Dodd-Frank, insider trading and the FCPA continue were
key to securities regulation and enforcement this week. The Commission proposed
more rules to implement the Reform Act. In this instance the rules concern
security-based swap execution facilities.
Insider trading continues to be a key focus as the
Galleon criminal trial tracks toward trial later this month. The SEC filed an
action evolving out of the expert network investigation it has been conducting
with the Manhattan U.S. Attorneys Office. The Commission's action overlaps the
previously filed criminal case but adds additional defendants. The SEC also
settled with two more defendants in its Galleon insider trading case. Both
previously pleaded guilty to criminal charges and were sentenced to time in
prison.
Finally, the Commission and DOJ resolved FCPA cases with
Maxwell Technologies. UK authorities however delayed for the third time the
implementation of the much discussed Bribery Act.
Market reform
The Commission continues to propose rules to implement Dodd-Frank despite
budget constraints. This week the proposed rules concerned security-based swap
execution facilities. The rules define a security-based swap execution
facility, establish their registration requirements and their duties and core
principles. They also exempt security-based swap execution facilities from the
definition of "exchange" and from most regulation as a broker.
SEC Enforcement
Insider trading: SEC v. Longoria, Civil Action No. 11-CV-0753 (S.D.N.Y.
Filed Feb. 3, 2011) is an action based on insider trading by hedge funds who
obtained the information through an expert network. Four defendants were paid
consultants of expert witness network Primary Global Research Inc.: Anthony
Longoria, formerly a Supply Chain Manager at Advanced Micro Devices, Inc. or
ADM; Daniel DeVore, formerly a Global Supply Manager at Dell, Inc.; Winifred
Jiau, who has held positions at various technology companies; and Walter
Shimoon, formerly a vice president of business development for components in
the Americas at Flextronics. Two defendants were employees of Primary Global:
James Fleishman, a vice president of sales; and Bob Nguyen, a technology
analyst and semiconductor vertical manager. According to the complaint, Mr.
Longoria furnished multiple Primary Global clients financial information on AMD
who traded in the securities of the company. Mr. DeVore had access to Dell
sales forecasts and price and volume information about purchases from
suppliers. He regularly furnished this information to network clients. Mr.
Shimoon had access to confidential information about Flextronis and its
customers including Apple, Omnivision and Research in Motion. He furnished this
information to network clients. Ms. Miau had contacts at Marvell and other
technology companies from whom she obtained information which was furnished to
network clients. Overall the complaint claims traders who used the tips from
the network had profits or avoided losses totaling at least $5.9 million. The
complaint alleges violations of Securities Act Section 17(a) and Exchange Act
Section 10(b). The case is in litigation. Previously a related criminal case
was filed (here).
Failure to disclose: In the Mater of AXA
Roenberg Group, Adm. Proc. File No. 3-14224 (Feb. 3, 2011)
is a proceeding naming as Respondents AXA Rosenberg Group LLC, a holding
company, AXA Rosenberg Investment Management LLC, an institutional money
manager and registered investment adviser, and Bar Rosenberg Research Center
LLC, an investment adviser that developed and maintained the computer model at
issue here. According to the Order, in June 2009 senior management at the
holding company and the money manager discovered that there was an error in a
computer model used in the management of the portfolios. The error was fixed
for U.S. managed portfolios in September 2009 and for others in late October
and early November. However, it adversely impacted 608 of 1421 client
portfolios managed by AXA Rosenberg Investment and caused $216,806,864 million
in losses. In November 2009 an employee informed the CEO of the money manager
and an investigation was conducted. It was disclosed to the Commission in late
March 2010 and to investors, who had been complaining about performance, on
April 15, 2010. The Order alleges violations of Securities Act Sections
17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4). To resolve the
proceeding Respondent AXA Rosenberg consented to the entry of a cease and
desist order based on the Securities Act Sections cited in the Order;
Respondent AXA Rosenberg Investment Management also consented to the entry of a
cease and desist order but based on Advisers At Section 206(2); and Respondent
Barr Rosenberg consented to the entry of a cease and desist order based on
Advisers Act Sections 206(2) and 206(4). Respondents also agreed to pay a
penalty of $25 million and to implement certain undertakings.
