On Capital Hill, the debate
continues regarding financial reform, as CFTC Chairman Gary Gensler continued
to champion new regulation for OTC derivatives. The SEC brought another case in
its on-going investigation regarding kickbacks relating to the New York state
pension fund and another investment fund fraud case. Two circuit court
decisions focused on the question of fraudulent omissions, while a district
court concluded that there is no private right of action under the
anti-pyramiding provisions of the Investment Company Act.
CFTC Chairman Gary Gensler, in remarks
to the Council of Institutional Investors on April 13, 2010, outlined what
he views as the key provisions necessary for reform in this area and commented
on the existing House and Senate bills. The essential elements of regulation in
this area begin with comprehensive regulation of any entity that deals in
derivatives. This includes Wall Street banks as well as other non-bank dealers.
All standardized over-the-counter derivatives must be brought onto transparent,
regulated exchanges or similar trading venues. This will lower risk and improve
pricing in the marketplace. Finally, to further lower risk all standardized OTC
derivatives must be brought into central clearinghouses.
For derivatives that are not
standardized, but rather are tailored to the needs of a particular hedger, the
contracts should not be subject to a clearing requirement Mr. Gensler noted.
New regulation should ensure that the dealer regulation and capital
requirements account for the risks of these transactions. At the same time, it
is critical that as many over-the-counter derivatives transactions as possible
are moved into the central clearing houses. This means that there should not be
broad exemptions. These key elements are incorporated into the Senate Banking
Committee bill and the current House legislation. Moving forward, it is
critical that each of these key elements be incorporated into the final
SEC enforcement actions
Kickbacks: SEC v. Quadrangle Group
LLC, Case No.
10-cv-3192 (S.D.N.Y. Filed Apr. 15, 2010) is an action against Quadrangle Group
and Quadrangle GP Investors II which alleges that Quadrangle obtained a $100
million investment in 2005 from the New York Retirement Fund by paying
kickbacks. Specifically, the Quadrangle is alleged to have agreed to distribute
a low budget DVD David Loglisci, the former New York State Deputy Comptroller.
In addition, the firm agreed to pay a $1 million fee to Henry Morris, the top
political advisor and chief fundraiser for former New York State Comptroller
Alan Hevesi. To resolve the case, each defendant consented to the entry of a
permanent injunction prohibiting future violations of Securities Act Section
17(a)(2) and to an order requiring them to pay a financial penalty. See also
21487 (Apr. 15, 2010).
Fraudulent unregistered offering:
SEC v. Integrity Financial AZ, Case No. 1:10-cv-00782 (N.D. Ohio Filed Apr. 15, 2010) is
an action against Steven Long and Walter Knitter, the former owners of
Integrity Financial AZ and two of its salesmen, Walter Knitter and Robert
Koeller. Between February 2008 and September 2009, the defendants raised about
$8 million from 58 investors in a fraudulent unregistered offering. Investors
were promised guaranteed returns of 10 to 20% in promissory notes that were
alleged to have been secured by real estate. The promotional materials falsely
promised that the investments were secure, low risk and non-pooled. The funds
were to be used to build homes in Tonopah, Arizona. In fact, most of the money
was diverted to other projects. The complaint alleges violations of the
registration and anti-fraud provisions. The case is in litigation. See also
21488 (Apr. 15, 2010).
Bank conversion fraud: In the matter
of Haberman Management Corp., Adm. Proc. File No. 3-13859 (Apr. 13, 2010) is a
proceeding against Ross Haberman and two controlled entities for fraud in
connection with bank conversions. Beginning in 2004 and continuing through the
first quarter of 2009, Mr. Haberman misrepresented the true beneficial owner of
certain accounts used in connection with the conversion of bank ownership. To
participate in financial institution conversions from being mutually owned to a
stock form of ownership, Mr. Haberman maintained accounts and certificates of
deposits at 200 institutions and maintained several dozen accounts in his name
but with assets from Haberman Value Fund L.P. He falsely represented that he
would be the beneficial owner of the stock and not the firm. The
misrepresentations deprived others of the opportunity to participate in the
To resolve the action, Respondents
consented to the entry of a cease and desist order from future violations of
Exchange Act Section 10(b) and Advisers Act Section 206 as well as a censure. The order
also barred Respondent Haberman from association with any investment adviser
with the right to reapply after three years. The fund was ordered to pay
disgorgement of $1919,943 along with prejudgment interest. Mr. Haberman agreed
to pay disgorgement of $91,317 along with prejudgment interest and a penalty of
Investment fund fraud: SEC v. Farah, Case No. 1:10-CV-00135 (D. NH Apr.
9, 2010) is an action against Scott Farah, Donald Dodge and their controlled
entities, which alleges that over 150 investors were defrauded since 2005 out
of at least $20 million. The defendants told investors that their funds would
be used to invest in specific real estate loans in segregated accounts and that
they would receive returns ranging from 12 to 20%. In fact, the funds were not
segregated and were used for a variety of purposes. The complaint alleges
violations of Securities Act Sections 5 and 17(a) and Exchange Act Section
10(b). The case is in litigation. See also Litig. Rel.
21482 (Apr. 9, 2010).
Investment fund fraud: SEC v. Brown, Civil Action No. 10-CV-1207 (D.
Minn. Apr. 8, 2010) is an action against Renee Brown, an investment adviser and
her controlled entity, Investors Income Fund X, LLC. According to the SEC, from
July 2009 through March 2010, Ms. Brown fraudulently raised more than $1.1
million from six investors by convincing them to invest in Fund X which is
suppose to be a "bond fund" with a fixed annual return. According to the
complaint, Fund X is a sham and Ms. Brown misappropriated most of the money she
raised. The complaint, which alleges violations of Securities Act Section
17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Section 206, is
in litigation. See also Litig. Rel.
21483 (Apr. 8, 2010).
This Week in Securities Litigation (April 16, 2010) in its entirety on SEC Actions, a blog by Thomas Gorman.