DOJ announced "Operation Broken Trust" this week, a sweep
focused on investment fund fraud. It is being conducted by the Justice
Department along with the SEC, CFTC, IRS and others. A new report shows that
the number of SEC settlements in FY 10 increased to the highest level since
2007. Settlements with individuals were up significantly, while those with
corporations declined.
This week, SEC enforcement was dominated by insider
trading cases. The actions were not the much-discussed headline grabbing probes
into the hedge fund industry however. Rather the actions were dominated by
family related insider trading rings.
SEC Settlement Trends
The SEC settled with 694 defendants in FY10, the highest
level since 2007 according to a
new NERA Economic Consulting Report available at http://www.securitieslitigationtrends.com/.
The overall increase came from a 25% jump in settlements with individuals.
Settlements with companies, however, declined during the same period by 12%.
The 168 company settlements were the second lowest since the passage of SOX.
The largest corporate settlement was with Goldman, Sachs & Co. at $550
million. Four of the top ten largest corporate settlements were FCPA cases.
Operation Broken Trust
Members of the Financial Fraud Task Force, including DOJ,
the SEC, the FBI, the IRS, the Postal Inspectors and the CFTC, in coordination
with the FTC, the U.S. Secret Service and the National Association of Attorneys
General, conducted the largest targeted sweep in history focused on financial
investment fraud. The task force, announced
this week by Attorney General Eric Holder, began on August 16th. Since
then, enforcement actions have been brought against 343 criminal defendants and
189 civil defendants. The actions involved over 120,000,000 victims. The task
force is designed to send two messages. One is to alert the public to invest
scams. The other is to warn those conducting these fraudulent enterprises that
law enforcement is using every tool to pursue them.
SEC Enforcement
Insider trading: SEC v. One of More Unknown
Purchasers of Securities of Wimm-Bill-Dann Foods OJSC, 10
Civ. 9159 (S.D.N.Y. Filed Dec. 8, 2010) is an insider trading action centered
on the acquisition of 66% of Wimm-Bill-Dann Foods OJSC, a Russian manufacturer
and seller of dairy and fruit juice products, by PepsiCo, Inc. The deal was
announced on December 2, 2010. In the days prior to the announcement an account
at SG Private Banking SA in Geneva, Switzerland made large purchases of
Wimm-Bill-Dann ADRs. For example, on November 29 the account purchased 23% of
the total trading volume; on November 30th 13% of the trading volume; and on
December 1st 21%. After the acquisition date the price of the ADRs rose 28%.
The positions in the account would yield $2.7 million if sold. The Commission
obtained a temporary freeze order. See also Litig. Rel.
21766 (Dec. 8, 2010).
Insider trading: SEC v. Cohen,
Case No. 10 CV 2514L (S.D. Cal. Filed Dec. 8, 2010); U.S. v. Myers, Case No. 10
CR 4832 (S.D. Cal. Filed Dec. 8, 2010) (here). These cases are,
respectively, a civil and criminal, insider trading case against Bret Cohen and
his Uncle David Myers. According to the SEC complaint, which alleges violations
of Exchange Act Section 10(b) and the one count information alleging a
conspiracy to violate the securities laws, the defendants were furnished inside
information on two occasions about Sequenom, Inc. The information came from two
brothers, tippers A and B. Tipper A was the patent agent for the company.
Tipper B is the fraternity brother of Mr. Cohen. In one instance, tipper A
furnished tipper B advance information about a pending acquisition of Exact
Sciences Corporation after working on the due diligence. Tipper B then
furnished the information to Mr. Cohen, who traded prior to the January 9, 2009
deal announcement. The share price increased significantly before Exact
Sciences rejected the bid on January 12. Beginning on January 13, and
continuing for several weeks, Mr. Cohen sold his shares. He made a profit of
over $34,000. Tippers A and B received a payment from Mr. Cohen.
The second transaction involved the April 29, 2009
announcement that previously disclosed test data for a Sequenom product could
not be relied on. Again, tipper A was involved in the matter for the company.
Again he furnished the information to tipper B, who tipped Mr. Cohen. A few
minutes before the market close on April 29, Mr. Cohen began buying Sequenom
put options which were sold the next day at a profit of over $572,000. Tipper B
was later paid a fee of $10,000. The cases are in litigation.
Reg M: In the Matter of Gartmore Investment
Ltd.,
Adm. File No. 3-14154 (Dec. 8, 2010) is a settled
proceeding against London based investment adviser Gartmore Investment Ltd.
