The SEC took three unusual steps this week. First, in a
high stakes move, the agency appealed the refusal of Judge Rakoff to approve
its proposed settlement in a market crisis case with Citigroup. A loss in the
Second Circuit could substantially injure the enforcement program. Second, the
agency brought an action against SIPIC for failing to institute liquidation
proceedings with respect to the Stanford Ponzi scheme. Finally, the SEC brought
an action against a private company claiming that it defrauded employees who
sold shares in their company back to their employer.
SEC v. Citigroup Global Markets, Inc. Case
No. 11 Civ 7387 (S.D.N.Y.): The Commission appealed the determination by
District Court Judge Rakoff to not approve the proposed settlement in this
case. The underlying action is the Commission's latest market crisis case which
is discussed here. Judge Rakoff declined to approve the proposed settlement
noting that he did not have sufficient facts on which evaluate the matter.
While the Court was critical in its order regarding the fact that the
settlement was based on neither admitting nor denying the allegations in the
complaint, central to the Court's conclusion was its view that there was a
fundamental mismatch between the allegations of the complaint which alleged an
intentional fraud and its charging sections which were based on negligence and
the proposed settlement which was bassed on a small fine when viewed in the
context of similar cases without offering any explanation for the apparent
mismatch. In proceedings before Judge Rakoff the Commission chose not to offer
an explanation. Rather, it argued essentially that the Court had a limited role
and should defer to the decision of the agency.
SEC v. Securities Investor Protection
Corporation:The Commission filed an application to compel
SIPIC to begin the liquidation of accounts related to the Stanford Group
Company. Previously, the SEC filed an action against Mr. Stanford and his
companies. In that proceeding the court ordered that Stanford Group be placed
into receivership. Despite a request from the Commission that SIPIC initiate a
liquidation in view of the customer accounts involved, it failed to take action
The application is pending.
SEC Enforcement: Filings and settlements
Investment fund fraud: SEC v. Management
Solutions, Inc., Case No. 2:11-cv-01165 (D. Utah, Filed Dec.
15, 2011) is an action against a father and son, Wendell A. Jacobson and Allen
R. Jacobson, and their company, Management Solutions. The complaint charges
that the two individual defendants operated an offering fraud and Ponzi scheme
through the company and over 200 other controlled entities. Investors, who were
apparently solicited through the church attended by the Jacobsons, were told
that their money would be used to rehab apartment buildings and, after the
installation of new management, they would share in the profits. When the
controlled entities suffered significant losses, the Jacobsons pooled the
investor funds into bank accounts and used them for family expenses and to
repay other investors. The Commission's complaint alleges violations of
Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a).
The SEC obtained an asset freeze order and the appointment of a receiver. The
case is in litigation.
False statements: In the Matter of Retirehub,
Inc., Adm. Proc. File No. 3-14666 (Filed Dec. 15, 2011) is an
action against the firm and its founder, Sunil Bhatia. The Order alleges that
from May 2003 to the time its investment adviser registration was withdrawn in
February 2011, Respondents made false statements on Form ADV. Specifically, the
Form stated that the firm was an internet investment adviser which is defined
in Rule 203A-2(f) and that it qualified for registration with the Commission
because it had over $25 million in managed assets. In fact both statements are
false. Respondents resolved the proceeding by consenting to the entry of a
cease and desist order based on Advisers Act Sections 203A, 204 and 207. Mr.
Bhatia also agreed to pay a civil penalty of $25,000.
