Westlaw Journal SECURITIES LITIGATION & REGULATION...EXECUTIVE COMPENSATION 13 No liability for gas firm directors who passed on tax-bonus savings plan Freedman v. Adams (Del.) SEE

VOLUME 18, ISSUE 21 / FEBRUARY 19, 2013

SECURITIES LITIGATION & REGULATION

Westlaw Journal

41392242

WHAT’S INSIDE

Litigation News and Analysis • Legislation • Regulation • Expert Commentary

COMMENTARY

SEC approves NYSE and Nasdaq rules on compensation committees and advisersCraig Miller and Rory Donald of Manatt, Phelps & Phillips discuss the new rules approved by the Securities and Exchange Commission mandating independent compensation committees for companies traded on the New York Stock Exchange and Nasdaq.

SECURITIES FRAUD

7 Chesapeake Energy suit is specific enough to move forward, investors say

Weinsteinv.McClendon (W.D. Okla.)

8 Oil company says investors claiming ‘fraud by hindsight’

InreHoustonAm.EnergyCorp.Sec.Litig. (S.D. Tex.)

9 News of AIG’s $10 billion suit caused stock drop, BofA investors say

InreBankofAm.AIGDisclosureSec.Litig. (S.D.N.Y.)

SETTLEMENT

10 BofA shareholders hold out, win $62.5 million pact over Merrill merger

InreBankofAm.Corp.Sec.,Derivative&ERISALitig. (S.D.N.Y.)

BREACH OF DUTY

11 Derivative lawsuit against tech company put on hold

Spagnolav.Bhalla (N.D. Ga.)

12 Investor wants Transocean execs to pay for Deepwater Horizon spill

Richardsonv.Newman (Tex. Dist Ct.)

EXECUTIVE COMPENSATION

13 No liability for gas firm directors who passed on tax-bonus savings plan

Freedmanv.Adams (Del.)

SEE PAGE 5

CONTINUED ON PAGE 14

SEE PAGE 3

COMMENTARY

Expanded use of FIRREA means new challenges for financial institutionsStephen Topetzes and Michael Ricciuti of K&L Gates discuss the reach of the Financial Institutions Reform, Recov-ery and Enforcement Act and how it is being applied to civil actions against financial institutions over mortgages sold to Fannie Mae and Freddie Mac.

CREDIT RATINGS

Justice Department sues S&P over rating failures

REUTERS/Brendan McDermid

The Justice Department has sued McGraw-Hill and subsidiary Standard & Poor’s Rating Services, alleging the companies’ credit ratings during the housing bubble misled and defrauded investors.

United States v. McGraw-Hill Cos., No. CV-13-00779, complaint filed (C.D. Cal. Feb. 4, 2013).

The Justice Department’s complaint, filed in the U.S. District Court for the Central District of California, seeks damages in excess of $5 billion under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73.

FIRREA permits the government to recover large civil penalties for fraud perpetrated upon federally insured financial institutions.

The claims in this case arise from S&P’s credit ratings of mortgage backed securities and collateralized debt obligations leading up to the recent global financial crisis purchased by financial institutions, including federally insured financial institutions.

© 2013 Thomson Reuters

Westlaw Journal Securities Litigation & RegulationPublished since September 1995

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TABLE OF CONTENTS

2 | WESTLAW JOURNAL n SECURITIES LITIGATION & REGULATION

Credit Ratings: United States v. McGraw-Hill Cos.Justice Department sues S&P over rating failures (C.D. Cal.) ...........................................................................1

Commentary: By Craig D. Miller, Esq., and Rory Donald, Esq., Manatt, Phelps & PhillipsSEC approves NYSE and Nasdaq rules on compensation committees and advisers ..................................... 3

Commentary: By Stephen Topetzes, Esq., and Michael Ricciuti, Esq., K&L GatesExpanded use of FIRREA means new challenges for financial institutions ....................................................5

Securities Fraud: Weinstein v. McClendonChesapeake Energy suit is specific enough to move forward, investors say (W.D. Okla.) .............................. 7

Securities Fraud: In re Houston Am. Energy Corp. Sec. Litig.Oil company says investors claiming ‘fraud by hindsight’ (S.D. Tex.) ..............................................................8

Securities Fraud: In re Bank of Am. AIG Disclosure Sec. Litig.News of AIG’s $10 billion suit caused stock drop, BofA investors say (S.D.N.Y.) .............................................9

Settlement/Merger-Related Issues: In re Bank of Am. Corp. Sec., Derivative & ERISA Litig.BofA shareholders hold out, win $62.5 million pact over Merrill merger (S.D.N.Y.) ..................................... 10

Breach of Duty: Spagnola v. BhallaDerivative lawsuit against tech company put on hold (N.D. Ga.) ....................................................................11

Breach of Duty: Richardson v. NewmanInvestor wants Transocean execs to pay for Deepwater Horizon spill (Tex. Dist Ct.) .....................................12

Executive Compensation: Freedman v. AdamsNo liability for gas firm directors who passed on tax-bonus savings plan (Del.) ...........................................13

News in Brief .....................................................................................................................................................15

Case and Document Index ...............................................................................................................................16

FEBRUARY 19, 2013 n VOLUME 18 n ISSUE 21 | 3© 2013 Thomson Reuters

COMMENTARY

SEC approves NYSE and Nasdaq rules on compensation committees and advisersBy Craig D. Miller, Esq., and Rory Donald, Esq. Manatt, Phelps & Phillips

Craig D. Miller (L) is co-chair of the financial services and banking practice at Manatt, Phelps & Phillips in San Francisco His practice focuses on representing public and private corporations in a wide range of corporate matters, including mergers, acquisitions, and public and private equity and debt securities offerings. Rory Donald (R) is an associate in the firm’s Los Angeles office. His practice focuses on corporate matters, including capital markets, mergers and acquisitions, and venture capital.

The Securities and Exchange Commission has approved new listing requirements promulgated by the New York Stock Exchange and the Nasdaq Stock Market relating to the composition of and oversight by compensation committees. The listing requirements, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, impose new obligations for compensation committees in connection with the retention and oversight of compensation committee advisers. The rules also revise the independence criteria for compensation committee members themselves.

Public companies must focus on two specific compliance dates in connection with evaluation of the new rules:

• July 1, 2013 — the date for compliance with the new rules relating to compensation, committee adviser independence and adoption of any required compensation committee charter amendments; and

• The date of the first annual meeting after Jan. 15, 2014, or Oct.31, 2014 — the date for compliance with the new rules relating to compensation committee

members meeting the appropriate independence requirements after review of any conflicts of interest.

STANDARDS FOR COMPENSATION COMMITTEE INDEPENDENCE

Under the new NYSE and Nasdaq listing standards, companies must have compensation committees composed entirely of independent directors. The NYSE and Nasdaq use both the general independence criteria already included in the exchanges’ listing standards for boards of directors, as well as new criteria specific to compensation committees.

