The Commission brought a significant market crisis case
this week, centered on the sale of complex, high risk financial instruments to
unsophisticated school districts which ended in millions of dollars in losses.
Insider trading was a key focus for the SEC, DOJ and the
FSA. The Commission brought cases against a boyfriend who misappropriate inside
information from his girlfriend and a father and son. The DOJ filed a companion
case against the father and son in which each defendant pleaded guilty and
brought charges against another alleged tipper in the expert network
investigation. In the UK the FSA brought insider dealing charges against three
Finally, the DOJ won two more convictions in FCPA cases.
The cases are part of a series of cases arising out of dealings with Haiti
Whistleblower rules: Sean
McKessy, Chief, Office of the Whistleblower, discussed certain aspects of the
program in remarks at Georgetown University on August 11, 2011. Mr. McKessy
noted that the program will bolster internal compliance systems, reviewed the
provisions in the rules that generally exclude attorneys, compliance personnel
and external auditors and noted that the program should speed up efforts to
address misconduct. The remarks are available here.
SEC enforcement - filings and settlements
Insider trading: SEC v. Scammell, @:11-cv-06597(C.D.
CA. Filed Aug. 11, 2011) is an action against Toby Scammell which centers on
the acquisition of Marvel Entertainment, Inc. by the Walt Disney Company, was
announced on August 31, 2009. Prior to the acquisition, Mr. Scammell lived with
his girlfriend in Los Angeles. During that period she was an extern at Disney
assigned to work on the Marvel acquisition. She worked long hours during the
summer of 2009 and periodically discussed the project in general terms with Mr.
Scammel but did not reveal the name of the company. Frequently she worked from
home where there were papers about the deal. She was aware of the announcement
date for the deal and the $50 price. Mr. Scammel had access to her papers and
blackberry. During one conversation she suggested that the project would be
done shortly after labor day. Mr. Scammell, who had never before traded
options, began making large and unusual purchase of Marvel options in mid -
August with an expiration date in September. The strike price was in the range
of $45 to $50. Since he did not have the money to pay for all of the options he
used funds in his brother's account without permission. When the deal was
announced Mr. Scammell liquidated his holdings, making a profit of $192,497 or
over 3000% of his investment. He did not tell his girlfriend or brother. The
Commission's complaint alleges violations of Exchange Act Section 10(b). The
case is in litigation.
Investment fund fraud: SEC v. Evolution
Capital Advisors, Civil Action No. 4:11-cv-02945 (S.D.Tx. Filed
Aug. 11, 2011) is an action against Damian Valdez and his controlled fimrs,
Evolution Capital Advisors, previously a registered investment adviser, and
Evolution Investment Group I. The complaint alleges that the defendants raised
approximately $10 million from over 80 investors through two fraudulent note
offerings. Investors were told that the notes were safe and secured by
government guaranteed assets which would be acquired through the use of
leverage. In fact the notes were not acquired, some were subject to significant
undisclosed defaults and others were subject to pre-payment penalties. The
defendants siphoned off about $2.4 million in fees and expenses from the
investor funds while another $2.7 million was used to make Ponzi type payments.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act
Section 10(b) and Advisers Act Sections 206(1) & (2). The case is in
Suitability: SEC v. Stifel, Nicolaus &
Co., Civil Action No 2:11-cv-00755 (E.D. Wis. Filed Aug. 10,
2011) is an action against defendants Stifel, Nicolaus & Co., Inc., a
retail and institutional brokerage and investment banking firm, and David
Noack, a senior vice president of the firm and co-heard of its Milwaukee
office. According to the complaint, Mr. Noack used his long standing and close
working relation with five Wisconsin school districts to sell them notes tied
to the performance of synthetic CDOs comprised of a portfolio of 100 or more
credit default swaps on corporate bonds. As part of the investment strategy the
school districts used largely borrowed funds. The school districts were induced
to make the investments through misrepresentations about the safety and nature
of the CDOs and in reliance on Mr. Noack. In fact Mr. Noack had little
knowledge about the highly leveraged and high risk investments which were
typically used by hedge funds, not inexperienced investors such as the school
districts. Ultimately there were millions of dollars in losses. The school
districts lost all of their investments. The complaint alleges violations of
Securities Act Section 17(a) and Exchange Act Sections 10(b), 15(c)(1)(A). The
case is in litigation.
Insider trading: U.S. v. Peterson (S.D.N.Y.
Filed Aug. 5, 2011); SEC v. Peterson, Civil Action No. 11-CV-5448
(S.D.N.Y. Filed Aug. 5, 2011). Clayton Peterson, a member of the board of
directors and chairman of the audit committee of Mariner Energy, Inc., and his
son Drew Peterson, who worked as an investment adviser in Denver, Colorado,
pleaded guilty to criminal insider trading charges and were named as defendants
in an SEC suit.
Clayton Peterson learned at board meetings that his firm
would be acquired by Apache Corporation in a deal that was announced on April
15, 2010. After first learning about the deal he repeatedly tipped his son,
instructing him to trade through an account belonging to his sister. The son
traded and tipped a hedge fund manager who also traded. Following the announcement
of the deal the share price of Marine Energy rose about 42%. The hedge fund
manager liquidated his positions, yielding a profit of $5 million. Within days
Drew Peterson, and the various accounts for which he traded, liquidated their
positions yielding a profit of $150,000. Clayton Peterson and his son Drew each
pleaded guilty to one count of conspiracy to commit securities fraud and one
count of securities fraud. Sentencing is scheduled for January 12, 2012. The
SEC brought a civil injunctive action against Clayton Peterson and his son. The
complaint alleges violations of Exchange Act Section 10(b). The action is
In the matter of Gualario & Co. LLC, Adm.
