The Department of Justice filed one of the most
significant market crisis cases this week against a major rating agency as a
defendant. The case centers on years of false statements about ratings given to
RMBS and CDOs, according to the complaint, as the market crisis evolved and the
market for those securities collapsed. At the same time the SEC announced that
last Spring the court granted summary judgment against it and in favor of a
defendant in one of its major market crisis cases. No appeal will be taken.
The PCAOB announced two new cooperative agreements this
week. The D.C. Circuit handed down a decision which defines the circumstances
under which reports prepared under Commission consent decrees become official
records subject to a common law right of access.
Market crisis: U.S. v. McGraw-Hill Companies,
Inc., Case No. CV 13-00779 (C.D. Cal. Filed Feb. 4, 2013). The
complaint is based on Financial Institutions Reform, Recover, and Enforcement
Act of 1989 or FIRREA and alleges wire fraud, mail fraud and financial
institution fraud. It seeks to vindicate the interests of a number of federally
insured institutions who purchased RMBS and CDOs based on the ratings issued by
S&P from 2004 through 2007. The complaint details an on-going scheme to
defraud purchasers of the securities by S&P involving a series of
transactions over years. The scheme centered on repeated false representations
by S&P that its credit ratings of RMBS and CDO traunches were objective,
independent, uninfluenced by any conflicts. Throughout the period the firm
failed to appropriately adjust its criteria and models as the market unraveled,
made changes to its standards which were designed to achieve a certain result
rather than reflect the markets, ignored the increasing risks of the market
crisis and, in some cases, disregarded its own policies. The complaint demands
civil money penalties in an unspecified amount and other relief.
SEC Enforcement: Litigated cases
Market crisis: SEC v. Perry, Civil
Action No. CV 11-1309 (C.D. Cal.) is an action which arose out of the collapse
of IndyMac Bancorp, Inc. It named as defendants Michael Perry, the former CEO,
and Scott Keys, the former CFO. The complaint alleged violations of Securities
Act Section 17(a) and Exchange Act Section 10(b) based on allegations that as
the market crisis unraveled the two men knew about the deteriorating condition
of the financial institution but misled investors about its true state in
repeated filings and statements. Previously, Mr. Perry settled, consenting to
the entry of an injunction based on Securities Act Section 17(a)(3) and
agreeing to pay a penalty of $80,000. This week the Commission announced that
on May 31, 2012 the court granted summary judgment in favor of Mr. Keys on all
claims and that it had elected not to appeal. See also Lit. Rel. No.
22614 (Feb. 7, 2013).
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 2 civil injunctive actions and 1 administrative
proceeding (excluding tag-along-actions and 12(j) actions).
Insider trading: SEC v. Balchan, Civil
Action No. 4:13-cv-298 (S.D. Tx. Filed Feb. 6, 2013). The action centers on the
acquisition of National Semiconductor Corporation by Texas Instruments,
announced after the close of the market on April 4, 2011. Defendant James
Balchan is married to a partner in a law firm. One of her partners, called
Partner A in the complaint, was a close friend of the general counsel of
National Semiconductor. In honor of his friend the general counsel, the Partner
A organized a "wine and dine" weekend. Mr. Balchan and his wife were invited.
Prior to the event Partner A called his friend the general counsel who told him
the event had to be canceled after requesting advise regarding the merger.
Subsequently, Partner A advised Mrs. Balchan that the event would be canceled
because of the pending acquisition. She told her husband who then purchased
3,000 shares of National Semiconductor in to transactions. When the deal was
announced the price spiked 76% giving him profits of $29,052.39. The
Commission's one count complaint alleges a violation of Exchange Act Section
10(b). Mr. Balchan resolved the case, consenting to the entry of a permanent
injunction based on the Section cited in the complaint. He also agreed to pay
disgorgement of $29,052.39 along with prejudgment interest and a penalty equal
to the amount of the disgorgement.
Short selling: In the Matter of Ardsley
Advisory Partners, File No. 3-15199 (Feb. 5, 2013) is an action
against the investment adviser alleging violations of Rule 105 of Regulation M.
The Order claims that the Respondent sold short during the restricted period
preceding its purchase of securities in public offerings by Sunpower
Corporation in April 2009, China Agritech, Inc. in April 2010 and Synutra
International, Inc. in June 2010. Overall the firm had profits of $506,671.50.
Prior to being contacted by the staff the adviser developed compliance
procedures for Rule 105. To resolve the matter the Respondent consented to the
entry of a cease and desist order based on Rule 105, agreed to disgorge its
trading profits and pay prejudgment interest. The firm also agreed to pay a
civil penalty of $253,335.
