Tag: securities

Fourth Circuit Sustains Securities Fraud Claim Against Drug Manufacturer

Katten Muchin Rosenman LLP

On March 6, the US Court of Appeals for the Fourth Circuit found that the United States District Court for the Western District of North Carolina had erred in dismissing a class action lawsuit filed under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) because the lower court had inappropriately relied on regulatory filings provided to the Securities and Exchange Commission and had incorrectly applied case law precedent. The plaintiff class contended that the defendants, Chelsea International, Ltd. and several of its corporate officers, materially misled investors over the risk associated with securing Food and Drug Administration (FDA) approval for a blood pressure medication that Chelsea was developing. Notably, the plaintiffs alleged that defendants had misled investors to believe that the FDA would approve the drug at issue based on the results of only one successful efficacy study, even though the FDA repeatedly had warned Chelsea that two successful studies and evidence of “duration of effect” would be necessary for approval of the new drug. The Fourth Circuit first held that the District Court erred in finding that Chelsea had failed to demonstrate the scienter necessary to sustain a securities fraud claim under the Exchange Act. The Fourth Circuit found that the District Court erred in its scienter analysis by considering SEC documents submitted by the defendants that were not integral to the complaint. The documents purportedly showed that the defendants did not sell any Chelsea stock during the class period. However, stock sales were never a part of the plaintiffs’ complaint and thus, the Fourth Circuit reasoned that the lower court should not have considered these SEC documents as evidence of the defendants’ intentions. Further, the Fourth Circuit held that material, non-public information known to the defendants about the status of the drug application conflicted with the defendants’ public statements on those subjects, which was an inconsistency the Fourth Circuit deemed sufficient to establish the severe reckless conduct necessary to establish an inference of scienter in securities fraud cases.

Zak v. Chelsea Therapeutics No. 13-2370 (4th Cir. Mar. 16, 2015)

ARTICLE BY

Michael S. Gordon
Katten Muchin Rosenman LLP

Exclusive Study Analyzes 2014 IPOs – Initial Public Offerings

Proskauer Rose LLP, Law Firm

Proskauer’s Global Capital Markets Group has just released its second annual IPO Study, the group’s analysis of U.S.-listed initial public offerings in 2014 and identification of year-over-year comparisons and trends. As with last year’s first edition, it yields a number of noteworthy observations and insights.

The study examines data from 119 U.S.-listed 2014 IPOs with a minimum deal size of $50 million, and also includes separate industry sections on health care; technology, media and telecommunications; energy & power; financial services; industrials; and consumer/retail. This edition expands on last year’s to include an appendix focusing on foreign private issuers, as 2014 experienced a meaningful return of IPO issuers from Europe and Asia. It also makes year-over-year comparisons of extensive data about deal structures and terms, SEC comments and timing, financial profiles, accounting disclosures, corporate governance and deal expenses.

Underlying the study is the proprietary IPO database that we created for the first edition and have subsequently expanded and enhanced, a valuable resource for sponsors and companies considering an IPO as well as for IPO market participants and their advisors.

Download Proskauer’s 2015 IPO Study

ARTICLE BY

Frank Lopez
Proskauer Rose LLP

SEC Charges Chilean Citizens With Insider Trading Concerning Tender Offer for Chilean

Katten Muchin Law Firm

The Securities and Exchange Commission recently filed suit in the US District Court for the Southern District of New York, alleging that defendants, Juan Cruz Bilbao Hormaeche and Thomas Andres Hurtado Rourke, both Chilean citizens, illegally traded on material non-public information that Abbott Laboratories was interested in purchasing CFR Pharmaceuticals, S.A., a pharmaceutical company headquartered in Chile.

