“The personal compensation received by CEOs while the companies they serve engage in wrongdoing can be clawed back,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a statement released by the SEC. “The costs of such misconduct need not be borne by shareholders alone.”

“Jenkins was captain of the ship and profited during the time that CSK was misleading investors about the company’s financial health,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office, in the statement. ‘The law requires Jenkins to return those proceeds to CSK.”

Commentary: The final line of the SEC statement reads, “The SEC’s complaint does not allege that Jenkins engaged in the fraudulent conduct.” This is an important new precedent set by the SEC. Now, even if a CEO is unaware of accounting fraud occurring within his or her organization, he or she is still liable for it. The SEC was given the power to do this through claw back provisions of Sarbanes-Oxley, though this is the first time the provisions have been used.

The ruling came after a complaint was filed with OSHA by an in-house attorney who worked for a publicly traded company (the attorney’s name and company seem to have been withheld). After the attorney learned that her company had sent misleading information to the SEC, she reported the information to the Board of Directors.

Her company hired a privately held, outside consulting firm to help reorganize. This is important because, after the attorney followed up on her report to the Board, she was fired by the outside company.

The attorney then sued both her company and the outside, privately-held firm that fired her, alleging that they both violated the whistle-blower provisions of Sarbanes-Oxley. An administrative law judge, as well as the DOL’s Administrative Review Board, ruled in her favor.

In 2000 Markopolis was a former employee of a rival firm to Madoff’s, and later in 2004 began his own fraud investigation practice. Markopolis (and a few of his friends) spent eight years trying to figure out how Madoff was illegally generating 12% returns for his investors amidst a terrible market. They went so far as to say they made a hobby out of trying to figure out Madoff’s secret.

From the article:

“Some people play fantasy sports, that was how it was with us — Madoff was our fantasy sport,” Mr. Markopolos recalls. “We wanted him nailed.”

According to the article, the SEC determined that “Mr. Madoff personally ‘misled the examination staff about the nature of the strategy’ used by the Fairfield funds and other hedge-fund accounts, and also ‘withheld from the examination staff information about certain of these customers’ accounts.’”

The article continues:

The staff recommended closing the investigation because Mr. Madoff agreed to register his investment-advisory business and Fairfield agreed to disclose information about Mr. Madoff to investors. The SEC report said the staff closed the case “because those violations were not so serious as to warrant an enforcement action.”

Back then Madoff only managed around $10 billion. Too bad he wasn’t discovered until his portfolio reached five times that size…

Take a look at the WSJ’s story, which also includes a number of documents Markopolos sent to the SEC over the past few years.

The Securities and Exchange Commission alleged in the fall of 2007 that Willbros Group paid over $6.3 million to Nigerian government officials between 2003 and 2005 in order to earn a $387 million government contract, according to news reports. The SEC also alleged that a number of Willbros employees participated in a tax evasion scheme in Bolivia.

The Department of Justice agreed to defer prosecution of Willbros for three years, pending the company’s cooperation with its investigation. If Willbros maintains a strong FCPA compliance program and hires an independent monitor, among other conditions, the DOJ will drop the charges.

It is almost unheard of for a person to sue his business partners for alleged FCPA violations – or any kind of violations for that matter – in order to not be implicated himself. As the FCPA blog points out, previous precedent was set when Alba sued Alcoa over alleged Bahrain bribery. The 76-year-old Grynberg says he had no knowledge of the alleged bribes and hopes to avoid DOJ prosecution by filing suit against the defendants. As he put it, “Unless I assert that I was an unwilling participant in this, my neck could be on the line. I’m too old to go to prison.”

This lawsuit comes only a couple weeks after Grynberg sued BP and Lord Browne for alleged bribery in Grenada. In fact, the Telegraph says Grynberg has brought over “73 separate lawsuits against rivals in his industry. Mr. Grynberg admits that he is litigious, but claims that he has a 98 percent success rate in court actions.”

Whether or not this subterfuge will keep Grynberg out of prison remains to be seen, but we do know he’ll be spending quite a bit of his remaining years in court.

Because of Flowserve’s “thorough review of the improper payments and the company’s implementation of enhanced compliance policies and procedures” the DOJ will delay prosecuting the company for three years, according to a DOJ press release. If Flowserve and its subsidiaries play nice during that time, the DOJ “will dismiss the Criminal Information.”

