A federal judge in California gutted the SEC’s case against the former CEO and former CFO of IndyMac Bank by granting partial summary judgment against the SEC and eliminating most of the claims. S.E.C. v. Perry, No. CV 11-1309 (C.D. Cal. May 21, 2012). (Transcript) The SEC had alleged that in 2008, IndyMac’s former CEO Michael W. Perry and former CFO A. Scott Keys participated in filing false and misleading disclosures in SEC filings. (Complaint) The SEC claimed that even as Perry and Keys were receiving information regarding IndyMac’s rapidly deteriorating financial condition, the two executives made misleading statements and omissions regarding the bank’s liquidity, capital-raising needs and activities, and capital ratio, which the SEC alleged was an important indication of the bank’s soundness. Despite the breadth of the SEC’s allegations, U.S. District Judge Manuel Real of the Central District of California granted the defendants’ motion for partial summary judgment, leaving few issues for trial.
Analyzing the alleged misstatements and omissions document-by-document, the court explained in detail why the SEC’s allegations must fail. For example, the SEC alleged that IndyMac’s 2007 Form 10-K misleadingly stated that the bank “may” be required to raise capital under terms that would be materially adverse to shareholders, when in fact the bank was already raising capital through a direct stock purchase plan that was highly dilutive of the bank’s book value. The court rejected the SEC’s claim, noting that the Form 10-K clearly stated elsewhere that the direct stock purchase plan was already in effect and therefore was not something that may happen, but which was already happening. The court also rejected the SEC’s allegation that Perry and Keys failed to disclose certain internal projections in the 10-K that revealed that the bank’s well-capitalized status was in jeopardy. The court held that companies are not required to disclose all internal projections, even where such disclosures would provide additional information. Since declining to disclose an existing internal projection is not an omission of material fact, the court ruled in favor of the defendants.
The court likewise ruled for the defendants on claims concerning a Form 8-K that was purportedly incorporated by reference into certain offering documents. The court first noted that that the offering documents expressly stated that they did not incorporate documents such as the 8-K. The court further found that the SEC had failed to show that the defendants made the statements in the offering documents because it was undisputed that neither Perry nor Keys signed the documents or had any role in preparing or reviewing them.
The court also granted defendants summary judgment concerning an allegedly misleading prospectus. The SEC alleged that Perry misled investors in a May 2, 2008 prospectus by failing to disclose that he had advised the board that the bank planned to defer its dividend. The board, however, did not approve deferral of the dividend until May 8—after the prospectus issued—and that information was promptly communicated to shareholders. Moreover, while Perry had stated the bank’s intent to the board on April 24—before the prospectus issued—it was the board that had the authority to take action. Noting that a management opinion is not actionable if the speaker lacks the authority to enforce the opinion, the court found for the defendants.
Finally, the court dealt a further blow to the SEC’s case by rejecting the agency’s claim for disgorgement. The court found the SEC had failed to demonstrate that the defendants’ salaries and benefits would not have been given but for the alleged illegal conduct.
Though some claims remain and trial is scheduled for late June 2012, the court granted summary judgment for defendants on a majority of the documents that lay at the heart of the government’s case.