On Capital Hill, hearings were held on the state of SEC
Enforcement. A bill passed a Senate Committee to repeal Section 9291 of
Dodd-Frank which gives the SEC authority to withhold certain documents from
FOIA requests. In addition, legislation passed in the House which generally
would require those who violate the FCPA to be debarred.
SEC Enforcement lost one insider trading case at trial,
but prevailed in the Fifth Circuit in its action against Mark Cuban. The
Division also brought more investment fund fraud actions, while settling with
another defendant in the Delphi financial fraud case.
Finally, a former Disney administrative assistant
followed in the path of her boyfriend and pleaded guilty in an unusual insider
trading case. The former aide, and her boyfriend, had shopped inside
information and ultimately tried to sell it to an undercover FBI agent.
Reform
Senate hearings on Enforcement:
SEC Enforcement Director Khuzami testified on Capital Hill, highlighting the
completion of the reorganization efforts he initiated after becoming Director
as discussed here.
He went on to recount the recent achievements noting that in fiscal 2010 the
Division had filed 634 enforcement actions; obtained disgorgement orders
totaling $1.53 billion; secured orders requiring the payment of $968 million in
penalties; obtained 45 emergency temporary restraining orders and 56 asset
freeze orders; and distributed nearly $2 billion to injured investors from 42
separate Fair Funds.
Mr. Khuzami then reviewed a number of significant cases
including the actions against Goldman Sachs & Co., ICP Asset Management
LLC, Lee B. Farkas, Citigroup, LACE Financial Corp, Morgan Keegan & Co. and
State Street Bank as well as the Moody's Section 21(a) report.
Rose Romero, Forth Worth Regional Office director,
largely reiterated the Director's comments. She also expressed her regret that
the SEC failed to act more quickly to limit the investor losses suffered by
Robert Allen Stanford. She then recounted the significant actions the
Commission has taken since filing its case against Mr. Stanford to improve
operations. Ms. Romero also noted that additional Wells notices have been
issued in the Stanford investigation, which is continuing.
Finally, the SEC Inspector general reviewed his report on
the investigation into Enforcement's inquiry of the Stanford matter, discussing
his view as to the reasons a case was not brought earlier. His report on that
matter has been available since March. The IG also speculated during his
testimony as to the reasons for the timing of filing the Goldman case.
Dodd-Frank Section 9291:
The Senate Judiciary Committee approved a bill (S. 3717) that would repeal this
Section (here)
which permits the SEC to withhold certain records from the public. The
exemption from the FOIA had long been sought by the Commission and was the
subject of Chairman Schapiro's recent testimony.
FCPA: The House unanimously
passed the
2010 Overseas Contractor Reform Act, H.R. 5366. Generally, the bill
requires agencies to debar companies and individuals found in violation of the
Foreign Corrupt Practices Act and to sever their existing government contracts
and grants. Waivers can be obtained after notice to Congress and justifying the
decision.
SEC enforcement actions
Insider trading: SEC v. Obus,
Case No. 1:06-cv-3150 (S.D.N.Y.) is an insider trading case against Thomas
Strickland, an employee of GE Capital Corp., Peter Black, an employee of
Wynnefield Capital, Inc and Nelson Obus, a manager at Wynnefield. The three
defendants were found not liable by Judge George Daniels after trial. The
action centered on the acquisition of SunSource by Allied Capital Corp. in
2001. According to the Commission, Mr. Strickland, a member of the GE Capital
team underwriting the deal, tipped his friend Peter Black, who in turn passed
the information on to Mr. Obus, who purchased SunSource shares. Mr. Obus made a
profit of $1.34 million on the transaction. The court concluded that Mr.
Strickland did not violate and duty and that there was no deception. No
confidentiality agreement existed to suggest Mr. Strickland was a temporary
insider of SunSource and GE Capital did not have any confidentiality policy that
was breached
Investment fund fraud: SEC v. McAdams,
Civil Action No. 4:10-CV-00701 (D.S.C. Filed March 18, 2010) is an action
against M. Mark McAdams and R. Dane Freeman. The complaint, filed earlier this
year, claims that the defendants raised about $3.5 million from investors over
a nine month period in 2008. Those funds were to be used to locate and secure
high return investment opportunities for investors on international trading
platforms. Some of the documents executed by investors in conjunction with the
investments promised returns after 60 days of 4,900% Most investors did not
receive the promised profits or a return of their investment. Portions of the
funds were diverted to other uses. Defendant McAdams settled the action,
consenting to the entry of a permanent injunction this week which prohibits
future violations of the antifraud provisions of the federal securities laws.
