This week SEC Chairman Mary Schapiro announced her
resignation, effective December 14, 2012. Commissioner Walter was designated as
Chairman, effective after Ms. Schapiro's departure. Ms. Walter has indicated
she will only remain as a member of the Commission for a brief period.
Beginning the week of Thanksgiving, the Commission
prevailed in two court actions while dismissing one of its market crisis cases.
It also filed four new insider trading actions and two market crisis cases.
The Manhattan U.S. Attorney's Office continued to bring
high profile insider trading cases, this time against another former employee
of SAC Capital. The Commission filed a parallel action. Following the filing of
the action speculation focused on possible charges against SAC Capital which
later announced that it has received a Wells Notice from the Commission.
The Chairman: Mary
L. Schapiro, one of the longest serving SEC Chairman, announced her
resignation, effective December 14, 2012. Ms. Schapiro has served through one
of the most difficult periods in the Commission's history. Taking office in
January 2009 she was immediately faced with an agency in disarray following a
series of scandals. The regulator was also faced with the aftermath of the
worst market crisis in history. Rising to the task under Ms. Schapiro's
leadership, the Commission initiated the largest reorganization of the
enforcement program in the history of the agency. Following the passage of the
ground breaking Dodd-Frank legislation, she led the Commission through an
unprecedented period of rule writing to implement the legislation.
SEC Enforcement: Litigated cases
Advisory fraud: SEC v. EagleEye Asset
Management, LLC, Civil Action No. 11-CV-11576 (D. Mass.) is an
action in which a jury returned a verdict in favor of the Commission and
against registered investment adviser EagleEye Management and its sole
principal Jeffrey Liskov based on a fraud on advisory clients. The complaint
centered around a forex trading scheme. Between April 2008 and August 2010 Mr.
Liskov made material misrepresentations to a dozen clients, according to the
Commission. The representations were made to induce the clients to liquidate
their securities holdings so the cash could be used to engage in high risk
forex trading. The trades resulted in about $4 million in losses for the
clients but generated over $300,000 in performance fees. In some instances Mr.
Liskov used a strategy which resulted in short term profits to generate the
fees. Later, however, the positions would decline sharply in value. In the case
of two clients Mr. Liskov liquidated their brokerage accounts without
permission. He then transferred the proceeds to forex trading accounts where
virtually all of their money was lost. The transfers were facilitated through
the use of doctored documents. The complaint alleged violations of Exchange Act
Section 109b) and Advisers Act Sections 206(1), 206(2) and 204. See also Lit.
Rel. No. 22546 (Nov. 27, 2012).
Aiding & abetting: SEC v. Greenstone
Holdings, Inc., Civil Action No. 10-cv-1301 (S.D.N.Y.) the
court granted in part the Commission's motion for summary judgment, fining
attorney Virginia Sourlis liable for aiding and abetting a fraud by issuing a
false legal opinion. In its papers the Commission claimed that attorney Sourlis
authored a false legal opinion that was used by the firm to issue over six
million shares of unregistered stock. The opinion described notes, note holders
and communications with those note holders for which there was no basis in
fact. The Court concluded that Ms. Sourlis aided and abetted violations of
Exchange Act Section 10(b). The Court reserved ruling on the Securities Act
Section 5 claim against the attorney while rejecting the SEC's claim of primary
liability against Ms. Sourlis. The Commission plans to file a motion seeking
appropriate remedies. See also Lit. Rel. 22542 (Nov.. 26, 2012).
Market crisis: SEC v. Steffelin, Civil
Action No. 11- 04206 (S.D.N.Y. Filed June 21, 2011) is the Commission's actions
against Edward Steffelin, a Managing Director at GSCP (NJ) L.P. That case was
filed in conjunction with another market crisis action against J.P. Morgan
Securities, SEC v. J.P. Morgan Securities LLC, Civil Action No. 11-04204
(S.D.N.Y. filed June 21, 2012). Both actions centered on the sale of interests
in a largely synthetic collateralized debt obligation known as Squared CDO
2007-1. The Commission's complaint alleged misstatements in connection with the
marketing of interests in the entity tied to the role of hedge fund Magnetar
Capital LLC. Mr. Steffelin's firm served as the portfolio managed on the deal.
Although the factual allegations in the complaint appeared to detail an
intentional fraud, the charges alleged negligence based fraud under Securities
Act Sections 17(a)(2) & (3). J.P. Morgan settled. Mr. Steffelin did not.
The Commission dismissed the proceeding with prejudice.
SEC Enforcement: Filings and settlements
Weekly statistics: Over
the last two weeks the Commission filed 9 civil injunctive actions and 8
administrative proceedings (excluding tag-along-actions and 12(j) actions).
