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Judge Rakoff's Opinion in S.E.C. vs. Vitesse Semiconductor

Judge Rakoff's Opinion in S.E.C. vs. Vitesse Semiconductor

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Categories:Business/Law
Published by: DealBook on Mar 22, 2011
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03/24/2011

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK-------------------------------------SECURITIES AND EXCHANGE COMMISSION,Plaintiff,-v-VITESSE SEMICONDUCTOR CORPORATION,LOUIS R. TOMASETTA, EUGENE F.HOVANEC, YATIN D. MODY, NICOLE R.KAPLAN,Defendants.-------------------------------------JED S. RAKOFF, U.S.D.J.x::::::::::::x10 Civ. 9239 (JSR)OPINION AND ORDERPending before the Court is the joint proposal of plaintiffSecurities and Exchange Commission (“S.E.C.”) and three of the fivedefendants Vitesse Semiconductor Corporation (“Vitesse”), Yatin D.Mody, and Nicole R. Kaplan – to approve Consent Judgments that wouldresolve the case as to these defendants. The proposal raisesdifficult questions of whether the S.E.C.’s practice of acceptingsettlements in which the defendants neither admit nor deny theS.E.C.’s allegations meets the standards necessary for approval by adistrict court.The Complaint in this case, filed December 10, 2010,alleges that for more than a decade, Vitesse engaged in fraudulentrevenue recognition practices and stock options backdatings that wereconcealed from its shareholders and the public by innumerable materialmisstatements in Vitesse’s filings with the S.E.C. Compl. 1. Thesefraudulent practices were allegedly orchestrated by the four
 
individual defendants: co-founder and CEO, Louis Tomasetta; ChiefFinancial Officer (“CFO”) and Executive Vice President, EugeneHovanec; Controller and CFO, Yatin Mody; and Manager/Director ofFinance, Nicole Kaplan. Id. 2. Among other things, the Complaintalleges that between September 2001 and April 2006, Tomasetta,Hovanec, Mody, and Kaplan materially inflated Vitesse’s reportedearnings by immediately recording as revenues the shipments made toVitesse’s largest distributor, Nu Horizons Electronics Corporation,even though the distributor had an unconditional right to return theproduct. Id. 2. The Complaint further alleges that from 1995 to2006, Vitesse, through Tomasetta and Hovanec, fraudulently backdatedor repriced forty stock option grants without proper accounting, sothat the company failed to record approximately $184 million incompensation expenses. Id. ¶¶ 5-6.Simultaneous with filing the Complaint on December 10, 2010,the S.E.C. – confident that the courts in this judicial district wereno more than rubber stamps – filed proposed Consent Judgments againstVitesse, Mody, and Kaplan without so much as a word of explanation asto why the Court should approve these Consent Judgments or how theConsent Judgments met the legal standards the Court is required toapply before granting such approval. Called to account, the S.E.C.provided the Court with a letter brief dated December 21, 2010 (“SEC2
 
Br.”) seeking to justify the proposed settlements. The Court then
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convened a hearing on December 22, 2010, at which the parties orallyanswered some of the Court’s questions and agreed to provide furtherwritten submissions regarding the Court’s stated concerns. Although
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these submissions did not fully answer all of the Court’s questions,the Court, upon reflection, finds that the materials now before it aresufficient to enable the Court to rule on whether or not to approvethe proposed Consent Judgments.The S.E.C.’s letter brief of December 21, 2010 correctlystates the standard that the Court must apply in determining whetherto approve the proposed Consent Judgments:The standard for judicial review and approval ofproposed consent judgments in [Securities and Exchange]Commission enforcement actions is well-established.Because actions brought by the Commission seek to enforcethe federal securities laws, they should serve “thepublic interest.” SEC v. Randolph, 736 F.2d 525, 529(9th Cir. 1984), see also United States v. Trucking Emp.,Inc.,
 
561 F.2d 313, 317 (D.C. Cir. 1977)(“prior toapproving a consent decree a court must satisfy itselfof the settlement’s overall fairness to beneficiaries andconsistency with the public interest”) (citations andinternal quotations omitted). To ensure that the publicinterest is served, the court “need not inquire into theprecise legal rights of the parties nor reach and resolvethe merits of the claims or controversy, but need onlydetermine that the settlement is fair, adequate, reasonable
 
This, and the other letter briefs submitted by the
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parties, will now be docketed with the Clerk of the Court.Indicative of the parties’ view that the Court’s approval
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was pro forma, the attorneys for settling defendants Mody andKaplan initially asked to be excused from attending thisconference, an application that was denied. See Transcript ofHearing on December 22, 2010 (“tr. 12/12/10") at 3.3

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