Commission Chair Mary Jo White announced a modified
settlement policy for select enforcement actions. While most cases will be
settled on a neither admit nor deny basis, the category of actions in which
admissions will be required will be expanded. Currently only those actions
where the defendant made admissions in a parallel case - typically a criminal
action - fall within this group. Now the group will be expanded to include
those which are egregious and have wide spread public interest.
The Commission settled its action against eight mutual
fund directors, dropping two of the three charges initially alleged in the
Order. The SEC also brought another financial fraud action against a PRC based
issuer that is the product of a reverse merger, a manipulation case and an
investment fund fraud action this week. All three cases are in litigation.
Settlement policy: SEC
Chair Mary Jo White stated that the agency is going to change the way it
settles enforcement actions, modifying its frequently criticized "neither admit
nor deny" policy. Now, in select cases, the Commission will require that
admissions be made as a condition of settling rather than permitting the
defendant to "neither admit nor deny" the allegations in the complaint of its
enforcement action. While the precise parameters were not defined by Ms. White,
she did indicate that it would apply to cases where there is intentional,
egregious conduct and/or wide spread public interest. The precise parameters of
the new policy were not specified. It will be applied on a case by case basis.
For most settling cases the current policy will continue to apply.
Remarks: Gregg E. Berman,
Associate Director, Office of Analytics and Research Division of Trading and
Markets, at the SIFMA Tech Conference, New York City (June 18, 2013). His
remarks focused on a new MIDAS system which permits the Commission to monitor
the markets in real time, conduct forensic analysis, and do market structure
research for policy decisions (here).
Remarks: Norman Champ,
Director, Division of Investment Management, at the 2013 Insured Retirement
Institute Government, Legal & Regulatory Conference, Washington, D.C. (June
18, 2013). Topics discussed include the Division's new Risk and Examinations
Office, its outreach to the industry and improved disclosure (here).
Remarks: Commissioner Elisse
B. Walter addressed the DirectWomen Board Institute, New York City (June 13,
2013). Topics covered in the remarks include enhanced decision making from
diversity and the role of the SEC in promoting diversity (here).
Remarks: Commissioner Bart
Chilton addressed the Hedge Fund Industry in remarks titled "Rock'n the
Trouble," Chicago, Illinois (June 18, 2013). The Commissioner discussed high speed
trading and cross-border regulation (here).
SEC Enforcement: Litigated decisions
Insider trading: SEC v. All Know Holdings,
Ltd., 11 C 8605 (N.D. Ill. Opinion issued June 10, 2013) is a
previously filed action which centered on the November 2011 announcement by
Pearson plc that it would acquire China based Global Education & Technology
Group, Ltd. The SEC filed suit within days of the announcement, charging the
company and others with insider trading in violation of Exchange Act Section
10(b) based largely on the large trading shortly before the deal announcement.
The critical question in the case since the time the complaint was filed has been
the source of the inside information. Defendants Youghui Zhang and All Know,
along with its principle and her friend, moved for summary judgment.
The motion of Mr. Zhang was denied while that of the All
Know defendants was granted. Defendant Youghui Zhang was employed at Global
Education, a company founded by his younger brother, Yongqi "David" Zahng and
his wife, Xiadong "Veronica Zhang. The day before the take-over announcement he
purchased 7,900 American Depository Shares of the company on the NASDAQ. In
rejecting his motion the court focused on Mr. Zhang's access to inside
information and his failure to explain numerous communications with his brother
despite discover requests from the Commission.
In contrast, the motion of the "All Know defendants" was
granted. All Known Holdings engages in stock trading, frequently taking large
positions in select company shares, according to the defendants. In the days
immediately preceding the deal announcement the firm purchase about $950,000
worth of Global Education shares. While the position was large, after making
the purchases the firm had a substantial amount of cash remaining. Those
purchases were based on a trading philosophy which focused on acquiring shares
of China based U.S. companies which the defendants viewed as undervalued and
there research about the company. At the same time Defendant Yao, a lifelong
friend of the principal of the company, also purchased shares.
In granting the All Knowing Defendants' motion the court
pointed to the failure of the SEC to cite any evidence demonstrating that the
All Know Defendants knew or had contact with an insider. That failure contrasts
with the detailed explanations offered by the Defendants for their purchases.
Indeed, the SEC did not offer any evidence demonstrating that the information
was obtained in breach of a fiduciary duty. While the SEC tried to claim that
the defendants engaged in discovery abuse the court noted that if this was true
an appropriate motion should have been filed. Here it was not.
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 3 civil injunctive action and 1 administrative
proceedings (excluding follow-on actions and 12(j) proceedings).
Financial fraud: SEC v. China MediaExpress
Holdings, Inc., Case No. 1:13-cv-00927 (D.D.C. Filed June 20,
2013) is an action against the company, a China based issuer, and its Chairman
and CEO, Zheng Cheng. Beginning in late 2009 at the completion of its reverse
merger the company systematically and materially overstated its cash. In a
filing made in mid-November 2009 it reported $40,000 in cash when in fact it
had $269. In a filing made about one year later the firm claimed to have
$160,947 in cash when in fact it had about $10,756. The overstatements in a
series of filings ranged from 452% to as much as 40,433%. This caused the stock
price to spike, attracting investors including one hedge fund that purchased
$53 million worth of stock. Mr. Cheng had incentives to participate in the
fraud since he had contracts to receive stock as the company hit certain
financial metrics. The complaint alleges violations of Securities Act Section
17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and13(b)(2)(B). The
case is in litigation.