The penalty wasn’t a surprise for the company (it had predicted a fine of $11 million in its 2007 third quarter report with the SEC), and stock value hasn’t responded to the report. In fact, the day of the announcement, Flowserve shares closed 12 cents higher than it opened.

Odyssey Marine Exploration immediately passed out confidentiality agreements to its employees containing two simple stipulations: 1) Don’t tell anyone about the shipwreck, code named “Black Swan,” and 2) Don’t trade company stock until the discovery was announced. Well, Tapanes had his own idea: mutiny and take some of the profits for himself.

This story started out with a lot of promise, but what could have been a great tale of daring-do and high sea escapades ended up being really lame. He didn’t bury a large amount of the treasure to be found later, he didn’t try sneaking it out of the boat. Instead, he courageously logged into his E*Trade account and unloaded $150,000 of his savings to buy 42,000 shares of the company. That was just before Odyssey Marine Exploration, the otherwise obscure company, announced the find and enjoyed watching its stock value jump by 80%.

Blatant insider trading is a very easy criminal activity to discover. A computer program immediately flags any unusual stock movement and alerts the authorities. The SEC very quickly found out that Tapanes worked for the company and began an investigation. Tapanes settled the issue outside of court and agreed to pay a fine of just over $215,000. He could still possibly face lawsuits from other federal agencies, according to one report on the story, but no other charges have been brought.

Siemens has been accused of bribing officials and executives across the planet, in countries from Italy to Nigeria to Saddam Hussein’s regime in Iraq. Employees not in the upper echelons of management were given immunity from prosecution in exchange for speaking out, but many experts don’t think that will improve the enormous morale problems that the company now faces. One German banker, quoted in the UK’s Financial Times and familiar with Siemens, has gone so far as to suggest the company may “implode” from the management loss that will occur pending results of the investigation.

The money will be returned to United Health shareholders, who have so far recovered $900 million from former and current executives related to illegal backdating. The deal will have to be approved by a federal and a state judge before it’s completely finalized.

“I am very pleased to have reached a resolution that puts these matters to rest,” McGuire said in an official statement.

But, things aren’t quite over. The California Public Employees’ Retirement System is spearheading a shareholder lawsuit requesting that he lose access to his remaining 24 million shares, estimated to be worth about $800 million. The result of that case is expected sometime this week.

Carole Argo, 46 of Baltimore, said that Anthony A. Caputo, Safenet’s former CEO, instructed her to backdate options to October 1, 2001, as that was a time when the company’s stock was relatively inexpensive.  Argo complied, additionally backdating her own stocks, along with those of another employee.

This resulted in Safenet filing an inaccurate report with the Securities and Exchange Commission, Argo said.

Argo and Caputo resigned last year because of an internal investigation looking into Safenet’s stock options grant practices. To date no charges have been filed against Caputo.

The regulation would have made it mandatory for corporate lawyers to report any “suspected wrongdoing” from business leaders within their company to outside government officials, according to the article.

David Bayless, former head of the SEC’s San Francisco office, had this to say:

“What is happening now is the SEC is trying to deputize general counsels. If a GC is aware of wrongdoing they are going to have to report it or else be a potential target of SEC actions. It is quite scary.”

Read the entire article here.

Commentary: This is an important trend for general counsels to be aware of. Even though GCs are not obligated to report any findings of illegal activity, it doesn’t mean that they’re in the clear from government oversight. Fortunately for corporate counsel everywhere, the Attorney-Client Privilege Protection Act of 2007 (a bill which would effectively decimate the SEC’s ability to waive attorney-client privilege) has already passed the House and is being discussed in the Senate.

The SEC stated:

“Although Textron knew of endemic corruption in the Middle East, it knew or was reckless in not knowing that illicit payments were paid in connection with all of these transactions.”

Textron is the second U.S. company to settle charges on cases dealing with the Oil-for-Food program. The natural gas pipeline company El Paso Corp. agreed to pay $7.73 million in charges last February.

Textron announced that it “disciplined or fired several employees connected to the scandal.”

Read the complete story here.

