I’m astounded and almost (but not quite!) speechless after reading the SEC’s complaint from last week against a former Nixon Peabody associate for insider trading.  The SEC alleges that a client, Teleplus Consumer Services Inc., called the lawyer and asked her to draft a letter of intent about a possible merger between Teleplus and a company called Rooms.com. 15 minutes later, the lawyer allegedly called her broker and told him to buy 10,000 shares of Teleplus at 12 cents per share.  The stock price jumped when the deal was announced two days later, giving the associate a quick $5,800 profit.

People, please!! Are you kidding?! Would you rob a bank by walking in the front door with no mask on (and wearing a shirt with your name, address and phone number written on it), and then make a “getaway” walk home along a busy road (past the police station) carrying two big burlap sacks with green dollar signs on the side with bills pouring out of the top?

The chance of this lawyer getting away with the insider trading alleged by the SEC was Z-E-R-O, and that is only because we cannot go below zero, otherwise it would have been lower.  I’ve tried to explain this before. It remains a mystery to me why people with a zero percent chance of success will take that chance, even when they have so much to lose.

Since it first began to unfold in December 2008, the Madoff case has been almost beyond belief:

• A former Chairman of the NASDAQ, managing billions of dollars for many of the world’s largest and most prestigious institutions, is a complete fraud?
• His supposed investment advisory business that for decades appeared to be among Wall Street’s most successful and which managed thousands of clients’ money was, in his words, “all just one big lie?”
• Every trade, every order ticket, every account statement, every confirmation and all other relevant records reflected on millions of pages sent to customers were fictitious?

These facts and countless others that have emerged in the Madoff case boggle the mind, but try pondering this for a moment: what if Madoff’s ultimate arrest by the FBI in December 2008 had occurred not in his apartment in New York… but in his office in Washington, D.C. as Chairman of the SEC!  According to the SEC Inspector General’s Madoff report, when examiners from the SEC’s Northeast Regional Office were scrutinizing Madoff’s firm in 2005,

“Madoff would drop the names of high-up people in the SEC. Madoff told them that Christopher Cox was going to be the next Chairman of the SEC a few weeks prior to Cox being officially named. He also told them that Madoff himself “was on the short list” to be the next Chairman of the SEC.”

The report provides no support for Madoff’s claim that he was on any “short list” to be the next SEC Chairman, and Madoff’s credibility is surely as low as any person’s on this planet, but the idea of Madoff’s scheme being uncovered while he was serving as SEC Chairman is so mind-blowing that it seems like something that could only occur in a bad movie. It will be very interesting to learn whether there is any truth to that statement.

After reviewing the SEC Inspector General’s Madoff report containing what he considered to be the SEC’s “monumental incompetence,” Sen. Charles Schumer (NY) said today that he will soon introduce legislation that would allow the SEC to fund itself.  Sen. Schumer said that he will introduce the legislation when Congress returns next week.  Being self-funded, which SEC Chairman Mary Schapiro and Commissioner Luis Aguilar have been suggesting lately, would mean the SEC would no longer be part of the budget and appropriations process, but would use the transaction fees paid by registrants.

Schumer believes that self-funding would increase the SEC’s funding substantially.  For a comprehensive discussion including my take on the self-funding issue, look for my upcoming column that will be published in the September 9 Compliance Week newsletter and here at ComplianceWeek.com.

We’ve already seen SEC insider trading cases alleging husband betraying wife, wife betraying husband, boyfriend betraying girlfriend, brother-in-law betraying brother-in-law, and even divorcee betraying divorcee, but here’s a new one: brother betraying sister.

Yesterday, the SEC filed a settled insider trading action against Sarath B. Gangavarapu alleging that he misappropriated inside information from his sister, whose husband was an executive officer at Covansys Corporation. The SEC claims that Gangavarapu purchased over 54,000 shares of Covansys stock at a cost of over $1.4 million based on that information during the nine days leading up to Covansys’ public announcement that it would be acquired by Computer Sciences Corporation. The concept of “sibling betrayal” is a new one in SEC cases to my knowledge, but due to the typical love-hate relationship between siblings in general, I’m going to slot this case as Betrayal Level: Low (”Someday We’ll Laugh About It”) on the “Familial Betrayal Advisory System.”

