The Commission filed a settled action alleging fraud in
connection with a going private transaction based on Exchange Act Section
13(e). The agency also brought its first action penalizing an exchange for
regulatory filings this week.
The SEC also added a managing director of a New York
brokerage firm as a defendant in its case centered on bribes paid to an
official of an Argentine bank. The Manhattan U.S. Attorney's Office filed
parallel criminal charges against the same person. In addition, the Commission
filed another action against an investment adviser, this time centered on the
theft of assets, and three new insider trading cases. One insider trading case
involved tipping by a corporate executive; another tipping by the
brother-in-law of a corporate director; and a third grew out of the expert
Finally, the Commission lost another case in the D.C.
Circuit. The Court remanded a FINRA panel decision, affirmed by the Commission,
for failing to consider mitigating evidence before imposing a life-time
industry bar. In the district courts the agency lost a statute of limitations
ruling in the wake of Gabelli in an insider trading case. It did, however,
prevail on a summary judgment motion centered on Morrison issues in its
high profile market crisis action against a former Goldman Sachs employee.
Alert: The SEC, in
conjunction with FINRA, issued an investor alert regarding pump-and-dump stock spam
titled "Inbox Alert-Don't Trade on Pump-And-Dump Stock E-mails."
Remarks: Commissioner Bart
Chilton delivered remarks titled "Cinema of Uncertainty" before the Institute
of International Bankers, New York City (June 13, 2013). His remarks focused on
the need for balance in regulation, the Volker Rule and the implementation of
the cross-border rules (here).
Remarks: Commissioner Scott D.
O'Malia delivered remarks titled "Taking the Time to Get it Right: the
Cross-Boarder Regulatory Framework," before the OpRisk Europe Conference,
London, England (June 12, 2013). His remarks focused on the need for more time
regarding the cross-border rules, the new SEF rules and the use of data (here).
Remarks: Chairman Gary Gensler
delivered remarks at the Sandler O'Neill Conference, titled "Cross-border
Application of Swaps Market Reform,"(June 6, 2013). His remarks focused on key
aspects of market reform including transparency, clearing and oversight (here).
SEC Enforcement: Recent rulings
Statute of limitations: SEC v. Wyly, 10
Civ. 5760 (S.D.N.Y. Opinion June 6, 2013) is an insider trading case against
Samuel Wyly and others centered on a scheme that is alleged to have occurred
from 1992 through at least 2004. As part of the scheme Mr. Wyly and others
concealed their ownership and trading activity in four companies where they had
board membership and then engaged in insider trading. The Court granted a
defense motion for summary judgment based on Gabelli v. SEC, 133 S.Ct.
1216 (2013). The court concluded that to the extent the transactions took place
beyond the five year statute of limitations for obtaining a penalty in
government actions, the Commission could not seek a monetary penalty. The court
rejected the SEC's claim that the running of the statute was halted by the
doctrine of fraudulent concealment. In making that argument the "SEC fails to
draw a meaningful distinction between acts of perpetration and acts of
concealment . . ." Rather, the SEC relied on the very evidence used as the predicate
for the fraud alleged in the complaint. The Court left open the "possibility
that acts which go 'beyond the [fraud]' but are not directly analogous to
'promising not to plead the statute of limitations,' might form the basis for
fraudulent concealment in an SEC enforcement action . . . "
Extraterritorial application:SEC v. Fabrice
Tourre, 10 Civ 3229 (S.D.N.Y. Ruling June 4, 2013) is an action
based on the settled Commission market crisis case against Goldman Sachs &
Co. Defendant Fabrice Tourre is the only Goldman employee charged in connection
with the action. The case centers on the sale of interests in a synthetic
collateralized debt obligation by the firm. The CDO had been created at the
behest of hedge fund Paulson & Co., Inc. which helped select the collateral
and later shorted it. Interests in the CDO were sold to IKB Deutsche
Industriebank AG and ABN AMRO Bank N.V. and unspecified domestic concerns. IKB
and ABN are foreign purchasers. Mr. Fabrice's motion for summary judgment,
based on Morrison v. National Australia Bank, Ltd., 130 S.Ct. 2869
(2010), argued that the Commission's claims under Securities Act Section 17(a)
and Exchange Act Section 10(b) were barred. The Court rejected the claims. The
defense motion focused on the fact that unlike Section 10(b), Section 17(a)
includes an offer. That offer, when the sale is consummated, must be within the
U.S. under Morrison, according to the motion. The Court rejected this
theory as contrary to the statutory language. Rather, if the person making the offer
is in the U. S. it is sufficient. Here there is evidence demonstrating that Mr.
