DOJ’s market crisis suit against S&P and new charges against Olympus and a subsidiary in the UK are key focal points of securities enforcement litigation in this holiday shortened week. Responding to DOJ’s complaint, the rating agency claims it lacks merit and is driven by the fact that S&P downgraded the credit of the U.S. The Serious Fraud Office in the UK has criminally charged camera and electronics giant Olympus, based in Japan, along with the firm’s U.K. subsidiary based on facts arising from the on-going difficulties of the company.
The SEC announced more whistleblower awards this week. The agency also brought actions based on insider trading, an investment fund fraud and a cherry picking scheme.
Finally, three defendants pleaded guilty to criminal FCPA charges in the action involving the payment of kickbacks to an official at a Venezuelan bank.
Whistleblowers: The SEC announced whistleblower awards totaling $125,000 which will be paid to three unidentified individuals. The awards are based on actions against Locust Offshore Management and its CEO Andrey Hicks. Mr. Hicks is serving 40 months in prison after pleading guilty to five counts of wire fraud and agreeing to certain forfeitures. The total value of the assets seized from Mr. Hicks are estimated to be $845,000. The whistleblowers are expected to receive 15%.
Report: The agency issued a report, in conjunction with its counterparts in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore and Switzerland, regarding cross-boarder regulation in the derivatives market (here).
SEC Enforcement: Filings and settlements
Filings this week: This week the Commission filed 2 civil injunctive actions and 1 administrative proceeding (excluding follow-on actions and 12(j) proceedings).
Insider trading: SEC v. Rungruangnavarat, Civil Action No. 13 cv 4172 (N.D. Ill. Filed June 5, 2013) is a previously filed action against Badin Rungruavgnavart, a 30 year old employee of a plastics company in Bangkok. It centers on the announcement that Shuanghui, a Chinese company, would acquire Smithfield Foods, Inc., made on May 29, 2013. Between May 21 and 28, 2013, the defendant purchased 1,300 out-of-the money July 29 Smithfield call options; 1,7000 out-of-the-money July 30 Smithfield call options; 955 July Smithfield single-stock future contracts; 1,625 September Smithfield single-stock futures contracts and 100 shares of Smithfield common stock. The options cost less than $100,000. All of the trades were made in an account at Interactive Brokers, opened shortly before the first transaction. The complaint alleges, based on information and belief, that the defendant possessed inside information. It speculates that the source may have been “a Facebook friend who is a former employee of the company where Rungruangnavarat works, and who is associate director at the Thai investment bank that advised Chareon on its contemplated Smithfield bid.” The complaint alleges violations of Exchange Act Section 10(b). A freeze order was obtained over the account which has over $3.2 million in unrealized gains. Yesterday the Court approved a settlement under which the defendant consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. Under the terms of the settlement the trading profits will also be disgorged and a $2 million penalty paid.
Insider trading: SEC v. DeZwirek, Civil Action No. 13-CIV-6135 (S.D.N.Y. Filed August 30, 2013) is an action against Phillip DeZwirek, the former CEO, Chairman and a 10% beneficial owner of CECO Environmental Corporation and API Technologies Corporation. In March and October 2008, the complaint alleges, Mr. DeZwirek purchased shares of CECO in advance of press releases announcing new contract bookings. Similarly, he purchased shares of API prior to a January 2011 acquisition announcement. Mr. DeZwirek also failed to amend Schedules 13D and Forms 4 and 5 disclosing 268 purchases and sales of CECO and API shares between from 2008 to 2010. The complaint alleges violations of Exchange Act Sections 10(b), 13(d) and 16(a). To resolve the case Mr. DeZwirek consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He was also agreed to pay disgorgement of $151,278, prejudgment interest and a civil penalty of $1,361,278. Under the terms of the settlement the defendant will be barred from serving as an officer or director of a public company for five years. See Lit. Rel. No. 22790 (Sept. 3, 2013).
Investment fraud: SEC v. Feldstein, Civil Action No. 13 CV 61681 (S.D.N.Y. Filed September 3, 2013) is an action against Ronald Feldstein and his two controlled entities, Mara Capital Management LLC and Vita Health of America, LLC. The complaint alleges two fraudulent schemes. The first began in December 2008 and continued through February 2009. During that period Mr. Feldstein and his two entities opened delivery versus payment or DVP accounts at three brokers based on representations that they had sufficient cash and securities in custodial accounts to cover any trading. This permitted them to avoid any deposit requirements. The defendants then engaged in a front running scheme, paying for profitable trades with sale proceeds from the liquidation of the position while abandoning unprofitable transactions. Within weeks the brokers were owed about $2 million. Later in 2009 Mr. Feldstein induced several individual investors to entrust him with $450,000 for investment. Under the plan the funds would be used to purchase select penny stocks and invest in an IPO and a hedge fund that was represented to be successful. In fact none of the money was invested. Mr. Feldstein converted it to his personal use. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Fraudulent trading: In the Matter of J.S. Oliver Capital Management, L.P., File No. 3-15446 (August 30, 2013) is a proceeding which names as Respondents the adviser, its founder, Ian Mansner, and the COO, Douglas Drennan. Beginning in June 2008, and continuing for over a year, the adviser, which had under management about $115 and advised four funds, disproportionately allocated profitable equity trades to six client accounts, thereby disadvantaging three others, according to the Order. The favored accounts included the managed funds. The scheme was executed by making block trades in omnibus accounts at broker-dealers, generally delaying allocation and then giving the more profitable trades to the favored accounts. Over the period that the cherry-picking scheme was operated, the disadvantaged accounts suffered total harm of $10.7 million. Between January 2009 and November 2011 the adviser also misused about $1.1 million in soft dollars. Rather than use the funds for the legitimate research and brokerage expenses of the adviser, and as disclosed in various materials, Respondents diverted the funds to pay for a series of improper items. The Order alleges willful violations of Securities Act Section 17(a), Exchange Act Section 10(b), Advisers Act Sections 204, 206(1), (2) and (4) and Section 207. The proceeding will be set for hearing.
