Litigation: Lawsuits are only thing “up” on Wall Street in past year

From USA Today:

The worst bear market since the 1930s has left investors wanting to see Wall Street pay.  Investors filed 210 federal securities class-action lawsuits in 2008, up 19% from 176 in 2007, according to Stanford Law School’s Securities Class Action Clearinghouse (SCAC) and Cornerstone Research. Plaintiffs claim they’ve been wronged out of up to $856 billion, up 27% from 2007 and the highest in six years.

‘Silo’ Thinking Let Us Down — Actions that made sense in isolation guaranteed a financial crisis when added together

By Stefan Szymanski

Abraham Lincoln once said, “I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” Business schools set out to prepare people to manage by telling them the truth about business, so does the present crisis prove that they have failed us?

As with bankers, this is a time for business school professors to show some humility. What most business schools do best is teach disciplines, such as accounting, finance, strategy, organizational behavior, and human resource management. Strengths vary, and employers have been adept at tapping into the richest veins buried in the leading schools. Thus there is a very real sense in which the best business school thinking in finance ended up being implemented in the most creative banks, that the best business school thinking in strategy ended up being sold by consultants to the world’s leading corporations, that the best business school thinking in organizational behavior and human resource management ended up being applied to the recruitment and performance management of employees at the highest levels.

This thinking let us down. The current economic crisis is a crisis of financial analysis, a crisis of strategic thinking, and a crisis of employee management. Bankers and dealers sold products whose risks they either did not understand or did not care for; their senior managers approved strategic plans neither understanding nor caring about the risks that were being run, and the whole show was underpinned by incentive management schemes that made no sense in anything other than the very short term. These actions made sense taken in isolation, but when added together they more or less guaranteed a crisis. In other words, the coordination failure of the banks reflects a coordination failure inside business schools, a “silo” mentality in which the value of specifics with strictly limited applicability outweighs the value of a broader wisdom.

For more see businessweek.com.

Securities and Exchange Commission v. Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (S.D.N.Y. Civ. 08 CV 10791 (LLS)) SEC Obtains Preliminary Injunction, Asset Freeze, and Other Relief Against Defendants

The United States Securities and Exchange Commission announced that on December 18, 2008, the Honorable Judge Louis L. Stanton, a federal judge in the Southern District of New York, entered a preliminary injunction order, by consent, against Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (“BMIS”).

The preliminary injunction continues to restrain Madoff and BMIS from violating certain antifraud provisions of the federal securities laws. Also, by consent, Judge Stanton ordered that assets remain frozen until further notice, continued the appointment of a receiver for two entities owned or controlled by Madoff in the United Kingdom (while defendant BMIS remains subject to oversight by a SIPC trustee), and granted other relief. The preliminary injunction order continues the relief originally obtained on December 12, 2008, in response to the Commission’s application for emergency preliminary relief that sought a temporary restraining order, an order freezing assets, and other relief against Madoff and BMIS based on his alleged violations of the federal securities laws.

The SEC’s complaint, filed on December 11, 2008, in federal court in Manhattan, alleges that the defendants have committed a $50 billion fraud and violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act of 1940. The complaint alleges that Madoff last week informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

The Commission continues to seek, among other things, a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and civil money penalties.

SEC Files Settled Foreign Corrupt Practices Act Charges Against Siemens AG for Engaging in Worldwide Bribery With Total Disgorgement and Criminal Fines of Over $1.6 Billion

The Securities and Exchange Commission filed a settled enforcement action on December 12, 2008, in the U.S. District Court for the District of Columbia charging Siemens Aktiengesellschaft (“Siemens”), a Munich, Germany-based manufacturer of industrial and consumer products, with violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Siemens has offered to pay a total of $1.6 billion in disgorgement and fines, which is the largest amount a company has ever paid to resolve corruption-related charges. Siemens has agreed to pay $350 million in disgorgement to the SEC. In related actions, Siemens will pay a $450 million criminal fine to the U.S. Department of Justice and a fine of €395 million (approximately $569 million) to the Office of the Prosecutor General in Munich, Germany. Siemens previously paid a fine of €201 million (approximately $285 million) to the Munich Prosecutor in October 2007.

The SEC’s complaint alleges that:

Between March 12, 2001 and September 30, 2007, Siemens violated the FCPA by engaging in a widespread and systematic practice of paying bribes to foreign government officials to obtain business. Siemens created elaborate payment schemes to conceal the nature of its corrupt payments, and the company’s inadequate internal controls allowed the conduct to flourish. The misconduct involved employees at all levels, including former senior management, and revealed a corporate culture long at odds with the FCPA.

For more see SEC.gov.

SEC Files Settled Books and Records and Internal Controls Charges Against Fiat S.p.A. and CNH Global N.V. For Improper Payments to Iraq Under the U.N. Oil for Food Program — Fiat Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties

The Securities and Exchange Commission filed Foreign Corrupt Practices Act books and records and internal controls charges against Fiat S.p.A. and CNH Global N.V. in the U.S. District Court for the District of Columbia. Fiat S.p.A., an Italian company, provides automobiles, trucks and commercial vehicles. CNH Global N.V., a majority-owned subsidiary of Fiat, provides agricultural and construction equipment. The Commission’s complaint alleges that from 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the “Program”). The kickbacks were characterized as “after sales service fees” (“ASSFs”), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Fiat’s and CNH Global’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.

