SAC Capital is close to a plea agreement in the criminal case against the firm, according to press reports. JPMorgan, in contrast, is having difficulty completing the much discussed $13 billion settlement of its mortgage cases, according to other reports.
SEC enforcement another “grouping” of cases. This time the agency filed a series of actions based on the custody rule. Previously the Commission filed groups of actions based on Rule 105 short selling claims and against auditors as part of Operation Broken Gate.
Finally, the CFTC, the DOJ and prosecutors in the U.K.’s — and Norway filed settled actions against Rabobank, based on the financial institution’s role in manipulating benchmark interest rates. The bank agreed to pay over $1billion in fines.
Remarks: Commissioner Daniel Gallagher delivered remarks at the Georgetown Center For Financial Markets and Policy Event, New York City (Oct. 30, 2013). He comments focused on corporate governance (here).
Remarks: Commissioner Luis Aguilar, spoke at the 20th Annual Securities Litigation and Regulatory Enforcement Seminar, Atlanta, Georgia (Oct. 25, 2013). His remarks focused on enforcement and factors that impact corporate penalties and admissions (here).
Remarks: Commissioner Daniel M. Gallagher addressed the AICPA/SIFMA Financial Management Society Conference on the Securities Industry (Oct.. 25, 2013). His address focused on setting priorities (here).
Whistleblowers: The Commission made its sixth award, this time for $150,000. That sum represents 30% of the money collected by the agency in the enforcement action. The person requested not to be identified.
Remarks: Chairman Gary Gensler gave the keynote address at the 5th Annual Financial Regulatory Reform Symposium, George Washington University (Oct. 31, 2013). His remarks focused on changes in the market place and the budget for the agency (here).
Remarks: Commissioner Bart Chilton addressed the Regulatory Compliance Association, delivering remarks titled Polls, Pots and Poltergeists, New York City (Oct. 31, 2013). The Commissioner commented on the political climate, malfeasance in the financial sector, large traders and the effects of changes on the future (here).
Remarks: Chairman Gary Gensler delivered the 2013 Annual Glauber Lecture, Harvard University (Oct. 29, 2013). The Chairman discussed transparency in the markets, reforms in the swaps markets, the benchmark interest cases and the resources of the agency (here).
SEC Enforcement – litigated cases
Prime bank fraud: SEC v. The Milan Group, Inc., Civil Action No. 11-cv-0232 (D.D.C. Filed Nov. 30, 2011) is an action against attorney Brynee Baylor, her firm, Baylor & Jackson P.L.L.C., The Milan Group, Inc., the estate of Frank L. Pavlico and others. The complaint alleged that defendants Pavlico and Baylor operated a prime bank scheme. Investors were solicited with claims of risk-free returns of up to twenty times their original investment within days through the lease and trading of certain foreign bank instruments. The program was fictitious. The Court granted the Commission’s motion for summary judgment against all of the primary defendants – Ms. Baylor, her firm, The Milan Group and Frank Pavlico through his estate – concluding that they violated Securities Act Section 17(a) and Exchange Act Section 10(b). The Court also concluded that there were violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). Permanent injunctions were entered against Ms. Baylor, her law firm and The Milan Group based on Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The judgment holds the Estate of Frank Pavlico, Milan Group, the law firm and Ms. Baylor jointly and severally liable for disgorgement in the amount of $2,665,000 along with prejudgment interest. The judgment also orders Ms. Baylor to pay the remaining obligation of $2,752,758. A civil penalty of $1,318,734 was imposed on Milan Group. Ms. Baylor and her firm were ordered jointly and severally to pay a civil penalty of $746,266. Ms. Baylor was also permanently barred from serving as an officer or director of a public company. See Lit. Rel. No. 22861 (Oct. 30, 2013).
SEC Enforcement – filed and settled actions
Weekly statistics: This week the Commission filed, or announced the filing of, 1 civil injunctive action and 4 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Undisclosed conflicts: In the Matter of Fry Hensley and Company, Adm. Proc. File No. 3-15235 (Oct. 30, 203) is a proceeding against the registered investment adviser and its principal, Nicholas Fry, II. The Order centers on undisclosed conflicts. Specifically, the adviser had written Portfolio Management Agreements with its clients that specified the compensation paid for advisory services. What clients were not told is that Respondents received payments from the broker dealer they recommend who charged large commissions. Mrs. Fry was a representative at the broker dealer and received half of the commissions. The advisor was insolvent but for the undisclosed commissions from the broker. The Order alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. To resolve the proceeding the Adviser consented to the entry of a cease and desist order based on each of the Sections cited in the Order, except Section 207, and a censure. Mr. Fry consented to the entry of a similar order based on each of the Sections cited in the Order. In addition, Mr. Fry will be barred from the securities business and from any supervisory capacity. Respondents will also, jointly and severally, pay disgorgement of $775,669.09 along with prejudgment interest. Payment was waived, however, based on financial condition. For the same reason a penalty was not entered.
