The Commission announced that its enforcement program
remains vibrant, having filed just one less action last year that its record
setting 735 actions in the prior fiscal year. The enforcement program is being
bolstered by over 3,000 whistleblower complaints that were filed last year from
all 50 fifty states and a number of foreign countries. And, the long awaited
guidance on the FCPA was published by the agency and the DOJ.
In court the Commission lost another significant market
crisis case centered on the first mutual fund to "break the buck." The jury did
find in the Commission's favor on the negligence based charges but it rejected
each intentional fraud claim. At the same time the Commission settled with BP
over its faulty disclosures regarding the Deep Water Horizon oil spill,
collecting the third largest penalty in its history.
Report: The House
Sub-Committee on Oversight and Investigations, Committee on Financial Services,
issued a report on MF Global (Nov. 15, 2012). The Report is critical of the
lack of coordination between the CFTC and the SEC and raises the prospect of a
merger of the two agencies (here).
Commission released statistics regarding its enforcement program for the last
fiscal year showing that a total of 734 enforcement cases were brought, one
less than the record setting 735 in the prior year. Those cases included 58
insider trading actions, one more than the year earlier; 147 actions involving
investment advisers, also one more than the prior year; and 134 against
broker-dealers, a 19% increase over the year before. They also included
"firsts" such as the proceeding against the New York Stock Exchange and dark
pool operator Pipeline Trading Systems.
report on the whistleblower program states that the agency received over 3,000
tips during the past year. Those came from all 50 states and 49 countries.
During the last fiscal year there were 143 enforcement judgments and orders
that potentially qualify for awards. The most common complaint related to
Report on NRSROs: The
agency issued a Staff Summary Report of Examinations of Nationally Recognized
Statistical Rating Organizations. The findings state that the methodology
applied to rating certain securities appears to have changed; certain
securities were not downgraded in a timely fashion; methodologies were
published and disclosed inconsistently; and directors were not actively
exercising their oversight duties (here).
SEC Enforcement: Litigated cases
Market crisis: SEC v. Reserve Management
Company, Inc., Case No. 1:09 CV 4346 (S.D.N.Y. Filed May 5,
2009) is the Commission's market crisis case centered on events which led to
the first money fund to "brake the buck." The jury returned verdicts against
the Commission on each intentional fraud count but did find in its favor on
negligence based counts. The case named as defendants Reserve Management
Company or RMC, a registered investment advisor owned by defendant Bruce Bent
Sr. and his family; Resrv Partners, a registered broker dealer which is the
distributor for the funds managed by RMC and which is also controlled by the
Bent defendants; Bruce Bent Sr., the Chairman of RMC and president, treasurer
and trustee of the Fund; and Bruce Bent II, also an owner of RMC and a vice
chairman and the vice president and assistant treasurer of the Fund.
The Fund, one of the oldest and most respected in the
country, held $785 million of Lehman Brothers bonds on September 15, 2008 when
the investment banking firm collapsed into bankruptcy. By mid-morning on
September 15 the Fund was overwhelmed with redemption demands. The Fund's
custodian bank halted redemptions. In an effort to reassure investors and
others the defendants made a series of misrepresentations regarding the
financial resources available and used a flawed methodology to calculate NAV,
according to the complaint. The complaint charged violations of Exchange Act
Section 10(b), Securities Act Section 17(a) and Advisers Act Section 206(1) and
Privilege: SEC v. Welliver, Civil
No. 11-CV-3076 (D. Minn. Ruling Oct 26, 2012) is an action in which the court
addressed the question of inadvertent privilege waivers. During the course of
an investigation which centered on a lending arrangement involving an
investment company and another related entity, privileged documents were
produced. Later in the enforcement action some of the same and other privileged
materials were produced, some of which were then used by the defense in a
deposition. At the time defenses had been asserted which included advice of
counsel. Subsequently, the defendants amended the defenses to delete reliance
on counsel and sought to claw back the privileged documents. The court rejected
the claim based on Rule 502, Federal Rules of Evidence. Under that Rule the
Court concluded that there was a waiver of privilege as to the materials
produced at the Jones deposition but not by subject matter. The disclosure was
clearly intentional the court found. The record, however, did not support a
claim that there should be a subject-matter waiver since neither party
described the context in which the materials were used which might suggest a
basis for such a ruling under the Rule. The Court also concluded that there had
been a waiver as to the materials produced in response to the SEC investigative
subpoena and in discovery. Under the Rule the critical point is the
reasonableness of the precautions taken, the time taken to rectify the error
and the overriding fairness, the same approach utilized in pre-Rule case law in
the district. Here there was no showing regarding the procedures used to
safeguard privilege including any evidence that the defendants sought
extensions of time from the SEC.
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 3 civil injunctive actions and 1 administrative
proceeding (excluding tag-along-actions and 12(j) actions).
False statements: SEC v. BP p.l.c.,
Civil Action No. 2:12-cv-02774 (E.D.La. Filed Nov. 15, 2012) is an action
against the London based oil company stemming from the Deepwater Horizon spill
in the Gulf of Mexico. It began with an explosion on April 20, 2010. Following
the explosion, which killed eleven crew members, the rig sank. BP stated that
the flow rate of oil into the Gulf was estimated to be 5,000 barrels of oil per
day in three separate Forms 6-K filed with the Commission. Additional similar
statements were made by BP officials. Over time other contradicted those claims
but BP maintained its position despite the fact that eventually it had several
other studies which showed that the flow rate was significantly more.