According to the complaint, on March 10, 2014, CFR’s Board of Directors met to consider Abbott’s offer to purchase CFR; Bilbao, then a member of the board, participated by telephone. After the meeting, between March 12, 2014 and May 7, 2014, Bilbao allegedly directed his business associate, Hurtado, to place trades purchasing more than $14 million in American Depository Shares (ADSs) of CFR in a US brokerage account maintained in the name of a British Virgin Islands company for the benefit of Bilbao. The SEC further alleges that based on knowledge of confidential information, Hurtado purchased 35,000 ADSs of CFR for $707,710. On May 16, 2014, Abbott announced a definitive agreement to acquire CFR, and on September 23, 2014, Abbott completed the tender offer. According to the SEC, Bilbao tendered his ADSs to Abbott on or before September 23, 2014, and saw a profit of more than $10.1 million. The SEC further alleges Hurtado tendered his ADSs to Abbott for a profit of about $495,000.

The SEC sued defendants for illegally trading on insider information. The SEC alleges that the nexus to the United States is the initial purchase of the ADSs through US-based brokerage accounts. The SEC seeks an order freezing defendants’ assets, an order requiring defendants to repatriate funds obtained from the alleged illegal activities, a final judgment that defendants violated the securities laws, and an order directing defendants to disgorge any illegal gains and to pay civil penalties.

Complaint, SEC v. Hormaeche, No. 14-cv-10036-RJS (S.D.N.Y. Dec. 22, 2014).

ARTICLE BY

Emily Stern
Zachary D. Denver
OF
Katten Muchin Rosenman LLP

What ERISA Plans Should Know about Money Market Reform

Drinker Biddle Law Firm

Most U.S. money market funds will begin restructuring their operations beginning in 2014 and throughout 2015 and 2016 as a result of the SEC’s adoption of wide ranging changes to the rules regulating these funds.  Since many plan participants invest in money market funds, ERISA plan sponsors, recordkeepers and investment consultants and other advisers will need to plan for operational, contractual, disclosure and other changes in connection with these new rules.

Floating and Stable NAV Funds

One of the biggest rule changes involves how money market funds will be allowed to value their shares.  Currently, money market funds generally offer shares at a stable net asset value (“NAV’) of $1.00.  Under the SEC’s new money market rules, only government and “retail” money market funds can offer their shares at a stable NAV.  Government money market funds are those funds that hold at least 99.5% of their investments in government securities, cash or repurchase agreements collateralized by government securities.  Money market funds that don’t qualify to offer shares at a stable NAV because of the nature of their shareholder base (i.e., institutional money market funds) will have to float their NAVs, meaning the share price will fluctuate from day to day.

Retail money market funds are funds that restrict investors only to beneficial owners that are natural persons.  A beneficial owner is any person who has direct or indirect, sole or shared voting and/or investment power.  Under the new rules, retail money market funds will be required to reasonably conclude that beneficial owners of intermediaries are natural persons.  The SEC stated that tax-advantaged savings accounts and trusts, such as (i) participant-directed defined contribution plans; (ii) individual retirement accounts; (iii) simplified employee pension arrangements, and other similar types of arrangements, would qualify for the natural person test.  On the other hand, defined benefit plans, endowments and small businesses are not considered “natural persons” and would not be eligible to invest in a retail money market fund.

It is widely expected that the SEC’s new money market rules will result in many changes in fund offerings.  For example:

  • Money market funds that currently have both institutional and natural persons as holders may spin off the institutional holders into separate floating NAV funds;

  • Some institutional funds may decide to liquidate or merge with other funds;

  • Some advisers may begin offering new money fund-“like” products that only hold short term securities (60 days or less maturity) and therefore value fund holdings at amortized cost; and

  • Some prime money market funds may change their investment strategies to operate as a government money market fund in order to steer clear of the floating NAV and liquidity fee and gate rules (discussed below).

Effect on ERISA Plans.  The SEC provided examples of how funds could satisfy the natural person definition with intermediaries, including through: contractual arrangements, periodic certifications and representations or other verification methods.  Accordingly, ERISA service providers who hold fund shares in omnibus accounts may expect to be contacted by retail money market funds to provide these certifications or representations and/or to enter into new agreements with funds for this purpose.

