The Commission filed another "suspicious trading" insider
trading case this week. The action centers on the highly publicized acquisition
of H.J. Heinz Co. In recently filed court papers the Commission has
identified the unknown trader as a private wealth client of the Zurich,
Switzerland affiliate of Goldman Sachs. The SEC also brought an offering fraud
case, an investment adviser fraud action that parallels a criminal case and
resolved a previously filed investment fund fraud action.
The Business Round Table, along with over thirty other
business groups, sent a letter to the DOJ and the SEC regarding the guidance
offered in the recently published A Resource Guide to the U.S. Foreign
Corrupt Practices Act. The letter revisits a number of issues which the
groups have previously raised including the lack of a procedures defense and
the need for clarity regarding the definitions of the terms "foreign official"
and "instrumentality."
Finally, the Australian Securities and Investment
Authority announced the imposition of the largest fine imposed on an individual
for operating a fraudulent investment scheme.
The SEC
Remarks: SEC Commissioner Luis
Aguilar delivered remarks titled "Shareholders Need Robust Disclosure to
Exercise Their Voting Rights as Investors and Owners" in Washington, D.C. (Feb.
20, 2013). The Commissioner's remarks focused on disclosures which facilitate
the proxy process such as those regarding executive compensation, leadership
structure and risk oversight, board diversity and political contributions (here).
Remarks: SEC Chairman Elisse
Walter addressed the American University School of Law in remarks titled
"Harnessing Tomorrow's Technology For Today's Investors and Markets" (Feb. 19,
2013) (here).
The Chairman's remarks focused on efforts by the Commission to use technology
and innovative techniques to meet the challenges of the future.
Canadian Securities Class Actions
Filings for securities class actions in Canada declined
last year, following the trend in the U.S., according to a recent report by
NERA Economic Consulting (here). Specifically, last year nine new securities
class actions were filed, down from the 15 actions filed in 2011 and the 12
brought in 2010. The number of filings last year is also below the average of
12 new cases per year since 2008. Eight of the nine new filings were Bill 198
cases. That is consistent with the average number of these cases since 2008.
Six of the nine cases had a parallel U.S. filing.
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed two civil injunctive actions and two administrative
proceedings (excluding tag-along-actions and 12(j) actions).
Investment fund fraud: In the Matter of James
S. Tagliaferri, Adm. Proc. File No. 3-15215 (Feb. 21, 2013)
is a proceeding against the president, chief compliance officer and one of two
owners of TAG Virgin Islands, Inc., a registered investment adviser. This is
the companion action to a criminal case brought in the Southern District of New
York (below). The Order alleges that from 2007 through 2010 Mr. Tagliaferri
failed to disclose to investors that he was being paid kickbacks to invest
their funds in certain securities. In addition, when promissory notes that he
put client money in neared or passed maturity and clients demanded payment, Mr.
Tagliaferri raised the necessary cash by causing client accounts to purchase
shares of a penny stock entity and then obtaining those funds from the seller
and/or his brother to make the payments. Mr. Tagliaferri is also alleged to
have misappropriated client funds. The proceeding will be set for hearing.
Investment fund fraud: SEC v. Vaughan, Civil
Action No. 10-263 (D.N.M.) is an action against Douglas Vaughan and his
controlled real estate companies. The complaint alleges violations of
Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b)
and 15(a)(1). Mr. Vaughan used the companies to conduct a Ponzi scheme,
according to the SEC, in which he promised investors above market returns.
Following the filing of the Commission's complaint, Mr. Vaughn was indicted and
pleaded guilty to mail and wire fraud charges and making false statements to
the Commission. He was sentenced to 12 years in prison. He then settled with
the Commission, consenting to the entry of a permanent injunction based on the
Sections cited in the complaint and agreeing to pay disgorgement of $43,658,321.
That obligation will be deemed satisfied by payment of that amount in the
criminal case. The action was also resolved as to the companies with the entry
of permanent injunctions based on the Sections cited in the complaint. See
also Lit. Rel. No. 22621 (Feb. 20, 2013).
Insider trading: SEC v. Certain Unknown
Traders in the Securities of H.J. Heinz Co., Civil Action No.
13-CIV-1080(S.D.N.Y. Filed Feb. 15, 2013) is an insider trading action based on
the February 14, 2013 announcement that Berkshire Hathaway and 3G Capital would
acquire H.J. Heinz for $72.50 per share. The complaint was filed one day after
the deal announcement against purchasers who traded through the Zurich,
Switzerland office of Goldman Sachs. They purchased 2,533 naked, out of the
money options for $90,000 the day before the announcement. The purchase yielded
the buyer $1.8 million in trading profits in one day. The complaint alleges a
violation of Exchange Act Section 10(b). The court granted a temporary freeze
over the account. The case is in litigation.
Offering fraud: In the Matter of Gregg C.
Lorrenzo, Adm. Proc. File No. 3-15211 (Feb. 15, 2013) is a
proceeding which names as Respondents Gregg Lorenzo, who has been a registered
representative, Frank Lorenzo, a registered representative and Charles Vista,
LLC, a registered broker-dealer controlled by Gregg Lorenzo and at which Frank
Lorenzo served as head of investment banking. The Order alleges violations of
Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c) in connection
with the solicitation of investors in 2009 and 2010 to purchase convertible
debentures in Waste2Energy, a company which is purported to have technology for
converting waste to energy. During that solicitation Respondents are alleged to
have made fraudulent misrepresentations to several customers regarding the
company and its prospects. Those misrepresentations focused on the risk of the
investment, the upside for the investment, the future prices for W2E stock, the
assets held by W2E and the prospects for its securities being listed on the
NASDAQ. The proceeding will be set for hearing.
