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Securities Litigation This Week: Looming Scandal, SEC Actions, Criminal Cases


The SEC is about to become entangled in another scandal, according to reports in the New York Times this week. The latest involves the destruction of documents, according to press reports.

The Supreme Court's ruling on what constitutes primary liability in Janus does not apply to Securities Act Section 17(a) or Investment Company Act Section 34(b) according to a ruling in an SEC enforcement action. In the expert networking criminal insider trading inquiry a former portfolio manager pleaded guilty. In another criminal case former NASDAQ executive Donald Johnson was sentenced to prison this week for insider trading. FINRA suspended and fined a trader for spoofing and the FSA imposed fines on two former hedge fund managers following the collapse of their fund.

Finally, the PCAOB issued a concept release focused on ways to improve auditor independence. The Board is seeking comment on the question of requiring audit firm rotation.

The Commission

The new whistleblower program became effective August 12, 2011. Key facets of the program are discussed here.

SEC enforcement - court rulings and decisions

Primary liability: SEC v. Daifotis, No 3:11-cv-00137 (N.D. CA. Filed Jan. 11, 2011) is an action against Kimon Daifotis, the former lead portfolio manager for Schwab YieldPlus Fund, and Randall Merk, an Executive Vice President at Charles Schwab & Co. The complaint focuses on events during the market crisis in 2007 and 2008 regarding YieldPlus Fund, an ultra-short bond fund that at its peak had $13.5 billion in assets and over 200,000 accounts. It alleges that the defendants made a series of misstatements in connection with the operation of the Fund and that Mr. Daifotis aided and abetted its deviation from the disclosed concentration policies.

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For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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