To start the new year SEC enforcement partially settled a
long running insider trading case. The Commission also brought cases alleging
evasion of the registration requirements and a churning action in which an
order of nuns was defrauded.
Two reports suggest the number of securities cases is
increasing. One tracks the number of FCPA filings. It shows a significant
increase in cases brought by DOJ and the SEC. The other chronicles a similar
trend for the filing of private securities fraud actions.
Market reform
The Committee on Capital Markets Regulation has requested in a letter addressed
to Senate and House leaders that each chamber hold hearings on the
implementation of the Act through rule making (here). Essentially, the
letter argues that critical new rules are being written to fast with inordinately
short comment periods and, perhaps more importantly, in a somewhat piece meal
fashion with an inadequate prospective on the overall issues. The letter
contends that the process under new regulations are being written to implement
the sweeping reforms in Dodd-Frank is "seriously flawed." The Committee also
told the legislators that those who will be impacted by the new regulations do
not have sufficient time to analyze them. The letter concludes by noting that
while "a long period of implementation creates uncertainty, with a possible
drag on the economy . . . " what may be far worse is a bad process which
produces rules that might "interfere with the proper functioning of the
financial system for years to come . . ."
SEC Enforcement
Insider trading: SEC v. Teo,
Civil Action No. 04-CV-1815 (D.N.J. Filed April 22, 2004) is an action against
Alfred Teo, Sr., a former director of Cirrus Logic, Inc., Mitchell Sacks and
others. The complaint alleges that Mr. Teo, while a director of Cirrus Logic,
Inc., misappropriated material non-public information about the potential
acquisition of C-'Cubed, Inc. Subsequently, he tipped Mr. Sacks. Both
defendants traded in the shares of C-Cubed. Mr. Sacks is alleged to have made a
profit of $115, 155 by selling his shares after the announcement that the
company would be acquired by another firm. The complaint also claims that Mr.
Teo traded on inside information and tipped others regarding additional deals.
The other tippee defendants have settled. Mr. Sacks settled this week with the
SEC, consenting to the entry of a permanent injunction prohibiting future
violations of Exchange Act Section 10(b). He also agreed to pay disgorgement of
$115,155 along with prejudgment interest and to pay a civil penalty in an
amount equal to the disgorgement.
Financial fraud: SEC v. Braas,
Case No. 11-cv-0087 (E.D. Pa. Filed Jan. 6, 2011) is a financial fraud action
alleging violations of Securities Act Section 17(a) and Exchange Act Sections
10(b), 13(b)(5) and aiding and abetting violations of Sections 13(a),
13(b)(2)(A) and 13(b)(2)(B). The defendants are Joseph Braas and Michael
Schlager, two former senior officers at Equipment Finance, LLC, a subsidiary of
Sterling Financial Corp. According to the complaint, from at least February 2002
through April 2007, Mr. Brass as the COO and Mr. Schlager as EVP, engaged in a
pervasive and wide ranging scheme using fraudulent underwriting and reporting
practices to conceal losses at the lending company. Essentially the two
defendants subverted virtually all controls and each aspect of the loan
procedures in order to effectuate their scheme. As a result the parent
company's filings with the Commission were false. The two defendants settled
the action, consenting to the entry of permanent injunctions prohibiting future
violations of the Sections cited in the complaint. Mr. Braas also agreed to pay
disgorgement and prejudgment interest of $1,489,024 while Mr. Schlager was
ordered to pay $1,121,302. Those amounts will be deemed satisfied upon entry of
an order of restitution in the parallel criminal case, U.S. v. Braas,
Crim. No. 10-cr-00753 (E.D. Pa. Nov. 18, 2010).
Evasion of registration: SEC v. Gendarme
Capital Cop., Case No. 2:11-cv-00053 (E.D. CA Filed Jan.
6, 2011) is an action alleging violations of Securities Act Section 5 by
Gendarme Capital Corp. and two of its executives, CEO Ezat Rahimi and VP Ian
Lamphere as well as their attorney Cassandra Armento. According to the
complaint the defendants engaged in a scheme which began in 2008 to evade the
registration requirements. Specifically, the company entered into agreements
with a number of penny stock issuers in which shares were obtained at a
substantial discount based on a representation that they would be held for long
term investment. In fact the shares were quickly sold into the market using
false letters to the transfer agents authored by attorney Armento. Gendarme is
alleged to have made more than $1.6 million. The case is in litigation.
