© 2012 The Texas Lawbook.
By Mark Curriden, JD
Senior Writer for The Texas Lawbook
Two former top executives at Plano-based Microtune Inc. won a major legal victory Wednesday that is likely to end the U.S. Securities and Exchange Commission’s five-year-long effort to prosecute them for allegedly being involved in a $22.5 million options backdating scheme.
The U.S. Court of Appeals for the Fifth Circuit, in an unanimous opinion, ruled that the SEC waited too long to bring charges against Microtune co-founder and former CEO Douglas Bartek and its former general counsel and CFO, Nancy Richardson.
The three-judge panel, which included Judge Catharina Haynes of Dallas, also rejected the SEC’s efforts to have Bartek and Richardson banned for life from serving as an officer or board member of a publicly traded corporation – a decision legal experts say is likely to receive a lot of attention in securities litigation circles.
“This is a complete win,” said Haynes and Boone litigation partner Ron Breaux, who led the firm’s defense of Bartek. “The court rejected the SEC’s arguments on every point. Bartek had faced significant penalties that would have had devastating consequences on him personally and professionally.”
The SEC claims that Bartek and Richardson improperly backdated stock options to new and existing employees from 2000 to 2003, but failed to properly record and report it. The agency started investigating Microtune in 2003 but waited until July 2008 to file charges, claiming that federal law allowed the five-year statute of limitations to be stayed while the SEC conducted discovery as part of its inquiry.
The federal appeals court found that “a plain reading of [the law] reveals no discovery rule exception.”
Legal experts said that the Fifth Circuit’s decision essentially keeps the law on statute of limitations the same as it has been applied for years. The SEC, they say, was seeking to make new law in order to give it more flexibility in how quickly it must bring its civil lawsuits.
Breaux said this is the first stock options backdating case in which the SEC’s claims were dismissed on statute of limitations grounds.
Efforts to obtain a comment from the SEC and whether it plans to appeal the court decision were unsuccessful. The SEC’s Fort Worth Regional Office handled the original investigation and lawsuit, but the appeal was handled by lawyers in the agency’s Washington, DC office.
“The SEC had argued that there was a Second Circuit case that supported their position, but the Fifth Circuit disagreed, finding the Second Circuit case to be factually distinguishable,” says Breaux. “Prior to the decision being announced, the SEC said they would likely try to get the Supreme Court to hear the case if they lost. So, we will have to see what the SEC does.”
Edwin Tomko, a former SEC enforcement lawyer at the SEC and now a partner at Curran Tomko Tarski, says the Fifth Circuit decision is “extremely interesting” because of the “far reaching ramifications” it could have in determining that injunctive relief barring Bartek and Richardson from being corporate officers is officially a penalty.
“For an unpublished opinion, which isn’t supposed to have precedential affect, this decision is likely to raise a lot of questions in other cases,” says Tomko.
In essence, the SEC argued that permanent injunctions banning Bartek and Richardson from serving as corporate officers are equitable remedies, not punishment. The Fifth Circuit disagreed.
Bartek is now the co-founder of Frisco-based Tango Networks, which develops technology designed to transform mobile devices into enterprise office phones.
The Bartek defense team also includes Haynes and Boone partners Lawrence A. Gaydos and Jeremy D. Kernodle and associates Emily W. Westridge and Ryan Paulsen.
The original case was SEC v. Microtune Inc., case number 08-cv-1105, in the U.S. District Court for the Northern District of Texas. At the Fifth Circuit, the case was number 11-10594 and styled Securities and Exchange Commission v. Douglas J. Bartek; Nancy A. Richardson.
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