Eventually the Flow Rate Technical Group, composed of government and academic
experts, determined that the rate was 52,770 to 62,700 barrels of oil per day.
The company never corrected its statements. The complaint alleged violations of
Exchange Act Sections 10(b) and 13(a). To resolve the case the company
consented to the entry of a permanent injunction prohibiting future violations
of the Sections cited in the complaint. It also agreed to pay the third larges
civil fine ever obtained by the SEC, $525 million which will be put into a fair
Disclosure: In the Matter of Massachusetts
Mutual Life Ins. Co., Adm. Poc. File No. 3-15095 (Nov. 15,
2012) is a proceeding against the firm stemming from the sale of certain
variable annuity products. Specifically, the Order alleges that from 2007
through 2009 the firm offered as an option a feature on certain variable annuity
products which was a rider known as Guaranteed Minimum Income Benefit or GMIB
value. It increased by a compound annual interest rate of either 5 or 6% and
permitted investors to make withdrawals any time during the annuity's
accumulation phase. The product was advertised as providing "Income Now" or
"Income Later." What was not clear in the disclosures, and apparently unknown
to certain company salesmen, was the effect of the withdrawals. After a number
of withdrawals both the contract and GMIB value, depending on market
conditions, could decline and adversely impact the amount a customer could
apply to an annuity and the future income stream. As part of its remedial
efforts the company eliminated the cap on GMIB riders. To resolve the
proceeding the company consented to the entry of a cease and desist order based
on the Section cited in the Order. It also agreed to pay a penalty of
Investment fund fraud: SEC v. Sekaran, Civil
Action No. 12 CIV 8199 (S.D.N.Y. Filed Nov. 9, 2012) is an action against Anand
Sekaran and his controlled entity, Wasson Capital Advisors Ltd. Mr. Sekaran was
the sole director and president of Wasson and also advised separately managed
accounts for others. For over a decade the operation was successful. As the
market crisis unfolded in 2008, however, defendants began incurring significant
losses from their investment strategy. Rather than inform investors they
created fictitious account statements on a monthly basis for three years. As
the losses continued Mr. Sekaran also misappropriated client funds to cover a
variety of personal expenses. The Commission's complaint alleges violations of
Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case
is in litigation. The U.S. Attorney's Office for the Southern District of New
York filed parallel criminal charges. In that proceeding Mr. Sekaran
surrendered and pleaded guilty to one count of securities fraud and one count
of mail fraud. His sentencing has been scheduled for February 19, 2013.
Investment fund fraud: SEC v. Ellis, Civil
Action No 0:12-cv-62211 (S.D. Fla. Filed Nov. 9, 2012) is an action against
James Ellis for soliciting 14 investors over a seven year period beginning in
2004 for a Ponzi scheme operated by George Ella. That Ponzi scheme is the
subject of an earlier Commission action. Lit. Rel. No. 22319 (April 6, 2012).
Most of the investors solicited by Mr. Ellis were his social connections in the
gay community centered in Wilton Manors, Florida. The complaint alleges
violations of each subsection of Securities Act Section 17(a), Sections 5(a)
and (c) and Exchange Act Section 10(b). The case is in litigation. See also Lit.
Rel. No. 22528 (Nov. 9, 2012).
Remarks: Commissioner Bart
Chilton addressed SEFCON, New York City (November 13, 2012) in remarks titled
"Bedrock, Country and My Dog." His remarks focused on the need for better
coordination for situations such as hurricane Sandy, cautioned against bills in
Congress to alter the Administrative Procedure Act and discussed the need for
position limits (here).
Remarks, Commissioner Bart
Chilton addressed The Globalization and Energy Markets: Investment and
Commodity Price Cycles Conference (Huston, Tx. Nov. 9, 2012) in Remarks,
"Sin-Orgy and Energy," which in part focused on the need for position limits,
an appeal being taken by the agency of an adverse court ruling regarding its
recent position limit rule and efforts to write a new rule (here).
Guidance: The SEC and the
Department of Justice released their long awaited guidance on the FCPA titled:
A Resource Guide to the U.S. Foreign Corrupt Practices Act (here).
The Securities and Futures Commission brought an action
against three current and former directors of First China Financial Network
Holdings Ltd, a Hong Kong exchange traded company that is a brokerage and corporate
finance company. Richard Yin Yingneng, former Chairman, Wang Wen Ming and Lee
Yiu Sun, current chairman and CEO of the company, were accused of a breach of
fiduciary duty in connection with a distribution of $18,692,000 dividend to
Fame Treasure Ltd, the seller in the 2007 acquisition by First China of GoH
Holdings Ltd (GoHi). Mr. Wang, the current Chairman of First China, was a
majority shareholder of GoHi at the time through his holdings in Fame Treasure
Ltd. The defendants claimed the distribution was part of an agreement between
the parties in the acquisition. The SFC claims the agreement does not exist.
Hurricane Sandy: To
aid the victims of Sandy's destruction please donate to the Red Cross, here.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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