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The Commission took the unprecedented of dismissing the
insider trading action against former Goldman Sach director Rajat Gupta, noting
that he challenged the administrative proceeding in district court. The SEC
reserved the right to file a federal court action. No such action has been
filed to date.
SEC Enforcement of focused on insider trading this week,
settling another of its Galleon insider trading actions. The SEC also filed
three other settled insider trading cases. The former CEO of a high tech
company pleaded guilty to criminal securities charges while the PCAOB announced
a settled action against a former E&Y partner and manager who furnished
false and backdated documents during an inspection.
In the court of appeals the SEC won the reversal of a
dismissal order in a case against a portfolio manager and the COO of the fund's
adviser. The court concluded that the Commission had adequately pleaded its
misrepresentation claim concerning statements by the defendants about the
market timing policies of the fund and their implementation and that its
request for a penalty was not time barred. Ashland Inc. lost two cases in two
different circuits against brokers who sold the company auction rate
securities which are now illiquid.
SEC enforcement - litigation
Insider trading: In the Matter of Rajatt K.
Gupta, Adm. Proc. File No. 3-14279 (Aug. 4. 2011) is the insider
trading action brought against former Goldman Sachs director. The Commission
entered an order dismissing the proceedings. The Order notes that on March 18,
2011 Mr. Gupta filed suit against the agency challenging this proceeding. It
goes on to state that "The Commission has determined that it is in the public
interest to dismiss these proceedings. Dismissing these proceedings will not
prevent the Commission from filing an action against Mr. Gupta in the United
States District Court." Previously the court had refused to dismiss the action
against the Commission and entered a discovery schedule.
SEC enforcement - filings and settlements
Insider trading: SEC v. Decinces, is
an action against Douglas Decinces, a former major league baseball player, his
physical therapist Joseph Donahoe, and two of his friends, Roger Wittenbach and
Fred Jackson each of whom was named as a defendant. The action centers on the
tender offer for Advanced Medical Optics Inc. by Abbott Laboratories Inc. which
was announced on January 12, 2009. Prior to that date Mr. Decines learned from
an employee at Advanced Medical about the pending transaction. Subsequently, he
made several purchases of stock, eventually building his portfolio to 83,700
shares. During this period, and prior to the public announcement, he tipped
Messrs. Donahoe, Jackson and Wittenbach who also traded. Mr. Wittenbach in turn
tipped his sister. Each defendant settled, consenting to the entry of permanent
injunctions prohibiting future violations of Exchange Act Sections 10(b) and
14(e). In addition, Mr. DeCinces agreed to pay disgorgement of $1,282,691 along
with prejudgment interest and a penalty of $1,197,998. Mr. Donahue agreed to
pay disgorgement of $75,570 and a penalty of $37,785. Mr. Jackson agreed to pay
disgorgement of $140,259 along with prejudgment interest and a penalty of
$140,259. Mr. Wittenbach agreed to pay disgorgement of $201,692 along with
prejudgment interest and a penalty of $214,906.
Insider trading: SEC v. Marovitz, 1:11-cv-05259
(N.D. Ill. Aug. 3, 2011) is an action against attorney William Morovitz, the
former husband of then Playboy CEO Christie Hefner. According to the complaint,
Mr. Morovitz traded on inside information he misappropriated from his wife in
three instances. In 2009 he bought shares before a takeover announcement and
sold most of the shares just before the deal collapsed, thus avoiding a loss. In
2008 he sold shares just before a poor earnings announcement, avoiding another
loss. In 2004 he purchased shares shortly before the announcement of a new
offering of another class of securities resulting in an unrealized profit. In
1998 Ms. Hefner had cautioned her husband that all information he learned from
her was confidential. She also had the general counsel of the company reiterate
that directive to her husband. Mr. Marovitz settled with the SEC, consenting to
the entry of a permanent injunction prohibiting future violations of Securities
Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay
$168,352 in disgorgement, prejudgment interest and civil penalties. The case
originated from an inspection of a broker dealer according to the Litigation
Release, No. 22059 (Aug 3, 2011).
