The SEC’s ongoing inquiry into possible insider trading in shares of Restoration Hardware has raised some interesting issues of spousal immunity. On Friday, a court ruled that Lena Yan may not avoid testifying before the SEC in its ongoing investigation into possible insider trading by her husband, Daniel Hew.

On June 4, the SEC announced that it had filed a subpoena enforcement action in the U.S. District Court for the Northern District of California against Yan, an analyst in the finance department at Restoration Hardware, Inc. seeking to compel her testimony pursuant to a subpoena. Yan had previously appeared for testimony on May 6, 2009, but refused to answer all substantive questions by invoking two marital-based privileges.

Last week, Yan argued to Judge William Alsup that she should not be forced to give her own testimony in the matter based on her “spousal testimonial privilege.” The Mercury News reports that Yan argued that

“I do not want anything that I say to be used against my husband in any way,” she stated, concerned that the SEC’s attorneys “may have already concluded that my husband is ‘guilty’ of insider trading.” Furthermore, the investigation “has put a significant amount of strain on my marriage, both emotionally and financially, and I do not want to create further stress in our marriage.”

The SEC responded that there could be “staggering” potential ramifications if such a privilege existed in its investigations, and that, in any case, both spouses generally need to maintain the privilege in order for either to claim it. Judge Alsup reportedly ruled for the SEC, and gave Yan 15 business days to show up at the SEC’s San Francisco headquarters to give sworn testimony.

Today, 71-year-old Bernard Madoff was sentenced to the maximum sentence–150 years in prison (aka, “The Full Bernie“)–for his multibillion-dollar Ponzi scheme. U.S. District Judge Denny Chin issued the sentence today in the Southern District of New York.

As more people learn daily, Twitter is a way to get a message out to the entire world. The twist, of course, is that your message will only be seen by people who have chosen to follow your updates. A “tweet” by a person who has no followers is the proverbial tree falling in the forest with no one around to hear it.

I am interested in how Twitter may intersect with the insider trading laws, and would like to throw this hypothetical question out for your thoughts:

An executive at publicly-traded ABC Corp. learns that his company is about to be acquired at a significant premium to its current stock price.  He goes on Twitter and posts the following:

“I’m about to become a rich man.  My company, ABC Corp., will be acquired next week at a 50% premium to current stock price. Shhh!!”

Here are the scenarios for discussion.  Assume in each scenario that many of the followers act on the tip by buying the stock of ABC Corp. that day:

(a) Executive has 5 followers, all family members.

(b) Executive has 5 followers, all strangers.

(c) Executive has 2,000 followers.

In fact, ABC Corp. is acquired the following week and the stock jumps from $20 to $30 on the public announcement, at which time the followers who traded sell their ABC Corp. stock for a big profit.  My questions for you are:

1. Is Executive liable for insider trading “tipping” in any of these scenarios?
2. Are the followers who profited on the tip liable for insider trading in any of these scenarios?

I will weigh in with my take on this next week.

Back in July 2008 I discussed an emerging tactic in the defense of SEC enforcement actions: to settle the case against you in all respects except for the issue of the SEC’s demand for an officer and director bar, and to litigate the bar issue.  In October 2007, for example, Frank McPike, former interim CEO of a company called Competitive Technologies, reached a creative agreement in the SEC’s case against him for allegedly participating in a scheme to manipulate the stock price of CT.  He settled the SEC’s case against him with the exception of the demand for a bar, which he took to trial.  McPike later prevailed at trial in April 2008, when the court declined to impose a bar.

A case decided yesterday shows that not all defendants adopting this strategy will have the same success, however.  Richard Selden was the former CEO of Transkaryotic Therapies (”TKT”), a publicly-traded biotechnology company.  In 2005, the SEC filed an enforcement action against Selden alleging that he made misleading statements about TKT’s flagship drug.  In July 2008, Selden agreed to settle most of the SEC’s case against him by agreeing to an injunction to pay a $125,000 civil penalty and $1,041,417 in disgorgement and prejudgment interest related to his sales of TKT stock.  Like McPike, Selden refused to settle the SEC’s demand for an officer and director bar, instead choosing to litigate the issue.

