The focus was on Dodd-Frank this week as the Commission
continued to implement the Act, issuing proposed rules regarding asset backed
securities and derivatives. SEC Enforcement filed a financial fraud case and
another investment fund fraud action which tracks a criminal case. Similarly,
in Michigan, a criminal indictment based on allegations of investment fund
fraud was handed down. Finally, the New York AG continued to move forward with
his "pay-to-play" investigation, settling with a national law firm.
Market reform
Dodd-Frank Rules:
The SEC issued proposed rules this week under three sections of Dodd-Frank.
- ABS: To implement Section 945, the Commission
proposed rules which would require issuers of asset backed securities to
disclose the nature of the review performed as well as its findings and
conclusions. Required disclosures would include information about how the loans
in the pool differ from the disclosed underwriting criteria; facts about loans
that did not meet the underwriting standards; and information about the entity
that made the determination that loans should be included in the pool despite
not having met the underwriting standards.
- Swaps: Section 766 requires the SEC to adopt an
interim final rule requiring the reporting of security-based swap transactions
that occurred before the enactment of the legislation, but which had not
expired on the date of enactment. This week, the Commission approved interim
Rule 13Aa-2T to comply with this requirement.
- Conflicts/Swaps: Section 765 specifies
requirements designed to mitigate conflicts of interest at clearing agencies
for security-based swaps. This week the SEC issued for comment Proposed
Regulation MC which is designed to deal with the potential conflicts.
Previously, the CFTC proposed similar rules for products within its
jurisdiction.
IG Report on Goldman:
The SEC's Inspector General filed a report on his investigation into the
circumstances surrounding the filing and settlement of the enforcement action
against Goldman Sachs (discussed here). In essence, it concludes that there is no
evidence suggesting that the filing or settlement was politically timed or that
there were press leaks by the SEC. Report of
Investigation, Case No. OIG - 534 (Sept. 30, 2010).
SEC Enforcement
Financial fraud: SEC v. LocatePlus Holdings
Corporation, Case No. 10-CV-11751 (D. Mass. Oct. 14,
2010) is an action against LocatePlus Holdings, a company which sells on-line
access to public record data bases for investigative searches. According to the
complaint, the company improperly inflated its revenue from 2005 through 2007
by recognizing $2 million from a fictitious customer called Omni Data. In fact,
that company was funded with cash routed from entities secretly controlled by
the former CEO and CFO of LocatePlus. The Commission's complaint alleges
violations which include the antifraud provisions of the Securities Act and the
Exchange Act. The case is in litigation. See also Litig. Rel. 21692 (Oct. 14, 2010).
Investment fund fraud: SEC v. Prevost,
Case No. 0:10-cv-04235 (D. Minn. Filed Oct. 1, 2010) names as defendants Bruce
Prévost, David Harrold and their controlled entities, Palm Beach Capital
Management LP and Palm Beach Capital Management LLC. According to the
complaint, from 1995 through 2008, Tom Petters perpetrated a massive Ponzi
scheme through the sale of promissory notes. At the time, Mr. Petters was a
prominent Minnesota businessman who controlled what is described as an "empire"
of companies including Polaroid Corporation, Fingerhut Direct Marketing and Sun
Country Airlines. The note proceeds were to finance the purchase of large
amounts of consumer electronics for resale to "Big Box" retailers. In reality,
Mr. Petters diverted the funds to his own use. Much of the $3.65 billion
invested came from feeder funds, including two controlled by defendants Prévost
and Harrold. During the period, these two defendants earned more than $58
million in fees. According to the complaint, Messrs. Prévost and Harrold made
false representations to investors regarding the safeguards provided by certain
bank accounts. By February 2008, Mr. Petters was unable to repay certain notes
held by two funds Messrs. Prévost and Harrold controlled. These two defendants
then joined with Mr. Petters to concoct a series of bogus notes used in
exchange transactions to conceal the inability to pay. The complaint alleges
violations of Securities Act Section 17(a), Exchange Act Section 10(b) and
Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation. See
also Litig. Rel. 21694 (Oct. 14, 2010). Mr. Petters was
previously convicted of conspiracy, fraud and money laundering (here).
Insider trading: SEC v. Di Nardo,
Civil Action No. 08-cv-6609 (S.D.N.Y. Filed July 25, 2008) is an action
originally filed on an emergency basis against unknown purchasers of DRS
Technologies, Inc. and American Power Conversion Corporation options. Both
companies were being acquired in October 2006 by Schneider Electric S.A. In an
amended complaint the SEC named Gianluca Di Nardo, an Italian citizen, and his
investment vehicle Corralero Holdings as defendants. The amended complaint
alleges that Mr. Di Nardo and his entity were in possession of inside
information in late September 2006 when he bought 2,400 APCC call options for
about $299,800. Those options were liquidated after the deal announcement,
yielding a profit of $1.4 million. Earlier, Mr. Di Nardo had purchased DRS call
options while in possession of inside information. After the deal announcement,
they were sold at a profit of $669,750. To resolve the action Mr. Di Nardo and
his company consented to the entry of permanent injunctions prohibiting future
violations of Exchange Act Section 10(b). The two defendants also agreed to pay
$2,110,000 in disgorgement along with prejudgment interest and a civil penalty
of $700,000. See also Litig. Rel. 21687A (Oct. 7, 2010).
Criminal cases
U.S. v. DeMiro,
Case No. 10-cr-20594 (E.D. Mich. Oct. 10, 2010) is an action against investment
adviser Dante DeMiro. He is the founder of MuniVest Financial Group and
MuniVest Services LLC. From March 2009 through September 2010 the indictment
claims that Mr. DeMiro falsely promised clients that he would purchase millions
of dollars in certificates of deposit. In reality he diverted the funds to his personal
use, defrauding a school district, a municipality and others out of about $10
million. Mr. DeMiro entered a plea of not guilty.
New York
New York AG Andrew Cuomo settled with the law firm Manatt
Phelps & Phillips, LLP in his pay-to-play investigation (discussed here).
According to the New York AG, Manatt made introductions and secured meetings on
behalf of firms seeking investments from public pension funds in New York,
California and in other locations. The law firm and the attorneys involved were
not licensed placement agents or securities brokers. Manatt was only paid for
one transaction. In 2003, the firm, in conjunction with Platinum Advisors,
helped place $25 million by CalPERS in Levine Leichtman Capital Partners Fund
III. The law firm and Platinum each received $187,500 in fees from 2004 through
2006. To resolve the matter Manatt agreed to pay a $550,000 fine to the State
of New York. In addition, the firm will be barred from appearing before any
public pension fund in New York for five years. It will also adopt the Attorney
General's Public Pension Fund Reform Code of Conduct and cooperate with the
on-going investigation.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
Gorman