on information she allegedly received from her broker, Peter Bacanovic, and indirectly from former ImClone CEO Sam Waksal (who is also residing in an FCI, for quite a bit longer). If she settles the case, it will likely involve a bar for at least some period of time from serving as a director and officer of the company, Martha Stewart Living Omnimedia, in addition to disgorgement of the loss avoided and a civil money penalty. The dollar figures are minute — at least for Stewart — because the disgorgement and penalty are unlikely to be more than $250,000 (including interest and assuming a 3x penalty, which is probably on the high side), and Stewart owns 30 million shares of the company, with a current market value of over $1 billion. Put another way, any monetary payment will be less than .025% of the value of her stock holdings in her company, so the key is what can be negotiated regarding the D&O bar. The case was never really about the money, as both sides would likely concede. (ph)
Category: Civil Enforcement
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The SEC entered into settlements with two more mutual fund companies regarding improper market timing by favored customers that effectively permitted the customers to bypass the 4:00 p.m. settlement time and engage in late trading to the detriment of other investors in the funds. The settlements by Bank of America (for the mutual funds marketed by NationsBank) and Columbia Management Advisors (Coumbia Funds) are available here and here. Bank of America agreed to disgorge $250 million and pay a civil money penalty of $125 million, bringing its total to $375 million (in addition to other administrative remedies), while Columbia will disgorge $70 million and pay a civil money penalty of $70 million. Ouch! The Commission also entered into settlements with individual managers at Columbia (see filings here against Gustafson, Palombo, and Martin). (ph)
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The SEC has raised the maximum Civil Monetary Penalty it can impose for violations of various provisions of the federal securities laws (including the Sarbanes-Oxley Act), as detailed in a final rule adopted by the Commission that becomes effective on Feb. 14 — Happy Valentine’s Day! (Rule available here). The changes range from $5,000 to $50,000, depending on the particular provision and type of defendant (individual, corporation, broker-dealer, etc.) that permits the Commission to seek a CMP. While the increases are not particularly significant, and many cases involving CMPs are for less than the statutory maximum, the change will likely affect the calculus for settlement negotiations because the SEC’s starting point on an acceptable penalty most likely will be raised. (ph)
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The Irish drug company Elan Corporation, plc, settled SEC civil charges that it made materially false statements regarding its operations in 2000 and 2001. The three primary disclosure violations involved statements about income and gains that failed to note their non-recurring nature, the failure to disclose that $490 million of transactions involved round-trip payments for which there was no real economic gain with partners in a joint venture, and a sale of securities with an affiliated party for which the company did not disclose the relationship. The SEC Litigation Release discussed the effect of the company’s disclosure violations:
Elan represented in its public statements that it was generating record amounts of revenue, net income and operating cash flow from drug sales and licensing activities. Elan also claimed that it was making significant progress towards achieving its goal of transforming itself into a fully integrated pharmaceutical company and generating $5 billion of annual revenue by 2005. The complaint alleges that these statements were materially misleading because Elan failed to disclose, or inadequately disclosed, certain transactions that were critical to Elan’s perceived success. As a result, investors were led to believe that Elan had achieved record results through improvements in the company’s business, when in fact it had not.
Elan agreed to pay $1 in disgorgement — it is not clear what the basis for that remedy is, and it is an amount much lower than usually seen in SEC enforcement actions involving disgorgement — and a $15 million civil penalty (now that’s more like it). (ph)
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The SEC and the U.S. Attorney’s Office for the Central District of California (Los Angeles) announced on Feb. 7 the filing of criminal and civil charges against Courtney D. Smith, an investment advisor who wrote the well-known market newsletter Wall Street Winners (company website here). According to the Litigation Release issued by the SEC, Smith received approximately $1.1 million in cash and stock that was funneled through his girlfriend’s small vitamin exporting company to tout the shares of GenesisIntermedia, Inc. (GENI), a now defunct public company:
The Commission alleges that Smith assisted GENI’s Chief Executive Officer and his accomplice (a Saudi Arabian national reputed to be an international arms dealer and financier) in a fraudulent stock manipulation and lending scheme that occurred between September 1999 and September 2001. According to the complaint, GENI’s CEO secretly paid Smith approximately $1.1 million in cash and GENI stock to tout GENI shares on television. Smith’s public statements, many of which were false or misleading, artificially inflated the price of GENI shares and facilitated the misappropriation of approximately $130 million by GENI’s CEO and his accomplice.
The SEC’s complaint is here, and a copy of the criminal filing will be posted when it is available. (ph)
UPDATE: A press release issued by the U.S. Attorney’s Office describes the criminal charges: "The indictment charges Smith with conspiring with a high-ranking officer and substantial shareholder of GENI to violate the securities laws through his paid promotion of the stock. Smith is also charged with eight substantive counts of violating federal securities laws for failing to disclose the payments he received for promoting GENI on television. If he is convicted of the nine counts in the indictment, Smith faces a maximum possible sentence of 45 years in federal prison."
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Marsh & McLennan Cos. Inc. announced a settlement with New York Attorney General Eliot Spitzer’s office on Jan. 31 regarding the complaint filed in October 2004 regarding alleged price fixing in its insurance brokerage unit. The company agreed to create an $850 settlement fund for customers to seek reimbursement for the increased costs from the company practice of soliciting inflated bids. A press release issued by Marsh Mac states that in addition to the settlement fund, which does not include any fine or civil penalty, it will undertake the following corporate reforms:
- MMC has discontinued the practice of receiving contingent compensation from insurance carriers. The company adopted this new policy effective October 1, 2004.
