Key events this week included a report to the SEC and
CFTC from the Advisory Committee on the flash crash. In court the SEC obtained
a split decision on summary judgment motions in an insider trading case,
winning as to one defendant and losing as to another. The Commission also lost
an option backdating case on statute of limitations grounds. In addition the
SEC filed an international market manipulation scheme case and more investment
fund fraud actions.
In criminal cases the expert network investigation
continued moving forward with another defendant appearing in response to an
indictment. And, in the court of appeals the Ninth Circuit held that a FINRA
rule limiting who can represent a party in an arbitration does not have
retroactive effect.
Market reform
Flash crash: The Joint CFTC - SEC Advisory Committee on Emerging
Regulatory Issues furnished the two agencies with a fourteen point report this
week. Threaded throughout it are comments about the impact of high speed
trading. In part, the report comments on steps which have been taken or are
under consideration by either or both agencies. For example, in its first point
the report notes that the Committee concurs with the steps taken by the SEC to
create single stock pause/circuit breakers for the Russell 1000 stocks and
actively traded ETFs as well as to enact rules which provide greater certainty
as to which trades will be broken under certain circumstances.
Others recommend specify specific action which should be
taken in the view of the Committee. These include recommendations that: the SEC
require an expansion of the pause rules; work with the Exchanges and FINRA to
implement a "limit up/limit down" process to supplement the existing pause
rules; and that it "proceed with a sense of urgency" regarding a consolidated
audit trail.
Other points include recommendations for further study:
to evaluate the present system-wide circuit breakers in view of certain points;
to consider the potential benefits which might be gained by changes in
maker/taker pricing practices; and to consider "reporting requirements for
measures of liquidity and market imbalance for large market venues." The report
concludes by noting that while there are other issues to be considered, the
points discussed are, in the view of the eight committee members, the most
important.
SEC Enforcement
Financial fraud: SEC v. Brown,
Civil Action No. 1:11cv192 (E.D. Va. Filed Feb. 24, 2011) is an action against
Desiree Brown, the former treasurer of Taylor, Bean and Whitaker Mortgage Corp.
Ms. Brown is alleged to have participated in a scheme with Lee Farkas to prop
up the failing mortgage company over a period of several years through the sale
of more than $1.5 billion in fictitious and impaired mortgage loans and
securities from Taylor Bean to Colonial Bank. She also participated in an
attempt to defraud the Treasury's Troubled Asset Relief Fund as described here.
The complaint alleges violations of Exchange Act Sections 10(b), 13(a),
13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation. In a related
case Ms. Brown pleaded guilty to criminal charges.
Market manipulation: SEC v. Ficeto
(C.D. Cal. Filed Feb. 24, 2011) is an action against Todd Ficeto, Florian Homm,
Colin Heatherington, Hunter World Markets, Inc., and Hunter Advisors, LLC.
Hunter World was a registered broker-dealer co-owned by defendants Ficeto and
Homm. Mr. Homm was also the co-founder and the chief or co-chief adviser for
Absolute Capital Management Holdings Ltd., a London based hedge fund management
company and SEC registered investment advisor to eight hedge funds. The
complaint details two related schemes which took place from September 2005
through September 2007. In one Mr. Homm along with defendants Ficeto,
Heatherington and Hunter World manipulated the share price of several domestic
microcap issuers. Through this manipulation, the complaint claims, the
defendants made millions of dollars. The manipulated stocks were the assets of
the hedge funds. The manipulations were carried out through coordinated trading
done through the use of instant messages by the principal traders at Hunter
World and those at Absolute Capital. In the second part of the scheme the
manipulated stocks were used to materially overstate the assets of the hedge
funds by at least $440 million in a fraudulent practice known as portfolio
pumping. When Mr. Homm abruptly resigned from Absolute Capital the funds and
their investors were left holding between $440 and $530 million in illiquid
positions, most of which were the microcap stocks. Overall the defendants are
alleged to have made at least $63.7 million. The complaint alleges violations
of the antifraud provisions as well as several broker-dealer record keeping
requirements as to certain defendants.
