We’ve tracked the various flavors of insider trading betrayals through the years (husband betraying wife, wife betraying husband, boyfriend betraying girlfriend, butler betraying master, etc.) but here is a new one: brother-in-law betraying brother-in-law.

According to this litigation release and complaint from the SEC, on July 21, 2006, Michael Stummer, a self-employed day trader from Ohio, arrived with his family at the New York home of his brother-in-law for an annual weekend gathering. His brother-in-law was a director of a private equity firm advising Buffets Holdings on an impending acquisition of Ryan’s Restaurant Group. The SEC alleged that:

During the weekend visit, Stummer snuck into the brother-in-law’s bedroom office, where, secretly and without permission, he accessed his brother-in-law’s bedroom office computer. By correctly guessing his brother-in-law’s password, Stummer deceptively gained unauthorized access to the private equity firm’s computer network and read several confidential and nonpublic emails relating to the Ryan transaction.

Stummer then allegedly used this information to purchase shares of Ryan’s which he later sold for a profit of $22,351 after the acquisition was announced and the stock surged 40%.

2 quick thoughts:

1. In January 2008, Judge Buchwald of the SDNY ruled in the Dorozhko case that a hacker who stole material, nonpublic information from the computer network of Thomson Financial and traded on that information did not violate Section 10(b). The SEC’s case against Stummer was settled immediately, and therefore will not be further litigated, but how does hacker Stummer differ from hacker Dorozhko?

2. If your password can be figured out by the educated guesses of your brother-in-law, you seriously need to upgrade your password.

Did you know that the U.S. Dept. of Justice files class action lawsuits?

The DOJ announced today that it had reached an agreement with American Airlines to settle a class action filed by the DOJ for the airline’s alleged violations of the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). The DOJ’s complaint alleged that American did not allow a class of more than 300 pilots to accrue vacation and sick leave benefits while on military leave to the same extent as pilots on comparable forms of non-military leave.

According to the DOJ, the American Airlines case, filed in 2006, was the first class action it has ever filed under USERRA, a federal statute that protects servicemembers’ and veterans’ civilian employment rights.

ABC reports that Pinkberry has settled a class action lawsuit after customers complained its frozen treat really wasn’t yogurt. According to the report, Pinkberry acknowledged it didn’t follow state guidelines that require frozen yogurt to be made off-site. The product will now be made at a dairy. Pinkberry will give $750,000 to two Southern California charities as part of the settlement.

Wait a minute… my memory on this is fuzzy but haven’t we seen this scenario before?

A publication called Law Dragon has published its list of “100 Lawyers You Need to Know in Securities Litigation.” The full list, which contains both plaintiffs’ and defense counsel, is available here.

As discussed in this article in the San Diego Union-Tribune, Starbucks’ supervisors sharing tips left by customers in tip jars is at the heart of a class action lawsuit that is now headed to the damages phase. The class action brought nearly four years ago alleges that the company’s policy of sharing tips between baristas and shift supervisors violates state labor laws which prohibit such sharing.

Starbucks argued at trial that the shift supervisors were not managers, and performed many of the same tasks as baristas. On Feb. 28, the court found Starbucks liable, ruling that shift supervisors “both supervise and direct the acts of the baristas” at the 1,400 California stores the company operates.

The damages portion of the Starbucks trial begins today. Terry Chapko, a lawyer for the baristas, said the final amount could be in the “tens of millions” of dollars for the 120,000 people who have worked as baristas at Starbucks in California since October 2000.

The SEC announced last week the appointments of the two leaders of its new “Office of Collections and Distributions.” The appointees are Richard J. D’Anna, Director of the office, and Lynn M. Powalski, Deputy Director. The new office is intended to “expedite the return of more than $5 billion in so-called Fair Funds to harmed investors, while cutting red tape and the costs of the distributions.”Mr.D’Anna was previously Senior Vice President at 1st Bridgehouse Securities and a Senior Vice President and Consultant at FITS, Inc. Ms. Powalski was previously an Assistant Director and Assistant Chief Litigation Counsel for Collections and Distributions within the SEC’s Division of Enforcement.

Yesterday marked the final day as an SEC Commissioner for Annette Nazareth.  In a letter to President Bush dated January 18, 20008, Ms. Nazareth announced that she was resigning as of January 31, 2008 “to pursue other professional opportunities.”

Following the departure in September 2007 of fellow Democratic commissioner Roel Campos, Nazareth had been the sole Democrat on the SEC, serving along with Republican Chairman Christopher Cox and commissioners Kathleen Casey and Paul Atkins.  As discussed in this article, “by law, the SEC cannot have more than three members from the same political party, which effectively means President Bush will have to find two Democrats” to join the Commission.  Earlier this year, Senate Majority Leader Harry Reid reportedly recommended two former SEC officials to fill the Democratic spots — Elisse Walter and Luis Aguilar.