Collins allegedly proposed to Dollar General to push forward a $10 million transaction on IBM electronic cash registers in order to increase IBM’s financial revenue for the year, as well as Collins’ bonus during that period. After Dollar General’s accounting firm determined that would have a negative impact on it’s earnings for the same fiscal year, they rejected the proposal. Collins offered to have IBM buy Dollar General’s outdated cash registers for $11 million to negate the company’s loss. Dollar General then repaid the money by an increase in the amount the company paid for the new IBM electronic cash registers.

This was deemed an illegitimate purchase as IBM never intended to use the equipment and ultimately destroyed it. In turn, all of IBM’s expenditure was repaid and Dollar General minimized the negative effect on its earnings for the fiscal year 2000.

Read the entire SEC report here.

Commentary: This is a good learning example for compliance and ethics officers to use with employees for training purposes.

Mr. Reyes had been accused of intentionally changing the grant dates for hundreds of stock option awards without disclosing the move to investors. Sentencing is scheduled for Nov. 21st and Reyes could face up to 20 years in prison and millions of dollars in fines.

The conviction is expected to embolden prosecutors to pursue similar cases.

Back in May, Brocade agreed to pay $7 million to settle civil fraud charges in connection with backdating. Reyes’ alleged accomplice and Brocade’s former head of HR, Stephanie Jensen, is still awaiting trial.

Commentary:The conviction was not surprising to us. You can read the original SEC compliant here. A review of the document will show that the SEC had a very strong case and that Mr. Reyes was pretty much a one-man compensation committee. Now the only question left is how much prison time he will get (unlike Take-Two’s CEO, who got off with probation, we are predicting actual prison time in this case). We are sure that prosecutors are reinvigorated.

Mr. Aguirre had been leading the SEC investigation into possible illegal insider trading by large hedge fund Pequot Capital that is run by Arthur J. Samberg.

Aguirre was fired after complaining that his superiors were interfering by improperly narrowing the scope of the investigation and preventing him from interviewing Morgan Stanley’s CEO John Mack (who allegedly could have been the source for some of the “inside information”).

Now, two years later, the congressional report agrees that the SEC bungled the investigation in a major way and that this resulted in a lost opportunity to broadly crack down on hedge fund insider trading. Here is an excerpt of the report:

“The investigation of Pequot Capital Management could have been an ideal opportunity for the S.E.C. to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement…”

Pequot Capital originally came under SEC scrutiny in 2004 after stock exchange officials found up to 25 sets of highly suspicious trades made by the hedge fund prior to major announcements. The SEC closed the Pequot inquiry last fall without taking action against the fund or its management.

Commentary: To us, it has seemed that there has been something fishy in this case since the get-go. That being said, Morgan Stanley CEO John Mack is surely far too smart to be passing along privileged information to a hedge for insider trading purposes. Yet, it’s rare that an experienced and fairly senior government official risk everything like this in “whistleblowing” unless there is real merit to the case. The Congressional investigation report appears to agree.

Records show that Pequot MUST have been improperly trading on inside information and that the SEC lost a tremendous opportunity to prove and prosecute. Unfortunately, nothing will likely come out it at this point in time – which makes our regulatory system (in this case) look about as fair and just as something designed by Putin.

On a lighter note, wondering what the picture is? That’s an illustration of a Pequot village from the mid-1600s (remember: Pequot is an Native American tribe). Know what the Pequot tribe does today? They are the wealthiest tribe in the nation and their holdings include the popular Foxwoods Hotel and Casino in Mystic CT. Perhaps Samberg had ‘gambling’ on his mind when decide what to name his hedge fund. So far his gaming seems to be working.

Mr. Brant pleaded guilty in back February. He had been facing up to four years in prison but received a lighter sentence in exchange for his cooperation with prosecutors.

Commentary: That loud whoosh that you heard when this sentence was imposed? It was the collective “phew” of relief being exhaled by hundreds of other executives from the dozens of others companies under scrutiny for improper and illegal stock option backdating. The precedent sent by this “probation” as opposed to actual prison time is encouraging for them. On a separate note…five years probation? Five years of meeting with probation officer with conversations like this:

Probation Officer: “Ryan, are you staying clean?”

Brant: “Yes, Sir.”

Probation Officer: “I don’t want to catch you doing any more of that stock option stuff any more…”

Brant: “No, Sir.”

Probation Officer: “And don’t be hanging around with that bad crowd of executives who falsify documents…and put down that pen – it’s not good for you.”