Insider trading: SEC v. Tudor, Civil
Action No. 10-CV-8598 (S.D.N.Y.) is one of the Galleon insider trading cases
tied to the Arthur Cutillo and Brien Santarias ring. Franz Tudor was a
proprietary trader at Schottenfeld Group, LLC and is alleged to have traded on
inside information regarding the acquisition of Axcan Pharma Inc. Mr. Tudor
settled with the Commission, consenting to the entry of a final judgment that
permanently enjoins him from violations of Exchange Act Section 10(b) and
directs him to pay disgorgement of $70,807 plus prejudgment interest. No
penalty was imposed based on his financial condition. In a related
administrative proceeding he consented to the entry of an order barring him
from the securities business. Previously, Mr. Tudor pleaded guilty to criminal
conspiracy and securities fraud charges in a related criminal case, U.S. v.
Tudor, 09-CR-1057 (S.D.N.Y.). Mr. Tudor has not been sentenced.
False statements/insider trading: SEC v.
Ferrone, Civil Case No. 1:11-cv-05223 (N.D. Ill. Filed Aug. 1,
2011). Biotech company Immunosyn Corporation was named as a defendant along
with Argyll Biotechnologies, LLC, its major shareholder, two other shareholder
entities, CEO Stephen Ferrone, CFO Douglas McClain Jr., Chief Scientific
Officer Douglas McClain, Sr. and Argyll's CEO James Miceli. Immunosyn stated in
public filings over a four year period beginning in 2006 that Argyll, which
controls its only drug, SF-1019, planned to commence the regulatory approval
process for human clinical trials in the U.S. The FDA had twice halted any
efforts to initiate the trials. Those actions were not disclosed until April
2010. During the period Messrs. Miceli, MClain Jr. and McClain, Sr. sold shares
in the company, raising about $20 million. The complaint alleges violations of
Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 16(a) and
20(a). The case is in litigation.
Fraudulent share issuance: U.S. v. Knabb (N.D.
CA.) is an action against Jasper Knabb, the former CEO of Pegasus Wireless
Corporation. Mr. Knabb pleaded guilty to a three count information alleging
conspiracy to commit securities fraud, securities fraud and falsifying books
and records. According to the information, between May 2005 and January 2008
Mr. Knabb caused Pegasus to issue over 490 million shares of stock to satisfy
thirty-one promissory notes and other documents. The notes were bogus and the
shares were issued to him and his family and friends. The scheme netted about
$25 million. Mr. Knabb is scheduled to be sentenced on November 3, 2011.
Previously, the CFO of Pegasus, Stephen Durland, pleaded guilty to similar
The Board announced a settlement of a proceeding against
Peter O'Tool, a former E&Y partner, and the manager on the engagements,
Darrin Estella. The Board found that shortly before a PCAOB inspection Messrs.
O'Toole and Estella created, backdated and added a document to the audit
working papers related to the most significant transaction in the engagement.
Other papers were also altered, added and backdated to other working papers
prior to the inspection. In addition, Messrs. O'Toole and Estella furnished
written document to inspectors representing that no changes had been made to
the audit working papers following the completion of the engagement. The
proceeding was brought in December 2010 and, for good cause shown, made public
over the objection of Messr. O'Toole and Estella. The Board order that Mr.
O'Toole be barred from associating with a PCAOB registered accounting firm with
a right to petition to remove the bar in three years. This is the longest bar
imposed by the Board. He was also directed to pay a $50,000 fine. Mr. Estella
was similarly barred with a right to petition after two years.
Court of appeals
SEC v. Gabelli, Nos.
10-3581, 10-3628 and 10-3660 (2nd Cir. August 1, 2011). The
Commission's action centered on claimed false statements made by Marc Gambelli,
the portfolio manager of Gabelli Global Growth Fund, and Bruce Alpert, the COO
of the Fund's adviser, Gabelli Funds, LLC. The complaint alleged that the
defendants mislead the board and investors regarding the market timing policies
of the fund, implying that the practice was not tolerated when in fact they
permitted one trader to time millions of dollars in trades for years. The
complaint alleged violations of Securities Act Section 17(a), Exchange Act
Section 10(b) and Advisers Act Sections 206(1) and (2).
