The Supreme Court and the JPMorgan settlement were the focus of securities litigation this week. The High Court agreed to hear a securities class action case which presents questions that may rewrite the way those cases are brought by eliminating or restricting the fraud-on-the-market presumption. JPMorgan concluded a much discussed and historic settlement with the Department of Justice and others concerning its civil enforcement liability tied to the mortgaged backed securities markets.
The SEC made available the latest report regarding whistleblowers this week showing that there was a slight increase in the number of tips and one record breaking award of over $14 million in the last fiscal year. Enforcement brought three administrative proceedings focused on undisclosed adviser fees, improper sales practices by a broker and a lack of procedures involving an investment adviser. The Commission also brought two insider trading cases, one related to the Galleon cases and a second tied to the stream of actions involving to Carter’s Inc. as well as an offering fraud action and a case seeking the enforcement of an order barring an account.
Remarks: SEC Chair Mary Jo White delivered the 5th Annual Judge Thomas A. Flannery Lecture, titled “The Importance of trials to the Law and Public Accountability,” Washington, D.C. (Nov. 14, 2013). Ms. White’s comments focused on the importance of trials and accountability in the legal system (here).
Remarks: Commissioner Daniel Gallagher delivered Informal Remarks at the Columbia Law School Conference on Hot Topics: Leading Current Issues in Securities Regulation and Enforcement (Nov. 15, 2012). His remarks focused on the imposition of corporate penalties, carefully tracing the history of the Commission’s authority in this area (here).
Remarks: SEC Enforcement Director Andrew Ceresney addressed the International Conference on the Foreign Corrupt Practices Act, Washington, D.C. (Nov. 19, 2013). The Director commented on creating a culture of compliance, international trends and the need for companies to cooperate with enforcement efforts (here).
Whistleblowers: The 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program was released. The Report notes that the number of whistleblower tips and complaints received in fiscal 2013 increased to 3,238, up slightly from the 3,001 complaints and tips received in the prior fiscal year. The Report identifies one award made during the fiscal year of over $14 million which is also the largest in the history of the program (here).
Remarks: Chairman Gary Gensler addressed the CME Global Financial Leadership Conference (Nov. 19, 2013). His remarks focused on the increased transparency in the markets, the transformation for swap dealers and international cooperation in the swap markets (here).
Remarks: Chairman Gary Gensler delivered remarks titled Bringing Transparency and Access to the Markets at the Swap Execution Facility Conference (Nov. 18, 2013). His remarks included comments on recent reforms in the markets (here).
Fraud-on-the-market theory: Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (S.Ct.). In agreeing to hear this case for the second time the Supreme Court set the stage for what may be a dramatic reshaping of private securities fraud damage actions. The High Court will consider two key issues. The first is whether the Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which adopted the fraud-on-the-market theory of reliance that many view as the foundation of securities class actions, should be overruled. The second is whether a defendant in a securities class action may rebut the Basic presumption at the class certification stage by introducing evidence that the alleged misrepresentations did not distort the market price of the stock.
JPMorgan settled its civil liability with the Department of Justice and others stemming from the mortgage market, agreeing to pay $13 billion. The long rumored settlement included admissions concerning its conduct in the residential mortgage-backed securities or RMBS market. It did not resolve the parallel criminal investigation or any other claims. The resolution is the outgrowth of investigations conducted by the Financial Fraud Enforcement Task Force’s RMBS Working Group, announced by the President in his state of the Union Address two years ago.
The settlement is the largest with a single entity in American History, according to DOJ. It is, in essence, a roll-up of several actions. It includes $9 billion in settlement of claims by DOJ, the Federal Housing Finance Agency, the National Credit Union and the Federal Deposit Insurance Corporation. It also includes claims brought by New York, California, Illinois and Massachusetts. The remaining portions of the settlement benefits consumers in the housing market. Specifically, $4 billion is for relief to consumers harmed by the unlawful conduct of JPMorgan and the two firms it acquired, Bear Stearns and Washington Mutual.
