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The Commission approved new rules regarding the much discussed consolidated audit trail this week while continuing to issue rules under Dodd-Frank. Now the exchanges and FINRA will be required to implement the provisions regarding the consolidated audit trail.
SEC enforcement brought actions centered on insider trading, market manipulation and the FCPA. The insider trading case named five physicians as defendants while the FCPA action is part of a sweep of the medical device industry.
Finally, the CFTC brought a significant action regarding an FCM where the customer segregated funds are largely missing. The action seems to follow in the path of the MF Global debacle.
Rules: The Commission approved new rules requiring a consolidated audit trail to monitor and analyze trading activity. The new rules will require the national exchanges and FINRA to establish a market wide consolidated audit trail. Its purpose is to enhance regulatory oversight (here).
Rules: The SEC approved rules and interpretations on key terms for regulating derivatives. These further define the terms "swap" and "security-based swap" and whether a particular instrument is regulated by the CFTC or the SEC. The rules and interpretations were written jointly with the CFTC under Dodd-Frank (here).
SEC Enforcement: Filings and settlements
Statistics: This week the SEC filed 3 civil injunctive actions and 2 administrative proceeding (excluding tag-along and 12(j) actions).
Undisclosed conflicts: In the Matter of Belsen Getty, LLC., Adm. Proc. File No. 3-14404 (July 11, 2012) is a proceeding which names as Respondents the firm, a registered investment adviser, and Terry Deru, its owner and managing member, and Andrew Limpert, its former principal. The Order alleges that in November 2006 Messrs. Deru and Limpert became involved in the founding of Nine Mile Software in which they were also significant shareholders. Both individual Respondents invested in the firm and sold restricted shares to clients of Belsen Getty. When Nine Mile conducted an IPO most of its shares were sold to Belsen Getty clients. In October and November 2008 Belsen Getty used its discretionary trading authority to trade Nine Mile stock on behalf of firm clients without alerting them to the risk or conflicts. In fact the firm was virtually the only market participant and at times was on both sides of the trades. Respondents also recommended to firm clients other high risk investments in which Messrs. Deru and Limpert has a financial interest without disclosing that fact. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4), 204A and 204(a). Respondent Limpert settled, consenting to the entry of a cease and desist order based on each of the Sections cited in the Order. He also agreed to the entry of a bar from the securities business and from participating in any penny stock offering. In addition, he agreed to pay disgorgement of $51,255.80 along with prejudgment interest and a penalty equal to the disgorgement.
Insider trading: SEC v. Mukkamala, Case No. 12-cv-13020 (E.D. Mich. July 10, 2012) is an action against five physicians, Apparao Mukkamala, Suresh Anne, Jitendra Prasad Katnenl, Mallikarjunarao Anne and Rao A.K. Yalamanchili. The action centers on the acquisition of American Physicians Capital, Inc. or ACAP, a holding company for a medical insurer, by The Doctors Company, also an insurer, which was announced on July 8, 2010. Mr. Mukkamala was the chairman of the board of ACAP. In that capacity he learned of the pending acquisition and, prior to its public announcement, told each of the other defendants about the deal. Each defendant traded. Collectively the defendants made about $623,000 in illegal profits. The Commission's complaint alleges violations of Exchange Act Section 10(b). Each defendant agreed to settle, consenting to the entry of a permanent injunction prohibiting future violations of that Section. In addition, the defendants collectively will pay over $1.9 million as part of the settlement. Specifically, defendant Mukkamala will pay $631,000; defendant Mallikarjunarao Anne, $253,000; defendant Suresh Anne will pay $697,000; defendant Katneni will pay $22,000; and defendant Yalamanchili will pay $298,000.
False statements: In the Matter of Calhoun Asset Management LLC, Adm. Proc. File No. 3-14680 (July 9, 2012) is a proceeding against Calhoun, a registered investment adviser and Krista Lynn Ward its managing member and sole employee. The Order alleges that in 2006 Ms. Ward started two hedge funds, Triumph Multi-Series Fund and Calhoun Market Neutral Fund. Both were managed by Calhoun. Ms. Ward aggressively marketed the funds to raise money, using a series of misrepresentations. Those included misrepresentations about her experience in the industry and Calhoun's due diligence process and included false statements in Forms ADV, filed with the Commission. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 203A, 204, 206(4) and 207. To resolve the actions each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Respondent Calhoun agreed to pay a penalty on a joint and several basis with Ms. Ward of $50,000. In addition, Ms. Ward agreed to be barred from the brokerage and investment advisory business with a right to apply for re-entry after five years.
