The Department of Labor (DOL) and the Securities and Exchange Commission (SEC) took action recently on a number of cases that included embezzlement and breach of fiduciary duty, illegal tips on M&As, failure to protect confidential information and fraud.
Trustees of 401(k) Plan Sentenced for Embezzlement
The DOL announced that following a plea agreement entered in the U.S. District Court for the Eastern District of Kentucky, William H. Kiser and Mary Sue Kiser, trustees of the Irotas Manufacturing Co. Inc. 401(k) Plan, have been sentenced to 15 months in prison and 3 years of supervised release for embezzling funds from the plan. The Kisers also have been ordered to pay restitution.
An investigation by the Employee Benefits Security Administration (EBSA) Cincinnati regional office had shown that the Kisers, who owned Irotas Manufacturing Co. Inc. in Shelbyville, Ky.., embezzled a total of $487,138.08 from the now-defunct company’s 401(k) plan for their own use between June 17 and Aug. 14, of 2008.
“This sentencing underscores the Department of Labor’s resolve to aggressively pursue those who steal from employee benefit plans,” said L. Joe Rivers, EBSA’s regional director in Cincinnati. “We will continue our commitment to investigating thefts from employee benefit plans under our Contributory Plans Criminal Project, which targets those individuals who threaten the retirement and health benefits of American workers.”
DOL Sues over ESOP Losses, Charges Overvaluation
The DOL has filed a lawsuit against GreatBanc Trust Co., based in Lisle, Ill., and Sierra Aluminum Co., of Riverside, Calif., in the U.S. District Court for the Central District of California, based on an investigation by EBSA.
In the suit, the DOL alleges that GreatBanc violated the Employee Retirement Income Security Act (ERISA) by breaching its fiduciary duties to the Sierra Aluminum Employee Stock Ownership Plan when it allowed the plan to pay more than fair market value for employer stock in June 2006. The suit names Sierra Aluminum, the ESOP’s sponsor, as a defendant for entering into an indemnification agreement with GreatBanc that violates ERISA.
According to the suit, GreatBanc failed to adequately inquire into an appraiser’s report presenting unrealistic and aggressively optimistic projections of Sierra Aluminum’s future earnings and profitability. It also allegedly failed to investigate the credibility of the assumptions, factual bases and adjustments to financial statements that the appraiser relied on in preparing its report.
The suit also alleges that GreatBanc asked the appraiser to revise its valuation opinion in order to reconcile the ESOP’s higher purchase price with the lower fair market value of the company stock.
In addition, the suit alleges that Sierra Aluminum’s indemnification agreement with GreatBanc violated ERISA to the extent that it would permit Sierra Aluminum to pay GreatBanc’s losses, costs, expenses and damages unless and until a court enters an unappealable judgment that GreatBanc did not violate ERISA. The complaint seeks to restore losses plus interest to the plan and to enjoin Sierra Aluminum from indemnifying GreatBanc.
Investment Bank Analyst Charged by SEC with Illegal Tipping
The SEC announced that it has charged a former analyst, Jauyo “Jason” Lee, at a Boston-based investment bank with illegally tipping a close friend with confidential information about clients involved in impending mergers and acquisitions that brought in more than $600,000 in profits.
The complaint, filed in U.S. District Court for the Northern District of California, alleges that Lee, who worked in the San Francisco office of Leerink Swann LLC, was first privy to information about Leerink’s client Syneron Medical, which was negotiating an acquisition of Candela Corp. in 2009. He later learned that Leerink’s client Somanetics Corp. was in the process of being acquired by Covidien in 2010.
Lee collected nonpublic details about each of the deals from unsuspecting coworkers involved with those clients and by reviewing various internal documents about the transactions. He then communicated repeatedly with his longtime college friend, Victor Chen of Sunnyvale, Calif., via dozens of phone calls and text messages. Some of the calls took place from Lee’s office telephone at Leerink.
Chen traded heavily on that information, making more than $600,000 in illicit profits—a 237% return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee, followed by large cash deposits by Chen, who then used the money for the insider trading.
The SEC alleges that in the days prior to each deal’s public announcement, Chen, who had never before bought securities in these companies, made sizeable purchases of stock and call options in Candela and these acquisition targets—suddenly spending a significant portion of his available cash to buy them.
Chen proceeded to sell most of his Candela and Somanetics holdings once public announcements were made about the transactions. Because Chen made some of his trades in his sister Jennifer Chen’s account, the SEC’s complaint also names her as a relief defendant for the purposes of recovering the illegal profits in her account. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties and permanent injunctions against Lee and Chen. Financial Executive Charged in Diverting Funds for Entertainment
Subramanian Krishnan, the former chief financial officer of a Minnetonka, Minn.-based manufacturer of computer networking devices, was charged by the SEC for secretly diverting company funds to cover unauthorized personal expenses and other employees’ entertainment expenses that lacked any legitimate business purpose.
The SEC alleges that Krishnan, the former CFO of Digi International, evaded the company’s internal controls that he created in order to approve employees’ falsified travel and entertainment expense reports over a five-year period. He also manipulated internal controls to review and approve his own expense reports that included unauthorized hotel and entertainment expenses.