According to the SEC, Delta & Pine (which has since been acquired by Monsanto) paid $43,000 to officials of the Turkish Ministry of Agricultural and Rural Affairs via its subsidiary Turk Deltapine between 2001 through 2006. The SEC ruled that these payments were in violation of the FCPA, and that Delta & Pine did not keep accurate books and records in connection with the improper payments.

Commentary: Under the FCPA, it is accepted to make ‘facilitation’ payments of a reasonable size in order to secure a ‘routine’ government action. For example, a small ‘facilitation’ payment in order to get a business license expedited (as it appears was necessary here) or to get something cleared through customs, is not necessarily illegal. The law does not specifically list a dollar threshold at which point an allowable ‘facilitation’ payment becomes a bribe. However, $43,000 clearly is not small – thus why the SEC took issue with it.

Judge Edward Nottingham also ordered the ex-CEO, Joseph Nacchio, to pay a $19 million fine and forfeit $52 million in assets he gained from illegal stock sales.

In administering his sentence the judge summed it all up by saying, “The crimes the defendant has been found guilty of are crimes of overarching greed.”

Commentary: Chalk up another win to the Feds for this sentence. This is definitely a longer sentence than many expected (as the maximum that he could have received, seven years and three months, was only slightly more than he actually got).

The Commission is hoping that this new management guidance, Auditing Standard No. 5 (which replaces Auditing Standard No. 2), will make Section 404 audits and management evaluations more risk-based and scalable to company size and complexity. The four elements of Auditing Standard No. 5 that SEC feels will have the greatest impact are that is (1) is less prescriptive, (2) makes the audit scalable (so it can change to fit the size and complexity of any company), (3) directs auditors to focus on what matters most and eliminates unnecessary procedures from the audit, and (4) includes a principles-based approach to determining when and to what extent the auditor can use the work of others.

According to Dow Jones, eleven oil and oil service firms received a letter on July 2 from the Justice Department’s criminal fraud section asking them to detail their relationship with Panalpina World Transport Holding Ltd. (PWTN), a Swiss-based shipping and logistics-management company.

Commentary: This should not be entirely surprising to Ethisphere readers – back on June 7th, we reported how Noble Corporation was opening an investigation into the dealings with a customs brokerage in Nigeria (obviously Panalpina). Noble’s announcement was simply coming on the heels of announcements of investigations from Tidewater (which we wrote about back on May 1st) as well as Global Industries Ltd.

Okay then, here you go…

First of all, CNBC is reporting this morning that Jimmy Cayne, the CEO of Bear Stearns, is being investigated…

Investigated for what? Fraud? Insider trading? Nope.

He is being investigated for inappropriately changing his golf scores in order to allow himself to win the July 4th golf tournament at the Hollywood Country Club in Deal, New Jersey.

The president of the club has formed a three person committee to investigate the incident.

Why the sudden interest in Cayne’s golf? Some think the attention is driven by angry investors who got severely burned during the meltdown in recent weeks of Bear Stearn’s subprime hedge funds.

During the crisis, the NY Times reported that the mess had not gotten in the way of Mr. Cayne’s golf game – the CEO shot a 96, 98 and 97 on June 14th, 15th, and 21th respectively.

Still not convinced?… Well the Wall Street Journal has decided that a private civil suit against the former CEO of Broadcom by a former assistant alleging that the CEO forced him to use drugs (as well do much more that is too lurid to report here) merits being on the front page of the paper two days in a row (seems like Murdoch already owns them). Other papers are now reporting it as well.

WSJ justified it reporting on the civil case because “it had [gotten] the attention of federal prosecutors probing Mr. Nicholas in a separate matter, the backdating of stock options at Broadcom.”

Commentary: Cheating at golf certainly would not set a good example to employees. But could a CEO lose his job over it? Now that would be a first – - However, it’s not entirely implausible in this day and age (and there are other reasons why Cayne might have to go).

According to the analysts, the warning they received from the Office Depot Investor Relations Department re-emphasized earlier alerts about the current business environment and soft spending by businesses. They also mentioned that the calls did not provide specific outlooks for sales and profits.