ERISA plan sponsors and investment consultants and advisers will also need to be alert to potential changes to existing money market funds currently offered in plans to which they provide services and/or new fund offerings that may be appealing to and/or better serve the best interests of participants.

Liquidity Fees and Redemption Gates

All money market funds, except government money market funds, will be subject to the SEC’s new rules with respect to the imposition of liquidity (or redemption) fees and redemption gates during periods when a money market fund’s weekly liquid assets dip below certain thresholds.  Under these new rules a fund board may impose up to a 2% liquidity fee and a gate on fund redemptions if weekly liquid assets fall below 30% of total assets.  The fund board must impose a 1% liquidity fee if weekly liquid assets fall below 10% of total assets, unless the board decides otherwise.  Of course, if 10% of a money market fund’s assets are below 10% of a fund’s total assets, it would be unlikely that a board would not impose liquidity fees and redemption gates.  The redemption gates can last no longer than 10 days and cannot be imposed more than once in a 90-day period.

Effect on ERISA Plans.  The liquidity fee and gate requirements will usually only be triggered in times of extreme market stress.  But they are features that many ERISA participants and ERISA service providers will not find appealing.  For that reason, there may be more demand from participants for government money market funds, which may, but are not required to, comply with the fee and gate rules.  It is not expected that government money market funds will opt to become subject to these fee and gate rules.

The liquidity fee and redemption gate rules will require recordkeepers to make technical changes in their operations.  These operational changes could be expensive and time consuming to implement especially for smaller plans.  In particular, it should be noted that liquidity fees may vary in amount depending on a fund board’s determination and redemption gates may vary in the amount of days and will need to be removed quickly upon notice by a fund board.  Additionally, there may be contractual impediments to implementation of liquidity fees and gates, which are discussed below.

Many commenters on the proposed money market rules raised questions with the SEC regarding possible conflicts caused by the application of the fee and gate rules to funds in ERISA and other tax-exempt plans.  Specifically, commenters mentioned the following issues with the fee and/or gate rules:

  • possible violations of certain minimum distribution rules that could be interfered with by the gate rule;

  • potential taxation as a result of the inability to process certain mandatory refunds on a timely basis;

  • delays in plan conversions or rollovers;

  • possible conflicts with the Department of Labor’s (“DOL”) qualified default investment (“QDIA”) rules; and

  • conflicts with plan fiduciaries’ duties regarding maintenance of adequate liquidity in their plans.

The SEC’s response generally was that these concerns either were unlikely to materialize or could be mitigated by ERISA plan sponsors or service providers.  For example, with respect to QDIAs, the SEC suggested that a plan sponsor or service provider could (i) loan funds to a plan for operating expenses to avoid the effects of a gate, or (ii) pay a liquidity fee on behalf of a redeeming participant.  In connection with rollovers or conversions, the SEC likewise pointed out that if the liquidity fee caused a hardship on a participant, then the ERISA fiduciary or its affiliate could simply pay the liquidity fee; failing that, the SEC suggested that the fiduciary consider a government money market fund for investment purposes, which is not required to comply with the fee and gate rules.

The SEC continues to work with the DOL on these and other ERISA-and tax exempt specific issues but thus far has not provided any relief from its fee and gate rules for these types of plans and accounts.  Thus, ERISA fiduciaries and plan sponsors may need to consider money market fund offerings in their plans in light of these issues.

Contractual Issues

As noted above, the “natural person” requirements for retail money market funds will require these funds to ascertain information regarding beneficial ownership of fund shares from ERISA intermediaries.  Retail money market funds may ask ERISA intermediaries to make representations about their customers through revised service agreements containing representations about the nature of the intermediaries’ customers.  These funds may also use periodic certifications or questionnaires to obtain this information.

In addition, many existing contracts between money market funds and intermediaries have restrictions in them regarding the imposition of redemption fees and may restrict a fund’s right to delay effecting redemptions thereby putting them in conflict with the new liquidity fee and redemption gate rules.  Recordkeepers who contract with retail or institutional money market funds may therefore be asked by these funds to amend or otherwise revise their servicing agreements with the funds to provide for liquidity fees and redemption gates.

