October 1, 2007

End of the Year Crush: SEC Enforcement Activity in September

Today is the start of fiscal 2008 at the SEC. As is typically the case, the end of the last fiscal year saw lots of Enforcement activity, as the Division sought to make or beat its budget numbers. The number of Enforcement cases and Corp Fin filing reviews are always very important for supporting the SEC’s annual budget request. The stepped-up Enforcement activity at year-end is demonstrated by the crush of 52 litigation releases issued in September, as compared to an average of around 36 litigation releases per month during the other 11 months of fiscal 2007. Here is my top 10 list of cases from the end-of-year blowout:

1. Daniel McKay – McKay was charged with trading on material non-public information that he misappropriated from his spouse, who was an executive vice president at Triangle Pharmaceuticals. As noted in this NY Times article from August, there has been a notable increase in insider trading cases involving husbands and wives.

2. Salvador Chavarria, et al. – Continuing the insider trading theme, three Dell accountants were charged with trading in options on Dell stock while in possession of material nonpublic information about the company’s disappointing results for the second quarter of 2006. This case should be a reminder that all employees in an organization (and particularly those with access to sensitive financial information) need to have the company’s insider trading policy drilled into their heads, as well as the potential consequences for not adhering to that policy.

3. Buca, Inc. – Buca, which operates the Buca di Beppo restaurant chain, was charged with, among other things, failing to report compensation to the company’s former CEO and CFO arising from reimbursed personal expenses. The personal expenses included ATM cash withdrawals, duplicate airline tickets, family wedding expenses, dog kenneling, home remodeling costs, vacations, and visits to strip clubs. The company is also charged with failing to report various related party transactions, including the former CEO’s purchase of an Italian villa with company funds and the former CFO’s ownership interest in a vendor. While the unreported compensation and related party transactions predate the SEC’s new rules, the case demonstrates that the SEC is more than ever willing to pursue these types of cases, even when the amounts involved are not large. Be sure to sign up now for next week’s conferences, including Linda Chatman Thomsen’s keynote speech at the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks,” to hear more.

4. Exo-Brain – The SEC announced a final judgment against this company and its principal for the usual unregistered offering and fraudulent misrepresentations and omissions violations. I just thought the name “Exo-Brain” was cool.

5. Federal Home Loan Mortgage Corporation, et al. – Freddie Mac and four of its former executives settled charges stemming from the company’s alleged fraudulent scheme to deceive investors about its true performance, profitability, and growth trends. Much of the conduct centered around Freddie Mac’s accounting for derivatives. The company agreed to pay a $50 million civil penalty, which is expected to be distributed to injured investors through a Fair Fund.

6. Joseph Keeney – Keeney, who was acting a business consultant to Frederick’s of Hollywood, was charged with trading on the basis of material non-public information obtained about the possible merger of privately-held Frederick’s and publicly-held Movie Star, Inc. Keeney was directly involved in the merger negotiations and was in charge of maintaining communications between the Special Committees of the two boards.

7. FCPA Actions – The recent trend toward stepped-up Foreign Corrupt Practices Act enforcement continued last week with a case against a former EDS official named Chandramowli Srinivasan, who was charged with bribing senior employees of Indian state-owned enterprises. EDS was also charged with related reporting, books-and-records, and FD violations. In another case, the SEC announced a settlement with Bristow Group for FCPA violations arising from improper payments made to Nigerian state government officials.

8. Stock Loan Crackdown – In Darin DeMizio, et al. and Joseph Simone, et al., the SEC charged 38 defendants with involvement in schemes where stock loan traders paid improper finders fees and illegal kickbacks. The defendants include current and former stock loan traders at Morgan Stanley, Van der Moolen, Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. Clearly there are some real problems in the stock loan industry that the SEC is seeking to ferret out.

9. Dwight Sean Jones – Jones – who was a defensive end for the LA Raiders, Houston Oilers, and Green Bay Packers – was charged with failing to allow the SEC Staff to examine his business records. Jones had been a registered investment advisor. The SEC may be the least of his worries – he was arrested in June on charges of mortgage fraud.

10. Robert Berlacher, et al. – The SEC’s efforts to crack down on illegal insider trading by hedge funds in the PIPEs market continues with a case against Berlacher, his Lancaster Investment Partners fund and related funds. According to the SEC’s complaint, the defendants generated $1.7 million in gains by shorting stock based on information about upcoming PIPEs offering and then covering those shorts with PIPE shares.

SEC Filing Fees: No Changes For Now

Another sign of the new fiscal year is the SEC’s Fee Rate Advisory from Friday. As is typically the case, the SEC starts fiscal 2008 off under a continuing resolution, because Congress has not yet passed the agency’s regular appropriation. As Broc noted in this blog, the SEC sets the filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002,” and the fiscal 2008 fees were set in this April order. The new fees will not go into effect, however, until five days after the date of enactment of the SEC’s appropriation.

For now, the filing fee rate for Securities Act registration statements remains at the current rate of $30.70 million. The same rate applies under Exchange Act Sections 13(e) and 14(g). Once the appropriation is enacted, this rate will rise to $39.30 per million.

Webcast Crush: Test Your Access Now

We are receiving so many last minute registrations for our three critical Conferences coming up next week – particularly the Video Webcast sign-ups – that we are concerned that many more of you are waiting until the very last minute to register.

Those that wait any longer may not have sufficient time to sign up and adequately test your ability to access streaming video, which is the format by which the webcasts will be displayed.

Those that have not yet registered for these essential Conferences – particularly in view of the latest executive compensation proxy disclosure guidance that will be provided by senior SEC Staffers John White and Paula Dubberly – are encouraged to do so now by clicking any of the links below:

– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)

Register for the “Member Appreciation Package” online – or use this Order Form.

If you have any questions, contact our HQ at or 925.685.5111.

– Dave Lynn