SEC Enforcement – filed and settled actions
Weekly statistics: This week the Commission filed, or announced the filing of, 4 civil injunctive and district court actions, DPA or NPA and 3 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Offering fraud: SEC v. Snisky, Civil Action No. 13-cv-03149 (D. Colo. Filed Nov. 21, 2013) is an action against Gary Snisky alleging an offering fraud. Specifically, the Commission’s complaint alleges that Mr. Snisky raised over $3.8 million from 40 elderly investors. Mr. Snisky targeted elderly investors with annuities, convincing them that his program was a better alternative. Mr. Snisky and his salesmen promised steady returns, a bonus to cover any annuity withdrawal penalties and assured investors their funds were safe and in bonds guaranteed by the U.S. government. In fact the representations were false and the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 7(a). See Lit. Rel. No. 22876 (Nov. 21, 2013).
Violation of order: SEC v. Jones, Civil Action No. 1:13-cv-00163 D. Utah Filed Nov. 21, 2013) is an action against R. Gordon Jones, CPA alleging that he violated a Commission order suspending him from appearing and practicing before the Commission that was entered in May 2001. Since that date, according to the complaint, Mr. Jones had been creating, compiling and editing financial statements for public companies that are filed with the Commission. The complaint requests an order enforcing the Commission’s order and other relief. See Lit. Rel. No. 22875 (Nov. 21, 2013).
Insider trading: SEC v. Miri, Civil Action No. 13 cv 8324 (S.D.N.Y. Filed Nov. 21, 2013) is an action against Sam Miri, a former employee of Marvell Technology Group, Ltd. In May 2008 Mr. Miri furnished Ali Far, co-founder of hedge fund advisory firm Spherix Capital LLC, with inside information about his company. Specifically, he told Mr. Far that after having a series of interim CFOs, a new person was going to be appointed. He also provided Mr. Far with financial information about Marvel that would be contained in a forthcoming announcement. Spherix Capital hedge funds subsequently purchased 300,000 shares of Marvell stock. Following a May 29, 2008 announcement by the company of its financial results which exceeded expectations, the share price increased by about 23%. Spherix Capital had profits of about $680,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action Mr. Miri consented to the entry of a permanent injunction based on the Section cited in the complaint and the entry of an order barring him from serving as an officer or director of a public company and requiring the payment of $10,000 in disgorgement, prejudgment interest and a $50,000 penalty.
False statements: SEC v. The NIR Group, LLC, Civil Action No. 11 Civ. 4723 (E.D.N.Y.) is a previously filed action against the investment adviser and Corey Ribotsky. The Court entered a final judgment by consent against Mr. Ribotsky, enjoining him from future violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Mr. Ribotsky also agreed to pay $12.5 million in disgorgement, prejudgment interest and a $1 million civil penalty. In addition, he agreed to the entry of an order barring him from the securities business with a right to reapply after four years in a to be filed administrative proceeding. The Court dismissed the claims against the firm on motion of the Commission since it is defunct. In the underlying case the Commission alleged that during the financial crisis the defendants made false statements to investors regarding the poor performance and trading strategy of the various funds and that Mr. Ribotsky misappropriated client assets. See Lit. Rel. No. 22873 (Nov. 21, 2013).
