Securities Litigation & Regulation

Westlaw Journal SECURITIES LITIGATION & REGULATION

Litigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 18, ISSUE 21 / FEBRUARY 19, 2013

CREDIT RATINGS WHAT’S INSIDE

SECURITIES FRAUD 7 Chesapeake Energy suit is Justice Department sues S&P over rating failures specific enough to move forward, investors say The Justice Department has sued Weinstein v. McClendon McGraw-Hill and subsidiary Standard & (W.D. Okla.) Poor’s Rating Services, alleging the 8 Oil company says investors claiming ‘fraud by hindsight’ companies’ credit ratings during the In re Houston Am. Energy housing bubble misled and defrauded Corp. Sec. Litig. (S.D. Tex.) investors. 9 News of AIG’s $10 billion suit caused stock drop, BofA United States v. McGraw-Hill Cos., No. CV-13- investors say 00779, complaint filed (C.D. Cal. Feb. 4, 2013). In re Bank of Am. AIG The Justice Department’s complaint, filed in REUTERS/Brendan McDermid Disclosure Sec. Litig. (S.D.N.Y.) the U.S. District Court for the Central District of The claims in this case arise from S&P’s credit California, seeks damages in excess of $5 billion SETTLEMENT ratings of mortgage backed securities and under the Financial Institutions Reform, Recovery 10 BofA shareholders hold out, collateralized debt obligations leading up to and Enforcement Act of 1989, Pub. L. No. 101-73. win $62.5 million pact over the recent global financial crisis purchased by Merrill merger FIRREA permits the government to recover financial institutions, including federally insured In re Bank of Am. Corp. Sec., large civil penalties for fraud perpetrated upon financial institutions. Derivative & ERISA Litig. federally insured financial institutions. CONTINUED ON PAGE 14 (S.D.N.Y.)

BREACH OF DUTY 11 Derivative lawsuit against tech company put on hold COMMENTARY COMMENTARY Spagnola v. Bhalla (N.D. Ga.) 12 Investor wants Transocean execs to pay for Deepwater SEC approves NYSE and Expanded use of FIRREA Horizon spill Nasdaq rules on means new challenges Richardson v. Newman compensation committees for financial institutions (Tex. Dist Ct.) and advisers Stephen Topetzes and Michael Ricciuti EXECUTIVE COMPENSATION of K&L Gates discuss the reach of the 13 No liability for gas firm Craig Miller and Rory Donald of Manatt, directors who passed Phelps & Phillips discuss the new rules Financial Institutions Reform, Recov- on tax-bonus savings plan approved by the Securities and Exchange ery and Enforcement Act and how it is Freedman v. Adams (Del.) Commission mandating independent being applied to civil actions against compensation committees for companies financial institutions over mortgages traded on the New York Stock Exchange sold to Fannie Mae and Freddie Mac. and Nasdaq. SEE PAGE 3 SEE PAGE 5 41392242 TABLE OF CONTENTS Westlaw Journal Securities Litigation & Regulation Credit Ratings: United States v. McGraw-Hill Cos. Published since September 1995 Justice Department sues S&P over rating failures (C.D. Cal.)...... 1 Publisher: Mary Ellen Fox Commentary: By Craig D. Miller, Esq., and Rory Donald, Esq., Manatt, Phelps & Phillips Executive Editor: Donna M. Higgins SEC approves NYSE and Nasdaq rules on compensation committees and advisers...... 3 Managing Editor: Phyllis Lipka Skupien, Esq. [email protected] Commentary: By Stephen Topetzes, Esq., and Michael Ricciuti, Esq., K&L Gates Expanded use of FIRREA means new challenges for financial institutions...... 5 Managing Desk Editor: Robert W. McSherry Senior Desk Editor: Jennifer McCreary Securities Fraud: Weinstein v. McClendon Chesapeake Energy suit is specific enough to move forward, investors say (W.D. Okla.)...... 7 Desk Editor: Sydney Pendleton Securities Fraud: In re Houston Am. Energy Corp. Sec. Litig. Westlaw Journal Securities Litigation & Oil company says investors claiming ‘fraud by hindsight’ (S.D. Tex.)...... 8 Regulation (ISSN 2155-0042) is published biweekly by Thomson Reuters. Securities Fraud: In re Bank of Am. AIG Disclosure Sec. Litig. Thomson Reuters News of AIG’s $10 billion suit caused stock drop, BofA investors say (S.D.N.Y.)...... 9 175 Strafford Avenue Building 4, Suite 140 Settlement/Merger-Related Issues: In re Bank of Am. Corp. Sec., Derivative & ERISA Litig. Wayne, PA 19087 BofA shareholders hold out, win $62.5 million pact over Merrill merger (S.D.N.Y.)...... 10 877-595-0449 Fax: 800-220-1640 Breach of Duty: Spagnola v. Bhalla www.westlaw.com Derivative lawsuit against tech company put on hold (N.D. Ga.)...... 11 Customer service: 800-328-4880 Breach of Duty: Richardson v. Newman For more information, or to subscribe, Investor wants Transocean execs to pay for Deepwater Horizon spill (Tex. Dist Ct.)...... 12 please call 800-328-9352 or visit west.thomson.com. Executive Compensation: Freedman v. Adams No liability for gas firm directors who passed on tax-bonus savings plan (Del.)...... 13 Reproduction Authorization Authorization to photocopy items for internal News in Brief...... 15 or personal use, or the internal or personal use by specific clients, is granted by Thomson Case and Document Index...... 16 Reuters for libraries or other users registered with the Copyright Clearance Center (CCC) for a fee to be paid directly to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923; 978-750-8400; www.copyright.com.

