The SEC approved new rules sought by the exchanges which
effectively bar market makers from using "stub quotes," a kind of quote which
is not intended to be executed. That type of quote was involved in the flash
crash.
SEC enforcement this week settled with two more Galleon
defendants. Another Galleon defendant was sentenced in a parallel criminal
case. SEC enforcement also filed an investment fund fraud case and resolved another.
The former CEO of KB Home was sentenced to five years of
probation with eight months of home confinement in his criminal option
backdating case. Mr. Karatz was acquitted of sixteen of twenty counts in the
indictment, including all of the option backdating charges. Finally, Goldman
Sachs was fined by FINRA for failing to update filings for its registered
representatives, one of which involved the Wells notice issued in the SEC's
enforcement action earlier this year against the firm.
Market reform
The SEC approved new rules proposed by the exchanges and
FINRA which will effectively preclude stub quotes (discussed here). A
stub quote is one which is "an offer to buy or sell stock at a price so far
away from the prevailing market that it is not intended to be executed, such as
an order to buy at a penny or an offer to sell at $100,000." This type of offer
was involved in the "flash crash." Under the new rules, depending on the
security, a market maker will have to make a bid which comes within certain
parameters. For example, for securities subject to the circuit breaker pilot
program the market maker will be required to enter a quote that is not more
than 8% away from the best bid and offer. For exchange listed equities that are
not included in the circuit breaker pilot program, a market maker will be
required to enter quotes that are no more than 30% away from best bid and
offer.
SEC Enforcement
Financial fraud: SEC v. LocatePlus Holdings
Company, Case No. 1:10-cv-11751 (D. Mass. Nov. 11, 2010) is an
action in which the SEC amended its complaint to add Jon Latorella and James
Fields as defendants (discussed here). According to the complaint the two men
used their control over LocatePlus, a provider of online access to public
record databases for investigative searches, to falsely inflate the revenue of
the company. The Commission claims that the two men caused LocatePlus to
recognize about $2 million from sham transactions they initiated. The complaint
also claims that Messrs. Latorella and Fields manipulated the share price of
Paradigm Tactical Products, Inc. which sells hand held metal detectors called
"FriskerPros." The Commission's complaint alleges violations of Securities Act
Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A),
13(b)(2)(B) and 13(b)(5). The case is in litigation.
Investment fund fraud: SEC v. Zada,
Civil Action No. 2:10-cv-14498 (E.D. Mich. Filed Nov. 10, 2010) is an action
against Joseph Zada and his company, Zada Enterprises, LLC. The complaint
alleges that Mr. Zada has been running a Ponzi scheme since at least January
2006. During that period Mr. Zada is alleged to have raised about $27.5 million
from 60 investors who were falsely led to believe that they were purchasing
promissory notes with interest rates that ranged from 7% to 12% and that their
funds would be put in oil-related investments. The funds were not invested as
claimed by Mr. Zada. Rather, portions of the money were used to repay other
investors. A significant part of the money was diverted to Mr. Zada's personal
use. 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. 21737 (Nov. 10, 2010).
Offering fraud: SEC v. Overland Energy, Inc.,
Civil Action No. 4:10-cv-613 (E.D. Tex. Nov. 9, 2010) is an action against
Garry Smith, Robert Nelson, their companies Overland Energy, Inc. and Acorn
Energy, Inc. and their chief salesman Steven Ray. The complaint claims that
since September 2007 Messrs. Smith and Nelson raised about $11 million from more
that 180 investors through six securities offerings conducted through Overland
and Acorn. The shares were sold using a PPM which stated that about 82% of the
proceeds would be spent on leasehold costs and to drill, test, complete and
equip oil and gas wells. Investors were also told that their funds would be
returned within one or two years. In fact, these claims were false, according
to the SEC. A significant portion of the investors funds were diverted to the
personal use of the individual defendants. The complaint alleges violations of
Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a).
The case is in litigation. See also Litig. Rel. 21736 (Nov. 10, 2010).
Investment fund fraud: SEC v. Sucarato,
Civil Action No. 09-CV-4953 (D.N.J.) is an action against Robert Sucarato who
was associated with New York Financial Company, an unregistered investment
adviser. The Commission claims that Mr. Sucarato raised at least $1,728,954
from several investors by selling interests in two hedge funds he and his
company purported to manage. Those interests were sold based on
misrepresentations. The investor funds were then either diverted to the
personal use of Mr. Sucarato or lost in commodity trading. Mr. Sucarato settled
by consenting to the entry of a permanent injunction prohibiting future
violations of Securities Act Sections 5and 17(a), Exchange Act Sections 10(b)
and Investment Advisers Act Sections 206(1) and 206(2). He also agreed to pay
disgorgement of $1,346,135 along with prejudgment interest. That amount will be
offset on a dollar for dollar basis by any payments made by him in a related
actions brought by the CFTC. Mr. Sucarato also consented to the issuance of an
Order in a related administrative proceeding to the issuance of an order which
bars him from association with any investment adviser. See also Litig. Rel. 21734 (Nov. 10, 2010).
