Thomas O Gorman, Partner,
Porter, Wright, Morris &
The market crisis, past enforcement
failures, insider trading and the FCPA dominated securities litigation this
week. In the wake of the report on the collapse of Lehman, not surprisingly
there are calls for a criminal investigation. Another Inspector General report,
which became available this week, details yet another enforcement failure. At
the same time the UK, the SEC and the U.S. Attorney's Office in New York all
focused on insider trading involving market professionals. DOJ and the SEC
settled another significant FCPA case.
Senator Christopher Dodd, Chairman of
the Senate banking committee, sent a letter to Attorney General Eric Holder
calling for a task force to investigate the collapse of former Wall Street
giant Lehman brothers. Citing the report of Examiner Anton Valukas, the
letter states that "Lehman presented a misleading picture of it financial
condition to the public by using extensive repurchase agreements known as Repo
105 transactions . . . The result was to conceal its holdings of bad assets and
to temporarily remove approximately $50 billion of assets from its balance
sheet at the end of the first and second quarters of 2008."
A report by the SEC's Office of
Inspector General details another past failure by the agency. This one concerns
the battle between hedge fund Greenlight Capital, managed by David Einhorn and
Allied Capital. The battle between these competitors, and the history of the
related SEC investigations, is detailed in Mr. Einhorn's book, Fooling Some of
the People All of the Time - A Long Short Story. According to the OIG Report,
Allied successfully lobbied the SEC to open an investigation into Einhorn and
his hedge fund despite a lack of evidence of wrong doing. The inquiry began in
June 2002. During the same time period, Mr. Einhorn was furnishing the staff
with evidence of wrongdoing by Allied. Thus, while enforcement was conducting
its investigation of Mr. Einhorn, OCIE was examining Allied. The lead
Enforcement attorney, however, was not permitted to contact OCIE. Shortly after
the Enforcement inquiry began, the division concluded that there was no
evidence of violations by Mr. Einhorn. Nevertheless, the matter languished and
was not closed until December of 2006. Mr. Einhorn was never notified of the
closing. Ultimately Enforcement concluded it has credible evidence of
wrongdoing by Allied. The staff however, after lobbying by counsel for the
company, did not bring a fraud charge. Evidence of stolen enforcement documents
about Mr. Einhorn which found their way to Allied and the revolving door between
the staff and private practice which created clear conflicts permeate the
report. The Office of Inspector General Report concludes with a series of
recommendations for improving enforcement which begin with ensuring that there
is proper evidence for commencing an investigation.
SEC enforcement actions
Financial fraud: SEC v. Priddy, Civil Action No. 1:10-cv-00739 (D.
Md. Filed Mar. 25, 2010) is an action against Richard Priddy, the former CEO
and President of TVI Corporation, Charles Sample, the former EVP of the company
and their personal accountant J. Michael Broullire. The complaint focuses on
two schemes. In one, Messrs. Priddy and Sample are alleged to have sold
products to the company through companies they controlled. Mr. Broullire
created the entities they used. These related party transactions netted them
significant profits which were not disclosed. In another, Mr. Priddy increased
the compensation of defendant Sample, a portion of which was kicked back to
him, without the required disclosures in the proxy statements. Messrs. Priddy
and Sample agreed to settle with the Commission, consenting to the entry of
permanent injunctions prohibiting future violations of Sections 10(b) and 14(a)
of the Exchange Act and from aiding and abetting violations of Section 13(a).
Mr. Broullire consented to the entry of an injunction prohibiting future
violations of Section 10(b) and from aiding and abetting violations of Section
13(a) of the Exchange Act. Messrs. Priddy and Sample have also been charged in
a related criminal case. See also Litig. Rel.
21462 (Mar. 25, 2010).
Investment fund: SEC v. Vaughn, Civil Action No. 1:10-cv-00263 (D.
N.M. Filed Mar. 24, 2010) is an action against Douglas Vaughn and his company
alleging violations of Securities Act Sections 5 and 17(a) and Exchange Act
Section 10(b). The complaint alleged the defendants defrauded about 600
investors, selling promissory notes and interests in real estate investments
which were suppose to pay fixed interest payments ranging from 10 to 25 percent
over three years. Investors were lured with misrepresentations about the
company and the claims about the security of the investment. In fact, Mr.
Vaughan's failing business accumulated losses of over $61 million. The $80
million owed to investors is 20 times the equity in the properties securing the
notes. The court issued an emergency freeze order. The case is in litigation. See
also Litig. Rel.
