U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20088 / April 24, 2007 United States v. Joseph P. Nacchio, Case No. 1:05-CR-00545-EWN (D. Colo.) Joseph P. Nacchio, Former Chief Executive Officer of Qwest, Found Guilty of 19 Counts of Insider Trading in Criminal Case The Securities and Exchange Commission (Commission) announced today that on April 19, 2007, a federal jury found Joseph P. Nacchio, the former chief executive officer of Qwest Communications International Inc., guilty of insider trading in the criminal action brought by the United States Attorneys office in Denver, Colorado.
The jury found Nacchio, 57, guilty of 19 counts of insider trading, covering $52 million in stock sales, that were charged in a December 2005 indictment. The jury returned not guilty verdicts on the remaining 23 counts. Nacchio faces up to 10 years in prison and a $1 million fine per count at sentencing, which Judge Nottingham has scheduled for July 27, 2007. Nacchio was released on bond pending his sentencing. He also faces asset forfeiture, the amount of which will be determined by Judge Nottingham at a separate hearing.
In March 2005, the Commission filed a complaint in the United States District Court for the District of Colorado against Nacchio and other officers, directors, and employees of the company alleging that from at least April 1, 1999 through March 31, 2002, Nacchio and others at Qwest engaged in a massive financial fraud that hid from the investing public the true source of the company's revenue and earnings growth. The complaint alleged that to meet aggressive targets for Qwest's revenue and earnings growth, Qwest fraudulently and repeatedly relied on immediate revenue recognition from one-time sales of assets known as "IRUs" and certain equipment, while falsely claiming to the investing public that the revenue was recurring. The complaint also alleged that Nacchio and others fraudulently and materially misrepresented Qwest's performance and growth to the investing public and that Nacchio traded on the basis of material nonpublic information. The Commission's civil action has been stayed against Nacchio, pending the outcome of the criminal action. Securities and Exchange Commission v. Joseph P. Nacchio, Robert S. Woodruff, Robin R. Szeliga, Afshin Mohebbi, James J. Kozlowski and Frank T. Noyes, Civ. No. 05-MSK-480 (CBS) (D. Colo.).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20087 / April 24, 2007 Securities and Exchange Commission v. International Fiduciary Corp., S.A., et al., U.S. District Court for Eastern District of Virginia (Civil Action No. 1:06CV1354) SEC Amends Complaint in Alleged International Fiduciary Corp. Prime Bank Ponzi-Scheme Case The Securities and Exchange Commission announced today that on April 19, 2007, it filed an amended complaint adding certain relief defendants and alleging additional details concerning the fraudulent investment program alleged in its original complaint. According to the original complaint, filed on December 4, 2006, defendants International Fiduciary Corporation, S.A. ("IFC"), Preston David Pinkett II, Daniel Eric Byer, and Malcolm Cameron Boyd Stevenson raised at least $18.2 million through a fraudulent "asset growth program" purportedly involving risk-free participation in the trading of "1st tier medium-term bank notes."
The amended complaint adds as relief defendants two individuals, Terry Martin and Robert Lowrey, both residents of Canada, as well as four Washington State-based companies: CD2E, Inc., M&M Technologies, and Winchell Corporation-each of which the amended complaint alleges Martin controls-and SZE Coast Operating Corporation, which the amended complaint alleges lists Lowrey as its Secretary. According to the amended complaint, defendant IFC, at the direction of defendants Pinkett, Byer, and Stevenson, paid these relief defendants, collectively, at least $1.9 million. The complaint does not allege that these relief defendants engaged in any violations of the federal securities laws, but rather that they hold or control funds that represent fruits of violations committed by the other defendants.
The amended complaint also alleges additional details concerning the fraudulent "asset growth program" alleged in the original complaint, including:
That the defendants raised at least $40 million from at least 140 investors, including at least 15 investors residing in the United States;
That the monthly rate of return promised to investors varied between 4% and 6% per month, with some investors being promised as much as 10% per month; and
That defendants Pinkett, Stevenson, and Byer transferred a combined total of at least $12 million of the investor funds raised in the alleged fraudulent scheme directly to themselves. The Commission wishes to acknowledge the continuing assistance of the British Columbia Securities Commission. For further information, see Litigation Release No. 19934 (December 5, 2006).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20086 / April 24, 2007 Securities and Exchange Commission v. Nancy R. Heinen and Fred D. Anderson, Case No. 07-2214-HRL (Lloyd). (N.D. Cal. filed April 24, 2007) SEC Charges Former Apple General Counsel for Illegal Stock Option Backdating Commission Also Settles Claims Against Former Apple CFO for $3.5 Million The Securities and Exchange Commission today filed charges against two former senior executives of Apple, Inc. in a matter involving improper stock option backdating. The Commission accused former General Counsel Nancy R. Heinen of participating in the fraudulent backdating of options granted to Apple's top officers that caused the company to underreport its expenses by nearly $40 million. The Commission's complaint alleges that Heinen, of Portola Valley, California, caused Apple to backdate two large options grants to senior executives of Apple — a February 2001 grant of 4.8 million options to Apple's Executive Team and a December 2001 grant of 7.5 million options to Apple Chief Executive Officer Steve Jobs — and altered company records to conceal the fraud.
The Commission also filed, and simultaneously settled, charges against former Apple Chief Financial Officer Fred D. Anderson, of Atherton, California, alleging that Anderson should have noticed Heinen's efforts to backdate the Executive Team grant but failed to take steps to ensure that Apple's financial statements were correct. As part of the settlement, Anderson agreed (without admitting or denying the allegations) to pay approximately $3.5 million in disgorgement and penalties.
According to the Commission's complaint, filed in the Northern District of California, Apple granted 4.8 million options to six members of its executive team (including Heinen and Anderson) in February 2001. Because the options were in-the-money when granted (i.e. could be exercised to purchase Apple shares at a below market price), Apple was required to report a compensation charge in its publicly-filed financial statements. The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. Heinen is also alleged to have directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17. As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant. Anderson, who should have realized the implications of Heinen's actions, failed to disclose key information to Apple's auditors and neglected to ensure that the company's financial statements were accurate. Both Heinen and Anderson personally received millions of dollars in unreported compensation as a result of the backdating.
The Commission's complaint also alleges improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen — as with the Executive Team grant — caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the Commission alleges that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that the Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" — a meeting that, in fact, never occurred.
Heinen is charged with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2, and 16a-3 thereunder, and Heinen is charged with aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. The Commission is seeking injunctive relief, disgorgement, and civil money penalties against Heinen, in addition to an order barring her from serving as an officer or director of a public company.
Anderson, without admitting or denying the allegations in the Commission's complaint, has agreed to a permanent injunction from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 16(a) of the Securities Exchange Act of 1934 and Rules 13b2-2 and 16a-3 thereunder, and from aiding and abetting further violations of Section 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. Anderson also will disgorge $2,953,125 in ill-gotten gains, plus prejudgment interest of $528,107.86 and will pay a civil monetary penalty of $150,000.
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