Market reform, insider trading and the FCPA continue to
dominate securities regulation and enforcement, along with the budget short
falls at the SEC. The inability of law makers on to agree on a budget and
furnish the SEC with the necessary funding is impacting operations and the
ability of the enforcement division to carry out its mission. All sides of the
political spectrum claim to support law enforcement. Yet the stale mate on
Capital Hill continues.
Nevertheless, the SEC and DOJ continued to bring
significant actions this week. The so-called expert network investigation
continues to expand. DOJ and the SEC brought additional charges against four
more individuals. The charges go beyond the expert network. Prosecutors made it
clear that the inquiry will continue for a considerable period of time. While
brining these cases the SEC prevailed in another insider trading trial The CFTC
also won a verdict in a commodity pool case.
Finally, the FCPA continues to be a key focus for
government prosecutors and the SEC. DOJ and the Commission filed more settled
FCPA cases this week.
Market reform and the SEC
Dodd-Frank Section 939A: The SEC continued to implement Dodd-Frank this
week, proposing rules which would remove credit ratings as one of the
conditions for companies seeking to use short form registration when
registering securities for public sale. Section 939A of the Act requires
federal agencies to examine how regulations rely on rating agencies and, if
appropriate, remove that requirement. The proposal this week is the first of a
series planned by the Commission.
Significant speeches at SEC Speaks:
- SEC Chairman Schapiro addressed topics which include
the restructuring of OCIE, improving market structure and the impact of the
budget shortfall (here).
- SEC Commissioner Aguilar noted in part that the enforcement
division must bring cases with obvious deterrent effect in which remedies are
calibrated to be meaningful and not routine. He also discussed the impact of
the underfunding of the agency (here).
- SEC Commissioner Kathleen Casey discussed the question
of the retroactivity of certain provisions of Dodd-Frank (here).
SEC Enforcement
Insider trading: SEC v. Gowrish,
09-CV-5883 (N.D. Cal. Filed Dec. 16, 2009) is an action against Vinayak
Gowrish, formerly an associate in the San Francisco office of TPG Capital, L.P,
a global private investment firm. A jury found him liable for insider trading.
The SEC's complaint named as defendants Mr. Gowrish and Adnan S. Zaman, an
associate with the investment banking firm of Lazard Ferres & Co. LLC,
along with their two friends Pascal Vaghar and Semeer Khoury. The complaint
alleged that Messrs. Gowrish and Zaman tipped their friends, Messrs. Vaghar and
Khoury, on five occasions, furnishing them with inside information
misappropriated from their respective employers. Messrs. Vaghar and Zaman were
alleged to have made almost $500,000 in illegal trading profits. In exchange Mr.
Gowrish was given cash kickbacks from defendant Vaghar. Mr. Zaman received
kickbacks in the form of cash, free rent and other items of value from both
traders totaling about $70,000. Each defendant, except Mr. Gowrish, settled at
the time the complaint was filed as discussed here. In reaching its verdict,
the jury found Mr. Gowrish liable for having furnished material non-public
information about the negotiations to acquire Sabre, TXU and ADS to his two
friends in violation of Exchange Act Section 10(b). The court will consider the
question of remedies at a later date. Lit. Rel. No. 21838 (Feb. 4, 2011).
In the Matter of Alpine Woods Capital
Investors, LLC, Adm. Proc. File No. 3-14233 (Feb. 7, 2011)
is a proceeding naming as Respondents Alpine Woods Capital, a registered
investment adviser, and Samuel Lieber, its CEO. Beginning in 2003 and
continuing for the next four years Alpine launched a number of new funds and
experienced significant growth. As a result it had significant opportunities to
obtain IPO allocations. Its compliance procedures required that they be
distributed "fairly and equitably," a statement repeated in its Form ADV. In
practice this was not followed. The order states that from 2006 through 2008
two small funds obtained a disproportionate share of IPO allocations which had
a significant, positive impact on their earnings. This was not disclosed to the
Board of Trustees or fund investors. There was also a failure to implement
written policies and procedures reasonably designed to prevent violations of
the Advisers Act. The Order alleges violations of Securities Act Section
17(a)(3), Advisers Act Sections 206(2) and (4) and Investment Company Act
Section 34(b). During the investigation Alpine hired a COO and CFO, voluntarily
replaced its Chief Compliance officer and retained an independent consultant to
review certain procedures. In resolving the matter Alpine offered to implement
certain procedures and consented to the entry of a cease and desist order based
on the Sections cited in the Order. The firm also agreed to pay a civil penalty
of $650,000. Mr. Lieber consented to the entry of a similar order based on
Section 206(4) of the Advisers Act and to pay a $65,000 civil penalty. .