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By Craig D. Miller, Esq., and Rory Donald, Esq. Manatt, Phelps & Phillips

The Securities and Exchange Commission members meeting the appropriate With respect to the source of compensation, has approved new listing requirements independence requirements after review the company’s board should consider promulgated by the New York Stock of any conflicts of interest. whether the director receives compensation Exchange and the Nasdaq Stock Market from any person or entity that would impair relating to the composition of and oversight STANDARDS FOR COMPENSATION the director’s ability to make independent by compensation committees. The listing COMMITTEE INDEPENDENCE judgments about executive compensation at requirements, as required by the Dodd- Under the new NYSE and Nasdaq the company. In considering the director’s Frank Wall Street Reform and Consumer listing standards, companies must have affiliations with the company, boards must Protection Act, impose new obligations for compensation committees composed consider whether any relationships with compensation committees in connection with entirely of independent directors. The the company place the director under the retention and oversight of compensation NYSE and Nasdaq use both the general the direct or indirect control of the listed committee advisers. The rules also revise independence criteria already included in company or its senior management. If there the independence criteria for compensation the exchanges’ listing standards for boards is a direct relationship between the director committee members themselves. of directors, as well as new criteria specific to and members of senior management, it Public companies must focus on two compensation committees. may impair the director’s ability to make specific compliance dates in connection with evaluation of the new rules: Under the new NYSE and Nasdaq listing standards, • July 1, 2013 — the date for compliance with the new rules relating to companies must have compensation committees compensation, committee adviser composed entirely of independent directors. independence and adoption of any required compensation committee The new NYSE standards require that in independent judgments regarding executive charter amendments; and determining the eligibility of compensation compensation at the company. Notably, • The date of the first annual meeting committee members, the issuer’s board affiliate status due to stock ownership is not after Jan. 15, 2014, or Oct.31, 2014 — the of directors should consider the sources of an automatic bar on membership on the date for compliance with the new rules compensation of the director and whether compensation committee. relating to compensation committee the director is affiliated with the company. 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 Craig D. Miller (L) is co-chair of the financial services and banking practice atManatt, Phelps & Phillips serving on compensation committees could 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 still qualify as independent even if they offerings. Rory Donald (R) is an associate in the firm’s Los Angeles office. His practice focuses on accepted up to $120,000 of consulting corporate matters, including capital markets, mergers and acquisitions, and venture capital. or other advisory fees. Although affiliate status due to stock ownership is not an

© 2013 Thomson Reuters FEBRUARY 19, 2013 n VOLUME 18 n ISSUE 21 | 3 automatic bar on compensation committee Listed companies must ensure these investment companies, foreign private issuers membership, issuers must consider whether powers and provisions are incorporated into who meet certain disclosure requirements or such affiliate status would impair the compensation committee charters. Although smaller reporting companies. director’s judgment as a member of the compensation committees are required The new compensation committee stan- compensation committee. to evaluate the independence of their dards and compensation adviser standards compensation consultants, neither the NYSE will not apply to controlled companies, RULES ON COMPENSATION nor the Nasdaq prohibits a compensation certain issuers of securities future products ADVISERS committee from retaining an adviser or registered clearing agencies that issue The new NYSE and Nasdaq listing standards ultimately determined not to be independent. standardized options. both impose the following requirements on their compensation committees: Affiliate status due to TIMING • The compensation committee must stock ownership is not All listed companies on the NYSE and the have sole discretion in retaining an automatic bar on Nasdaq must comply with the compensation compensation advisers. committee adviser requirements by July 1, membership on the 2013. NYSE- and Nasdaq-listed companies • The compensation committee must compensation committee. be directly responsible for the appoint- will be required to comply with the new ment, compensation and oversight of listing standards on committee member independence by the earlier of the company’s compensation advisers. Furthermore, both the NYSE and Nasdaq say first annual meeting after Jan. 15, 2014, or compensation committees are not required • The issuer must provide funding for Oct. 31, 2014. In addition, public companies to undertake an independence analysis for the reasonable compensation of will have to certify compliance with the new consultants, counsel or other advisers whose compensation advisers. compensation committee rules to their role is limited to the following: • In considering a compensation adviser, respective exchanges. consultant or counsel, the compensation • Advising on broad-based employee committee must take into account the benefit plans that do not discriminate FUTURE STEPS following six criteria for independence: in scope, terms or operation in favor of Companies should work with their in-house executive officers; or 1. The adviser’s or the adviser’s firm’s and external counsel to ensure compliance provision of other services to the company. • Providing advice that either is not with the new compensation committee customized for a particular issuer or rules in the requisite timeframes. In many 2. Any business or personal relationships is customized based on parameters cases, companies will have to amend their between the compensation adviser and that are not developed by the adviser compensation committee charters and members of the compensation committee. and about which the adviser does not engage in an independence analysis for both 3. Any business or personal relationships provide advice. advisers and members of the compensation between the company’s executive officers committee. WJ and the compensation adviser or the EXEMPTIONS compensation adviser’s firm. The new standards will not apply to 4. The compensation adviser’s ownership companies already exempt from compen- of issuer’s stock. sation committee requirements, such as 5. The amount of fees received from the passive business organizations and issuers company by the compensation adviser’s whose only listed equity is preferred stock. firm, as a proportion of the firm’s revenue. The compensation committee member independence requirements will not apply 6. Conflict of interest policies and to limited partnerships, companies in bank- procedures of the compensation adviser’s ruptcy, registered open-end management firm.

By Stephen Topetzes, Esq., and Michael Ricciuti, Esq. K&L Gates

The broad effort by the United States to number of identified criminal statutes. It the Department of Justice revealed a new combat abuses believed to have caused also provides for large financial penalties and and broad interest in pursuing additional or contributed to the global credit crisis prescribes a longer limitations period than matters under FIRREA. They launched many features new uses of an old weapon: the other federal enforcement statutes. investigations and filed civil charges against Financial Institutions Reform, Recovery and several large banks, asserting practices Enforcement Act. The result is a changed related to mortgage origination, mortgage landscape for persons or entities facing FIRREA provides for servicing or foreclosure around the start of investigations or possible government claims large financial penalties the credit crisis harmed federally insured related to financial services. and prescribes a longer financial institutions. FIRREA was enacted in 1989 in the wake limitations period than In many cases, the claims under FIRREA are of the savings and loan crisis in the United other federal enforcement filed with companion civil claims under the States. It is a wide-ranging statute, with statutes. False Claims Act, which center on alleged elements of a sweeping government bailout damage to the United States flowing from and receivership program for failed savings federal mortgage insurance or another banks, a recast federal deposit insurance and For more than 20 years after its passage, federal guarantee. Recent large settlements regulatory scheme for thrift institutions, and the enforcement provisions of FIRREA between the United States and a number additional requirements concerning lending, were used infrequently. When they were of large financial institutions have each appraisals and public oversight. used, the government generally pursued contained a FIRREA component. Other Importantly, it also includes broad claims against persons or companies that significant actions are pending. These enforcement provisions conferring significant “victimized” a financial institution that had actions collectively seek or involve billions investigative powers on the U.S. Department been closed and placed into receivership. of dollars in fines and pose a substantial of Justice and permitting the United States to All of that changed after President Obama threat to financial services companies and bring civil charges against persons or entities launched an interagency Financial Fraud associated individuals. that violate, or conspire to violate, one of a Enforcement Task Force. Beginning in 2010, 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 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 this language. companies, boards of directors, broker-dealers, investment advisers, investment companies and FIRREA was historically applied generally 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 to claims against defendants (frequently regulators or attorneys general. He also has extensive experience handling complex securities litigation, individuals) whose alleged bad acts produced including regulatory or disciplinary proceedings, class-action lawsuits and arbitrations. Michael or contributed to the failure of a federally 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. insured financial institution. The language He has represented clients — as defendants, witnesses or victims — in federal and state criminal and of the statute permitted potentially broad securities enforcement matters and has handled a variety of state and federal civil and administrative interpretation because the enumerated investigations and proceedings across the country. predicate acts for claims under FIRREA