Insider trading SEC v. Rosenberg, Civil Action No. 1:13-CV-3559 (N.D. Ga. Filed Oct. 29, 2013) is an insider trading case against equity analyst Dennis Rosenberg. The complaint alleges that Mr. Rosenberg was repeatedly furnished with inside information over a five year period beginning in 2005 by Eric Martin who had served at Carter’s initially as the Director, and later the Vice President, of Investor Relations. In each instance Mr. Rosenberg profited or avoided a loss. In some cases he also tipped others.
Overall Mr. Rosenberg had ill-gotten gains, losses avoided, and consulting fees from a hedge fund he tipped of about $500,000. His tippees had combined profits of about $2 million. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Rosenberg partially resolved the action by consenting, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction based on the Sections cited in the complaint. The order also directs him to pay disgorgement of $500,000 along with prejudgment interest. The amount of civil monetary penalties to be imposed, if any, will be determined at a later date. See Lit. Rel. No. 22858 (Oct. 29, 2013).
Insider trading: SEC v. Mancuso, Civil Action No. 13-CV-2555 (S.D.N.Y.) is a previously filed action against Joseph Mancuso, a former proprietary trader at broker-dealer Schottenfeld Group, LLC. The complaint alleged that he traded while in possession of inside information furnished by Zvi Goffer which traced to Arthur Cutillo and Brien Santarlas, formerly of Ropes and Gray. The Court entered a final order by consent which enjoins Mr. Mancuso from future violations of Exchange Act Section 10(b) and directs him to pay disgorgement of $349,489 along with prejudgment interest. Payment was waived, and no penalty imposed, in view of financial condition. The order also barred him from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 22857 (Oct. 29, 2013).
Fraudulent accounting: SEC v. Greene, Civil Action No. 1:12-CV-00119 (D.D.C.) is a previously filed action against the former president of privately held Americas Premier Corporation. Beginning in the third quarter of 2005, and continuing through 2006, Mr. Greene and a then senior vice president of InPhonic Senior engaged in a series of round trip transactions and other fraudulent financial conduct that was concealed from the auditors of InPhonic and inflated its results. This week the Court entered a final judgment by consent against Mr. Greene, enjoining him from future violations of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(a). He was also ordered to pay a penalty of $100,000. See Lit. Rel. no. 22856 (Oct. 28, 2013).
Custody rule: In the Matter of Further Lane Assets Management, LLC, Adm. Proc. File No. 3-15590 (Oct. 28, 2013) named as Respondents the registered investment adviser, Osprey Group, Inc. and Jose Araiz. Mr. Araiz owns, and is the President, CEO and CCO of the adviser. Osprey is an unregistered investment adviser controlled by Mr. Araiz.
Further Lane, unlike many advisers, maintained custody of the assets of hedge funds that it managed. Nevertheless, the firm failed to arrange for an annual surprise examination to verify the assets held for investors or for investors to receive account statements at least quarterly as required by the Rule. The adviser also failed to disclose that it engaged in a related party in-kind redemption from another fund advised by Mr. Araiz thereby changing its investment approach. In addition, the adviser did not adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and to maintain the required records. To resolve the proceeding the adviser agreed to implement certain undertakings and consented to the entry of a cease and desist order based on Sections 204, 206(2), 206(3), 206(4) and 207 of the Advisers Act and a censure. Mr. Araiz consented to the entry of a cease and desist order based on the same Sections. Osprey consented to the entry of a cease and desist order based on Section 206(3) and to the entry of a censure. The three Respondents will pay, on a joint and several basis, disgorgement of $338,017 and prejudgment interest. Mr. Araiz will also pay a civil money penalty of $150,000.
Custody rule: In the Matter of GW & Wade, LLC, Adm. Proc. File No. 3-15589 (Oct. 28, 2013) is a proceeding which names as a Respondent the registered investment adviser. The adviser, which manages funds for typically high net worth individuals, generally invests in mutual funds. Although the adviser has custody of client assets, it failed to obtain an examination of those assets by an independent public accountant and to identify those assets in its public disclosures. The firm also failed to adopt or implement policies and procedures reasonably designed to prevent violations of the securities laws and to implement policies and procedures for calculating its advisory fees in discretionary accounts. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on Sections 204, 206(4) and 207 of the Advisers Act and a censure. The firm will also pay a civil money penalty of $250,000.
