Back 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.” My 2004 article discussed a situation involving a company called AGCO Corp. that on March 10, 2004 received a letter from the SEC advising it that the SEC’s inquiry had been terminated, and no enforcement action has been recommended to the Commission.

Later that day, the Atlanta Journal-Constitution reported that AGCO Corp. had publicly announced the end of the SEC’s inquiry, and quoted AGCO Corp.’s CEO as stating that “It’s a good day…. When you’re sure that you haven’t done anything wrong — but to the outside world it looks like you’re guilty of something — it’s a real relief to be vindicated from any accusations.”

“Vindication,” however, is not the SEC’s message when it advises companies that an investigation has been terminated. Indeed, the SEC routinely warns in such letters that it is “providing this information under the guidelines in the final paragraph of Securities Act Release No. 5310,” which states:

The Commission is instructing its staff that in cases where such action appears appropriate, it may advise a person under inquiry that its formal investigation has been terminated. Such action on the part of the staff will be purely discretionary on its part for the reasons mentioned above. Even if such advice is given, however, it must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation of that particular matter.  All that such a communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the Commission. The attempted use of such a communication as a purported defense in any action that might subsequently be brought against the party, either civilly or criminally, would be clearly inappropriate and improper since such a communication, at the most, can mean that, as of its date, the staff of the Commission does not regard enforcement action as called for based upon whatever information it then has. Moreover, this conclusion may be based upon various reasons, some of which, such as workload considerations, are clearly irrelevant to the merits of any subsequent action. (Emphasis added).

Not surprisingly, within one day of its so-called “vindication,” AGCO issued a press release stating that

The termination of the SEC inquiry does not indicate that our accounting procedures or disclosures are correct or that we have been vindicated. That is not what the SEC letter said, and I want to correct what was reported in the media. All the letter said was that the inquiry was terminated. Neither that letter nor anything else said by the SEC staff in any way suggested that AGCO’s accounting or related disclosures are correct.

As we discussed here in 2006, painful lessons such as the one in AGCO seemed to have led corporations to respect the “No-Spin Zone” in recent years, and helped them to avoid turning what should be a positive development into a negative one. Indeed, a “default” corporate statement seems to have evolved in response to notice from the SEC of the termination of an investigation: companies now simply say that they are pleased that “the matter is behind us.”

All of this is context for the alarm bells that went off when we saw this article (”Usana Feels Vindicated”) in Saturday’s Salt Lake Tribune.  The article reported that Usana Health Sciences Inc. announced that it had received notification from the SEC that its inquiry was complete and that no “enforcement action” was being recommended.  So far so good.  But the article also quoted an “outside spokesman” for the company as  stating “We couldn’t have asked for a better outcome…. This really is a vindication of the company.”

Uh oh.  After four years, the “V” word is again being tossed around in the “No-Spin Zone.”  Stay tuned to see what, if anything, may follow.

The SEC’s 2007 Performance and Accountability Report for its fiscal year ended September 30, 2007, is now available.  Some of the highlights of the Report, which is available here, include:

• There was a significant reduction in the SEC’s collections activity from 2006 to 2007.  According to the Report, “the variance in collection activity is due to a reduction in fair funds collections of $1,307.6 million for 2007, due to a lower volume of financial fraud cases with large settlements. In FY 2006, the SEC won fines and penalties in several large cases. These collections are expected to be distributed to harmed investors in subsequent years.” (p. 18)
• In FY 2007, the SEC distributed $580.5 million to harmed investors. (p. 18)
• In FY 2007, the SEC initiated 776 investigations, 262 civil actions, and 394 administrative proceedings. (p. 25)
• The SEC’s enforcement cases in FY 2007 resulted in a total of approximately $1.6 billion in disgorgement and penalties ordered against securities law violators.  (p. 25)
• As a result of SEC enforcement cases, approximately $13.8 billion in disgorgement and penalties from FY 2003 through FY 2007 were ordered to be paid to the SEC, courts, or other appointed trustees. More than 75 percent of the total amounts ordered had been collected by the end of FY 2007.  (p. 26)
• In FY 2007, 92% of the SEC’s cases were “successfully resolved,” i.e., resulted in a favorable judgment for the SEC, a settlement, or the issuance of a default judgment. (p. 27)
• In FY 2007, 54% of first enforcement actions were filed within two years of opening an investigation or inquiry, lower than the SEC’s goal of 66%. The SEC attributed this lower percentage to two factors: a higher than expected number of more complex cases (issuer reporting and disclosure cases) and the allocation of significant resources to the SEC’s effort to distribute and track Fair Funds to injured investors under Sarbanes-Oxley. (p. 27)

The SEC announced last week that following its most recent distribution of $356 million to investors harmed by the financial fraud at Fannie Mae, it has now “distributed more than $3 billion overall since the agency was given authority to send financial penalties from SEC enforcement actions to the victims of financial fraud.”

