Regulators from six agencies including the SEC appeared
on Thursday before the Senate Banking Committee to detail their plans for
implementing Dodd-Frank. SEC
Chairman Mary Shapiro told the Committee that the Commission has more than 100
rule-making provisions, 20 studies and five new offices to implement.
Nevertheless, the Commission expects to meet the deadlines. A dispute over
funding on Capital Hill could impact that schedule.
The new Supreme Court term began on Monday with two
important securities cases due to be argued. SEC Enforcement, joining the USAO
for the Southern District of Florida and the FBI, continued the increasing
trend of employing "blue collar" tactics in securities cases with a sting
operation against microcap stock manipulators that yielded six SEC enforcement
actions and seven criminal cases. SEC enforcement also prevailed at trial this
week while continuing to focus on insider trading and investment fraud cases. The
U.S. Attorney's Office also won at trial in an insider trading case. The CFTC
released a series of statistics documenting the increasing enforcement efforts
of the agency.
Supreme Court
The Supreme Court term opened this week with two
important securities cases on the docket. One is Matrixx Initiatives v.
Siracusano, No. 09-1158 cert. granted June 14, 2010, which presents a key
question regarding materiality (discussed here). The complaint claims that Matrixx made
false statements about its key product Zicam, a nasal spray. In 2003, the
company issued statements about the success of the product. The statements did
not disclose certain information from researchers suggesting there were side
effects. In fact, the company denied these claims. A class action suit claims
the company statements were false and misleading. The district court dismissed
the case following decisions in the Second and other circuits which hold that
drug manufacturers need not disclose results which are not material on a
statistical basis. The Ninth Circuit reversed, holding that the complaint
alleges a cause of action, is properly pleaded and that the traditional materiality
standards apply.
The second is Janus Capital Group v. First Derivative
Traders, No. 09-525, cert. granted June 28, 2010 (also discussed here)
which focuses on the question of what constitutes primary liability. Defendant
Janus Capital Group, Inc. is a publicly traded asset management firm which
sponsors a family of funds. Plaintiffs claim that the defendants violated
Exchange Act Section 10(b) because the prospectuses for the funds created the
misleading impression that steps would be taken to curb market timing. In fact,
the complaint claims there were secret agreements which permitted the practice.
The district court dismissed the complaint, concluding that it did not contain
any allegations that Janus Capital actually made or prepared the prospectuses
or that any of the statements were attributable to it. The court of appeals
reversed, concluding that defendants "made" the misleading statements. The
court did not adopt an attribution rule.
Sting operation - more "blue collar" tactics
Blue collar tactics are quickly becoming a hallmark of
securities enforcement as the SEC continues to team with the Department of
Justice, various U.S. Attorneys' Offices and the FBI. The Galleon insider
trading cases made extensive use of wire taps and informants (here). The Goncalves
cases represent the largest FBI FCPA sting operation.
Now the SEC, the U.S. Attorney's Office for the Southern
District of Florida and the FBI have brought six SEC enforcement actions
against over a dozen persons and seven parallel criminal cases based on a sting
operation. See, e.g., SEC v Sand, No. 1:10-cv-23603 (S.D. Fla. Filed
Oct. 7, 2010) (and related cases) and U.S. v. Korem, Case No. 0-2-732-cr-UU
(S.D. Fla. Filed Oct. 6, 2010) (and related cases). Each of the cases centers
on a scheme to manipulate various microcap stocks by insiders or those related
to the company. The company officials are alleged to have paid kickbacks to
fund managers, brokers and others. Those officials were to use their control
over various accounts to trade the stocks thereby impacting the price and
volume. Insiders could then profit from the inflated prices. Typically the
promoter of the stock would pay a kickback to a person believed to be, for
example, a fund manager. In some instances the books of the company were then
falsified to cover-up the payments. In reality, the so-called fund manager was
an undercover FBI agent. The SEC complaints, which focus on various time
periods ranging from 2008 to the present, allege violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). Each case is in litigation. The
criminal cases charge conspiracy, securities fraud, wire fraud and mail fraud. See
also Litig. Rel. 21691 (Oct. 7, 2010). The U.S. Attorneys' press release is here.
