SEC Holds Overall Winning Record But Loses Several High Profile Cases in 2013
2013 ended on a tough note for the SEC. The public and the media have repeatedly wondered why, five years after the financial collapse, the SEC has yet to hold any prominent Wall Street executives accountable for the enormous damage done to the global economy. Of course, one reason may be that there is a difference between allegedly unethical behavior and illegal conduct, and securities violations often involve complex and uncertain evidence. Nevertheless, the SEC’s record at trial against those executives who have been the subject of enforcement actions has been spotty lately. Although the SEC continues to win about 80 percent of its trials, including several victories in 2013 (not to mention settlements), the SEC closed the year with three high profile losses.
Securities and Exchange Commission v. Jensen: Most recently, on Dec. 10, 2013, after an eight-day bench trial, Judge Manuel Real in the U.S. District Court for the Central District of California rejected all of the SEC’s accounting fraud allegations against two former executives of Basin Water Inc. The SEC had accused Basin’s former CEO Peter Jensen and former CFO Thomas Tekulve of engaging in “sham transactions” to boost reported revenues from the sale of their groundwater pollution purification systems. But Judge Real found that the SEC failed to present sufficient evidence that Jensen and Tekulve intentionally misled anyone or were reckless in their accounting practices.
Securities and Exchange Commission v. Kovzan: Just one week earlier, on Dec. 2, 2013, a federal jury in Kansas acquitted Stephen Kovzan, CFO of NIC Inc., of all charges brought by the SEC. In January, the SEC had charged Kovzan with 12 counts of securities fraud, violation of the internal controls provisions, and aiding and abetting NIC’s alleged securities law violations. The charges all related to a scheme to conceal $1.18 million in payments to former NIC CEO Jeffery Fraser to cover personal expenses, including vacations, spa treatments, clothes, and commuting by private jet (these payments should have been reported as compensation). The SEC sought financial penalties, injunctive relief, and to bar Kovzan from serving as an officer of a publicly traded company. But after a three week trial, the jury answered every question posed on a 15-page verdict form in Kovzan’s favor and acquitted Kovzan on all 12 counts.
Securities and Exchange Commission v. Cuban: Perhaps the highest profile SEC case of the year, the SEC took on billionaire Mark Cuban (owner of the Dallas Mavericks) and lost. In January 2008, the SEC filed insider trading charges against Cuban related to his sale of his stake in a Canadian Internet company. But on Oct. 16, 2013, a jury in Dallas (in the U.S. District Court for the Northern District of Texas) acquitted Cuban of all charges after less than five hours of deliberation. The jury explicitly found that the SEC failed to prove that Cuban had received material, non-public information or that he had promised not to act on that information.