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The Commission began trial in its action against former Goldman Sachs employee Fabrice Tourre. The case centers on the market crisis action the SEC previously resolved with his former employer. The stakes are high in this case with significant media coverage and the Commission’s reputation hanging in the balance.
A new survey of the financial services industry raises significant questions about the culture of firms on Wall Street. A substantial number of those responding indicated that the rules may have to be broken to get ahead, that their competitors would engage in such conduct and that their superiors would ignore wrongful acts. The survey seemed to confirm one released by Ernst & Young in May of this year.
SEC Enforcement filed one civil injunction action this past week. The case centered on a forex investment scheme. A parallel action was filed by the CFTC.
Remarks: Commissioner Luis Aguilar delivered remarks titled Investor Risks in the Retail Forex Business, Washington, D.C. (July 11, 2013). The Commissioner’s comments focused on delays in issuing rules under Dodd-Frank regarding retail forex transactions (here).
Remarks: Commissioner Daniel Gallagher delivered remarks at the Society of Corporate Secretaries & Governance Professionals, Seattle, Washington (July 11, 2013). The Commissioner’s remarks focused on the SEC’s disclosure regime (here).
Survey regarding the financial services industry
A new survey titled “Wall Street in Crisis: A Perfect Storm Looming” (July 2013), prepared by Labaton Sucharow, a law firm specializing in whistleblower actions, raises questions regarding the culture of the financial services industry. Key findings from the survey include: 1) Almost 30% of those surveyed indicated that rules might have to be broker to be successful; 2) when asked if they believed it was likely that the staff at their company had engaged in wrongful conduct, 24% responded in the affirmative;
3) of those responding, 23% stated that they had either personally observed, or had first hand knowledge of, wrong-doing in the work place; 4) when asked if leaders at their organization would likely ignore suspected insider trading, 17% responded in the affirmative; if the leader actually learned of insider trading, 15% stated it was unlikely the conduct would be reported.
SEC Enforcement: Litigated Actions
Investment fund fraud: SEC v. Palladino, Civil Action No. 13-11024 (D. Mass.) is an action against Steven Palladino and his company, Viking Financial Group, Inc. The complaint alleged that the defendants defrauded at least 33 investors by inducing them to invest in what is essentially a Ponzi scheme. Investors were told that their money would be placed in short term, high interest loans that were secured and paid a high rate of return. In fact most of the investor money was used to pay other investors and the Palladino family expenses. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). A freeze order was entered at the time the action was filed. After briefing the court concluded that the SEC had established that the defendants engaged in securities fraud and that an injunction should be entered. The court also entered a temporary order as to disgorgement. The question of civil penalties will be addressed after the resolution of the parallel criminal action. Previously the Commission’s charges were resolved with other defendants. See also Lit. Rel. 22752 (July 18, 2013).
Investment contract: SEC v. Graham, Case No. 13-10011 (S.D. Fla. Ruling issued July 10, 2013) is an action against five individuals who are alleged to have raised about $300 million from 1,400 investors over a four year period beginning in 2004 selling interests in a sale lease back arrangement. Investors were to purchase a unit in a resort and immediately lease it back for a cash payment. On a motion to dismiss the critical issue was the nature of the investment solicited by defendants and if it constituted an investment contract.
In granting the motion of the defendants to dismiss, the court held that the Commission must plead: 1) that there was an investment; 2) that it was a common enterprise; and 3) that the buyer lacked control over the profitability of the investment. At the core of this test is an analysis of the purchase agreement. Here, however, “Plaintiff has neither filed a copy of the purchase agreement on the record, nor included adequate factual allegations in the Amended Complaint concerning the contents of the purchase agreement. Accordingly, the court dismissed the complaint without prejudice.
SEC Enforcement: Filings and settlements
Filings this week: This week the Commission filed 1 civil injunctive action and no administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Insider trading: SEC v. Gupta, Civil Action No. 11 Civ. 7566 (S.D.N.Y.) is a previously filed the insider trading case against former Goldman Sachs director Rajat Gupta. Mr. Gupta was convicted of one count of conspriracy to commit securities fraud and three counts of securities fraud by a jury. He was sentenced to serve two years in prison and pay a $5 million criminal fine. This week he resolved issues in the SEC’s civil case. The court entered a final order enjoining Mr. Gupta from future violations of the securities laws and barring him from serving as an officer or director of a public company and any broker, dealer, or investment adviser. He was also directed to pay a civil penalty of $13.9 million. Under an earlier order Mr. Gupta is required to disgorge his share of the profits and losses avoided as a result of the insider trading based on his illegal tips along with prejudgment interest.
Bribery: SEC v. Syndicated Food Service International, Inc., Civil Action No. 04-CV-1303 (E.D.N.Y.) is a previously filed action centered on a massive broker bribery scheme. It involved the stock of nine public companies and took place from 1997 to 2003. The court entered a final judgment against Syndicated on July 3, 2013 prohibiting future violations of Securities Act Section 13(a) and Exchange Act Sections 10(b) and 13(a). Previously, the matter was resolved with several other defendants. See also Lit. Rel. No. 22751 (July 12, 2013).
