Michael Pickens, the son of famed corporate raider T. Boone Pickens, entered a guilty plea to three counts of securities fraud. The government brought the charges in July 2005 (see earlier post here) related to a scheme to send out hundreds of thousands of faxes containing purported inside information about small companies, and the faxes were made to appear to be misdirected to the wrong number. Gullible recipients who thought they’d stumbled on the next big investment opportunity bought the shares that allowed Pickens and his cohorts dump their stock in the companies at inflated prices. Pickens was also involved in a bizarre case in Connecticut in June 2006 when he was charged with burglarizing a fly fishing store (see earlier post here). In the securities case, he is looking at a sentence around five years. An AP story (here) discusses the guilty plea. (ph)
Category: Securities
-
The Government Accountability Office will take a look at the SEC’s enforcement program in response to a letter from Senator Charles Grassley regarding how the Commission is pursuing insider trading and other types of securities fraud cases. A Bloomberg story (here) discusses the Senator’s request. The letter came as a result of charges leveled by former Enforcement Division attorney Gary Aguirre, who claimed that an insider trading investigation of hedge fund firm Pequot Capital Management and Morgan Stanley CEO John Mack was snuffed out due to outside pressure that prevented him from taking testimony from Mack. After a Senate Judiciary Committee hearing on regulation of hedge funds that included Aguirre as a witness, the Commission subsequently went through with the deposition of Mack in August 2005. Shortly thereafter, the staff determined that it would not recommend that civil charges be filed (see earlier post here).
The GAO audit will no doubt increase the pressure on the SEC to process its cases more quickly and perhaps cut down a bit on the bureaucracy that builds up in any agency over time. A Wall Street Journal story (here) notes that the number of enforcement actions has dropped since its peak in 2003, and likely will be below 600 for the 2006 fiscal year that ended on September 30. Whenever the numbers fall, there are questions raised about the agency’s effectiveness, and those issues become more troublesome after the SEC had its budget increased in order to police the markets more closely.
Simply counting the number of cases filed may not be the best way to measure an agency’s effectiveness, and I suspect one result of the GAO (and congressional) scrutiny will be to push cases through to show a quick response to any potential weaknesses in the Enforcement Division’s management. The Commission has investigations of over 100 companies for options back-dating, and while a few of those will produce criminal charges, a number will likely result in administrative actions at a minimum because of the false financial statements, and perhaps could even lead to civil enforcement actions for securities fraud. That probably means there will be a cascade of cases over the next year, especially to pump up the numbers for FY2007 to have the groundwork ready for when the GAO issues its report. There is no better way to respond to criticism than to point to current numbers and note an increase in the number of cases, just like corporations do when reporting their quarterly financials. Unfortunately, when the heat is on to generate "stats" for Congress, the quality of the cases may not mean as much as getting a quick settlement. Like all types of law enforcement, there is an ebb and flow to the cases, and look for the flow to be heavier over the next twelve months . . . almost like channel-stuffing. (ph)
-
A common means of committing a fraud is to target small groups with whom the perpetrator shares a common characteristic that engenders a degree of trust. Many frauds prey on ethnic groups, as demonstrated by an SEC civil injunctive action filed against Hyun Soo Jang and Kangsan Kim for targeting Korean investors in the Los Angeles area. According to the SEC Litigation Release (here), Jang and Kim operated through two now-defunct securities firms, Unus Capital Management, Inc. and PeopleN Investment Corp., to defraud forty investors of approximately $4.5 million. According to the SEC:
The complaint alleges that Jang and Kim did not use investor funds to purchase securities as promised. Instead, according to the complaint, Jang, age 39, formerly of Los Angeles, Calif., and Kim, age 34, of Anaheim, Calif., misappropriated the funds entrusted to them, including about $2.5 million taken by Jang, and $500,000 taken by Kim and Unus. The complaint also alleges that Jang used an additional $500,000 to repay existing investors with money that had been deposited by new investors.
The Commission’s complaint alleges that, between January 2003 and August 2005, Unus attracted investors through broadcasting morning stock market reports hosted by Jang and Kim that were aired on Korean-language radio stations. As alleged in the complaint, after being contacted by interested investors, Jang and Kim falsely portrayed Unus and PeopleN as established and regulated entities. The complaint alleges that Jang and Kim misrepresented PeopleN as a broker that was registered and a member of various securities industry organizations, such as the New York Stock Exchange, the Securities Investor Protection Corporation and The Nasdaq Stock Market, Inc. In addition, the complaint alleges that Jang and Kim continued to hold out Unus as a registered investment adviser even after the firm had withdrawn its registration with the California Department of Corporations.
Interestingly, the Commission also issued its Litigation Release in Korean (here). (ph)
-
The Wall Street Jrl reports here that the former CFO of REFCO was indicted. The press release of the U.S. Attorney’s Office for the Southern District of New York states the Robert C. Trosten was indicted for his alleged:
"participation in a scheme to defraud Refco’s investors that resulted in losses of more than one billion dollars. TROSTEN is charged with assisting PHILLIP R. BENNETT, formerly Chief Executive Officer of Refco, in hiding from Refco’s auditors and investors hundreds of millions of dollars of debt owed to Refco by a company controlled by BENNETT."