Tourre was primarily responsible for the fraudulent offering materials and that
he participated in the marketing. The Court also granted the SEC's cross
motion, finding that there was sufficient evidence on the interstate commerce
element for Section 17(a) and the domestic element of its Section 10(b) and
17(a) claims. There is no doubt that the mechanisms of interstate commerce were
used the court stated. Likewise, the trade confirmations demonstrate that the
transactions were concluded in the U.S.
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 4 civil injunctive action and 2 administrative
proceedings (excluding follow-on actions and 12(j) proceedings).
Disclosure/fraud: In the Matter of Revlon,
Inc., Adm. Proc. File No. 3-15356 (June 13, 2013) is an action
involving a going private transaction which closed on October 9, 2009. On that
date 46% of the shares of Revlon Class A common stock not beneficially owned by
MacAndrews & Forbes Holdings Inc., which owned about 58% of the class, was
tendered in the transaction. Prior to the closing of the deal the trustee of
Revlon's 401(k) plan, which held a substantial block of stock, determined that
it could only allow 401(k) members to tender their shares in an exchange offer
designed to reduce the debt owed to MacAndrews & Forbes if an independent
third party financial adviser determined that the offer provided for "adequate
consideration." The advisor retained determined that in fact the offer did not
provide such consideration. In tendering their securities, shareholders were
not informed about this opinion because the company engaged in what was called
"ring fending" - essentially a series of steps taken to fence off the
independent directors from the opinion and preclude disclosure. With the
board's processes compromised, shareholders were told that the "Board of
Directors approved the Exchange Offer and related transactions based upon the
totality of the information presented . . ." The Order alleges violations of
Exchange Act Section 13(e), which governs going private transactions, and the
related rules. To resolve the proceeding, the company consented to the entry of
a cease and desist order based on Exchange Act Section 13(e). It also agreed to
pay a civil money penalty of $850,000.
Insider trading: SEC v. Shah, Civil
Action No. 12-CV-4030 (S.D.N.Y.) is a previously filed action against Reema
Shah and Robert Kwok. The complaint alleged two insider trading schemes. In one
Reema Shah, a former mutual fund and hedge fund portfolio manager, tipped Mr.
Kwok, formerly a senior director at Yahoo! Inc., regarding the then upcoming
acquisition of Moldflow by Autodesk, Inc. Mr. Kwok traded and realized profits.
Later Mr. Kwok tipped Ms. Shah about the then upcoming announcement of an
internet search engine partnership agreement between Yahoo and Microsoft
Corporation. Ms. Shaw caused certain mutual funds and hedge funds to purchase
shares of Yahoo. The court entered a final judgment against Mr. Kwok. He had
consented to the entry of a permanent injunction and the entry of an order
barring him from serving as an officer or director of a public company. He also
agreed to pay disgorgement of $4,750 plus interest and a civil penalty equal to
the amount of the disgorgement. In the parallel criminal case Mr. Kwok pleaded
guilty to conspiracy to commit securities fraud. He was sentenced to serve two
years probation and ordered to forfeit $4,754 and to pay a fine of $1,000. See
also Lit. Rel. No. 22726 (June 12, 2013).
Insider trading: SEC v. Jacobs, Civil
Action No. 1:13-cv-1289 (N.D. Ohio Filed June 11, 2013) is an action against
Andrew Jacobs and his brother Leslie Jacobs. The case centers on the tender
offer by Sanofi-Aventis, a French pharmaceutical company, for Chattem, Inc.,
announced on December 21, 2009. Prior to the announcement Andrew Jacobs learned
about the tender offer in a confidential conversation with his brother-in-law,
a Chattem executive. He then tipped his brother who traded and, after the
announcement, had profits of $49,457.21. The Commission's complaint alleges
violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.