21459 (Mar. 24, 2010).
Investment fund: SEC v. American
Settlement Associates, LLC, Case No. 4:10-cv-00912 (S.D. Tex. Mar. 19, 2010) was brought against
the fund and its promoters, Charles Jordan and Kelly Gipson, discussed here. The scheme
centered on the sale of an investment product known as a "viatical" or "life
settlement," fractionalized interests in life insurance policies. Defendants
acquired a $5 million policy in the name of a particular insured through a life
settlements broker. They raised over $3.7 million from approximately 50
investors in 10 states by selling fractionalized interests in the policy,
according to the complaint. Investors were promised returns ranging from 42% to
48% after approximately three and one half years, which were guaranteed even if
the insured lived beyond the projected time period because there was suppose to
be a bond. In fact, defendants used the money for their own purposes, failed to
pay the policy premiums resulting in its cancellation and the bonding company was
not licensed in the U.S. The SEC filed a fraud complaint and obtained a freeze
order and the appointment of a receiver. The case is in litigation.
Insider trading: U.S. v. Poteroba (S.D.N.Y. Filed Mar. 24, 2010); SEC
v. Poteroba, Civil Action No. 10 (S.D.N.Y. Filed Mar. 24, 2010 are insider
trading cases. The criminal case names as defendants Igor Poteroba, a former
Managing Director at UBS Securities and Alexei Koval. The SEC complaint adds a
third defendant, Alexander Vorobiev. The two cases allege that from 2005
through 2009 Mr. Poteroba tipped defendant Koval on upcoming mergers with
information he learned at UBS. The criminal case is based on six illegal tips
which the SEC action expands the number to eleven as discussed here. Both cases are in
Diamler AG reportedly has agreed to
pay $185 million to settle a long-running FCPA investigation. According to the
court papers, beginning in 1998 the company paid million of dollars in bribes
to secure business in China, Nigeria, Russia and Vietnam among others. Overall
bribes were paid in 22 countries. Under the terms of the settlement, $93.6
million will be paid to DOJ and $91.4 million will be paid in a settlement with
the SEC. Two Diamler subsidiaries will plead guilty to conspiracy and FCPA
The number of class action
securities cases settling last year, as well as the value of those settlements,
increased according to a
new report by Cornerstone
Research. Last year 103 cases settled, an increase from 97 in 2008. The
value of those settlements increased significantly compared to the prior year.
In 2009, the total value was $3.8 billion compared to $2.75 billion the prior
year, up by 35%. Of the 103 settlements, 19 involved companies in the finance
sector, 16 concerned companies in the pharmaceutical industry and 15 involved
high tech companies. The number of cases lead by institutional investors also
increased significantly. In 2009, 65% of the lead plaintiffs were institutions
compared to 35% the prior year.
U.K. The FSA and London's Serious
Frauds Office conducted their largest enforcement effort to date, targeting an
insider trading ring. One hundred and forty three agents raided sixteen London
and South England homes and business seizing documents and computers which
supposedly are part of a large, long running insider dealing ring. Six
individuals were arrested during the raid, including an executive from Deutsche
Bank, a senior employee of BNP Paribas, and a trader at New York City based
hedge fund Moore Capital, who supposedly was using his personal rather that
firm accounts. The FSA believes that London city professionals are passing
inside information to traders either directly or through middlemen.
Jonathan Katz, the long time
Secretary of the SEC, now retired, has a forth coming paper titled "Reviewing
the SEC Reinvigorating the SEC." It will be published shortly in the University
of Pittsburgh Law Review. The paper recounts the history of SEC enforcement
during the years Mr. Katz was on the staff, noting that periodically over the
years large frauds were missed. In this regard, the paper helps place the
Enforcement's current difficulties in prospective. It concludes with
recommendations for reorganizing and revitalizing the enforcement program.
more cutting edge commentary on developing securities issues, visit SEC
Actions, a blog by Thomas Gorman.
Thomas O. Gorman is the chair of the securities
litigation practice group and a partner in the Washington, D.C. office of
Porter Wright Morris & Arthur. He is also the co-chair of the ABA White
Collar Crime securities subcommittee. Previously he served in positions of
increasing responsibility on the staff of the Securities and Exchange
Commission, the division of enforcement and the office of the general counsel.
He is the author of a blog dedicated to securities litigation, http://www.SECActions.com.
Mr. Gorman's Martindale-Hubbell® profile here.