False audit opinion: In the Matter of
Kempisty & Co., CPAs, P.C., Adm. Proc. File No. 3344
(Dec. 14, 2011) is a proceeding against the audit firm, its founding partner
Philip Kempisty, and an employee of the firm, John Rubino. The Order alleges
that in the audit of Kentucky Energy, Inc. for the year ended December 31, 2005
the audit firm improperly issued an audit opinion stating that the financial
statements presented fairly the financial position of the company in conformity
with generally accepted accounting principles when in fact they did not. The
company had improperly accounted for warrants and convertible notes it had
issued to third parties. The Order finds that the Respondents aided and abetted
violations by the company of Exchange Act Section 13(a). It also finds that the
Respondents engaged in improper professional conduct in violation of Rule
102(e). To resolve the proceeding Respondents consented to the entry of a cease
and desist order from causing any violations and any future violations of
Exchange Act Section 13(a). Respondents are also denied the right to practice
before the Commission. Mr. Kempisty may request that the Commission reinstate
him after one year while the other two Respondents may make such a request
after three years. Re-entry in each instance is conditioned on compliance with
Regulation SHO: In the Matter of Gary Bell, Adm.
Proc. No. 3-14660 (Filed Dec. 13, 2011) is an action against Gary Bell who
traded through GAS, LLC. According to the Order, Mr. Bell violated the "locate
requirement" and the close out requirements of Regulation SHO. That Regulation
requires market participants seeking to effect a short sale to borrow, arrange
to borrow, or have reasonable grounds to believe that a security can be
borrowed in time to make delivery prior to effecting a short sale. Market
makers are exempt from this requirement. They are not exempt from the close out
requirement which specifies that if there is a fail-to-deliver position for
thirteen consecutive settlement days in certain securities the position must be
closed. Here Respondent in one transaction created a synthetic long position
while selling short the underlying stock and inappropriately relying on the
market maker exception. In another he entered into a paired transaction with a
fail-to-deliver position in which he borrowed the necessary stock for a day or
two to make it appear that he had satisfied the close out requirement when in
fact he had not. To resolve the proceeding Respondent consented to the entry of
a cease and desist order based on Exchange Act rule 203(b)(1) and 203(b)(3). He
also agreed to be suspended from the securities business for a period of nine
months, to pay disgorgement of $1.5 million along with prejudgment interest and
a civil penalty of $250,000.
Fraudulent promotion: SEC v. Eiten, Case
No 1:11-CV-12185 (D. Mass. Filed Dec. 12, 2011) is an action against Geoffrey
Liten and his company National Financial Communication Corp. The company issues
a penny stock promotion piece entitled "OTC Special Situations Reports." In
four reports the complaint claims misrepresentations were made regarding the
financial condition of companies as well as their revenue projections, property
rights and the interaction of company management with Mr. Eiten who was hired to
issue the reports. Those reports were issued without checking the accuracy of
the information with the companies involved. The complaint alleges violations
of Exchange Act Section 10(b). The case is in litigation.
Fraudulent shell sale: SEC v. Alternative
Green Technologies, Inc., Civil Action No 11-cv-9056 (S.D.N.Y.
Filed Dec. 12, 2011) is an action against the company, Mitchell Segal, Belmont
Partners LLC, Joseph Meuse, Howard Borg, David Ryan, Vikram Khanna and
Panascope Capital Inc. According to the complaint, Alternative Green and
attorney Segal submitted false documents to a transfer agent so that the shares
of the company could be issued for trading. Those actions were facilitated by
Belmont and defendant Meuse by creating, and in some instances backdating,
false documents. The stock certificates were then used to fund promotional
campaigns promoting Alternative Green. The stock promoters were defendants
Ryan, Panascope Capital and its president defendant Khanna. The complaint
alleges violations of Securities Act Section 5 and Exchange Act Section 10(b).
Defendants Borg, Khanna and Panascope Capital have consented to the entry of a
permanent injunction prohibiting further violations of Section 5. Mr. Khanna
and Panascope Capital have agreed to pay $81, 477.10 to settle the charges
while Mr. Borg agreed to pay $35,264.05 and to surrender to the transfer agent
for cancellation more than 4 million shares of the company that were illegally
Investment fund fraud: SEC v. Malarz, Case
No 11-cv-8803 (N.D. Ill. Filed Dec. 12, 2011) is an action against Marcin
Malarz, Jack Sienkiewicz and Arthur Lin. According to the complaint, the
defendants raised over $14.3 million from at least 43 investors based on
promises that the funds would be invested in apartment complexes which would be
rehabilitated. Investors were assured that their money was personally
guaranteed by Mr. Malarz and in some instances by Mr. Sienkiewicz. In fact
substantial portions of the money was used for the personal benefit of the
defendants while other portions were employed to make Ponzi like payments. The
complaint alleges violations of Securities Act Sections 5and 17(a)(2) and
Exchange Act Section 10(b). The case is in litigation.