- The company will provide clients with a comprehensive disclosure of all forms of compensation received from insurers.
- The company will adopt and implement company-wide, written standards of conduct for the placement of insurance.
- The company will provide all quotes and terms as received from insurance companies to enable clients to make informed insurance coverage decisions.
- MMC will establish a Compliance Committee of the MMC Board of Directors and has appointed a chief compliance officer.
After Spitzer filed the complaint against the company, he essentially demand that its top management, including former CEO Jeffrey Greenberg, be removed by the board of directors before settlement negotiations could begin. The board complied, and Marsh Mac’s new CEO, Michael Cherkasky, came from its Kroll unit and was Spitzer’s supervisor in the Attorney General’s office earlier in his career. Although the settlement ends the highest profile litigation involving the company’s insurance brokerage business, it does not end the lawsuits brought by other states, shareholders, and clients. Look for those cases to be settled soon. (ph)
UPDATE: Settlement agreement here.
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The SEC announced that it filed and settled complaints against Goldman Sachs and Morgan Stanley relating to the allocation of shares in Initial Public Offerings (IPO) to clients of the firms by requiring those receiving shares to place orders to purchase additional shares, thereby raising the price of the stock. Each firm agreed to pay a civil penalty of $40 million. The Litigation Release regarding Morgan Stanley states:
In its complaint, the Commission alleges that Morgan Stanley violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by attempting to induce certain customers who received allocations of IPOs to place purchase orders for additional shares in the aftermarket. The complaint further alleges that Morgan Stanley did induce certain customers to place such orders during the new issues’ first few trading days.
The allegations against Goldman Sachs are substantially similar (Litigation Release here). The Commission action does not involve a fraud allegation, and with the cooling of the IPO market there is much less demand for the shares of newly-public companies. (ph)
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The SEC issued a Litigation Release (Jan. 25) discussing the settlement of a civil injunctive action for insider trading by Jun Singo Liang, a Chinese citizen who does not reside in the United States. Liang is a senior vice president and general manager of the Wireless Business Department for NetEase.Com, a Beijing-based company with an office in California whose shares are traded as American Depository Receipts on NASDAQ. The complaint alleges that prior to a public announcement that Liang’s division, NetEase’s largest, had suffered a significant revenue shortfall, he "sold more than 47,000 shares of NetEase stock * * *, realizing over $3 million in sales proceeds. After NetEase announced the revenue shortfall, the stock price plummeted by 23%. By trading ahead of this news, Liang avoided more than $700,000 in losses." Liang agreed to pay disgorgement and prejudgment interest totaling $731,169, a civil penalty of $355,129, and a five-year director-and-officer bar.
The Commission’s Release notes that Liang’s penalty is lower than the usual one-times trading profit sought from defendants because he voluntarily disclosed his trading to the company and the SEC. The civil action shows once again the scope of the SEC’s jurisdiction to reach trading by those outside the United States when the securities are traded on an American market. (ph)
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The SEC filed a civil injunctive action on Jan. 24 accusing Penthouse International, Inc. (now PHSL Worldwide, Inc.), Charles Samel, a former officer of the company, and Jason Galanis, shareholder in the company, of accounting and Sarbanes-Oxley certification violations. In addition, the Commission filed and settled a separate cease-and-desist proceeding against Penthouse founder and former CEO Bob Guccione related to the Sarbanes-Oxley violations. The SEC Litigation Release states that "Penthouse improperly included as revenue on the financial statements for that quarter $1 million received as an up-front payment in connection with a five-year website management agreement" and that "Samel and Galanis prepared and filed the false Form 10-Q, and they did so knowing or recklessly disregarding that Guccione had not seen or approved it, that Penthouse’s auditor had not performed its required review of the Form 10-Q, and that it would be improper to include the $1 million payment as revenue for the quarter ended March 31, 2003." The Commission is seeking inter alia director-and-officer bars against Samel and Galanis. The SEC complaint (here) does not have any pictures or forum items.(ph)
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An article in the Denver Business Journal (Jan. 21) discusses bankruptcy court proceedings against the relatives of Will Hoover, whose eponymous company was a ponzi scheme that resulted in investor losses of over $15 million. Hoover was sentenced to a 100-year prison term, and the trustees in bankruptcy for the company have made the following claims against Hoover’s family members to recover funds transferred to them by Hoover:
- Katie Galpin, Hoover’s sister living in Wimberley, Texas, received $224,622 from Hoover or his company within four years of the personal and business bankruptcy filings, of which $40,583 was made within one year of the filings.
- Michael Hoover, Hoover’s brother living in Charlotte, N.C., received $33,050 within four years of the filings and $10,050 within one year of the filings.
- Kim Wyatt (formerly Kim Hoover), Hoover’s daughter living in Orange, Calif., received $185,658 within four years of the filings and $119,215 within one year of them.
- Mark Hoover, Hoover’s son living in Laguna Hills, Calif., received $84,218 within four years of the filings and $22,679 within one year of them.
There is a separate lawsuit seeking repayment of $8,000 from the photographer who took the pictures at Kim Wyatt’s wedding that were paid for by Hoover. (ph)
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