FDIC SAYS IT CAN SUE PROFESSIONALS WHO PLAYED ROLE IN THE FAILURE OF AN INSTITUTION

The following excerpt is from the FDIC website:

As receiver for a failed financial institution, the FDIC may sue professionals who played a role in the failure of the institution in order to maximize recoveries. These individuals can include officers and directors, attorneys, accountants, appraisers, brokers, or others. Professional liability claims also include direct claims against insurance carriers such as fidelity bond carriers and title insurance companies.

The FDIC follows the policies adopted by the FDIC Board in 1992, Statement Concerning the Responsibilities of Bank Directors and Officers, require Board approval before actions are brought against directors and officers.

Professional liability suits are only pursued if they are both meritorious and cost-effective. Before seeking recoveries from professionals, the FDIC conducts a thorough investigation into the causes of the failure. Most investigations are completed within 18 months from the time the institution is closed. Prior to filing the claim, staff will attempt to settle with the responsible parties. If a settlement cannot be reached, however, a complaint will be filed, typically in federal court.

As receiver, the FDIC has three years for tort claims and six years for breach-of-contract claims to file suit from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed.

Professionals may be sued for either gross or simple negligence. The The Supreme Court has ruled that the FDIC may pursue simple negligence claims against directors and officers if state law permits (Atherton v. FDIC)."

BANK AND TOP EXECUTIVE CHARGED BY SEC WITH MISLEADING INVESTORS

The following excerpt is from an SEC e-mail: 

"Washington, D.C., Jan. 18, 2012 — The Securities and Exchange Commission today charged the holding company for one of Florida’s largest banks and its top executive with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis.

The SEC alleges that BankAtlantic Bancorp and its CEO and chairman Alan Levan made misleading statements in public filings and earnings calls in order to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.

“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This is exactly the type of information that is important to investors, and corporate executives who fail to make that required disclosure will face severe consequences."

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, BankAtlantic and Levan knew that a large portion of the loan portfolio — which consisted primarily of loans on large tracts of lands intended for development into single family housing and condominiums — was deteriorating in early 2007 because many of the loans had required extensions due to borrowers’ inability to meet their loan obligations. Some loans were kept current only by extending the loan terms or replenishing the interest reserves from an increase in the loan principal. Levan knew this negative information in part from participating in the bank’s Major Loan Committee that approved the extensions and principal increases. BankAtlantic and Levan also were aware that many of the loans had been internally downgraded to non-passing status, indicating the bank was deeply concerned about those loans.

“BankAtlantic and Levan publicly minimized the risks in the bank’s commercial residential loan portfolio when in reality, they had significant concerns about the borrowers’ ability to pay,” said Eric I. Bustillo, Miami Regional Office Director. “Investors had a right to know this key information.”

The SEC alleges that despite this knowledge, BankAtlantic’s public filings in the first two quarters of 2007 made only generic warnings of what may occur in the future if Florida’s real estate downturn continued. BankAtlantic failed to disclose the downward trend already occurring in its own portfolio. The steady deterioration of this portfolio constituted a known trend that should have been disclosed in the Management’s Discussion and Analysis (MD&A) section of BankAtlantic’s filings, which were signed by Levan. During earnings calls in the same time period, Levan made further misleading statements to investors about the portfolio. BankAtlantic finally acknowledged the problems in the third quarter of 2007 by announcing a large unexpected loss. The investing public did not expect a loss of that magnitude, and BankAtlantic’s share price immediately dropped 37 percent.

According to the SEC’s complaint, BankAtlantic and Levan attempted to sell some of the deteriorating loans after this announcement. However, they failed to account for them properly as being “held for sale,” which is required by Generally Accepted Accounting Principles (GAAP). BankAtlantic concealed the attempted sales from auditors and investors alike, because proper accounting would have required BankAtlantic to write them down and incur immediate additional losses. Instead, BankAtlantic schemed to understate its net loss by more than 10 percent in its 2007 annual report.

The SEC’s complaint seeks financial penalties and permanent injunctive relief against BankAtlantic and Levan to enjoin them from future violations of the federal securities laws. The complaint also seeks an officer and director bar against Levan.

The SEC’s investigation was conducted by Senior Counsel Brian P. Knight and Senior Accountant Fernando Torres under the supervision of Assistant Regional Director Thierry Olivier Desmet in the Miami Regional Office. C. Ian Anderson and Adam L. Schwartz will lead the SEC’s litigation efforts."

BILLION DOLLAR HEDGE FUNDS CHARGED BY SEC WITH INSIDER TRADING

The following excerlt is from an SEC e-mail:

"Washington, D.C., Jan. 18, 2012 – The Securities and Exchange Commission today charged two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The charges stem from the SEC’s ongoing investigation into the trading activities of hedge funds. The U.S. Attorney for the Southern District of New York today announced criminal charges against the same seven individuals.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep “Sandy” Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.