This is the eighth action brought by the Commission centered on this
transaction. See also Lit. Rel. No. 22723 (June 11, 2012).
Regulatory failures: In the Matter of Chicago
Board Options Exchange, Inc., Adm. Proc. File No.
3-15353 (June 11, 2013). Here the CBOE became the first exchange to be fined
for regulatory failures. The proceeding centers on three key issues. First, the
CBOE failed to adequately enforce the federal securities laws and its own
regulations. While the exchange developed a surveillance program to identify
possible violations of Regulation SHO which flagged exceptions, it consistently
failed to follow-up and closed investigations despite evidence of possible
violations. In this regard the exchange staff was inadequately trained. Second,
the exchange interfered with a Commission enforcement investigation. During the
course of a Commission investigation into possible violations of Regulation
SHO, the CBOE staff advocated for the member and assisted in preparing an
inaccurate Wells submission. Finally, the exchange, along with C2 Options
Exchange, Inc., failed to propose rule changes until after it implemented
certain trading functions. Following the commencement of the SEC's
investigation the CBOE and C2 undertook a series of remedial efforts and
initiatives which the Commission considered in resolving this action. The
proceeding was resolved with the CBOE consenting to the entry of a cease and
desist order based on the Sections cited in the Order. C2 consented to the
entry of an order based on Exchange Act Section 19(b)(1). The CBOE also agreed
to pay a civil penalty of $6 million and is continuing to implement a series of
Insider trading: SEC v. Cutillo, Civil
Action No. 09-CV-9209 (S.D.N.Y.) is a previously filed action against, among
others, Emanuel Goffer, a former proprietary trader at broker dealer Spectrum
Trading, LLC. Mr. Goffer's brother, Zvi, is alleged to have orchestrated an
insider trading ring involving attorneys formerly with the law firm of Ropes
and Gray. Those attorneys furnished inside information on take-over
transactions to Zvi who in turn passed it to his brother and others. Emanuel
Goffer traded on the information resulting in illicit profits of $1.3 million.
To settle the action the defendant consented to the entry of a final judgment
of permanent injunction prohibiting future violations of Exchange Act Section
10(b). He also agreed to pay disgorgement and prejudgment interest. The
disgorgement will be off-set in part by a forfeiture order in the related
criminal case. The remainder was waived in view of his financial condition. In
a related administrative proceeding Mr. Goffer was barred from the securities
business and from participating in any penny stock offering. In the related
criminal case Mr. Goffer was convicted and sentenced to three years in prison. See
also Lit. Rel. No. 22721 (June 11, 2013).
Misappropriation: SEC v Mayfieldgentry Realty
Advisors, LLC, Civil Action No. 13-cv-12520 (E.D. Mich.
Filed June 10, 2013). The Commission charged the investment adviser and its
principals and owners, Chauncey Mayfield, Blair Ackman, Marsha Bass, W. Emery
Mathews and Alicia Diaz. The adviser has long managed real estate for the fund
and controls one of its bank accounts. In January 2007 MGRA agreed to purchase
select shopping center properties for $4.3 million. The adviser secured a bank
loan for about $4.3 million of the purchase price. At year end with only
$200,000 in cash the firm could not fund the balance of the purchase.
