Mutual Fund Scandals Beget Lawsuits

By Michael P. Bruno, Staff Writer

The mutual fund scandals have ushered in a wave of securities class-action suits. Since September, roughly a dozen mutual fund families (and associated companies and advisers) have been targeted alleging the same wrongdoing reported in news headlines recently and seeking cash settlements for wronged shareholders, according to Securities Class Action Services.

Defendants include Fred Alger Management Inc., Veras Investment Partners LLP, Alliance Capital Management LP, Canary Capital Partners LLC, Janus Capital Management LLC, AXA Financial Inc., Federated Investors Inc., Morgan Stanley, and Marsh & McLennan Co.s Inc. and its Putnam Investments, among several others.

The courts are just one of the venues where the repercussions of the mutual fund scandals are playing out. Congress is crafting a potential law to reform the industry. The Securities and Exchange Commission is drafting new regulations for greater fund oversight. State officials are investigating fund companies and advisers. And some investors have been moving money out of funds associated with all of the above.

The growing list of lawsuits, defendants, and plaintiffs lawyers is reminiscent of past business scandals where legions of lawyers and actors looked to get into the action, leaving few on the sidelines. In fact, of almost 10 lawyers contacted by SCAS Alert for comment, all declined to speak due to some connection to mutual fund litigation. By comparison, the lawsuits themselves are far from mute. They articulate allegations of market timing and late trading at fund companies, performed by favored investors, while insiders reaped financial rewards from the activity.

Take the Alger mutual funds lawsuit: "Defendants engaged in fraudulent and wrongful schemes that enabled certain favored investors to reap many millions of dollars in profit through secret and illegal timed trading," plaintiffs attorneys alleged when announcing the lawsuit. "In exchange for allowing and facilitating this improper conduct, the fund defendants received substantial fees and other renumeration for themselves and their affiliates to the detriment of plaintiff and other members of the class who knew nothing of these illicit arrangements. Specifically, Alger Management, as manager of the Alger Funds, and each of the relevant fund managers, profited from fees Alger Management charged to the Alger Funds that were measured as a percentage of the fees under management."

Before plaintiffs lawyers started competing in earnest to lead litigation against Alger, the company said it commissioned an "independent review" run by Zachary Carter, a former U.S. Attorney for the Eastern District of New York and a senior partner at Dorsey & Whitney. "We have 'zero-tolerance' for any behavior that does not meet the highest business and ethical standards that we expect of ourselves and that our clients deserve," Alger said in a statement Oct. 16.

Meanwhile, at the Federated family of mutual funds: "The defendants permitted certain favored investors to illegally engage in 'timing' of the Federated Funds whereby these favored investors were permitted to conduct short-term, 'in and out' trading of mutual fund shares, despite explicit restrictions on such activity in the Federated Funds' prospectuses," plaintiffs attorneys charged there. "The defendants permitted certain favored investors to illegally receive the prior day's price for orders placed after 4 p.m. This allowed ... defendants and other mutual fund investors who engaged in the same wrongful course of conduct to capitalize on post 4:00 p.m. information, while those who bought their mutual fund shares lawfully could not."

Federated retained the law firm Reed Smith LLP, as well as its previous counsel Dickstein Shapiro Morin & Oshinsky LLP, to conduct an internal investigation, according to a regulatory filing with the SEC. "Federated has committed to taking remedial actions when and as appropriate, including compensating the funds for any detrimental impact these transactions may have had on them," the company said.

Under these and other lawsuits, plaintiffs attorneys are now seeking mutual fund shareholders who can serve as lead plaintiffs for their class actions, and they could find a willing candidate pool of Main Street investors, among others. Individual investors aren't likely to bring arbitration claims related to the allegations involving rapid-fire trading, the Wall Street Journal said, because the damage to any one investor is relatively small, and it's hard to blame your broker for fund-company practices. Instead, these allegations are more likely to provide fodder for class actions, the Journal said.

Stephen Bainbridge, a professor of corporate and securities law at University of California - Los Angeles, opined to SCAS Alert that unlike past business scandals, such as Enron Corp. and its complicated special-purpose entities, the mutual fund wrongdoing will make for easier cases to litigate. The fund class actions revolve around two main allegations: self-dealing and straight up violations of securities laws.

