Senator Schumer sent the Commission a letter this week
requesting that it review certain trading practices such as high speed trading,
quote stuffing and sub-penny pricing. SEC enforcement filed another settled
option backdating case along with actions based centered on an offering fraud
and misrepresentations by a rating agency. In addition, an ALJ concluded in an
initial decision that the Division did not prove its claim that the former
general counsel of a broker dealer failed to reasonably supervise a broker. In
criminal cases, the Virginia Financial and Securities Fraud Task Force brought
fraud charges against individuals alleged to have conducted an offering fraud.
Finally, the FSA sanctioned the London based unit of Goldman Sachs &
Company for failing to advise the regulator about the SEC's investigation of
the U.S. company.
Market reform
Senator Charles Schumer, a member of the Senate Banking
Committee, sent a letter to SEC Chairman May Schapiro dated September 7, 2010
discussing high speed trading and other market practices. Specifically, the
letter requests that the Commission reconsider its position on high speed
trading. According to the Senator, high speed trading now accounts for
"roughly" two-thirds of trading volume in the equity markets. Some reports
suggest that much of this trading is not real, because thousands of trades are
sent and cancelled in a fraction of a second.
The letter goes on to request that a formal investigation
be conducted into "quote stuffing" and "sub-penny pricing" to determine what
role, if any, they played in the May 6 Flash Crash. The letter also requests
that the Commission consider imposing a minimum quote duration to preclude the
practice of sending and canceling orders in a fraction of a second. Finally,
Senator Schumer requests that the SEC consider banning "sub-penny pricing"
because the practice may have contributed to market volatility on May 6.
SEC enforcement actions
Option backdating: SEC v. Affiliated Computer
Services, Inc., Civil Action No. 1:10-cv-1515 (D.D.C. Filed
Sept. 9, 2010) is a settled action against business process and information
technology services company, Affiliated Computer. The company was acquired by
Xerox Corporation in February 2010. The complaint alleges that from 1995
through 2006 the company backdated option grants to officers and employees.
During an internal investigation into those practices, the former CEO and CFO
of the company made public statements denying that there was any intentional
backdating. In January 2007, the company restated its financial statements
recording a $51 million compensation expense for 72 of the 73 grants awarded
between 1994 and 2005. The company settled the matter, consenting to the entry
of a permanent injunction prohibiting violations of Securities Act Section
17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The
settlement reflects the cooperation of the company. See Litig. Rel. 21643 (Sept. 9, 2010).
Investment adviser fraud: In the Matter of
Neal R. Greenberg, Adm. Proc. File No. 3-14033 (Sept. 7,
2010). Respondent Neal Greenberg is a registered investment adviser, the
controlling shareholder of Tactical Allocation Services ("TAS") and the head
portfolio manager of its subsidiary Agile Group, LLC. which serves as the
investment adviser to several funds. According to the Order, Mr. Greenberg made
a series of misrepresentations and omissions to induce investors to purchase
shares in the various funds. Most of the investors were not suited for these
investments. By mid-September 2008, the funds limited redemptions due to a lack
of liquidity. By month end, redemptions were suspended because of substantial
losses resulting from significant investments with fraudster Tom Petters and
Ponzi king Bernard Madoff. The Order for Proceedings (discussed here)
alleges willful violations by Mr. Greenberg of Exchange Act Section 10(b) and
Advisers Section 206(1), 206(2) and 206(4). Agile is alleged to have willfully
aided and abetted and caused by Mr. Greenberg willfully violated Advisers Act
Section 206(4). The case is in litigation.
Offering fraud: SEC v. Berkshire Resources,
LLC,
Civil Action No. 09-0704 (S.D. Ind. Filed June 8, 2009) named as defendants
David Rose and Jason Rose and the company they controlled, Berkshire Resources,
and Mark Long. Brian Rose and Joyce Rose were named as relief defendants. Over
more than two years beginning in April 2006, Berkshire Resources raised about
$15.5 million from 265 investors in the U.S. and Canada through a series of
unregistered fraudulent securities offerings according to the complaint. The
company purported to be in the oil and gas exploration business. Investors were
falsely assured that all of their funds would be put in oil and gas development
projects and that Jason Rose had substantial experience in the business. In
fact much of the money was not invested as claimed. Portions of the funds were
diverted to the personal use of the Rose family.
The SEC settled with David Rose, Jason Rose and Mark Long
and two relief defendants (as discussed here). David and Jason Rose each consented to
the entry of permanent injunctions prohibiting future violations of Securities
Act Section 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). In addition,
David Rose agreed to pay disgorgement of $15,400,000 along with prejudgment
interest and a civil penalty of $130,000. Jason Rose agreed to disgorge
$182,896.42 and prejudgment interest and to pay a civil penalty of $130,000.
Defendant Long consented to the entry of a permanent injunction prohibiting
future violations of Securities Act Section 5 and agreed to disgorge $446,775
along with prejudgment interest and to pay a civil penalty of $130,000. The two
relief defendants agreed to disgorge in excess of $600,000 along with
prejudgment interest. David and Jason Rose and Mark Long also agreed to be
barred from future association with any broker or dealer.