Insider trading: SEC v. Conradt, Civil
Action No. 12-cv-8676 (S.D.N.Y. Filed Nov. 29, 2012) is an action against
attorney Thomas Conradt, formerly a registered representative at a New York
City brokerage firm, and David Weishaus, a law school graduate who was also
formerly an employee at a broker-dealer. The case centers on the acquisition of
SPSS Inc., by International Business Machine Corporation, announced on July 28,
2009. Mr. Conradt obtained inside information on the deal from his roommate
who, in turn, obtained it from an associate at a law firm working on the deal.
The associate discussed the information in confidence. Instant messages between
the two defendants reflect the fact that they knew they had inside information.
The defendants, and other downstream tippees, purchased shares and options in
advance of the deal announcement. Following the announcement the two
defendants, along with three other registered representatives tipped but not
charged here, had trading profits of over $1 million. The U.S. Attorney's
Office for the Southern District of New York announced parallel criminal
charges. The cases are pending. See also Lit. Rel. No. 22549 (Nov. 29,
Insider trading: SEC v. Pamplin,
Civil Action No. 1:12-cv-04136 (N.D. Ga. Filed Nov. 29, 2012) is an action
centered on the acquisition of TurboChef Technologies, Inc. by Middleby
Corporation, announced on August 12, 2012. Defendant John Pamplin, Jr. was
employed at TurboChef as its Chief Information Officer until March 2008 when he
was terminated. Subsequently, he remained in contact with a number of employees
of the company. The complaint claims he pressed those employees for information
about the company and a possible deal. Through those contacts it is alleged
that he in fact obtained inside information. He is also alleged to have engaged
in suspicious trading which included liquidating company share holdings and the
purchasing out of the money options. Following the announcement of the deal Mr.
Pamplin had $68,000 in trading profits. The complaint, which is in litigation,
alleges violations of Exchange Act Section 10(b). See also Lit. Rel. no.
22550 (Nov. 29, 2012).
Investment fund fraud: SEC v. Resources
Planning Group, Inc., Civil Action No. 12-cv-9509 (N.D. Ill.
Filed Nov. 29, 2012) is an action against the registered investment adviser and
its co-owner and co-principal, Joseph Hennessy. From early 2007 through the
spring of 2012 the defendants raised more than $1.3 million by telling
investors that the Midwest Opportunity Fund could offer high returns when in
fact it was in poor financial condition. Investors were not told that the money
was actually to repay notes of the Fund personally guaranteed by Mr. Hennessy
that had been issued to acquire the Fund's largest portfolio companies but
which it could not repay. The complaint alleges violations of Securities Act
Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2)
and (4). The case is in litigation. See also Lit. Rel. No. 22548 (Nov.
Asset valuation: In the Matter of KCAP
Financial, Inc, Adm. Proc. File No. 3-15109 (Nov. 28, 2012)
is a proceeding which names as Respondents, KCAP Financial, Inc., f/k/a/
Kohlberg Capital Corporation, a closed end investment company that is regulated
as a BDC, and three of its officers, Dayl Pearson, Michael Wirth and R.
Jonathan Corless the CIO. From late 2008 through the middle of 2009 KCAP held
two primary classes of assets. One was corporate debt while the other was
investments in CLOs. During the financial crisis the firm did not account for
certain market based activity in determining the fair value of its debt
securities. Likewise, it failed to account for certain market based activity
for its two largest CLO investments by properly fair valuing them. At the time
KCAPs filings stated that those CLOs were valued using a discounted cash flow
method that incorporated market data. In fact the CLOs were valued at KCAP's
cost. In May 2010 the firm disclosed that it had to restate the fair values for
certain securities and the CLOs. It had overstated NAV by about 27% as of the
end of 2008. Its internal controls also were not designed to properly value
illiquid securities. As a result, the Order alleges that the firm violated
Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and the related rules.
The individual defendants are each alleged to have caused the violations.
To resolve the action each Respondent consented to the
entry of a cease and desist order based on the Sections cited in the Order. In
addition, Messrs. Pearson and Wirth each agreed to pay a penalty of $50,000
while Mr. Corless will pay a $25,000 civil penalty.