Investment fraud: SEC v. ABS Manager, LLC, Case
No. 13 CV 0319 (S.D. Ca. Filed Feb. 8, 2013) is an action against ABS Manager,
whose state investment adviser application is pending, and George Price, its
sole manager and owner and a San Diego radio investment talk show host. The
complaint alleges that since 2009 the defendants have raised about $18.8
million from 35 investors for three funds. Investors were told that their funds
were safe and secured by government backed bonds yielding double digit returns.
In fact the money was invested in the most high risk version of CMOs which lost
value. Mr. Price also misappropriated about $500,000 in the form of claimed
fees. The case is in litigation. See also Lit. Rel. No. 22622 (Feb. 20,
2013). The court denied the SEC's request for a freeze order and the
appointment of a receiver citing a failure to plead the claims with
particularity.
CFTC
Material nonpublic information: The
agency filed an enforcement action against the New York Mercantile Exchange,
Inc., owned by the CME Group, and two former CME NYMEX employees, William
Byrnes and Christopher Curtin. The complaint, filed in the Southern District of
New York, alleges that 2008, 2009 and 2010 non-public information about CME
NYMEX trading and customers was repeatedly disclosed to a commodity broker. The
conversations were frequently captured on tape. The complaint alleges that the
Commodity Exchange Act specifically prohibits the disclosure of this type of
information.
FINRA
Customer agreement: A
FINRA arbitration panel returned a split ruling in the regulator's proceeding
against Charles Schwab & Co. The action focused on two points. First, it
claimed that amendments to Schwab's customer agreements which required
customers to waive their rights to bring or participate in class actions
against the firm violate FINRA rules. The panel concluded that this does
violate FINRA rules but that the regulator may not enforce those rules because
they are in conflict with the Federal Arbitration Act. Second, it claimed that
a provision in the customer agreement which prevented the customer from
permitting an arbitration claim to be consolidated with others also violated
FINRA rules. The panel concluded that this violates FINRA rules. The panel
directed Schwab to take corrective action and pay a $500,000 fine.
E-mail retention: Four
subsidiaries of ING Groep N.V. were fined $1.2 million and directed to conduct
a comprehensive review of their e-mail systems by the regulator. The sanctions
were based in part on the failure of the subsidiaries to retain or review
e-mails over and eight year period beginning in 2004. During the period the
firms did not properly configure hundreds of employee e-mail accounts to make
sure that items sent to and from them were maintained and reviewed. In
addition, from 2005 through 2011 nearly six million e-mails were not reviewed
despite the fact that they were flagged for review.
Criminal cases
Investment adviser fraud: U.S. v. Taliaferri (S.D.N.Y.)
is an action against Virgin Island based investment adviser James Taliaferri
who managed TAG Virgin Island Inc., a registered investment fund. A parallel
action was filed by the SEC (above). The charges allege that he accepted
millions of dollars in fees to place client investments in certain securities
without making the required disclosures; improperly used client funds to,
ultimately, make payments to other clients; and placed fictitious securities in
client accounts. He is charged with investment adviser fraud, securities fraud,
wire and mail fraud and violations of the Travel Act.
FCPA
Letter of business groups: Prior
to the issuance of A Resource Guide to the U.S. Foreign Corrupt Practices
Act by the Department of Justice and the Securities and Exchange Commission
late last year, there were calls for additional guidance on the application of
the Act and demands for Congressional reform. Now, in a letter to Assistant
Attorney General Lanny Breuer and Acting SEC Director of Enforcement George
Canellos dated February 19, 2013, the Business Roundtable and thirty two other
business groups are seeking clarification of the Guide and the Act. The
letter addresses a series of point seeking at times clarification and at others
offering an interpretation of the Guide. The points covered include: the
need for a compliance defense; a request for examples of cooperation credit; a
request for clarification of the terms foreign official and instrumentality;
and a discussion of parent-subsidiary liability, successor liability, and
intent. It concludes with a discussion of the meaning of the term declination
and a urges officials to continue making information available about
declinations.
ASIC
Investment fund fraud: The
Australian Securities and Investment Commission announced that David Hobbs of
New Zealand was ordered to pay a $500,000 fine in connection with the operation
of a $30 million Ponzi scheme. The scheme solicited investors with promises
that the funds would be invested off shore in safe investments which would pay
a monthly rate of return. In fact the representations were false. Others
associated with one of the funds involved here have been sentenced to prison.
The fine was the largest in ASIC history.
Insider trading: The
regulator announced that Calvin Zhu was sentenced to serve twenty-seven months
in prison for insider trading. Previously, the executive pleaded guilty. The
underlying conduct occurred from December 2006 through July 2011 while he was
an executive at three companies: Calburn Partnership Pty Ltd; Credit Suisse
Management (Australia) Pty Ltd; and Hanlong Mining. The court took into account
the fact that Mr. Zhu pleaded guilty and cooperated.
For more commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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