The new indictment also added new fraud charges against former CEO of Refco Phillip R. Bennett.
(esp)
-
A number of former Delphi Corp. executives are in line to be sued by the SEC for securities fraud related to accounting problems at the company, according to a Detroit News story (here). Once the largest auto supplier after its spin-off from General Motors in 1999, Delphi filed for bankruptcy in October 2005, and its accounting for various transactions have been the subject of civil and criminal investigations for over two years. The investigation focused on round-trip transactions that inflated Delphi’s income and the booking of loans from suppliers as "rebates" that allowed them to be recognized as income. In addition, a $300 million payment to its former parent was accounted for differently by each company, which resulted in GM being dragged into the investigation. Among those identified as likely to be sued include Delphi’s former v-p of treasury, the former director of financial accounting and reporting, and the former chief accounting officer. At this point it is unclear whether Alan Dawes, the former chief financial officer terminated in 2005, will be sued by the SEC. An ongoing grand jury investigation may result in charges against one or more of the Delphi executives, and the SEC may be waiting to sue Dawes and others until the criminal investigation is complete to avoid any problems with discovery. No word either whether the Commission is preparing a case against GM. Because Delphi is still in bankruptcy and will emerge as a significantly different company, the SEC may forgo filing charges against it. (ph)
-
Former Homestore.com, Inc. CEO Stuart Wolff received a fifteen-year prison sentence for his role in the company’s accounting fraud through "round-trip" transactions to inflate revenues during the technology bubble. A jury convicted Wolff on charges of conspiracy, insider trading, filing false reports with the SEC, falsifying corporate records, and lying to company auditors. The insider trading counts relate to Wolff’s exercise of stock options and then sale of the shares while Homestore.com inflated its revenue related to on-line advertising. A press release issued by the U.S. Attorney’s Office for the Central District of California (here) notes that Wolff remains free on bond, and the court will hold a hearing on November 13 to decide whether to grant bail pending appeal. (ph)
-
The options-timing investigations claimed another general counsel, this time at KLA-Tencor, a Silicon Valley company, which announced that Stuart J. Nichols has resigned immediately from the position he held since 2000. According to a company press release (here), "incorrect measurement dates for certain stock option grants were used for financial accounting purposes, principally during the period July 1, 1997 through June 30, 2002, and as a result, the Company will restate its financial statements to correct the accounting for retroactively priced stock options. The Company now anticipates that the total additional non-cash charges for stock-based compensation expenses will not exceed $400 million." KLA-Tencor probably would have fired its CEO at the time of the back-dating, except that Kenneth Schroeder retired in 2005, so instead it has terminated all employment relationships with him, which means the usually lucrative "consulting" contract handed out to former CEOs is gone. The company also announced that it will "cancel all outstanding retroactively priced stock options held by Mr. Schroeder and to re-price all outstanding retroactively priced stock options held by Mr. Nichols." Welcome to the club. (ph)
-
UnitedHealth Group, Inc. CEO Dr. William McGuire has been forced out by the board of directors over suspiciously-timed options grants, reports the Wall Street Journal (here). The company’s general counsel, David Lubben, is also leaving after an internal investigation in which assertions by company executives that options were not back-dated were not entirely credible. The report on the investigation, which the company made available (here), states that many of the options grants to senior executives "were likely backdated" and that "certain facts run contrary" to Dr. McGuire’s assertions about the options award process.
Dr. McGuire became something of a poster child for exorbitant executive pay, with unexercised options worth almost $1.75 billion — that’s right, billion not million — and gains of almost $115 million in 2004 and $124 million in 2006 from exercising a small slug of his options. The Journal story notes that twelve option grants from 1994 to 2002 to Dr. McGuire, among ohters, were made shortly before an increase in UnitedHealth’s stock price, and in three years the grants were at the low price for that year, a remarkable coincidence that may explain in part the high value of his stock options. It appears that at least some of the grants involved back-dating, which has become the kiss of death for CEOs and other senior officers. The company postponed filing its 10-Q in August 2006 and still has not filed any financial statements due to accounting issues related to the options back-dating.
