Securities and Exchange Commission v. Spiegel, Inc.

The Securities and Exchange Commission (SEC) (plaintiff) filed a civil action against Spiegel, Inc. (defendant), alleging that Spiegel had failed to file required periodic reports with the SEC during 2002 and had failed to disclose an auditor’s opinion. Spiegel consented to the review of its records by a court-appointed independent examiner. The examiner found that beginning in 1999, Spiegel had started offering credit cards to high-risk borrowers and then sold the credit-card receivables to special-purpose entities through an asset-backed-securitization program. When an economic downturn left Spiegel’s customers unable to pay their credit-card bills, Spiegel’s asset-backed securitizations nearly hit a performance trigger that would have sent the securitizations into a rapid amortization and likely would have bankrupted Spiegel. To avoid that outcome, Spiegel manipulated one of the components in the calculation of the performance trigger. In 2001, Spiegel began experiencing other financial difficulties. In March 2002, as Spiegel was preparing to file its SEC Form 10-K annual report for 2001, Spiegel’s auditor advised Spiegel that the auditor would have to give Spiegel a so-called “going concern” opinion (i.e., an opinion casting doubt on Spiegel’s ability to remain in business). Spiegel decided not to file its Form 10-K rather than file the Form 10-K with the going-concern opinion. The National Association of Securities Dealers Automated Quotations (Nasdaq) indicated that Nasdaq would delist Spiegel unless Spiegel filed the Form 10-K. Spiegel’s United States-based management, United States-based outside counsel, and outside auditors all recommended that Spiegel file the Form 10-K. However, Spiegel’s German executive committee rejected that idea and directed Spiegel not to file. German management also directed Spiegel not to file any of Spiegel’s SEC Form 10-Q quarterly reports during 2002. In February 2003, when Spiegel learned of a potential SEC Enforcement Division investigation, Spiegel began to belatedly file the missing reports. The 15-month gap in any filings by Spiegel left investors unable to obtain information necessary to make informed investment decisions about Spiegel. The examiner further found that Spiegel’s outside counsel, Kirkland & Ellis, had advised Spiegel’s general counsel by May 2002 that Spiegel was violating the law by not filing the Form 10-K. Kirkland & Ellis’s advice had also reached Spiegel’s upper management, which meant that Kirkland & Ellis and Spiegel’s general counsel had initially satisfied the SEC’s requirement that lawyers representing a public company must report violations of securities laws “up the ladder” (i.e., as high as the board of directors). However, the examiner noted that because the lawyers’ advice was rejected by Spiegel’s upper management, the initial reporting up the ladder was not sufficient under the circumstances. The examiner further found that White & Case, the outside counsel tasked by a German executive with reviewing the United States attorneys’ recommendations, had failed to report up the ladder that White & Case agreed with the attorneys’ advice. The examiner opined that if White & Case had done so, Spiegel’s German management might have decided to comply with Spiegel’s legal obligations. Furthermore, neither Kirkland & Ellis nor White & Case had advised Spiegel of the consequences of Spiegel’s continuing failure to make disclosures after May 2002. The examiner opined that if the SEC had had a so-called “noisy withdrawal” requirement in place (i.e., a requirement that outside counsel must withdraw from representation and inform the SEC if the company does not timely respond appropriately to counsel’s advice), the SEC might have learned about Spiegel’s issues sooner.