Insider trading: SEC v. Galleon Management,
LP,
Civil Action No. 09-CV-8811 (S.D.N.Y.) is the Commission's enforcement action
involving the now defunct hedge fund, its founder Raj Rajaratnam and others
discussed here. This week the
Commission settled with defendant Ali Hariri. The SEC claimed that defendant
Hariri tipped co-defendant Ali Far about an earnings announcement at his
company, Atheros Communications, Inc. In return Mr. Far tipped Mr. Hariri with
inside information about another company. To settle with the Commission
defendant Hariri consented to the entry of a permanent injunction prohibiting
future violations of Exchange Act Section 10(b) and Securities Act Section
17(a). He also agreed to pay disgorgement and prejudgment interest of $2,665.68
and to the issuance of an officer and director bar. Mr. Hariri previously
pleaded guilty in the parallel criminal case and was sentenced to 18 months in
prison followed by two years of supervised release and to pay a criminal fine
of $50,000. U.S. v. Hariri, 10 CR 00173 (S.D.N.Y.). The SEC previously obtained
full disgorgement of Mr. Hariri's downstream tippees Messrs. Far and Lee. See
also Lit. Rel. No. 21839 (Feb. 4, 2011).
Investment fund fraud: SEC v. Farah,
Case No. 1:10-CV-00135 (D.N.H. Filed April 9, 2010) is an action against Scott
Farah, Donald Dodge and their related entities. The Commission's complaint
alleged that the defendants ran a Ponzi scheme which defrauded investors of at
least $33 million. Each defendant settled with the Commission, consenting to the
entry of permanent injunctions prohibiting future violations of the antifraud
provisions of the federal securities laws. The injunctions as to defendants
Farah, Dodge and Financial Resources Mortgage were also based on Securities Act
Section 5. In a related criminal proceeding Mr. Farah was sentenced to 15 years
in prison. Mr. Dodge received a 6 year sentence. Mr. Farah pleaded guilty to
one count of wire fraud and one count of mail fraud. Mr.Dodge pleaded guilty to
one count of wire fraud. The court has not made a determination on the question
of restitution pending a report from the trustee in a related bankruptcy
proceeding.
Unregistered stock sales: SEC v. Olins,
Civil Action No. 07-6423 (N.D. Cal.) is an action against Robert Olins, the
former CEO of SpatiaLight, Inc. and his company Argyle Capital Management.
Previously, the Commission obtained summary judgment on a Securities Act
Section 5 claim as to the sale of SpatiaLight shares. On this part of the case
the court entered a permanent injunction based on the registration provisions
as to both defendants and directed that $2.4 million in disgorgement be paid
along with prejudgment interest and a $5,000 civil penalty. Other portions of
the complaint alleged misrepresentations in connection with the sales and false
filings. The Commission settled those claims. See Lit. Rel. No. 21845 (Feb. 9,
2011).
CFTC
Investment fund fraud: CFTC v. Bromfield is
a fraud action against commodity pool operators Damien Bromfield and Donovan
Davis, Jr. Following a two week trial in Orlando, Florida the agency prevailed.
According to the CFTC, the defendants secured $17 million in investments for
their pool from over 100 customers in 2007 and 2008. Substantial portions of
the invested funds were misappropriated by the defendants. The court has not
set a hearing date for determining remedies.
Criminal cases
Insider trading:
Four additional individuals were charged in the on-going expert network insider
trading investigation. Samir Baral, the founder of Barai Capital Master Fund,
and Donald Longueuil, a portfolio manager at an unregistered investment
adviser, were each charged with conspiracy to commit securities fraud and wire
fraud and obstruction of justice. Mr. Baral was also charged with three counts
of securities fraud. In addition, Jason Pflaum, who worked as an analyst at
Barai Capital and Noah Freeman pleaded guilty to conspiracy to commit
securities fraud and securities fraud. According to the court papers, the four
defendants engaged in a conspiracy to insider trade from 2006 through 2008. The
group is alleged to have obtained material non-public information about six
different entities some of which was furnished by Winifred Jianu who was
previously charged in connection with this investigation. Messrs. Barai, Longueuil
and Freeman also regularly shared inside information according to the papers.
All four defendants took steps to conceal their activities. Messrs. Barai and
Longueuil also evaluated what proof the government might have against them and
destroyed evidence following the public disclosure of the investigation,
according to the charging papers. The SEC amended its complaint, adding each
defendant from the new criminal cases. SEC v. Longoria, Civil Action No.