Undisclosed fees: In the Matter of Larry C. Grossman, Adm. Proc. File No. 3-15617 (Nov. 20, 2013) is a proceeding which names as Respondents Larry Grossman and Gregory Adams, who are affiliates of registered investment adviser Sovereign International Asset Management, Inc. Sovereign had about $85 million in assets under management at its peak in 2008. Many of its investors were retirees. Shortly after forming Sovereign, Mr. Grossman met Nikolai Simon Battoo, the principal of BC Capital Group, S.A., and its affiliated companies, which operated off-shore hedge funds. Mr. Battoo was named as a defendant in a Commission fraud action brought in 2012. Subsequently, Mr. Grossman executed three referral agreements and one consulting contract on behalf of a Sovereign affiliate with funds and entities controlled or owned by Mr. Battoo. Under the three agreements referral fees were paid to Sovereign while the fourth called for the payment of fees directly to Mr. Grossman for consulting services. Subsequently, Mr. Grossman recommended to clients that they invest in the Battoo group without fully disclosing the risks. Neither he nor Mr. Adams disclosed the stream of fees received from that group under the four agreements. As funds in the Battoo group suffered difficulties, the two men ignored a series of red flags, continuing to make the same investment recommendation. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 15(a) and Advisers Act Sections 206(1), 206(2), 206(3), 206(4) and 207. The proceeding will be set for hearing.
Fraudulent sales practices: In the Matter of Gregg C. Lorenzo, Adm. Proc. File No. 3-15211 (Nov. 20, 2013) is a proceeding naming as Respondents Mr. Lorenzo, Francis Lorenzo, and Charles Vista, LLC. Both men were affiliated with broker Charles Vista. Beginning in September 2009, Respondents made false representations to investors in an effort to sell convertible debentures issued by a start-up. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the proceeding Gregg Lorenzo and Charles Vista each consented to the entry of a cease and desist order based on the Sections cited in the Order. Gregg Lorenzo is also barred from the securities business. The two settling Respondents will pay disgorgement of $130,000 along with prejudgment interest. Gregg Lorenzo will pay a civil penalty of $375,000 while Charles Vista will pay $4,350,000.
Lack of procedures: In the Matter of Agamas Capital Management, L.P., Adm. Proc. File No. 3-15616 (Nov. 19, 2013) is a proceeding against the registered investment adviser centered on its failure to adopt appropriate procedures. Agamas is the adviser for a fund and a managed account. Many of the investments were illiquid and had to be valued. From January 2007 through December 2008 Agamas failed to fully document the basis for its frequently discretionary pricing. It also failed to adopt policies and procedures to review its investor disclosures periodically and to manage conflicts of interest arising from cross trades. The Order alleges a violation of Advisers Act Section 206(4). To resolve the proceeding the adviser will implement certain undertakings. It also consented to the entry of a cease and desist order based on the Section cited in the Order, to the entry of a censure and to pay a penalty of $250,000.
Insider trading: SEC v. Megalli, Civil Action No. 1:13-CV-03783 (N.D. Ga. Filed Nov. 14, 2013); U.S. v. Magalli, Case No. 1:13-cr-00442 (N.D. Ga. Filed Nov. 14, 2013). These actions name Mark Megalli as a defendant. He was an executive at investment adviser Level Global Investors, L.P. from August 2009 through the fall of 2011. After departing from Carter’s Inc. Mr. Martin obtained material non-public information about his former employer from Richard Posey, then the firm’s vice president of operations. Mr. Megalli is alleged to have tipped the fund executive four times: 1) Prior to the announcement on October 27, 2009 concerning accounting practices at the company; 2) before the November 9, 2009 restatement announcement; 3) before a December 23, 2009 announcement about the restatement; and 4) prior to the July 29, 2010 earnings release. Overall, Level made profits or avoided loses of $3 million. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). Both cases are in litigation. See Lit. Rel. No. 22870 (Nov. 14, 2013).
Remarks: Deputy AG James Cole addressed the Foreign Corrupt Practices Act Conference (Nov. 19, 2013). His remarks reviewed enforcement efforts in other countries and coordination with DOJ (here).