© 2013 Thomson Reuters FEBRUARY 19, 2013 n VOLUME 18 n ISSUE 21 | 5 include, among other matters, conduct In addition, the enforcement provision of grand jury — are subject to significant use proscribed by the federal mail and wire fraud FIRREA, 12 U.S.C. § 1833a, provides for restrictions. And, after criminal charges are statutes, which are broadly applied criminal substantial penalties. Maximum penalties filed, the government in criminal cases does provisions. are $1 million for each violation. Continuing not have the broad discovery rights that exist The Department of Justice has recently violations may produce greater fines — up to in civil practice. expanded its use of FIRREA dramatically. In $1 million per day or a total of $5 million. Still Longer limitations period particular, the government now says failures higher penalties may be imposed relative to conduct producing pecuniary gain for the The limitations period for enforcement by large financial institutions to appropriately claims under FIRREA is 10 years after the underwrite or service Federal Housing defendant or harming a U.S. government financial institution insurance fund. In those claim accrues, which is longer than the Administration-insured mortgage loans limitations period applied to other relevant warrant the maximum penalties permitted cases, the civil penalty may equal the amount of the pecuniary gain or loss attributed to the civil enforcement statutes. This lengthy under FIRREA. timeframe— and the potential to recover or impose substantial penalties related to The United States may be much more inclined such a long period — serve to enhance the to pursue civil claims under FIRREA than to seek attractiveness of FIRREA for government lawyers. to bring criminal charges for the same conduct. Broader application than the False Claims Act The government apparently intends to apply prohibited conduct. The high “per violation” Unlike the False Claims Act, which requires the enforcement provisions of FIRREA to and other civil penalties available under the underlying harm to involve government an increasing array of acts or practices by FIRREA mean large mortgage originators, monies, FIRREA has no such limitation. individuals or entities (including financial loan servicers and others whose conduct institutions) that are deemed to have might “affect” a federally insured financial The road ahead harmed or “affected” federally insured institution face potentially enormous The Department of Justice is using FIRREA financial institutions. Further, it is clear liabilities under FIRREA. in a way that expands the government’s that the government’s recent claims against Broad investigative powers, pretrial civil enforcement efforts relative to financial originators or servicers of FHA-insured discovery institutions. The potentially high penalties, mortgage loans reflect a willingness on the long limitations period and expanded part of the United States to “up the ante” FIRREA provides the government with fact-gathering ability conferred on the against financial institutions already facing extensive investigative powers. Under government seem to suggest FIRREA will federal scrutiny by folding claims under FIRREA, the government has broad ability remain a central part of the government’s FIRREA into actions that historically centered to subpoena documents and take testimony arsenal for the foreseeable future. on the False Claims Act or other statutes. in civil investigations. The availability of such pre-suit discovery tools distinguishes Whether these powers will be limited by Lower standard of proof, higher FIRREA from civil aspects of the False Claims the courts remains to be seen. Case law penalties Act and other civil statutes enforced by the interpreting FIRREA is limited. Among FIRREA authorizes the United States to Department of Justice. Of course, once other things, courts have yet to fully address seek to impose substantial civil remedies a complaint is filed asserting civil claims what it means to “affect” a federally insured against persons or entities who commit acts under FIRREA, the government can engage financial institution. As more defendants prohibited by 14 criminal statutes. Unlike in broad discovery under the Federal Rules begin to balk at the government’s aggressive efforts by the government to prosecute of Civil Procedure, including depositions, use of the statute, they may explore judicial crimes under those underlying statutes, written interrogatories and additional intervention as a means of limiting the which require proof “beyond a reasonable document requests. government’s use of FIRREA. The answers doubt,” the United States need only provided to those defendants may have Together, these pre- and post-suit discovery support its claims under FIRREA based on a significant consequences for financial powers may provide the government with “preponderance of the evidence.” The effect institutions and those who deal with them. more flexibility than that offered in criminal of this lower standard of proof is significant. WJ investigations. Although grand juries in The United States may be much more criminal cases have broad investigatory inclined to pursue civil claims under FIRREA power, the resulting grand jury materials — than to seek to bring criminal charges for the documents and testimony gathered by the same conduct.

