Accounting & Tax

SEC Improves Its Won-Lost Record

In recent years, directors and officers who've gone to trial against the securities regulator have stood little chance of winning.
Craig SchneiderFebruary 7, 2005

These days, more executives are challenging charges of securities fraud in court, only to lose at trial.

Indeed, an increasing number of individual directors and officers are choosing to litigate instead of settling claims with the Securities and Exchange Commission. In the SEC’s fiscal year 2004, for example, 43.7 percent of the cases that it brought were litigated upon filing. That is, at least one defendant in the case did not settle when the SEC brought actions in federal district court or brought administrative proceedings. In FY03, that number was 38.1 percent; in FY02, 43.3 percent; and in FY01, 34.2 percent.

The litigation risks, however, appears to outweigh the benefits. David Kornblau, chief litigation counsel at the SEC, recently provided CFO.com with exclusive statistics on the results of district court trials that show the regulator’s losses are much more the exception than the rule.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

In the SEC’s fiscal year 2004, the securities watchdog prevailed at trial against seven executives and lost against two, according to Kornblau. In FY03, the SEC won four and lost one; in FY02, it won two and lost none; and again in FY01, it won two and lost none.

Kornblau describes these cases as mostly “garden variety” securities fraud, in which management allegedly makes false statements about the company’s business or commits financial fraud when it files reports with the commission. He also finds that the executives who do go to trial tend to have engaged in “more blatant fraud.” None of the officers or directors who challenged the SEC were from Fortune 500 companies.

Four months into fiscal year 2005, the SEC’s record is one win, one loss. In November, the commission prevailed against Maxxon Inc. and its president and chief executive officer, Gifford Mabie, who was charged with making false statements. Last month, on the other hand, a federal court cleared David Gane, former president and chief executive officer of Dicom Imaging Systems Inc., of all charges of securities fraud. The SEC had sought undisclosed monetary penalties and a lifetime ban against Gane’s serving as a corporate officer or director.

David Bayless, a partner at Morrison and Foerster who represented Gane, also served for five years as district administrator of the SEC’s San Francisco office. Bayless suggests that the tough penalties being sought by the commission — such as lifetime officer-and-director bans — and what he calls “government overreaching” are starting to backfire with executives. Defendants, he believes, may see litigation as a safer option than settling, albeit sometimes more expensive.

Kornblau, citing the statistics, says Bayless himself may be “getting carried away.”

Results of District Court Trials
Against Public Company Officers or Directors
Date of Decision Case Name and Charges Type of Trial Result
1/4/2005 David Gane; false statements Bench Gane, president and CEO of Dicom Imaging Systems Inc., found not liable
1/18/2004
(FY04)
Maxxon; false statements Jury Prevailed against defendants Maxxon Inc. and president and CEO Gifford Mabie
9/29/2004 Isaac Sutton; financial fraud Jury Verdict for defendant Isaac Sutton, executive VP, COO, and vice chairman of Happiness Express Inc.
9/1/2004 Papalia; false statements Bench Prevailed against defendant Robert Papalia, chairman and CEO of Nano World Projects Corp.
6/10/2004 David Malmstedt/Mark Huetteman; financial fraud Jury Verdict for defendant David Malmstedt, executive VP of worldwide sales for Legato Systems, Inc.; Huetteman settled
3/8/2004 Ed Johnson (MERL Holdings); accounting fraud, false filing, insider trading Jury Prevailed against defendant Ed Johnson, chairman, president, and CEO
2/27/2004 Global Timber Corp.; false statements Jury Prevailed against defendants David A. Kirk and Jonathon Bentley-Stevens, officers and/or directors
10/16/2003
(FY04)
CEC/Levine; financial fraud Jury Prevailed against defendants Gerald H. Levine, CEO, and Maria A. Levine, CFO of C.E.C. Industries Corp.)
10/19/2003
(FY04)
Happ; insider trading Jury Prevailed against defendant Robert D. Happ, director, Galileo Corp.
7/31/2003 Desaigoudar (Henke); accounting fraud, insider trading Bench Prevailed against defendant Chan M. Desaigoudar, chairman and CEO, California Micro Devices Corp.
7/25/2003 Solucorp; financial fraud, false statements Bench Prevailed against defendants Joseph S. Kemprowski, officer and director; Peter R. Mantia, president and director; and Victor Herman, CFO; case dismissed against VP Robert Kuhn
7/30/2002 Hottovy; financial fraud Jury Prevailed against defendant Ronald J. Hottovy, CFO, Scientific Software-Intercomp Inc.
4/16/2002 Ginsburg, Scott; insider trading Jury Prevailed against defendant Scott Ginsburg, CEO, Evergreen Media
7/12/2001 Montle; false statements, manipulation Bench Prevailed against defendant Paul J. Montle, CEO and president, Viral Testing Systems
7/2/2001 Enterprises Solutions; false statements and press releases Bench Prevailed against defendant John A. Solomon, president
Source: SEC

4 Powerful Communication Strategies for Your Next Board Meeting