Fraudulent trading: U.S. v. Miller, No. 3:12-mj-0288 (D. Mass.) is an action against David Miller, formerly a trader with Rochdale Securities LLC. Mr. Miller previously pleaded guilty to one count of conspiracy to commit wire fraud and securities fraud and one count of wire fraud. The underlying case alleged that he engaged in a fraudulent scheme to place a series of unauthorized purchases for more than 1.6 million shares of Apple stock in October 2012. Rochdale eventually collapses. This week the Court sentenced Mr. Miller to serve 30 months in prison followed by three years of supervised release. He was also ordered to make full restitution to the broker which suffered a loss of $5,292,202.50. The Commission has a parallel case, SEC v. Miller, Civil Action No. 3:13-cv-00522 (D. Conn.). See Lit. Rel. No. 22872 (Nov. 21, 2013).
Investment fund fraud: U.S. v. Leiske, No. 8:08-cr-00176(C.D. Cal.) is a case in which former stock broker William Ferry, real estate investment manager Dennis Clinton and former Bankers Trust v.p. Paul Martin were convicted on charges of conspiracy, mail fraud and wire fraud. In the underlying scheme, the defendants sold interests in what they called a “Fed Trade Program.” The program was supposedly regulated by the Federal Reserve. Profits were to be split with the investor and certain humanitarian projects. The funds were managed offshore by a Swiss banker. Here the defendants solicited an undercover FBI team. Mr. Ferry was sentenced to serve 15 months in prison while Messrs. Clinton and Martin will each serve 30 months.
Investment fund fraud: U.S. v. Walji, No. 1:13-cr-00217(S.D.N.Y.) is an action against Abdul Walji and Reniero Francisco, respectively the CFO and President of Arista LLC. Mr. Walji carried out two investment fraud schemes while Mr. Francisco participated in one. In the first, the two men raised about $10 million from 40 investors based on assurances their funds would be safely invested. In fact the fund was a commodity pool and portions of the money were put in options and futures. Portions were misappropriated by the defendants. False account statements were furnished to investors to conceal the fraud.
In the second, Mr. Walji defrauded several pension funds he advised through a series of entities beginning in 2008 and continuing until June 2013. Again misrepresentations were made about the manner in which the funds would be invested. Portions of the investor funds were misappropriated and investors were furnished with false account statements. The scheme resulted in losses of about $11.3 million. After pleading guilty Mr. Walji was sentenced to serve 151 months and Mr. Francisco 97 months in prison.
Investment fund fraud: The Australian Securities & Investment Commission resolved proceedings with Sydney financial adviser Gabriel Nakhi. Mr. Nakhi had advised clients in self-managed superannuation funds to advance money to him with the promise of a high rate of return. Instead the money was used for his personal expenses. The matter was resolved with an undertaking banning Mr. Nakhi from the financial services business.
European Securities and Markets Authority
Financial statement disclosure: The ESMA published a review of the comparability and quality of disclosures in the 2012 IFRS financial statements of listed institutions. The report makes recommendations for improvement in key areas including: The structure and content of the income statement; liquidity and funding risk including the effects of asset encumbrance; hedging and the use of derivative; credit risk with a focus on credit risk management; and criteria used to assess impairment of equity securities classified as available for sale. The agency expects better disclosure in the future.
Takeover code: The Securities and Futures Commission brought a proceeding against Chow Yei Ching, the chairman of Chevalier Group, his son Oxcar Chow Vee Tsung and Joseph Leung Wing Kong. It alleges a violation of the Takeover Code which requires that a general solicitation for the company shares be made by a shareholder who acquires a major holding in the securities of the company. In assessing this obligation those acting in concert are aggregated. Here Mr. Ching, with the assistance of the others, accumulated shares of ENM Holdings Ltd. under the name of four British Virgin Island companies he owned for the benefit of his longtime friend Ms. Nina Kung. At the time Ms. Kung held 34.64% of the shares. The acquisition increased her holdings to 44.33%, triggering the mandatory general offer obligation.
Boiler room: The Financial Conduct Authority obtained a worldwide injunction against Berkley Brooks LLC, a suspected boiler room. The firm had solicited about 20 investors and raised approximately £650,000.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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