Pricing Changes

The new money market rules will require all floating NAV money market funds to price their shares to four decimal places (e.g., $1.0000).  Recordkeepers will need to adjust their systems to accommodate the four-decimal place pricing system.

Disclosure and Education/Training

ERISA service providers will need to train and educate their personnel on the new money market rules and fund options so that they can answer participants’ questions.  ERISA service providers will need to develop disclosure for ERISA participants that clearly describes the risks and differences in money market funds and new fund options.

Compliance Dates

The new money market rules take effect in various stages over the next two years.  Importantly, the floating NAV, decimal pricing, and liquidity fee and gate rules become effective on October 14, 2016.  That said, the mutual fund industry appears to be moving quickly to prepare to comply, and it is probable that investment advisers to money market funds will begin to make some changes, for example, creating new funds and separating retail and institutional shareholders into different funds well ahead of the 2016 compliance date.  Therefore, ERISA service providers will need to be alert to the possibility that their operations may need to be adjusted as these changes occur.

The SEC’s new money market rules will usher in many changes to money market funds over the next 18-24 months that will affect ERISA and tax-exempt participants who invest in these vehicles and ERISA service providers.  ERISA service providers should begin preparing for these changes by assessing their systems, as applicable, to evaluate whether they can comply with the new rules and, if not, what other investment options might be available to address participants’ short-term investment needs.  ERISA service providers may also want to consider whether non-government money market funds or other short-term liquidity vehicles should be offered to ERISA participants in light of the new fee and gate rules.

ARTICLE BY

Diana E. McCarthy
OF
Drinker Biddle & Reath LLP

Join the ABA for their Securities Fraud Conference in New Orleans – November 13-14

SFR14_250x250

When

Thursday November 13 – Friday November 14, 2014

Where

The Westing New Orleans

Each year this National Institute draws elite officials from both the U.S. Department of Justice and the U.S. Securities and Exchange Commission for an exclusive educational and professional forum to examine current legal and ethical issues relating to securities fraud.

  • Program highlights include:
  • Creative Discovery Tactics in Defending Securities Fraud Allegations
  • Compliance Chiefs: The Role of the Internal Watchdog
  • Future of Private Plan Securities (including the recent Stanford Supreme Court decision)
  • Too Big to Fail: If All Else Fails, Do Guilty Pleas Matter?
  • Sez Who? SEC Targeting Attorneys Who Allegedly Obstruct Enforcement Investigations (ETHICS)

Quarterly Whistleblower Award Update – August 21, 2014

Drinker Biddle Law Firm

Since our last quarterly update, the SEC’s Office of the Whistleblower (“OWB”) has issued four denial orders and three award orders. Here are some lessons learned from this activity:

  • The SEC Will Not Award Whistleblowers Who Provide Frivolous Information. The SEC determined that a claimant (who submitted “tips” relating to almost every single Notice of Covered Action”) was ineligible for awards because he/she “has knowingly and willfully made false, fictitious, or fraudulent statements and representations to the Commission over a course of years and continues to do so.” Under Rule 21F-8, persons are not eligible for an award if they “knowingly and willfully make any false, fictitious, or fraudulent statement or representation, or use any false writing or document knowing that it contains any false, fictitious, or fraudulent statement or entry with intent to mislead or otherwise hinder the Commission or another authority.” 17 C.F.R. § 240.21F-8(c)(7). The OWB found that a number of passages submitted by the claimant were patently false or fictitious and that the person had the requisite intent because of the (1) incredible nature of the statements, (2) continued submissions that lack any factual nexus to the overall actions, and (3) refusal to withdraw unsupported claims at the request of the OWB. (May 12, 2104.)

