The Week In Securities Litigation: SEC Amends Insider Trading Case Against 2 Former Brokers

The Week In Securities Litigation: SEC Amends Insider Trading Case Against 2 Former Brokers

In this holiday shortened week the Commission amended an insider trading case brought against two former brokers to identify the source of the information, a research analyst who befriended a lawyer working on the underlying deal. The agency also resolved financial claims with convicted inside trader Raji Rajartnam in the case involving former Goldman Sachs director Rajat Gupta.

FINRA filed a settled action with five brokers who improperly charged lobby expenses to municipal bond offerings. The regulator also filed a settled action against a broker for improperly pricing mutual fund shares received on paper. The shares were priced on the day the order was processed rather than at the time it was received.

Finally, Australian securities regulators announced that a former corporate official has been imprisoned for insider trading. The case centered on the announcement of a strategic alliance by the trader's company.


Bulletin: The SEC issued an investor Bulletin to Help Investors Assess Municipal Bond Credit Risk (here).

Rules: The Commission approved new Rules Regarding Lost Holders of Securities (here).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 2 civil injunctive actions and 2 administrative proceedings (excluding tag-along-actions and 12(j) actions).

Failure to disclose: In the Matter of 1st Financial Services, LLC, Adm. Proc. File No. 3-15157 (Dec. 27, 2012) is a proceeding against the firm, an inactive investment adviser, and its owner and managing member, Jeffry Eissnaugle. The Order alleges that from at least the beginning of 2009 through the end of 2010 the firm failed to adequately disclose its precarious financial condition to clients, which would have triggered guarantee obligations on the part of the Respondents to certain clients. The firm also failed to disclose that it is no longer eligible to be a registered investment adviser. The firm was liquidated in Chapter 7. The Order alleges violations of Advisers Act Sections 206(1), (2) and (4). The proceeding was resolved with the entry by consent of a cease and desist order against Mr. Eissnaugle based on the Sections cited in the Order. He was also barred from the securities business and prohibited from serving with a registered investment company. Mr. Eisnaugle was ordered to pay $588,000 in disgorgement along with prejudgment interest. Payment was waived based on financial condition.

Insider trading: SEC v. Gupta, Civil Action No. 11-CV-7566 (S.D.N.Y.) is the insider trading action against former Goldman Sachs director Rajat Gupta and Raj Rajartnam. This week the court entered an order on consent directing Mr. Rajartnam to pay $1,299,120 in disgorgement along with prejudgment interest. This case is based on tips furnished by Mr. Gupta to Mr. Rajartnam. The claims against Mr. Gupta are pending.

Penny stock fraud: SEC v. Garber, Civil Action No. 12 CIV 9339 (S.D.N.Y. Filed Dec. 21, 2012) is an action against Danny Garber, Michael Manis, Kenneth Yellin, Jordan Feinstein and twelve related companies. The complaint claims that over a three year period beginning in 2007 the individual defendants acquired billions of shares of penny stocks by either purchasing them at deep discounts based on misrepresentations about the availability of certain exemptions or through the acquisition of convertible notes. Attorney opinions incorporating the misrepresentations were used to ensure that the shares did not have restrictive legends. The shares were then sold into the market in violation of the registration provisions, yielding about $17 million in illicit profits for the defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22579 (Dec. 21, 2012).

Beneficial ownership: SEC v. Rosen, Civil Action No. 9:12-CV-81395 (S.D. Fla. Filed Dec. 21, 2012) is an action against Lee Rosen, former chairman of the Board of New Generation Biofuels Holdings, Inc. The Commission's complaint alleges that Mr. Rosen engaged in a fraudulent scheme to evade the reporting requirements regarding his interest in company shares held in three trusts from which he received direct cash payments and indirect benefits since he attempted to use the shares in an unsuccessful effort to purchase a yacht. The complaint alleges violations of Securities Act Section 17(a)(1), (2) and (3) and Exchange Act Sections 10(b), 13(d) and 16(a). To resolve the case Mr. Rosen consented to the entry of a permanent injunction prohibiting future violations of each Section cited in the complaint. He also agreed to pay disgorgement of $666,000, prejudgment interest, and a civil money penalty of $195,000. See also Lit. Rel. No. 22578 (Dec. 21, 2012).