The SEC was given authority to distribute such penalties to investors under the Fair Funds provisions of the Sarbanes-Oxley Act of 2002 (prior to the passage of SOX, the SEC was required to send financial penalties from its enforcement actions to the U.S. Treasury).

Here’s a new one:  NEC Corp. announced yesterday that it is “unable” to complete a U.S. GAAP-required analysis relating to software, maintenance and service revenues that its auditors need to complete the audit of NEC’s consolidated financial statements for the fiscal year ended March 31, 2006.

“Unable?”  What exactly does that mean?  As boiled down in this article on CFO.com, the company “simply cannot figure out U.S. GAAP revenue-recognition rules, and will stop trying.”  NEC acknowledges in its press release that this may mean its ADRs will be suspended or delisted on Nasdaq.

As Eddie Murphy put it in “Delirious,” NEC has effectively decided to “take the zero.”

I’ve tried to warn you people.  I even wrote this memo in 2005, written as bluntly as I can put it, addressed to all you "Public Company Employees About to Engage in Insider Trading in Advance of ‘Big News’ About [Your] Companies."  But do you listen? 

Well, maybe some of you do but then I see yet another case like this one in which, according to the SEC’s complaint, an employee of a public company learned on the job in January 2007 that his employer was about to make a tender offer for another company.  The SEC alleges that the employee then called his wife, who bought 12,000 shares of the company to be acquired the next day and, over the next few days, they collectively bought 900 call options for that company.  When the tender offer was publicly announced less than a week later, the couple allegedly "jointly realized illegal profits exceeding $1,000,000."  Now, less than six months later, they’ve both been sued by the SEC. 

My 2005 memo tried to hammer home some basic insider trading concepts.  Things like:

• The SEC at least takes a look at the trading that precedes every merger, earnings surprise or other announcement that causes a significant rise or fall in the price of a company’s stock.  Every one.
• If there is unusual trading activity preceding a rise/fall in a company’s stock, the SEC will immediately obtain the names of the traders involved.  That means your name.

There’s more if you care to read it, but to reiterate what I stated in closing that memo, "this is an IQ test and every one of you employees (or directors) of public companies whose names show up on this list are failing.  Just stop it."

I did a double-take when I first read this press release by Interpublic a few weeks ago that so pleasantly described a "development" in an SEC investigation into certain restatements, an "invite" to respond to a Wells notice, and that how "under recently revised settlement procedures, such a [Wells] notice is now a prerequisite to settlement negotiations with the Commission staff."

I’ve had this press release in the "to-blog" file for some time as I was now not quite sure what to do with it, but I think that this post that I belatedly just discovered on Footnoted.org does the job for me quite well.

According to this article in the Jamaica Gleaner, a new Caribbean stock exchange to be known as the "Caribbean Exchange Network" (CXN) will commence operations in the third or fourth quarter of 2007, with approximately 120 listed securities.  The CXN will reportedly "harmonise three of the largest stock markets"–Jamaica, Trinidad, and Tobago–via a common trading platform, and hopes to add additional countries’ exchanges in the future.

Back in September 2006, the SEC said the butler did it (insider trading, that is).  Today, the butler agreed to pay up, to the tune of a total of about $66K.

In this press release related to its action against Columbia Funds, the SEC’s Linda Chatman Thomsen, Director of the Division of Enforcement, announced this week that the SEC  has "now returned more than $1.8 billion to injured investors through Fair Fund distributions in multiple cases."

Dennis Berman has this interesting article in yesterday’s WSJ about an advanced form of insider trading that is rarely discussed–trading in credit-default swaps. 

The article explains that

This insurance, also known as a credit-default swap, is an important part of the insider-trading picture. The closer a company is to going private the greater the risk of a debt default — because in these transactions the company is loaded up with a pile of new debt — and the more expensive to insure against it.

These swaps are private contracts between two parties but the aggregate of these contracts has effectively become a market unto itself, with prices fluctuating by the hour based on market information. Options and equity investors obsessively monitor the price movements. Swaps are traded only by the most sophisticated players — hedge funds, banks and insurers — and it is difficult to identify who is trading these instruments.

Using the First Data Corp. buyout as a case study, the article shows how the price of a First Data Corp. credit-default swap contract went from $32,000 prior to the first discussions of the buyout to over $112,000 by the time 5 banks and their lawyers were involved in finalizing the transaction several  months later.

The article also points out that "while the SEC looks at basic stock and option trading, a lot of the insider-trading action appears to be moving to these swaps, and it isn’t even clear whether the agency has regulatory authority over them."

Thanks to this post on Dealbreaker.com for the link to the article.