Insecurities: Securities Fraud Roundup 3.30.11

March 30th, 2011. By LucyC

Top Securities Fraud Stories…

This week’s catch phrase—”False and Misleading Statements”…In our last edition of Insecurities, the recurring theme was ‘failure to disclose’—which led us to the Madoff Meter. Well, seems the idea of Bernie kind of stuck. So he’s back…

Though he never did really leave did he? Case in point, his yacht (or the ability to sell it in order to drum up some quid to help those who’d invested with him) was in today’s news—as well as the fact that three former Madoff employees lost their bid to have criminal charges dropped against them. The grounds for their request? That the charges should be dropped because the government had frozen their assets—assets they need to pay their lawyers. It didn’t fly with U.S. District Judge Laura Taylor Swain, who rejected the bid.

Enough about Bernie (or, more about him later)—starting off this edition of Insecurities is Elan Corporation…

Company:        Elan Corporation

Ticker:              ELN

Class Period:     Jul-2-09 to Aug-5-09

Date Filed:        Mar-1-11

Court:               Southern District of New York

Madoff Meter: 

The Allegations:

What’s that crashing sound I hear? Elan got hit with a securities class action lawsuit earlier this month over allegations that it and certain of its officers and directors made  false and misleading statements regarding the July 2, 2009 sale of the Company’s rights to its Alzheimer Immunotherapy Program (“AIP”) to Johnson & Johnson (“JNJ”).

The allegations stem from Elan’s failure to disclose that a provision in their definitive agreement with JNJ would violate the terms of an existing agreement between the Company and Biogen Idec Inc. (“Biogen”) related to their joint development and sale of multiple sclerosis drug Tysabri. Hey—maybe they just forgot about their deal with Biogen.

As a result of the violation, Elan was forced to renegotiate the terms of its sale of AIP, whereby JNJ paid $115 million less to Elan than previously agreed. Ouch.

Predictably, once Elan issued its press release disclosing the breach of their agreement with Biogen to the public, share prices of Elan common stock fell about 11%, according to the lawsuit, on abnormally high trading volume. That would make a difference to retirement funds, no doubt.

Next up: China Integrated Energy…

Company:                      China Integrated Energy, Inc.

Ticker:                           CBEH

Class Period:                  Mar-30-10 to Mar-16-11

Date Filed:                      Mar-26-11

Lead Plaintiff Deadline:  May-25-11

Court:                            Central District of California

Madoff Meter:

The Allegations:

Determining fact from fiction. This one involves China Integrated Energy—and allegations that it also issued materially false and misleading statements to investors, because it concealed related-party transactions.

The alleged facts—that the transactions between the Company and its officers and directors had the effect of funneling cash to these officers and directors. The alleged fiction—that the company’s Chinese SAIC filings misrepresented its financial performance, business prospects, and financial condition to investors.

So, the only people making the kind of money advertised were CBEH’s officers and directors. Not the investors. The alleged violations were uncovered in a report by Sinclair Upton, most of which CBEH denied. However, they did ‘fess up to having engaged in an undisclosed related party transaction with the CEO’s 22 year old son? Where’s Bernie? This could be a 3 or 4 on the Madoff meter…

On to Finisar Corporation…

Company:                     Finisar Corporation

Ticker:                           FNSR

Class Period:                  Dec-2-10 to Mar-8-11

Date Filed:                     Mar-15-11

Lead Plaintiff Deadline:    May-14-11

Court:                           Northern District of California

Madoff Meter:

The Allegations:

Was Finisar doing a little too much networking maybe? It’s also accused of issuing false and misleading statements resulting in investor losses.

Finisar provides optical subsystems and components that connect short-distance local area networks, storage area networks, longer distance metropolitan area networks, fiber-to-the-home networks, cable television networks and wide area networks. A growth industry one would figure—especially in emerging markets.