That issue was resolved yesterday when a federal court ruled that Selden “is presently unfit to serve as an officer or director of a public company” and barred Selden from acting in such a role for two years. It is unclear whether the two year bar is better for Selden than what he could have achieved in a settlement, but the case shows that defendants will not always avoid an O&D bar by taking the issue to court.

What if I were to tell you that a Form 8-K filed yesterday with the SEC has a 280+ word discussion comparing the challenge of estimating legal fees to “being asked to predict how many minutes after being force fed a dead frog we would throw-up?” Is that something you might be interested in?

(If so, click here). (via Footnoted.org)

After the high-profile scandals involving first Ebbers and now Madoff, I have to think that the name “Bernard” has seen its last birth certificate for some time.

It’s not as if the name – which was in the “Top 100″ at the turn of the century – was exactly flourishing before 2002, when the first hints of the WorldCom scandal became known.  According to Social Security name data, the name “Bernard” was already in a slow, steady decline through the 1990s, dropping from the 430th most popular boy’s name in 1990, to 496th in 1995, and to 654th in 2000.

The criminal charges of financial fraud brought against Ebbers in 2004 seemed to hasten the decline of “Bernard,” as the name, which had plateaued in the mid-700s from 2002 to 2004, suddenly plummeted over 200 spots to 952nd in 2006.  The name has held steady since 2006, however, and even climbed back up to 940th in 2008.

Enter Bernard Madoff, who was arrested in December 2008.  Madoff has since pleaded guilty to the largest fraud in history and become one of the most reviled criminals ever, with tens of thousands of victims scattered around the globe.  The Social Security data only covers the top 1000 names, but I think it is safe to say that following Madoff, the name “Bernard” will drop off that list altogether in 2009, for a good long time.

Lloyd: What are the chances of a guy like you and a girl like me… ending up together?
Mary: Well, that’s pretty difficult to say.
Lloyd: Hit me with it! I’ve come a long way to see you, Mary. The least you can do is level with me. What are my chances?
Mary: Not good.
Lloyd: You mean, not good like one out of a hundred?
Mary: I’d say more like one out of a million.
[pause]
Lloyd: So you’re telling me there’s a chance.

I think this scene from Dumb and Dumber is probably pretty close to a transcript of the conversation that occurred between Bernard Madoff and his attorney on the subject of whether Madoff could successfully seek leniency in his sentencing on June 29.

According to a CNBC report, Madoff’s attorney Ira Lee Sorkin has filed a letter with the court in the SDNY seeking leniency and asking that Madoff be sentenced to as little as 12 years in prison, when he will be 83 years old. Madoff faces up to 150 years in prison after pleading guilty to 11 felony counts related to his massive Ponzi scheme. Sorkin’s letter to Judge Denny Chin also states that Madoff plans to speak at the sentencing hearing.

In an important decision for auditors, BDO International received a favorable jury verdict yesterday in Florida which clears it from responsibility for part of a $521.7 million verdict over negligent audits.  The jury found that BDO International does not control U.S. member firm BDO Seidman LLP, which in August 2007 was required by another jury to pay $170 million in compensatory damages to Banco Espirito, Portugal’s third-largest bank, and $351.7 million in punitive damages. Bloomberg reports that lawyers for Banco Espirito argued BDO International should pay part of the verdict, setting up the current court battle.

After deliberating for about an hour on Thursday, the jury found that BDO International didn’t manage BDO Seidman and therefore couldn’t be held liable for its conduct. The verdict follows a separate ruling by state court Judge John Schlesinger on June 16 that Banco Espirito also failed to provide sufficient evidence showing they were entitled to ask for BDO International for punitive damages.

