The war on insider trading by the Manhattan U.S. Attorney
was propelled forward this week with the conviction of Galleon hedge fund
founder Raj Rajaratnam on all fourteen counts. At the same time another
defendant in the expert network investigation pleaded guilty. DOJ also
prevailed in an FCPA jury trial.
SEC enforcement filed another investment fraud case and a
settled financial fraud action. The division lost an effort to retroactively
apply a Dodd-Frank collateral bar provision.
Monitoring risk: SEC Chairman Mary Schapiro testified on May 12, 2011
before the Senate Committee on Banking, Housing and Urban Affairs on monitoring
systemic risk and promoting financial stability. In her testimony the Chairman
addressed a number of topics including: steps the SEC is taking to examine
strengthening market structure; its response to the flash crash; rule making
under Dodd-Frank regarding derivatives and private fund adviser registration
and reporting; the Financial Stability Oversight Council; new authority
regarding Financial Market Utilities; and systemic risk assessment (here).
SEC Chairman Mary Schapiro also testified before the House Committee on
Oversight and Government Reform regarding the future of capital formation. In
her testimony the chairman addressed issues concerning registered offerings,
private placements, capital formation for smaller companies, IPOs and
reporting. The Chairman also stated that a review is underway of restrictions
on communications in IPOs, whether the general solicitation ban should be
revisited, the number of shareholders that trigger public reporting and
regulatory questions posed by new capital raising strategies (here).
Investment fraud: SEC v. Gracy,
Civil Action No. CV 11-2282 (S.D.N.Y. May 11, 2011) is an action against George
Garcy and Angelo Cuomo alleging violations of Securities Act Sections 5 and
17(a) and Exchange Act Section 10(b). From 2003 through early 2009 the
defendants raised about $8 million from at least 200 investors through the
fraudulent sale of unregistered securities of E-Z Media, Inc. Defendants employed
a series of misrepresentations about the company to sell the securities and
then misappropriated substantial sums. The action is pending. Parallel criminal
charges were unsealed on May 11 in the Eastern District of New York.
Financial fraud/insider trading: SEC v.
Michael Baker Corp., Civil Action No. 4:11-cv-1791 (S.D. Tx.
Filed May 11, 2011) is a settled action against the company, John Scullin, a
former Manager of Project Accounting, and Dennis Higgins, a former operations
manager for the company. Beginning in the fourth quarter of 2006, and
continuing through the first three quarters of 2007, Mr. Scullin made a series
of manual journal entries that were unsupported and inflated the pre-tax income
of the company by amounts which ranged from 13% to 100%. This was facilitated
by materially deficient internal controls. When Mr. Higgins learned about the
material misstatements and before the public announcement he sold all of his
shares in the company.
The company settled, consenting to the entry of a permanent
injunction prohibiting future violations of Exchange Act Sections 13(a),
13(b)(2)(A) and 13(b)(2)(B). Mr. Scullin resolved the case by consenting to the
entry of a permanent injunction prohibiting future violations of Exchange Act
Sections 10(b) and 13(b)(5) and from aiding and abetting violations of the
books and records and internal control provisions. He also agreed to pay a
civil penalty of $35,000. Mr. Higgins resolved the charges against him by
consenting to the entry of a permanent injunction prohibiting future violations
of Exchange Act Section 10(b) and agreeing to pay disgorgement of $16,929.75
along with prejudgment interest and a civil penalty in the same amount.
In a related administrative proceeding Michael Higgins,
the former CFO of the company and Mr. Scullin's supervisor, consented to the
entry of a cease and desist order precluding him from causing violations of
Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). In the Matter of
Michael Higgins, CPA, Adm. Proc. File No. 3-14379 (May 11, 2011).
Retroactivity: In the Matter of John W.
Lawton, Adm. Proc. File No. No. 3-14162 (April 29, 2011). This
action was brought under Section 203(f) of the Advisors Act. Respondent
previously managed a multi-million hedge fund through an investment adviser,
Crossroads Capital Management, LLC. As a result of his misconduct over fifty
investors lost somewhere between $2.5 million and $7 million. Mr. Lawton
pleaded guilty to one count of mail fraud and one count of false statements in
a criminal case and consented to the entry of a permanent injunction in and SEC
enforcement actions. Based on this record a request for summary disposition was
granted. The critical question in the case was the application of Section 925
of Dodd-Frank which amended Advisors Act Section 203(f) to provide for a
collateral bar. Judge Murray rejected a request for a collateral bar since
statutes are presumed not to be retroactive. To the extent Section 925 provided
for new penalties, they could not be applied to past conduct under the ruling.
Insider trading: U.S. v. Rajaratnam, Case No.
1:09-cr-0118 (S.D.N.Y.). Defendant Raj Rajaratnam was found guilty on all
fourteen counts of conspiracy and insider trading. Mr. Rajaratnam is the
founder of the Galleon funds. The charges are based on overlapping insider
trading schemes in which the defendant received inside information from a
variety of sources as discussed here.
Insider trading: U.S. v Shimoon,
10-mj-2823 (S.D.N.Y.) is one of the expert network cases. This week defendant
Manosha Karunatilaka pleaded guilty to one count of conspiracy to participating
in an insider trading scheme. It involved expert networking firm Primary Global
Research. The defendant is a former account manager at Taiwan Semiconductor
Manufacturing Co. From 2008 through 2010 he participated in a conspiracy to
furnish inside information to clients of the expert network firm. This included
information about his company. Sentencing is scheduled for September 15, 2011.
U.S. v. Noriega,
Case No. 2:10-cr-01031 (C.D. CA.). Lindsey Manufacturing and its owner and
President, Keith Lindsey, vice president and CFO Steve Lee were convicted on
FCPA charges following a jury trial. Angela Aguilar was convicted of money
laundering. Ms. Aguilar is a Mexican national, married to Enrique Aguilar of
Grupo International which served as an agent for Lindsey to secure business
from a state owned enterprise. Mr. Aguilar is a fugitive.
The charges stem from bribes paid to employees of
Comision Federal de Electricidad or CFE, a state owned enterprise in Mexico, by
Lindsey through Grupo. Beginning in 2002, and continuing over the next seven
years, Lindsey secured business from CFE. Over the period the company was paid
more than $19 million by the utility. To secure the business Lindsey paid a 30%
commission to Grupo with the understanding that all or part of it would go to
CFE officials. To cover the cost of the commission Lindsey raised its prices to
CFE thereby passing on the cost to the electric company. The commissions were
paid under false invoices. Over the years Messrs. Lindsey and Lee wired about
$5.9 million to Grupo. Ms. Aguilar authorized the payment of Grupo funds to CFE
officials. The company and Messrs. Lindsey and Lee were each convicted on one
count of conspiracy and five counts of FCPA violations. Ms. Aguilar was
convicted on one count of conspiracy to commit money laundering. Sentencing is
scheduled for the company and defendants Lindsey and Lee on September 16, 2011.
Ms. Aguilar is scheduled to be sentenced on August 12, 2011.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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