SEC v. White, Civil Action No. 4:13-CV-3883 (E.D. Tex. Filed July 9, 2013) is an action which names as defendants Kevin White, a securities law recidivist, and his controlled entities, JGW Capital Management LLC, Revelation Forex Fund, LP and RFF GT, LLC.
In September 2011, just three months after Revelation was formed, Mr. White and KGW Capital began soliciting investors . Revelation was supposed to utilize a complex trading strategy in the forex markets to obtain superior returns for clients. In fact the firm had huge losses. Investors, who put about $7.1 million into the scheme, were not told about the losses, that about $1.7 million of their money was used for Mr. White’s personal expenses or that he had at one time been barred by the New York Stock Exchange. The SEC’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The court granted a freeze order at the time the complaint was unsealed. The action is pending. See also Lit. Rel. No. 22750 (July 12, 2013). The CFTC brought a parallel action, ; CFTC v. RFF GP LLC, Civil Action No. 4:13-cv-00382 (E.D. Tex. Filed July 9, 2013).
Court of appeals
FCPA/restitution: U.S. v. Green, No. 10-50519 (9th Cir. Opinion Filed July 11, 2013) is the appeal by Gerald and Patricia Green of the restitution order entered in their FCPA case. The FCPA charges stemmed from their work with the Bangkok International Film Festival. The couple had a number of contracts from the Tourism Authority of Thailand to run the Festival and related promotions. Under their tutelage the festival thrived. However, the contracts were obtained by paying about $1.8 million to the governor of Thailand’s Tourism Authority. After being convicted on FCPA charges by a jury they appealed that part of the order requiring them to pay $250,000 in restitution. To enter this part of the sentencing order the court had to find under the applicable statute that there was an identifiable victim who either suffered a physical injury or pecuniary loss. The court concluded that these statutory requirements were met, finding there was a victim and that there was a loss in terms of the “bribery figure amount.”
On appeal the Greens challenge the Court’s findings which form the predicate for the restitution order, arguing that the jury and not the court had to make the requisite findings. The Ninth Circuit rejected this claim. The issue here is an outgrowth of the Supreme Court’s decision in Apprendi and its recent application of that case in Southern Union Co. v. U.S., 132 S.Ct. 2344 (2012). Apprendi held that “[o]ther than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt.” The ruling has been applied to the fact-finding needed to trigger capital punishment and, in Southern Union, to criminal fines. It does not apply to fact-finding regarding whether sentences are consecutive or concurrent. Following the Supreme Court’s ruling in Apprendi, but before Southern Union,, the Ninth Circuit rejected the contention that Apprendi applies to restitution as Mr. and Mrs. Green argued. Following those decisions the Ninth Circuit affirmed the ruling of the district court.
Investment contracts: SEC v. Radical Bunny LLC, No. 11-16275 (9th Cir. Opinion issued July 10, 2013) is a Commission action which claimed that beginning in late 2005, and continuing through June 2008, the company and four individual defendants raised over $189 million from at least 900 investors through a nationwide offering of unregistered securities in the form of promissory notes or investment contracts. The notes were sold using a series of misrepresentation, according to the SEC. After the district court granted summary judgment in favor of the SEC each defendant settled, reserving the right to appeal the ruling.
On appeal defendants argued that there was a triable issue of fact as to whether the investments were a security under the test set forth in the Supreme Court’s seminal decision in SEC v. W.J. Howey Co., 328 U.S. 293 1946). The Court concluded that the facts proffered by the Commission met the test. The undisputed facts demonstrated that Appellants sent each investor a document entitled “Direction to Purchase.” Investments made following the Direction were in a “common enterprise. All the profits were to come from the efforts of the Appellants who promised an 11% return annually. That profit was paid by Radical Bunny. Investors did not have or exercise any control over the underlying loans to be acquired by Radical Bunny with investor funds. Under these circumstances the Court had little difficulty affirming the district court’s conclusion that the Howey test had been met.
Suitability: The Securities and Futures Commission reached an agreement with The Royal Bank of Scotland N.V. regarding the sale of Lehman Brothers equity linked notes. Under the agreement the bank will repurchase the notes from sold to retail customers for 100% of the purchase price. This includes notes sold by the predecessor of RBS, ABN AMRO Bank N.V. The repurchase was based on a finding that the high risk instruments were sold to customers for which they were unsuitable.
Parallel action: The Securities and Futures Commission instituted proceedings against Tiger Asia Management LLC. The action is based on claims of market abuse tied to the same facts as those on which the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office for the District of New Jersey brought charges against the firm. See SEC v. Tiger Asia Management LLC (D. N.J. Filed Dec. 12, 2012).
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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