This Week In Securities Litigation

by Dorsey & Whitney LLP
Contact

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

SEC

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.

Australia

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.

Hong Kong

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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.