The Commission prevailed after a two week jury trial in an insider trading case this week, ending a string of losses. The agency also filed two settled actions, one based on insider trading claims and another involving overbilling by an assistant to an investment adviser. Finally, the SEC concluded four other actions — two insider trading cases, a misappropriation action and its FCPA case against several Siemens’ executives.
Remarks: Commissioner Kara M. Stein addressed the Trader Forum 2014 Equity Trading Summit, New York City (Feb. 6, 2014). Her remarks focused on making the markets more robust and efficient (here).
Testimony: Chair Mary Jo White testified before the Senate Committee on Banking, Housing, and Urban Affairs (Feb. 6, 2014). Her testimony reviewed primarily the implementation of select portions of Dodd-Frank (here).
Testimony: Chair Mary Jo White testified regarding The Impact of the Volcker Rule on Job Creators, Part II (here).
SEC Enforcement – Litigated Cases
Investment fund fraud: SEC v. Quan, Case No. 0:11-cv-00723 (D. MN Filed March 24, 2011) is an action against hedge fund manager Marlon Quan and his entities, Acorn Capital Group, LLC and Stewardship Investment Advisors, LLC which were used to manage several hedge funds. Following a two week trial, the jury returned a verdict in favor of the Commission on each of its fraud charges except on Securities Act Section 17(a)(1).
The action centered on funneling investor funds to the Tom Petters Ponzi scheme. From 2001 through 2008 Mr. Quan raised, according to the complaint, over $459,077,561 from at least 165 investors. Those investors and entities invested in Mr. Quan’s hedge funds. Portions of the investor funds were funneled to fraudster Tom Petters and his entities in exchange for promissory notes. He claimed to operate funds in which investor money was used to finance the purchase of merchandise for re-sale to “big box” retailers such as Wal-Mart and Costco. In reality, Mr. Petters operated a massive Ponzi scheme, the assets of which have been seized by a Court appointed Receiver. Mr. Quan and his entities were paid over $93 million in fees.
When soliciting funds from investors, Mr. Quan furnished them with written materials which assured then that big-box retailers were making payments into a lock box controlled by one of his entities. He also told investors that a major accounting firm had been retained to examine the books of the entities controlled by Mr. Petters, that there was insurance against default and that proper due diligence had been undertaken. Those representations were false, according to the Commission. In 2007 when the Petters entities began to default on their notes, Mr. Quan and his entities took steps to cover-up and conceal the truth from their investors. The SEC’s complaint alleged violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4). See Lit. Rel. No. 22925 (Feb. 11, 2014).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed or announced the filing of 1 civil injunctive, DPAs, NPAs or reports and 1 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Overbilling: In the Matter of Ronald E. Huxtable II, Adm. Proc. File No. 3-15748 (Feb. 12, 2014). Ronald Huxable, a retiree, became associated with an unidentified investment adviser in early 2009 and began trading options in his accounts. Later he brought clients A, B, C, D, E, F and G to the advisory. Most understood that he placed trades in their accounts under the direction of the Adviser. Mr. Huxable split the advisory fees with the Adviser. In February 2011 Clients B, C and H had net losses in their accounts as did Mr. Huxtable. Rather than reflect the losses in the accounts, the Adviser decided to spread them over a five month period. Accordingly, in February only one fifth of the loss was reflected in each of the accounts, making them appear profitable when they were not. Under those circumstances management fees were due. The clients and Mr. Huxtable were then sent statements for management fees as if the profits were real, Each statement was paid. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). To resolve the proceeding Mr. Huxtable consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of an order barring him from the securities business. In addition, Mr. Huxtable agreed to pay disgorgement of $12,132, prejudgment interest and a penalty of $50,000.
Insider trading: SEC v. Conradt, Civil Action No. 12-8676 (S.D.N.Y.) is a previously filed action against Mr. Conradt, Trent Martin and David Weishaus. The case centered on the acquisition by International Business Machine, Inc. of SPSS, Inc. in 2009. Prior to the announcement of the deal Mr. Martin misappropriated inside information about the transaction from his roommate, an associate at a large law firm. He then tipped Mr. Conradt who tipped Mr. Weishaus. Each man traded. This week the Commission announced that on December 26, 2013 the Court entered a final judgment by consent against Mr. Weishaus which permanently enjoined him from future violations of Exchange Act Section 10(b) and directed the payment of $227,485 in disgorgement along with prejudgment interest and a civil penalty equal to the amount of the disgorgement. Each defendant previously pleaded guilty in a parallel criminal case. See Lit. Re. No. 22926 (Feb. 12, 2014).
Insider trading: SEC v. Well Advantage Ltd., Civil Action No. 12-cv-5786 (S.D.N.Y.) is a previously filed “suspicious trading” action against the Hong Kong based company. The action centered on the acquisition of Canadian owned oil assets by Chinese oil company Nexen. Well Advantage purchased a large stake in Nexen shortly before the deal announcement. Previously, the Commission was able to identify Ren Feng and his wife Zeng Huiyu as unknown traders and settle with them. This week the Commission settled with CITIC Securities International Investment Management Ltd. and China Shenghai Investment Management Limited. CITIC agreed to pay $3,299,596.84 as disgorgement and a penalty equal to that sum. China Shenghai agreed to pay disgorgement of $4,268,057.16 to settle the charges.