The SEC alleges that in April 2007, Covansys was in discussions with CSC and another company about their interest in acquiring it. Gangavarapu allegedly spoke frequently with his sister during April 2007 and asked her questions about her husband’s work activities. His sister allegedly told Gangavarapu that her husband was in meetings behind closed doors and working extra hours, and after learning from her husband that Covansys’ board of directors would vote the next day on which acquisition offer to accept, told her brother that “by tomorrow, it’s a relief, it will be over.” The SEC says that Gangavarapu proceeded to trade based on this information, ultimately profiting more than $361,761.

Read the SEC’s Litigation Release

Yesterday, the SEC began announcing its enforcement actions through an additional medium: its new @SEC_Actions feed on Twitter. The SEC had been somewhat half-heartedly and sporadically announcing enforcement actions through its @SEC_News Twitter feed prior to yesterday, but the @SEC_News feed now seems to be reserved for pushing out links to its daily News Digest as well as certain press releases.

Even if you’re not actively using Twitter yourself, you can still benefit from the new @SEC_Actions feed by either (1) simply clicking on the link and using it as a webpage containing what will hopefully be up-to-date information, or (2) adding the RSS feed (available here) for @SEC_Actions into your RSS feed reader for real-time updates.

It remains unclear what the SEC and CFTC will end up doing to coordinate their regulatory efforts now that both appear safe from being abolished, but know this: whatever they do will be “harmonious.”

In response to a June 17, 2009, White Paper from the White House that called on the SEC and CFTC to “harmonize regulation of futures and securities,” the two regulators issued a press release today (”SEC, CFTC to Hold Joint Meetings on Regulation Harmonization“) stating that they will soon “hold joint meetings to seek input from the public on harmonization of market regulation.”

Both agencies then took turns seeing how many times they could additionally use some form of the root word “harmony” in their brief statements:

“These joint meetings will build on the progress the CFTC and SEC have made on designing a framework to regulate OTC derivatives. It will move us further down the road of harmonizing our regulations to increase transparency, reduce regulatory arbitrage and rebuild confidence in our markets,” said SEC Chairman Mary Schapiro.

“I look forward to working with Chairman Schapiro and hearing from market experts and participants on how to most effectively harmonize our regulatory systems,” said CFTC Chairman Gary Gensler. “Harmonizing our regulatory policies will improve market integrity by applying consistent standards to market participants. There are three areas where this review will most benefit the American public: to address gaps between the two agencies’ financial regulatory authorities, to assess the effects of regulatory overlap and to bring appropriate consistency to the two agencies’ regulation over similar products, practices and markets.”

In the meantime, I’m probably now stuck with this song in my head for the rest of the morning:

I recently discovered a new website called “myCorporateResource.com.” MCR combs the websites of the top 100 American law firms to find new Client Alerts, which it estimates number approximately 10,000 per year. MCR says that it then “aggregates, reviews, sorts and summarizes this content -for free- to give you a really useful corporate resource.”

Predictably, I honed in on the SEC enforcement, securities litigation, and white collar memos, and found that many were very timely and useful. Nick Montgomery, the editor of MCR, very kindly responded to my request that MCR provide RSS feeds of its “Securities Litigation” and “White Collar Defense & SEC Enforcement” categories of memos, and I will begin featuring feeds of these memos on Securities Docket shortly (you can see them below now).

MCR sorts law firm memos in roughly 80 different ways, including industry, professional role (Board members, C-level executives, accountants, …), area of law, and geography (China, India, UK, …), and has a special sections dedicated to Corporate Governance, the SEC, and the Credit Crisis.

Below are the feeds from my two favorite categories: “Securities Litigation” and “White Collar Defense & SEC Enforcement.”

