UPDATE 7-25: This article has been updated to reflect changes in the original SEC Actions article.
The SEC is heading for a record year in terms of the
number of settled enforcement actions according to a new report by NERA. The
Commission also lost its bid to compel SIPIC to provide coverage for those who
purchased CDs from the off-shore bank operated by convicted fraudster Robert
SEC enforcement filed another high profile action in
conjunction with the Manhattan U.S. Attorney's Office. This case was against
Peter Madoff, broker of he Ponzi scheme king. Mr. Madoff pleaded guilty to parallel
criminal charges while maintaining that he was surprised to learn about the
Ponzi scheme. The Commission also brought a financial fraud action and an
investment fund fraud case in this holiday shortened week.
Enforcement trends: The
SEC is on pace to settle a record number of enforcement actions, according to a
new report released by NERA Economic Consulting. This trend is being driven by
a marked rise in the number of actions against individuals, primarily in
insider trading and Ponzi scheme cases. NERA is projecting that at the current
pace the SEC will settle 758 cases by year end. Presently, the Commission has
concluded 379 settlements. That total represents 93 resolved cases with
corporations and 286 with individuals. If the current pace continues the total
settlements will be the most since 2005 when the Commission resolved 824 cases,
according to the Report.
The largest increase in settlement activity is in insider
trading cases. In 2011 the Commission settled 63 insider trading cases. Based
on current trends, NERA projects that the agency will settle 120 cases in
fiscal 2012. Settlements in Ponzi scheme cases had the next largest increase
with a projected 76 settlement compared to 55 in 2011.
SIPIC coverage: SEC v. SIPC, Civil
Action No. 11-mc-678 (D.D.C.) is an action in which the SEC sought to compel
SIPIC to provide coverage for those who purchased certificates of deposit
issued by Stanford International Bank, Ltd., an off-shore bank, that marketed
CDs through now defunct Stanford Group Company, a broker dealer registered with
the SEC and a member of SIPIC. The court rejected the SEC's position,
concluding that those who purchased the CDs were not customers within the
meaning of the SIPIC statute. In reaching this conclusion the court declined to
give deference to the views of the Commission since the agency altered its long
held view regarding the meaning of the term customer in taking its position
here. The court also noted that the SEC interpretation would broaden the scope of
SIPIC liability well beyond the plain meaning of the statutory term
SEC Enforcement: Filings and settlements
week the SEC filed 3 civil injunctive actions and 1 administrative proceeding
(excluding tag-along and 12(j) actions).
False reports: SEC v. Gold Standard Mining
Corporation, Case No. CV 12-5662 (C.D. Cal. Filed June 29,
2012) is an action against the company, Panteleimon Zachos, a Greek resident
who is CEO and CFO, Kenneth Eads, its general counsel, Gruber & Company LLC,
an audit firm and Edward Gruber, managing member of the audit firm. From May
2009 through April 2011 Gold Standard and its CEO filed false and misleading
periodic reports with the Commission concerning the operations of the company,
its assts and financial statements. Those reports misrepresented the facts
concerning the Russian gold mine the company claimed to own as well as well as
its financial condition.
The complaint alleges violations of Exchange Act Sections
10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). Defendants Gold Standard
and Zachos settled with the Commission, consenting to the entry of permanent
injunctions based on the Sections cited in the complaint. Mr. Zachos will also
be barred from serving as an officer or director of a public company. The other
defendants have not settled.
Fraudulent reports: SEC v. Madoff (S.D.N.Y.
Filed June 29, 2012) and U.S. v. Madoff (S.D.N.Y. June 29, 2012) are
actions against Peter Madoff, the younger brother of Bernie Madoff. Peter
Madoff pleaded guilty to a two count criminal information and agreed to forfeit
$143.1 million and not request a prison term under the statutory maximum of ten
years. Under a separate agreement the assets of his wife and daughter will also
be forfeit with the exception of a stipend left for his wife. Mr. Madoff was
the Senior Managing Director and Chief Compliance Officer of Bernard L. Madoff
Investment Securities LLC from 1969 through the December 2008. In that capacity
he was responsible for BMIS's market-making and proprietary trading operations.