"Both of these strike me as pretty valid claims," said Bainbridge, who authors an Internet diary at ProfessorBainbridge.com. The mutual funds "made statements in their prospectuses that they didn't keep." And insiders allegedly reaped the reward.

The professor predicted that the mutual fund industry will want to settle the lawsuits, and accompanying allegations against the industry, quickly. It's not good for business, particularly because of battered investor confidence, for mutual funds to have their names in the scandal section of newspapers each day.

"If I were advising mutual funds, I'd say, 'get out your checkbooks and start writing,'" Bainbridge said.

Several fund-related businesses are already setting aside money for lawsuits and settlements. In fact, the mutual fund scandals broke with the announcement of a settlement, rather than an investigation or indictment. On Sept. 3, N.Y. Attorney General Eliot Spitzer announced a $40 million settlement with Canary Capital, two Canary-related entities, and Edward J. Stern, the managing principal of those entities -- $30 million of which was restitution while $10 million was a penalty.

And according to the Journal, Bank of America Corp. and Alliance Capital Holding LP, both implicated in the scandal, already have set aside $290 million combined, but neither has broken out how much will go to litigation, research and restitution.

 Puncturing the Myths of Opting Out

By Bruce Carton, Executive Director

On Nov. 17, Judge Cote of the U.S. District Court for the Southern District of New York found in In re: WorldCom, Inc. Securities Litigation, No. 02 Civ. 3288 (DLC), that law firm Milberg Weiss had "engaged in an active campaign to encourage pension funds not to participate in the class action and instead to file individual actions with Milberg Weiss as their counsel."

The Court further found that while "there may be sound and good reasons for filing an individual action and choosing to opt out of the class action…certain communications with Milberg Weiss had resulted in confusion and misunderstanding of the options available to putative class members, and did not appear to have presented a forthright description of the advantages and disadvantages of both the individual action and class action options."

To address this confusion, the court ordered that the lead counsel in the class action was permitted to draft a curative notice to be provided to all members of the class and to each plaintiff who had filed an individual action.

The WorldCom case is only the latest development in an "institutional opt-out" trend that has gathered momentum this year. In July 2003, for instance, state pension funds in Ohio and California elected to opt out of the class action pending against AOL and filed individual actions in their own state courts. In addition, in September 2002, Ohio reportedly joined at least four other states--Illinois, Alabama, West Virginia and California--in opting out of the federal class actions against Enron and filing individual actions in state court. Betty Montgomery, then the Ohio Attorney General, stated at the time that pursuing recovery in state court gave Ohio "three important advantages… We improve the likelihood to recover real dollars, we move our case more quickly through the system, and most importantly, we have complete control over our lawsuit."

Does an institutional opt-out in favor of an individual state court action really provide institutions with these and other advantages? While there are theoretical arguments in support of individual actions, the advantages sought by institutions often do not materialize in practice. Indeed, both plaintiffs' counsel and defense counsel at the recent Institutional Investor Forum in New York agreed that individual state court actions make sense only in rare instances.

Larger, Quicker Recoveries?

In theory, an individual action may result in a larger recovery for an institution than the "pennies on the dollar" settlements that are not uncommon in class actions. Discussing his state's decision to opt out of the AOL case, current Ohio Attorney General Jim Petro explained, "The class-action lawsuit, you get peanuts at the end of it . . . The only guys who make money are the lawyers."

In reality, however, any settlement with a plaintiff in an individual action will almost certainly be tethered to, and come after, a settlement with the class plaintiffs. Boris Feldman, a securities litigator with the law firm Wilson Sonsini Goodrich & Rosati, explained at the Institutional Investor Forum that he would not settle an individual action first because the price-per-share offered to the plaintiff in the individual action would immediately become the floor for any settlement in the much larger class action. In addition, Feldman said he would expect plaintiffs' counsel in the class action to demand a "most favored nation"-type provision in any class settlement agreement, requiring the settling defendant to increase the amount of that settlement accordingly if it subsequently settled with an opt-out plaintiff for more money per share. Such a clause would make it very expensive for a defendant to settle on more favorable terms with an individual opt-out plaintiff.