  • The SEC Will Enforce the Time Frames Set Forth in the Statue. The OWB denied two awards because the claimants did not submit an award claim within the 90-day period established by Rule 21F-10(b). The claimants argued that OWB should waive the 90-day period due to extraordinary circumstances. See 17 C.F.R. § 240.21F-8(a). The OWB determined that neither a lack of awareness that the information that the whistleblower had shared would lead to a successful enforcement action nor the lack of awareness that the Commission posted Notices of Covered Actions on its website constitutes an extraordinary circumstance to waive the timing requirement. See SEC Release No. 72178 (May 16, 2014) and SEC Release No. 72659 (July 23, 2014).

  • Whistleblowers are Not Eligible for an Award Unless the Information Leads to a Successful Enforcement Action. The OWB denied an award to a claimant because the provided information did not lead to a “successful enforcement by the Commission of a federal court or administrative action, as required by Rules 21F-3(a)(3) and 21F-4(c) of the Exchange Act.” OWB also noted that the claimant did not submit information in the form and manner required by Rules 21F-2(a)(2), 21F-8(a), and 21F-9(a) & (b) of the Exchange Act. See In the Matter of Harbinger Capital Partners, LLC, File No. 3-14928 (July 4, 2014).

The OWB Can Be Persuaded to Change Its Preliminary Determination. Although the OWB initially denied the whistleblower’s award claim on the basis that the information did not appear to have been voluntarily submitted within Rule 21F-4(a)(ii) because it was submitted in response to a prior inquiry conducted bya self-regulatory organization (“SRO”). In a Final Determination issued on July 31, 2014, however, the OWB determined that claimant was entitled to more than $400,000. OWB noted that a submission is voluntary if it is provided before a request, inquiry, or demand for information by the SEC in connection with an investigation by the Public Company Accounting Oversight Board, any self-regulatory organization, Congress, the federal government, or any state Attorney General.

On the basis of the unique circumstances of this case, the OWB decided to waive the voluntary requirement of Rule 21F-4(a) for this claimant. The SEC noted that the claimant “worked aggressively … to bring the securities law violations to the attention of appropriate personnel,” the SRO inquiry originated from information that in part described claimant’s role, claimant believed that the company had provided the SRO with all the materials that claimant developed during his/her own internal efforts, and claimant promptly reporting to the SEC that the company’s internal efforts as a result of the SRO inquiry would not protect investors from future harm. Sean McKessy, chief of the SEC’s Office of the Whistleblower, remarked that “[t]he whistleblower did everything feasible to correct the issue internally. When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed. This award recognizes the significance of the information that the whistleblower provided us and the balanced efforts made by the whistleblower to protect investors and report the violation internally.”See SEC Release No. 72727 (July 31, 2014); SEC Press Release, “SEC Announces Award for Whistleblower Who Reported Fraud to SEC After Company Failed to Address Issue Internally,” (July 31, 2014).

  • SEC Continues to Make Awards to Qualified Claimants. On June 3, 2014, the SEC awarded two claimants 15% each for a total of 30% percent of the monetary sanctions collected in the covered action. See SEC Release No. 72301 (June 3, 2014). On July 22, 2014, the SEC awarded three claimants 15%, 10%, and 5% respectively (for a total of 30%) of the monetary sanctions collected in the Covered Action. See SEC Release No. 72652 (July 22, 2014).

ARTICLE BY

William L. Carr
Daniel E. Brewer
 
OF
Drinker Biddle & Reath LLP

SEC Brings Fraud Charges Against Oil and Gas Company and Its CEO

Katten Muchin Law Firm

On August 4, the Securities and Exchange Commission instituted cease-and-desist proceedings against Houston American Energy Corp., an oil and gas exploration and production company, and John F. Terwilliger, its CEO, for making fraudulent claims about the company’s oil reserves. According to the SEC, during late 2009 and early 2010, Houston American raised approximately $13 million in a public offering and saw its stock price increase from less than $5 to more than $20 per share after fraudulently claiming that a Colombian exploration concession, in which Houston American owned a fractional interest, held between one billion and four billion barrels of oil reserves that would be worth the equivalent of $100 per share to investors. The SEC alleged that those estimates lacked any reasonable basis and were falsely attributed to the concession’s operator, who actually had much lower estimates. The SEC order charged Houston American and Mr. Terwilliger with violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act); Rule 10b-5, Section 20(b) of the Exchange Act; and Section 17(a) of the Securities Act of 1933. The SEC seeks a civil penalty and disgorgement from Houston American, and to prohibit Mr. Terwilliger from acting as an officer and director of the company.

