This week the Commission announced three victories in
court and filed four new civil injunctive actions. At the same time long
simmering matters moved forward. Reuters reports that the new DOJ task force,
created in the wake of the President's state of the union address, is "casting
a wide net" focused on the much investigated market crisis. Subpoenas issued to
large banks supposedly overlap and expand on earlier ones issued by the SEC and
Two long running FCPA matters also inched forward. The
Second Circuit Court of Appeals directed the government to respond to the
petition of handbag maker Frederic Bourke requesting that his appeal be reheard
by the full Court. The Court's order suggests Mr. Bourke may win an opportunity
for rehearing since the order is the first step.
Similarly, corruption issues involving Aluminum Bahrain
BSC and Alcoa continued to percolate. A long running suit by BSC asserting RICO
claims but tied to alleged FCPA violations centered on allegations that the
company was victimized by bribery and fraud is moving forward. Until recently
it was stayed at the request of the DOJ which is investigating possible FCPA
violations. Now BCS faces a motion to dismiss its claims. Regardless, of the
ruling the DOJ and the U.K.'s SFO are interested. The DOJ is reportedly
evaluating the possible FCPA violations. The SFO has brought charges against a
former official of each company.
Budget: SEC Chairman Mary
Schapiro testified before the Subcommittee on Financial Services and General
Government of the House Appropriations Committee on March 6, 2012, regarding
the SEC's proposed budget. That budget seeks $1.566 billion for fiscal 2013 (here).
Daniel Gallagher addressed the Investment Advisers Association (March 8, 2012)
commenting on Dodd-Frank related issues and questions regarding failure to
Daniel Gallagher addressed the Institute of International Bankers on March 5,
2012 regarding "Ongoing Regulatory Reform in the Global Capital Markets." The
remarks focused initially on the Financial Stability Oversight Council and then
the Volker Rule (here).
Enforcement statistics: A
Bloomberg article titled "SEC Enforcement Story Doesn't Add Up for 2011" (March
2, 2012) claims that for fiscal 2011 the Commission actually only filed 499 new
enforcement actions, not the 735 claimed by the agency. The difference,
according to Bloomberg, stems from the fact that 230 of the 735 were actually
follow-on administrative proceedings that are based on other enforcement
actions. The 499 actions is less than the number of new cases brought in the
year before the reorganization of the Division, according to the article. In
that year the agency claimed it filed 664 total actions but 144 were follow-on
meaning that only 520 new cases were filed in 2009.
SEC Enforcement: Litigated cases
Financial fraud: SEC v. Das, Civ.
No. 8:10-CV-00102 (D. Neb.) is an action against Rajnish Das and Stormy Dean,
both former executives and CFOs of infoUSA, Inc. This is one of three civil
injunctive cases brought by the Commission centered on the self-dealing of the
former chairman of the company who engaged in undisclosed related party
transactions which benefitted him to the detriment of the company. Messrs. Das
and Dean were alleged to have improperly approved expenses for the former
chairman of the company without proper documentation. The complaint alleged
violations of Exchange Act Section 10(b), 13(a), 13(b)(2), 13(b)(5) and 14(a).
Following a ten day trial the jury returned a verdict in favor of the
Commission. The Court has not determined the remedies.