Indeed, the plaintiffs' law firm Bernstein Litowitz Berger & Grossman, co-lead counsel in the WorldCom case discussed above, offers the following eye-opening bit of research: to its knowledge, no individual action has ever settled prior to a pending class action or settled on more favorable terms. To the contrary, the firm states that in its own high-profile cases such as Cendant Corp. and 3Com Corp., huge settlements were obtained and paid out to the class while individual class actions remain mired in litigation.

Moreover, unlike class actions where the enormous potential damages weigh in favor of, and promote settlements before, trial, the relatively insignificant potential damages presented by one individual action will make defendants more willing to risk a trial, with the additional prospect (and delay) of appeals should the plaintiff prevail.

Control Over the Lawsuit?

Theoretically, the opt-out plaintiff can chart its own course through an individual action, independent of the parallel class action. As the WorldCom case shows, however, this independence will be illusory where plaintiff's counsel represents a number of institutional opt-outs also filing state claims. In WorldCom, Milberg Weiss filed at least 47 individual actions on behalf of over 120 pension funds. Defendants were able to remove the individual cases to federal court and, over Milberg Weiss' objection, consolidate all of the cases with the class action for pretrial purposes. In any event, plaintiffs' counsel handling multiple opt-out cases will need to coordinate the efforts ongoing in each of the cases, and will be pulled by trustees for each plaintiff who have their own views and strategies on how to proceed. So much for independence.

No Stay of Discovery?

Unlike federal securities class actions subject to the Private Securities Litigation Reform Act of 1995 (PSLRA), state cases do not have a statutory stay (prohibition) of all discovery while a motion to dismiss is pending. In practice, however, defendants will fight hard and often be successful in obtaining a stay of discovery in the state cases, as well. It is highly inefficient to require the defendants' executives, for example, to give depositions in numerous cases on the same issues, and courts are inclined to coordinate discovery in the class and individual actions.

Even if early discovery is permitted, however, it will be a two-way street, presenting the individual plaintiff with significant discovery obligations and possible embarrassment that a class member will not face. Fund trustees and managers will themselves be subject to discovery by defendants. As Feldman stated at the Institutional Investor Forum, "if you like depositions, you'll love being an opt-out plaintiff." He further warned that the discovery requested in such cases is not limited to the security at issue, but also extends to the fund's performance and decision-making with respect to other investments.

Other Downsides of Individual Actions

Individual actions present other notable disadvantages:

• Significantly higher attorneys' fees: According to law firm Bernstein Litowitz, capable plaintiffs' counsel will need to charge an individual plaintiff a fee that is a substantial part of any recovery. In a class action, by contrast, fees as low as 10 to 15 percent are not uncommon, and any fees paid to class counsel will be scrutinized for fairness by the federal court.
• No 1934 Act claims: Plaintiffs filing an individual action in state court will not be able to assert a fraud claim under Rule 10b-5, the core claim of many securities cases. Plaintiffs will be limited to state claims and 1933 Act (non-fraud) claims only.
• Shorter limitations periods: Negligence-based claims under state law and 1933 Act claims have shorter limitations periods then fraud claims, which may eliminate or reduce the recovery available to individual plaintiffs.
• No reforms: Institutional investors have increasingly sought to effect corporate governance reforms as part of class action settlements. Individual actions are far less likely to achieve such results.
• State court forum: Because they are the forum for the overwhelming majority of securities fraud lawsuits, federal courts are more familiar with the substantive and procedural issues accompanying such suits than state courts.
• Undermining the process: The institutional opt-out trend has the potential, on a "macro level," to undermine the foundation of the securities-class action process established by the PSLRA--that institutions will assume the lead plaintiff role and control securities class actions. If a sufficient number of institutions choose to opt out of class actions, defendants in these cases will have no ability to achieve finality through a settlement, thus destroying the leverage and ability of institutions leading the class actions to effect favorable settlements.

There may well be a combination of circumstances in which, notwithstanding the disadvantages discussed above, an institutional opt-out makes sense. The current evidence suggests that in most situations, however, the time, effort, and expense of an institutional opt-out are not warranted.