Last week, I asked here whether former AIG CEO Maurice “Hank” Greenberg had “blown up his settlement” with the SEC through comments made on his behalf following the settlement. To recap, the following statement was issued on behalf of Greenberg immediately following his SEC settlement:

Mr. Greenberg has consistently made clear that he personally never engaged in any fraud whatsoever and that the vast majority of AIG’s Restatement was unnecessary and concerned accounting issues for which he had no responsibility,” the statement said. “He also made clear to the SEC that he would never settle a charge of securities fraud, even if the settlement did not require him to admit the charge, and that he was confident that he could defeat in court any such claim if it were made.

The SEC promptly responded to this statement, saying that Greenberg had mischaracterized the case against him.  The next day, SEC spokesman John Nester stated that

Under the governing law, the charge against Mr. Greenberg as a control person with respect to AIG’s alleged securities fraud requires his culpable participation in the underlying fraud. The charge carries no suggestion that Mr. Greenberg was not a participant in fraudulent acts. Moreover, the settlement does not express any view that minimizes Mr. Greenberg’s role in any of the transactions that have been the subject of restatement by AIG.

I asked whether a rare “No-Spin Zone” violation might have occurred via Greenberg’s statement, with the key question being whether the SEC deemed Greenberg’s statement to be a denial of the SEC’s charges against him.  If so, it would violate the terms of the settlement agreement in which Greenberg agreed to settle the case without admitting or denying the allegations against him.

From the looks of things, however, it looks like the SEC will not move to vacate the settlement based on Greenberg’s comments.  First, nearly a week later there has been no public action by the SEC to vacate the settlement.  Second, I understand that a subsequent statement on Greenberg’s behalf that tempered his initial statement of earlier that day may have helped smooth things over.  The statement on his behalf, made late on August 6, was as follows:

• When Mr. Greenberg was quoted in the Wall Street Journal earlier today as saying that the $15 million paid by him was “not an insignificant amount,” he was referring to the penalty of $7.5 million and the disgorgement of $7.5 million that he agreed to pay in settling the section 20(a) charge that was filed today by the SEC. The size of that payment is a reflection of the importance of the charge to the SEC and Mr. Greenberg’s willingness to make it is a reflection of his recognition of that importance.
• While Mr. Greenberg indicated that he is pleased with the terms of today’s settlement, he recognizes the seriousness of a control person charge, and the significance with which the SEC treats it.
• Despite the parties’ agreement as to the specific elements of AIG’s 2005 Restatement included in the control person charge, the parties continue to disagree as to the appropriateness of other components of the Restatement. Mr. Greenberg was not meaning to suggest in his public statements that the SEC shares his view as to appropriateness or inappropriateness of the Restatement as a whole.

Last week, a federal judge in the SDNY entered a final judgment against Edwin “Bucky” Lyon, IV, and various Gryphon Partners entities in an SEC insider trading case.  The case, filed back in December 2006, is part of the SEC’s ongoing campaign against insider trading by hedge funds in connection with PIPE (”private investment in public equity”) offerings.

As previously discussed here, hedge funds are routinely asked to invest in PIPE offerings.  The fact that a PIPE is imminent, however, is generally regarded as material, negative news likely to drive down the price of the company’s stock because a PIPE offering may be dilutive to existing shareholders, may be seen as “last resort” financing for a company in poor health, and is often at a steep discount to the market price.

In the Lyon case, Lyon and each Gryphon Partners entity agreed to pay, jointly and severally, disgorgement of $66,712, plus prejudgment interest of $33,850, and a civil penalty of $310,288.  In addition, several of the Gryphon Partners entities agreed to pay, jointly and severally, disgorgement in the amount of $243,576, plus prejudgment interest of $123,590.

The SEC’s complaint alleged that, in connection with four separate PIPE offerings,

Lyon and Gryphon Partners, after being solicited to invest, engaged in illegal insider trading by selling short the PIPE issuers’ securities prior to the public announcement. Lyon and Gryphon Partners engaged in this conduct notwithstanding their agreement to keep information about the PIPE confidential.