Failure to supervise: In the Matter of TD Ameritrade,
Inc.,
Adm. Proc. File No. 3-14225 (Feb. 3, 2011) is a settled proceeding naming as a
Respondent the registered broker dealer. The Order alleges that for
approximately eighteen months beginning in January 2007 the Respondent failed
to reasonably supervise its registered representatives in connection with the
offer and sale of shares in the Reserve Yield Plus Fund, a mutual fund managed
by The Reserve. There was a training program for registered representatives.
However, at times the fund was mischaracterized as a money market fund or as
safe as cash when in fact it was not. The Order alleges violations of
Securities Act Section 17(a)(2). The proceeding was resolved with Respondent
agreeing to implement certain undertakings, to compensate certain customers
which is expected to total up to $10 million and to the entry of a censure. No
penalty was imposed at this time. If the undertakings are not fully implemented
the Division of Enforcement reserved the right to reopen the matter for
consideration of other relief.
Failure to supervise: In the Matter of Torrey
Pines Securities, Inc., Adm. Proc. File No. 3-14230 (Feb. 3,
2011); In the Matter of Jack C. Smith, Jr., Adm. Proc. File No. 3-14229 (Feb.
3, 2011). Respondent Torrey Pines is a registered broker dealer based in Del
Mar, California. Respondent Smith had an ownership interest in the firm and,
during the time period, was the president CEO and had supervisory
responsibility at the firm. The matters center on a failure to supervise
registered representative Dennis Keating. From August 2006 through April 2007
Mr. Keating raised over $17 million from friends, family and Torrey Pines
customers through private unregistered offerings During the period he acted as
an unregistered broker and made misrepresentations to investors. He was
enjoined in an earlier Commission proceeding. In these to proceedings
Respondents are alleged to have failed to reasonably supervise Mr. Keating and,
as to the firm, that it had inadequate procedures. Accordingly, Respondents violated
Exchange Act Section 15(b)(4)(E) and Advisers At Section 203(e) according to
the Order. Mr. Smith resolved the proceeding by consenting to the entry of an
order which suspends him from supervision for any broker or dealer or
investment adviser for a period of nine months. He also agreed to pay a civil
money penalty of $25,000. The action as to the firm is in litigation.
Books, records and internal control violations: In the Matter of Deerfield
Capital Corp. and Danielle Valkner, CPA, Admin. Proc. File No. 3-14216
(Feb. 2, 2011) is an proceeding naming as Respondents, Deerfield Capital, a
publically traded specialty finance company and Danielle Valkner, its former
CFO. The Order is based on three transactions one of which occurred in December
2005 while the other two were in March 2006. Each transaction involved
securities issued by a Real Estate Mortgage Investment Conduit. That entity is
an investment vehicle used for the pooling of mortgage loans and the issuance
of mortgage backed securities. In each instance the firm improperly recognized
gain from the purported sale of the vehicle when in fact it simultaneously
purchased virtually the identical one. The firm recognized a total of $7.5
million in revenue from the three deals. According to the Order, the firm
violated the books and records and internal control provisions of the Exchange
Act. The proceeding was resolved with each Respondent consenting to the entry
of a cease and desist order as to the provisions cited in the Order. In
addition the firm agreed to pay disgorgement of $977,000 along with prejudgment
interest.
In the Matter of Don S. Hershman,
Adm. Pro. File No. 3-14218 (Feb. 2, 2011) is a proceeding naming as a
Respondent attorney Don Hershman. The Respondent was counsel to Wextrust Capital
LLC. That entity raised about $270 million from 1,400 investors in 70 private
placement offerings. The Commission alleged in an enforcement action that those
offerings are fraudulent. During the course of his representation Respondent
became aware of facts that he knew or should have known were material and not
disclosed. Those included the fact that Wextrust: engaged in the over-raising
of funds and took actions inconsistent with the disclosure documents; that one
of its principal executives pleaded guilty to conspiracy to commit bank fraud
and had lied about it; and that the CFO was having trouble accessing the bank
accounts which were controlled by the principal who had pleaded guilty. He also
worked on an offering which he knew had the effect of diluting the cash flow of
investors from a prior offering and, although he told the client he did not
like the structure, Respondent continued to represent the client and did not
insist on disclosure. The Order alleges violations of Securities Act Sections 17(a)(2)
and (3). To resolve the matter Respondent consented to the entry of a cease and
desist order and agreed to pay disgorgement of $25,291 along with prejudgment
interest to the receiver appointed in the enforcement action against Wextrust.