Insider trading: SEC v. He, Civil Action No. 1:14-cv-00344 (N.D. Ga. Filed February 6, 2014) names as a defendant Hao He, known as Johnny He. Mr. He is the sole owner and officer of Torin Drive International LLC. The company, based in Memphis, Tennessee, has suppliers in China. The action centers on trading ahead of negative guidance issued by Sina Corporation, a foreign private issuer headquartered in Shanghai, China. From October 10, 2012 through November 5, 2012 Mr. He traveled to Shanghai, China. Shortly after his return Mr. He had several telephone conversations with an unknown “person or persons” in China. On November 13, 2012 Mr. He purchased 50 November put options contracts for Sina Corporation due to expire on November 17, 2012. The next day he purchased an additional 200 Sina November put option contracts. After the close of the markets on November 15, 2012, Sina released earnings which exceeded the expectations of analysts for the third quarter of the year. At the same time the firm “unexpectedly gave weak fourth quarter guidance, well short of analyst expectation.” When the markets opened the next day Sina’s share priced dropped 8.5%, opening at $48.60 compared to the close one day earlier of $53.10. Following the announcement Mr. He sold his options for $331,530.83, resulting in profits of $169,819.10. The complaint alleged violations of Exchange Act Section 10(b). The defendant settled the action, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to pay disgorgement of $169,819.10, prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 22921 (Feb. 7, 2014).
Misappropriation: SEC v. Onyx Capital Advisors, LLC, Civil Action No. 2:10-cv-11633 (E.D. Mich. Filed April 22, 2010) is a previously filed action against the Advisor, Roy Dion, Jr. and Michael Farr. The complaint alleged that about $23.8 million was raised from three public pension funds for a start-up private equity fund. Defendants then illegally withdrew money invested by the pension funds to pay for personal expenses. The funds were taken under the guise of management fees. After granting summary judgment the Court entered a final judgment against the firm and Mr. Dixon. The judgment permanently enjoins the two defendants from future violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). It also requires the payment, jointly, of disgorgement in the amount of $3.1 million along with prejudgment interest and a penalty in the same amount. In addition, the Court ordered Mr. Farr to pay disgorgement in the amount of $2.3 million, prejudgment interest and a civil penalty of $1 million. Previously the Court had entered a permanent injunction against Mr. Farr prohibiting future violations of Advisers Act Sections 206(1) and 206(2). See Lit. Rel. No. 22922 (Feb. 7 2014).
SEC v. Sharef, Civil Action No. 11-Civ-09073 (S.D.N.Y.) is a previously filed action against seven executives of Siemens arising out of the FCPA action against that firm. Specifically, the complaint alleged that defendants Ulrich Bock, Stephan Signer, both former employees of the German parent corporation, Andres Truppel, former CFO of Siemens Argentina, and others, engaged in a scheme from 2001 through 2007 to bribe senior government officials in Argentina to retain a large contract for a national identity card project. Mr. Truppel settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A, 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). In addition, he was ordered to pay a civil penalty of $80,000. Messrs. Bock and Signer defaulted. At the Commission’s request, permanent injunctions prohibiting future violations of the same Exchange Act Sections cited in order against Mr. Truppel were entered against the two men. In addition, each was ordered to pay a civil penalty of $524,000, “the highest penalty assessed against individuals in an FCPA case,” according to the Commission. The judgment also orders Mr. Bock to pay disgorgement of $313,452 and prejudgment interest. See Lit. Rel. No. 22923 (Feb. 10, 2014).
Survey: AlixPartners published their Annual Global Anti-Corruption Survey/Survey of General Counsel and Compliance Officers, available here. The survey records the attitudes of senior corporate officials regarding corruption risk and the implementation of policies.
Proposed Rule: The Board approved a proposed rule that would prohibit firms and associated persons from conditioning settlements of customer disputes on, or otherwise compensating customers for, an agreement not to oppose a request to expunge information from an associated person’s Central Registration Depository record. The proposal will be forwarded to the SEC for review, public comment and approval.
Auditor independence: The Australian Securities & Investments Commission accepted an enforceable undertaking from auditors Martin George Thompson and Allan Ni Kwan Kwok of Wong & Mayers Chartered Accountants regarding auditor independence and rotation requirements. Specifically, an ASIC inquiry found that Mr. Thompson, after seven years as lead auditor, continued to provide non-audit services during the following two year prohibited periods. This is contrary to the Code of Ethics. Mr. Kwok as lead auditor failed to identify and declare Mr. Thompson to be in contravention of the Code in two reports. To address a concern regarding the adequacy of the firm’s systems in this regard the two men have been required to: 1) Engage an ASIC approved auditor to review the controls and policies with respect to compliance of ethical requirements; 2) implement the recommendations from the review; and 3) engage a third party to provide pertinent training to all partners. Mr. Thompson will also be required to take additional training in ethics and have an independent auditor review the next audits of his top three audit fee-paying clients.
Disclosure: The ASIC announced that Diploma Group Ltd. was fined $33,000 for failing to comply with its continuous disclosure obligation. The company entered into an agreement to sell certain assets dated December 4, 2012. The sale materially enhanced its financial position according to the company. Nevertheless, it delayed announcing the transaction until July 31, 2013.
Freeze order: The ASIC obtained a freeze order against the Charterhill group of companies and their principals George and Betty Nowak. The firms purported to be “one stop shopping” for investors. They specialize in assisting clients to invest in property through self-managed superannunation funds. The firms recently went into liquidation. The order freezes the assets, restricts the travel of principals and requires them to surrender their passports.
False statements: Mr. Ng Kai Chak was convicted on two counts of misleading the Securities and Futures Commission during an investigation. During an inquiry into the manipulation of the shares of Sino-Tech International Holdings Ltd. Mr. Ng twice mislead investors about the control of his securities account, falsely claiming that he personally placed the trades. Investigators determined this was incorrect, however, since the orders were placed through the Internet Protocol address assigned to the workplace of Mr. Wong Chun who is now being prosecuted for market manipulation.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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