Unregistered broker: In the Matter of Ambit
Capital Pvt. Ltd., Adm. Proc. File No. 3-15105 (Nov. 27, 2012); In
the Matter of Motilal Oswal Securities Ltd., Adm. Proc. File No. 3-15106
(Nov. 27, 2012); In the Matter of JM Financial Institutional Securities
Private Ltd., Adm. Proc. File No. 3-15107 (Nov. 27, 2012); In the Matter
of Edelweiss Financial Services Ltd., Adm. Proc. File No. 3-15108 (Nov. 27,
2012) are proceedings against brokers registered in India that solicited
business in the United States without registering with the Commission. Each
firm resolved the proceeding by agreeing to the entry of a censure. In addition,
Ambit agreed to pay disgorgement and prejudgment interest of $30,910 while
Edelweiss agreed to pay $568,347, JM Financial will pay $443,545 and Motilal
will pay $821,584.
Insider trading: SEC v. Lazorchak,
Case No. 2:12-cv-07164 (D.N.J. Filed Nov. 19, 2012). The SEC and the U.S.
Attorney's Office, New Jersey, brought civil and criminal insider trading
charges against, respectively, six and seven individuals based on a five year
insider trading ring that garnered over $1.4 million in illegal profits. The Commission's
complaint named as defendants: John Lazorchak, Director of Financial Reporting
at pharmaceutical company Celgene Corporation; Mark Cupo, Director of
Accounting at Sanofi-Aventis Corporation, another pharmaceutical company and a
former co-worker of Mr. Lazorchak; Mark Foldy, employed in the marketing
department at a third pharmaceutical company, Styker Corporation; Michael
Castelli, a friend of defendant Cupo; Lawrence Grum, who holds a brokers
license and attended high school with defendant Castelli; Michael Pendolino;
and James Deprado who is not named as a defendant in the criminal case.
Defendants Larzorchak, Pendolino, Foldy and Deprado attended the same high
The ring is alleged to have traded on inside information
in advance of four corporate take-over announcements. The basic scheme involved
an arrangement devised by Messrs. Castelli and Grum. It called for Mr.
Lazorchak, through defendant Cupo, to furnish them inside information obtained
from his position at Celgene. Mr. Cupo served only as a middleman. Defendants
Castelli and Grum placed the trades, often in options. Over time the scheme
expanded. Mr. Lazorchak illegally tipped Messrs. Pendolino and Foldy and was,
in turn, compensated by them. Messrs. Pendolino also tipped others. The
Commission's complaint alleges violations of Exchange Act Sections 10(b) and
14(e) and Securities Act Section 17(a). Each defendant in the criminal case is
charged with multiple counts including conspiracy and securities fraud. The
defendants voluntarily surrendered in the criminal action. Both cases are
Improper registration: In the Matter of Evens
Barthelem, Adm. Proc. File No. 3-15102 (Filed Nov. 20,
2012) is a proceeding against registered investment adviser Barthelemy Group
LLC and its founder and sole owner Evens Barthelemy. The Order centers on the
improper registration of Barthelemy Group with the Commission beginning in
2009. The improper registration was discovered during an examination by the
staff. To resolve the proceeding each Respondent consented to the entry of a
cease and desist order based on Advisers Act Sections 203A, 204, 206(4) and
207. Mr. Barthelemy will also be barred from the securities business with a
right to reapply after two years and the firm is censured. A financial penalty
was not imposed based on the financial condition of each Respondent.
In the Matter of EM Capital Management, LLC, Adm.
Proc. File No. 3-15101 (Nov. 20 2012) is a proceeding against the registered
investment adviser and its CEO and majority interest holder, Seth Freeman. The
Order alleges that the Respondents failed to furnish required books and records
including financial statements, e-mails and other documents to the inspection
staff. Despite repeated requests, the materials were not made available until
months after the staff notified Respondents that they were considering
recommending an enforcement action. To resolve the proceeding each Respondent
consented to the entry of a cease and desist order based on Advisers Act
Section 204. Each was also censured and agreed to pay, jointly and severally, a
civil money penalty of $20,000.
Investment fund fraud: SEC v. Colangelo, Jr.,
Action No. 12 CIV 8439 (S.D.N.Y. Filed Nov. 19, 2012) is an action against Mr. Colangelo
centered on three claims: First, he raised about $760,000 from investors for
the Brickel Fund LLC in 2009 based on a series of misrepresentations regarding
its historical rates of return, investment strategy and without disclosing he
had previously been charged with fraud-based felonies. Second, from the Spring
of 2009 through Winter 2001 he raised another $1.2 million from three investors
he solicited as advisory clients using similar misrepresentations. Third, from
mid-2009 through late 2011 he raised an additional $2.2 million for three
claimed start up companies he controls again based on material
misrepresentations that were similar to those in the other schemes. In each
instance portions of the money was misappropriated. The complaint alleges
violations of Securities Act Section 17(a), Exchange Act Section 10(b) and
Advisers Act Sections 206(1), (2) and (4). The case is in litigation. See
also Lit. Rel. No. 22534 (Nov. 19, 2012). A parallel criminal action was
filed by the U.S. Attorney's Office.
