SEC Fraud

There are a lot of SEC filing forms for almost anything you could possible think of but there aren’t many that regular folks should be concerned with. Here are all the SEC forms, but when it comes to the major forms there are only a handful you need to be aware of.

10-Q: The 10-Q is a quarterly financial report, it’s filed three times a year (the fourth of these filings, which is the last quarter in the company’s fiscal year, is the 10-K).
10-K: The 10-K is the annual financial report.
8-K: The 8-K is a form that is filed as needed and is a “current report” of the company’s status. It’s filed anytime they need to announce major events that shareholders should know about. It’s very much like the 10-K and 10-Q except not regularly scheduled.
S-1/S-3: It’s the registration form filed by companies when they want to begin selling shares. The S-3 is the shorter version of the S-1 for companies that are already public.

Here is a full and comprehensive list of all the forms.

In a separate indictment released on Thursday, the Securities and Exchange Commission charged the same two ex-Bear Stearns fund managers with defrauding investors as the subprime mortgage market began to collapse. The civil indictment comes at the same time as the U.S. Justice Department’s criminal indictment.

I’m surprised it took this long to get an indictment considering the funds failed in the summer of 2007. The two men are charged with defrauding investors and costing them at least $1 billion through their actions. The main charge is that they covered up the problems with their investments and then tried to get their own money out before recovering investors money.

Sifting Through the SEC Charges of Two Former Bear Stearns Managers [Fox Business]

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Conclusion: According to the Company’s Form 10-Q for the quarterly period ended September 30, 2005, beginning in late June 2005, four securities class action complaints were filed on behalf of Company shareholders in the United States District Court for the Southern District of Indiana, against the Company and several of its officers. The complaints allege that the defendants concealed adverse information about the Company’s defibrillators and sold stock in violation of federal securities laws. The complaints seek class certification, monetary damages, and injunctive relief. On October 24, 2005, these complaints were voluntarily dismissed without prejudice.

The Complaint charges Guidant and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The Company develops, manufacturers, and markets products that focus on the treatment of cardiac arrhythmias, heart failure, and coronary and peripheral disease, including implantable defibrillator systems. The implantable defibrillator systems are used to detect and treat abnormally fast heart rhythms that could result in sudden cardiac death.

On December 15, 2004, Guidant management entered into a $24.5 billion merger deal with Johnson & Johnson. While the Company pointed to its defibrillator business as a key component of that deal, the Complaint alleges, it concealed from investors significant un-addressed product defect and liability issues of the Company’s implantable defibrillator product lines. Although life-threatening, defendants knew or consciously disregarded the fact that these mechanical problems were difficult to characterize and observe in implanted patients, making unlikely that any temporary physical disablement in patients would be attributed to device malfunction.

On June 17, 2005, the FDA issued a nationwide recall notification, impacting Guidant’s implantable defibrillators and cardiac resynchronization therapy defibrillators. Within that notification, FDA advised the public that the malfunction of Guidant’s devices could lead to a serious, life-threatening event for a patient. On this news, the Company’s shares fell $3.36, losing 4.5% percent of their value over the two trading days following the FDA recall, closing at $70.33, on a combined volume of over 25 million shares. As a result, Guidant investors lost over $1.09 billion in the value of their shares as a result of the surprise announcement of the FDA recall. Guidant’s stock price closed today at $63.90 on tremendous volume exceeding 49 million shares on further news and Company warnings concerning problems with another of Guidant’s implantable heart devices.

The Complaint alleges that during the Class Period, Guidant knew and concealed: (1) the serious health issues encountered by patients caused by the malfunctioning and defective nature of the defective devices; (2) the overwhelming threat to the deal Guidant had forged with Johnson & Johnson for the sale of the Company, including the threat to the ability of insiders to profit as a result of stock sales during the Class Period; (3) the lack and insufficiency of communications to healthcare providers and patients regarding the defective nature of the Company’s defibrillator products, even when adequate communications were essential to protect the lives of its implant patients; and (4) the troubling decision to await overwhelming negative media accounts before taking affirmative actions regarding the Company’s defibrillator products.