In the Matter of Tony Ahn,
Adm. Proc. File No. 3-14272 (Filed Feb. 24, 2011) is a settled proceeding in
which the Respondent was a registered representative from August 2005 to May
2008 associated with Hunter World Markets discussed above. Mr. Ahn was the
primary trader during the period he. The Order alleges violations of Exchange
Act Section 10(b) and aiding and abetting violations of Sections 15c-1 and
17(a). Respondent resolved the matter, consenting to the entry of a cease and
desist order based on the Sections cited in the Order and to a bar from
associating with any broker dealer with a right to reapply after five years. He
also agreed to pay a civil penalty of $40,000 and acknowledged the sum was not
higher based on his agreement to cooperate with the Commission.
In the Matter of Elizabeth Pagliarini,
Adm. Proc. File No. 3-14273 (Filed Feb. 24, 2011) is a proceeding against the
chief compliance officer of Hunter World and Tony Ahn, its primary trader. The
Order alleges that the Respondent failed to reasonably supervise Mr. Ahn by not
following procedures or following up on suspicious trades. It also alleges that
Respondent aided and abetted and caused Hunter World's violations of Exchange
Act Section 17(a). To resolve the matter Respondent consented to the entry of a
cease and desist order and to pay a civil penalty of $20,000. She was also
suspended from acting in a supervisory capacity for twelve months.
Investment fund fraud: SEC v. Blackwell,
Case No. 3:11-cv-00234 (N.D. Tx. Filed Feb. 7, 2011) is an action against
Christopher Blackwell and two entities he controlled AV Bar Reg, Inc., and
Millers A Game, LLC. Since 2007 the defendants are alleged to have raised over
$4 million from thirteen investors selling fraudulent investments. Defendant
Blackwell touted his investment expertise, including telling an undercover
agent he had worked at Goldman Sachs which is false, and promised returns as
high as 30%. In reality significant portions of the investor funds were
diverted to his personal use while other portions were diverted to making Ponzi
type payments. The complaint alleges violations of the antifraud provisions.
The SEC obtained an emergency freeze order. The case is in litigation.
Investment fund fraud: SEC v Secure Capital
Funding Corp., Case No 3:11-cv-00916 (D. N.J. Filed Feb.
18, 2011) is an action against the named company, Betram Hill, PP&M Trade
Partners and Kiavanni Pringle. According to the complaint, Mr. Hill and SCF and
Mr. Pringle and PP& M, have, since late last year, been conducting similar
operations. Investors were told that their funds would be put into Swiss
debentures which were safe and would then be used in highly leveraged margin
accounts to trade and generate returns ranging from 10% to 100% per month.
Investors were solicited in the U.S. the U.K. and other countries. In reality
over $3 million was wired out of the country almost immediately and the Swiss
securities are fictitious, according to the Commission. The complaint alleges
violations of Securities Act Sections 5 and 17(a) and Exchange Act Section
10(b). Mr. Hill has previously been charged by Jamaican authorities for running
a $326 million Ponzi scheme which is not related to this case according to the
SEC. The Commission obtained an emergency freeze order in this case which is
now in litigation. See also Lit. Rel. No 21864 (Feb. 18, 2011).
Insider trading: SEC v. De La Maz,
Case No. 09-21977 Civ. (S.D. Fla. Filed July 15, 2009). Defendants Thomas
Borell, an attorney, and Dr. Sebastian de Las Maza both traded in the
securities of take over target, Neff Corporation, and were charged with insider
trading. Although the court concluded that the circumstantial evidence
supported inferences that both men had inside information, it granted the
motion of Mr. Borell but denied that of Dr. de Las Maza while noting that the
evidence is neither compelling nor strong. The case centers on the acquisition
of Neff Corporation by Odyssey Investment Partners. Mr. Borell and his family
for years have been friends of Jose Mas, a Neff director, and his family,
stemming from the fact that their children went to the same school. While the
families socialized and even traveled together, it was only as a part of a
large group of families tied to the school. Mr. Borell traded just prior to the
announcement in a manner which was not consistent with his earlier trading
patterns and failed to offer a convincing explanation for the trades.