Prime bank fraud: SEC v. McClintock, Civil
Action No. 1:12-CV-4028 (N.D. Ga. Filed Nov. 19, 2012) is an action against
Billy McClintock and Dianne Alexander who are alleged to have conducted a prime
bank fraud scheme since at least 2004. Over 220 investors in 20 states who paid
over $15 million were promised access to a Trust supposedly created after World
War II by a group of very wealthy families. Investors were told the Trust had
the ability to create money through fractional banking and the sale of
debentures. Access was carefully restricted according to the pitch. Investors
were to receive returns of 38% annually. In reality the Trust did not exist and
the defendants misappropriated the funds, according to the Commission's
complaint. That complaint alleges violations of Securities Act Sections 5(a),
5(c), each subsection of 17(a) and each subsection of Exchange Act Section
10(b) and Section 15(a). The case is in litigation.
Market crisis: SEC v. J.P. Morgan Securities
Filed Nov. 16, 2012) is an action against the firm and affiliates Bear Stearns
Asset Backed Securities I, LLC, Structure Asset Mortgage Investments II, Inc.,
SACO I, Inc. and J.P. Morgan Acceptance Corporation I, arising out of the
residential mortgage market. The case centers on two key claims. The first
focuses on Bear Stearns and a practice known as "bulk settlements" which
involved 156 RMBS transactions from 2005 -2007. Loan originators were typically
required to buy back loans that had early payment defaults or certain other
defects. Bear frequently negotiated discounted cash deals with the originator
rather than execute the buy-back and then kept most of the proceeds without
making the appropriate disclosures to the loan originators. The second part of
the action centers on J.P. Morgan and its failure to properly disclose its
delinquency rate for RMBS. The firm claimed in the prospectus supplement for a
$1.8 billion RMBS offering in 2006 that only four loans were delinquent by 30
to 59 days when in fact about 620 were 30 to 59 days delinquent and the four
disclosed were in fact 60 to 89 days delinquent. The complaint alleges
violations of Securities Act Sections 17(a)(2) and (3). The defendants settled
the action, consenting to the entry of a permanent injunction prohibiting
future violations of the Sections cited in the complaint. In addition,
defendants will pay $162,065,536 in disgorgement, prejudgment interest and a
$60.35 million penalty. The SEC intends to seek distribute the money through a
Market crisis: In the Matter of Credit Suisse
Securities (USA) LLC, Adm. Proc. File No. 3-15098 (Nov. 16,
2012) is a proceeding against Credit Suisse Securities and a series of
affiliated entities. The allegations are essentially the same as in the action
brought against J.P. Morgan listed above. To resolve the proceeding the
Respondents consented to the entry of a cease and desist order based on
Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 15(d). They
also agreed to pay disgorgement of $68,747,769 along with prejudgment interest
and a $33 million penalty which the SEC will seek to distribute through a Fair
Offering fraud: SEC v. Wilson, Civil
Action No. 12-cv-15062 (E.D. Mich. Filed Nov. 15, 2012) is an action against
Joel Wilson and his controlled entities, Diversified Group Partnership
Management LLC and American Realty Funds Corporation. Beginning in 2009 and
continuing through 2012 Mr. Wilson raised about $6.7 million from 120 investors
selling unregistered shares in his company, Diversified Group Partnership
Management, LLC through his brokerage firm, W.R. Rice Financial Services, Inc.
Investors were told their funds would be put in real estate, yielding returns
of 9.9%. They were not told that the real estate business did not generate sufficient
revenue to make the promised payments or that portions of the money would be
diverted to Mr. Wilson's personal use. Defendant Wilson raised additional funds
for his real estate business through American Realty Funds Corporation, an OTC
Bulletin Board company he controlled. The materials contained omissions,
including the fact that it was delinquent on its loan payments and about its
business relationships with Mr. Wilson. Since the company was delinquent on its
filing, the Commission suspended trading in its shares. The complaint alleges
violations of Securities Act Sections 5(a), 5(c), each subsection of 17(a),
Exchange Act Sections 10(b), 13(a) and 20(e), control person liability under
Section 20(a) and Advisers Act Section 206(4). The case is in litigation. See
also Lit. Rel. No. 22537 (Nov. 20, 2012).