Proc. File No. 3-14340 (Aug. 11, 2011) is a proceeding which alleges violations
of the antifraud provisions of the securities laws in connection with
transactions with advisory clients. The Respondents filed a Motion for Summary
Disposition alleging a failure to comply with Exchange Act Section 4E which was
added to the Act under Dodd-Frank. It requires that an action be filed within
180 days of the issuance of a Wells notice unless the period is extended by the
Director of the Division of Enforcement. The exception is available under
Section 4E(a)(2) tilted "Exceptions for Certain Complex Actions." Here the
parties agreed that the 180 days began on July 22, 2010. The Division Director
extended the period by ninety days until April 14, 2011. Prior to that date
this proceeding was instituted. Respondents argued that the extension was
inappropriate because protracted settlement negotiations do not qualify as
"sufficiently complex." The motion was denied.
Insider trading: U.S. v. Ng, 11-02096
(S.D.N.Y.) is the latest case from the expert network investigation. Defendant
Stanley Ng is charged with conspiring to commit securities fraud and wire
fraud. Mr. Ng was employed as the SEC Reporting Manager at Marvell Technology
Group, Inc. According to the charging papers, he was recruited by Winifred Jiau
along with Ngoc Nguyen, who worked in the finance department of NVIDIA
Corporation, to join an investment club in which they furnished inside
information about their employers in return for other stock tips. In fact Mr.
Ng did provide inside information such as in May and August 2008 when he
disclosed the then confidential earnings of the company prior to the
information being made public. Ms. Jiau, who traded on the information, also
sold it to others including Samir Barai and Noah Freeman who traded. Mr. Ng was
released on bond after being arrested. Ms. Jiau and Messrs. Nguyen, Barai and
Freeman have either been convicted or pleaded guilty in connection with the
U.S. v. Esquenazi (S.D.Fla.).
Joel Esquenazi, the president of Miami based Terra Telecommunications Corp.,
and Carlos Rodriguez, the executive vice president of the company, were
convicted on FCPA and other charges following a jury trial. Specifically, the
two men were convicted on one count of conspiracy to violate the FCPA and wire fraud,
seven substantive FCPA counts, one count of money laundering conspiracy and
twelve counts of money laundering. The charges are based on a scheme which
began in November 2001 and continued through early 2005 to bribe government
officials at Telecommunciations D'Haiti S.A.M. or Haiti Teleco. As part of the
scheme the defendants paid about $890,000 in bribes to officials at Haiti
Teleco through a series of shell companies. The purpose of the bribes was to
obtain favorable business advantages, including better rates and a continuation
of service. To conceal the payments the defendants used various shell companies
and created false records. These are the latest convictions in an on-going
series of related cases.
Research center established: Stanford
University and the FINRA Foundation initiated a Fraud Prevention Research
Center which will serve as a resource for law enforcement, government and
research groups studying financial fraud (here).
Failure to supervise: Citigroup Global
Markets, Inc. was fined $500,000 by the regulator for
failing to supervise former registered representative Tamara Moon. Ms. Moon is
alleged to have misappropriated almost $750,000 from twenty-two customer
accounts by using falsified documents and engaging in unauthorized trades.
Typically the customers were elderly. According to FINRA, Ms. Moon took
advantage of a series of gaps and lax procedures at the firm. Throughout the
eight year period over which the misappropriations were made Citigroup failed
to follow-up on red flags related to Ms. Moon's activities.
U.S/China meetings: U.S.
and Chinese regulators met in Beijing to discuss audit oversight cooperation.
The Sino-U.S. Symposium on Audit Oversight was attended by officials of the
China Securities Regulatory Commission or CSRC, the Chinese Ministry of Finance
or MOF, the Public Company Accounting Oversight Board and the Securities and
Exchange Commission. The meetings focused on developing an effective
cross-boarder audit oversight system in the near future to ensure market
integrity and investor protection. Such a system would permit the PCAOB to
carry out its obligations under the Sarbanes Oxley Act and conduct the required
periodic inspections of Board registered auditors of China based issuers. The
U.S. delegation invited the CSRC and the MOF to send delegates to Washington,
D.C. to have further discussions. No agreements were reached during the
Auditor independence: The
Board will consider issuing a concept release soliciting public comments on
ways to enhance auditor independence including mandatory audit firm rotation at
an open meeting on August 16, 2011.
The FSA charged an investment banker and two of his
associates with insider dealing relating to trading from February to November
2009. Specifically, Thomas Ammann, an investment banker, was charged with three
counts of insider dealing. He was also charged with one count of money
laundering and two counts of encouraging insider dealing. Christina Weckwerth,
a resident of Germany, was charged with two counts of insider dealing and one
count of money laundering while Jessica Mang was named in one count of insider
Program: Current Trends in
FCPA Enforcement, August 17, 2011, Live in Menlo Park, CA, and webcast
nationally. The program link is here.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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