Churning: In the Matter of Paul George
Chironis, Adm. Proc. No. 3-13869 (Jan. 6, 2011) is an action in
which the named Respondent was a registered representative at Capital Growth
Financial, Inc., a now defunct broker dealer. Mr. Chironis was the
representative for two accounts of the Sisters of Charity of New York. Over a
one year period beginning in January 2007 the Order alleges that the Respondent
churned the account and charged undisclosed excessive markups and markdowns
through his defacto control. During the period Mr. Chironis repeated traded the
accounts, which held primarily mortgage backed securities, frequently selling
one bond and replacing it with a very similar security. Over the time period
about $20.1 million in bonds were purchased while about $18 million were sold.
The accounts, which initially had a value of about $8.3 million, lost over
10.8% of their value. To resolve the case Respondent consented to the entry of
a cease and desist order from committing or causing any violations or future
violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He
was also ordered to pay disgorgement of $250,000 and a civil penalty of
$100,000. Finally, the Respondent was barred from associating with any broker
or dealer and from serving or acting in any capacity for a registered investment
company.
Evasion of registration: SEC v. K&L
International Enterprises, Inc., Case No. 6:09-cv-1638
(M.D. Fla. Filed Sept. 24, 2009) is an action against Stephen Carnes, Lawrence
Powalisz and their companies, KL International Enterprises, Inc. Signature
Leisure, Inc and Signature Worldwide Advisors LLC, along with Jared Hochstedler
and Enzyme Environmental Solutions, Inc. The complaint alleges violations of
Securities Act Section 5. It claims that the defendants engaged in a scheme to
evade the registration requirements of the Securities Act by purporting to
convert loans to microcap companies into equity and then immediately dumping
the shares on the market. Over $7 million was made through this scheme
according to the Commission. This week defendants Jared Hochstedler and Enzyme
Environmental Solutions settled with the Commission, consenting to the entry of
permanent injunctions prohibiting future violations of Securities Act Section
5. In addition, the company consented to the entry of an order requiring the
payment of disgorgement in the amount of $346,135 along with prejudgment
interest and a civil penalty of $25,000. Mr. Hochstedler agreed to the entry of
an order requiring the payment of disgorgement in the amount of $1,445,000
along with prejudgment interest. Payment of all but $385,000 was waived based
on his financial condition. The other defendants in this action previously
settled with the Commission.
Criminal cases
U.S. v. La Madrid,
Case No. 3:09-cr-02582 (S.D.Ca). is an action against two brothers, Matthew and
Lance La Madrid, who are alleged to have run a $30 million Ponzi and mortgage
scheme, the Plus Money Premium Return Funds and related entities. The brothers
pleaded guilty to conspiracy and mail fraud charges. The defendants admitted at
the time of their plea that between 2004 and 2008 they obtained over $30
million from investors, falsely promising that the funds would be invested in
"covered calls" option trading. In fact portions of the money were funneled to
a secret bank account while some was used to repay other investors. Beau La
Madrid also admitted to defrauding investors in connection with a scheme in
which he obtained investor funds by falsely claiming it would be put into real
estate investments. Sentencing is scheduled for April 4, 2011.
FCPA
In 2010 the number of FCPA enforcement actions brought by
the SEC and DOJ rose significantly according to a report prepared by Gibson
Dunn. Last year the SEC brought 26 actions which eclipsed its previous high of
20 in 2007. DOJ brought 48 cases compared to 26 in the prior year. The report
is available here.
Private actions
A recent study by NERA based on 11 months of data and
projections for December 2010, concludes that the number of private securities
actions filed last year increased significantly over the prior year. This is
based largely a significant increase in the second half of the year. The report
projects a total of 239 filings by year end compared to 220 the prior year. It
also notes that the average settlement was $42 million, adjusted for outliers,
which is consistent with the prior year. However, the median settlement of
$11.1 million is significantly higher than the $8.5 million in the prior year.
The report is available at here.
An excellent summary of the report is available from the D&O Diary here.
New York
Cuomo
v. Rattner, No 451435-2010 (S.Ct. NY Filed Dec. 30, 2010) is the second action
against financier Steven Rattner based on the NYAG's "pay-to-play" investigation.
The suit involves essentially the same allegations as those in the SEC case (here). In sum, it claims
that Mr. Rattner provided more than $1 million in "sham placement fees" to
Henry Morris, the former political adviser to former New York State Comptroller
Alan Hevesi, in return for investments by state pension funds in investment
fund Quadrangle. Mr. Rattner was formerly affiliated with that fund. In
addition, the complaint claims that Mr. Rattner arranged a DVD distribution
deal for a movie produced by David Loglisci, the former pension fund Chief
Investment Officer. Mr. Rattner agreed to pay $10 million to resolve the suit
and to be banned from any affiliation with a New York pension fund for five
years.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
Gorman