Following the verdict, BDO International lawyer Mark Raymond commented that “BDO International isn’t the boss of anyone… These accounting firms are their own boss. [The verdict] puts to rest [the] theory that this is one great big organization.”  Banco Espirito’s attorney, Steven Thomas, expressed disappointment with the verdict but said no decision had been made on whether the bank will appeal.

In a letter addressed to SEC Chairman Mary Schapiro on Monday, Senator Chuck Grassley says he is tired of waiting for an unredacted copy of the recent Inspector General report (discussed here) about the activities of SEC attorneys who may have engaged in insider trading and violations of the SEC’s own trading policies.  According to a press release on Grassley’s website, he has twice asked for information that the SEC has apparently already released in response to requests made through the Freedom of Information Act.  To date, however, the SEC has not sent it to him.

“The contents of the Inspector General report about the activities of SEC attorneys deserve congressional scrutiny. The public needs to know that the SEC is doing something to deter misconduct and that this sort of thing isn’t more widespread,” he said.

Grassley says he is just trying to get what was provided to the Washington Post over a month ago, and he would like to know “why the SEC’s responses to media requests pursuant to FOIA should be more complete and informative than responses to Members of Congress.”  On May 17, Grassley says, the Washington Post reported information that had been redacted in the version of the Report he received, citing a copy of the Report it obtained from the SEC through the Freedom of Information Act (FOIA).

If it makes you feel any better, Senator, the SEC still has not sent me anything in response to my May 15 FOIA request for a copy of the report!

Let’s try to quickly catch up on the back and forth that has gone on since yesterday between House Financial Services Capital Markets Subcommittee Chairman Paul Kanjorski and SEC Inspector General H. David Kotz.  Yesterday, Kanjorski announced that he sent a letter to Kotz calling for an update by the end of this month on his internal investigation into why and how the SEC failed to detect the Madoff scandal.

Kotz began his investigation into the matter in December 2008 at the request of then-Chairman Christopher Cox, and he stated at that time that he planned to break the investigation into discrete pieces and issue reports on these pieces on a rolling basis (rather than holding all of his findings until the end and issuing one massive report).

In his letter, Kanjorski wrote that while Kotz previously acknowledged that it was critical for his investigation to be conducted expeditiously, “[s]ix months have now passed since you began your investigations into the $65 billion Madoff Ponzi scheme. In addition, more than five months have ensued since you testified and made public commitments regarding these matters.”  To date, Kanjorski observed, the only update Kotz has offered on the Madoff investigation is a “one-page summary” in Kotz’s recent semi-annual report to Congress (discussed here).  Kanjorski stated that this summary was “an inadequate response to my earlier requests and your prior public commitments.  The time has come for you to act.”  Kanjorksi asked for an update on the investigation no later than June 30.

Kotz responded the same day in a letter to Kanjorski, stating that he plans to release at least three reports over the coming months.  First, Kotz said, he will release a comprehensive investigative report no later than August 31 detailing all the examinations and investigations that the SEC has conducted on Bernard L. Madoff Securities LLC of New York from 1992 until the present.

In addition, based on the findings of the investigative report, the IG’s office will issue two more reports providing specific recommendations for improving the SEC’s Division of Enforcement and its Office of Compliance Inspections and Examinations (OCIE) no later than Sept. 30. Kotz added that “[w]e have been working as quickly as possible over the past several months.”

This response did not quite satisfy Kanjorski, however.  Today he shot off another letter to Kotz, saying that late August was too late because House Financial Services Committee Chairman Barney Frank has indicated that he plans to move regulatory restructuring legislation before the end of July, and Kanjorski wishes to “use the Madoff fraud as a case study for determining how to improve oversight of and investor protection in our securities markets.” Kotz’s recommendations, Kanjorski said, must therefore come

before, and not after, the House Financial Services Committee acts on a regulatory restructuring bill. As per my initial correspondence, by June 30 please provide me with your current suggestions for modifying our federal securities laws based on your Madoff investigations and other examinations.