Accordingly, in January 2008 Mr. Mayfield directed his CFO to send two wires
totaling $3.1 million from the fund's account. Subsequently, reports were
periodically furnished to the fund which highlighted in part the performance of
the managed properties but never mentioned the money taken to pay for the shopping
centers. The defendants had agreed to return the money but without informing
the client. Just prior to the filing of another Commission action against the
adviser, the firm finally informed the fund. The SEC complaint alleges
violations of Advisers Act Sections 206(1) and (2). Mr. Mayfield and the firm
settled with the Commission, consenting to the entry of a permanent injunction
prohibiting future violations of the Sections cited in the complaint. In
addition, they agreed to pay disgorgement of $3,076,365.88. The remaining
defendants are litigating the case. See also Lit. Rel. No. 22720 (June
Insider trading: SEC v. Dosti, Civil
Action No. 13-cv-3897 (S.D.N.Y. Filed June 7, 2013) is the latest insider
trading case stemming from the expert network inquiry. Here fund manager Victor
Dosti, employed at defendant Whittier Trust Company, obtained inside
information regarding the shares of Dell, Inc., NVIDIA Corporation and Wind
River Systems, Inc. from his colleague, Danny Kuo. Specifically, in 2008 Mr.
Kuno, as a member of a group that shared such information, obtained inside
information regarding the earnings announcements of Dell. In 2009 and 2010 Mr.
Kuo obtained inside information regarding the earnings of NVIDIA from Hyung Lin
who obtained it from a friend at the company. Likewise, in 2009 Mr. Kuo
obtained advanced information about the acquisition of Wind River by Intel from
a friend at the company. In each instance Mr. Dosti caused the fund to trade,
garnering profits and avoiding losses of over $724,000. The defendants settled,
consenting to the entry of a permanent injunction prohibiting future violations
of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition,
Whittier agreed to pay disgorgement of $724,051.62 along with prejudgment
interest and a penalty equal to the amount of the disgorgement. Mr. Dosti
agreed to pay disgorgement of $77,900 along with prejudgment interest and a
penalty equal to the amount of the disgorgement. The SEC acknowledged the
cooperation of Whittier in the investigation.
Insider trading: SEC v. Tomlinson, Civil
Action No. CV 13-1549 (N.D. Cal. Filed June 7, 213) is an action against Bruce
Tomlinson, former vice president of finance at Intermune, Inc. The case centers
on the potential approval by the European Medicines Agency of an application by
the company which was submitted in March 2010. By mid-November 2010 Mr.
Tomlinson learned that the process was proceeding much more rapidly than had
been expected. He e-mailed his friend Michael Sarkesian about this, noting that
it had significant implications for the company. Mr. Sarkesian bought 400
out-of-the-money call options prior to the announcement by the Committee for
Medicinal Products for Human Use of the European Medicines Agency on December
17, 2010. Following the announcement he had profits of $616,000. To resolve the
case Mr. Tomlinson consented to the entry of a permanent injunction prohibiting
future violations of Exchange Act Section 10(b) and the entry of an order
barring him from serving as a director or officer of a public company for five
years. He also agreed to pay a civil penalty of $616,000. In a separate
administrative proceeding he will be suspended under Rule 102(e)(3) from
appearing or practicing before the Commission as an accountant with a right to
apply for reinstatement after five years. See also Lit. Rel. No. 22717
(June 7, 2013).
Related party transactions: SEC v. China
Natural Gas, Inc., Civil Action No. 12-cv-3824 (S.D.N.Y.) is a
previously filed action against the company, and its chairman Qinan Ji. The
case centered on an undisclosed $14.3 million loan Mr. Ji authorized without
board approval to a real estate company owned by his son and nephew and about
which he repeatedly lied to the auditors. To resolve the case the company
consented to the entry of a permanent injunction prohibiting future violations
Securities Act Sections 17(a)(2) and Exchange Act Sections 13(a), 13(b)(2)(A),
13(b)(2)(B) and 14(a). The company also agreed to pay a penalty of $815,000.
Mr. Ji consented to the entry of a permanent injunction prohibiting future
violations of Securities Act Section 17(a) and Exchange Act Sections 10(b),
13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 15(a) and Section 304 of
Sarbanes-Oxley. He also agreed to be barred from serving as a director or
officer of a public company for 10 years and to pay a penalty of $100,000. See
also Lit. Rel. No. 22719 (June 7, 2013).
Investor alert: The
regulator issued an investor alert titled "Alternative Funds Are Not Your
Typical Mutual Funds." The Alert cautions investors that "alt" mutual funds
hold more non-traditional investments and employ complex trading strategies in
comparison to more traditional funds.