Fraudulent stock repurchase: SEC v. Stiefel
Laboratories Inc., Case No 1:11-cv-24438 (S.D. Fla. Filed Dec.
12, 2011) is an action against the company and its Chairman Charles Stiefel.
The complaint claims that the defendants defrauded company employees out of
$110 million in the repurchase of shares of the privately held firm. During the
term of the repurchases the company, which provided the employees with
valuations of the shares under a pension plan, acquired the shares at prices
that were as much as 300% below what the defendants knew to be the value of the
stock. As the repurchases unfolded the defendants also made misrepresentations
regarding the value of the shares. Ultimately the company was purchased by
GlaxoSmithKline plc. at a share price significantly over that paid to the
employees. The complaint charges violations of Exchange Act Section 10(b). The
case is in litigation.
Insider trading: SEC v. Galleon Management,
Action No. 09-cv-8811 (S.D.N.Y.); SEC v. Cutillo, Civil Action No.
09-CV-9208 (S.D.N.Y.) are two cases developed from the Galleon investigations.
In the former the SEC settled with Zvi Goffer, a former trader at Schottenfeld
Group, LLC who provided tips on the acquisition of Hilton Hotels Corp. and
Kronos Inc. Mr. Goffer consented to the entry of a permanent injunction prohibiting
future violations of Exchange Act Section 10(b) and agreed to pay disgorgement
of $265,709.33 plus prejudgment interest. Mr. Goffer was also a defendant in
the Cutillo case where he was alleged to have furnished inside
information on the potential acquisition of 3Com and Avaya among others. To
resolve this action he consented to a similar injunction and to the payment of
disgorgement of $1,014,758 plus prejudgment interest. In a related
administrative proceeding he agreed to the entry of an order barring him from
the securities industry. In the related criminal case Mr. Goffer was found
guilty of securities fraud and conspiracy to commit securities fraud, sentenced
to 10 years in prison and ordered to pay $10,022,931 as criminal forfeiture.
Investment fund fraud: U.S. v. Onsa (E.D.N.Y.)
is an action against former hedge fund manager Ward Onsa. He pleaded guilty to
securities fraud. According to the court papers, Mr. Onsa operated investment
firm Ward Onsa & Co. until 2005 when a series of trading losses and
judgments resulted in the bankruptcy of the firm. Subsequently, he solicited
over $5 million from investors for a second fund, New Century Hedge Fund
Partners, L.P. That fund also plummeted into insolvency as a result of trading
losses and withdrawals of investor money. As the fund crashed Mr. Onsa sent
investors false statements to conceal the losses. Much of the money he raised
for the second fund was from IRA accounts.
Insider trading: Jamil
Bouchareb and Daniel Corbin, who each previously pleaded guilty to one count of
conspiracy to commit securities fraud and one count of securities fraud, in
Manhattan, were sentenced to prison this week. According to the charging
papers, from February 2005 to September 2008 Mr. Bouchareb obtained inside
information regarding six mergers from Matthew Devlin whose wife worked for an
international communications firm. Mrs. Devlin had entrusted the information to
her husband expecting him to keep it confidential. Defendant Bouchareb used the
information to trade in the shares of the six companies. In September 2006 he
also purchased shares of a takeover target on inside information after
consulting with Mr. Corbin. The two men earned hundreds of thousands of dollars
in trading profits, portions of which were paid to Mr. Devlin. Mr. Bouchareb
was sentenced to serve 30 months in prison while Mr. Corbin will serve 6
months. Mr. Devlin will be sentenced in March 2012.
