A proposal by federal regulators to settle a lawsuit over suspicious trades in H.J. Heinz Co. without requiring the defendants to admit wrongdoing was questioned by U.S. District Judge Jed Rakoff, who has assailed similar accords in other cases.
The Manhattan judge told U.S. Securities and Exchange Commission lawyers late last year that his “only concern with the proposed settlement was the inclusion” of the “no admit, no deny” language, according to a court filing yesterday. He said regulators could either remove the language, have the defendants admit the allegations or provide him with evidence supporting the lawsuit’s claims.
In November 2011, Rakoff rejected a proposed $285 million settlement with Citigroup Inc. (C), citing public interest in learning the truth about SEC allegations that the bank had misled investors in a $1 billion collateralized debt obligation linked to risky mortgages. In 2009, he rejected a $33 million agreement between the SEC and Bank of America Corp.
The U.S. Court of Appeals in New York blocked the Citigroup case from going forward while it considers an appeal.
SEC Chairman Mary Jo White said on June 19 that the regulator will seek more admissions of wrongdoing from defendants as a condition of settling enforcement cases. The change in policy would probably apply to cases in which investors were significantly harmed and the alleged fraud was egregious.
In the case involving trades of Heinz, the SEC had proposed that two defendants each pay a civil penalty of $1.5 million without admitting or denying allegations of insider trading, according to an SEC filing yesterday in the case. The agency said there was suspicious trading of call option contracts on the day before the company announced an agreement to be acquired by an investment group involving Berkshire Hathaway Inc. (BRK/A)
Trading in the options gives the right to buy the underlying shares and profit when the stock rises. The timing and size of the trades were deemed highly suspicious by the SEC as the accounts used had no history of trading Heinz securities in the previous six months and the only trading in the account involving Heinz occurred the day before the takeover was announced.
The SEC claims that Rodrigo Terpins placed an order to purchase the Heinz call options while he was vacationing at Walt Disney World in Florida and the trade was based on nonpublic information he obtained from his brother Michael Terpins.
Brokerage records and order tickets at an account held at Goldman Sachs in Switzerland, phone records, an e-mail and other documentary evidence supports the SEC’s claims, Megan Bergstrom, an SEC attorney said in the filing.
After not trading in Heinz securities in their account for at least a year, the two men invested nearly $90,000 in risky options positions the day prior to the announcement. As a result of the “well-timed” trade their position increased from approximately $90,000 to over $1.8 million, she said in the filing.
The no-admit language was removed from a proposed judgment, and a new clause was added “to make clear that the removal of the NAND language should not be construed as an admission,” Bergstrom said in the filing.
The settlement is fair and in the public interest and the SEC has produced sufficient evidence to support the claims in its lawsuit against Michel and Rodrigo Terpins, the traders, Bergstrom said.
Rakoff hasn’t ruled yet.
The case is U.S. Securities and Exchange Commission v. Michel Terpins and Rodrigo Terpins, 13-cv-1080, U.S. District Court, Southern District of New York (Manhattan).
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