Rating agencies:In the Matter of Damyon
Mouzon, Adm. Proc. File No. 3-14029 (Filed Sept. 2, 2010) is an
action against the former President of LACE Financial Corporation, a Nationally
Recognized Statistical Rating Organization. The Order, discussed here,
alleges that the firm made a material misrepresentation in its application to
be an NRSRO and for an exemption from a conflict of interest rule. It also
alleges that the firm failed to disclose, and have adequate written policies
regarding, certain extra procedures it used for the firm's primary client. The
firm also failed to retain its e-mail as required. Mr. Mouzon is alleged to
have been the cause of the violations. Respondent Mouzon consented to the entry
of a cease and desist order from committing or causing any violations and any
future violations of Exchange Act Sections 15E(a)(1) and 17(a). The firm
settled similar charges on filing (also discussed here).
Insider trading: SEC v. Galleon Management,
LP,
Civil Action No. 09-CV-8811 (S.D.N.Y.) is the Commission's action based on the
Galleon insider trading case. Specifically, the complaint alleges that Galleon
founder Raj Rajaratnam and other engaged in a pattern of insider trading over a
period of years (here).
This week, the Commission settled with defendants Roomy Khan and Rajiv Goel.
Ms. Khan is an individual investor who had been employed at Intel in the late
1990s. She later worked for Galleon. Mr. Goel is a friend of defendant
Rajaratnam who was a managing director within the treasury group of Intel. He
was also the Director of Strategic Investments at Intl Capital, an Intel
subsidiary that makes proprietary equity investments in technology companies.
Mr. Goel and Ms. Kahn are alleged to have furnished inside information to Mr.
Rajaratnam. Both defendants settled with the Commission by consenting to the
entry of permanent injunctions prohibiting future violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). Ms. Kahn also agreed to pay
disgorgement of $1,552,566.94 along with prejudgment interest. Mr. Goel will
pay disgorgement in the amount of $230,570.52 along with prejudgment interest.
Mr. Goel is also barred from serving as an officer or director of an issuer.
The court will consider the question of a penalty at a later date for each
defendant. Both defendants are cooperating with the SEC. See also Litig. Rel. 21732 (Nov. 8, 2010).
Criminal cases
Option backdating: U.S. v. Karatz,
No. 2:09-cr-00203 (C.D. Cal.) is the criminal option backdating case against
Bruce Karatz, former CEO of KB Home. Mr. Karatz was acquitted on sixteen counts
centered on option backdating claims. He was however convicted on two counts of
mail fraud and two counts of making a false statement. Mr. Karatz was sentenced
this week. The court ordered Mr. Karatz to serve five years probation, the
first eight months of which requires he be confined to his home. In addition,
he was directed to pay a $1 million fine and perform 2,000 hours of community
service. The government had sought a sentence of six years in prison and a $7.5
million fine in addition to the disgorgement Mr. Karatz paid to settle the SEC
case. The sentence followed the recommendation of the probation department.
Insider trading: U.S. v. Hariri, 09
Mag. 2436 (S.D.N.Y. Filed Nov. 4, 2009) is an action arising out of the Galleon
insider trading case (here). Defendant Ali Hariri was a vice president at Atheros
Communications. He is alleged to have furnished inside information to Ali Far,
a hedge fund manager, who traded. In return for the information Mr. Far
furnished defendant Hariri with inside information on other technology
companies. Mr. Hariri previously pleaded to conspiracy and securities fraud.
This week he was sentenced to 18 months in prison followed by two years
of supervised release. He must also pay a $50,000 fine.
FINRA
FINRA imposed a $650,000 fine on Goldman Sachs for
failing to update filings for two of its registered representatives to reflect
the fact that they were issued Wells Notices by the SEC and for not having
adequate procedures (discussed
here). The regulator found that Goldman failed to disclose that two of its
registered representatives, one of whom is Fabrice Tourre, had received Wells
notices from the SEC. Mr. Tourre's notice was based on the ABACUS transaction
at the center of the SEC's enforcement action in which he is a defendant. Firms
are required to update a representative's regulatory record by filing a Form U4
reporting the receipt of a Wells Notice within 30 days. FINRA also concluded
that Goldman does not have adequate supervisory procedures and systems in place
to ensure proper disclosure. Its written supervisory procedures, manuals and
policies fail to mention "Wells Notices."
For
more news involving securities issues, visit SEC Actions, a
blog by Thomas Gorman