Market crisis: SEC v. Brookstreet Securities
Corp., Case No. SA 8:09-cv-1411 (C.D. Cal.) is an action against
the broker and its principal, Stanley Brooks. From 2004 through 2007 the
defendants promoted what was called the "CMO Program" in which collateralized
mortgage obligations or CMOs which are high risk and illiquid were sold to
unsuitable retail customers. Eventually over 1,000 Brookstreet customers put
about $300 million into the securities as part of the program. As the market
crisis unfolded in 2007 and CMO prices plummeted, Mr. Brooks liquidated
investor accounts in the program to meet margin calls and avoid having the firm
fall under its required net capital level. The liquidated accounts included
those which were fully paid. Customers suffered substantial losses. The firm
collapsed when it could not meet its net capital requirements. The Court
granted the Commission's motion for summary judgment as to each defendant,
entering a permanent injunction prohibiting future violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). It also ordered Mr. Brooks to pay
$110,713.31 in disgorgement and prejudgment interest and a civil penalty of
Insider trading: SEC v. Jantzen, Case
No. 1:10-cv-00740 (W.D. Tex.) is an action in which the Commission prevailed on
summary judgment against John Jantzen, a registered securities broker, and his
wife Marleen Jantzen, a former assistant to an executive at Dell, Inc. The case
centers on the acquisition of Perot Systems, Inc. by Dell, announced on
September 21, 2009. Prior to the announcement Mrs. Jantzen learned from
internal Dell e-mails about the deal. On the final day of trading before the
announcement, Mrs. Jantzen made a cash transfer to the brokerage account of the
couple. Shortly after the transfer Mr. Jantzen purchased 24 call options and
500 shares of Perot Systems. Dell securities were also purchased. Following the
deal announcement the couple had one day trading profits of $26,950.50. In
granting the Commission's motion for summary judgment the Court found that the
two defendants violated Exchange Act Sections 10(b) and 14(e). The Court
entered an injunction against each defendant prohibiting future violations of
each Section cited in the complaint. The order also directed that the
defendants pay disgorgement in the amount of their trading profits along with
prejudgment interest. Further briefing was ordered on the question of a
SEC Enforcement: Filings and settlements
Filings: Since March 1, 2012
the Commission has filed 4 civil injunctive actions and no new administrative
proceedings (excluding those which are essentially part of a settlement or part
of the Section 12(j) program). Those filed this past week include:
Insider trading: SEC v. Harrold, (C.D.
Ca. Filed March 8, 2012) is an action against Steven Harrold, formerly the Vice
President, Strategy & Innovation, European Group for Coca-Cola Enterprises,
Inc. or CCE. The company is an Atlanta based marketer, producer and distributor
of Coca-Cola products whose shares are listed on the NYSE. On February 25, 2010
CCE announced that it had entered into an agreement with The Coca-Cola Company
under which that company would acquire CCE's North American bottling
operations. In addition, CCE would acquire Coca-Cola's Norwegian and Swedish
bottling operations. Coca-Cola also agreed to assume about $8.9 billion in CCE
debt while that company obtained the future rights to acquire Coca-Cola's
German bottling operations. The morning of the announcement CCE's share price
opened 30% higher. Earlier in February Mr. Harrold learned about the
transaction in the course of his employment. He was instructed to keep it
confidential and told that there was a trading blackout period. Nevertheless,
the day before the announcement he purchased 15,000 shares of CCE stock at
about $19.30 per share and put in a limit order to sell the block at $22.50 per
share. Following the announcement his shares were sold under the limit order
yielding a profit of about $86,850. Subsequently, during an internal inquiry he
admitted placing the trades in the account of his wife. He was terminated by
the company. The complaint alleges violations of Exchange Act Section 10(b).
The case is pending.
Pump & dump: SEC v. Prime Star Group,
Inc., Civil Action No. 2:12-cr-00371 (D.Nev. Filed March 7,
2012) is an action against the company and its CEO, Roger Mohlman along with
Danny Colon, Marysol Morera, Felix Rivera, Esper Gullatt, Jr., Kevin Carson,
Joshua Konigsberg and certain related entities. According to the complaint,
Prime Star illegally distributed over 18 million shares using fraudulent Rule
144 letters. Shares were distributed to the other defendants who retained a
portion of the shares and touted the stock. Prime Star and Mr. Mohlman are also
alleged to have made false statements in various press releases as part of the
scheme. The complaint alleges violations of Securities Act Sections 5 and 17(a)
and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B). Mr.
Konigsberg settled with the Commission, consenting to the entry of a permanent
injunction prohibiting future violations of Securities Act Section 5. The other
defendants are litigating the action. A related administrative proceeding based
on Exchange Act Section 12(j) was also brought against Prime Star.
Investment fund fraud: SEC v. Callahan, Civil
Action No. 12-CV-1065 (E.D.N.Y. Filed March 6, 2012) is an action against
investment adviser Brian Callahan and his firms Horizon Global Advisors Ltd.,
and Horizon Global Advisors, LLC. Mr. Callahan raised about $74 million from
over 24 investors beginning in 2005. Although investors were told that the
money would be put into liquid assets much of it was diverted to assist a beach
project of Mr. Callahan's brother-in-law which was facing foreclosure. Portions
of the money was also used to repay other investors. The complaint alleges
violations of Securities Act Section 17(a), Exchange Act Section 10(b) and
Advisers Act Sections 206(1) and (2). The Court entered a temporary freeze
order at the request of the Commission. The case is in litigation.