Misrepresentations:In
the Matter of Lace Financial Corp., Adm. Proc. File No.
3-14028 (Sept. 2, 2010); In
the Matter of Damyon Mouzon, Adm. Proc. File No. 3-14029 (Sept. 2, 2010)
are proceedings which name as respondents, respectively, NRSRO LACE Financial
Corp., and its founder and controlling shareholder Barron Putnam and Damyon
Mouzon, the firm's president. The Order is each case is based on the same key
allegations. Each alleges that the firm made a material misrepresentation in
its application to be an NRSRO and for an exemption from a conflict of interest
provision. That provision, Rule 17g-5(c)(1), prohibits an NRSRO from issuing or
maintaining a credit rating solicited by a person that in the last year
provided the agency with net revenue equaling or exceeding 10% of its total
revenue. In its application, Lace materially misrepresented the amount of
revenue for its largest customer during 2007. Lace also failed to disclose that
it had carried out an extra layer of review when formulating ratings for
certain issuers whose securities comprised pools of asset-backed securities
managed by the firm's largest customer. Lace also failed to keep written
policies and procedures regarding that layer of review. The firm also failed to
maintain e-mail as required. Mr. Putnam is alleged to have violated Rule
17g-5(c)(2) by participating in determination of a credit rating for an entity
whose stock he owned. He is also alleged to have caused the violations of Lace.
The proceeding as to Lace and Mr. Putnam was resolved with each respondent
consenting to the entry of a cease and desist order from committing or causing
any violations or future violations of Exchange Act Sections 15E(a)(1),
15E(h)(1), 15E(h)(1)m 15E(k) and 17(a). Lace was also censured and ordered to
pay a civil penalty of $20,000. The action with regard to Mr. Mouzon will be
set for hearing.
Initial decision
Failure to supervise: In the Matter of
Theodore W. Urban, Adm. Proc. File No. 3-13655 (Sept. 8, 2010)
is a proceeding against the former General Counsel and Executive Vice President
of Ferris, Baker Watts, Inc. The case centers on claims that Mr. Urban failed
to reasonably supervise registered representative Stephen Glantz and detect
fraud. Mr. Glantz pleaded guilty to securities fraud in 2007. That fraud
occurred while he was employed at FBW. It involved fraudulent trading by a firm
client who was operating a Ponzi scheme and later pleaded guilty to fraud
charges. After a hearing on the merits, the ALJ dismissed the proceeding,
concluding that the Division failed to prove its allegations. (This case will
be discussed in detail in an article on Monday).
Criminal cases
Investment fund fraud: U.S. v. Allmendinger,
Case No. 3:10-cr-00248 (E.D. Va. Filed Sept. 7, 2010) names as defendants
Christian Allmendinger, Adley Abdulwahab and David White. The three defendants
were the principals of A&O Resources Management Ltd. The indictment
contains one count of conspiracy to commit mail fraud, six counts of mail
fraud, one count of conspiracy to commit money laundering, six counts of money
laundering and four counts of securities fraud. It also seeks the forfeiture of
about $103 million. According to the indictment, the defendants and others
raised more than $100 million from about 800 investor victims in the U.S. and
Canada. False representations were used to induce investors to purchase life
settlement investments through A&O Resources and its related entities. When
state authorities initially began to investigate, the indictment claims that
the defendants crafted two sham transactions in an effort to conceal the fraud.
Portions of the investor funds are alleged to have been diverted to the
personal use of the defendants. Four others implicated in this case have
entered into plea agreements. This case has been coordinated with the Virginia
Financial and Securities Fraud Task Force.
FSA
The U.K.'s Financial Services Authority fined Goldman Sachs
International, the London based unit of Goldman Sachs & Co.
approximately $26 million for failing to comply with FSA principles 2 and 3.
Those principles require, respectively, that a firm conduct its business with
due skill, care and diligence and that it deal with its regulators in an open
and cooperative way, disclosing "anything relating to the firm of which the FSA
would reasonably expect notice." Here, the London-based unit of the firm failed
to disclose to the FSA the SEC investigation into the Abacus transaction and
the issuance of a Wells notice which ultimately resulted in the enforcement
action against the firm (here). The FSA concluded that this was not intentional.
Since the firm cooperated with the investigation, it received a 30% discount on
the fine.
Postings For SEC Enforcement Positions
Chief Counsel. Details are listed here.
Associate Director - Office of Whistleblower
Coordinator
The person selected for this role will be responsible for
building and managing the new Whistleblower Office and overseeing the
implementation of policies and procedures to ensure that the SEC is in
compliance with the Whistleblower provisions of the "Dodd-Frank Wall Street
Reform and Consumer Protection Act."
The posting is open until September 22, 2010. Details are listed here.
Associate Director
The person selected for this position will lead a staff
engaged in investigations involving matters in many of the enforcement
program's priority areas including insider trading, market manipulation,
financial reporting and accounting fraud, violative conduct by broker-dealers,
investment advisers and investment companies and offering frauds. The posting
for Associate Director, Division of Enforcement is listed on USA Jobs,
Announcement # 10-380443-WG. The posting will close on 09/17/10. Here's the link.
For
more news involving securities issues, visit SEC Actions, a
blog by Thomas Gorman.