The Commission won a significant victory this week in the
Second Circuit Court of Appeals in its Citigroup litigation. While
technically the Court only granted a stay of the proceedings in the district
court, the panel's evaluation of the probability of success on the merits and
the overall tone of the opinion clearly reflected the SEC's position that the
District Court overstepped its limited role in the settlement process.
The SEC also brought its first cases arising out of its
year long investigation into the pre-IPO market and another market crisis case.
The DOJ continued to focus on FCPA enforcement, resolving another inquiry with
a deferred prosecution agreement. The CFTC stepped up enforcement, filing a
settled action against a Goldman Sachs unit while the FSA announced the
resolution of a significant market crisis case.
Finally, Cornerstone Research released its report on
securities class actions. It shows a significant drop in settlements last year
but suggests that there may be an increase in the future of class actions with
a parallel SEC enforcement component.
Speech: Chairman Mary
Schapiro addressed the Society of American Business Editors and Writers Annual
Convention, Indianapolis, Indiana (March 15, 2012). The Chairman's comments
included remarks on SEC reform, the state of Dodd-Frank rules, a critique of
pending legislation regarding the wall between analysts and underwriters,
initiatives regarding money market funds, the status of rules on derivatives
and the flash crash (here).
Speech: Meredith Cross,
Director, Division of Corporate Finance, addressed the Eleventh Annual Institute
on Securities Regulation in Europe, London, England (March 8, 2012). The topics
include rule making under Dodd-Frank, capital formation initiatives, the
regulation of disclosure by foreign private issuers and the disclosure review
Securities class actions
Last year the number of court approved settlements in
securities class actions dropped to 65, down by about 25% from 2010 and about
35% below the average over the prior 10 years. The total value of the
settlements declined by 58% to $1.4 billion in 2011 from $3.2 billion in 2010,
according to a report by Cornerstone Research. The average settlement in 2011
of $21 million was also far below the average for 2010 which was $55.2 million.
The decline in value is due in part to the fact that there was no single
settlement exceeding $1 billion, the Report notes.
Cases that involve SEC actions typically have
significantly higher settlements, according to Cornerstone. Last year, however,
the percentage of settled cases that involved the remedy of a corresponding SEC
action prior to the settlement of the class case were less than 10% compared to
30% in the prior year. This decline occurred despite reports by the SEC that it
filed a record number of enforcement actions in the last fiscal year.
Accordingly, Cornerstone notes that "we would expect the percentage of class
action settlement with corresponding SEC actions to increase in the next few
years as these cases are resolved."
The Citigroup appeal
The Second Circuit Court of Appeals granted the SEC's
request for a stay of its enforcement action against Citigroup Global Markets
Inc. and held that it properly had jurisdiction of the matter. SEC v.
Citigroup Global Markets, Inc., Docket Nos. 11-5227-cv (Decided March 15,
2012). The action stems from the refusal of the district court to execute a
proposed settlement of the Commission's market crisis enforcement action
against Citigroup (here).
Following that determination, the district court directed that the action
proceed to trial. The SEC filed a direct appeal and, as an alternative measure,
a writ of mandamus. In the Second Circuit the Commission, joined by Citi,
requested a stay of the underlying enforcement action pending appeal.
The motion panel concluded that the Court has
jurisdiction. While it expressed some doubt regarding the merits of a direct
appeal, the Court concluded that it has jurisdiction under the writ.
In evaluating the traditional multi-prong test for
granting a stay, the Court began by noting that the appeal raises important
questions regarding the role of the district court and an administrative agency
in the settlement process. Central to the ruling is the panel's conclusion that
the SEC has a likelihood of success on the merits. In evaluating this prong of
the stay test the Court noted that an agency such as the SEC is entitled to
deference in evaluating the public interest and a settlement. Despite the fact
that the district court stated it gave the agency deference, in fact it appears
that it did not. Indeed, the panel appeared to view the district court's ruling
as little more than impermissible second guessing of the agency. Accordingly,
the panel concluded that there was a probability of success on the merits. In
reaching this conclusion the Court made it clear that while the district court
has a role in the settlement process, it is limited and not of the scope taken
by the district court here.
The Court cautioned that its decision was being made
without having the benefit of briefing from an opposing side and that it is not
binding on the merits panel. The panel also directed that counsel be appointed
to represent the other side for briefing on the merits. The Court rejected a
request to expedite the appeal.
SEC Enforcement: Filings and settlements
Filings: The Commission filed
seven (7) civil injunctive actions and three (3) administrative proceedings
(excluding tag-a-long cases and Section 12(j) actions) this week.