Custody rule: In the Matter of Knelman Asset Management Group, LLC, Adm. Proc. File No. 3-15588 (Oct. 28, 2013) is a proceeding which names as Respondents the registered investment adviser and its managing director, CEO and COO, Irving P. Knelman. Knelman Asset Management is the manager of Rancho Partners I, LLC, a fund of private equity funds. The Order alleges that the custody rule was violated by failing to arrange the annual surprise examination or taking the alternate of ensuring that investors were furnished with audited financial statements. The adviser held customer securities in a safe deposit box to which it had access, an arrangement set up after a 2005 inspection in which the staff pointed out a violation of the custody rule. At the time of the 2010 inspection the firm was still in violation of the rule.
The Order alleges four other violations of the federal securities laws: 1) Using a distribution method for members that was contrary to the firm documents and, in some instances, making improper discretionary cash distributions to certain members; 2) failing to conduct an annual review of the adequacy and effectiveness of the adviser’s compliance policies and procedures; 3) failing to accurately maintain the required books and records; and 4) filing a form ADV which incorrectly stated that the firm did not have custody. To resolve the proceeding the adviser agreed to implement certain undertakings. Each Respondent consented to the entry of a cease and desist order based on Sections 204, 206, 206(2), 206(4) and 207 of the Advisers Act. The adviser was also censured and will pay a civil money penalty of $60,000 while Mr. Knelman will pay $75,000.
Year end summary: The CFTC stepped up its enforcement activity in fiscal 2013, bringing a number of significant actions, according to a recent report by the agency. Last year the trading Commission filed 82 enforcement actions while opening 290 new investigations. Over the past three years the Commission brought 282 enforcement actions, almost double the number initiated in the prior three years. Those actions resulted in Orders imposing about $1.5 billion in penalties and requiring the payment of approximately $200 million in restitution and disgorgement. The Commission also reported that about 93% of its major fraud cases had a parallel criminal investigation, reflecting the continued criminalization of regulatory enforcement.
Interest rate manipulation: In the Matter of Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., CFTC Docket No. 1402 (Oct. 29, 2013); U.S. v. Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., (D.D.C. Filed Oct. 29, 2013).Rabobank – Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. – a Dutch financial giant, resolved charges that it manipulated LIBOR and Euribor with four enforcement agencies, paying more than $1 billion in fines.
LIBOR, a widely used rate, is published by the British Banker’s Association. The calculation of the rate for each period or maturity was made by obtaining submissions from a panel of banks for a particular currency. From 2005 through 2011 Rabobank was a member of the Contributor Panel for a number of currencies. The Euro Interbank Offered Rate, or Euribor, published by the European Banking Federation, is calculated in a manner that is similar to LIBOR. Again, Rabobank was a member of the Contributor Panel for Euribor for the six year period beginning in 2005. Rabobank began in 2005 to submit requests made at the behest of its derivatives traders for certain dollar LIBOR, yen LIBOR, pound sterling LIBOR and Euribor contributions that would benefit the trading positions of the traders, according to the court papers. In making these submissions Robobank did not submit rates that complied with the definitions of LIBOR and Euribor. The financial institution also entered into separate agreements with traders at other banks to make yen LIBOR and Euribor submissions that benefited the trading positions at other institutions. Again, Rabobank did not make the submissions in accord with the definitions of LIBOR and Euribor. Substantial portions of the wrongful conduct are documented in e-mails and messages quoted in the charging papers.
To resolve the inquiries with the DOJ Robobank entered into a deferred prosecution agreement. The underlying complaint charged the firm with wire fraud. The firm also agreed to pay a criminal fine of $325,000,000. With the CFTC the bank consented, without admitting or denying the underlying allegations, to the entry of a cease and desist order based on Sections 9, 13b and 13(a)(2) of the Commodity Exchange Act. In addition, the firm agreed to implement a series of remedial undertakings designed to prevent future violations and will pay a fine of $457,000,000. Finally, the bank resolved charges in the U.K. and the Netherlands. With the FCA the financial institution agreed to pay a £105 million fine while it will pay about $96 million to the Dutch Public Prosecution Service.
Alert: The regulator issued a new investor alert titled Closed-End fund Distributions: Where is the Money Coming From? (here).
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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