Securities Regulation and Litigation Lawyer & Attorney : OverRegd Blog : Lindquist & Vennum Law Firm, Minneapolis and Denver

A New York Supreme Court has ordered Richard Grasso to pay back around $100 million he received in compensation while serving as chairman of the New York Stock Exchange in 2003. The order, issued October 19, 2006, granted partial summary judgment to New York State Attorney General Eliot Spitzer, who started this lawsuit against Grasso in 2004. The order found that Grasso breached his fiduciary duties owed to the NYSE's board of directors by not disclosing to the board that increases in his pay would result in his Supplemental Executive Retirement Plan ("SERP") skyrocketing. Grasso's 2003 pay package was $187.50 million. Presiding Judge Charles Ramos found Grasso's defense that he was ignorant about the true value of his SERP shocking. The case is People of the State of New York v. Grasso et al., case number 401620/04. Grasso has filed an appeal challenging the judge's ruling.

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Effective March 6, 2007, NASD member general securities firms that issue monthly account statements (electronic or written) will be required to include on customer monthly account statements language that advises the customer to promptly report any inaccuracy or discrepancy in that person's account to his or her brokerage firm and to reconfirm any conversation the customer has with the firm in writing.

These mandatory changes stem from the SEC's recent approval of amendments made to NASD Rule 2340, in light of efforts by the NASD and other self-regulatory organizations to heighten customer attentiveness to account activity and to address specific concerns brought to the attention of the SEC and SIPC by the U.S. General Accounting Office. The amendments to Rule 2340 in no way restrict customer rights.

A complete discussion and analysis of the amendments to Rule 2340 and a copy of the amended rule can be found on the NASD website. Link

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O death, where is thy sting? O grave, where is thy victory?

--1 Corinthians 55

Death be not proud, though some have called thee
Mighty and dreadful, for, thou are not so.

--John Donne

As expected, the federal judge who presided over the criminal trial voided the fraud and conspiracy convictions of former Enron CEO Ken Lay. Lay died of heart failure soon after his convictions. The court followed long established precedent requiring that criminal convictions be voided where the defendant died without the opportunity to appeal the guilty verdict.

The immediate practical consequence of the ruling is to delay government attempts to collect assets from Lay's estate.

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According to an article written by Justin Scheck of The Recorder and published on www.law.com, Larry Sonsini, director and lawyer for several companies suspected of illegally backdating stock options, has been under scrutiny for his possible role in manipulating option deals for employees.

According to Scheck, records filed by software maker Novell, Inc. show that in 1999, Sonsini and the rest of the company's board of directors deviated from the usual compensation plan by awarding themselves 50,000 options apiece. The grant reportedly occurred on October 26, 1999, when the stock was priced at a 17-month low. Over the following two months, the share price more than doubled, making the award worth more than $1 million on paper (the options ultimately became worthless before vesting due to the tech market crash). The timing of the grant has raised questions of whether the options were actually awarded on the day the company said that they were.

Additionally, Scheck reports, less than one month after the grant, Novell announced significantly more optimistic financial figures as compared to the prior fiscal year. This series of events makes corporate governance experts wonder whether the grants were also "spring loaded" - i.e. intentionally issued just before positive disclosures that the board knew would impact share prices. Although the practice of spring-loading is troubling to business ethicists, the Securities and Exchange Commission does not appear to view spring-loading with the same severity as it does backdating.

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Heightened regulatory review of NASD member firms continues. Earlier this week Oppenheimer and Co. was fined $800,000 for failing to respond to regulatory requests for information and failing to report timely and accurately thousands of municipal securities transactions. The NASD also cited Oppenheimer for failing to retain business-related internal e-mails for 20 employees who traded municipal securities and whose e-mails were necessary to an NASD investigation into the firm's trade reporting deficiencies.

The full text of the NASD release can be found online.

Of note, as requests for firm e-mail communications has become a standard practice during regulatory investigations, member firms should take care to ensure retention policies and procedures are in place should the need arise to produce these materials.

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Summary judgment for defendants in civil cases involving insider trading claims brought by the SEC is a rarity. Courts tend to be hospitable to cases that are necessarily based on circumstancial rather than direct evidence, and the key issues of materiality, intent to defraud, and whether the information is non-public tend to be factbound determinations.

Nevertheless, the Court in SEC v. Heartland Advisors, Inc., 2006 WL 254090 (E.D. Wisc. August 31, 2006) recently granted summary judgment to two individuals accused of insider trading by the SEC in a civil lawsuit. Moreover, the Court expressed hostility to the SEC claims in this case. For example, the Court suggested that the SEC is not unlike Brittany Spears in their misuse of quotes:

[T]he SEC makes much of the Heartland offices tour that Krueger allegedly testified to and never had. SEC's proposed factfinding of fact 87 states, "Defendant Krueger claims that he came back to HAI's offices for a "tour" after lunch. However, a thorough review of citations given for that proposition reveals that Krueger never said anything about a tour.

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