The complaint alleges that the company failed to disclose that its recent revenue growth was due to an oversupply of inventory in the market and that the Company would be unable to sustain its strong growth due to increased pricing pressures and a slowdown in business from China. As a result of defendants’ false statements, Finisar’s stock traded at artificially inflated prices during the Class Period, reaching a high of $43.23 per share on February 14, 2011.

Then, on March 8, 2011, after the market closed, Finisar issued a press release announcing its third quarter fiscal year 2011 results—reporting earnings of $18.8 million, or $0.22 diluted earnings per share, and revenue of $263.0 million. The Company further reported its fourth quarter 2011 revenues would be in the range of $235 to $250 million, lower than analysts’ estimates. On this news, Finisar’s stock fell $15.43 per share to close at $24.61 per share on March 9, 2011, a one-day decline of nearly 39%—it went straight through the floor and kept on going…

Top Securities Settlements…

Countrywide Financial

Madoff Meter:

A couple of settlements registering on our Madoff meter this month. I’d give this first one a 5. It involves Countrywide/BoFA singing from the subprime mortgage crisis hymn book. A federal judge approved a $601.5 million settlement of a class action suit against Countrywide Financial Corp. The settlement is reportedly one of the largest stemming from the subprime mortgage crisis.

Filed in 2007, the suit alleged that Countrywide, now part of Bank of America Corp, allegedly misled investors about its financial condition and lending practices, failing to disclose the extent of subprime loans it held. (Who did disclose the extent of their subprime exposure?)

However, all is not rosy in subprime settlement land. More than 30 investors, including large institutional shareholders such as the California Public Employees’ Retirement System, Teachers Retirement System of Texas and BlackRock Investment Management LLC, said in October they were opting out. That, in turn, allowed Bank of America to opt out of an earlier settlement in which it would have paid $600 million while KPMG LLP—Countrywide’s former auditors, would have had to pay $24 million.

Some reports indicate that there may be further opt-outs by institutional investors while other opt-out investors, including funds belonging to the states of Oregon and Michigan and retirees from Fresno, California, have already sued Bank of America separately.

About 970 institutional investors held stock in Countrywide during the period covered by the lawsuit.

Credit Suisse Group AG

Madoff Meter:

Credit Suisse Group AG has agreed to pay $70 million to settle recent US securities litigation over allegations that bank mislead investors about its subprime exposure and ability to limit losses. The settlement requires court approval. But it does register as a 4 on our Madoff meter without court approval. According to court papers, the settlement also covers several executives, including Chief Executive Brady Dougan. Further, the settlement allows recovery for investors who bought Credit Suisse’s American depositary shares, and U.S. investors who bought Credit Suisse securities in Switzerland, between February 15, 2007 and April 14, 2008.

According to reports by Reuters,on February 19, 2008, Credit Suisse took a $2.85 billion write down and suspended some traders who overstated the value of some assets. Its shares fell 6.6 percent that day. Then on March 20, Credit Suisse said write downs would contribute to a surprise first-quarter loss, and its shares fell 6.4 percent.

GT Solar International Inc

Madoff Meter:

And finally a settlement that doesn’t involve a bank. GT Solar International Inc, has said it will pay $10.5 million to settle two putative securities class action lawsuits related to the company’s initial public offering on July 24, 2008. Great start guys. What’s that expression—start as you mean to go on…

Under the terms of the proposed settlement GT Solar will pay $10.5 million into a fund. The $10 million will be made up by a $1 million contribution by the company while liability insurers make up the remaining $9.5 million. Well, they are only following established business practices…

Tags: Bernie Madoff, China Integrated Energy, Countrywide, Credit Suisse, Elan Corporation, Finisar, GT Solar, Insecurities, Securities Fraud, Securities Lawsuits, Securities Settlements

This was posted on Wednesday, March 30th, 2011 at 3:41 pm and is filed under Emerging Issues, Insecurities, Securities . Feel free to respond, or trackback. Read our comments policy.