Manipulation: SEC v. Bahr, Case
No. 13CV1423 (S.D. Ca. Filed June 18, 2013) is an action against David Bar
centered on the manipulation of the shares of iTrakr Systems, Inc. in November
and December 2012. Mr. Bahr arranged to pay the representative of a group of
registered representatives who supposedly had discretionary authority over a
number of accounts a 30% kickback to acquire and hold the shares. The purpose
was to maintain the share price while Mr. Bahr distributed other shares and
sold his at inflated prices. In December 2012 Mr. Bahr conducted a test of the
scheme. His contact turned out to be an undercover government agent. The
Commission's complaint alleges violations of Securities Act Section 17(a) and
Exchange Act Section 10(b). The case is in litigation. The U.S. Attorney's Office
for the Southern District of California filed parallel criminal charges.
Investment fund fraud: SEC v. MacDonald, Civil
Action No. 3:13-cv-02275 (N.D. Tx. Filed June 17, 2013) is an action against
Duncan MacDonald and Gloria Solomon. The two defendants set out to find funding
for a medical insurance venture, Global Corporate Alliance. When they failed
after months of effort and spending the company into debt, they fabricated a
successful history for Global. Subsequently, they raised about $10 million from
investors. A portion of that money was used to repay investors while the
balance was either taken by the two defendants or spent. The scheme collapsed.
The SEC's complaint alleges violations of Securities Act Section 17(a) and
Exchange Act Section 10(b). The case is in litigation. See also Lit.
Rel. No. 22728A (June 18, 2013).
In the Matter of J. Kenneth Alderman, CPA, Adm.
Proc. File No. 3-15127 (June 13, 2013) is a proceeding against eight mutual
fund directors: Jack Blair; Albert Johnson; James Stillman McFadded; W. Randall
Pittman; Mary Stone; Archie Willis; J. Kenneth Alderman and Allen Morgan. Four
funds were involved. The investment adviser was Morgan Asset Management, Inc.
The Order which initiated the proceeding centered on claims that certain assets
had been incorrectly valued. At the end of the first quarter 2007 the Funds had
a combined net asset value of about $3.85 billion. Large portions of those
assets were invested in complex structured products such as collateralized debt
obligations and similar instruments for which there were no readily available
market quotations. Thus the Funds' portfolios of these assets had to be fair
valued by the boards. The directors delegated the task to Morgan Asset. The
Order alleges that there were no meaningful policies and procedures for
carrying out the valuation task. Originally the Order claimed this had a
material adverse impact on NAV and certain filings. Those claims were dropped
in the settlement process. The Order issued at the time of settlement alleged
only a violation of Rule 38a-1 under the Investment Company Act. Respondents
and the Commission agreed to settle the proceeding following litigation but
prior to a hearing. Each Respondent consented to the entry of a cease and
desist order based only on Rule 38a-1.
Auditor independence: In the Matter of
Rosenberg Rich Banker Berman & Company, CPA, Adm.
Proc. File No. 3-15358 (June 14, 2013) is a proceeding against the audit firm
and partner Brian Zucker. The Order concerns violations of the auditor independence
rules by the firm and Mr. Zucker. Specifically, Mr. Zucker performed Financial
and Operations Principal or FINOP services for a broker-dealer client while the
firm served as its auditor. He also arranged for the audit firm to pay a
contractor who served as the broker-dealer's Financial and Operations Principal
and directed a staff accountant to provide FINOP services to the broker-dealer.
To resolve the proceeding the firm and Mr. Zucker consented to the entry of a
cease and desist order based on Exchange Act Section 17(a). In addition, the
firm agreed to the entry of a censure and an order requiring that it pay
disgorgement of $12,000 and a civil monetary penalty of $25,000. Mr. Zucker
also agreed to the entry of an order denying him the privilege of appearing or
practicing before the Commission as an accountant with the right to reapply
after one year.
Investment fraud: U.S. v. Betts (S.D.N.Y.)
is a criminal action charging defendant Seth Betts with wire fraud. In 2008 Mr.
Betts presented himself to a Midwest University as a principal of Betts and
Gambles Global Securities, LLC. He induced the University to invest $8.16
million in collateralized mortgage obligations which were to be resold at a
profit. In fact he misappropriated the funds. Mr. Betts was arrested this week.
The case is pending.
Insider trading: U.S. v. Posey (N.D.
Ga.) is a proceeding in which Richard Posey, formerly an executive at Carters
Inc. pleaded guilty to one count of conspiracy to commit insider trading. Mr.
Posey is charged with having repeatedly obtained inside information from about
April 2009 to July 2009 and furnished it to Eric Martin, the head of investor
relations, to permit him and others to insider trade. In addition, from about
mid 2005 through 2009 Mr. Posey repeatedly traded in the shares of his employer
using inside information. As part of the plea arrangement Mr. Posey agreed that
he is responsible for illegal trading profits of between $2.5 and $7 million
over the period. He also agreed to pay restitution of $800,000 to the company
which is the cost of the internal investigation to date it conducted regarding
the insider trading allegations. The date for sentencing has not been
Manipulation: U.S. v. Kaufmann (E.D.N.Y.)
is an action in which defendant Roland Kaufmann, formerly the CEO of Axius
Inc., previously pleaded guilty to one count of conspiracy to violate the
Travel Act. He is alleged to have engaged in a scheme to have stock brokers
purchase the common shares of a company he controlled to manipulate the price.
As part of the scheme Mr. Kaufmann and another engaged the services of a person
they believed would assist in the scheme who in fact was an undercover agent.
Mr. Kaufman was sentenced to serve 16 months in prison.
The Securities and Futures Commission banned Ms. Michelle
Ng Man Chow from the securities business for life. From August to October 2011
Ms. Ng took a number of checks from the account of one client and deposited
them in her account and that of another client. She also sold securities from
the account of the first client without authority and then lied in an effort to
conceal her actions. While the loss has been repaid the Commission found it
appropriate to ban her for life.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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