According to the Commission’s Complaint:

During the Oil for Food Program, Fiat’s subsidiary, IVECO S.p.A., used its IVECO Egypt office to enter into four direct contracts with Iraqi ministries in which $1,803,880 in kickbacks were made on the sales of commercial vehicles and parts. After agreeing to pay the ASSFs, IVECO Egypt increased its agent’s commissions from five percent to between fifteen and twenty percent of the total U.N. contract price, which the agent funneled to Iraq as kickbacks. The agent submitted invoices for the inflated commissions, and IVECO financial documents show line items for “contract pay-back” due to the agent. IVECO and the agent secretly inflated the U.N. contracts by ten to fifteen percent. Despite the agent’s invoices being held for one year and the unusually large commissions, IVECO paid the invoices. In one instance, IVECO set up a bank guarantee in the amount of the ASSF in favor of a Dubai-based firm that operated as a front company for Iraq. IVECO’s bank guarantee was canceled and, instead, the agent established an identical bank guarantee to conceal IVECO’s role. A line item identified as “pay-back” on IVECO documents corresponded to the amount of the agent’s bank guarantee. The ASSFs were incorrectly recorded as legitimate commissions on the company’s books and records.

For more see SEC.gov.

SEC Files Settled Enforcement Actions Against UnitedHealth Group Inc. and Former General Counsel in Stock Options Backdating Case

Litigation Release No. 20836 / December 22, 2008

The Securities and Exchange Commission filed a civil injunctive action against UnitedHealth Group Inc., a Minnetonka, Minnesota health insurance company, alleging that it engaged in a scheme to backdate stock options. Without admitting or denying the allegations, UnitedHealth agreed to settle to charges that it violated the reporting, books and records, and internal controls provisions of the federal securities laws.

In a separate complaint, the Commission charged former UnitedHealth General Counsel David J. Lubben with participating in the stock option backdating scheme. Without admitting or denying the allegations, Lubben consented to, among other things, an antifraud injunction, a $575,000 civil penalty, and a five-year officer and director bar.

The Commission alleges that between 1994 and 2005 UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.

According to the Commission’s complaint, certain UnitedHealth officers used hindsight to pick advantageous grant dates for the company’s nonqualified stock options that on many occasions coincided with, or were close to, dates of historically low annual and quarterly closing prices for UnitedHealth’s common stock. Although pricing the options below current prices required the company to report a compensation expense under well-settled accounting principles, UnitedHealth avoided reporting the charges by creating inaccurate and misleading documents indicating that the options had been granted on the earlier date. The backdated grants resulted in materially misleading disclosures, with the company overstating its net income in fiscal years 1994 through 2005 by as much as $1.526 billion.

For more see SEC.gov.

What’s Behind the Drop in Corporate Fraud Indictments? Is there no more corporate crime — or has Justice simply stopped looking for it?

Daphne Eviatar
The American Lawyer
November 1, 2007

In his summer of discontent, there were few days of undiluted glory for Attorney General Alberto Gonzales, and July 17 was no exception. Just six weeks before he resigned, Gonzales stood before hundreds of federal prosecutors and investigators in the U.S. Department of Justice’s Great Hall to celebrate the fifth anniversary of the department’s Corporate Fraud Task Force and declare victory over white-collar corruption.

But the white-collar crime news that day was not dominated by Gonzales’ recitation of notches on his prosecutorial belt. Instead, the headlines focused on a federal judge in New York who dismissed indictments against 13 former KPMG executives, a very pointed rebuke to the Justice Department for some of the more aggressive tactics used by federal prosecutors over the past five years.

Record Backdating Settlement Reached in Mercury Case

By Debra Cassens Weiss

A group of pension funds will receive $117.5 million to settle their class action suit against Mercury Interactive Corp. for losses caused by stock options backdating.

The deal is the largest to date in a stock options backdating suit, the San Jose Mercury News reports. Previously the record was an $18 million settlement, according to the law firm representing the funds, Labaton Sucharow.

Mercury had already agreed to pay another $28 million to settle civil fraud charges related to the backdating that were filed by the Securities and Exchange Commission, the Wall Street Journal reports (sub. req.). The agency has also filed civil charges against four former Mercury executives, including former general counsel Susan Skaer.

For more see ABA Law Journal Online.

SEC Charges Former NFL Player for Violations of Investment Adviser Regulations after Refusal (or Inability) to Produce Business Records

The SEC has charged former NFL player Dwight Sean Jones with failing to allow the Commission staff to examine his business records, as required by the federal securities laws, in connection with his investment adviser practices, mostly for other former players.

The Division of Enforcement alleges, among other things, that Jones refused to produce or allow the inspection of his advisory business records.  Jones claims all his records had either been destroyed in a fire or inadvertently sold by a storage company.

For more, see Administrative Proceeding No. IA-2651 and Order.

The Backdating Option

When corporate executives decide to secretly backdate stock options, they could be setting up their HR leader to take the fall — a risk HR would be wise to brace for.

By Steven Yahn

When it comes to the complex and, at times, sensitive matter of stock-option grants for top executives, HR can ill afford to trust that everything will be just fine if they let others worry about the details. With the mushrooming of federal probes into questionable options grants — as well as a few high-profile allegations of direct HR involvement in fraudulent cases of options-grants backdating — it’s time to jump in with both feet.

For more see Human Resource Executive Online.