Insider trading: SEC v. Mityas, Civil
Action No. 12-Civ-1281 (E.D.N.Y. Filed March 15, 2012) is an action against
Sherif Mityas, a partner and vice - president at a consulting firm. Mr. Mityas'
firm was retained by the Carlyle Group in connection with a proposed
acquisition of NBTY Inc. Shortly after learning the identity of the target Mr.
Mityas purchased shares of NBTY. He also tipped as relative who traded.
Following the announcement of the deal on July 15, 2010, Mr. Mityas liquidated
his shares at a profit of $25,895. The relative held the shares through the
completion of the merger and had a profit of $12,035. Mr. Mityas settled the
action consenting, without admitting or denying the allegations in the
complaint, to the entry of a permanent injunction prohibiting future violations
of Exchange Act Section 10(b). He also agreed to pay disgorgement of his
profits and those of his relative in the amount of $37,931 along with
prejudgment interest and a penalty equal to the amount of the disgorgement. Mr.
Mityas also pleaded guilty to criminal securities fraud charges based on these
Investment adviser fraud: SEC v. Murray, Case
No. CV 12 1288 (N.D. Cal. Filed March 15, 2012) is an action against James
Murray, an investment adviser of Market Neutral Trading, LLC. Defendant Murray
is alleged to have started raising funds from investors in 2008. The next year
he distributed an audit report to investors on the performance of the fund from
Jones, Moore & Associates, Ltd. That report was false, according to the
complaint. In fact, the firm is not an accounting firm but rather a shell
company controlled by Mr. Murray. The audit report overstated the fund's
investment gains by about 90% and its income by about 35%. The complaint
alleges violations of Adviser Act Section 206(4). The case is in litigation. A
parallel criminal case has been filed.
Pre-IPO market: SEC v. Mazzola, CV-12-1258
(N.D. Ca. Filed March 14, 2012) is an action against Frank Mazzola, a
registered representative who is the principal and owner of defendant Felix
Investments, LLC, a registered New York City broker, and Facie Libre Management
Associates, LLC, an investment adviser for two pooled investment vehicles. The
two funds invested primarily in the shares of Facebook. The complaint alleges
that shares were sold in the two funds based on a series of misrepresentations
including: Failing to state that Facebook blocked share transfers to Facie
Libre for about one year; failed to disclose the full compensation earned by Mr.
Mozzola; assertions that Face Libre was about to get more Facebooks shares
without having any reasonable basis; and a claim that the funds were "Facebook
approved" so they were more likely to obtain additional shares when in fact
they were not. Defendant Mazzola is also alleged to have made
misrepresentations in connection with the sale of shares in funds for Zynga and
Twitter. The complaint alleges violations of Exchange Act Section 10(b),
Securities Act Section 17(a) and Advisers Act Section 206(4). The case is in
Pre-IPO market: In the Matter of Laurence
Albukerk, Adm. Proc. File No. 3-14801 (Filed March 14, 2012). This
settled proceeding names as Respondents registered representative Laurence
Albukerk and his company, EB Financial Group, LLC, investment adviser to funds
holding Facebook shares. The action alleges that Respondents failed to properly
disclose the fees they earned in connection with the sale of the shares. The
matter was settled with Respondents consenting to the entry of a cease and
desist order based on Securities Act Section 17(a)(2) and Advisers Act Section
206(4) in addition to paying disgorgement and prejudgment interest of $210,499
and a penalty of $100,000).
Pre-IPO Market: In the Matter of Sharespost,
Inc., Adm. Proc. File No. 3-14800 (Filed March 14, 2012) is a
proceeding which names as Respondents the company and its founder and president
Greg Brogger. The Order alleges that Respondents facilitated the sale of
pre-IPO shares without registering as a broker dealer. The action was resolved
with Respondents consenting to the entry of a cease and desist order based on
Exchange Act Section 15(a) and the company agreeing to pay a penalty of $80,000
while Mr. Brogger paid $20,000.
Insider trading: SEC v. McGee,
Civil Action No. 12-cv-1296 (E.D. Pa. Filed March 14, 2012) is an action
against two registered representatives, Timothy McGee and Michael Zirinsky, and
three others, Robert Zirinsky, Paulo Lam and Marianne sze wan Ho. The complaint
centers on the acquisition of Philadelphia Consolidated Holding Corporation, a
Pennsylvania based insurance holding company, by Tokio Marine Holdings, Inc.,
announced on July 23, 2008. Mr. McGee, a financial advisor with Ameriprise
Financial Services, learned about the transaction from a senior executive of
the company with whom he had a long term, close relationship, stemming from
their association at Alcoholics Anonymous. Mr. McGee traded and tipped his
co-worker and friend Michael Zirinsky who also traded. Mr. Zirinsky in turn
tipped his father, Robert Zirinsky and his friend, Paulo Lam, a resident of
Hong Kong. Mr. Lam then tipped his business partner and the husband of
defendant Ho, both residents of Hong Kong. Defendants Robert Zirinsky, Lam and
Ho each purchased shares of Philly. Defendant Michael Zirinsky purchased shares
for his account as well as in those of his wife, sister, mother and grandmother
for which he was the account executive. Each defendant profited: Mr. McGee -
$292,128; the Zirinsky family - $562,673; Mr. Lam - $837,975; and Ms. Ho -
$110,580. Defendants Lam and Ho settled, consenting to the entry of final
judgments prohibiting future violations of Exchange Act Section 10(b) without
admitting or denying the allegations in the complaint. Mr. Lam agreed to pay
disgorgement of $837,975 along with prejudgment interest and a penalty of
$251,392. Ms. Ho agreed to disgorge $110,580 along with prejudgment interest
and to pay a penalty of $16,587. The other defendants are litigating the case.