6 | WESTLAW JOURNAL n SECURITIES LITIGATION & REGULATION © 2013 Thomson Reuters SECURITIES FRAUD to contribute only to the costs associated with drilling productive wells, while Chesapeake has to pay all costs associated with acquiring Chesapeake Energy suit is specific enough and exploring land, regardless of whether the land proves productive for drilling. to move forward, investors say This arrangement gave McClendon an incentive “to push the company into excessive Shareholders in the nation’s second-largest natural gas provider have told land acquisition and exploration costs … in an Oklahoma federal court that they have pleaded a sufficient case alleging order to maximize the potential upside of the company CEO violated federal securities law to overcome a defense productive wells,” the complaint alleges. motion to dismiss. OTPPB says that as details of the loans came to light through various news reports, the Weinstein et al. v. McClendon et al., stock price tumbled nearly 60 percent, from No. 12-465, opposition brief filed (W.D. a class-period high of $36 per share to $14.81 Okla. Jan. 23, 2013). per share. Aubrey K. McClendon, who co-founded The complaint purports to state claims Oklahoma City-based Chesapeake Energy against all the individual defendants and Corp. in 1989, and five current or former Chesapeake for violating Section 10(b) of the corporate officials allegedly withheld Securities Exchange Act by making untrue from investors that McClendon had taken statements about McClendon’s loans that $1.55 billion in loans from banks and deceived the investing public into paying private equity firms to cover his own stake in artificially inflated prices for common stock. company-owned wells, the suit says. The individual defendants also face a claim McClendon used the loans to help buy under Section 20(a) of the Exchange Act for himself a 2.5 percent stake in thousands of making false statements or failing to disclose wells the company has drilled since 2005 information about the loans while acting as and will drill up to 2015, according to the “controlling persons” of Chesapeake. complaint filed in the U.S. District Court for Moving to dismiss the suit Dec. 6, the the Western District of Oklahoma. REUTERS/Sean Gardner defendants argued that the plaintiffs have The shareholders say the loans created Chesapeake Energy Corp. CEO Aubrey McClendon, shown here, not “even attempted” to plead a specific, and the other defendants claimed the plaintiffs are “wholly a conflict between McClendon and unable to articulate a coherent theory of how and why the highly particularized fact giving rise to a defendants committed fraud.” Chesapeake’s shareholders because they possible inference of wrongdoing. required him to act in the best interests of his appointed lead plaintiff in July. The original The plaintiffs disagreed with this assertion in lenders, even if the action would be harmful complaint was filed in April by shareholders their Jan. 23 opposition brief. They say the to the company. Dvora and Steven Weinstein. failure to disclose McClendon’s loans violated Moving to dismiss the complaint, McClendon The OTPPB suit is brought on behalf of a generally accepted accounting principles, as and the other defendants claimed the proposed class of purchasers of Chesapeake’s well as SEC regulations. plaintiffs are “wholly unable to articulate common stock from April 30, 2009, to May 11, The defendants “knew or should have known” a coherent theory of how and why the 2012. The complaint says they suffered that McClendon’s loans had to be disclosed defendants committed fraud.” monetary damages caused by purchasing under these standards and regulations and They also said the suit does not identify any Chesapeake stock at allegedly inflated prices. created a conflict of interest, the brief says. specific statements that were allegedly false McClendon served as board chairman of The shareholders also say the defendants or misleading as required by the Private Chesapeake until June 21 but is still CEO. had a strong motive to conceal the details of Securities Litigation Reform Act, 15 U.S.C. § 78u. According to the OTPPB complaint, the loans and to misrepresent the company’s financial statements regarding the loans, But the shareholders claim they have Chesapeake instituted a “founders” program WJ pleaded enough particular facts to give rise in 2005 that permitted McClendon to according to the brief. to an inference of an intent to deceive. purchase up to a 2.5 percent ownership Attorneys: Plaintiffs: Joseph A. Fonti, Labaton Sucharow LLP, In their brief in opposition, they say the interest in all of Chesapeake’s working wells. New York; David Keesling, Richardson Richardson Boudreaux Keesling PLLC, Tulsa, Okla. defendants were in a position to know about The defendants concealed from the investing the loans, understand their materiality, and public that McClendon financed his purchase Defendants: Robert P. Varian, Kenneth P. Herzinger, M. Todd Scott, Alexander K. Talarides, Orrick, realize a failure to provide “complete and using $1.5 billion in loans from Chesapeake’s Herrington & Sutcliffe, San Francisco accurate information” about them would corporate lenders, principally EIG Global Related Court Documents: likely mislead investors. Energy Partners, the complaint says. Opposition brief : 2013 WL 271515 Motion to dismiss: 2012 WL 6211898 The Ontario Teachers’ Pension Plan Board, The plaintiffs contend the deal places Complaint: 2012 WL 5363573 a Chesapeake shareholder, filed the McClendon in conflict with shareholders See Document Section A (P. 19) for the brief in consolidated complaint Oct. 19 after being because the founders program obligates him opposition.

© 2013 Thomson Reuters FEBRUARY 19, 2013 n VOLUME 18 n ISSUE 21 | 7 SECURITIES FRAUD plug the well, the suit says. The company also disclosed for the first time that the Oil company says investors claiming Securities and Exchange Commission had been conducting a nonpublic investigation of ‘fraud by hindsight’ possible securities fraud since October 2010. A Texas oil and gas exploration company and its executives want a federal The stock closed at $2.25 a share. At one point during the class period, it traded as judge to shut down a shareholder lawsuit alleging they made false and high as $20.44, according to the complaint. misleading statements about the commercial viability of an oil well in South The suit says Houston American’s executives America that the company ended up plugging. knew or recklessly disregarded the falsity and misleading nature of the information they In re Houston American Energy Corp. “As a result of the defendants’ wrongful acts had been disclosing to the investing public to Securities Litigation, No. 12-1332, motion to and omissions, and the precipitous decline in inflate the stock price. dismiss filed (S.D. Tex. Jan. 14, 2013). the market value of the company’s securities, But the motion to dismiss says the suit fails Moving to dismiss the suit, Houston American the plaintiffs and other class members have to specify any allegedly false or misleading Energy Corp. CEO John F. Terwilliger and suffered significant losses and damages,” the statements as required by the Private CFO Jay Jacobs and four of the company’s complaint says. Securities Litigation Reform Act, 15 U.S.C. directors said the allegations are based Despite prior rosy representations about the § 78u. on a “classic, yet impermissible fraud-by- amount of oil in a well in Colombia, Houston hindsight theory.” American announced last March that there The defendants also note the fact that Houston American paid $5 million for a second test of the well’s commercial viability. The defendants said they had cautioned investors that there was no way to predict prior to drilling and testing “Houston American would not have incurred this additional expense if it really knew all whether the well was going to be successful. along, as plaintiffs allege, that there was ‘no oil’ in the well,” the motion says. The defendants said they had cautioned were delays and that conditions at the site The shareholders seek compensatory investors that there was no way to predict prevented sufficient testing, the suit says. damages and attorney fees. WJ prior to drilling and testing whether the well Houston American’s share price dropped Attorneys: was going to be successful. 35 percent, from about $11 to $7, in the wake Plaintiffs: William B. Federman, Federman & Sherwood, Dallas Houston American even expressly stated of the announcement, according to the suit. in press releases regarding the well that Defendants: Gerard G. Pecht, Fulbright & The company subsequently issued a series Jaworski, Houston; Peter A. Stockes and Mark “there is no assurance that we will locate of statements allegedly designed to bolster Oakes, Austin, Texas hydrocarbons in sufficient quantities to investor confidence, the complaint says. Related Court Documents: be commercially viable,” according to the Motion to dismiss: 2013 WL 271654 defendants’ Jan. 14 motion filed in the U.S. But the stock took a 36 percent hit April 19 Complaint: 2012 WL 5983290 District Court for the Southern District of when Houston American announced it would 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.