U.S. v. Lujan, Case No. 13 Crim 671 (S.D.N.Y. Aug. 29, 2013); U.S. v. Hurtado (S.D.N.Y. Aug. 29, 2013); U.S. v. Clarke, 13 Crim 670 (S.D.N.Y. Aug. 29, 2013). Ernesto Lujan, Jose Hurtado and Tomas Clarke each pleaded guilty to six counts: Two count of conspiracy to violate the FCPA; one count of violating the FCPA; one count of violating the Travel Act; one count of money laundering; and one count of conspiracy to obstruct justice. Each defendant was an employee of New York based broker-dealer Direct Access Partners LLP. Beginning in early 2009, and continuing through 2012, the three defendants participated in a bribery scheme in which kick backs were funneled too Maria de los Angeles Gonzales de Hernandes, an official at state controlled Banco de Desarrollo Economico y Social de Venezuela or BANDES. Portions of the $60 million in mark-ups and mark-downs the broker received from the business directed by Ms. Gonzales were funneled to her through off-shore accounts. The defendants also attempted to obstruct an SEC inspection of the broker by destroying e-mail. In addition, Mr. Clarke lied to the SEC inspection staff, according to the court documents. In a related scheme Messrs. Lujan, Clarke and Hurtado are alleged to have paid bribes to an official at another Venezuelan state controlled bank.
Sentencing for Messrs. Lujan and Clarke is scheduled for February 11, 2014. Sentencing for Mr. Hurtado is scheduled for March 6, 2014. The SEC’s parallel case is pending. SEC v. Clarke, Civil Acton No. 13 CV 3070 (S.D.N.Y. Filed May 13, 2013).
Court of appeals
Extraterritorial effect: U.S. v. Vilar, Docket Nos. 10-521-cr, 10-580-cr, 10-4639-cr (2nd Cir. Decided August 30, 2013) is a criminal action against Alberto Vilar and Gary Alan Tanaka. The defendants were found guilty in February 2010 by a jury based on claims that they lied to certain investors about the nature of their investments. Both defendants had been prominent investment managers and advisers for a number of years. At one point they were responsible for managing about $9 billion. Following the collapse of an investment scheme in 2000 and 2001, and after misappropriating certain client funds, the two men were indicted for conspiracy to commit securities fraud, investment adviser fraud, mail fraud and wire fraud. After a nine week trial Mr. Vilar was convicted on all twelve counts. Mr. Tanaka was convicted of conspiracy, securities fraud, and investment adviser fraud.
On appeal a key issue was if Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), which held that Exchange Act Section 10(b) does not have extraterritorial effect, applies in criminal cases. The Second Circuit, noting that this was a question of first impression, held that Morrison applies equally in civil and criminal cases. In reaching this conclusion the Court rejected an effort by the government to draw a distinction between civil and criminal statutes when applying the presumption against extraterritoriality on which Morrison is based. To the contrary “The Supreme Court has emphasized that we apply this rule of statutory interpretation because we understand that ‘Congress generally legislates with domestic concerns in mind . . . ‘” the Court held (internal citation omitted).
False statement to auditor: The Serious Fraud Office has charged Olympus Corporation, a Japanese company which specializes in camera and audio equipment, and its U.S. subsidiary, Gyrus Group Ltd., with making false or deceptive statements to an auditor in violation of Section 501 of the Company Act. The charges are based on the global fraud for which the company is being prosecuted in Japan.
Segregated client funds: The Financial Conduct Authority fined Aberdeen Asset Managers Limited and Aberdeen Fund Management Limited £7,192,500 for failing to identify and properly protect client funds held by third party banks from September 2008 through August 2011. The FCA’s rules require that money held on behalf of a client be clearly identified so that it is protected and returned as soon as possible in the event of a failure. In May 2009 the predecessor of the FCA, the FSA, wrote to the two firms and requested that they conform compliance with these rules following an inspection. The firms represented that they were in full compliance. In fact they failed to have adequate documentation for about £685 million in client funds. The fine imposed here was reduced by 30% based on the cooperation of the firms.
Short selling: Premium Stars Investment Ltd. pleaded guilty to illegal short selling. The firm was fined $3,000 and ordered to pay the costs of the investigation by the Securities and Futures Commission. The firm engaged in prohibited conduct by selling shares it had subscribed for in a rights offering by China Properties after it had applied but before obtaining the shares.
Prosecutorial responsibility: The Securities and Futures Commission issued a statement regarding its coordination with criminal prosecutors on those matters the regulator concludes may warrant criminal prosecution (here).
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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