Market crisis: SEC v. Goldstone, Case
No. 12-257 (D.N.M. Filed March 13, 2012) is an action against Larry Goldstone,
the former CEO and president of Thornburg Mortgage, Inc., Clarence Simmons, its
former CFO and senior executive v.p. and Jane Starrett, former chief accounting
officer. Thornburg was the second largest independent residential mortgage
company behind Countrywide. Shortly before the filing of the 2007 Form 10-K on
February 28, 2008, the institution was suffering from a liquidity crisis. In
the fourth quarter of 2007 the company had about $360 million in margin calls
from securities collateralizing its repurchase agreements. As the company
prepared to file its 2007 10-K its financial condition continued to plummet.
Adjustable rate mortgage or ARM securities it held dropped in value. The
company faced $300 million more in margin calls. Paying late meant that
Thornburg violated its lending agreements with at least three lenders. If the
firm was declared in default its financial condition would sink further. That
default would trigger another default under the cross-default clauses with its
other lenders which would lead to the seizure of its ARM securities that were
the collateral for its loans. The defendants chose not to inform the auditors
or disclose these items in its Form 10-K. Within hours of that filing the
company got more margin calls. Within days it was forced to restate its
financial statements to reflect a write down of its securities, the impact of
the margin calls and reverse a fourth quarter profit to a loss. Eventually Thornburg
filed for bankruptcy. The complaint alleges violations of Securities Act
Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A, 13(b)(2)(B)
and 13(b)(5) as well as control person liability under section 20(a). The case
is in litigation.
Offering fraud: SEC v. United American
Ventures, LLC, Civil Action No. 1:10-cv-00568 (D. N.M. Filed
June 14, 2010) is an action against the company, Philip Thomas, Eric Hollowell,
Mathew Dies, Integra Investment Group, LLC and Anthony Olivia. The complaint
alleged that false statements were utilized to induce about 100 persons to
invest about $10 million in a program involving convertible bonds. The
complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Sections 10( b) and 15(a)(1). Each defendant consented to the
entry of an injunction based on the sections cited in the complaint. Issues
regarding disgorgement and penalties were reserved to the court. In an order
dated March 2, 2012 the court held Defendants Hollowell, Thomas and United
American Ventures jointly and severally liable for disgorgement in the amount
of $8,652, 942 along with prejudgment interest and individually liable for a
civil penalty of $1 million. Defendants Oliva and Integra were held jointly and
severally liable for disgorgement of $294,039 along with prejudgment interest
while Defendant Oliva was directed to pay a civil penalty of $130,000.
Defendant Dies was ordered to pay disgorgement of $54,381 along with
prejudgment interest and a civil penalty of $54,382. A default judgment was
entered against All American Capital for disgorgement in the amount of
Investment fund fraud: In the Matter of
Armando Ruiz, Adm. Proc. File No. 3-14388 (March 12, 2012)
is an action against Mr. Ruiz, a registered representative, and his controlled
entity, Maradon Holdings, LLC. From April 2008 through May 2009 Mr. Ruiz raised
about $705,000 from eight equity investors and $112,500 from a ninth investor
who loaned funds to Maradon. The company was represented to have been formed to
develop in to a financial services firm serving the Hispanic community. In fact
none of the shares were issued and much of the offering proceeds were used by
Mr. Ruiz for personal expenses. Six of the nine investors were repaid about
$180,000. To settle the proceeding the Respondents consented to the entry of a
cease and desist order based on Securities Act Section 17(a)(2). In addition,
Mr. Ruiz is barred from the securities business with a right to reapply after
three years. He also agreed to pay disgorgement of $112,500 along with
prejudgment interest and to pay a civil penalty of $75,000. The amount of the
disgorgement equals the investment made by an investor who put in $112,500 as a
loan which was purportedly converted to equity.