SEC Enforcement
Misappropriation: SEC v. Alexander,
Case No. CV-10-4535 (N.D. Cal. Filed Oct. 7, 2010) is an action against Barbara
Alexander, a national radio talk show host and former president of APS Funding,
Beth Pina, former CFO of APS and Michael Swanson, former VP of APS. The SEC's
complaint alleges that the three defendants sold interests in APS, a real
estate investment fund, to the public through the use of Ms. Alexander's radio
show. Approximately $7 million was raised from 50 investors who were told that
their funds would be used to make short term real estate loans and would yield
a return of 12%. In fact about $1.2 million went directly to the defendants
while another $1.3 million was used for various projects beginning in 2006 and
continuing through 2009. The complaint alleges violations of Securities Act
Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation.
See also Litig. Rel. 21690 (Oct. 7, 2010).
Investment fund fraud: SEC v. Anderson,
Case No. 10 CV 6420 (N.D. Ill. Oct. 7 2010) is an action against Robert
Anderson and an entity he controls, Rosand Enterprises. According to the
complaint, Mr. Anderson raised about $12 million from 77 investors from 2005
through 2008 by telling them that their money would be invested in Rosand. That
entity was supposed to be in the home rehabilitation business in Chicago and
other areas. Investors were to receive a 10-20% return per month. In fact the
funds were used to make Ponzi type payments back to other investors, put in
various questionable investments and used for personal items of Mr. Anderson.
The complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Section 10(b). The case is in litigation. See also Litig. Rel. 21688 (Oct. 7, 2010).
Investment fund fraud: SEC v. Imperia
Investment IBC, Civil Action No. 2:10 - CV-00986 (D. Utah
Filed Oct. 6, 2010) is an action against Imperia which claimed to sell Traded
Endowment Policies or viatical settlements through its website. The company,
which claimed it was licensed and located in the Bahamas and Vanuatu, told
investors that for $50 they could obtain and $80,000 loan which would be traded
and yield them 1.24% per day in returns. Those returns could only be obtained
by the use of a VISA card. Through the web site the company raised about $7
million world wide. Almost $4 million was from persons who are deaf. In fact
all the allegations on the website are false. The company is not licensed or
located in the jurisdictions claimed. The SEC obtained a freeze order on filing
the complaint which charges violations of Securities Act Sections 5 and 17(a)
and Exchange Act Section 10(b). The case is in litigation. See also Litig. Rel. 21686 (Oct. 7, 2010).
Insider trading: SEC v. Jantzen,
Case No. 1:10-cv-00740 (W.D. Tex. Oct. 5, 2010) is an insider trading action
against former Dell Employee Marleen Jantzen and her husband John, a broker.
The case centers on the tender offer by Dell for Perot Systems in September
2009. Prior to the announcement of the transaction Ms. Jantzen learned about
the deal during the course of her employment. She was obligated to execute an
agreement not to trade. The day before the announcement, Ms. Jantzen
transferred funds to her brokerage account. Almost immediately her husband
purchased 500 shares and 24 options in Perot. The position was sold immediately
after the announcement at a profit of over $26,813.58. The complaint alleges
violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.
See also Litig. Rel 21685 (Oct. 6, 2010). This is the second case
based on this transaction. Earlier the Commission brought SEC v. Saleh,
Case No. 3:09-cv-01778 (N.D. Tex. Filed Sept. 23, 2009). That case is settled.