With respect to the source of compensation, the company’s board should consider whether the director receives compensation from any person or entity that would impair the director’s ability to make independent judgments about executive compensation at the company. In considering the director’s affiliations with the company, boards must consider whether any relationships with the company place the director under the direct or indirect control of the listed company or its senior management. If there is a direct relationship between the director and members of senior management, it may impair the director’s ability to make

Under the new NYSE and Nasdaq listing standards, companies must have compensation committees

composed entirely of independent directors.

The new NYSE standards require that in determining the eligibility of compensation committee members, the issuer’s board of directors should consider the sources of compensation of the director and whether the director is affiliated with the company.

independent judgments regarding executive compensation at the company. Notably, affiliate status due to stock ownership is not an automatic bar on membership on the compensation committee.

The Nasdaq standards now require all listed companies to have a standing compensation committee with at least two members, a significant change from previous rules. Nasdaq formerly allowed compensation decisions to be made by the independent directors of a public company. In addition, the new standards prohibit a compensation committee member from accepting directly or indirectly any consulting, advisory or other fees from the company, other than director fees and fixed-fee payments under a retirement plan.

This is also a significant deviation from previous Nasdaq rules, where directors serving on compensation committees could still qualify as independent even if they accepted up to $120,000 of consulting or other advisory fees. Although affiliate status due to stock ownership is not an

4 | WESTLAW JOURNAL n SECURITIES LITIGATION & REGULATION © 2013 Thomson Reuters

automatic bar on compensation committee membership, issuers must consider whether such affiliate status would impair the director’s judgment as a member of the compensation committee.

RULES ON COMPENSATION ADVISERS

The new NYSE and Nasdaq listing standards both impose the following requirements on their compensation committees:

• The compensation committee must have sole discretion in retaining compensation advisers.

• The compensation committee must be directly responsible for the appoint-ment, compensation and oversight of compensation advisers.

• The issuer must provide funding for the reasonable compensation of compensation advisers.

• In considering a compensation adviser, consultant or counsel, the compensation committee must take into account the following six criteria for independence:

1. The adviser’s or the adviser’s firm’s provision of other services to the company.

2. Any business or personal relationships between the compensation adviser and members of the compensation committee.

3. Any business or personal relationships between the company’s executive officers and the compensation adviser or the compensation adviser’s firm.

4. The compensation adviser’s ownership of issuer’s stock.

5. The amount of fees received from the company by the compensation adviser’s firm, as a proportion of the firm’s revenue.

6. Conflict of interest policies and procedures of the compensation adviser’s firm.

Listed companies must ensure these powers and provisions are incorporated into compensation committee charters. Although compensation committees are required to evaluate the independence of their compensation consultants, neither the NYSE nor the Nasdaq prohibits a compensation committee from retaining an adviser ultimately determined not to be independent.

investment companies, foreign private issuers who meet certain disclosure requirements or smaller reporting companies.

The new compensation committee stan-dards and compensation adviser standards will not apply to controlled companies, certain issuers of securities future products or registered clearing agencies that issue standardized options.

TIMING

All listed companies on the NYSE and the Nasdaq must comply with the compensation committee adviser requirements by July 1, 2013. NYSE- and Nasdaq-listed companies will be required to comply with the new listing standards on committee member independence by the earlier of the company’s first annual meeting after Jan. 15, 2014, or Oct. 31, 2014. In addition, public companies will have to certify compliance with the new compensation committee rules to their respective exchanges.

FUTURE STEPS

Companies should work with their in-house and external counsel to ensure compliance with the new compensation committee rules in the requisite timeframes. In many cases, companies will have to amend their compensation committee charters and engage in an independence analysis for both advisers and members of the compensation committee. WJ

Affiliate status due to stock ownership is not an automatic bar on membership on the

compensation committee.

Furthermore, both the NYSE and Nasdaq say compensation committees are not required to undertake an independence analysis for consultants, counsel or other advisers whose role is limited to the following:

• Advising on broad-based employee benefit plans that do not discriminate in scope, terms or operation in favor of executive officers; or

• Providing advice that either is not customized for a particular issuer or is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

EXEMPTIONS

The new standards will not apply to companies already exempt from compen-sation committee requirements, such as passive business organizations and issuers whose only listed equity is preferred stock. The compensation committee member independence requirements will not apply to limited partnerships, companies in bank-ruptcy, registered open-end management


COMMENTARY

Expanded use of FIRREA means new challenges for financial institutionsBy Stephen Topetzes, Esq., and Michael Ricciuti, Esq. K&L Gates

Stephen Topetzes (L) is a partner with K&L Gates in Washington. His practice focuses on securities enforcement, securities litigation and corporate internal investigations. He regularly represents public companies, boards of directors, broker-dealers, investment advisers, investment companies and individuals in a wide range of matters. Those include investigations by the Securities and Exchange Commission, the Department of Justice, the Financial Industry Regulatory Authority, and state securities regulators or attorneys general. He also has extensive experience handling complex securities litigation, including regulatory or disciplinary proceedings, class-action lawsuits and arbitrations. Michael Ricciuti (R), a partner with the firm in Boston, concentrates his practice in government enforcement, white-collar criminal defense, securities enforcement, internal investigations and complex civil litigation. He has represented clients — as defendants, witnesses or victims — in federal and state criminal and securities enforcement matters and has handled a variety of state and federal civil and administrative investigations and proceedings across the country.

FIRREA provides for large financial penalties and prescribes a longer limitations period than

other federal enforcement statutes.

The broad effort by the United States to combat abuses believed to have caused or contributed to the global credit crisis features new uses of an old weapon: the Financial Institutions Reform, Recovery and Enforcement Act. The result is a changed landscape for persons or entities facing investigations or possible government claims related to financial services.

FIRREA was enacted in 1989 in the wake of the savings and loan crisis in the United States. It is a wide-ranging statute, with elements of a sweeping government bailout and receivership program for failed savings banks, a recast federal deposit insurance and regulatory scheme for thrift institutions, and additional requirements concerning lending, appraisals and public oversight.

Importantly, it also includes broad enforcement provisions conferring significant investigative powers on the U.S. Department of Justice and permitting the United States to bring civil charges against persons or entities that violate, or conspire to violate, one of a

number of identified criminal statutes. It also provides for large financial penalties and prescribes a longer limitations period than other federal enforcement statutes.

For more than 20 years after its passage, the enforcement provisions of FIRREA were used infrequently. When they were used, the government generally pursued claims against persons or companies that “victimized” a financial institution that had been closed and placed into receivership.

All of that changed after President Obama launched an interagency Financial Fraud Enforcement Task Force. Beginning in 2010,

the Department of Justice revealed a new and broad interest in pursuing additional matters under FIRREA. They launched many investigations and filed civil charges against several large banks, asserting practices related to mortgage origination, mortgage servicing or foreclosure around the start of the credit crisis harmed federally insured financial institutions.