11-CV-0753 (S.D.N.Y.).
FCPA
U.S. v. Tyson Foods, Inc.
(D.D.C. Filed Feb. 10, 2011); SEC v. Tyson Foods, Inc., Civil No.
1:11-CV-00350 (D.D.C. Filed Feb. 10, 2011). Tyson Foods settled FCPA charges
with DOJ and the SEC. According to the court papers, over a two year period
beginning in fiscal 2004 the Mexican subsidiary of the company paid over
$100,000 to two individuals who served as official Mexican government
veterinarians at Tyson de Mexico's facilities. The veterinarians were
responsible for certifying that chickens being processed for export complied
with the applicable health regulations. To conceal the payments initially the
wives of the two veterinarians were placed on the payroll. When this
arrangement was discovered by a plant manager the payments to the wives were
replaced with invoices to one of the veterinarians. This approach was approved
by an executive of Tyson International. It was not until two years after the
discovery of the payments that the company ordered them halted.
To settle with DOJ Tyson entered into a deferred
prosecution agreement. The underlying information charges the company with
conspiring to violate the FCPA and violating the Act. The company agreed to pay
a criminal fine of $4 million. To resolve the SEC investigation, the company
consented to the entry of a permanent injunction prohibiting violations of the
anti-bribery and books and records provisions of the FCPA. The company also
agreed to pay disgorgement and prejudgment interest of over $1.2 million. Both
DOJ and the SEC acknowledged the cooperation of the company. See also Lit. Re.
No. 21851 (Feb. 10, 2011).
Survey results:
Deloitte, in a press release dated February 7, 2011, discussed the publication
of its "Look Before You Leap" survey of corporate executives, investment
bankers, private equity executives and hedge fund managers. In the survey 63%
of the respondents reported that over the last three years FCPA and
anti-corruption issues have caused their companies to renegotiate or pull out
of planned business relationships, mergers or acquisitions. The survey data
revealed that 21% of those who responded identified a lack of transparency or
unusual payment structures in contracts as the reason for renegotiating or
terminating deal. At the same time 18% stated that their company renegotiated
or pulled out of the deal because of the use of agents, consultants,
distributors or third parties to obtain or facilitate business.
Court of appeals
Full Value Advisors, LLC v. SEC,
No. 10-1053 (D.C. Cir. Feb. 4, 2011) is an action by an institutional
investment manager challenging the constitutionality of Exchange Act Section
13(f). That Section, which applies to institutional investment managers holding
at least $100 million in securities, requires the filing of quarterly reports
on Form 13F essentially disclosing its holdings. That information is made
public unless the Commission determines otherwise in the public interest or
delays the disclosure. Managers can seek an exemption but must disclose
sufficient information on Form 13F for a judgment to be made on the request. Here
an application was made but the required Form 13F information was omitted.
Subsequently, Full Value requested confidential treatment as to all the
securities it would otherwise be required to disclose. The SEC denied the
request for an exemption and for confidential treatment. The Commission noting
that the fund failed to furnish sufficient facts. In any event, absent
extraordinary circumstances, the fund could not seek an exemption from
disclosing its positions unless it first sought in good faith confidential
treatment. Here Full Value did not meet the requirements for such treatment.
Petitioner argued that the disclosure requirements
compelled speech in violation of the First Amendment and represented an
uncompensated taking in violation of the Fifth Amendment. The court rejected
both arguments. Neither the First nor the Fifth Amendment claims are ripe for
review the court held. The court also held that the disclosure requirements
here are only part of a regulatory process designed to inspire confidence in
the markets and protect proprietary information in the process. The
requirements of Section 13(f) are thus indistinguishable from other similar
provisions which do not violate the constitution.
FSA
The FSA was directed by The Upper Tribunal in a recent
decision to fine David Massey ₤150,000 and ban him from performing any role in
regulated financial services for engaging in market abuse. The case centers on
transactions from November 2007 when Mr. Massey was a Corporate Finance
Executive at Zimmerman Adams International. He had acted as a financial PR
consultant for Eicom, the then an AIM-listed digital broadcaster. On November
1, 2007 Mr. Massey shorted Eicom shares at 8p per share. At the time he
executed that trade he knew that Eicom was in need of further funds for a
possible acquisition. He also knew that the company was prepared to issue up to
3 million shares to him at a substantial discount. Immediately after executing
the short trade, Mr. Massey accepted an offer to in fact purchase 2.6 million
Eicom shares at 3.5p. This made him a profit of over ₤100,000.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
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