Mr. McAdams was also ordered to pay disgorgement, prejudgment interest and
penalties in amounts to be determined by the Court. See also Litig. Rel. 21661 (Sept. 23, 2010).
Reg. M violation: In
the Matter of Carlson Capital, L.P., Adm. Proc. File No.
3-14066 (Sept. 23, 2010) names as a Respondent Carlson Capital, L.P. a
registered investment adviser that manages several funds. In four instances in
2008, Respondent bought shares from an underwriter or broker participating in a
public offering after having sold short the same security during the restricted
period. As a result, Respondent made over $2 million in illegal profits. These
transactions violated Rule 105 of Regulation M, which prohibits buying an
equity security made available through a public offering from an underwriter or
broker or dealer participating in the offering after having sold short the same
security during a restricted period (generally defined as five business days
before the pricing of the offering). To resolve this matter, Respondent
consented to the entry of a cease and desist order from committing or causing
any violations and any future violations of Rule 105 of Regulation M.
Respondent was also censured and ordered to disgorge $2,256,386 along with
prejudgment interest and to pay a civil penalty of $260,000.
Undisclosed conflicts: In
the Matter of Sierra Financial Advisors, LLC Adm.
Pro. No. 3-14067 (Sept. 23, 2010) is an action which names as Respondents
Sierra Financial, a registered investment adviser and its two principals,
Michael Earl and Michael Breakey. Over a three-year period beginning in 2004,
Respondents used their discretionary authority to invest client funds in two
entities owned by the individual Respondents. Those are PPR Trust, a real
estate venture and Southwinds, another residential and real estate venture. In
making these investments, Respondents failed to disclose their conflicts of
interest to the investors and contrary to their representations. The funds were
subsequently used for other purposes. Respondents also failed to keep adequate
records or have appropriate written policies and procedures which were reasonably
designed to prevent violations of the Advisers Act. As a result, Respondents
willfully violated the antifraud provisions of the Securities Act, the Exchange
Act and the Advisers Act.
Each Respondent submitted a sworn affidavit demonstrating
an inability to pay disgorgement or a penalty. To resolve the matter SFA
consented to the entry of a cease and desist order from committing or causing
any violations of Securities Act Section 17(a), Exchange Act Section 10(b) and
Advisers act Sections 204 and 206(1), 206(2), 206(4) and 207. Respondent Earl
also consented to the entry of cease and desist orders based on Securities Act
Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 204, 206(1)
and 206(2) and the pertinent rules. Respondent Breakey, who served at SFA's
compliance officer, consented to the entry of a cease and desist order based on
the same sections as the order against Mr. Earl with the addition of Advisers
Act Section 207. SFA also resigned as an investment adviser while the individual
Respondents were barred from association with any investment adviser and are
prohibited from serving in essentially any capacity with an investment adviser,
depositor or principal underwriter.
Investment fund fraud: SEC v. True North
Finance Corp., Civil Case No. 10-3995 (D. Minn. Sept. 21,
2010) is an action against attorney Todd Duckson and Michael Bozora and Timothy
Redpath. The Capital Solutions Monthly Income Fund began operations in 2004,
according to the complaint. In May 2008, the fund's sole borrower defaulted.
The fund foreclosed on the borrower's real estate projects after which the
defendants took over its management. Mr. Duckson managed the fund while Messrs.
Bozora and Redpath continued to raise money from investors who were not told of
the default and foreclosure. The complaint alleges that the defendants raised
over $21 million from investors after the default and at a time when the fund
had no meaningful income. True North Finance Corporation, which merged with the
Fund in 2009, and its CFO, Owen Williams, were also named as defendants and
charged with accounting fraud. According to the complaint, in 2008 and 2009 Mr.
Williams caused True North to overstate its revenues by as much as 99%. The
case, which charges violations of the antifraud provisions, is in litigation. See
also Litig. Rel. 21657 (Sept. 21, 2010).