In many cases, the claims under FIRREA are filed with companion civil claims under the False Claims Act, which center on alleged damage to the United States flowing from federal mortgage insurance or another federal guarantee. Recent large settlements between the United States and a number of large financial institutions have each contained a FIRREA component. Other significant actions are pending. These actions collectively seek or involve billions of dollars in fines and pose a substantial threat to financial services companies and associated individuals.

AN ATTRACTIVE ENFORCEMENT TOOL

Several aspects of this rediscovered and now more broadly applied government enforcement tool make it attractive to the U.S. government and warrant special attention.

Potentially broad application

The enforcement provisions of FIRREA pertain to fraud or other acts that “affect” a federally insured financial institution. Recent allegations by the United States reflect that the government sees significant elasticity in this language.

FIRREA was historically applied generally to claims against defendants (frequently individuals) whose alleged bad acts produced or contributed to the failure of a federally insured financial institution. The language of the statute permitted potentially broad interpretation because the enumerated predicate acts for claims under FIRREA


include, among other matters, conduct proscribed by the federal mail and wire fraud statutes, which are broadly applied criminal provisions.

The Department of Justice has recently expanded its use of FIRREA dramatically. In particular, the government now says failures by large financial institutions to appropriately underwrite or service Federal Housing Administration-insured mortgage loans warrant the maximum penalties permitted under FIRREA.

The government apparently intends to apply the enforcement provisions of FIRREA to an increasing array of acts or practices by individuals or entities (including financial institutions) that are deemed to have harmed or “affected” federally insured financial institutions. Further, it is clear that the government’s recent claims against originators or servicers of FHA-insured mortgage loans reflect a willingness on the part of the United States to “up the ante” against financial institutions already facing federal scrutiny by folding claims under FIRREA into actions that historically centered on the False Claims Act or other statutes.

Lower standard of proof, higher penalties

FIRREA authorizes the United States to seek to impose substantial civil remedies against persons or entities who commit acts prohibited by 14 criminal statutes. Unlike efforts by the government to prosecute crimes under those underlying statutes, which require proof “beyond a reasonable doubt,” the United States need only support its claims under FIRREA based on a “preponderance of the evidence.” The effect of this lower standard of proof is significant. The United States may be much more inclined to pursue civil claims under FIRREA than to seek to bring criminal charges for the same conduct.

In addition, the enforcement provision of FIRREA, 12 U.S.C. § 1833a, provides for substantial penalties. Maximum penalties are $1 million for each violation. Continuing violations may produce greater fines — up to $1 million per day or a total of $5 million. Still higher penalties may be imposed relative to conduct producing pecuniary gain for the defendant or harming a U.S. government financial institution insurance fund. In those cases, the civil penalty may equal the amount of the pecuniary gain or loss attributed to the

grand jury — are subject to significant use restrictions. And, after criminal charges are filed, the government in criminal cases does not have the broad discovery rights that exist in civil practice.

Longer limitations period

The limitations period for enforcement claims under FIRREA is 10 years after the claim accrues, which is longer than the limitations period applied to other relevant civil enforcement statutes. This lengthy timeframe— and the potential to recover or impose substantial penalties related to such a long period — serve to enhance the attractiveness of FIRREA for government lawyers.

Broader application than the False Claims Act

Unlike the False Claims Act, which requires the underlying harm to involve government monies, FIRREA has no such limitation.

The road ahead

The Department of Justice is using FIRREA in a way that expands the government’s civil enforcement efforts relative to financial institutions. The potentially high penalties, long limitations period and expanded fact-gathering ability conferred on the government seem to suggest FIRREA will remain a central part of the government’s arsenal for the foreseeable future.

Whether these powers will be limited by the courts remains to be seen. Case law interpreting FIRREA is limited. Among other things, courts have yet to fully address what it means to “affect” a federally insured financial institution. As more defendants begin to balk at the government’s aggressive use of the statute, they may explore judicial intervention as a means of limiting the government’s use of FIRREA. The answers provided to those defendants may have significant consequences for financial institutions and those who deal with them. WJ

The United States may be much more inclined to pursue civil claims under FIRREA than to seek to bring criminal charges for the same conduct.

prohibited conduct. The high “per violation” and other civil penalties available under FIRREA mean large mortgage originators, loan servicers and others whose conduct might “affect” a federally insured financial institution face potentially enormous liabilities under FIRREA.

Broad investigative powers, pretrial discovery

FIRREA provides the government with extensive investigative powers. Under FIRREA, the government has broad ability to subpoena documents and take testimony in civil investigations. The availability of such pre-suit discovery tools distinguishes FIRREA from civil aspects of the False Claims Act and other civil statutes enforced by the Department of Justice. Of course, once a complaint is filed asserting civil claims under FIRREA, the government can engage in broad discovery under the Federal Rules of Civil Procedure, including depositions, written interrogatories and additional document requests.

Together, these pre- and post-suit discovery powers may provide the government with more flexibility than that offered in criminal investigations. Although grand juries in criminal cases have broad investigatory power, the resulting grand jury materials — documents and testimony gathered by the


SECURITIES FRAUD

Chesapeake Energy suit is specific enough to move forward, investors sayShareholders in the nation’s second-largest natural gas provider have told an Oklahoma federal court that they have pleaded a sufficient case alleging the company CEO violated federal securities law to overcome a defense motion to dismiss.

appointed lead plaintiff in July. The original complaint was filed in April by shareholders Dvora and Steven Weinstein.

The OTPPB suit is brought on behalf of a proposed class of purchasers of Chesapeake’s common stock from April 30, 2009, to May 11, 2012. The complaint says they suffered monetary damages caused by purchasing Chesapeake stock at allegedly inflated prices.

McClendon served as board chairman of Chesapeake until June 21 but is still CEO.

According to the OTPPB complaint, Chesapeake instituted a “founders” program in 2005 that permitted McClendon to purchase up to a 2.5 percent ownership interest in all of Chesapeake’s working wells.

The defendants concealed from the investing public that McClendon financed his purchase using $1.5 billion in loans from Chesapeake’s corporate lenders, principally EIG Global Energy Partners, the complaint says.

The plaintiffs contend the deal places McClendon in conflict with shareholders because the founders program obligates him

Weinstein et al. v. McClendon et al., No. 12-465, opposition brief filed (W.D. Okla. Jan. 23, 2013).

Aubrey K. McClendon, who co-founded Oklahoma City-based Chesapeake Energy Corp. in 1989, and five current or former corporate officials allegedly withheld from investors that McClendon had taken $1.55 billion in loans from banks and private equity firms to cover his own stake in company-owned wells, the suit says.

McClendon used the loans to help buy himself a 2.5 percent stake in thousands of wells the company has drilled since 2005 and will drill up to 2015, according to the complaint filed in the U.S. District Court for the Western District of Oklahoma.

The shareholders say the loans created a conflict between McClendon and Chesapeake’s shareholders because they required him to act in the best interests of his lenders, even if the action would be harmful to the company.