After 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.

In re Bank of America AIG Disclosure Securities Litigation, No. 11- normal period of time between when AIG discovered its claims and 6678, memorandum in opposition to motion to dismiss filed when it had to file a lawsuit. (S.D.N.Y. Jan. 14, 2013). The settlement talks were unsuccessful, and AIG filed the suit in August The shareholders say in a brief opposing a motion to dismiss their 2011, the plaintiffs’ brief says. securities fraud lawsuit that top BofA executives propped up the Nevertheless, the BofA officers knew from the beginning that troubled bank’s stock price by hiding “the largest individual investor AIG’s claims were meritorious and needed to be disclosed, claim of its kind against any financial institution in the United States.” but they intentionally deceived investors about the extent of the bank’s In 2011 BofA’s financial reports revealed a barrage of shareholder liability for subprime-related litigation, the plaintiffs say. 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. The shareholder plaintiffs allege that BofA executives knew about AIG’s Some of the lawsuits were filed against BofA and the two financial institutions it rescued as part of the federal government’s bank bailout: pending suit since January 2011. Countrywide Financial Corp. and Merrill Lynch & Co., the brief says. But BofA’s financial reports for the first three quarters of 2011 After the plaintiffs filed their second amended complaint, BofA and intentionally left out the “looming lawsuit” by insurance giant American its officers moved to dismiss it, claiming that they had no duty to International Group, and “shocked investors” dumped BofA’s shares specifically detail which lawsuits the bank faced. “when the truth was finally revealed,” the brief says. The defendants argued that under the heightened pleading standards Investors “hammered” BofA’s share price when it was revealed in of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u, the August 2011 that AIG had filed a $10 billion lawsuit against BofA plaintiffs failed to show that the BofA officers intended to injure the and its rescued banks over $28 billion in subprime mortgages they shareholders financially by purposely deceiving them about the AIG allegedly sold to AIG. BofA’s share price closed down 20.3 percent the claims. day after the suit was disclosed, the plaintiffs’ brief says. The plaintiffs, in their brief in opposition to dismissal, respond that The plaintiffs allege that BofA executives had known about AIG’s the $10 billion AIG suit is a significant financial event that had to be pending suit since January 2011. discussed, if for no other reason than to simply correct previous fiscal At that time, the plaintiffs say, AIG told BofA officers that roughly disclosures that estimated the bank’s liability. WJ 40 percent of the $28 billion in mortgages BofA, Countrywide and Attorneys: JPMorgan had sold it were “defective” and far below the represented Plaintiffs: Jason A. Zweig, Hagens Berman Sobol Shapiro LLP, New York value, resulting in a loss of more than $10 billion. Defendants: Jeffrey R. Burke, Winston & Strawn, New York While BofA and AIG were discussing a possible settlement, however, Related Court Documents: Plaintiffs’ memorandum in opposition to motion to dismiss: 2013 WL 170923 they entered into a secret “tolling” agreement that extended the Defendants’ memorandum in support of motion to dismiss: 2012 WL 6703265

© 2013 Thomson Reuters FEBRUARY 19, 2013 n VOLUME 18 n ISSUE 21 | 9 SETTLEMENT/MERGER-RELATED ISSUES A statement released by Chimicles & Tikellis, one of the lead law firms representing BofA shareholders hold out, win the Delaware plaintiffs, said-”the revised settlement delivers substantial value to Bank $62.5 million pact over Merrill merger of America, representing a more than three- fold increase over the original settlement.” Bank of America shareholders in Delaware who strongly opposed a tentative $20 million global settlement of derivative suits that challenged the bank’s Since the suits were brought on behalf of BofA, the settlement money will be returned subprime rescue merger with Merrill Lynch & Co. have won a Manhattan to the corporate coffers — rather than federal judge’s approval of a $62.5 million deal resolving the litigation. 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

REUTERS/Tim Chong paying $3.6 billion in bonuses for 2008.

In re Bank of America Corp. Securities, Derivative & Employee Retirement Income The suits said BofA shareholders who backed Security Act Litigation, No. 09-MD-2058, the merger didn’t know that Merrill was well on its order and final judgment entered (S.D.N.Y. way to an eventual $15.8 billion fourth-quarter loss Jan. 24, 2013). and was paying $3.6 billion in bonuses for 2008. After a Jan. 11 hearing U.S. District Judge P. Kevin Castel of the Southern District of New York, who is overseeing myriad lawsuits offer was the result of a “collusive reverse The takeover forced Bank of America in over the controversial merger, approved the auction” in which BofA sought out the January 2009 to get two federal bailouts and revised settlement of all derivative litigation plaintiff group with the lowest settlement bid contributed to a 93 percent drop in its share filed on behalf of Bank of America. so it could pull the rug out from under the price over six months. His order, entered Jan. 24, released only other plaintiffs’ suits with a low-ball global the derivative charges of breach of fiduciary pact. THE RIGHT OF WAY duty brought against the BofA officers and Even though the Delaware plaintiffs filed suit Shareholders filed suits on behalf of the directors in both Delaware and New York. in the Chancery Court rather than in New company in New York, where BofA is based, York, the proposed settlement of all derivative and in Delaware, where it is incorporated, COLLUSIVE? litigation would end their suit as well. They alleging the merger and bailouts were a The settlement negotiations spotlighted unsuccessfully asked the Delaware court to breach of the BofA directors’ and officer’s tensions between New York-based plaintiff enjoin the New York settlement. fiduciary duty. lawyers — who had agreed last May to a If the original $20 million derivative settlement The Delaware suits were consolidated in the proposed $20 million settlement — and had been approved by Judge Castel, they said, Chancery Court. But before the case went to Delaware attorneys who contended that that the Delaware litigation — which had survived trial, it was stayed because of the possible initial pact was “grossly unfair.” a motion to dismiss and was ready to go to $20 million settlement in the multidistrict In a Chancery Court action, the Delaware- trial in the Chancery Court with strong claims litigation in New York before Judge Castel. based plaintiff lawyers said the $20 million — would have been dismissed along with all other derivative suits.