From Stanford Law School

Summary: According to the Press Release dated August 13, 2001, the lawsuit asserts claims under Section 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC thereunder and seeks to recover damages. The complaint further alleges that E-Loan, Inc. and certain of its officers and directors violated the federal securities laws by issuing and selling E-Loan common stock pursuant to the initial public offering without disclosing to investors that at least one of the lead underwriters and two of the other underwriters of the IPO had solicited and received excessive and undisclosed commissions from certain investors. The complaint further alleges that defendants violated the Securities Act of 1933 because the Prospectus distributed to investors and the Registration Statement filed with the SEC in order to gain regulatory approval for the E-Loan offering contained material misstatements regarding the commissions that the underwriters would derive from the IPO and failed to disclose the additional commissions and laddering scheme discussed above.

The Associated Press reports that the Securities and Exchange Commission has suspended trading of NeoTactix Corp., Graystone Park Enterprises Inc., and Younger America Inc. for 10 days pending an investigation into their finances and operations. The concern is that the stocks were being promoted through YouTube online videos and the companies had “inadequately disclosed their assets and financial conditions and are still under investigation. Trading suspensions can sometimes be followed by securities fraud charges.”

This is all part of a push by the SEC to decrease the amount of stock pump & dump email scams, which the SEC claims has decreased the number of complaints by 68% since the program started.

Source: AP

According to a Press Release dated November 29, 2001, the complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On or about August 13, 1999, Quest commenced an initial public offering of 4,400,000 of its shares of common stock at an offering price of $14 per share (the Quest IPO). In connection therewith, Quest filed a registration statement, which incorporated a prospectus (the Prospectus), with the SEC. The complaint further alleges that the Prospectus was materially false and misleading because it failed to disclose, among other things, that: (i) the Underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the Underwriters allocated to those investors material portions of the restricted number of Quest shares issued in connection with the Quest IPO; and (ii) the Underwriters had entered into agreements with customers whereby the Underwriters agreed to allocate Quest shares to those customers in the Quest IPO in exchange for which the customers agreed to purchase additional Quest shares in the aftermarket at pre-determined prices.

The SEC announced today that it would be investigating an unusual surge in “put” options trading leading up to last week’s monumental collapse of Bear Stearns. A “put” option is a bet that a stock will go down, so a significant uptick in the purchase of those prior to something as surprising as that collapse is very questionable. With a “put,” a trader buys the right to sell shares at a specified price. If the shares fall, then a profit can be made.

How usual was the trading? The number of open put options went from 167,439 to 465,820 and the SEC wants to know why. The prior week the number of open put contracts was around 155,000. The SEC wants to know if people had insider knowledge because that increase is phenomenal.

Source: Wall Street Jornal Law Blog

What is the Securities & Exchange Commission? The SEC’s mission is to “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” [Source: SEC.gov] In that role, the SEC investigates persons and organizations that may seek to violate basic laws and rules that govern the operation of the markets. A prime example of this is the latest release, dated March 20th, 2008, in which the SEC filed charges against AB Volvo for improper payments to Iraq under the U.N. Oil for Food Program, a charge that AB Volvo settled for $12.6M. The charges alleged that between 1999 and 2003, AB Volve made improper kickback payments and additional payments of nearly $8.5M.

The SEC was created with the Securities Exchange Act of 1934, which built upon the Securities Act of 1933, based on the findings of a committee that investigated the crash in 1929. (this was during the peak of the Great Depression) This act was meant to give investors, of which there were very few left, confidence that the markets would provide more reliable information and establish rules for honesty. The acts were based on these two basic premises:

• Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
• People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors’ interests first.

To learn more about the SEC, please review their about page.