Matter of Houston American Energy Corp. et al, Admin. Proceeding No. 3-16000 (Aug. 4, 2014).

ARTICLE BY

Michael S. Gordon
Ashley H. Jones
Of
Katten Muchin Rosenman LLP

SEC Commissioner Highlights Need for Cyber-Risk Management in Speech at New York Stock Exchange

Proskauer Law firm

Cyber risks are an increasingly common risk facing businesses of all kinds.  In a recent speech given at the New York Stock Exchange, SEC Commissioner Luis A. Aguilar emphasized that cybersecurity has grown to be a “top concern” of businesses and regulators alike and admonished companies, and more specifically their directors, to “take seriously their obligation to make sure that companies are appropriately addressing those risks.”

Commissioner Aguilar, in the speech delivered as part of the Cyber Risks and the Boardroom Conference hosted by the New York Stock Exchange’s Governance Services department on June 10, 2014, emphasized the responsibility of corporate directors to consider and address the risk of cyber-attacks.  The commissioner focused heavily on the obligation of companies to implement cybersecurity measures to prevent attacks.  He lauded companies for establishing board committees dedicated to risk management, noting that since 2008, the number of corporations with board-level risk committees responsible for security and privacy risks had increased from 8% to 48%.  Commissioner Aguilar nevertheless lamented what he referred to as the “gap” between the magnitude of cyber-risk exposure faced by companies today and the steps companies are currently taking to address those risks.  The commissioner referred companies to a federal framework for improving cybersecurity published earlier this year by the National Institute of Standards and Technology, which he noted may become a “baseline of best practices” to be used for legal, regulatory, or insurance purposes in assessing a company’s approach to cybersecurity.

Cyber-attack prevention is only half the battle, however.  Commissioner Aguilar cautioned that, despite their efforts to prevent a cyber-attack, companies must prepare “for the inevitable cyber-attack and the resulting fallout.”  An important part of any company’s cyber-risk management strategy is ensuring the company has adequate insurance coverage to respond to the costs of such an attack, including litigation and business disruption costs.

The insurance industry has responded to the increasing threat of cyber-attacks, such as data breaches, by issuing specific cyber insurance policies, while attempting to exclude coverage of these risks from their standard CGL policies.  Commissioner Aguilar observed that the U.S. Department of Commerce has suggested that companies include cyber insurance as part of their cyber-risk management plan, but that many companies still choose to forego this coverage.  While businesses without cyber insurance may have coverage under existing policies, insurers have relentlessly fought to cabin their responsibility for claims arising out of cyber-attacks.  Additionally, Commissioner Aguilar’s speech emphasizes that cyber-risk management is a board-level obligation, which may subject directors and officers of companies to the threat of litigation after a cyber-attack, underscoring the importance of adequate D&O coverage.

The Commissioner’s speech offers yet another reminder that companies should seek professional advice in determining whether they are adequately covered for losses and D&O liability arising out of a cyber-attack, both in prospectively evaluating insurance needs and in reacting to a cyber-attack when the risk materializes.

Read Commissioner Aguilar’s full speech here.

ARTICLE BY

Shawn Ledingham
OF
Proskauer Rose LLP

SEC Settles Charges Against Hedge Fund Adviser for Conducting Prohibited Transactions and Retaliating Against Whistleblower

Vedder Price Law Firm

On June 16, 2014, the SEC settled charges against a hedge fund advisory firm,Paradigm Capital Management, Inc., for engaging in principal transactions with an affiliated broker-dealer without providing effective disclosure to, or obtaining effective consent from, a hedge fund client. The SEC also settled charges against the firm’s owner, Candace Weir, for causing the improper principal transactions.