10 | WESTLAW JOURNAL n SECURITIES LITIGATION & REGULATION © 2013 Thomson Reuters The New York litigation included suits BREACH OF DUTY alleging that BofA officers and directors violated federal securities laws by hiding the bad news about the Merrill merger plan Derivative lawsuit against tech company and that investors were blindsided and lost money when the market learned the truth. put on hold According to court records, those New York An Atlanta federal judge has stayed a derivative class-action lawsuit alleging securities fraud suits were settled separately last September for $2.43 billion, with BofA — top executives at Ebix Inc. made false and misleading statements concerning rather than its insurers — footing the bill. the technology company’s net income and its purported organic growth.

A SETTLEMENT, WITH OBJECTIONS Spagnola v. Bhalla et al., No. 13-00062, Throughout 2009 and 2010 the 2013 WL 328217 (N.D. Ga., Atlanta Div. management of Ebix, a supplier of software Settlement talks between the New York Jan. 23, 2013). and e-commerce solutions to insurance and derivative plaintiffs and BofA produced financial industries, assured investors that its the tentative $20 million pact to resolve all Gilbert C. Spagnola sued on behalf of internal controls and accounting procedures derivative claims, but the Delaware plaintiffs Ebix, alleging the misconduct of the firm’s were viable, according to the September vehemently objected. directors and officers has caused substantial harm to the company, including costs and order. They said the proposed settlement was expenses incurred from both a securities Ebix officials said organic growth was above grossly unfair and inadequate because class-action suit and a separate investigation 10 percent, and that the company could it would release all defendants for what by the federal government. expect to see continued low tax rates for amounted to 0.4 percent of the estimated years to come due to investments in foreign $5.8 billion in derivative claims and 4 percent U.S. District Judge Richard W. Story put the markets, according to the order. of the total of $500 million in available derivative case on hold “in the interest of insurance money. judicial economy” pending the conclusion But the long, tortured corporate history of expert discovery in the related securities the shareholders lay out in their securities The Delaware plaintiffs also accused the class-action that he is overseeing in the complaint alleges the company was really New York plaintiffs of being inadequate Northern District of Georgia. In re Ebix Inc. stagnating, and the individual defendants representatives of the derivative shareholders Sec. Litig., No. 1:11-02400, 2012 WL 4482798 repeatedly misled analysts about the and said they had no idea of the true value (N.D. Ga., Atlanta Div. Sept. 28, 2012). company’s billing, taxation and accounting of the claims they were about to release so practices, the order said. cheaply. In September Judge Story ruled that shareholders in the securities action pleaded Last fall, the U.S. Securities and Exchange Last November Judge Castel agreed to hold their case with enough specificity to survive Commission also launched an investigation hearings on the objections. the heightened pleading standards of the into Ebix’s accounting practices and public After several conferences in December, he Private Securities Litigation Reform Act of statements to shareholders. held a hearing Jan. 9 to discuss revisions 1995. In the derivative action, Spagnola alleges to the settlement and then held a final Congress passed the PSLRA to weed that the defendants have been aware of hearing Jan. 11 during which he approved the out nuisance securities suits by requiring Ebix’s accounting irregularities and its “lack $62.5 million pact. plaintiffs to back up their claims in federal of adequate internal controls” over financial According to the Chimicles & Tikellis court with enough specifics to pass a reporting since at least March 2010. statement, at the Jan. 11 hearing, BofA threshold test before they could begin to take Despite this knowledge, Spagnola says, lawyers commended counsel for the discovery. the defendants continued to announce and Delaware plaintiffs, “who in our view … are Under those standards, Judge Story found affirm Ebix’s materially misleading financial principally responsible for the increase in the in the securities suit that the plaintiffs reports. cash component of the settlement.” WJ showed that Ebix CEO Robin Raina and CFO Attorneys: Judge Story said all parties in the derivative Robert Kerris failed to discover or recklessly Plaintiffs (Delaware): Pamela Tikellis, Chimicles & action will meet and confer regarding future Tikellis, Wilmington, Del. disregarded deficiencies in the company’s case scheduling upon the completion of internal controls and stagnant growth, and Plaintiffs (New York): Max Berger, Bernstein expert discovery in the securities action. WJ Litowitz Berger & Grossmann, New York that these problems contributed to the loss Related Court Documents: Related Court Documents: of stock value. Stay order: 2013 WL 328217 Delaware plaintiffs’ reply brief in support of Complaint: 2013 WL 228479 injunctive relief: 2012 WL 2169579

© 2013 Thomson Reuters FEBRUARY 19, 2013 n VOLUME 18 n ISSUE 21 | 11 BREACH OF DUTY by the fact that it could and should have been prevented,” Richardson says. Investor wants Transocean execs to pay A commission convened by President Obama to investigate the spill found the majority for Deepwater Horizon spill of the errors leading to the blowout could Officers and directors of Transocean Ltd. are facing a shareholder lawsuit for be attributed to Transocean management, according to the complaint. breach of fiduciary duty, waste of corporate assets and unjust enrichment over the explosion and massive oil spill at the company’s Deepwater Horizon Richardson says Transocean was aware of problems with blowout preventers on its rigs oil rig in the Gulf of Mexico in April 2010. 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