Moving to dismiss the complaint, McClendon and the other defendants claimed the plaintiffs are “wholly unable to articulate a coherent theory of how and why the defendants committed fraud.”

They also said the suit does not identify any specific statements that were allegedly false or misleading as required by the Private Securities Litigation Reform Act, 15 U.S.C. § 78u.

But the shareholders claim they have pleaded enough particular facts to give rise to an inference of an intent to deceive.

In their brief in opposition, they say the defendants were in a position to know about the loans, understand their materiality, and realize a failure to provide “complete and accurate information” about them would likely mislead investors.

The Ontario Teachers’ Pension Plan Board, a Chesapeake shareholder, filed the consolidated complaint Oct. 19 after being

to contribute only to the costs associated with drilling productive wells, while Chesapeake has to pay all costs associated with acquiring and exploring land, regardless of whether the land proves productive for drilling.

This arrangement gave McClendon an incentive “to push the company into excessive land acquisition and exploration costs … in order to maximize the potential upside of productive wells,” the complaint alleges.

OTPPB says that as details of the loans came to light through various news reports, the stock price tumbled nearly 60 percent, from a class-period high of $36 per share to $14.81 per share.

The complaint purports to state claims against all the individual defendants and Chesapeake for violating Section 10(b) of the Securities Exchange Act by making untrue statements about McClendon’s loans that deceived the investing public into paying artificially inflated prices for common stock.

The individual defendants also face a claim under Section 20(a) of the Exchange Act for making false statements or failing to disclose information about the loans while acting as “controlling persons” of Chesapeake.

Moving to dismiss the suit Dec. 6, the defendants argued that the plaintiffs have not “even attempted” to plead a specific, highly particularized fact giving rise to a possible inference of wrongdoing.

The plaintiffs disagreed with this assertion in their Jan. 23 opposition brief. They say the failure to disclose McClendon’s loans violated generally accepted accounting principles, as well as SEC regulations.

The defendants “knew or should have known” that McClendon’s loans had to be disclosed under these standards and regulations and created a conflict of interest, the brief says.

The shareholders also say the defendants had a strong motive to conceal the details of the loans and to misrepresent the company’s financial statements regarding the loans, according to the brief. WJ

Attorneys:Plaintiffs: Joseph A. Fonti, Labaton Sucharow LLP, New York; David Keesling, Richardson Richardson Boudreaux Keesling PLLC, Tulsa, Okla.

Defendants: Robert P. Varian, Kenneth P. Herzinger, M. Todd Scott, Alexander K. Talarides, Orrick, Herrington & Sutcliffe, San Francisco

Related Court Documents: Opposition brief : 2013 WL 271515 Motion to dismiss: 2012 WL 6211898 Complaint: 2012 WL 5363573

See Document Section A (P. 19) for the brief in opposition.

REUTERS/Sean Gardner

Chesapeake Energy Corp. CEO Aubrey McClendon, shown here, and the other defendants claimed the plaintiffs are “wholly unable to articulate a coherent theory of how and why the defendants committed fraud.”


SECURITIES FRAUD

Oil company says investors claiming ‘fraud by hindsight’A Texas oil and gas exploration company and its executives want a federal judge to shut down a shareholder lawsuit alleging they made false and misleading statements about the commercial viability of an oil well in South America that the company ended up plugging.

plug the well, the suit says. The company also disclosed for the first time that the Securities and Exchange Commission had been conducting a nonpublic investigation of possible securities fraud since October 2010.

The stock closed at $2.25 a share. At one point during the class period, it traded as high as $20.44, according to the complaint.

The suit says Houston American’s executives knew or recklessly disregarded the falsity and misleading nature of the information they had been disclosing to the investing public to inflate the stock price.

But the motion to dismiss says the suit fails to specify any allegedly false or misleading statements as required by the Private Securities Litigation Reform Act, 15 U.S.C. § 78u.

The defendants also note the fact that Houston American paid $5 million for a second test of the well’s commercial viability.

“Houston American would not have incurred this additional expense if it really knew all along, as plaintiffs allege, that there was ‘no oil’ in the well,” the motion says.

The shareholders seek compensatory damages and attorney fees. WJ

Attorneys:Plaintiffs: William B. Federman, Federman & Sherwood, Dallas

Defendants: Gerard G. Pecht, Fulbright & Jaworski, Houston; Peter A. Stockes and Mark Oakes, Austin, Texas

Related Court Documents: Motion to dismiss: 2013 WL 271654 Complaint: 2012 WL 5983290

In re Houston American Energy Corp. Securities Litigation, No. 12-1332, motion to dismiss filed (S.D. Tex. Jan. 14, 2013).

Moving to dismiss the suit, Houston American Energy Corp. CEO John F. Terwilliger and CFO Jay Jacobs and four of the company’s directors said the allegations are based on a “classic, yet impermissible fraud-by-hindsight theory.”

The defendants said they had cautioned investors that there was no way to predict prior to drilling and testing whether the well was going to be successful.

Houston American even expressly stated in press releases regarding the well that “there is no assurance that we will locate hydrocarbons in sufficient quantities to be commercially viable,” according to the defendants’ Jan. 14 motion filed in the U.S. District Court for the Southern District of Texas.

The consolidated class-action complaint was filed in Houston federal court nearly two months after U.S. District Judge Melinda Harmon joined three separate lawsuits accusing Houston American of securities fraud.

The judge also designated Paul Spitzberg and Stephen Gerber as lead plaintiffs in her Sept. 20 order.

The consolidated complaint, which also names directors John Boylan, O. Lee Tawes III, Stephen Hartzell and Edwin Broun III as defendants, seeks to represent all investors who purchased shares of Houston American from Nov. 9, 2009, through April 18, 2012.

“As a result of the defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, the plaintiffs and other class members have suffered significant losses and damages,” the complaint says.

Despite prior rosy representations about the amount of oil in a well in Colombia, Houston American announced last March that there

The defendants said they had cautioned investors that there was no way to predict prior to drilling and testing

whether the well was going to be successful.

were delays and that conditions at the site prevented sufficient testing, the suit says.

Houston American’s share price dropped 35 percent, from about $11 to $7, in the wake of the announcement, according to the suit.

The company subsequently issued a series of statements allegedly designed to bolster investor confidence, the complaint says.

But the stock took a 36 percent hit April 19 when Houston American announced it would


SECURITIES FRAUD

News of AIG’s $10 billion suit caused stock drop, BofA investors sayAfter being kept in the dark by Bank of America officers, investors were “hammered” when the market reacted to news of AIG’s $10 billion lawsuit over subprime-mortgage-backed securities it bought from BofA, shareholders have told a federal judge in Manhattan.

The shareholder plaintiffs allege that BofA executives knew about AIG’s

pending suit since January 2011.

In re Bank of America AIG Disclosure Securities Litigation, No. 11- 6678, memorandum in opposition to motion to dismiss filed (S.D.N.Y. Jan. 14, 2013).