TENTATIVE SETTLEMENTS

DPL Inc.

DPL has agreed to pay $145.5 million to settle a class-action lawsuit filed in August 2002 in U.S. District Court for the Southern District of Ohio. Investors who purchased the common stock of DPL during the period from March 30, 1999, through Aug. 14, 2002, are expected to be eligible to take part in the settlement.

The complaint alleges as follows: during the class period, defendants falsely represented that the company's portfolio of financial assets, comprising approximately 25 percent of DPL's total assets, were "highly diversified both in terms of geography and industry" and were a hedge against the company's energy business. Defendants failed to disclose that DPL's investment portfolio was highly concentrated in Argentine debt securities and other securities that were highly risky.

DPL is a diversified regional energy company with headquarters in Dayton, Ohio.

Sonic Innovations Inc.

Sonic Innovations has agreed to pay $7 million to settle a class-action lawsuit filed in October 2000 in U.S. District Court for the District of Utah. Investors who purchased the common stock of Sonic Innovations during the period from May 2, 2000, through Oct. 24, 2000, are expected to be eligible to take part in the settlement.

The complaint alleges that during the class period, defendants misrepresented the true status of its relationship with Starkey Laboratories Inc. In particular, concealing the fact that Starkey, one of Sonic Innovations' largest customers: (a) had millions of dollars worth of Sonic Innovations' product in its inventory that it could not sell; (b) was refusing to pay for product previously shipped to it by Sonic Innovations; and (c) considered the April 19, 1999, original equipment manufacturing agreement to be void because Sonic Innovations had materially breached the quality control provisions. Furthermore, defendants knowingly concealed the fact that they were informed prior to the initial public offering of stock that the IC-1 chips the company was shipping to Starkey were defective, which would jeopardize its contract with Starkey.

According to the company, Sonic Innovations designs, develops, manufactures and markets advanced digital hearing aids for hearing-impaired consumers. Capitalizing on its advanced understanding of human hearing, the company has developed patented digital signal processing, or DSP, technologies and embedded them in the smallest single-chip DSP platform ever installed in a hearing aid.

DISMISSALS

Merrill Lynch Analyst Suits

Eight class-action lawsuits filed against Merrill Lynch in 2002 in U.S. District Court for the Southern District of New York have been dismissed. The lawsuits sought to represent purchasers of the common stock of the following companies: eToys Inc., Homestore.com, iVillage Inc., Lifeminders, LookSmart Ltd., Openwave Systems Inc., Pets.com Inc. and Quokka Sports Inc.

These analyst suits alleged that defendants Merrill Lynch and analyst Henry Blodget issued favorable analyst reports to the public regarding the eight companies listed above when they knew or should have known that the positive recommendations were unwarranted and false. The complaint further alleged that the "buy" recommendation that the defendants issued was driven by efforts to attract lucrative investment banking business rather than by the company's fundamental merits, and that significant, material conflicts of interest prevented the defendants from providing objective analysis.

Merrill Lynch is a leading financial management and advisory company, with offices in 36 countries and private client assets of approximately $1.1 trillion. As an investment bank, it is a leading global underwriter of debt and equity securities and strategic advisor to corporations, governments, institutions and individuals worldwide.

Pediatrix Medical Group Inc.

A class-action lawsuit that was filed against Pediatrix Medical Group in June 2003 in U.S. District Court for the Southern District of Florida has been dismissed. The lawsuit was filed on behalf of investors who purchased Pediatrix common stock during the period from Feb. 7, 2002, through June 23, 2003.

The complaint alleged that defendants made statements that were materially false and misleading because they failed to disclose: (1) that the defendants engaged in fraudulent "upcoding" in its billing practices while telling the investing public that its billing practices were legitimate; and (2) Pediatrix materially inflated its class period financial results through inclusion of these fraudulent revenues.

Pediatrix is a Florida corporation with its headquarters in Sunrise, Fla. The company provides "physician services" to hospital-based neonatal intensive care units.

