The defendant, an executive officer of the U.S. subsidiary of a Swiss medical technology company, moved for summary judgment dismissing the Securities and Exchange Commission’s claims that he violated the antifraud and books and records provisions of the Securities Exchange Act of 1934. The SEC’s allegations stemmed from an improperly accrued “recall reserve” fund created in connection with the recall of a faulty medical device and the corrective surgeries that were necessary for patients who received the devices. After the recalls commenced, a number of patients initiated class action lawsuits, which were consolidated and settled in May 2002.
Among other issues, the court analyzed the accrual of a loss contingency in the fourth quarter of 2002 relating to the success fee paid to the company’s attorney for settling the litigation. Although the company originally agreed to pay the attorney a $5 million fee, plus a $20 million success fee, after the company’s stock price soared, the attorney sought, and was ultimately paid, an additional $25 million. The SEC alleged that the loss contingency should have accrued in the third quarter of 2002, when the defendant allegedly learned that the additional payment would be made, and that the defendant was liable, both as a primary violator and as an aider and abettor, for antifraud and books and records violations because he “took part or participated in the decision not to accrue” the payment at that time and also “failed to retain adequate documentation to support recognizing the payment in the proper reporting period.”
The court held that although the propriety of the accrual could not be resolved on summary judgment, the defendant could not be liable as a primary violator of the antifraud provisions because it was necessary to show that he caused the misstatements to be made and “‘[c]ausation’ cannot be satisfied by mere ‘participation.’” However, the court held that he could be liable for aiding and abetting the antifraud provisions because participation could be found to satisfy the “substantial assistance” requirement necessary for liability under those provisions. Further, the court held that even if the defendant was not responsible for the company’s financial statements as a whole, “a genuine issue of material fact exists as to whether [defendant] was responsible for accounting for the [transaction] and retaining adequate documentation” and thus denied the motion to dismiss the books and records violations. (SEC v. May, No. 07-1867 (JDB), 2009 WL 2634876 (D.D.C. Aug. 28, 2009))