The shareholders say in a brief opposing a motion to dismiss their securities fraud lawsuit that top BofA executives propped up the troubled bank’s stock price by hiding “the largest individual investor claim of its kind against any financial institution in the United States.”

In 2011 BofA’s financial reports revealed a barrage of shareholder lawsuits and regulatory actions related to the collapse of high-risk mortgage-backed securities from 2008 to 2010, according to the brief filed in the U.S. District Court for the Southern District of New York.

Some of the lawsuits were filed against BofA and the two financial institutions it rescued as part of the federal government’s bank bailout: Countrywide Financial Corp. and Merrill Lynch & Co., the brief says.

But BofA’s financial reports for the first three quarters of 2011 intentionally left out the “looming lawsuit” by insurance giant American International Group, and “shocked investors” dumped BofA’s shares “when the truth was finally revealed,” the brief says.

Investors “hammered” BofA’s share price when it was revealed in August 2011 that AIG had filed a $10 billion lawsuit against BofA and its rescued banks over $28 billion in subprime mortgages they allegedly sold to AIG. BofA’s share price closed down 20.3 percent the day after the suit was disclosed, the plaintiffs’ brief says.

The plaintiffs allege that BofA executives had known about AIG’s pending suit since January 2011.

At that time, the plaintiffs say, AIG told BofA officers that roughly 40 percent of the $28 billion in mortgages BofA, Countrywide and JPMorgan had sold it were “defective” and far below the represented value, resulting in a loss of more than $10 billion.

While BofA and AIG were discussing a possible settlement, however, they entered into a secret “tolling” agreement that extended the

normal period of time between when AIG discovered its claims and when it had to file a lawsuit.

The settlement talks were unsuccessful, and AIG filed the suit in August 2011, the plaintiffs’ brief says.

Nevertheless, the BofA officers knew from the beginning that AIG’s claims were meritorious and needed to be disclosed, but they intentionally deceived investors about the extent of the bank’s liability for subprime-related litigation, the plaintiffs say.

After the plaintiffs filed their second amended complaint, BofA and its officers moved to dismiss it, claiming that they had no duty to specifically detail which lawsuits the bank faced.

The defendants argued that under the heightened pleading standards of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u, the plaintiffs failed to show that the BofA officers intended to injure the shareholders financially by purposely deceiving them about the AIG claims.

The plaintiffs, in their brief in opposition to dismissal, respond that the $10 billion AIG suit is a significant financial event that had to be discussed, if for no other reason than to simply correct previous fiscal disclosures that estimated the bank’s liability. WJ

Attorneys:Plaintiffs: Jason A. Zweig, Hagens Berman Sobol Shapiro LLP, New York

Defendants: Jeffrey R. Burke, Winston & Strawn, New York

Related Court Documents: Plaintiffs’ memorandum in opposition to motion to dismiss: 2013 WL 170923 Defendants’ memorandum in support of motion to dismiss: 2012 WL 6703265


SETTLEMENT/MERGER-RELATED ISSUES

BofA shareholders hold out, win $62.5 million pact over Merrill mergerBank of America shareholders in Delaware who strongly opposed a tentative $20 million global settlement of derivative suits that challenged the bank’s subprime rescue merger with Merrill Lynch & Co. have won a Manhattan federal judge’s approval of a $62.5 million deal resolving the litigation.

REUTERS/Tim Chong

The suits said BofA shareholders who backed the merger didn’t know that Merrill was well on its way to an eventual $15.8 billion fourth-quarter loss

and was paying $3.6 billion in bonuses for 2008.

In re Bank of America Corp. Securities, Derivative & Employee Retirement Income Security Act Litigation, No. 09-MD-2058, order and final judgment entered (S.D.N.Y. Jan. 24, 2013).

After a Jan. 11 hearing U.S. District Judge P. Kevin Castel of the Southern District of New York, who is overseeing myriad lawsuits over the controversial merger, approved the revised settlement of all derivative litigation filed on behalf of Bank of America.

His order, entered Jan. 24, released only the derivative charges of breach of fiduciary duty brought against the BofA officers and directors in both Delaware and New York.

COLLUSIVE?

The settlement negotiations spotlighted tensions between New York-based plaintiff lawyers — who had agreed last May to a proposed $20 million settlement — and Delaware attorneys who contended that that initial pact was “grossly unfair.”

In a Chancery Court action, the Delaware-based plaintiff lawyers said the $20 million

offer was the result of a “collusive reverse auction” in which BofA sought out the plaintiff group with the lowest settlement bid so it could pull the rug out from under the other plaintiffs’ suits with a low-ball global pact.

Even though the Delaware plaintiffs filed suit in the Chancery Court rather than in New York, the proposed settlement of all derivative litigation would end their suit as well. They unsuccessfully asked the Delaware court to enjoin the New York settlement.

If the original $20 million derivative settlement had been approved by Judge Castel, they said, the Delaware litigation — which had survived a motion to dismiss and was ready to go to trial in the Chancery Court with strong claims — would have been dismissed along with all other derivative suits.

A statement released by Chimicles & Tikellis, one of the lead law firms representing the Delaware plaintiffs, said-”the revised settlement delivers substantial value to Bank of America, representing a more than three-fold increase over the original settlement.”

Since the suits were brought on behalf of BofA, the settlement money will be returned to the corporate coffers — rather than individual shareholders — and theoretically boost the stock price by making the company more valuable.

2 BAILOUTS

All the lawsuits faulted Bank of America for not revealing, prior to its shareholders’ vote on the merger in December 2008, that Merrill was in deep financial trouble as a result of heavy gambling on subprime mortgage-backed securities that would topple the financial services industry.

The suits said BofA shareholders who backed the merger didn’t know that Merrill was well on its way to an eventual $15.8 billion fourth-quarter loss and was paying $3.6 billion in bonuses for 2008.

The takeover forced Bank of America in January 2009 to get two federal bailouts and contributed to a 93 percent drop in its share price over six months.

THE RIGHT OF WAY

Shareholders filed suits on behalf of the company in New York, where BofA is based, and in Delaware, where it is incorporated, alleging the merger and bailouts were a breach of the BofA directors’ and officer’s fiduciary duty.

The Delaware suits were consolidated in the Chancery Court. But before the case went to trial, it was stayed because of the possible $20 million settlement in the multidistrict litigation in New York before Judge Castel.


The New York litigation included suits alleging that BofA officers and directors violated federal securities laws by hiding the bad news about the Merrill merger plan and that investors were blindsided and lost money when the market learned the truth.

According to court records, those New York securities fraud suits were settled separately last September for $2.43 billion, with BofA — rather than its insurers — footing the bill.

A SETTLEMENT, WITH OBJECTIONS

Settlement talks between the New York derivative plaintiffs and BofA produced the tentative $20 million pact to resolve all derivative claims, but the Delaware plaintiffs vehemently objected.