Manipulation: SEC v. Axius, Inc., Case No. CV 12-3338 (E.D.N.Y. Filed July 5, 2012) and U.S. v. Neuhaus, No. 1:12-cr-00439(E.D.N.Y.) are actions involving Axius, Roland Kaufmann and Jean-Pierre Neuhaus. Mr. Kaufmann is a director and the president and CEO of the company. Mr. Neuhaus is a stock promoter. Early this year Messrs. Kaufmann and Neuhaus engaged in a scheme to manipulate the shares of Axius by entering into an arrangement with an individual they believed represented a group of stock brokers with discretionary authority over the accounts of wealthy customers. Under the arrangement the individual would receive detailed instructions from Messrs. Kaufmann and Neuhaus regarding the purchase of Axius stock. The individual was to receive 26% to 28% in return for buying up to 1 million shares of Axius securities for up to $5 million. The individual turned out to be an undercover law enforcement official. The SEC's complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In the criminal case the two men were each charged with conspiracy, securities fraud, violating the Travel Act and money laundering. Both cases are pending.
Customer segregated funds: CFTC v. Peregrine Financial Group, Inc., Case No. 12-cv-5383 (N.D. Ill. Filed July 10, 2012) is an action against the firm and its owner Russell R. Wasendorf. The National Futures Association, the designated self-regulatory organization for monitoring and auditing the firm's compliance, was conducting an audit this month, according to the CFTC's complaint. Peregrine claimed during the audit to have over $220 million in customer funds. In fact the NFA was only able to find about $5.1 million. Mr. Wasendorf is reported to have attempted suicide earlier this week. The complaint seeks a freeze order, the appointment of a receiver and monetary relief including fines and restitution. The action is pending.
SEC v. Orthofix International N.V., Case No. 3:12-CV-419 (E.D. Tx. Filed July 10, 2012). Orthofix, a limited liability company whose shares are registered with the Commission, settled FCPA charges with the SEC and the DOJ. The charges stem from payments made by its Mexican subsidiary, Promeca S.A. de C.V., to employees of the Instituto Mexicano del Seguro Social or IMSS. From 2003 through 2010 Promeca is alleged to have repeatedly paid bribes to officials of IMSS to obtain and retain sales contracts. Payments totaling $317,000 yielded about $8.7 in gross revenues and about $4.9 in net profits. Over the course of the period, about $80,050 in gifts were given to officials. The company self-reported when it discovered the scheme. Orthofix also implemented significant remedial measures. There is no allegation in the SEC complaint that the parent company was involved in the bribery scheme. The Commission's complaint alleges violations of Exchange Act Section 13(b)(2)(A) and 13(b)(2)(B).
Orthofix settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint and agreed to pay $4,983,644 in disgorgement along with prejudgment interest. The company also agreed to certain undertakings and to report to the SEC on its compliance program for two years. To settle with the DOJ the company entered into a deferred prosecution agreement with a term of three years. It also agreed to pay a $2.2 million criminal fine.
Investment fund fraud: U.S. v. Sullivan, 1:12-mj-00633 (E.D.N.Y. Filed July 5, 2012 under seal) is an action charging Paul Sullivan with wire fraud. The criminal complaint alleges that Mr. Sullivan made investments without the authorization of his clients that resulted in significant losses. When those losses were discovered Mr. Sullivan attempted to prevent clients from alerting authorities by promising to have them reimbursed from the money he obtained from another group of clients. He characterized this as "private investment opportunities." His pitch to one client, including an admission of wrong doing, was captured on tape by authorities. The action is pending.
The regulator issued a new investor warning regarding exchange traded notes. It is titled: "Exchange-Traded Notes - Avoid Unpleasant Surprises." The alert details a series of potential risks regarding the investment instruments (here).
The Securities and Futures Commission revoked the license of Edmond Leung Chi Keung and barred him from re-entering the industry for 10 years. This action followed the dismissal of his appeal from findings made against him along with David Tsien, formerly of JP Morgan Securities (Asia pacific) Ltd and Steve Luke, formerly a fund manager at JF Asset Management Ltd. for insider dealing.
For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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