Breach of fiduciary duty: In the Matter of Top Fund Management, Inc., Adm. Proc. File No. 3-15154 (Dec. 21, 2012) is a proceeding which named as Respondents Top Fund, a registered investment adviser and Barry Ziskin, its founder and president. Top Fund managed Z Seven Fund, Inc. The prospectus for the fund specified that it was a stock fund seeking long-term capital appreciation. Beginning in September 2009 the fund invested in options. Within weeks it had losses that exceeded half of its assets which, when coupled with redemptions, resulted in the liquidation of the fund. The Order alleges violations of Advisers Act Sections 206(1) and (2) and Securities Act Section 17(a)(3) and Exchange Act Section 10(b). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Top Fund also agreed to the entry of a censure. Respondent Ziskin will be barred from the securities business and from serving with a registered investment company. No penalties were imposed based on financial condition.

Investment fund fraud: SEC v. GLR Capital Management, LLC, Civil Action No. 12-02663 (C.D. CA. Filed May 24, 2012) is an action that was originally brought against the fund and its manager John Geringer. The complaint essentially alleged that the defendants were operating a fraudulent investment fund. Investors were told that the fund was trading in well know stock indices and making double digit returns when in fact it was heavily invested in two private, illiquid startup companies. This week the SEC authorized the amendment of the complaint to add Christopher Luck and Keith Rode as defendants. Both are principals of GLR Capital Management LLC which managed the GLR Growth Fund, L.P. The amended complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). See also Lit. Rel. No. 22580 (Dec. 21, 2012).

Insider trading: SEC v. Conradt, Civil Action No. 12-cv-8676 (S.D.N.Y. Filed Nov. 29, 2012) is an action against Thomas Conradt and David Weishaus, two former brokers who are alleged to have traded on inside information involving the acquisition of SPSS Inc., by International Business Machine Corporation, announced on July 28, 2009. This week the SEC and the Manhattan U.S. Attorney's Office added the reputed source of the inside information to their actions, Trent Martin, an Australian citizen who is a former research associate at an international financial services firm. Court papers assert that he was friends with an associate working at a New York City based law firm that was retained in connection with the transaction. The associate told Mr. Martin about the transaction in confidence. Mr. Martin is alleged to have misappropriated the information and passed it on to Messrs. Conradt and Weishaus who, along with others, traded. Instant messages exchanged between the Messrs. Conradt and Weishaus confirm that the two men believed they were in possession of material non-public information. Those messages also reference "Trent." In the criminal case Mr. Martin has been charged with one count of conspiracy to commit securities fraud and one count of securities fraud. The SEC's action alleges violations of Exchange Act Section 10(b). The actions are pending. See also Lit. Rel. No. 22549 (Nov. 29, 2012).


Improper fees: The regulator imposed a total of $4.4 million in fines and disgorgement payments on five firms for improperly billing the California Public Securities Association for lobby fees. From January 2006 through December 2010 the firms made payments to Cal PSA, an association that engages in a variety of political activities including lobbying on behalf of companies seeking to influence California state government. They then requested that those voluntary payments be reimbursed as underwriting expenses from the proceeds of municipal and state bond offerings. Those fees were not underwriting expenses or directly tied to municipal bond offerings yet the five firms each included them in their underwriting expenses. The firms and payments are: Citigroup: $888,000 fine and $391,106 in restitution; Goldman Sachs: $568,000 fine and $115,997 in restitution; JP Morgan: $465,700 fine and $166,676 in restitution; and Morgan Stanley: $647,700 fine and $170,054 in restitution. The firms also failed to have adequate supervisory procedures with respect to this issue.

Improper pricing: Pruco Securities, LLC was fined $550,00 and ordered to pay $10.7 million in restitution to mutual fund customers whose shares were improperly priced. One of the firm's retail brokerage units incorrectly believed that it could price orders received on paper on the date they were processed rather than prior to 4:00 p.m. on the date received as required by the Investment Company Act. As a result, from late 2003 through June 2011 about 34,000 customer orders were mispriced. The firm also failed to have adequate procedures to ensure that the orders were properly priced. The fact that the company self-reported and cooperated was taken into consideration.


The former executive vice president of BG Group plc, Dr. Stuart Alfred Fysh, was convicted by a jury following a four week trial of two counts of insider trading. He was ordered to serve at least twelve months and up to two years in prison and to pay a penalty of $640,857.18. He will also be barred from managing a public company in Australia for a period of five years. Dr. Fysh was charged with trading while in possession of inside information about an upcoming announcement of a strategic alliance between his company and QGC. When the deal was subsequently announced the share price appreciated significantly.

Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy's destruction with a donation to the Red Cross (here).

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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