The U.S. Chamber of Commerce published a report containing a series of recommendations regarding the SEC’s Enforcement program. Several recommendations focused on the use of administrative proceedings, including one which would permit a Respondent seeking a jury trial to essentially opt out of the proceeding and have the case reinstituted in Federal court.
The D.C. Circuit rejected a claim that Exchange Act Section 4E, which requires that enforcement actions be brought within 180 days of issuing a Wells notice, constituted a bar to bring a proceeding after that date. The Court deferred to the SEC’s interpretation which concluded that the Section was simply and internal rule, despite the fact that the decision it was reached in the context of reviewing a decision in an enforcement action rather than rule making.
Finally, the SEC resolved another action in which a firm’s procedures resulted in inaccurate blue sheets by requiring admissions of facts. In another case the agency gave definition to the meaning of cooperation in resolving charges with a defendant at the center of an insider trading ring who, according to the SEC, gave extraordinary cooperation. Although an injunction was imposed and disgorgement ordered, the payment would be satisfied through the forfeitures/restitution made in the parallel criminal case. No penalty was ordered. The sentence in the criminal case has not yet been imposed
Remarks: SEC Chair Mary Jo White delivered remarks at the 2015 National Association of Women Lawyers Annual Meeting and Awards Luncheon, July 16, 2015. Here remarks focused on the evolution of women in the profession (here).
USCC Report on SEC Enforcement
The U.S. Chamber of Commerce published a report regarding the enforcement practices of the SEC titled “Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices, July 2015” (here). The Report contains twenty-nine recommendations for improving the program divided into ten categories which focus on: The use of administrative proceedings; Wells notices; admissions; duplicative regulatory enforcement; enforcement policy; improving Commission oversight of the enforcement process; the transparency of the enforcement process; streamlining the investigative process; document requests during an investigation; and improving the efficiency of the investigative process.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed -3 civil injunctive cases and 1 administrative actions, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Sudfeld, Jr., Civil Action No. 15 3939 (E.D. Pa. Filed July 16, 2015). Defendant Herbert Sudfeld, Jr. was a real estate partner at a Doylestown, Pennsylvania law firm that was advising Harleysville Group, Inc. regarding its merger with Nationwide Mutual Insurance Co. Mr. Sudfeld was not working on the deal. Rather he learned about the pending deal announcement from a conversation between an attorney working on the transaction and their shared legal assistant. The day before the announcement he purchased a total of 3,000 shares of Harleysville stock in his wife’s IRA account. Following the announcement of the deal the stock price was up 87%. Mr. Sudfeld sold the stock, yielding profits of $79,410. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of Pennsylvania filed parallel criminal charges.
Insider trading: SEC v. McGee, Civil Action No. 12-cv-1296 (E.D. Pa.) is a previously filed action which named as defendants Timothy McGee and Michael Zirinsky, both former registered representatives at Ameriprise Financial Services, Inc. The complaint alleged that Mr. McGee misappropriated inside information about the merger of Philadelphia Consolidated Holdings Corp. with Tokio Marine Holdings, Inc. from a Philadelphia Consolidated executive told him about the deal at an Alcoholics Anonymous meeting. Mr. McGee subsequently traded. Previously, he was convicted of insider trading and perjury. He settled the SEC’s charges, consenting to the entry of a final injunction based on Exchange Act Section 10(b), agreeing to pay disgorgement of $292,128 and prejudgment interest. The Court had granted summary judgment earlier. Mr. Zirinsky previously settled. See Lit. Rel. No. 23304 (July 15, 2015).
Investment fund fraud: SEC v. Moore, Civil Action No. 15 cv 1575 (S.D. Cal. Filed July 16, 2015) is an action which names as a defendant Paul Moore, who operated Coast Capital Management, LLC. Mr. Moore solicited clients to invest with Coastal Capital using a series of misrepresentations regarding his experience and the firm. In reality Coastal Capital, which is now defunct, was a Ponzi scheme. Mr. Moore diverted almost $2 million to his personal use. Another $625,000 in investor funds were diverted to repaying other investors. To conceal the scheme investors were given false account statements. The complaint alleges violations of Section 10(b) and each subsection of Rule 10b-5, each subsection of Securities Act Section 17(a) and Advisers Act Sections 201(1), 206(2) and 206(4). The case is in litigation. A parallel criminal action was brought by the U.S. Attorney’s Office for the Southern District of California.
Procedures: In the Matter of OZ Management, L.P., Adm. Proc. File No. 3-16686 (July 14, 2015) is a proceeding which names the investment adviser as a Respondent. Over a period of six years beginning in 2008, the adviser provided inaccurate trade data to four prime brokers. That data was in turn furnished to the Commission as blue sheets and to FINRA causing several inaccurate referrals on potential Rule 105 violations. The firm resolved the matter by admitting to the facts and consenting to the entry of a cease and desist order based on Exchange Act Section 17(a). The firm will also pay a penalty of $4,250,000.