According to the SEC’s order, Paradigm’s former head trader made a whistleblower submission to the SEC that revealed the principal transactions between Paradigm and the affiliated broker-dealer. The SEC found that, after learning that its head trader had reported potential violations to the SEC, Paradigm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation. This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions. According to the SEC, Ms. Weir conducted transactions between Paradigm and an affiliated broker-dealer while trading on behalf of a hedge fund client. The SEC’s order also found that Paradigm failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction. The SEC’s order stated that Paradigm attempted to satisfy the written disclosure and consent requirements by establishing a conflicts committee to review and approve each of the principal transactions on behalf of the hedge fund. The SEC’s order found that the conflicts committee itself, however, was conflicted, because its two members, Paradigm’s chief financial officer and chief compliance officer, each reported to Ms. Weir and Paradigm’s CFO also served as CFO of the affiliated broker-dealer. The SEC also found that Paradigm’s Form ADV was materially misleading for failing to disclose its CFO’s conflict as a member of the conflicts committee.

The SEC’s order found that Paradigm violated, among other things, Sections 206(3) and 207 of the Advisers Act. The SEC’s order also found that Ms. Weir caused Paradigm’s violations of Section 206(3) of the Advisers Act. Paradigm and Ms. Weir agreed to jointly and severally pay disgorgement of $1.7 million for distribution to current and former investors in the hedge fund, and pay prejudgment interest of $181,771 and a penalty of $300,000. Paradigm also agreed to retain an independent compliance consultant.

Article By:

Investment Services Group
Of:
Vedder Price

SEC Settles Civil Foreign Corrupt Practices Act (FCPA) Action Against Two Former Oil Services Executives

Katten Muchin

On the eve of a trial which was scheduled to begin this week, the Securities and Exchange Commission settled a civil Foreign Corrupt Practices Act (FCPA) case it brought against two former oil services executives. The case was an outgrowth of anindustry-wide investigation the SEC had initially commenced beginning in 2010.

In February 2012, the SEC filed a complaint against Mark A. Jackson, who was the former CEO and CFO of Noble Corporation, and James J. Ruehlen, former Director and Division Manager of Noble’s Nigerian subsidiary, alleging that they authorized the payment of bribes to customs officials to process false paperwork that purported to show the export and re-import of oil rigs, which was necessary under the requirements of Nigerian law. In fact, the rigs had never been moved. The SEC alleged that the scheme was part of a design to save Noble from losing business and incurring costs associated with exporting rigs from Nigeria and re-importing them under new permits. The complaint asserted violations of the anti-bribery and books and records provisions of the FCPA. The complaint also detailed the fact that Jackson had refused to cooperate during Noble’s internal investigation of the matter and had asserted his Fifth Amendment rights and refused to testify during the SEC investigation.

The settlement with Jackson and Ruehlen was the last in a lengthy saga of FCPA actions against Noble and its former employees. Noble was initially charged with FCPA violations in a civil action in 2010. The company settled, agreeing to pay more than $8 million in fees. The SEC filed charges against Jackson and Ruehlen in 2012 following the corporate settlement and also filed charges against Thomas F. O’Rourke, the former controller and head of internal audit at Noble. O’Rourke quickly settled and agreed to pay a penalty.

Despite pursuing the action for more than two years and alleging serious wrongdoing by the defendants, including responsibility for an extensive bribery scheme, the SEC agreed to settle with Jackson and Ruehlen just two days before their trial was to commence with an injunction against violating the books and records provision of the FCPA. Although Noble had settled its own case for a hefty penalty, neither Jackson nor Ruehlen were required to pay a fine, concede a violation of the bribery provisions of the FCPA nor agree to restrictions on employment.

SEC v. Jackson et al., No. 4:12-c-00563 (S.D. Tex. Jul. 7, 2014).  

Article By:

Emily Stern
Ashley H. Jones
Of:
Katten Muchin Rosenman LLP