In a 5-3 decision yesterday (opinion available here), the U.S. Supreme Court ruled against investors and in favor of certain customers and suppliers of publicly-held Charter Communications in Stoneridge Investment Partners v. Scientific-Atlanta Inc. and Motorola Inc.  The investors “sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors’ company to mislead its auditor and issue a misleading financial statement affecting the stock price.”  The Court, however, concluded that “the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.”

As summarized here by the WSJ, the case centered on the theory of “’scheme liability,’ i.e., whether third parties — investment bankers, lawyers, accountants and vendors — can be held liable under the federal securities laws for fraud committed by companies with which they do business.”  The Court’s ruling appears to rein that theory in by requiring actual reliance on a third party’s allegedly deceptive conduct.

A quick video analysis of the Court’s decision by the WSJ’s Ashby Jones is available below.

Back in 2004, I wrote in this Compliance Week article that “corporate executives, spokespersons and counsel should be aware that the period immediately following an SEC investigation needs be treated as the “No-Spin Zone.” My 2004 article discussed a situation involving a company called AGCO Corp. that on March 10, 2004 received a letter from the SEC advising it that the SEC’s inquiry had been terminated, and no enforcement action has been recommended to the Commission.

Later that day, the Atlanta Journal-Constitution reported that AGCO Corp. had publicly announced the end of the SEC’s inquiry, and quoted AGCO Corp.’s CEO as stating that “It’s a good day…. When you’re sure that you haven’t done anything wrong — but to the outside world it looks like you’re guilty of something — it’s a real relief to be vindicated from any accusations.”

“Vindication,” however, is not the SEC’s message when it advises companies that an investigation has been terminated. Indeed, the SEC routinely warns in such letters that it is “providing this information under the guidelines in the final paragraph of Securities Act Release No. 5310,” which states:

The Commission is instructing its staff that in cases where such action appears appropriate, it may advise a person under inquiry that its formal investigation has been terminated. Such action on the part of the staff will be purely discretionary on its part for the reasons mentioned above. Even if such advice is given, however, it must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation of that particular matter.  All that such a communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the Commission. The attempted use of such a communication as a purported defense in any action that might subsequently be brought against the party, either civilly or criminally, would be clearly inappropriate and improper since such a communication, at the most, can mean that, as of its date, the staff of the Commission does not regard enforcement action as called for based upon whatever information it then has. Moreover, this conclusion may be based upon various reasons, some of which, such as workload considerations, are clearly irrelevant to the merits of any subsequent action. (Emphasis added).

Not surprisingly, within one day of its so-called “vindication,” AGCO issued a press release stating that

The termination of the SEC inquiry does not indicate that our accounting procedures or disclosures are correct or that we have been vindicated. That is not what the SEC letter said, and I want to correct what was reported in the media. All the letter said was that the inquiry was terminated. Neither that letter nor anything else said by the SEC staff in any way suggested that AGCO’s accounting or related disclosures are correct.

As we discussed here in 2006, painful lessons such as the one in AGCO seemed to have led corporations to respect the “No-Spin Zone” in recent years, and helped them to avoid turning what should be a positive development into a negative one. Indeed, a “default” corporate statement seems to have evolved in response to notice from the SEC of the termination of an investigation: companies now simply say that they are pleased that “the matter is behind us.”

All of this is context for the alarm bells that went off when we saw this article (”Usana Feels Vindicated”) in Saturday’s Salt Lake Tribune.  The article reported that Usana Health Sciences Inc. announced that it had received notification from the SEC that its inquiry was complete and that no “enforcement action” was being recommended.  So far so good.  But the article also quoted an “outside spokesman” for the company as  stating “We couldn’t have asked for a better outcome…. This really is a vindication of the company.”

Uh oh.  After four years, the “V” word is again being tossed around in the “No-Spin Zone.”  Stay tuned to see what, if anything, may follow.

According to this article from Reuters, Italian consumer group Adusbef may file Italy’s first class action lawsuit in its fight against Italian banks’ use of a “most hated” type of compound interest on loans.

The article notes that a recently enacted law will allow class action lawsuits to be filed in Italy for the first time beginning in July 2008, and Adusbef may bring such a suit against the practice of “anatocism, where compound interest is calculated on the initial loan plus interest that is accumulated each time the money comes due.”

Adusbef is quoted as stating that anatocism is a “form of usury” and “the most hated banking practice.” The article states that although it is banned by the Italian civil law code, Italian banks have been using compound interest for over 50 years.