In a week when the financial markets were shut for two
days by hurricane Sandy, the Commission filed actions focused on insider
trading, financial fraud, false advertising, and, in addition, a stop order
proceeding. One insider trading case stems from the seemingly never ending
Galleon investigation. Another was against an advertising executive tipped by
his insider - friend. The financial fraud case ties to earlier actions
involving Carter's, Inc. while the false advertising proceeding was against an
investment adviser for statements made in the materials about its program. The
stop order proceeding was instituted to halt share sales where the registration
statement failed to disclose that a de facto officer of the company is a
disbarred and previously enjoined attorney.
On Monday, the Supreme Court will hear argument in Amgen
v. Connecticut Retirement Plans and Trust Funds. The issues focus on
whether a securities law plaintiff must prove materiality at the class
certification stage of the case and, if so, if the defendants must be given an
opportunity to rebut application of the fraud-on-the-market theory prior to
Remarks: Chairman Mary
Schapiro addressed the George Washington University Center for Law, Economics
and Finance Fourth Annual Regulatory Reform Symposium on October 26, 2012. The
Chairman reviewed SEC rule making under Dodd-Frank (here).
Remarks: Carlo di Florio,
Director, Office of Compliance Inspections and Examinations, addressed the National
Society of Compliance Professionals (Oct. 22, 2012). His remarks focused on
conflicts of interest (here).
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 3 civil
injunctive actions and 3 administrative proceedings (excluding tag-a-long and
False advertising: In the Matter of BTS Asset
Management, Inc., Adm. Proc. File No. 3-15082 (Oct. 29, 2012).
Respondent BTS Asset Management, Inc., a registered investment adviser, has
operated the BTS High Yield Bond Fund program since 1981. Clients apply
buy/sell signals from the adviser to mutual funds or variable annuities they
select in the high yield bond sector with a view to capital preservation. The
goal is to be in bonds when they are rising and move to a money fund when they
are not. Since the early 1990s the advertisements for the bond program have
claimed that it has had "no down years" since inception. In 2005 BTS learned
that about half of its clients would have had a down year in 2004 with losses
of up to 3.3% following the buy/sell signals. The fact that a significant
percentage of its clients likely would have had results which materially varied
from the "no down year" claim made the advertisements false and misleading,
violating Advisers Act Section 206(4), according to the Order. To resolve the
proceeding the adviser agreed to implement a series of procedures which include
the retention of an independent consultant to review its compliance policies
and procedures. BTS also agreed to the entry of a cease and desist order based
on the Section cited in the Order and a censure. The firm will pay a $200,000
penalty as part of the settlement.
Stop order: In the Matter of the Registration
Statement of Caribbean Pacific Marketing, Inc., Adm.
Proc. File No. 3-15083 (Oct. 29, 2012) is a stop order proceeding to halt sales
of shares in Caribbean Pacific. In the proceeding the Division alleges that the
registration statement fails to disclose that William J. Reilly holds a de
facto position with the company and that he is a disbarred attorney who is
prohibited by a court order from involvement from any penny stock offering,
serving as a corporate officer and director and from violating certain
provisions of the federal securities laws. He has also been suspended from
practicing before the Commission. A hearing will be held on November 15, 2012.
Undisclosed commissions: In the Matter of
Tilden Loucks & Woodnorth, LLC, Adm. Proc. File No. 3-15081
(Oct. 29, 2012) named as Respondents Tilden Louchs & Woodnorth, LLC,
Woodnorth, LLC, LaSalle St. Securities, LLC and Ralph Loucks. Tilden is a
registered investment adviser that was formed by Mr. Loucks. LaSalle is a registered
broker dealer. The action centers on undisclosed commissions. Tilden's clients
all maintained brokerage accounts at LaSalle which administered its back office
functions. Most of the trades for Tilden's clients were executed by LaSalle.
Beginning in late October 2007, and continuing until early 2012, Tilden charged
client commissions that exceeded the fees it paid LaSalle to execute trades.
The higher commissions represented undisclosed compensation for Tilden and Mr.
Loucks. Under this arrangement, clients paid on average $143.77 per trade,
according to the Order. At the same time Tilden paid LaSalle an average of
$37.47 to execute the trades. The excess went to Tilden. The arrangement was
not disclosed. To the contrary, the Forms ADV told clients they were getting a
discount. Tilden was paid over $186,000 in undisclosed compensation, shared by
Mr. Loucks. The Order alleges violations of Advisers Act Section 206(2) and
207. To resolve the proceeding Tilden agreed to implement certain procedures.
In addition, Tilden and Mr. Loucks consented to the entry of cease and desist
orders based on Section 206(2) and 207. LaSalle consented to a similar order
based on Section 206(2). Both entities agreed to the entry of a censure and to
pay, jointly and severally, disgorgement of $170,319.94 along with prejudgment
interest. The three Respondents also agreed, jointly and severally, to pay
disgorgement of $16,288.18 along with prejudgment interest. Tilden and LaSalle
will each pay a penalty of $100,000 while Mr. Loucks will pay $25,000.