Insider trading: U.S. v. Martoma, 12
mag 2985 (S.D.N.Y. Unsealed Nov. 20, 2012) and SEC v. CR Intrinsic
Investors, LLC, Civil Action No. 12 cv 8466 (S.D.N.Y. Filed Nov. 20, 2012)
are actions against Mathew Martoma, a former portfolio manager at CR Intrinsic
Investors. The SEC action also names as defendants the entity and Dr. Signey
Gilman, a professor at the University of Michigan medical school. The court
papers claim the defendants participated in a highly lucrative insider trading
scheme which made profits and avoided losses totaling about $276 million. Mr.
Martoma met the doctor through an expert network, according to the court
papers. He consulted on certain clinical trials being conducted by
pharmaceutical companies Elan and Wyeth from 2006 through 2008. The Doctor is
alleged to have furnished Mr. Martoma with inside information on the trials in
advance of the announcement of the data. This permitted the fund managed by Mr.
Martoma, and other affiliated funds, to liquidate a long position of over $700
million in Elan and Wyth stock and short those securities prior to the
announcement which caused the share prices to plummet. Following the
announcement of disappointing results, the funds had profits of about $82
million on the short positions. By liquidating their massive long positions the
funds avoided losses of about $194 million.
In the criminal case Mr. Martoma has been charged with
one count of conspiracy to commit securities fraud and two counts of securities
fraud. Dr. Gilman entered into a non-prosecution agreement. The case against
Mr. Martoma is pending. The Commission's complaint alleges violations of
Securities Act Section 17(a) and Exchange Act Section 10(b). Dr. Gilman settled
with the Commission, consenting to the entry of a permanent injunction
prohibiting future violations of the Sections cited in the complaint. He also
agreed to pay $234,000 in disgorgement and prejudgment interest. The court will
determine at a later date if any additional financial penalty is appropriate.
The action is pending as to the other two defendants.
Financial fraud: U.S. v. Collins
(S.D.N.Y.) is the long-running criminal case against former Mayer Brown partner
Joseph Collins. On November 16, 2012 a jury again convicted Mr. Collins of
conspiracy, securities fraud and making false statements to the SEC in
connection with his role as lead partner for Refco. The underlying scheme
involved the concealment of millions of dollars in loses. Mr. Collin's initial
conviction had been reversed by the court of appeals.
Remarks: Commissioner Bart
Chilton delivered remarks titled "Whose Markets Are These Anyway? Can Ya Dig
It?" as the Keynote Address Before the Consumer Federation of America 2012 Financial
Services Conference (Washington, D.C., Nov. 29, 2012). The Commissioner's
remarks covered topics which included market integrity of the system, high
speed trading and the need to update the penalty system for the agency.
The regulator announced that it had entered into an
agreement with the Japan Securities Dealers Association. The Memorandum of
Understanding will support more robust cooperation between the two regulators.
The regulator fined UBS AG £29.7 (discounted from ₤42.4
million for early settlement) for systems and controls failings that permitted
an employee to engage in unauthorized trading which resulted in losses of US
$2.3 billion. The losses were incurred primarily on exchange traded index future
positions. During the relevant period the regulator concluded that there was
insufficient focus on key risks associated with unauthorized trading at the
London Branch. Significant control breakdowns remained undetected for a
substantial period. Some systems were simply not effective in controlling
unauthorized trading while others had deficiencies.
Insider dealing: Former
CITIC Pacific Ltd. director of Finance Simon Chui Wing Nin was sentenced to
serve 15 months in prison and pay a fine of $1.36 million (the amount of the
loss avoided) for insider dealing. He was also ordered to pay the cost of the
investigation and will be disqualified from being a director for three years.
Mr. Nin was involved in calculating the impact of the drop in value of the
Australian dollar on the company. He understood the company faced a substantial
mark to market loss and traded while in possession of this information prior to
it becoming public.
Failure to supervise: The
SFC banned Wong Tang Chung, a former executive director of Mega Capital (Asia)
Company Limited, from re-entering the industry for three years. The action was
based on his failure to properly supervise and take responsibility for the
listing application of Hortex International Holdings Company Ltd on the Hong
Kong Stock Exchange. Mr. Wong was one of two responsible officers and sponsor
principals in charge of the supervision of Mega Capital's transaction team.
Australian Securities and Investment Commission announced that it obtained an
ex parte court order appointing KPMG as a liquidator of four companies based in
Arizona. The order restrains Royale and Active Pty Ltd and ActiveSuper Pty Ltd.
who raised over $4.75 million from over 300 investors. The last known director
of the four Arizona based entities lost control and there was risk that the
assets, which were invested in 14 Arizona properties purchased with funds from
Australian clients of Royale and Active, were at risk.
Hurricane Sandy: As
we enjoy the holiday season please remember the victims of Sandy's destruction
with a donation 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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