While lawyers say that the disclosure may go against the SEC’s Regulation FD, which is aimed at preventing selective disclosure of material information to analysts, Office Depot insiders insist that nothing material was disclosed. Even so, the hint was enough for most of the company’s analysts to cut their earnings estimates and for options traders to take positions that would pay off if Office Depot’s stock fell.

Commentary: This is nearly unbelievable that a company would do this in today’s environment. It has garnered surprisingly little press. The SEC appears to be sleeping through it too. And Office Depot is claiming that their calls with the analysts were routine? Then how do you explain that the stock dropped over 8% from $34.46 at close of business on June 21st (the day before they first started ‘tipping’ analysts) down to $31.81 on June 28th on stock trading volume that was nearly 4 TIMES AS HIGH AS NORMAL? This wiped more than $700 million off the market capitalization of the company.

Then the company finally announced in a June 29th filing with the SEC that it expected soft earnings. The stock dropped another couple percentage points after the announcement (when the rest of the world got the news), but that was only a fraction of the overall loss that had already occurred in the prior week.

The executives were originally convicted on conspiracy and fraud charges during a December 2006 trial.

In U.S. District Court for the District of New Hampshire, Judge Paul Barbadoro sentenced former Enterasys CFO Robert J. Gagalis to 11 1/2 years in prison. Bruce D. Kay, another former Enterasys finance executive, was sentenced to 9 1/2 years in prison. The prior week, former Enterasys accountant Robert G. Barber was sentenced to just over 8 years in prison.

Gagalis reportedly tried to stand up and read a statement, but broke into tears. His attorney ended up reading it for him, in which he apologized for his actions and especially regretted the “sorrow, pain and anxiety his actions caused to his three children and his wife.”

In levying the sentences, Judge Barbadoro said: “These kinds of crimes endanger our markets. It is vitally important to me that we do everything we can to protect the integrity of our markets.”

The case dates back to May 2004 when the executives were indicted over allegations that they had artificially inflated revenues between March 2000 and December 2001 as Entrasys became an independent spin-off from the computer computer networking company, Cabletron.

The defendants had backdated and falsified documents and concealed terms of business transactions from Enterasys’ auditors, including creating false revenue by secretly investing company funds in other companies and having those companies to use the investment proceeds to buy Enterasys products.

According to DOJ, the loss to public investors due to these shenanigans was $97 million.

Read more about the case and its background here.

Commentary: WOW… We are against fraud just as much as the next guy, but even us were stunned by the length of these sentences. And more fun in “The Barber’s” courtroom is yet to come – with the former CEO of Entrasys and several others still awaiting sentencing.

As Dow Jones reported:

Traders booked massive profits in positions on Hilton Hotels Corp. as the stock surged 26% after the company said Blackstone Group will buy it for $47.50 a share.

The fact that many traders were taking profits in positions added as recently as Tuesday, hours before the deal was announced, had some crying foul. “This one stinks of insider trading,” said Steve Sosnick, equity-risk manager at the Timber Hill LLC market-making unit of Interactive Brokers Group.

Before the deal was announced, there was heavy trading in call options and a run-up in Hilton’s stock price, and many traders say that makes it another example of a private-equity buyout that was preceded by suspect trading in the options market. These traders are frustrated by their perception that this spree is going largely ignored by regulators.

It’s like a rash of burglaries in your neighborhood and you can’t get any information and the cops aren’t doing anything,” said Matt Calder, senior trader at Toro Trading LLC, an option market maker.

You don’t have a huge amount of parties who should’ve known about this deal,” Mr. Sosnick said of the Hilton buyout. “Perhaps this is one where enforcement can arise.”

Commentary: Okay, the booking photo of Paris is totally gratuitous but we figured it was one more way to get the SEC’s attention on this “no-brainer” (now we have two reasons to reference the Paris’ photo). Insider trading is running amok – and this is a perfect example. If the SEC snoozes through this one it will be a real shame.

A complaint from the office of Massachusetts Secretary of State William F. Galvin accuses UBS of providing investment managers office space at below-market rent, low-interest personal loans, and a number of other gifts without either UBS or the investment managers disclosing this relationship to the hedge funds’ clients.

The complaint cites a clear conflict of interest in the gift-giving. Hedge fund brokers should be chosen on a cost and service basis, and bribery makes that less likely – thus the depriving unknowing investors of the best deal available to them.