Nevertheless, the court granted summary judgment in his favor because there was
no relation of trust and confidence between the men as defined in Rule 20b-5-2.
Dr. De La Maza also traded just before the announcement. His daughter is
married to the former CEO of Neff and knew about the deal. While he denied
having inside information the court concluded that the circumstantial evidence
regarding his access and unusual trading was sufficient to raise an inference
that had to be resolved by the jury.
Statute of limitations: SEC v. Microtune,
Inc.,
Civil Action no. 3:08-CV-1105 (N.D. Tx.) is an option backdating case in which
the court concluded that virtually all of the Commission's claims for relief
were time barred under the five year limitation period of 28 U.S.C. Section
2462. The suit is against the company and two of its former executives, CEO
Douglas Bartek and CFO and General Counsel Nancy Richardson. According to the
SEC, stock options of the company were fraudulently backdated between 2000 and
mid-2003. Prior to the time the limitations period expired the SEC was put on
inquiry notice of the option practices of the company, a point the agency
admitted. While some investigation was done it stopped. Later the company
conducted an internal investigation which revealed the practices. The SEC chose
to wait for the completion of that inquiry. The court held that once the SEC
was on inquiry notice it had to act diligently. If it had done so here it would
have discovered the practices prior to the expiration of the limitation period.
It did not. The court rejected the SEC's claim that the five years began from
when it was put on inquiry notice. The court also held that the requests for
injunctions, officer and director bars and civil penalties were all essentially
penalties and thus time barred. None of those remedies, on the record here, are
remedial.
Criminal cases
Insider trading: U.S, v. Jaiu,
10-mj-02900 (S.D.N.Y.) is an action which charges Winifred Jiau with conspiracy
and securities fraud in connection with the expert network investigation. Ms Jaiu
was a consultant to Primary Global Research LLC. According to the court papers
the defendant furnished inside information to two hedge fund managers. One was
Noah Freeman who pleaded guilty to securities fraud on February 7, 2011. The
illegal tips concerned Nvidia Corp. and Marvell Technology Group Ltd. Ms. Juia
appeared in court this week to enter a not guilty plea.
Court of appeals
Retroactivity: Sacks v. SEC,
No. 07-74647 (9th Cir. Filed Feb. 22, 2011) is a case in which the court
considered the retroactivity of a FINRA rule which precludes persons barred by
the SEC from the industry from representing a person in an arbitration. In 2007
FINRA proposed a rule which would prohibit anyone barred from the securities
industry from representing parties in securities arbitrations. The rule was
approved after review by the Commission's Division of Market Regulation.
Petitioner Richard Sacks initiated a proceeding in the Ninth Circuit
challenging the rule. Although he is not an attorney he has for years represented
persons in arbitrations. He has also been barred from the industry by the SEC.
First, the court rejected the SEC's claim that Mr. Sacks had not exhausted his
remedies because an appeal had not been filed with the SEC. The court held that
its jurisdiction arose from the special statutory process of 15 U.S.C. Section
78y which governs review of rules proposed by self-regulatory organizations.
Under that Section the person aggrieved by the rule can petition either the
D.C. Circuit or the circuit court for the district in which he or she resides.
Second, the court concluded that the rule is impermissibly retroactive in the
case of Mr. Sachs. Before applying a statute retroactively the court looks
first to see if it expressly provides for retroactive effect. If not the
question becomes whether the retroactive application of the provision would add
"new legal consequences to events completed before its enactment." Here the
court concluded that applying the rule to Mr. Sacks would add to his
punishment. Therefore the rule can not be retroactively applied.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
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