“These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

According to the SEC’s complaint filed in federal court in Manhattan, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. For his role in the scheme, Goyal was paid $175,000 in soft dollar payments that were deposited in a brokerage account of an individual affiliated with him.

The SEC alleges that after obtaining the inside information from Goyal in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora tipped his portfolio manager at Diamondback, Todd Newman of Needham, Mass. Newman traded on the information on behalf of the Diamondback hedge funds he controlled. Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global. Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds. During this time period, both Adondakis and Chiasson lived in New York City

.

According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City andDanny Kuo of San Marino, Calif. Horvath caused insider trades at his firm that resulted in approximately $1.4 million of illicit gains. Kuo similarly caused the firm where he worked to execute profitable insider trades in Dell securities.

The SEC further alleges that Kuo also obtained inside information about Nvidia Corporation’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s first quarter 2010 earnings announcements, which was made in May 2009. Kuo again caused his firm to trade on inside information. Kuo’s insider trades in Dell and Nvidia resulted in approximately $270,000 in ill-gotten gains. Kuo also tipped Tortora at Diamondback and Adondakis at Level Global with the nonpublic information about Nvidia. Tortora again tipped Newman, who made more insider trades on behalf of the Diamondback hedge funds. The illegal trades in Dell and Nvidia securities resulted in $3.9 million in illicit gains for Diamondback. At Level Global, Adondakis tipped Chiasson who made the insider trades on behalf of those hedge funds. Chiasson’s insider trades in Dell and Nvidia resulted in approximately $72.6 million of illicit gains for the Level Global hedge funds.

The SEC’s complaint charges each of the defendants with violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, charges Goyal, Tortora, Newman, Adondakis, Chiasson, Horvath and Kuo with aiding and abetting others’ violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s complaint seeks a final judgment ordering the defendants to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone, Daniel Marcus and Stephen Larson – members of the SEC’s Market Abuse Unit in New York – and Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter."

SENATOR CARL LEVEN ON THE FALL OF ENRON REMINDERS

The following excerpt is from U.S. Senator Carl Leven's website:

Important Reminders from Enron's Fall

12-09-2011

Ten years ago this month, Enron collapsed, bankrupting the seventh largest U.S. corporation at the time and ripping away the mask from a massive and damaging corporate fraud.

This is a good time to reflect on what happened a decade ago and how many of the misdeeds that led to Enron’s collapse are still far too prevalent today. We shouldn’t forget how the culture of Enron – built on outsized corporate pay, conflicts of interest, tax evasion, financial engineering, and hidden debt – did so much harm to so many, and nearly brought the global economy to its knees. That culture is still too big a part of our financial system.

The Senate Permanent Subcommittee on Investigations, which I chair, released reports on the failure of Enron’s board members to safeguard shareholder interests; actions taken by major financial institutions to help Enron cook its books; and Enron’s use of financial engineering to make its financial results look better than they were, while evading taxes.

The findings we reached in the aftermath of Enron’s demise are worth keeping in mind as we consider our economic future. Why should we remember Enron?

• Runaway executive pay.  Enron paid its CEO Ken Lay $140 million in 2000, including $123 million in stock options. Enron set the standard for outrageous CEO pay, and demonstrated how, in search of ever-larger paychecks, CEOs can lead companies into ever-riskier schemes that endanger not just shareholders, but the economy as a whole.

• Tax evasion.  Despite reporting huge profits, Enron paid no taxes in four of its last five years and used tax scams and offshore shell entities to dodge paying its fair share.  Today, dozens of U.S. corporations use similar tactics not only to dodge Uncle Sam, but claim huge tax rebates. Enron was a catalyst for today’s corporate tax cheats.

• Corporate conflicts of interest. Enron’s chief financial officer profited by using his own company, LJM, to do deals with Enron to cook its books. Heedless of Enron’s example, banks such as Goldman Sachs and Citi later set up synthetic securities, sold shares to clients, and profited by betting against their own clients.  Enron helped create a culture of corporations failing to do right by their clients.

• Accounting conflicts.  Enron’s accounting firm, Arthur Andersen, approved financial statements loaded up with fraud. Despite Enron’s cautionary tale, so did accountants for Madoff Securities, Olympus, and other firms that have collapsed in years since, damaging investors, consumers and market stability. Enron showed how accountants reliant on revenues from clients can be convinced to look the other way. It’s still happening today.

• Credit rating conflicts. Credit rating agencies gave Enron AAA ratings until it collapsed. They have given the same AAA ratings to toxic securities, failing corporations, and deadbeat banks, often because issuing tougher ratings would cost them business. Enron exposed the unreliability of credit rating agencies that place the search for market share above the need for objective analysis. 