They said the proposed settlement was grossly unfair and inadequate because it would release all defendants for what amounted to 0.4 percent of the estimated $5.8 billion in derivative claims and 4 percent of the total of $500 million in available insurance money.

The Delaware plaintiffs also accused the New York plaintiffs of being inadequate representatives of the derivative shareholders and said they had no idea of the true value of the claims they were about to release so cheaply.

Last November Judge Castel agreed to hold hearings on the objections.

After several conferences in December, he held a hearing Jan. 9 to discuss revisions to the settlement and then held a final hearing Jan. 11 during which he approved the $62.5 million pact.

According to the Chimicles & Tikellis statement, at the Jan. 11 hearing, BofA lawyers commended counsel for the Delaware plaintiffs, “who in our view … are principally responsible for the increase in the cash component of the settlement.” WJ

Attorneys:Plaintiffs (Delaware): Pamela Tikellis, Chimicles & Tikellis, Wilmington, Del.

Plaintiffs (New York): Max Berger, Bernstein Litowitz Berger & Grossmann, New York

Related Court Documents: Delaware plaintiffs’ reply brief in support of injunctive relief: 2012 WL 2169579

BREACH OF DUTY

Derivative lawsuit against tech company put on hold An Atlanta federal judge has stayed a derivative class-action lawsuit alleging top executives at Ebix Inc. made false and misleading statements concerning the technology company’s net income and its purported organic growth.

Throughout 2009 and 2010 the management of Ebix, a supplier of software and e-commerce solutions to insurance and financial industries, assured investors that its internal controls and accounting procedures were viable, according to the September order.

Ebix officials said organic growth was above 10 percent, and that the company could expect to see continued low tax rates for years to come due to investments in foreign markets, according to the order.

But the long, tortured corporate history the shareholders lay out in their securities complaint alleges the company was really stagnating, and the individual defendants repeatedly misled analysts about the company’s billing, taxation and accounting practices, the order said.

Last fall, the U.S. Securities and Exchange Commission also launched an investigation into Ebix’s accounting practices and public statements to shareholders.

In the derivative action, Spagnola alleges that the defendants have been aware of Ebix’s accounting irregularities and its “lack of adequate internal controls” over financial reporting since at least March 2010.

Despite this knowledge, Spagnola says, the defendants continued to announce and affirm Ebix’s materially misleading financial reports.

Judge Story said all parties in the derivative action will meet and confer regarding future case scheduling upon the completion of expert discovery in the securities action. WJ

Related Court Documents: Stay order: 2013 WL 328217 Complaint: 2013 WL 228479

Spagnola v. Bhalla et al., No. 13-00062, 2013 WL 328217 (N.D. Ga., Atlanta Div. Jan. 23, 2013).

Gilbert C. Spagnola sued on behalf of Ebix, alleging the misconduct of the firm’s directors and officers has caused substantial harm to the company, including costs and expenses incurred from both a securities class-action suit and a separate investigation by the federal government.

U.S. District Judge Richard W. Story put the derivative case on hold “in the interest of judicial economy” pending the conclusion of expert discovery in the related securities class-action that he is overseeing in the Northern District of Georgia. In re Ebix Inc.Sec.Litig., No. 1:11-02400, 2012 WL 4482798 (N.D. Ga., Atlanta Div. Sept. 28, 2012).

In September Judge Story ruled that shareholders in the securities action pleaded their case with enough specificity to survive the heightened pleading standards of the Private Securities Litigation Reform Act of 1995.

Congress passed the PSLRA to weed out nuisance securities suits by requiring plaintiffs to back up their claims in federal court with enough specifics to pass a threshold test before they could begin to take discovery.

Under those standards, Judge Story found in the securities suit that the plaintiffs showed that Ebix CEO Robin Raina and CFO Robert Kerris failed to discover or recklessly disregarded deficiencies in the company’s internal controls and stagnant growth, and that these problems contributed to the loss of stock value.


BREACH OF DUTY

Investor wants Transocean execs to pay for Deepwater Horizon spillOfficers and directors of Transocean Ltd. are facing a shareholder lawsuit for breach of fiduciary duty, waste of corporate assets and unjust enrichment over the explosion and massive oil spill at the company’s Deepwater Horizon oil rig in the Gulf of Mexico in April 2010.

REUTERS/U.S. Coast Guard/Handout

Fire boat response crews battle the blazing remnants of the offshore oil rig Deepwater Horizon in the Gulf of Mexico April 21, 2010. A shareholder of the rig owner, Transocean Ltd., says the company’s failure to exercise proper oversight of its operations led to the disaster.

Richardson et al. v. Newman et al., No. 2013-623, complaint filed (Tex. Dist. Ct., Harris County Jan. 7, 2013).

Margaret C. Richardson, trustee of the H. and M. Richardson Revocable Survivor’s Trust, claims a dozen board members, including President and CEO Steven L. Newman, failed to exercise proper oversight of Transocean’s operations. She says this failure led to the disastrous spill that has ravaged the company’s finances and left its reputation in tatters.

According to the complaint filed in Texas’ Harris County District Court, the Deepwater Horizon, leased by nonparty operational partner BP plc, exploded and caught fire April 20, 2010, mainly due to poorly trained crew members and inadequate emergency equipment.

The fire and explosion killed 11 crew members and caused the rig to collapse, shearing a pipeline that continued spewing hundreds of millions of gallons of oil into the Gulf for

months. The rig’s blowout preventer, an emergency valve-closing device made by Cameron International, failed to seal the well head, according to the complaint. made the blowout preventer.

Ecosystems in the Gulf of Mexico and Gulf Coast have been devastated, as has the fishing industry in the region, the suit says. Transocean has been exposed to hundreds of lawsuits stemming from the spill, as well as civil and criminal charges from federal government agencies, the plaintiff alleges.

The company recently agreed to plead guilty to a misdemeanor charge of violating the Clean Water Act and to pay $1.4 billion in criminal and civil penalties, the suit says. Its market capitalization has meanwhile been cut nearly in half, according to the complaint, from $29.6 billion the day before the tragedy to about $16 billion today.

“A horrible accident by all accounts, the Deepwater Horizon disaster is made worse

by the fact that it could and should have been prevented,” Richardson says.

A commission convened by President Obama to investigate the spill found the majority of the errors leading to the blowout could be attributed to Transocean management, according to the complaint.

Richardson says Transocean was aware of problems with blowout preventers on its rigs as far back as 2000 and was twice put on notice by the regulators in the United Kingdom in 2005 and 2006 about unusable or ill-maintained blowout preventer components.

Another rig in 2006 suffered a leak from a blowout preventer due to improper inspection and maintenance, according to Richardson, while two other Transocean rigs experienced accidents in 2009 — one of them remarkably similar to the Deepwater Horizon disaster — allegedly due to inadequate safety policies and improper training.