Insider trading: SEC v. Poteroba,
Civil Action No. 10-civ-2667 (S.D.N.Y. Filed March 24, 2010) is an insider
trading action against former investment banker Igor Poteroba, securities
industry professional Aleksey Koval, and their friend Alexander Vorobiev. This
week, Mr. Poteroba partially settled the action against him by consenting to
the entry of a permanent injunction prohibiting future violations of Exchange
Act Sections 10(b) and 14(e). Issues regarding disgorgement, prejudgment
interest and penalties will be resolved later. Mr. Poterobia also consented to
the entry of an order barring him from associating with any broker dealer or
investment adviser. The complaint alleged that Mr. Poteroba was part of a
serial insider trading ring. He is alleged to have misappropriated confidential
inside information from his employer, UBS, regarding at least eleven
acquisitions, tender offers or other business transactions. Prior to each deal
he tipped his friend Aleksey Koval who traded and then tipped Mr. Vorobiev who
traded on four deals. Overall approximately $1 million in illegal profits were
made. See also Litig. Rel 21681 (Oct. 4, 2010).
Custody rule: In the Matter of Altschuler,
Melvoin and Glasser LLP, Adm. Proc. File No. 3-1408 (Oct. 4,
2010) is an action based on alleged violations of Adviser Act Section 206(4)
and Rule 102(e) against audit firm Altschuler, Melvion and Glasser and CPA
George Johnson, II. According to the
Order, the audit firm was to perform the annual Advisers Act surprise
examination of Sentinel Management Group, a registered investment adviser.
Sentinel was required by the Custody Rule to have an independent accountant
verify all client funds and securities by surprise examination each year. The
Respondent firm conducted the exams from 2002 through 2006. Mr. Johnson was the
engagement partner for each year except 2004. In conducting the exams, the
Respondents failed to comply with the applicable standards. This resulted in
Sentinel's violation of the Custody Rule and Section 206(4) of the Advisers
Act. The failures also constituted improper professional conduct. Accordingly,
the Commission ordered Respondents to cease and desist from causing any violations
and any future violations of Advisers Action Section 206(4). The firm was
censured and ordered to disgorge its fees of $18,700. Mr. Johnson is denied the
privilege of appearing or practicing before the Commission as an accountant.
Misrepresentations: SEC v. U.S. Pension Trust
Corp., Civil Action No. 07-22570 (S.D. Fla. Filed Sept. 28,
2007) is an action discussed
here in which the court found defendants U.S. Pension Trust Corp., U.S.
College Trust Corp., Iliana Maceiras, Leonardo Maceiras Jr. and Nildo Verdeja
liable for violating Exchange Act Sections 10(b) and 15(a) and Securities Act
Section 17(a) based on a multiyear fraud. The court entered its findings
following a five day bench trial. In its opinion, the court concluded that the
defendants violated the antifraud provisions by soliciting investors to
purchase shares in U.S. mutual funds through agents largely in Latin America
while failing to disclose that they would be charged excessive commissions, in
some instances as high as 85%. The defendants also mislead investors about the
registration of the investments with the Commission, the Federal Reserve Bank
and the Office of the Comptroller of the Currency. The court also concluded
that the companies had acted as unregistered broker dealers and that the
individual defendants aided and abetted those violations.
The Court ordered the companies to pay disgorgement of
$62.6 million based on investor contributions that were fraudulently raised
from 1995 through 2008. Those companies were also directed to pay a $50 million
civil penalty. The individuals were ordered to pay disgorgement which ranged
from $674,567 to $1,093,364, representing the salaries they paid themselves
during the time period. Each individual was also ordered to pay a $200,000
civil penalty. See also Litig. Rel. 21680 (Oct. 1, 2010).
Investment fund fraud: SEC v. Chiaese,
Civil Action No. 10-cv-5110 (D.N.Y. Filed Oct. 5, 2010) is an action against
Carlo G. Chiaese, a registered representative associated with a broker dealer,
his wife Micol, and a controlled entity C.G.C. Advisors, LLC as discussed here.
The complaint chronicles the investment efforts of six clients identified with
various code names. Each investor gave the defendants express instructions for
investing their funds. Each was assured those instructions were followed. Each
received account statements to bolster those claims. Each claim was false.