Insider trading: SEC v. Chellam, Case
No. 12 CV 7983 (S.D.N.Y. Filed Oct 26, 2012) is an action against former
Xilins, Inc. CFO, Kris Chellam. In late 2006 Mr. Chellam tipped Raja Rajaratnam
regarding downward trends about Xilinx's business. At the time the information
contradicted the company's prior public projections. As a result of Mr.
Chellam's information, the Galleon hedge funds shorted Xilinx shares. After the
company released the negative information on December 7, 2006, those funds had
a profit of $978,684. At the time of the tip Mr. Chellam was good friends with
Mr. Rajaratnam, had a significant investment in the Galleon funds and was
discussing prospective employment with those funds which he eventually
accepted. The complaint alleges violations of Exchange Act Section 10(b) and
Securities Act Section 17(a).
Mr. Chellam settled with the SEC, consenting to the entry
of a permanent injunction prohibiting future violations of the sections cited
in the complaint. In addition, he will pay $675,000 in disgorgement,
prejudgment interest and a penalty of $978,684. Mr. Chellam will also be barred
for five years from serving as an officer or director of a public company.
Insider trading: SEC v. Van Gilder, Case
No. 1:12-cv-02839 (D. Colo. Filed Oct. 26, 2012) is an action against the CEO
of Denver based VanGelder Insurance Co., Michael Van Gelder. It centers on the
acquisition of Delta Petroleum by Tracinda Corporation, announced on December
31, 2007. In the weeks leading up to the announcement, a close person friend of
Mr. Van Gelder furnished him with information about the deal. The friend was
employed at Delta and involved in the transaction. As the deal developed the
two friends exchanged dozens of text messages and telephone calls. Prior to the
deal announcement Mr. Van Gilder purchased shares of Delta for his account as
well as options and urged relatives, his broker and a co-worker to also buy.
Following the deal announcement the share price increased by about 20% giving
Mr. Van Gelder, one of his relatives, his broker and his co-worker trading
profits of over $161,000.
Mr. Van Gelder is also alleged to have purchased Delta
securities based on inside information from the same friend regarding the then
up coming third quarter 2007 financial results. That trading resulted in $4,000
in ill-gotten gains. The Commission's complaint alleges violations of Exchange
Act Section 10(b). It is pending. The U.S. Attorney for the District of
Colorado also announced a parallel criminal action against Mr. Van Gilder.
Financial fraud: SEC v. Johnson, Civil
Action No. 1:12-CV-03709 (N.D. Ga. Filed Oct. 26, 2012) is an action against
Michael Johnson, a divisional merchandise manager at Kohl's. It centers on the
fraud at Carter's, Inc. in which senior executive Joseph Elles gave Kohl's
additional "accommodations" to secure orders provided that they be concealed
from his company by deferring them and executing fraudulent confirmations. Mr.
Johnson participated in the fraud by agreeing to the arrangements and executing
the confirmations. The complaint alleges violations of Exchange Act Section
13b-5 and the related rules. The case is pending. See also Lit. Rel. No.
3421 (Oct. 26, 2012).
Remarks: Chairman Gary Gensler
addressed the Futures Industry Association Expo, Chicago, Ill., November 1,
2012 (by video). His remarks reviewed the recently issued swaps rules regarding
clearing, transparency and cross border application. He also discussed the use
of benchmarks (here).
Rigney a representative at Topps Rogers, was banned from the securities
business and fined ₤117,330 for selling Unregulated Collective Investment
Schemes or UCIS to clients without assessing their eligibility or suitability.
The instruments are very complex and risky. Nevertheless, he had clients who
invested substantial portions of their retirement funds in them. After he
agreed to stop selling the instruments the representative attempted to transfer
a UCIS from one client to another without telling the customer it had been
suspended two years earlier. He also improperly exercised discretion over
client accounts. Mr. Rigney is now bankrupt and his firm is in liquidation.
Jialin, the chairman of VST Holdings, Limited was sentenced to six months in
prison and fined $240,000 in connection with a price rigging scheme.
Previously, he was convicted on 10 counts of price rigging and 16 counts of
failing to disclose his interest in shares of the company. Between August 2007
and January 2008 the defendant had three accounts through which he bought and
sold VST shares in transactions that resulted in no change of beneficial
ownership but did increase the share price. That increase supported a share
placement in October 2007 and the year end share price performance.
Insider dealing; Simon
Chui Wing Nin, the former assistant director of finance at CITIC Ltd. was
convicted of insider dealing following an eight day trial. The evidence
demonstrated that he was involved in calculating the amount the company would
have to pay on certain investment contracts it purchased as a hedge on which
CITIC would lose money. Before that information became available Mr. Chui sold
most of his shares of CITIC, avoiding a loss of about HK$1.36 million.
Hurricane Sandy: The
President suggested that those who want to aid the victims of this devastating
storm contribute to the Red Cross. The link is here.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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