The Order alleges a violation of Rule 105 of Regulation M, which prohibits
short selling of equity securities during a restricted period prior to a public
offering and then purchasing the same securities in the public offering. The
Respondent is alleged to have violated the Rule in May 2009 in connection with
certain short sales it made prior to the public offering by BB&T Corp. The
Respondent made profits of $928,117.83. The action was resolved with a consent
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 of the
Exchange Act. Respondent also agreed to disgorge its trading profits along with
prejudgment interest and pay a penalty of $375,000.
Bid rigging: In the Matter of Banc of America
Securities LLC, Adm. Proc. File No. 3-14153 (Dec. 7, 2010)
is an action
against Banc of America Securities, now Merrill Lynch, for its role in improper
bidding practices from 1998 through 2002. Municipalities generally invest
the proceeds from the purchase of municipal securities temporarily in
reinvestment products. IRS regulations generally require that the investments
be at fair market value. That value is typically established through a bidding
process. Here, that process was not competitive because of undisclosed
consultations, agreements, or payments. These actions jeopardized the tax
exempt status of the underlying municipal securities. Respondent settled with the
SEC by consenting to the entry of a cease and desist order from committing or
causing any violations and any future violations of Exchange Act Section
15(c)(1)(A) and agreeing to pay disgorgement plus prejudgment interest of
$36,096,442 directly to the affected entities. No penalty was assessed because
of the cooperation of the Respondent. The settlement was part of a global
resolution which also included the IRS, the Office of the Comptroller of
Currency and 20 State Attorneys General. Overall Respondent paid $137.1
million. DOJ did not charge Banc of America under the terms of its Antitrust
Corporate Leniency Program.
Insider trading: SEC v. Temple,
Case No. 10-cv-1058 (D. Del. Filed Dec. 7, 2010) names as defendants Jeffery
Temple and his brother-in-law Benedict Pastro (here). Mr. Temple was employed at
a Wilmington, Delaware law firm from August 12, 2002 through October 11, 2010
as Information Systems and Security Manager which gave him access to electronic
and other files containing material non-public information. Defendant Benedict
Pastro is Mr. Temple's brother-in-law. Beginning in June 2009, and continuing
until his termination from the firm, Mr. Temple traded in advance of twenty-two
prospective mergers and/or acquisition related announcements involving twenty
law firm client. In twelve instances, the complaint claims Mr. Temple tipped
his brother-in-law. Overall, Mr. Temple is alleged to have made illegal profits
of $88,300. Mr. Pastro is alleged to have made $94,000 in illegal profits. The
complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case
is in litigation.
FCPA
U. S. v. Chodan,
(S.D. Tex. Dec. 6, 210) is an action in which Joseph Chodan, a former
commercial vice president and consultant to the U.K. subsidiary of Kellogg,
Brown & Root, Inc. pleaded guilty to conspiring to violate the FCPA (here). The plea is based on FCPA
violations by a joint venture formed in 1990 by KBR, Snamprogetti Netherlands
B.V., Technip S.A. and another company. The purpose of the venture was to
secure contracts from Nigeria LNG, Ltd., a company formed by the Nigerian
government which held a 49% interest. From 1995 through 2004, the joint venture
was awarded four EPC contracts by Nigeria LNG Ltd. to build facilities on Bonny
Island. KBR CEO Albert Stanley and others met with a designated representative
of the government and negotiated the agreements and bribes. Mr. Chodan
recommended that the joint venture hire two agents to pay the bribes. One was a
Gibraltar corporation controlled by Jeffrey Tesler. The other was a Japanese
trading company. About $132 million was paid to the Gibraltar company. Another
$50 million was paid to the Japanese trading company. At various points during
the venture, Messrs. Stanley, Chodan and others met with government officials
to secure the appointment of a representative with whom they could deal.
Previously, KBR, Snamprogetti, Technip and Mr. Stanley resolved their cases (see
e.g., here). The date for
sentencing has not been set.
FINRA
The agency filed
an action seeking a temporary cease and desist order against San Antonio based
broker Pinnacle Partners Financial Corporation and its president Brian K.
Affaro. FINRA alleges that from August 2008 to the present Mr. Affaro and
Pinnacle have operated a boiler room. Through this operation more than $10 million
has been raised from over 100 investors. The funds were raised through
misrepresentations. According to FINRA, the investor funds were misused by Mr.
Affaro.
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