• Excessive speculation.  Enron speculated and manipulated electricity prices for big profits. Today, speculators whipsaw the American economy with roller coaster energy, metal, and food prices.  Enron jacked up the commodity business to everyone’s detriment but the speculators; and without tough enforcement of anti-speculation laws, the damage will continue.

• Financial engineering. Enron designed countless financial engineering gimmicks that served its financial interests but endangered clients and investors.  Today, financial firms rave about financial “innovations,” while pushing toxic products like auction securities, naked credit default swaps, and worse.  Enron showed how financial engineering creates weapons of mass destruction; a decade later, exotic financial products helped bring the U.S. economy to its knees.

• The need for regulators to stop the madness.  In response to Enron, the Sarbanes-Oxley Act banned multimillion-dollar corporate loans to corporate insiders, forced CEOs to certify their internal financial controls, and created new accounting oversight.  Those changes helped curb Enron-style abuses. Congress continued the cleanup in 2010 with Wall Street reform legislation, but much more needs to be done.  All of us should keep Enron in mind as financial regulators work to turn the law we passed into strong rules that can build new protections for consumers and the economy.

SEC COMMISSIONER GALLAGHER SPEAKS AT OPEN MEETING ON PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD'S PROPOSED 2012 BUDGET

The following excerpt is from the SEC website:

"Thank you, Chairman Schapiro. I would like to echo the gratitude already expressed by my fellow commissioners to the staffs of the PCAOB and SEC for their hard work, and I would also like to thank Chairman Doty and his fellow board members for being here today.

As has been noted, section 109(b) of the Sarbanes-Oxley Act requires that the PCAOB’s budget be approved by the Securities and Exchange Commission.

It would have been possible to approve the Board’s annual budget and accounting support fee in a non-public process, but I believe it is important that the Commission exercise its approval authority in the uniquely public manner that an open meeting affords us. Indeed, as Chairman Doty recognized, the PCAOB support fees, like many other regulatory fees, are ultimately paid by investors and so this is highly important. I want to thank Chairman Schapiro for finding time on our very busy calendar to hold this meeting.

Congress provided that the Board should be funded primarily through an accounting support fee (Sec. 109(c)(1)). That means the appropriations process by which the Congress oversees the SEC and many other Government departments and agencies does not apply to the Board’s accounting support fee, and so has no potential to constrain the Board’s budget or guide the various activities it funds. The role Congress has assigned to the Commission, then, is essentially to stand in the Congress’s stead in ensuring that the Board raises and spends its funds in the best interest of the investing public and, thereby, that of accounting profession as a whole.

Having reached the end of its review process for the PCAOB’s 2012 budget, the Commission’s staff, represented this morning by the Office of the Chief Accountant, recommends that the Commission approve the Board’s budget – and I am happy to play my part in doing so.

But, consistent with our responsibility, I want to join my colleagues in raising certain questions, which I’ll direct to Jim Kroeker, our Chief Accountant, and Jim Doty, the Board’s Chairman, as appropriate."

EMPLOYEE OF DATA STORAGE COMPANY CHARGED WITH INSIDER TRADING

The following is from the SEC website:

January 17, 2012

"The Securities and Exchange Commission today charged a sales director at Santa Ana, Calif.-based data storage manufacturer STEC Inc. with insider trading in company securities based on non-public information he learned on the job.

The SEC’s complaint filed in the U.S. District Court for the Central District of California, alleges that Farzin Bazshushtari, who lives in Mission Viejo and is STEC’s Director of Industrial Distribution, purchased 7,000 STEC shares on April 27, 2009, after learning about STEC’s positive first quarter financial results. When those results were announced publicly on May 11, STEC’s stock price jumped 30 percent.

The SEC further alleges that Bazshushtari purchased another 5,500 shares on May 27, 2009, after seeing internal weekly sales reports indicating that STEC would outperform second quarter guidance. He additionally purchased 200 STEC call options on June 10. When the company publicly increased second quarter revenue guidance on June 16 to reflect the surging sales, STEC’s stock price jumped 26 percent.

According to the SEC’s complaint, Bazshushtari made total profits of $76,676.50 by trading on inside information. Bazshushtari knew that he violated company policies when he placed the trades. His April 27 purchase was made during a “blackout” period when STEC employees were prohibited from trading in company stock. He purchased STEC call options despite STEC employees being prohibited from trading in STEC options, which give holders the right to buy or sell shares in the future. Bazshushtari further violated STEC’s written insider trading and ethics policies when he traded on margin and held his STEC securities in a margin account.

Bazshushtari agreed to settle the SEC’s charges by paying $76,676.50 in disgorgement and a $76,676.50 penalty. Bazshushtari also has consented without admitting or denying the SEC’s allegations to a permanent injunction from further violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.