Bribes: U.S. v. Lujan (S.D.N.Y.)
is a case in which Ernesto Lujan, a managing partner of a U.S. broker dealer,
has been charged in a bribery scheme involving an official at Venezuela's state
economic development bank, Banco de Desarrollo Economico y Social de Venezuela
or BANDES. Mr. Lujan was charged with one count of conspiracy to violate the
FCPA, violating the FCPA, conspiracy to violate the Travel Act and violating
the Travel Act. The charges are based on the same scheme alleged by the SEC in
its previously filed action, SEC v. Clarke, Civil Action No. 13 CV 3070
(S.D.N.Y. Filed May 7, 2013). The SEC also amended its complaint to add Mr.
Lujan as a defendant.
Court of appeals
Sanctions: Saad v. Securities and Exchange
Commission, No. 10-1195 (D.C. Cir. Decided June 11, 2013)
is an action based on the largely undisputed fact that John Saad submitted
several false expense claims to his employer and later tried to conceal the
wrongful conduct. Mr. Saad had been employed by Penn Mutual and registered with
its broker-dealer affiliate, HTK, a FINRA member. In July 2006 after a business
trip was canceled he submitted false expense reports seeking reimbursement as
if he had traveled. When the company discovered this he was terminated. Later
FINRA investigated and Mr. Saad attempted to cover-up the falsification, misleading
investigators several times. A FINRA hearing panel found against him and
imposed a life time bar from the industry that was affirmed by the NAC and the
The propriety of the life time bar was a critical issue
before the Circuit Court. The Court began by noting that it does not second
guess the Commission on sanctions. At the same time the Court stressed, the
"Commission must be particularly careful to address potentially mitigating
factors before it affirms an order . . . barring an individual . . . " Under
the applicable statute, the SEC can affirm the bar not as a penalty but as a
means of protecting investors. In doing so, however, the agency must explain
its reasons. In this case the decision of the Commission, as well as that of the
FINRA Hearing Panel and the NAC, ignores potential mitigating factors asserted
by Mr. Saad and supported by the record. Here Mr. Saad established that he had
been terminated by his employer prior to any action by FINRA, a point that was
not considered. Yet under FINRA Sanction Guidelines this factor must be
considered. Similarly, the SEC's decision referenced, but did not address, Mr.
Saad's contention that he was under severe stress at the time of the incident.
While this factor is not specifically mentioned in the FINRA Sanction
Guidelines, those are only illustrative and not exhaustive. This factor should
have been considered. "Because the SEC failed to address potentially mitigating
factors with support in the record, it abused its discretion . . . " Accordingly,
the Court remanded the case for further proceedings.
The U.K. regulator fined Xcap Securities PLC ₤120,900 for
failing to adequately protect client assets. Specifically, from the end of June
2010 through August 2011 the firm failed to properly segregate client funds
from its own, did not maintain accurate records and account for client assets
and did not accurately reconcile client accounts.
The Securities and Futures Commission of Hong Kong fined
Credit Suisse Securities (Hong Kong) Limited $1.6 million for regulatory
breaches. Specifically, in October and December 2011 the firm exceeded the
position limits for open positions in Industrial and Commercial Bank of China
Limited stock. Although the firm had procedures in place they did not generate
warning reports for the SFC's position limits. Traders thus had to rely on
their memory. Here the lapses occurred because the trader did not correctly
remember the firm's position.
The German Federal Financial Supervisory Authority announced
that it had obtained a conviction for market manipulation against a business
man. The defendant was sentenced to serve five years and three months in prison
and ordered to pay a fine of €3.5 million as restitution to injured parties.
The case centered on a capital increase. Specifically, the defendant furnished
falsified bank confirmations to a registration court causing it to reflect a
false capital increase - one had not occurred. The defendant then implemented
share transactions, selling securities at a price that did not reflect the
reality of the company.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
firstname.lastname@example.org). Webcast nationally by the ABA and available in other
Dorsey & Whitney offices. For further information please click here.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
For more information about LexisNexis
products and solutions connect with us through our corporate site.