The timing of Dr. McGuire’s departure likely means that a restatement will be coming soon, or at least an estimate of the financial hit from the manipulation of the options grants. After the CEO dismissals in the past week (see earlier posts here and here), UnitedHealth may have set the tone for the coming week of more of the same. The problem for Dr. McGuire will be that his gains from the options exercises is likely to draw even greater interest from federal prosecutors in the results of UnitedHealth’s internal investigation. The U.S. Attorney’s Office for the Southern District of New York has subpoenaed the company, and that district has not yet brought a criminal case from the options back-dating investigations yet, unlike the Northern District of California (Brocade Communications) and Eastern District of New York (Comverse Technology). The SDNY prosecutors may be looking to make a big splash soon, and Dr. McGuire could be the unlucky target. (ph)
-
The SEC filed a civil insider trading action against foreign purchasers of call options in CNS Inc., the maker of consumer health products such as the Breathe Right nasal strip, in advance of the disclosure that the company agreed to be taken over by GlaxoSmithKline PLC. The defendants traded through Swiss accounts by purchasing out-of-the-money CNS call options in the week before the announcement of the deal, given them a profit of over $650,000. The SEC Litigation Release (here) quotes from the Commission’s complaint:
Between September 27 and October 2, 2006, Unknown Purchasers bought a total of 1186 out-of-the-money CNS call option contracts. These purchases represented approximately 67% to 100% of the daily volume of the various CNS options series on the days purchased.
The Unknown Purchasers’ trading coincided with key non-public and confidential events leading up to the announcement that Glaxo would acquire CNS. Specifically, Glaxo was one of several companies contacted by investment bankers on behalf of CNS in August 2006. After Glaxo had executed a confidentiality agreement, Glaxo was invited to submit a binding offer for CNS by September 29, which it did. On October 2, the CNS Board met to review the offers, and Glaxo was informed that it was one of two finalists and that it should submit a best and final offer by October 4.
On Monday, October 9, 2006, before the opening of the New York securities markets, CNS and Glaxo announced the execution of an agreement whereby Glaxo would acquire CNS for a price of $37.50 per share – a 31% premium over the closing price of CNS stock on Friday, October 6. On the date of the announcement, CNS shares closed at $36.72 – a 28.5% increase over the closing price of CNS stock on Friday, October 6.
On October 9 and 10, 2006, following the announcement of the merger between CNS and Glaxo, the Unknown Purchasers sold the CNS options in both accounts and realized net profits of approximately $651,895.
As is common in cases involving foreign purchasers, the SEC sought a freeze order to keep the funds from leaving the United States, which was granted by the U.S. District Court for the Eastern District of Pennsylvania.
The trading in CNS call options is similar to a recurrent pattern of insider trading, particularly by foreign purchasers. In August 2005, the SEC filed against then-unknown purchasers of Reebok call options before a takeover by Adidas, a case that turned out to be part of a much larger insider trading network. More recently, in June 2006, the Commission filed suit against defendants in Argentina who purchased Maverick Tube call options before an announced takeover by Tenaris. What made the trades particularly suspicious is that the options were out of the money at the time of the purchases and had fairly short expiration dates, making them especially risky — unless the purchaser knew that the price of the company would increase significantly due to a pending extraordinary announcement. Given the frequency with which these types of insider trading cases occur, particularly when it involves overseas purchasers, it is starting to sound like repeat episodes of Desperate Housewives. (ph)
-
Former Comverse Technology CEO Kobi Alexander’s days of freedom could come to an end in the near future. After fleeing — or deciding to resettle — in Namibia in July, shortly before federal prosecutors filed charges against him for securities fraud related to options back-dating at Comverse, he was arrested by Namibian authorities at the request of the U.S. A magistrate in Windhoek, the capitol, released Alexander after he posted $1.3 million bail and surrendered his Israeli passport. Now, Prosecutor General Olivia Imalwa has appealed that decision to the High Court, arguing that Alexander is a flight risk and could sneak out of Namibia even without the surrendered passport. Alexander has been accused by federal prosecutors of transferring over $50 million shortly before he was charged, and could have considerably more in assets available.
The U.S. is still preparing its extradition request to have Alexander returned under a law adopted by the Namibia Parliament at the request of the Justice Ministry; the two countries do not have an extradition treaty. According to an article (here) in Ha’aretz, an Israeli newspaper, the extradition request is due this week. If the court determines that Alexander can be extradited to the United States, he will be held in jail while he appeals that decision to the High Court, a process that can take years rather than months.
Meanwhile, on the U.S. side of the case, a grand jury in the Eastern District of New York returned a superseding indictment that adds obstruction of justice, bribery, and a new securities fraud charge to the thirty-two counts in the earlier indictment (see Bloomberg story here). The obstruction and bribery counts involve an alleged offer by Alexander in March 2006 to a Comverse executive to "name your price" to take the blame for the options back-dating at the company. It is not clear yet who the executive is, but the roster of those cooperating with the government may rise. Federal prosecutors disclosed that they are negotiating possible plea bargains with the two other former Comverse officers charged along with Alexander, CFO David Kreinberg and general counsel William Sorin. The defendants originally were charged in a criminal complaint, and the government requested that the court grant a thirty-day extension before a grand jury has to return an indictment because the parties were engaged in plea discussions. If either agrees to cooperate, it is very likely they will provide additional information about Alexander’s involvement in the options back-dating, probably strengthening the government’s case. An AP story (here) discusses the status of the case against Kreinberg and Sorin. (ph)
MattBray.net 