U.S. v. Kozeny, Docket
No. 09-4704 (2nd Cir. Decided Dec. 14, 2011) is the FCPA action
against Frederic Bourke, Jr., co-founder of accessory company Dooney &
Bourke, and others. The case stems from Mr. Bourke's investment in an
enterprise put together by Victor Kozeny, a man with a shadowy past, to try and
acquire SOCAR, the state oil company of Azerbaijan at a time when the country
was privatizing assets. Mr. Kozen, and others allegedly paid millions in bribes
through various entities in an effort to ensure that the president of
Azerbaijan would issue a decree to privatize SOCAR. The decree was never
issued. Mr. Kozen invested $7 million indirectly in the project, although he
knew that Mr. Kozen had a troubled reputation and expressed concern about the
prospect of paying bribers. A jury found Mr. Bourke guilty of violating the
FCPA and making false statements. He was sentenced to serve 366 days in prison.
Mr. Kozeny is a fugitive. Mr. Bourke's appeal focused on the question of
knowledge and whether the instruction on conscious avoidance should have been
given under the circumstances.
The Second Circuit affirmed the conviction. Under
established Second Circuit precedent a conscious avoidance instruction permits
a jury to find culpable knowledge on the part of a defendant when the evidence
demonstrates that he intentionally avoided confirming a fact. The instruction
is only proper when the defendant asserts the lack of some specific aspect of
knowledge required for conviction and the facts are sufficient to warrant
giving the charge the Court held. Here the government's primary theory was that
Mr. Bourke had actual knowledge. Nevertheless, there is ample evidence to
support giving the instruction in this case, according to the Court. This is
because the testimony established that Mr. Bourke knew of the pervasive
corruption in the country, Mr. Kozeny's reputation as the Pirate of Prague and
the fact that he created companies which were designed to shield him from
liability. Tape recordings involving Mr. Bourke and another investor in which
he voiced concerns about whether Mr. Kozeny and his company were paying bribes
also support this conclusion. All of this evidence was bolstered by the
testimony of Mr. Bourke's attorney - he waived privilege - that he advised that
his client he could not just look the other way if he thought there was wrong
doing. The Court also rejected a claim that giving the instruction was
inconsistent with the government's theory. The Court held that "this same
evidence [which supports the conclusion of conscious avoidance] may also be used
to infer that Bourke actually knew about the crimes.
U.S. v. Sharef, 11
Crim 1056 (S.D.N.Y.) charges eight and SEC v. Sharef, 11 CIV 9073
(S.D.N.Y. filed Dec. 13, 2011) seven former Siemen's executives and agents with
FCPA violations. Named as defendants in the indictment are Uriel Sharef, a
former member of the central executive committee of Siemens AG; Herbert
Steffen, a former CEO of Siemens Argentina; Andres Truppel, a former CFO of
Siemens Argentina; Ulrich Bock, Stephan Singer and Eberhard Reichert, former
senior executives of Siemens Business Services or SBS; and Carlos Sergi and
Miguel Czysch, intermediaries and agents of the company.
The actions center commitments by Siemen's executives and
agents to pay over $100 million in bribes to Argentine officials to win a $1
billion contract. The contract derives from a 1994 tender by the government of
Argentina for the DNI project to create a new system of national identity
booklets with state of the art national id cards. During the bidding process the
defendants and others committed Siemens to paying about $100 million in bribes
to officials of the Argentine government, members of the opposition party and
candidates for office who were likely to come to power during the project.
Approximately $31.3 million was paid after March 12, 2001 when Siemens became a
U.S. issuer. In 1998 the project was awarded to a special purpose subsidiary of
In 1999 the government suspended the project. More bribes
were paid. Nevertheless, in May 2001 the project was terminated. The indictment
alleges violations of the FCPA, conspiracy to commit wire fraud, conspiracy to
commit money laundering and substantive wire fraud. The SEC's complaint alleges
violations of Exchange Act Sections 30A, 13(b)(2)(A), 13(b)(2)(B), and
13(b)(5). Both actions are pending.