• Anicom Inc.
• California Amplifier Inc
• DOV Pharmaceutical Inc.
• Lumisys Inc.
• Pilot Network Services Inc.
• Reliance Acceptance Group Inc.
• Xylan Corp.

A federal judge finally signed off on the Securities and Exchange Commission's $1.4 billion settlement with 10 Wall Street firms and two former analysts over alleged research conflicts. U.S. District Judge William H. Pauley III in Manhattan called the settlement "fair, reasonable and adequate" and said it would provide an architecture for distributing $399 million to aggrieved investors who purchased stock tainted by overly bullish research, the Wall Street Journal reported. The 10 firms agreed in April to settle allegations that Wall Street analysts were disingenuously bullish about shares of their firms' investment-banking clients during the stock-market bubble of the late 1990s. But the deal, first announced in outline form last December, needed the judge's approval, which came in late October.

The pact also settles charges that at least two big firms, Citigroup Inc.'s Citigroup Global Markets unit, formerly Salomon Smith Barney, and Credit Suisse Group's Credit Suisse First Boston, improperly doled out coveted shares in initial public offerings to corporate executives in a bid to win banking business from their companies, the Journal said. The penalties included lifetime bans from the securities business for two former celebrity analysts, Jack Grubman of Salomon and Henry Blodget of Merrill Lynch & Co., who were charged with issuing fraudulent research reports and agreed to pay penalties of $15 million and $4 million, respectively. All the firms and the individuals consented to the charges without admitting or denying wrongdoing.

Federal prosecutors announced plans to retry investment banker Frank Quattrone on obstruction-of-justice charges, less than two weeks after their first attempt ended in a mistrial. A new trial may not begin until early next year, the Wall Street Journal reported. On Oct. 24, four weeks after the first trial began, jurors deadlocked 8-3 in favor of a conviction on two of three charges of obstruction and witness tampering. All were based on Quattrone's forwarding of a colleague's e-mail, advising members of his technology-sector investment banking unit at securities firm Credit Suisse First Boston to "clean up" their files. The e-mail referenced the firm's document-retention policy, which mandates that certain documents be retained while certain others can be eliminated.

Richard M. Scrushy was indicted on 85 counts of alleged corporate fraud in early November. The former head of health-care giant HealthSouth Corp. is expected to go to trial in January. He was charged with conspiracy, securities fraud, wire fraud, mail fraud, making false statements, money laundering and providing false certifications to securities regulators in violation of the Sarbanes-Oxley Act--the first such indictment under the landmark corporate governance law. Fifteen of Scrushy's former executives at HealthSouth have agreed to plead guilty and participate in the government's case, the Wall Street Journal reported.

Scrushy's defense attorneys will appeal a Delaware Chancery Court ruling in early December ordering Scrushy to repay in cash a $25 million loan from the firm, even though the company had allowed him to repay the debt with HealthSouth stock, Dow Jones Newswires reported. At the same time, they will also ask the court to unlock up to $75 million of Scrushy's assets that were frozen. A Securities and Exchange Commission freeze on Scrushy's assets was lifted in the spring when a federal court judge ruled the agency failed to prove Scrushy was involved in fraud. But his assets were frozen again this fall after he was indicted by federal prosecutors. Scrushy has pleaded not guilty to the indictment and has launched a vigorous public relations and legal defense against the charges.

Former Enron Corp. Chairman and Chief Executive Kenneth L. Lay agreed in early November to turn over personal and corporate documents to the Securities and Exchange Commission, which is investigating the bankrupt Houston energy company he headed. Lay had resisted giving up the documents for more than a year, contending that surrendering them would violate his Fifth Amendment right against self-incrimination, the Associated Press reported. Under an agreement reached between the SEC and Lay and approved by U.S. District Judge Royce Lamberth, the SEC can use any leads derived from the documents for any law-enforcement purpose, including any future civil action it may bring against him.

The highest-ranking Enron executive charged to date is former Chief Financial Officer Andrew Fastow, who faces close to 100 criminal charges, including fraud, money laundering, conspiracy and obstruction of justice, the AP said. Fastow has pleaded innocent and is free on $5 million bond as he awaits trial in April. In August 2002, Michael Kopper, managing director under Fastow of Enron Global Finance, pleaded guilty to money laundering and conspiracy and agreed to cooperate with federal prosecutors in what one called a substantial breakthrough in the investigation.