REUTERS/U.S. Coast Guard/Handout lost billions as a direct result of the spill and Fire boat response crews battle the blazing remnants of the offshore oil rig Deepwater Horizon in the Gulf of Mexico April 21, 2010. A will incur significant costs going forward, shareholder of the rig owner, Transocean Ltd., says the company’s failure to exercise proper oversight of its operations led to the disaster. while its ability to raise capital or debt has been severely restricted. Richardson et al. v. Newman et al., No. 2013- months. The rig’s blowout preventer, an 623, complaint filed (Tex. Dist. Ct., Harris emergency valve-closing device made by She claims Transocean executives violated County Jan. 7, 2013). Cameron International, failed to seal the well their duties to shareholders by failing to properly monitor risks at the drilling rigs Margaret C. Richardson, trustee of the H. head, according to the complaint. made the blowout preventer. while maintaining that safety was a prime and M. Richardson Revocable Survivor’s Trust, concern. She also asserts the executives, claims a dozen board members, including Ecosystems in the Gulf of Mexico and Gulf who earned hundreds of thousands of President and CEO Steven L. Newman, failed Coast have been devastated, as has the dollars annually — or millions, in Newman’s to exercise proper oversight of Transocean’s fishing industry in the region, the suit says. case — should be forced to disgorge any operations. She says this failure led to the Transocean has been exposed to hundreds compensation they earned while the alleged disastrous spill that has ravaged the company’s of lawsuits stemming from the spill, as well breaches were taking place. finances and left its reputation in tatters. as civil and criminal charges from federal Richardson demands a jury trial and government agencies, the plaintiff alleges. According to the complaint filed in Texas’ proposed an order directing Transocean to Harris County District Court, the Deepwater The company recently agreed to plead guilty reform policies and procedures and granting Horizon, leased by nonparty operational to a misdemeanor charge of violating the shareholders a vote on various areas of partner BP plc, exploded and caught fire Clean Water Act and to pay $1.4 billion in corporate governance. April 20, 2010, mainly due to poorly trained criminal and civil penalties, the suit says. Its She is also seeking unspecified damages crew members and inadequate emergency market capitalization has meanwhile been from the individual defendants, as well as equipment. cut nearly in half, according to the complaint, legal fees. WJ from $29.6 billion the day before the tragedy The fire and explosion killed 11 crew members Attorney: and caused the rig to collapse, shearing a to about $16 billion today. Plaintiff: Paul T. Warner, Cypress, Texas pipeline that continued spewing hundreds “A horrible accident by all accounts, the Related Court Document: of millions of gallons of oil into the Gulf for Deepwater Horizon disaster is made worse Complaint: 2013 WL 67116

In 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. plan was a waste of assets. It rejected her fee request after finding Jan. 14, 2013). that her lawsuit could not have benefited the shareholders because it The full Delaware Supreme Court affirmed a decision that the XTO was not meritorious when it was filed. board did not have to adopt a corporate charter provision saving WASTEFUL? $40 million in taxes on $130 million in bonuses it awarded to its officers. On appeal to the state Supreme Court, Freedman argued that the XTO The en banc opinion said the board’s decision to give up the tax savings directors’ decision to forgo the tax savings under a Section 162 plan in favor of increased executive compensation flexibility was protected was outside the protection of the business judgment rule and exposed by the business judgment rule, which shields directors even if their them to liability. actions end up costing the company money. The Supreme Court disagreed. The ruling, which said the XTO directors could consider factors other than cost in making their bonus decisions, could complicate the task The court said Freedman did not specifically allege that any of the of shareholders who recently filed a new wave of suits challenging bonuses paid to the XTO executives would have been tax-deductible if “wasteful” executive compensation awards. the company had a Section 162 plan. Such compensation suits typically charge that the directors breached The board indicated a Section 162 plan would constrain the directors in their fiduciary duties by ignoring company policies requiring determining appropriate bonus levels, the opinion said. compensation increases to be based on company performance and to “The decision to sacrifice some tax savings in order to retain flexibility abide by shareholder resolutions. in compensation decisions is a classic exercise of business judgment,” said Justice Carolyn Berger, writing for the court. CONSTRAINED? Even if the board’s decision “was a poor one for the reasons alleged by The suit by shareholder Susan Freedman charged that XTO’s directors Freedman, it was not unconscionable or irrational,” the decision said in did not adopt Internal Revenue Code Section 162(m), a commonly affirming the lower court. 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 INFERRING BAD FAITH? the board did not want to be “constrained” by the limits of Section 162. In a blog posting, professor Larry Hamermesh, who heads the corporate Freedman filed suit in the Delaware Chancery Court in 2008, claiming law section of Widener University’s School of Law, said the board’s the company lost money by paying taxes on more than $130 million in failure to explain why it changed its mind about the Section 162 plan bonuses to executives between 2004 and 2007. might have been “enough, for pleading stage purposes, to support an But the XTO directors adopted a Section 162 plan in 2009 and agreed inference that the board’s actions were in bad faith.” to be acquired by ExxonMobil in 2010, the Supreme Court opinion said. “One of the recipients of the bonuses was the company’s CEO, who Texas-based XTO is incorporated in Delaware. was also a member of the board,” Hamermesh noted. “The bonus Freedman agreed to drop her suit in 2011, but she sought $1 million in payments to him were a self-dealing transaction — one perhaps well- attorney fees, claiming her action had benefited the company and all considered and justified by an independent compensation committee, its shareholders by calling for the board to adopt the Section 162 plan, but one in respect of which the motives that implicate the duty of according to the Supreme Court opinion. loyalty were present.” WJ In Delaware, a plaintiff law firm that wins either a money judgment Attorneys: Appellant: Robert Goldberg, Biggs & Battaglia, Wilmington, Del. 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 Appellee: Raymond DiCamillo, Richards, Layton & Finger, Wilmington the benefit. Related Court Document: Opinion: 2013 WL 144638 The Chancery Court found that Freedman could not have proved that See Document Section B (P. 34) for the opinion. the directors’ initial decision to pass on the adoption of the Section 162

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. 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 Investors rely on S&P’s ratings and use announce a major financial fraud enforcement action against Standard & Poor’s at the Justice Department in Washington. them to gauge the riskiness of securities for purchase. The ratings spare investors the For example, the suit alleges that Bear The complaint asserts that S&P rated costs associated with analyzing the credit Stearns informed S&P that a new model S&P these securities high, knowing a higher risk of the securities. beta-tested for Bear would adversely affect rating allowed issuers to sell off the quickly S&P represented to investors that its rating its business with S&P. The complaint claims deteriorating securities to unsuspecting system was objective and independent, the S&P subsequently delayed implementing the investors. complaint says. model. In a press release issued by S&P Feb. 4, Between 2004 and 2007 S&P developed By working with issuers on its rating systems, the company described the government’s new analytical rating models that would S&P’s ratings were artificially inflated to allegations as “entirely without factual or more accurately rate securities based on the the benefit of issuers and the detriment of legal merit.” risks mortgage delinquencies and defaults investors, the complaint asserts. S&P points to the failure of everyone to posed. S&P, however, allegedly delayed, Moreover, the Justice Department asserts foresee the financial crisis as evidence that it adjusted and limited updates to the ratings that S&P knew the housing market was could not have defrauded investors and, like models to benefit its own business interests collapsing while it continued to highly rate everyone else, it was merely responding to at the expense of the investing public. securities, thereby causing significant losses rapidly changing market conditions. The delay allegedly exposed a conflict to investors who relied on the ratings. S&P said in the release that it is “committed of interest between S&P and issuers of In particular, the complaint says, S&P rated to providing investors and the markets with securities during this period. CDOs consisting of MBS highly even though the highest-quality ratings available and the According to the government, S&P polled S&P knew MBS were facing increased credit tools to navigate an increasingly complex issuers to determine if the new models would risks as a result of the bursting housing global financial marketplace.” WJ cause S&P to lose profits and their market bubble. Related Court Document: share. It worried, the complaint says, that Additionally, S&P allegedly knew issuers Complaint: 2013 WL 416293 if it rated securities lower than investment were liquidating their warehouses of CDOs as grade, issuers would move their business to the MBS market collapsed, the government Moody’s or Fitch. claims.