The SEC settled with defendant Bernd Regendantz, the
former CFO of SBS from February 2002 to 2004. He is alleged to have authorized
two bribe payments totaling about $10 million. Mr. Regendantz consented to the
entry of a permanent injunction prohibiting future violations of Exchange Act
Sections 30A and 13(b)(5) and from aiding and abetting violations of Exchange
Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). He agreed to pay a civil penalty
of $40,000 which was deemed satisfied by the payment of a €30,000
administrative fine ordered by the Public Prosecutor General in Munich,
Fargo Investments LLC was fined $2 million for unsuitable sales of reverse
convertible securities by one registered representative to 21 customers and for
not providing sales charge discounts on certain sale to eligible customers.
Reverse convertibles are interest bearing notes in which repayment of the
investment is keyed to the performance of an underlying asset. The investment
carries risk of loss depending on the nature of the underlying asset. Here one
salesman, who is the subject of a separate proceeding, sold these investments
to clients who, for the most part, were elderly and/or had limited risk tolerance.
Wells Fargo will, in addition to paying the fine, make restitution to the
customers for the investments and the fees.
MF Global: FINRA Vice Chairman
Stephen Luparello testified before the House Committee on Agriculture on
December 8, 2011 regarding the collapse of M. F. Global (here).
Insider dealing: Rupinder
Sidhu, a management consultant, was convicted on 22 counts of insider dealing
and sentenced to two years imprisonment. Mr. Sidhu was found not guilty on one
count of insider dealing. The charges centered on allegations that Mr. Sidhu
obtained inside information regarding 18 different UK and European listed
shares from Anjam Ahmad, an ex-hedge fund trader and risk manager with AKO
Capital LP. Mr. Ahmad supplied Mr. Sidhu with information he obtained in his
role as a trader at AKO about the firm's forthcoming transactions. Over the
last three years the FSA has secured 11 convictions for insider dealing. The
regulator currently is prosecuting 15 other individuals for the crime.
RBS report: The
regulator published a report regarding he failure of the Royal Bank of
Scotland. It focused on six points: 1) A significant weakness in RBS's capital
position from management decisions which was permitted by an inadequate global
regulatory capital framework; 2) over-reliance on risky short-term wholesale
funding; 3) concerns and uncertainty about the bank's underlying asset quality;
4) substantial losses in credit trading activities which eroded market
confidence; 5) the acquisition of ABN AMRO which was done with inadequate due
diligence; and 6) an overall systemic crisis in which banks in the condition of
RBS were vulnerable to failure.
Private securities litigation
NERA Economic Consulting issued a report on trends in
private actions. The consulting firm is projecting that by year end filings for
private actions will be slightly below the level of 2010. Suits objecting to
mergers account for about 29% of the total while about 18% relate to Chinese
companies. The report is available here Regulation SHO: In the Matter of
Gary Bell, Adm. Proc. No. 3-14660 (Filed Dec. 13, 2011) is an action
against Gary Bell who traded through GAS, LLC. According to the Order, Mr. Bell
violated the "locate requirement" and close out requirements of Regulation SHO.
That regulation requires market participants seeing to effect a short sale to
borrow arrange to borrow, or have reasonable grounds to believe that a security
can be borrowed in time to make delivery prior to effecting a short sale.
Market makers are exempt from this requirement. They are not exempt from the
close out requirement which requires that if there is a fail-to-deliver
position for thirteen consecutive settlement days in certain securities the
position must be closed. Here Respondent in one transaction created a synthetic
long position while selling short the underlying stock and in another entered
into a paired transaction with a fail-to-deliver position in which he borrowed
the necessary stock for a day or two o make it appear that he had satisfied the
close out requirement when in fact he had not. To resolve the proceeding
Respondent consented to the entry of a cease and desist order based on Exchange
Act rule 203(b)(1) and 203(b)(3). He also agreed to be suspended from the
securities business for a period of nine months, to pay disgorgement of $1.5
million along with prejudgment interest and a civil penalty of $250,000.
For more cutting edge commentary on developing
securities issues, visit SEC Actions, a blog by Thomas
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Small bits of content which are explained in details, helps me understand the topic, thank you!