Overall, at least $2.5 million was invested by the six clients with the
defendants. The money was misappropriated and used by the individual defendants
to enhance their life style according to the complaint. The SEC's complaint
alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b)
and Sections 206(1) and 206(2) of the Investment Advisers Act. The case is in
litigation.
CFTC
The CFTC released statistics regarding is enforcement program
for FY 2010. Those statistics demonstrate that the number of enforcement
actions brought in FY 2010 increased by 14% to 57 cases compared to the prior
fiscal year. This represents a 42% increase over FY 2008. In addition, the
Enforcement Division opened 419 investigations in FY 2010, an all time high.
This represents a 66% increase over FY 2009.
Criminal cases
Insider trading: U.S. v. Contorines
(S.D.N.Y.) is an insider trading case against Joseph Contorines. The defendant was convicted following trial on one count of
conspiracy to commit securities fraud and seven counts of securities fraud.
The case was based on trading by Mr. Contorines from 2004 through 2006. During
that time, he was furnished with confidential inside information regarding
upcoming mergers by Nicos Stephanou, an employee of an investment banking firm
who resided in London and New York. Mr. Contorines made over $7 million in
illegal profits. Mr. Stephanou also tipped Michael Koulouroudis who previously
pleaded guilty. Mr. Contorines is scheduled to be sentenced on February 4,
2011.
Court of appeals
SOX Section 304: Cohen v. Viray,
Case No. 08-3860-cv (2nd Cir. Sept. 30, 2010)(In re: DHB Industries, Inc.
Derivative Litig.), discussed here, centers on efforts to settle class action
and derivative litigation where the settlement agreements indemnified the
former CEO from Section 304 liability. The initial suits focused on disclosures
regarding the inferior material used to manufacture body armor by the company.
Subsequently, there was a restatement of the firm's financial statements. Mr.
Brooks, the former CEO, and others were indicted on securities fraud and other
charges which claim they essentially looted the company. Mr. Brooks was
recently convicted (here).
Parallel SEC enforcement actions are pending (here).
Mr. Cohen filed objections to the proposed settlement,
challenging the fees to be paid. DOJ also objected arguing that the proposed
settlement limited the government's remedies in the then pending criminal cases
and undermined the efforts of the SEC to hold individuals liable under SOX
Section 304. The government's objections were based on two provisions of the
proposed settlement agreement. In one, DHB released Mr. Brooks and another
officer from any liability under Section 304. In another, the company agreed to
indemnify Mr. Brooks and another officer for any liability under Section 304.
The district court overruled the objections and approved the settlement.
The Second Circuit reversed. The court began by
considering the question of whether Section 304 contains a private cause of
action. On this point the court concluded, based on the language of the
Section, its legislative history and the structure of the Act, that Section 304
does not provide for a private cause of action. The court went on to hold that
the settlement provisions violate Section 304. Only the SEC has authority to
enforce Section 304 and to exempt a CEO or CFO from liability. In view of this
fact, it is clear that the settlement is an end run around the provision and
undermines the SEC's authority. It also undermines the important public policy
the section was designed to implement.
FSA
The chief executive of the FSA gave a keynote address last week
focused on the place of values and trust in regulation. Hector Sants
stressed in his remarks that another crisis cannot be prevented until the trust
of the society in the financial system is restored. It is up to those who
manage financial institutions to restore that trust. Regulators have a role in
this. The starting point for regulators should be to encourage individuals to
make appropriate judgments and to act at all time with integrity. In this
regard, the regulator should focus "on what an unacceptable culture looks like
and what outcomes that drives ..." The regulator, however, should not define the
culture. Mr. Sants went on to stress that regulators should focus on the
outcomes from the culture and ensure that there is a proper framework for
assessing and maintaining a proper culture.
For
more news involving securities issues, visit SEC Actions, a
blog by Thomas Gorman