Former Farris Baker Watts General Counsel Ted Urban
finally prevailed in his long running battle with the SEC to clear his name and
reputation. The Commission, on an evenly divided vote, affirmed the initial
decision of the Administrative Law Judge, dismissing the failure to supervise
charge brought against him.
As the new RMBS Task Force began to unfold the DOJ and
the SEC filed, respectively, criminal and civil charges against former Credit
Suisse trades tied to the market crisis. This is one of the few market crisis
cases involving charges against former employees of a major Wall Street bank.
The SEC also concluded a financial fraud action this week which traces to 2000.
The DOJ continued to have difficulty extending what it
has called the "new era" of FCPA enforcement. The second African Sting trial
ended with a split verdict, two defendants were acquitted by the jury. The
court declared a mistrial as to three others after the jury hung. The first
trial in this case ended in a hung jury.
Finally, the FSA sanctioned two more persons in
connection with their roles in Greenlight Capital's insider trading.
Previously, the regulator sanctioned the firm and its founder.
SEC Enforcement: Litigated cases
Failure to supervise: In the Matter of
Theodore W. Urban, Adm. Proc. File No. 3-13655 (Jan. 26, 2012) is
an action against the former General Counsel of Farris Baker Watts, Inc.
alleging failure to supervise. Previously, the initial decision dismissed the
charges against Mr. Urban (here). On the Division's appeal, the Commission
canceled the oral argument after reviewing the briefs and directed that the
proceeding be dismissed. The two participating Commissioners were split.
Commissioners Aguilar, Paredes, Walter, Gallagher and Chairman Schapiro did not
participate.
SEC Enforcement: Filings and settlements
Market crisis: SEC v. Kareem Serageldin,
Civil Action 12 CIV 0796 (S.D.N.Y. Filed Feb. 1, 2012) is an action brought by
the Commission, with a parallel case by the USAO in Manhattan, which charges
four former Credit Suisse Group traders with fraudulently overpricing subprime
bonds: Kareem Seregeldin, Global Head of Structured Credit Trading at Credit
Suisse; David Higgs, Managing Director and Head of Hedge Trading who reported
to Mr. Serageldin; Faisal Siddiqui, vice president in Credit Suisse Group's CDO
Trading Group in New York who reported to Mr. Higgs; and Salmaan Siddiqui, vice
president in Credit Suisse Group's CDO Trading Group in New York who also
reported to Mr. Higgs. In late 2007 and 2008 the defendants engaged in a
fraudulent scheme to overstate the prices of more than $3 billion of subprime
bonds owned by Credit Suisse to ensure their bonuses and help Mr. Seregldin
secure a promotion. Beginning in latter part of 2007 defendants marked the
bonds to the P&L rather than to fair value to avoid the impact of the
required write downs. Shortly after reporting the fourth quarter results,
Credit Suisse senior management began to unravel the fraud. They detected
abnormally high prices on certain bonds controlled by Defendants. On February
19, 2008 the firm issued a press release stating that its financial results
were incorrect. Subsequently, the bank revised net income for 2007 downward
from CHF 8.55 or $7.12 billion to CHF 7.76 or $6.47 billion and for the fourth
quarter of 2007 from CHF 1.3 or $1.16 billion to CHF 540 or $471 million. The
write downs centered on the defendants' ABN1 book which recognized a write down
of about $1.3 billion. The SEC's complaint alleges violations of Exchange Act
Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in
litigation. The firm was not charged based on its cooperation.
Financial fraud: SEC v. Todd, Case
No. 03-CV 2230 (S.D. Ca.) is the long running financial fraud action against
Jeffrey Weitzen, former CEO of Gateway, Inc., and Robert Manza, former
controller of the company. In brief, the complaint claimed that the defendants
engaged in a fraud with respect to the recognition of revenue in the third
quarter of 2000 while at Gateway. Previously, a jury found in favor of the
Commission. The district court overturned that verdict on post trial motions.
The Ninth Circuit, however, reversed those rulings and remanded the case to the
district court. This week both defendants settled. Mr. Weitzen consented,
without admitting or denying the allegations in the complaint, to the entry of
an injunction prohibiting future violations of Exchange Act Section 10(b). He
also agreed to pay a civil penalty of $110,000. Mr. Manza consented to the
entry of a permanent injunction on the same basis which prohibits future
violations of Exchange Act Section 10(b) and aiding and abetting violations of
Section 13(a). Mr. Manza also agreed to be barred for five years from serving
as an officer or director of a public company and to pay disgorgement of
$85,150 along with prejudgment interest and a penalty of $110,000.
Short selling: In the Matter of Jeffrey A.
Wolfson, Adm. Proc. File No. 3-14726 (Jan. 31, 2012) is an action
against Jeffery Wolfson, his brother Robert, and the firm where they were
employed, Anchor Trading II, LLC. It alleged repeated violations provisions of
Reg. SHO. According to the Order, over a one year period beginning in July
2006, the Respondents earned at least $17,375,000 in illicit trading profits by
engaging in a series of transactions which violated the locate and close out
provisions of the Regulation. The proceeding is being scheduled for hearing.