Financial fraud: SEC v. Rivelli,
Civ. No. 05-CV-1039 (D. Colo. June 7, 2005) is a financial fraud case in which
the Commission settled with the remaining two defendants, Rodney Johnson, the
former CFO of Fischer Imaging Corporation, and Robert Hoffman, a salesman at
the company. The complaint, brought against six executives of the company
including the two that settled this week, alleges that the defendants
participated in a scheme to fraudulently boost income by recognizing revenue on
sales which were not sales - company product was shipped to a controlled
warehouse where it was stored. The two settling defendants and another also
participated in the implementation of a policy under which revenue was
recognized on transactions with side agreements before the contingency was
removed, contrary to GAAP. Defendant Johnson and others were also involved in
the misstatement of the inventory account and other improper accounting. Each
defendant was alleged to have furnished false or misleading documents or
information to the outside auditors. Based on these factual claims the
complaint alleged violations of Securities Act Section 17(a) and Exchange Act
Sections 10(b), 13(a), 13(b)(2) and 13(b)(5).
To resolve the case, Mr. Johnson consented to the entry
of a permanent injunction prohibiting future violations of Securities Act
Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and from aiding and
abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B. He also
agreed to pay disgorgement of $36,761 along with prejudgment interest. A
penalty was not imposed based on his financial condition. He was however barred
from serving as an officer or director for five years. Mr. Hoffman settled by
consenting to the entry of a permanent injunction prohibiting him from aiding
and abetting violations of Exchange Act Section 13(a). The other individual
defendants previously settled with the Commission. Before the filing of this
case the company also settled with the SEC.
Falsification of documents: In the Matter of
David M. Tamman, Esq., Adm. Proc. File No. 3-014207 (Jan. 27,
2011) is a Rule 102(e) action against attorney David Tamman, identified as a
partner in a major law firm with offices in Los Angeles. Mr. Tamman was counsel
to NewPoint Financial Services, Inc. in connection with several offerings of
debentures. According to the Order, Mr. Tamman altered the memoranda used in
those placements by inserting provisions noting that the principal of NewPoint
was using investor funds for his own purposes and then produced the documents
to the inspection and enforcement staff without disclosing that he had altered
them. He also deleted metadata from documents being produced to the staff
during the investigation. The case is in litigation.
Insider trading: SEC v. Galleon Management
L.P.,
Civil Action No. 09-CV-8811 (S.D.N.Y.) is the Commission's insider trading case
(here) which parallels the
criminal case against the founder of Galleon, Raj Rajaratnam. This week the
Commission settled with defendants Robert Moffat and Mark Kurland. Mr. Moffat
is a former Senior Vice President and Group Executive of IBM's Systems and
Technology Group. Mr. Kurland was the Chief Executive Officer of New Castle, a
hedge fund. Mr. Moffat is alleged to have furnished inside information to
defendant Danielle Chiessi about the quarterly earnings of Sun Microsystems,
the quarterly financials of IBM and pending transactions involving ADM. Ms.
Chiessi tipped Mr. Kurland who traded. Both men settled with the SEC. Mr.
Moffat consented to the entry of a permanent injunction prohibiting future
violations of Exchange Act Section 10(b). He also agreed to the entry of an
officer and director bar. In the parallel criminal case Mr. Moffet previously
pleaded guilty an was sentenced to six months in prison followed by two years
of supervised release. Mr. Kurland settled with the SEC, consenting to the
entry of a permanent injunction prohibiting future violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). He also agreed to pay
disgorgement of $4,213,630.18 which is the profits/or loss avoided/ from the
trading, along with prejudgment interest. Mr. Kurland had previously pleaded
guilty in the parallel criminal case and been sentenced to serve 27 months in
prison followed by two years of supervised release. He was also ordered to pay
criminal forfeiture of $900,000.