Meanwhile, Lay and Jeffrey Skilling, who had also served as chief executive at Enron, were negligent in their failure to flag the energy trader's use of questionable accounting techniques, according to a bankruptcy court-appointed examiner's final report. Both men, neither of whom has been charged criminally for their role in the company's downfall, breached their fiduciary duties by failing to "provide adequate oversight of Enron's use of" special-purpose entities, or SPEs, which Enron used to move debt off its books, according to Neal Batson's final report, Dow Jones Newswires reported in late November.

Enterasys Networks Inc. in mid-October agreed to pay approximately $17.4 million in cash and to distribute shares of common stock with a value of $33.0 million, and to adopt corporate governance changes to settle all outstanding shareholder litigation against the communication-network provider. The company said the agreement resolves all claims made in six class-action lawsuits filed in the U.S. District Court for the District of New Hampshire against Enterasys and former officers in 2002, which were later consolidated into a single class action, as well as shareholder derivative actions filed in New Hampshire and Delaware.

Legal woes have been inducing several corporate giants to include corporate-governance changes in court settlements this year, including WorldCom Inc., Siebel Systems Inc., Computer Associates International Inc., Homestore Inc., Hanover Compressor Co., and Sprint Corp. The reforms come after each has been targeted in court by institutional investors angry after two years of corporate scandals.

SEC Approves Corporate Governance Listing Standards for NYSE and Nasdaq

The SEC in early November finally approved similar packages of new corporate-governance standards for issuers listed on the New York Stock Exchange and the Nasdaq Stock Market. The stock markets had first proposed the new rules more than a year ago. The SEC had said it delayed approval because it was working to harmonize the rules from the two markets.

"These rule changes are at the core of a broad movement by our markets to enhance the corporate governance practices of the companies traded on them and I congratulate the NYSE and the [National Association of Securities Dealers, Nasdaq's parent] for their efforts," SEC Chairman William H. Donaldson said in a statement at the time. "Investors will recognize significant benefits from these actions today and long into the future."

The new rules require that the board of directors of each listed company comprise a majority of independent directors. Independence is defined, in part, as having not worked (including immediate family members) at the company in the prior three years. In an example of harmonizing the two packages, the Big Board had originally proposed a five-year period but later cut it to three years, matching the Nasdaq's proposal.

Another new rule mandates that directors and their family members cannot receive more than $100,000 a year in direct compensation excluding their director pay and other compensation for previous employment, such as deferred pay or pension.

In general, issuers must adhere to the new standards by their first annual meeting after Jan. 15, 2004, or by Oct. 31, 2004.

In late June, the SEC approved a major new requirement from the two markets' corporate-governance packages regarding shareholder approval of most equity-based compensation plans. In October, the same was approved for the American Stock Exchange. Last month, the agency announced approval of similar new rules at several regional stock markets, including Boston, Chicago, Philadelphia, and the Pacific Exchange.

A recent study by Institutional Shareholder Services, using the ISS definition of independence, revealed a significant increase in the number of companies with majority-independent boards since 2001. In the two-year period between July 3, 2001, and July 3, 2003, the percentage of companies with a majority of independent directors rose from 61 percent to 74 percent, while the percentage of S&P 500 companies with majority-independent boards increased from 88 percent to 92 percent.

AmeriCredit Insider-Trading Probe Ends with $500,000 in Penalties

The Securities and Exchange Commission settled its insider-trading probe into automobile finance company AmeriCredit Corp. in early November with penalties totaling around $500,000, including $100,000 from the Texas company for failing to stop at least one person from improperly trading, according to SEC and company statements.

The settlement came after AmeriCredit announced in late September that it had offered a deal to the agency, including the $100,000 fine for being a "control person" of the employees. AmeriCredit said at the time it thought the SEC would accept the offer; five weeks later the agency announced a settlement along those lines.