Financial fraud: SEC v. Senior, Civil
Action No. 3:12CV60 (N.D. Ind. Filed Jan 30, 2012) is one of four actions
centered on a years long financial fraud at Sheffield, England based Symmetry
Medical Sheffield LTD f/k/a Thorton Precision Components, Ltd or TPC. Charged
with the fraud were Richard Senior, then VP for European Operations, Matthew
Bell, then Finance Director, Lynne Norman, then Controller, and Shaun Whiteley,
then the Account Manager. The four executives systematically engaged in a
fraudulent scheme to inflate the financial results of TPC by understating
expenses and overstating assets and revenues beginning in 1999. As a result of
the scheme net income was overstated for fiscal 2004 by 39%, 2005 by 421%, 2006
by 30%, for the first quarter of 2007 by 131% and for the second quarter of
2007 by -6.4%. In April 2008 Symmetry restated its financial statements for
fiscal years 2006, and the first two quarters of 2007. The complaint alleges
violations of Securities Action Section 17(a) and Exchange Act Sections 10(b),
13(a), 13(b)(2)(B) and 13(b)(5).
Each defendant settled, consenting to the entry of a
permanent injunction, without admitting or denying the allegations in the
complaint, based on the sections they were alleged to have violated. Messrs
Senior, Bell and Norman will also be barred from serving as an officer or
director of a public company. Mr. Bell agreed to pay disgorgement of $136,209 along
with prejudgment interest but payment is waivered based on his financial
condition. Mr. Senior's consent defers the resolution of the monetary component
of the case pending the completion of assets discovery. Finally, Messrs. Bell,
Norman and Whitley also agreed to be barred from appearing or practicing before
the Commission as an accountant.
Related actions:
- Company
& CFO: In the Matter of Symmetry Medical, Inc., Adm.
File No. 3-14723 (Jan. 30, 2012) is a proceeding against the company and
its CFO and Senior Vice President, Fred Hite. The company consented to a
cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A)
and 13(b)(2)(B). Mr. Hite consented to the entry of a cease and desist
order based on Exchange Act Section 13(b)(5) and SOX Section 304(a),
agreed to pay a civil penalty of $25,000 and to reimburse the company for
$185,000 in bonuses and other incentive based or equity based compensation
and for stock sale profits.
- CEO:
SEC v. Moore, Civil Action No. 3:12 CV 61 (N.D. Ind., Filed Jan 30,
2012) is and action against Brian Moore, CEO and president of Symmetry
based on SOX Section 304. Mr. Moore resolved the matter by agreeing to the
issuance of a final judgment ordering him to reimburse $450,000 to
Symmetry which represents certain discretionary compensation paid to him
in during the 12 month period following the restated financials.
- Auditors:
In the matter of Christopher Kelly, ACA, Adm. Proc. File No.
3-14724 (Jan. 30, 2012). This is a proceeding against outside auditors, Christopher
Kelly and Margaret Hebb, alleging improper professional conduct. The
matter was resolved with the entry of an order by consent suspending each
Respondent from appearing or practicing before the Commission as an
account with a right to reapply after two years.
FCPA/Anti-corruption
The jury acquitted defendants Patrick Caldwell and
Johathan Godsey in the SHOT-Show or Africa Sting cases. The court declared a
mistrial after the jury failed to reach a verdict as to defendants John
Mushriqui, Jeana Mushriqui and Mark Morales. The court previously dismissed the
conspiracy count as to each defendant. Defendant Giordanella, who was only
named in that count, was thus released.
Initially, twenty-two executives and employees of
military supply companies were indicted in the largest FCPA sting operation in
history. The cases were lauded by the Department of Justice which has declared
this to be a "new era" of FCPA enforcement. The first trial, which began in May
2011, ended in a mistrial when the jury deadlocked. The defendants were Andrew
Bigelow, Pankesh Patel, John Weir and Lee Tolleson. Prior to submitting the
case to the jury the court dismissed a substantive FCPA count as to Messrs.
Patel and Tolleson and dismissed a money laundering count as to each defendant.
Criminal cases
Investment fund fraud: U.S. v. Schneider (E.D.N.Y.)
is a securities fraud action against Laurie Schneider which alleges that she
operated a Ponzi scheme. According to the court papers, beginning in September
2006 the defendant solicited investments in Janitorial Close-Out City Corp., a
company which supposedly invested in industrial equipment and machinery
manufactured by companies in China. Investors were falsely told that their
investment was guaranteed, that there were rates of return as high as 60% and
that the equipment could be purchased at discount prices and resold in the U.S.
at a profit. In fact investors who received returns were paid with other
investor funds. Approximately 25 investors paid over $5 million to the
defendant. The case is pending.
FINRA
The agency initiated a proceeding against Charles Schwab
& Co., alleging it violated FINRA rules in two respects. First, it amended
its customer agreements to require that they waive their rights to bring class
actions against the firm. Second, the firm added a provision which requires
that customers agree that arbitrators in a proceeding cannot consolidate their
action with more than one person's claim. FINRA is seeking an expedited
hearing.
FSA
The regulator imposed penalties on two more persons tied
to the sale by Greenlight Capital of part of its shares of Punch based on
inside information (here). This time the FSA sanction Alexander Ten-Holder, the
former compliance officer at Greenlight Capital (UK) ₤130,000 for failing to
question and make reasonable inquiries before selling the shares. Mr.
Ten-Holder received the order to liquidate the firm's position in Punch knowing
that there had been conversations with management. He should have inquired to
satisfy himself that the sales were not being ordered based on inside
information. Mr. Ten-Holder however failed to take any steps.
The FSA also fined Caspar Agnew, a trading desk director
at JP Morgan Cazenova, ₤65,000 in connection with the transaction for failing
to identify and act on a suspicious order from Greenlight to sell Punch. As a
result of his inaction the firm failed to identify the trade as suspicious and
report it to the FSA.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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