Investment fund fraud: SEC v. Illarramendi,
Case No. 3:11-cv-00078 (D. Conn. Filed Jan. 14, 2011) is an action alleging
violations of Advisers Act Sections 206(1), 206(2) and 206(4) against
unregistered investment adviser Francisco Illarramendi and his controlled
entity, Michael Kenwood Capital Management, LLC. According to the complaint,
Mr. Illarramendi controls a group of affiliated entities organized under the
name of The Michael Kenwood Group. Through the entities he advises hedge funds,
one of which has about $540 million in assets. The investors in these funds are
off-shore individuals and entities. About 90% of the funds come from a foreign
pension fund. Since 2009 Mr. Illarramendi has improperly invested at least $53
million from the funds into personal accounts and entities he controls. For
example, during the investigation by the staff Mr. Illarramendi is alleged to
have transferred as much as $5 million of investor funds into a west coast
company he controls. The Commission obtained a temporary asset freeze. The case
is in litigation. See also Lit. Rel. No. 21828 (Jan. 28, 2011).
Criminal cases
Insider trading: U.S. v. Sebbag
(S.D.N.Y.) is an insider trading case against defendant Yonni Sebbag and his
girlfriend who obtained inside information from her position at Disney. After
soliciting buyers the couple sold the information to an undercover FBI agent as
discussed here. Mr. Sebbag, who
previously pleaded guilty, was sentenced to 27 months in prison in connection
with his role in the scheme.
SEC v. Landberg,
Civ. No. 11-CV-0404 (S.D.N.Y.) is an action against investment adviser William
Landberg and his controlled entities, West End Financial Advisors LLC, West End
Capital Management LLC and Sentinel Investment Management Corporation. Two
officers of the entities were also named as defendants, Kevin Kramer and Steven
Gould. The complaint claims that in 2008 and 2009, as the condition of the $66
million advisory business deteriorated, investors were falsely given to believe
that the funds were stable and safe investments. In fact defendant Landberg
obtained fraudulently obtained bank loans to sustain the illusion that the fund
was performing well. Portions of the bank loans were used to make
distributions. Mr. Landberg is also alleged to have misappropriated at least
$1.5 million for himself and his family. According to the complaint, defendants
Gould and Barsuk facilitated the fraud. The complaint, which is in litigation,
alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b)
and Advisors Act Sections 206(1), 206(2) and 206(4).
FCPA
Maxwell Technologies, Inc. settled FCPA charges with DOJ
as well as the SEC. U.S. v. Maxwell Technologies Inc; SEC v. Maxwell
Technologies Inc., Case No. 1:11-cv-00258 (D.D.C. Filed Jan. 31, 2011). The
violations at Maxwell occurred from 2002 through May 2009. During that period
the company marketed products through its Swiss subsidiary in China. Sales were
made by a Chinese agent to state owned enterprises. The sales invoices had
added 20% to cover the cost of the kickbacks. Overall the company paid $2.5 million
in bribes and was awarded contracts that generated $15 million in revenue and
$5.6 million in profits. In February 2009 a new Maxwell sales director learned
about the kickbacks and informed the CEO who in turn notified the audit
committee and outside counsel. After inquiry the company disclosed the
potential FCPA issues in its Form 10-Q filing for the quarter ended March 31,
2009.
The company resolved the issues with DOJ. A two count
criminal information was filed, charging the company with violating the
anti-bribery and books and records provisions of the FCPA. Maxwell entered into
a deferred prosecution agreement. It also agreed to implement enhanced
procedures and pay a criminal fine of $8 million. In the SEC settlement the
company consented to the entry of a permanent injunction prohibiting future
violations of the anti-bribery and books and records and internal control
provisions of the FCPA. Maxwell also agreed to pay disgorgement of $5,654,567
and prejudgment interest of $696,314. The company will also be required to
comply with certain undertaking regarding its FCPA compliance program. DOJ
noted that the company voluntarily disclosed the violations. The SEC stated
that the company cooperated.
U.K. Bribery Act
The Ministry of Justice announced that the implementation
of the Bribery Act. It had been scheduled to go into effect in April 2011. This
is the third delay in implementing the Act.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
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