Despite Newman’s own claims to analysts during an August 2009 conference call that “a handful of blowout preventer problems” had been resolved, two other rigs experienced blowout preventer problems within two weeks of the Deepwater Horizon explosion, according to the complaint.

Richardson estimates Transocean has now lost billions as a direct result of the spill and will incur significant costs going forward, while its ability to raise capital or debt has been severely restricted.

She claims Transocean executives violated their duties to shareholders by failing to properly monitor risks at the drilling rigs while maintaining that safety was a prime concern. She also asserts the executives, who earned hundreds of thousands of dollars annually — or millions, in Newman’s case — should be forced to disgorge any compensation they earned while the alleged breaches were taking place.

Richardson demands a jury trial and proposed an order directing Transocean to reform policies and procedures and granting shareholders a vote on various areas of corporate governance.

She is also seeking unspecified damages from the individual defendants, as well as legal fees. WJ

Attorney:Plaintiff: Paul T. Warner, Cypress, Texas

Related Court Document: Complaint: 2013 WL 67116


EXECUTIVE COMPENSATION

No liability for gas firm directors who passed on tax-bonus savings planIn its first decision on the issue, Delaware’s high court has ruled that XTO Energy’s directors could not be sued for allegedly wasting the natural gas fracking company’s assets by awarding its officers bonuses that were not tax-deductible.

Freedman v. Adams III et al., No. 230-2012, 2013 WL 144638 (Del. Jan. 14, 2013).

The full Delaware Supreme Court affirmed a decision that the XTO board did not have to adopt a corporate charter provision saving $40 million in taxes on $130 million in bonuses it awarded to its officers.

The enbanc opinion said the board’s decision to give up the tax savings in favor of increased executive compensation flexibility was protected by the business judgment rule, which shields directors even if their actions end up costing the company money.

The ruling, which said the XTO directors could consider factors other than cost in making their bonus decisions, could complicate the task of shareholders who recently filed a new wave of suits challenging “wasteful” executive compensation awards.

Such compensation suits typically charge that the directors breached their fiduciary duties by ignoring company policies requiring compensation increases to be based on company performance and to abide by shareholder resolutions.

CONSTRAINED?

The suit by shareholder Susan Freedman charged that XTO’s directors did not adopt Internal Revenue Code Section 162(m), a commonly used corporate tax plan that would have made compensation of more than $1 million per year tax-deductible to each of its officers. She said the board did not want to be “constrained” by the limits of Section 162.

Freedman filed suit in the Delaware Chancery Court in 2008, claiming the company lost money by paying taxes on more than $130 million in bonuses to executives between 2004 and 2007.

But the XTO directors adopted a Section 162 plan in 2009 and agreed to be acquired by ExxonMobil in 2010, the Supreme Court opinion said. Texas-based XTO is incorporated in Delaware.

Freedman agreed to drop her suit in 2011, but she sought $1 million in attorney fees, claiming her action had benefited the company and all its shareholders by calling for the board to adopt the Section 162 plan, according to the Supreme Court opinion.

In Delaware, a plaintiff law firm that wins either a money judgment or a benefit, such as a corporate governance change, can petition the court to have the company pay a fee award in proportion to the size of the benefit.

The Chancery Court found that Freedman could not have proved that the directors’ initial decision to pass on the adoption of the Section 162

plan was a waste of assets. It rejected her fee request after finding that her lawsuit could not have benefited the shareholders because it was not meritorious when it was filed.

WASTEFUL?

On appeal to the state Supreme Court, Freedman argued that the XTO directors’ decision to forgo the tax savings under a Section 162 plan was outside the protection of the business judgment rule and exposed them to liability.

The Supreme Court disagreed.

The court said Freedman did not specifically allege that any of the bonuses paid to the XTO executives would have been tax-deductible if the company had a Section 162 plan.

The board indicated a Section 162 plan would constrain the directors in determining appropriate bonus levels, the opinion said.

“The decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment,” said Justice Carolyn Berger, writing for the court.

Even if the board’s decision “was a poor one for the reasons alleged by Freedman, it was not unconscionable or irrational,” the decision said in affirming the lower court.

INFERRING BAD FAITH?

In a blog posting, professor Larry Hamermesh, who heads the corporate law section of Widener University’s School of Law, said the board’s failure to explain why it changed its mind about the Section 162 plan might have been “enough, for pleading stage purposes, to support an inference that the board’s actions were in bad faith.”

“One of the recipients of the bonuses was the company’s CEO, who was also a member of the board,” Hamermesh noted. “The bonus payments to him were a self-dealing transaction — one perhaps well-considered and justified by an independent compensation committee, but one in respect of which the motives that implicate the duty of loyalty were present.” WJ

Attorneys:Appellant: Robert Goldberg, Biggs & Battaglia, Wilmington, Del.

Appellee: Raymond DiCamillo, Richards, Layton & Finger, Wilmington

Related Court Document: Opinion: 2013 WL 144638

See Document Section B (P. 34) for the opinion.


S&P is a global credit rating agency that rates debt issuances based on credit risk and financial stability of the issuer.

A mortgage backed security is backed by pools of mortgage loans whose principal and interest payments are distributed to investors with varying maturity dates, cash flows, and default risks.

A collateralized debt obligation is a security backed by pools of other debt securities, sometimes MBS, credit derivatives and/or other structured debt securities.

According to the complaint, S&P acts as an intermediary between issuers of debt securities and investors. It analyzes the securities from the issuer and rates them according to risk.

Investors rely on S&P’s ratings and use them to gauge the riskiness of securities for purchase. The ratings spare investors the costs associated with analyzing the credit risk of the securities.

S&P represented to investors that its rating system was objective and independent, the complaint says.

Between 2004 and 2007 S&P developed new analytical rating models that would more accurately rate securities based on the risks mortgage delinquencies and defaults posed. S&P, however, allegedly delayed, adjusted and limited updates to the ratings models to benefit its own business interests at the expense of the investing public.

The delay allegedly exposed a conflict of interest between S&P and issuers of securities during this period.

According to the government, S&P polled issuers to determine if the new models would cause S&P to lose profits and their market share. It worried, the complaint says, that if it rated securities lower than investment grade, issuers would move their business to Moody’s or Fitch.

For example, the suit alleges that Bear Stearns informed S&P that a new model S&P beta-tested for Bear would adversely affect its business with S&P. The complaint claims S&P subsequently delayed implementing the model.

By working with issuers on its rating systems, S&P’s ratings were artificially inflated to the benefit of issuers and the detriment of investors, the complaint asserts.

Moreover, the Justice Department asserts that S&P knew the housing market was collapsing while it continued to highly rate securities, thereby causing significant losses to investors who relied on the ratings.

In particular, the complaint says, S&P rated CDOs consisting of MBS highly even though S&P knew MBS were facing increased credit risks as a result of the bursting housing bubble.

Additionally, S&P allegedly knew issuers were liquidating their warehouses of CDOs as the MBS market collapsed, the government claims.