GEORGIA MAN SETTLES INSIDER-TRADING CASE SOFTWARE FIRM’S SALE TO ORACLE DOESN’T OVER AIRLINE MERGER COMPUTE WITH SHAREHOLDER An Atlanta businessman has settled civil securities fraud charges An investor in Eloqua Inc. has sued to stop Oracle Corp.’s proposed accusing him of making nearly $160,000 in illicit profits from an $871 million takeover of the software developer for what he says insider-trading scheme involving AirTran’s 2010 merger with Southwest is a “grossly inadequate” price. Plaintiff Florin Ursu says Eloqua’s Airlines. The Securities and Exchange Commission alleged John M. directors breached their fiduciary duty to shareholders by conducting a Darden III, 73, a former consultant, made illegal trades after receiving “lackadaisical three-week solicitation process” in which only three other insider information about the pending merger from a longtime board potential strategic buyers were approached. After that, the Delaware member of AirTrans Holdings Inc. Without admitting or denying the Chancery Court complaint says, the directors agreed to negotiate charges, Darden agreed to disgorge $159,200 in profits along with exclusively with Oracle, eventually accepting an offer of $23.50 per prejudgment interest of $9,300. He will also pay a civil penalty of an share. But Ursu alleges this price undervalues Eloqua’s shares, noting additional $159,200, the SEC said in a statement. The settlement that at least one industry analyst set a price target of $27 for the stock. is still subject to approval by the U.S. District Court for the Northern Ursu seeks to enjoin the proposed transaction “unless and/or until the District of Georgia. defendants cure their breaches of fiduciary duty.” Securities and Exchange Commission v. Darden, No. 13-00138, Ursu v. Payne et al., No. 8215, complaint filed (Del. Ch. Jan. 14, 2013). proposed consent order filed (N.D. Ga. Jan. 17, 2013). Related Court Document: Related Court Document: Complaint: 2013 WL 154394 Complaint: 2013 WL 171015 STOCK RESEARCH EXEC IMPRISONED SEC SUES FORMER JEFFERIES EXECUTIVE FOR FRAUD FOR INSIDER TRADING The Securities and Exchange Commission has filed a complaint in The president of Oregon-based stock research firm Broadband the U.S. District Court for the District of Connecticut against Jesse C. Research LLC has been sentenced in New York federal court to a Litvak, a former executive of broker-dealer Jefferies & Co., for allegedly 51-month prison term. The Manhattan U.S. attorney’s office said misleading customers while trading mortgage-backed securities. Jan. 15 that John Kinnucan pleaded guilty last July to one count of The complaint says Litvak purchased mortgage-backed securities conspiracy to commit securities fraud and two counts of securities from one customer to be sold to another customer at a higher agreed- fraud in the U.S. District Court for the Southern District of New York. upon price. Litvak allegedly misled the purchaser about the true Federal prosecutors said he unlawfully obtained insider information price he paid for the mortgage-backed security. Jeffries as a result through sources at public companies from 2008 to 2010 and sold received a greater profit than he would have if the price had been the information to his Broadband clients, which included hedge funds accurately provided. The complaint was filed the same day the U.S. and money management firms. Kinnucan allegedly paid his sources attorney for the District of Connecticut announced a New Haven federal “consulting fees” for insider information about their companies. grand jury had returned a 16-count indictment against Litvak. The According to prosecutors, Kinnucan paid one source $27,500 and put indictment charged him with securities fraud, Troubled Asset Relief $25,000 into a business operated by another source. In addition to Program fraud and making false statements to the federal authorities. the prison term, Kinnucan will forfeit $164,000, prosecutors said. Securities and Exchange Commission v. Litvak, No. 3:13-CV-00132, United States v. Kinnucan, No. 12-CR-00163, defendant sentenced complaint filed (D. Conn. Jan. 28, 2013). (S.D.N.Y., Foley Square Jan. 15, 2013). Related Court Document: Complaint: 2013 WL 312370

Freedman v. Adams III et al., No. 230-2012, 2013 WL 144638 (Del. Jan. 14, 2013)...... 13 Document Section B...... 34

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)...... 9

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)...... 10

In re Houston American Energy Corp. Securities Litigation, No. 12-1332, motion to dismiss filed (S.D. Tex. Jan. 14, 2013)...... 8

Richardson et al. v. Newman et al., No. 2013-623, complaint filed (Tex. Dist. Ct., Harris County Jan. 7, 2013)...... 12

Securities and Exchange Commission v. Darden, No. 13-00138, proposed consent order filed (N.D. Ga. Jan. 17, 2013)...... 15

Securities and Exchange Commission v. Litvak, No. 3:13-CV-00132, complaint filed (D. Conn. Jan. 28, 2013)...... 15

Spagnola v. Bhalla et al., No. 13-00062, 2013 WL 328217 (N.D. Ga., Atlanta Div. Jan. 23, 2013)...... 11

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

United States v. McGraw-Hill Cos., No. CV-13-00779, complaint filed (C.D. Cal. Feb. 4, 2013)...... 1

Ursu v. Payne et al., No. 8215, complaint filed (Del. Ch. Jan. 14, 2013)...... 15

Weinstein et al. v. McClendon et al., No. 12-465, opposition brief filed (W.D. Okla. Jan. 23, 2013)...... 7 Document Section A...... 19