According to the information and the SEC complaint, he filed numerous false
documents including compliance reviews of the trading in the BMIS IA business,
statements to regulators, auditors and IA clients, and reports with the SEC on
an annual basis on Form ADV which misrepresented the number of adviser clients
and the assets under management. Mr. Madoff is also alleged to have engaged in
a tax fraud which involved the transfer of family assets in a manner to avoid
paying millions of dollars in required taxes. These schemes also permitted his
brother to avoid paying millions of dollars in taxes. Sentencing is set for
October 4, 2012. The SEC complaint alleges violations of Exchange Act Sections
10(b), 15(b)(1), 15(c) and 17(a) and Advisers Act Sections 204, 206(1), (2),
(4) and 207. The action is pending.
Investment fund fraud: SEC v. Price, Case
No. 1:12-CV-2296 (N.D. Ga. Filed July 2, 2012) is an action against Aubrey
Price and his controlled entities, PFG, LLC, an unregistered investment fund,
Montgomery Asset Management, LLC (Florida), and Montgomery Asset Management,
LLC (Georgia). Beginning in 2008 the defendants sold shares to more than 100
investors in PFG based on representations that the money would be invested in
marketable securities in addition to illiquid investments in South America real
estate and a troubled South Georgia bank. About $36.9 million, which
represented a significant portion of the assets, was deposited with a broker
dealer. The account suffered significant trading losses. Investors, however,
were initially given fictitious statements. Later Mr. Price sent them a 22 page
letter confessing his fraud. Mr. Price has disappeared. The complaint alleges
violations of Exchange Act Section 10(b). A freeze order has been entered.
Manipulation: In the Matter of Eric Wanger, Adm.
Proc. File No. 3-14676 (July 2, 2012) is an action against Mr. Wanger and his
controlled entity, Wanger Investment Management, Inc. which at one time
registered with the Commission as an investment adviser and later withdrew that
registration. In April 2008 Respondents started a fund with about $3.5 million.
Between the end of January 2008 and the end of September 2010 Mr. Wanger marked
the close at least fourteen times on separate days at the end of a month or
quarter in thinly traded securities. This improperly inflated the Fund's
monthly statements by amounts ranging from 3.6% to 5,908.71%. It also
improperly inflated NAV by amounts ranging from about 0.24% to 2.56% as well as
the fees paid to Mr. Wanger and Wanger Investment. In 2008 and 2009 Mr. Wanger,
through Wanger Investment, directed the transfer of funds from the Fund's
brokerage account to Wanger Investment to pay adviser operating expenses and
payroll. The transfers were not specifically authorized by the Fund. From 2007
through 2009 Mr. Wanger also served on the board of one of the companies whose
securities he manipulated at a time when the Fund was a 10% shareholder. During
the period Mr. Wanger failed to timely file the required Form 4 with the
Commission. The Order alleges violations of Securities Act Section 17(a),
Exchange Act Sections 10(b) and 16(a) and Advisers Act Sections 206(1), (2),
(3) and (4). The Respondents resolved the matter, consenting to the entry of
cease and desist orders based on the Sections cited in the Order. In addition,
Mr. Wanger will be barred from the securities business with a right to apply
for re-entry after one year and will pay a penalty of $75,000.
Securities and Futures Commission brought a criminal proceeding against PME
Group Ltd., a Hong Kong listed company, and its director Ms. Ivy Chan Shui
Sheung, based on furnishing false and misleading information in stock
announcements. From February 11, 2008 to February 28, 2008, the closing price
of PME's shares rose 136%. Following inquiries by the exchange, PME made three
announcements stating that it did not know of any negotiations or disclosable
agreements and that its directors were not aware of any price sensitive matter.
In fact the company was taking steps to acquire control of another company that
owned 50% of a listed company. The case is pending.
For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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