S&PCONTINUED FROM PAGE 1

REUTERS/Yuri Gripas

Acting U.S. Associate Attorney General Tony West speaks next to U.S. Attorney General Eric Holder (L) at a Feb. 5 news conference to announce a major financial fraud enforcement action against Standard & Poor’s at the Justice Department in Washington.

The complaint asserts that S&P rated these securities high, knowing a higher rating allowed issuers to sell off the quickly deteriorating securities to unsuspecting investors.

In a press release issued by S&P Feb. 4, the company described the government’s allegations as “entirely without factual or legal merit.”

S&P points to the failure of everyone to foresee the financial crisis as evidence that it could not have defrauded investors and, like everyone else, it was merely responding to rapidly changing market conditions.

S&P said in the release that it is “committed to providing investors and the markets with the highest-quality ratings available and the tools to navigate an increasingly complex global financial marketplace.” WJ



NEWS IN BRIEF

GEORGIA MAN SETTLES INSIDER-TRADING CASE OVER AIRLINE MERGER

An Atlanta businessman has settled civil securities fraud charges accusing him of making nearly $160,000 in illicit profits from an insider-trading scheme involving AirTran’s 2010 merger with Southwest Airlines. The Securities and Exchange Commission alleged John M. Darden III, 73, a former consultant, made illegal trades after receiving insider information about the pending merger from a longtime board member of AirTrans Holdings Inc. Without admitting or denying the charges, Darden agreed to disgorge $159,200 in profits along with prejudgment interest of $9,300. He will also pay a civil penalty of an additional $159,200, the SEC said in a statement. The settlement is still subject to approval by the U.S. District Court for the Northern District of Georgia.

Securities and Exchange Commission v. Darden, No. 13-00138, proposed consent order filed (N.D. Ga. Jan. 17, 2013).


SEC SUES FORMER JEFFERIES EXECUTIVE FOR FRAUD

The Securities and Exchange Commission has filed a complaint in the U.S. District Court for the District of Connecticut against Jesse C. Litvak, a former executive of broker-dealer Jefferies & Co., for allegedly misleading customers while trading mortgage-backed securities. The complaint says Litvak purchased mortgage-backed securities from one customer to be sold to another customer at a higher agreed-upon price. Litvak allegedly misled the purchaser about the true price he paid for the mortgage-backed security. Jeffries as a result received a greater profit than he would have if the price had been accurately provided. The complaint was filed the same day the U.S. attorney for the District of Connecticut announced a New Haven federal grand jury had returned a 16-count indictment against Litvak. The indictment charged him with securities fraud, Troubled Asset Relief Program fraud and making false statements to the federal authorities.

Securities and Exchange Commission v. Litvak, No. 3:13-CV-00132, complaint filed (D. Conn. Jan. 28, 2013).


SOFTWARE FIRM’S SALE TO ORACLE DOESN’T COMPUTE WITH SHAREHOLDER

An investor in Eloqua Inc. has sued to stop Oracle Corp.’s proposed $871 million takeover of the software developer for what he says is a “grossly inadequate” price. Plaintiff Florin Ursu says Eloqua’s directors breached their fiduciary duty to shareholders by conducting a “lackadaisical three-week solicitation process” in which only three other potential strategic buyers were approached. After that, the Delaware Chancery Court complaint says, the directors agreed to negotiate exclusively with Oracle, eventually accepting an offer of $23.50 per share. But Ursu alleges this price undervalues Eloqua’s shares, noting that at least one industry analyst set a price target of $27 for the stock. Ursu seeks to enjoin the proposed transaction “unless and/or until the defendants cure their breaches of fiduciary duty.”

Ursu v. Payne et al., No. 8215, complaint filed (Del. Ch. Jan. 14, 2013).


STOCK RESEARCH EXEC IMPRISONED FOR INSIDER TRADING

The president of Oregon-based stock research firm Broadband Research LLC has been sentenced in New York federal court to a 51-month prison term. The Manhattan U.S. attorney’s office said Jan. 15 that John Kinnucan pleaded guilty last July to one count of conspiracy to commit securities fraud and two counts of securities fraud in the U.S. District Court for the Southern District of New York. Federal prosecutors said he unlawfully obtained insider information through sources at public companies from 2008 to 2010 and sold the information to his Broadband clients, which included hedge funds and money management firms. Kinnucan allegedly paid his sources “consulting fees” for insider information about their companies. According to prosecutors, Kinnucan paid one source $27,500 and put $25,000 into a business operated by another source. In addition to the prison term, Kinnucan will forfeit $164,000, prosecutors said.

United States v. Kinnucan, No. 12-CR-00163, defendant sentenced (S.D.N.Y., Foley Square Jan. 15, 2013).


CASE AND DOCUMENT INDEX

Freedmanv.AdamsIIIetal., No. 230-2012, 2013 WL 144638 (Del. Jan. 14, 2013) ...........................................................................................................13 Document Section B .....................................................................................................................................................................................................34

InreBankofAmericaAIGDisclosureSecuritiesLitigation, No. 11-6678, memoranduminoppositiontomotiontodismissfiled (S.D.N.Y. Jan. 14, 2013) .................................................................................................................................................................................9

InreBankofAmericaCorp.Securities,Derivative&EmployeeRetirementIncomeSecurityActLitigation, No. 09-MD-2058, orderandfinaljudgmententered (S.D.N.Y. Jan. 24, 2013) ................................................................................................................. 10

InreHoustonAmericanEnergyCorp.SecuritiesLitigation, No. 12-1332, motiontodismissfiled (S.D. Tex. Jan. 14, 2013) ...............................................8

Richardsonetal.v.Newmanetal., No. 2013-623, complaintfiled (Tex. Dist. Ct., Harris County Jan. 7, 2013) .............................................................. 12

SecuritiesandExchangeCommissionv.Darden, No. 13-00138, proposedconsentorderfiled (N.D. Ga. Jan. 17, 2013) ................................................. 15

SecuritiesandExchangeCommissionv.Litvak, No. 3:13-CV-00132, complaintfiled (D. Conn. Jan. 28, 2013) ............................................................... 15

Spagnolav.Bhallaetal., No. 13-00062, 2013 WL 328217 (N.D. Ga., Atlanta Div. Jan. 23, 2013) ................................................................................... 11

UnitedStatesv.Kinnucan, No. 12-CR-00163, defendantsentenced(S.D.N.Y., Foley Square Jan. 15, 2013) ................................................................... 15

UnitedStatesv.McGraw-HillCos., No. CV-13-00779, complaintfiled (C.D. Cal. Feb. 4, 2013) ..........................................................................................1

Ursuv.Payneetal., No. 8215, complaintfiled (Del. Ch. Jan. 14, 2013) ............................................................................................................................. 15

Weinsteinetal.v.McClendonetal., No. 12-465, oppositionbrieffiled (W.D. Okla. Jan. 23, 2013) .................................................................................... 7 Document Section A..................................................................................................................................................................................................... 19