Securities & Exchange Commission v. Vitesse Semiconductor Corp.
2011 U.S. Dist. LEXIS 28695
S.D.N.Y.2011Background
- SEC seeks consent judgments against Vitesse Semiconductor, Mody, and Kaplan to resolve securities-enforcement claims without admissions or denials.
- Allegations span over a decade: fraudulent revenue recognition and backdated stock option grants resulting in approximately $184 million in unrecorded compensation expense.
- Alleged conduct included recognizing revenues from shipments to Nu Horizons with unconditional return rights and backdating or repricing forty stock options from 1995–2006.
- Mody and Kaplan have pleaded guilty in parallel criminal proceedings and cooperated with the government; Vitesse faces financial distress and contributed to a class-action fund.
- SEC proposes specified monetary penalties, disgorgement, and broad injunctive relief; consent judgments would preclude admissions or denials by the defendants.
- Court emphasizes its duty to ensure the consent judgments are fair, reasonable, adequate, and in the public interest despite deference to the SEC.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court may approve settlements without admissions | SEC asserts longstanding policy allows settlements without admission/denial; consistency with public interest. | Defendants argue settlements should require admissions or at least not obscure truth; risk of collateral estoppel and public misperception. | Court approves under unusual circumstances, while noting policy concerns. |
| Whether the terms are fair, reasonable, adequate, and in the public interest | SEC claims terms reflect corporate finances and cooperate with criminal proceedings; overall public interest served. | Defendants contend penalties are modest given misconduct over a decade and potential liability elsewhere. | Terms are fair, reasonable, adequate, and in the public interest. |
| Whether the unique circumstances justify approving settlements that do not admit conduct | SEC relies on coexisting criminal pleas and class-action fund contributions to support admissions by implication. | The practice undermines transparency and public confidence without admissions or clear collateral estoppel safeguards. | Under the present unusual circumstances, consent judgments are approved, with caveats for future settlements. |
Key Cases Cited
- SEC v. Randolph, 736 F.2d 525 (9th Cir. 1984) (settlements should serve the public interest; court reviews for fairness and adequacy)
- United States v. Trucking Enterprises, Inc., 561 F.2d 313 (D.C. Cir. 1977) (before approving consent decrees, court must ensure fairness, adequacy, and public interest)
- Citizens for a Better Environment v. Gorsuch, 718 F.2d 1117 (D.C. Cir. 1983) (court must determine consent judgments are fair, reasonable, adequate, and in public interest)