Microcap fraud: SEC v. Gallison, Civil Action No. 1:15-cv-05456 (S.D.N.Y. Filed July 14, 2015) names thirty–four defendants, including fifteen individuals and nineteen entities. Key individual defendants include: Harold Gallision, a founder of defendant Moneyline Brokers, and a securities law recidivist; Carl Kruse Sr., Carl Kruse Jr., Frank Zangara, Charles Moeller and Mark Dresner. Key entity defendants include Moneyline, a purported broker dealer based in Costa Rica and controlled by Mr. Gallison; Bastille Advisers, Inc., Club Consultants, Inc., Jurojin, Inc., Sandias Azucaradas CR S.A., and Vanilla Sky, S.A., all affiliated with Moneyline and referred to as Moneyline entities.
Beginning in 2009, and continuing through most of the next year, Moneyline and the Moneyline entities operated as a broker-dealer under the control of Mr. Gallison. The firm sought U.S. based customers who wanted to manipulate the share price of microcap firms they controlled or owned. Under the Moneyline business model U.S. customers were instructed to transfer microcap shares to U.S. brokerage accounts in the name of Moneyline entities. The shares were unregistered and after transfer comingled with other held assets to conceal the actual ownership from the brokers. The Moneyline entities represented to the U.S. brokers that they were the beneficial owners of the shares. A group of Moneyline affiliated persons assisted customers with market manipulation schemes by directing matched trades. The two manipulations here centered on Warrior Girl and Everock Inc., both shell companies. The manipulations employed matched and wash trades and false statements. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a). In addition, it alleges violations of Exchange Act Sections 9(a), 10(b), 15(a), 17(a) and control person liability under Section 20(a). The case is in litigation. See Lit. Rel. No. 23303 (July 14, 2005). A parallel criminal case was initiated by the Department of Justice.
Insider trading/cooperation: SEC v. Tamayo, Civil Action No. 3:14-cv-09844 (D. N.J.). Cooperating defendant Frank Tamayo was the man in the middle of an insider trading ring with two of his friends — Steven Metro, a managing clerk at Simpson Thatcher, and Vladimir Eydelman, a registered representative with Oppenheimer & Co. In the scheme Mr. Metro stole information from his employer, passed it to Mr. Tamayo who then typically met with Mr. Eydelman in Grand Central Station, later did research on the stock as a cover and ultimately placed the trades. The scheme yielded about $5.6 million in trading profits. Mr. Tamayo cooperated with the U.S. Attorney and the SEC. This week he settled with the SEC. Based on what the SEC termed “extensive cooperation” he resolved the civil enforcement action. Under the terms of the agreement Mr. Tamayo consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). He was also ordered to pay disgorgement of over $1 million. That amount will be deemed satisfied by the entry of orders of forfeiture or restitution in the parallel criminal case where he has pleaded guilty. No monetary penalty was imposed. He is also obligated to continue cooperating with the authorities. The settlement is subject to court approval. See Lit. Rel. No. 23202 (July 13, 2015).
Court of appeals
Internal enforcement deadlines: Montford and Company, Inc. v. SEC, No. 14-1126 (Decided July 10, 2015). The decision centers on the meaning of Exchange Act Section 4E which provides that not “later than 180 days after the date on which Commission staff provides a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action.” The Section was added to the Exchange Act as part of Dodd-Frank. Petitioners Montford and Company, a registered investment adviser, and Ernest Montford, its founder, claimed this provision was violated when an enforcement action was brought against them183 days after a Wells notice. Respondents efforts to secure a dismissal of the proceeding were rejected by the ALJ and the Commission. The DC Circuit affirmed, essentially giving deference to the Commission decision that even absent an extension by the Director of Enforcement, the provision is just an internal deadline that does not act as a statute of limitations. The Court held that it did “not owe the Commission’s interpretation any less deference because the Commission interprets the scope of its own jurisdiction . . . Nor is it relevant that the Commission’s interpretation is the result of adjudication, rather than notice-and-comment rulemaking.” This is because for “traditional agencies” such as the SEC, adjudication is an appropriate forum in which to exercise lawmaking by interpretation. Section 4E is ambiguous and the SEC’s determination is reasonable the Court found.
Insider trading: Northern Star Resources director Peter Farris pleaded guilty on two counts of insider trading. The Australian Securities and Investment Commission determined that he traded in advance of a firm announcement that its major shareholder and managing director had sold 37 million shares of the firm. By selling before he announcement Mr. Farris avoided a loss of almost $124,000. He was sentenced to serve two years and nine months in prison which was suspended and to pay a fine of $65,000. Mr. Farris consented to forfeiting the loss avoided amount.
Misrepresentations: Laura Kaing Mang Yi, a representative at Bank Julius Baer & Co. Ltd. was banned from the securities business for three years. The Securities and Futures Commission found that she had furnished her employer false credentials regarding her academic background, including a fake diploma.
Personal account: The SFC barred Tai Nga Chun, a registered representative at Kingston Corporate Finance Limited, from the securities business for eight months. The agency determined that he maintained a secret personal account through which he traded for a period of two months in violation of his employer’s rules.