Insider trading: SEC v. Williams, Civil
Action No. 12-1126 (E.D. Pa. Filed March 5, 2012); SEC v. Duncan, Civil
Action No. CV 12-1785 (C.D. Ca. Filed March 5, 2012)
Each case is based on the acquisition of Hi-Shear
Technology Corporation by Chemring Group PLC., announced on September 16, 2009.
The defendant in the first case is John M. Williams, an employee of Deloitte
Tax LLP since 1997. In the second the defendant is William F. Duncan, the
President of Duncan Insurance Service, Inc., dba The Olson Duncan Agency, a
California insurance brokerage firm. Mr. Duncan and his agency had a long term
relationship with Hi-Shear. Defendant Williams was told about the deal as part
of his work at Deloitte. From September 10 to 14 Mr. Williams purchased 850
shares of Hi-Shear stock. He did not report the transactions to Deloitte as
required. Following the deal announcement he liquidated his holding, realizing
profits of $6,803.18.
Mr. Duncan deduced that a transaction would be
forthcoming from the information available to him through his work with the
company in connection with requests to provide estimates for a "tale" for the
D&O coverage. As part of his review he was furnished with a memorandum
evaluating the D&O coverage and raising questions about its adequacy if
there was an extraordinary transaction or a change in control. Mr. Duncan began
purchasing Hi-Sear stock the day he furnished the company with the quote on the
tail. By September 9 he had acquired 10,000 shares at a cost of over $102,000.
Following the September 16 announcement he liquidated his holdings, realizing a
profit of $85,525.
Each defendant settled on essentially the same terms,
consenting to the entry of a permanent injunction, without admitting or denying
the allegations in the complaint, which prohibits future violations of Exchange
Act Section 10(b). Each defendant agreed to pay disgorgement along with
prejudgment interest and a penalty equal to their trading profits. Mr. Williams
also agreed to the entry of an administrative order which suspends him from
appearing or practicing before the Commission as an accountant for five years.
Financial fraud: U.S. v. Stanford (S.D.Tx)
is the financial fraud case against Robert Allen Stanford. Following a six week
trial the jury returned guilty verdicts on 13 of 14 counts. Mr. Stanford was
convicted on one count of conspiracy to commit wire and mail fraud, four counts
of wire fraud, five counts of mail fraud, one count of conspiracy to obstruct
an SEC investigation, one count of obstruction of an SEC investigation and one
count of conspiracy to commit money laundering. He was found not guilty on one
count of wire fraud.
Insider trading: U.S. v. Liang, No.
11-cr-530 (D.Md.) is the insider trading case against former FDA chemist Cheng
Yi Liang. Previously the defendant pleaded guilty, admitting that he used
information from the computers at the agency which contained confidential
information to trade in securities. He was sentenced to five years in prison.
Court of appeals
Absolute Activist v. Ficeto, Docket
No. 11-0221-cv (2nd Cir. Decided March 1, 2012) is an action
centered on a Section 10(b) claim for damages by nine Cayman Island hedge funds
managed by Absolute Capital Management Holdings Ltd. (ACM). The defendants were
Florian Homm, CIO of ACM, Sean Ewing, Chairman/Chief Executive Officer, Ullrich
Angersbach, Head of IR and Marketing and Colin and Craig Heatherington, ACM
employees who were principals of defendant CICV Global Capital Ltd. (CIC).
Plaintiffs claimed that over approximately three years
Defendants Homm, Ficeto, Hunter and Colin Heatherington caused the nine Funds
to purchase U.S. Penny Stocks directly from the issuers in PIPE transactions.
Following the purchases various of the defendants are alleged to have engaged
in a "pump and dump" type scheme involving the penny stock securities acquired
by the Funds. The defendants reaped huge profits while the Funds suffered
losses of about $195,916,212. The district court dismissed the complaint with
prejudice for lack of subject matter jurisdiction based on Morrision v.
National Australia Bank Ltd., 130 S.Ct. 2869 2010). The Second Circuit
reversed and remanded with leave to replead. Under Morrison if the
transaction is not on an exchange the key question is whether the securities
transaction took place in this country. The test is when the parties first
became bound to effectuate the transaction. Thus plaintiffs must allege facts
demonstrating that the parties incurred irrevocable liability within the United
States. Here the complaint fails to allege such facts but since it was written
prior to Morrision the Court remanded with leave to replead.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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