The district court dismissed the claims, concluding that
their statement which discussed effort to preclude market timing was literally
true, that the SEC could not recover a penalty for aiding and abetting under
the Advisers Act and, in any event, that no injunction could be entered here.
The Second Circuit reversed. First, there is no doubt that the statement was
literally true. That is not sufficient however. Here the statement was a half
truth that did not disclose the fact that a large trader was permitted to
market time. Thus is was false and misleading. Second, the law in the Second
Circuit is settled that the SEC can seek a civil penalty for aiding and
abetting a violation of Section 206 of the Advisers Act.
Likewise, the claim for a civil penalty is not time
barred. Section 2442 of title 28 requires that the claim for civil penalties be
brought within five years. Here the SEC correctly argues that its claim did not
accrue until September 2003 when, as the complaint alleges, it discovered the
claim. This is correct according to the Court. Finally, here, where there are allegations
which plausibly allege that for almost three years the defendants aided and
abetted the violations of the investment adviser, the complaint sufficiently
pleads a reasonable likelihood of future violations.
ARS: Ashland, Inc. v. Oppenheimer & Co., No.
10-5305 (6th Cir. July 28, 2011) is a case brought by Ashland, a
diversified global chemical company, based on its purchases of auction rate
securities on the advise of Oppenheimer & Co. The company began purchasing
auction rate securities or ARS in May 2007. The company was assured that ARS
were liquid and as safe as money market funds. Although Ashland raised
questions about the market as the subprime crisis unfolded and when one
prominent broker permitted an auction to fail, Oppenheimer repeatedly reassured
the company that the market was safe. By February when Ashland made its last
purchase the company had built a portfolio of about $194. Just days later
Oppenheimer concluded there were problems in the market. By then however it was
too late. The ARS market collapsed and Ashland's holdings were illiquid.
Ashland filed suit claiming the securities firm failed to tell it that the
continued health of the ARS market depended on the intervention of underwriters
who had no obligation to supporting it. The district court dismissed the
complaint. The Circuit Court affirmed.
The key issue, according to the Court, is whether
plaintiff adequately pleaded a strong inference of scienter as required by the
PSLRA. This means that the facts alleged must be taken collectively to asses if
they meet the requirements of the statute as interpreted in Tellabs, Inc v.
Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). In this case while
the facts may support an inference of scienter, it is outweighed by those which
are contrary. Ashland has failed to explain "why or how Oppenheimer possessed
advance, non-pubic knowledge that underwriters would jointly exit the ARS
market and cause its collapse in February 2008 . . . " While Oppenheimer
employees were aware of what might happen if the underwriters chose to exit the
market, this was a seemingly remote risk in view of past history. Indeed, it is
likely that the market collapse "caught Oppenheimer and its employees off
guard" the Court concluded. Furthermore, the complaint here differs
significantly from those which have survived a motion to dismiss. In cases
which have survived a motion to dismiss the plaintiff explained why or how the
defendant knew about the impending difficulties with the ARS markets. Here the
complaint does not. Accordingly it must fail. See also Ashland Inc. v.
Morgan Stanley & Co., Docket No. 10-1549-cv (2nd Cir. July
28, 2011)(Similar suit in which the dismissal by the district court was
affirmed on appeal).
Program: Is FCPA Enforcement
To Aggressive? August 5, 2011, ABA Annual Meeting Toronto.
The program links are here
The program is co-chaired by Thomas Gorman, Dorsey & Whitney, and Frank
Razzano, Pepper Hamilton. The panel includes Ret. Judge Stanely Sporkin, Greg
Andres, Deputy AG, DOJ; Peter Clark, Cadwalder, Wickersham & Taft; Joseph
Warin, Gibson, Dunn & Crutcher; and Eric Bruce, Kobre & Kim.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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