Investment fund fraud: SEC v. We the People,
Inc. (S.D. Fla. Filed Feb. 4, 2013); SEC v. Olive (S.D.
Fla. Filed Feb. 4, 2013); SEC v. Reeves (S.D. Fla. Filed Feb. 4, 2013).
These three cases center on claims that Richard and Susan Olive essentially
hijacked what was a legitimate, albeit essentially dormant, charity that had
been devoted to promoting nuclear safety. In March 2008 Richard and Susan Olive
were employed by We The People to assist with fund raising on a commission
basis. The couple did not disclose their checkered regulatory history which
included securities fraud actions and state and federal indictments. At We the
People the couple embarked on a fund raising campaign which raised over $75
million from 400 investors in over 30 states over a four year period. Investors
were offered the right to purchase a tax deductible gift annuity or a charitable
gift annuity that was supposed to make charitable contributions over the life
of the investor in most cases. The representations on which the annuities were
sold were false and much of the money was siphoned off by the couple with the
assistance of attorney William Reeves, named in a separate action. The
complaint against the Olives and another company owned by Mrs. Olive, We're Not
Alone, LLC, alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)
and Exchange Act Sections 10(b) and 15(a). The case is in litigation.
The company settled with the Commission, consenting to
the entry of a permanent injunction prohibiting future violations of Securities
Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). We the People
also agreed to pay disgorgement and consented to the appointment of a receiver
who will marshal the over $60 million in remaining investor assets. Attorney
Reeves also settled, consenting to the entry of a permanent injunction
prohibiting future violations of Securities Act Sections 5(a) and 5(c) as well
as each subsection of Section 17(a). He also agreed to be suspended from
practicing before the Commission for a period of five years. The court will
determine at a later date what financial penalty, if any, should be imposed.
Mr. Reeves entered into a cooperation agreement with the Commission, which is
reflected in the terms of the settlement.
Investment fund fraud: A
criminal complaint was filed by the Manhattan U.S. Attorney's Office naming as
defendants Charles Huggins, Christopher Butchko and Anne Thomas. Beginning in
2009 and continuing through 2011 the three defendants are alleged to have
raised about $2.5 million from investors through companies known as JYork
Industries Inc. and Urogo Inc. Investors were falsely told that their funds
would be used to develop gold and diamond mines in Sierra Leone and Liberia. In
fact much of the money was diverted to the personal use of the defendants. The
case is pending.
Insider trading: U.S. v. Motey (S.D.N.Y.)
is the criminal insider trading action against Karl Motey of the Coda Group.
From 2007 through early 2009 he is alleged to have provided inside information
to a number of individuals, including Doug Whitman about Marvel Technologies.
Mr. Motley testified at the trial of Mr. Whitman for the government. Previously
he pleaded guilty. This week he was sentenced to time served in view of his
The Board entered into cooperative agreements with the
French High Council for Statutory Auditors and the Auditing Board of the
Central Chamber of Commerce of Finland. The agreements call for cooperation,
provides a framework for inspections and authorizes the exchange of
confidential information. The Board now has agreements with six European Union
Accessibility of reports: SEC v. American
International Group, Case No. 12-5141 (Decided: Feb. 1, 2013). The
Circuit Court held that a report prepared by a consultant retained under a consent
decree, and which was part of the ancillary relief, was not a public record and
accessible to the reporter plaintiff. The case arose out of the 2004 settlement
of a Commission enforcement action against insurance giant AIG. The consent
decree called for the entry of an injunction against future violations, the
payment of disgorgement, establishment of a restitution fund and the creation
of a committee to review future transactions. It also required the retention of
an independent consultation who was charged with reviewing a number of AIG's
completed transactions and preparing pertinent reports documenting the findings
and recommendations. Reporter Sue Reisinger requested access to the reports
citing a common law right of access and the First Amendment. The district court
granted Ms. Reisinger's request. The D.C. Circuit reversed.
The critical issue was whether the reports are considered
to be a judicial record. The public has a fundamental interest in viewing the
work of public agencies, the Court noted. Accordingly, courts have long
recognized a common law right to inspect and copy public records. Those are
records created and kept for the purpose of memorializing official actions,
decisions, statements or other matters of significance. Viewed in that context
the critical question regarding judicial records is the role they play in the
adjudicatory process. If the record is part of that process there is a right of
access, although it is not unfettered. Rather, disclosure will ultimately hinge
on balancing the government's interest in secrecy and the public's in
disclosure. In this case the Court found it unnecessary to balance the rights
involved in view of its conclusion that the reports sought are not judicial
records. The reports in this case have nothing to do with the court's decision
to enter the consent decree or the relief ordered at the time and thus there is
no right of access.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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