The settlement calls for:

• Former Assistant Vice President Thomas M. Laker of Fort Worth, Texas, to disgorge $110,172 in illicit profits, plus prejudgment interest of $7,642, and pay a civil penalty of $110,172
• Senior Vice President John R. Gentry III of Stanley, N.C., to disgorge $43,600 in losses avoided, plus prejudgment interest of $2,831, and a pay a civil penalty of $43,600
• Former Senior Vice President James M. Adelt of Grapevine, Texas, to disgorge $41,763 in losses avoided, plus prejudgment interest of $2,711, and pay a civil penalty of $41,763
• Former Vice President Michael W. Morris of Fort Worth, Texas, to disgorge $11,016 in losses avoided, plus prejudgment interest of $715, and pay a civil penalty of $11,016; and
• Former Assistant Vice President Keith A. Cyr of Mansfield, Texas, to disgorge $10,393 in losses avoided, plus prejudgment interest of $674, and pay a civil penalty of $10,393.

The SEC alleged that in the ordinary course of their duties at AmeriCredit, the defendants obtained material nonpublic, "unfavorable" information about AmeriCredit's financial performance for the last quarter of 2001. Each of them then sold AmeriCredit stock between Jan. 2 and Jan. 10, 2002. On Jan. 10, 2002, AmeriCredit announced its earnings and the stock dropped, so the defendants "fraudulently" avoided losses they would have otherwise incurred. Also, one unidentified employee sold the stock short before the announcement and earned "illegal" trading profits, the SEC said.

On top of that, the SEC asserted that AmeriCredit knew or recklessly disregarded that Cyr, one of the employees who allegedly engaged in the insider trading, would make such trades. Specifically, the SEC claimed that AmeriCredit was aware of a sale of AmeriCredit shares Cyr made on Jan. 2, 2002, through a brokerage account that AmeriCredit set up for him and monitored in connection with AmeriCredit's employee stock option program. Cyr again traded on Jan. 4, and since the company failed to take steps to stop it, it was liable as the "control person," the SEC said.

All five individuals and the company neither admitted nor denied the allegations under the settlement. AmeriCredit said in September when it announced the deal that it had adopted tighter restrictions for employees who trade in its securities, including stricter blackout periods and defined trading windows for a broader group of employees.

OK AG Temporarily Drops Charges Against Ebbers

Oklahoma Attorney General Drew Edmondson has dropped criminal charges he brought against former WorldCom Inc. chief executive Bernard Ebbers to keep with an arrangement Edmondson struck with federal prosecutors in New York who are targeting the scandal-plagued telecommunications company.

Edmondson said he plans to refile his charges against Ebbers by next March 31, but was forced to drop them temporarily under his agreement with the federal officials after Judge James Paddleford twice declined to delay a Dec. 1 preliminary hearing in the case. The Oklahoma attorney general had hoped to delay the preliminary hearing to avoid a conflict with the scheduled Feb. 1 trial in New York of Scott Sullivan, former WorldCom CFO.

"We have an agreement with United States Attorney James Comey that we will not call any witnesses in our case until those people have testified in Scott Sullivan's federal trial," Edmondson said, according to the Associated Press. "I intend to honor that agreement. This dismissal is purely a strategic move, and I have every intention of refiling these charges early next year."

The Oklahoma attorney general filed criminal charges on Aug. 27 against WorldCom and six of its former executives, including Ebbers. Oklahoma alleged the defendants' conduct with respect to the company's now well publicized accounting irregularities constituted criminal violations of the Oklahoma Securities Act. But similar allegations had been under investigation by the U.S. Attorney's Office for the Southern District of New York and the Securities and Exchange Commission since June 2002. The federal officials quickly expressed displeasure; both immediately issued press releases making it clear that Oklahoma's action had blindsided them and expressing hope that their ongoing cases would not be jeopardized. [SCAS Alert, October 2003]

Edmondson's case has been largely hamstrung by an October agreement he made with Comey, the Wall Street Journal said. That deal stated that Edmondson wouldn't seek testimony from the four less senior former WorldCom executives crucial to the prosecution of both Sullivan and Ebbers. The four--Buford Yates, David Myers, Betty Vinson and Troy Normand--have pleaded guilty to federal charges of financial fraud.