The SEC has brought several other “PIPE” insider trading cases against hedge fund managers.  These cases include actions against Hilary Shane (May 18, 2005); Jeffrey Thorp (March 14, 2006), and Robert Berlacher (September 13, 2007).  The SEC’s case against Mark Cuban, which was dismissed last month, was also a PIPE-related case.

Did former AIG CEO Maurice “Hank” Greenberg just blow up his settlement yesterday with the SEC through comments made on his behalf following the settlement?

The New York Times reports that shortly after the SEC’s announcement of the settlement, in which Greenberg agreed to settle the case without admitting or denying the allegations against him, “Mr. Greenberg issued a defiant statement saying he had ‘no responsibility’ for the fraud at A.I.G., which he ran for about four decades ending in 2005.”

See the potential problem here?  As a refresher, in 2004 I wrote in this Compliance Week article that “corporate executives, spokespersons and counsel should be aware that the period immediately following an SEC investigation needs be treated as the ‘No-Spin Zone.’”  The article discusses several ways that companies and executives can unwittingly stir up trouble following the conclusion of an SEC matter, including matters that end in a settlement, and highlights a 1996 case in which a defendant’s post-settlement comments led to the SEC seeking to vacate the settlement altogether:

On March 20, 1996, for example, the SEC filed a settled insider trading action against Michael P. Angelos, in which Mr. Angelos agreed to settle the case without admitting or denying the allegations against him. Shortly thereafter, counsel for Mr. Angelos made statements that were “construed by the Commission as denials of the allegations in the Complaint and thus violative of this agreement to settle the action without admitting or denying these allegations.”

In response, on March 27, 1996, just one week after the settlement, the SEC actually filed a motion to vacate the judgment entered against Mr. Angelos. On April 22, 1996, the SEC finally agreed to withdraw its motion to vacate (and to let the settlement stand) after receiving the following public corrective statement from Mr. Angelos:

I settled this case without admitting or denying the allegations of the complaint. To comply with my settlement with the Securities and Exchange Commission, I withdraw any statement made on my behalf that may have been inconsistent therewith. I am pleased that this settlement resolves the SEC’s lawsuit against me. I will have no further comment other than any sworn testimony I may give in this or any other matter.
Michael P. Angelos

The Angelos case shows that SEC will not tolerate defendants who settle a case without admitting or denying the SEC allegations, but then proceed to make comments doing just that – which brings us back to Mr. Greenberg. Dow Jones reports that the specific statement issued on behalf of Greenberg yesterday was as follows:

Mr. Greenberg has consistently made clear that he personally never engaged in any fraud whatsoever and that the vast majority of AIG’s Restatement was unnecessary and concerned accounting issues for which he had no responsibility,” the statement said. “He also made clear to the SEC that he would never settle a charge of securities fraud, even if the settlement did not require him to admit the charge, and that he was confident that he could defeat in court any such claim if it were made.

According to the NY Times, the SEC promptly responded to this statement last night, saying that Greenberg had mischaracterized the case against him.  The NY Times added that “the agency did not say whether it would take further action against him.”

The key question here for the SEC for “No Spin Zone” purposes is whether the statement above on Greenberg’s behalf is a denial of any of the SEC’s specific allegations in the complaint (available here). Notably, the SEC’s complaint against Greenberg includes a “control person” allegation that “Greenberg, directly or indirectly, controlled AIG at the time of AIG’s violations of Section 10(b) of the Exchange Act … and he was a culpable participant in these violations.”

This morning, SEC spokesman John Nester stated that

Under the governing law, the charge against Mr. Greenberg as a control person with respect to AIG’s alleged securities fraud requires his culpable participation in the underlying fraud. The charge carries no suggestion that Mr. Greenberg was not a participant in fraudulent acts. Moreover, the settlement does not express any view that minimizes Mr. Greenberg’s role in any of the transactions that have been the subject of restatement by AIG.

So will the SEC determine that the statement on Greenberg’s behalf was a “No Spin Violation” and seek to vacate the settlement, as in the Angelos case?  Stay tuned.