Offering fraud: SEC v. Ellis, Civil
Action No. 12-cv-1203 (E.D. Pa. Filed March 8, 2012) is an action against
Edward Ellis, Sr. and Jennifer Seidel, alleging that the two defrauded
investors in connection with the purchase of shares in their company, Sederon,
Inc. From August 2007 through October 2008 stock was sold to about 54
investors. The company raised approximately $519,500. In selling the shares the
defendants made a series of misrepresentations, according to the complaint,
including: Claims that Sederon was highly profitable; statements that the
business was rapidly expanding; a claim that an IPO would be forth coming; a
representation that IPO investors would be able to sell their shares in the
open market at profits from 900 to 1,300 percent; and a claim that the shares
were limited or then available at a "special discount." The defendants also
failed to disclose the fact that Mr. Ellis had previously spent time in prison
in connection with a guilty plea to charges based on a fraudulent securities
offering, that he had been enjoined by the SEC and ordered to cease and desist
by state securities regulators. The Commission's complaint alleges violations
of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case
is in litigation.
U.S. v. Bizjet International Sales and
Support, Inc., Case No. 12 cr 61 (N.D. Okla. Filed March 14,
2012) is a case in which the company was charged in a one count criminal
information. It charged the company with conspiracy to violate the FCPA
anti-bribery provisions. Bizjet is an indirect subsidiary of Lufthansa Technik
AG, a German provider of aircraft related services. The company, according to
the court documents, paid bribes to officials employed by the Mexican Policia
Federal Preventiva, the Mexican Coordination General de Transportes Aereos
Presidenciales, the air fleet for the Gobierno del Estado de Sinaloa, the air
fleet for the Goblerno del Estado de Sonora and the Republica de Panama
Autoridad Aeronautica Civil. In some instances the bribes were paid directly.
In others they were paid through a shell company owned by a company official.
Bizjet resolved the matter by entering into a deferred prosecution agreement.
As part of the agreement the company will pay an $11.8 million criminal fine
which is about a 30% reduction from the bottom of the guideline fine range. The
company also agreed to implement a compliance and ethics program and report to
the DOJ at no less than twelve month intervals during the three year term of
the agreement. The agreement reflects the cooperation of the company. The DOJ
also entered into an agreement with Lufthansa Technik under which the firm will
not be prosecuted as long as it complies with its undertakings which are to
continue cooperating and implementing rigorous procedures over three years.
U.S. v. Duperval (S.D.
Fla.) is an FCPA related action against Jean Duperval, the former director of
international relations for Telecommnications D'Haiti S.A.M. or Haiti Teleco.
Following a jury trial Mr. Duperval was convicted on two counts of conspiracy
to commit money laundering and 19 counts of money laundering. The charges stem
from the period 2003 to 2006 during which about $500,000 was paid to two shell
companies for bribes for Mr. Duperval in connection with the issuance of
preferred telecommunication rates, a continued telecommunications connection
with Haiti and the continuation of a favorable contract with Haiti Telco. The
payments were documented with invoices for consulting services although no real
services were rendered. Previously, seven other individuals have been convicted
on charges related to the scheme.
Goldman Sachs Execution & Clearing, L.P., a
registered futures commission merchant, agreed to the entry of a cease and
desist order, to implement improved procedures and to pay a $5.5 million civil
penalty and $1.5 million in disgorgement to resolve a proceeding. The action
was based on allegations that it failed to diligently supervise accounts during
the period May 2007 through December 2009. The firm provided back-office and
other services to some clients who are broker dealers. One of those clients
permitted investors to trade commodities in subaccounts. Goldman Sachs
Execution failed to diligently supervise the handling of the subaccounts,
failing to investigate signs of questionable conduct regarding rule violations.
During the period the firm received about $1.5 million of gross fees and
commissions from transacts it executed and/or cleared on behalf of the broker
Market crisis: The
FSA brought an action against HBCS Group and its primary subsidiary, the Bank
of Scotland PLC, centered on the market crisis. From January 2006 through
December 2008 the FSA concluded that Bank of Scotland: Pursued an aggressive
growth strategy that focused on high-risk, sub-investment grade lending;
increased the complexity and size of its high risk transactions as the crisis
unfolded; continued to increase its market share in this high risk area as
others pulled out of the market; and had an internal structure more focused on
profits than risk. These actions stemmed from serious control deficiencies. As
the market crisis continued to unfold, and the stress in the bank's
transactions became apparent, it was "slow" to move the transactions to the
High Risk area despite a significant risk to the firm's capital. This failure
meant that the extent of the risk was not fully known to the Group's board or
auditors. Ultimately as a result of these failures the government and the taxpayers
were forced to bail out the Bank. For failing to take reasonable care to
organize and control its affairs with adequate risk management the FSA imposed
a censure. The agency explained that ordinarily a fine would be imposed but
that would be a double cost to the taxpayer under the circumstances.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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