Investment fund fraud: SEC v. Bujkovsky,
Case No. 10-CV1965 (S.D. Cal. Filed Sept. 21, 2010) is an action against
California lawyer George Bujkovsky. While representing MAK 1 Enterprises Croup
and its principals, Mohit Khanna and Sharanjit Khanna, the defendant defrauded
certain MAK 1 investors and aided and abetted the fraud of his clients according
to the complaint. MAK 1 is a Ponzi scheme halted by a Commission action in
2009. Despite having notice that MAK 1 was conducting an unregistered and
likely fraudulent offering, Attorney Bujkovsky made material misrepresentations
to some investors about the operations of the entity. Substantial portions of
investor funds were diverted and misappropriated. The Commission's action is in
litigation. See also Litig. Rel. 21659 (Sept. 22, 2010).
Earlier, Mr. Bujkovsky pleaded guilty to charges of
obstruction of justice for making false statements to the Commission staff and
income tax evasion. Mohit Khanna pleaded guilty to conspiracy and mail and wire
fraud and filing a false tax return. Both are scheduled to be sentenced
November 15, 2010.
Accounting fraud: SEC v. Delphi Corp.,
Case No. 06-cv-14891 (E.D. Mich. Filed Oct. 30, 2006), discussed here, is
a financial fraud action against Delphi Corporation and certain of its
officers. This week defendant John Blahnik, the former Treasurer and Vice
President of Treasury, Mergers and Acquisitions of the company, settled with
the Commission. Mr. Blahnik consented to the entry of a permanent injunction
prohibiting future violations of Exchange Act Sections 10(b) and 13(b)(5) and
Securities Act Section 17(a) and from aiding and abetting violations of
Sections 13(a) and13(b)(2)(A). Mr. Blahnik also agreed to pay disgorgement and
prejudgment interest totaling $50,000 and to pay a civil penalty equal to that
amount. He also agreed to be barred from serving as an officer or director of a
public company for a period of five years. See also Litig. Rel. 21660 (Sept. 22, 2010).
Investment fund fraud: SEC v. LADP
Acquisition, Inc., Civil Action No. CV 106835 (C.D. Cal. Filed
Sept. 14, 2010), discussed
here, names as defendants William A. Goldstein, Marc E. Bercoon and their
related entities. The complaint claims that Messrs. Goldstein and Bercoon
perpetrated a "bait-and-switch" scheme on investors, promising to invest their
funds in high profile Hollywood films and TV shows. These claims drew about 100
investors who put about $3.2 million into the defendants' scheme beginning in
mid-2009. In actuality, LADP Acquisition had no business operations. Its shares
were worthless. In addition, defendants misappropriated over $800,000 of the
investor funds and diverted them to their own use according to the complaint.
The complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Section 10(b). The case is in litigation.
Criminal cases
Insider trading: U.S. v. Hoxie,
Case No. 1:10-mj-01113 (S.D.N.Y.) is an insider trading case against former
Walt Disney Co. assistant Bonnie Hoxie. Ms. Hoxie and her boyfriend, Yonnie
Sebbag, who pleaded guilty on August 23, 2010, had shopped the sale of inside
information which they ultimately agreed to sell to undercover FBI agents as discussed here.
This week Ms. Hoxie pleaded guilty to one count of conspiracy and one count of
wire fraud. The date for sentencing has not been set.
Court of appeals
Insider trading: SEC v. Cuban,
No. 09-10996 (5th Cir. Sept. 21, 2010) is an insider trading case against Mark
Cuban. The district court dismissed the action, discussed here.
The Fifth Circuit reversed. According to the complaint, in the spring of 2004
Mr. Cuban, who owned 6.3% stake or 600,000 shares of Mamma.com., was contacted
by the CEO of that company about investing in an upcoming PIPE offering. The
CEO did not tell Mr. Cuban about the deal until after there was an agreement
that the information would be kept confidential. After becoming upset, Mr.
Cuban stated that he did not like PIPE offerings because they are dilutive. He
ended the call stating "Well, now I'm screwed. I can't sell." Subsequently, Mr.
Cuban called the banker conducting the deal in accord with an e-mail he had
received from the CEO. In that call, he obtained additional non-public and
confidential information. One minute after the phone call ended Mr. Cuban sold
his stake, avoiding a $700,000 loss.
The circuit court disagreed with the reading of the
complaint adopted by the district court. Stressing that all reasonable
inferences must at this stage of the case be drawn in favor of the SEC, the
court concluded that the "allegations [in the complaint], taken in their
entirety, provide more than a plausible basis to find that the understanding
between the CEO and Cuban was that he was not to trade." The court
characterized the complaint as "factually sparse record" in reaching its conclusion
that there were sufficient allegations for the case to proceed past the motion
to dismiss stage.
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