The Supreme Court handed down its much anticipated decision in Halliburton. While the Court declined to overrule Basic and its presumption of reliance based on the fraud-on-the-market theory, it did alter existing practice. The Court held that in attempting to rebut the presumption, defendants can introduce evidence demonstrating a lack of price impact. That practice is currently used to an extent in some circuits.
The New York Attorney General brought a fraud action against Barclays’ based on the operation of its dark pool. The AG claimed that while investors were promised a safe trading environment, in fact the bank allowed predatory trading practices to occur.
Finally, the SEC entered into another deferred prosecution agreement, this time with a regional bank involving a financial fraud. The Commission also instituted two related administrative proceedings, one of which will be set for hearing. In addition, the agency brought a pay-to-play proceeding, an investment fraud case and actions based on a prime bank fraud scheme and insider trading.
Remarks: Chair Mary Jo White delivered remarks at the Stanford University Rock Center for Corporate Governance Twentieth Annual Stanford Directors’ College, Stanford, California (June 23, 2014). Her remarks discussed directors as gatekeepers, tone at the top, self-reporting and cooperation (here).
Pilot Plan: The Commission announced that it has ordered FINRA and the national exchanges to work with it in the development of a 12 month pilot program which will widen minimum quoting and trading increments for certain small capitalization stocks (here).
Rules: The Commission adopted its first series of rules and guidance on cross-border security-based swap activities for market participants (here).
Fraud-on-the-market presumption: Halliburton Co. v. Erica P. John Fund, No. 13-317 (Decided June 23, 2014). The Court rejected claims that Basic Inc. v. Levinson, 485 U.S. 224 (1988), which substituted a rebuttable presumption based on the fraud-on-the-maket theory for the element of reliance, be overruled. The Court held: “We adhere to the [Basic] decision and decline to modify the prerequisites for invoking the presumption of reliance. But to maintain the consistency of the presumption with the class certification requirements of Federal Rule of Civil Procedure 23, defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 4 civil injunctive actions, DPAs, NPAs or reports and 5 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Insider trading: SEC v. Payton, Civil Action No. 14-CV-4644 (June 25, 2014) is an action against two former brokers, Benjamin Durant III and Daryl M. Payton. The action centers on the acquisition of SPSS Inc. in 2009 by IBM Corporation. The complaint alleges that the two defendants traded on inside information from Thomas Conradt, named in a previous enforcement action. The case is discussed in detail here. A parallel criminal action was brought by the Manhattan U.S. Attorney. See Lit. Rel. No. 23031 (June 25, 2014).
Prime bank fraud: SEC v. Robinson, Civil Action No. 2:14-cv-1036 (D. Nev. June 26, 2014) is an action against Cheryl Robinson who is alleged to have acted as a promoter in a prime bank scheme involving Malom Group AG from 2009 to 2001. The case is discussed in detail here. Ms. Robinson settled the action, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Section 10(b). The order precludes her from participating in the issuance, offer, or sale of any security with the exception of those traded on a national securities exchange. She also agreed to pay disgorgement of $204,417 and prejudgment interest. Based on inability to pay, no penalty was imposed. See Lit. Rel. No. 23032 (June 26, 2014).
Investment fund fraud: In the Matter of David J. Montanino, Adm. Proc. File No. 3-15943 (June 24, 2014). Mr. Montanino is the sole officer and director of Calibourne Capital Management, LLC, a state registered adviser, and the portfolio manager of American Private Fund I, LP. He was previously associated with a broker dealer. Mr. Montanino, and his now deceased business partner, raised about $794,000 from investors from early February 2010 through mid-2011 in two private placements using American Private, a fund which claimed to invest in a portfolio of investment funds. Those funds were either lost or misappropriated. Mr. Montanino also deceived an advisory client who invested in American Private regarding the operations of the fund, its management, the investment program and its prospects as well as his background. Respondent took portions of the investor funds for personal use. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advises Act Sections 206(1) and 206(2). The proceeding will be set for hearing.
Financial fraud: In the Matter of Thomas A. Neely, Jr., Adm. Proc. File No 3-15945 (June 25, 2014) and In the Matter of Jeffrey C. Kuehr, Adm. Proc. File No. 3-15946 (June 25, 2014) are proceedings against, respectively, Mr. Neely, E.V.P of Regions’ Bank risk management credit division and Mr. Kuehr, E.V.P and head of Regions’ special asset department, and Michael J. Willoughby, a senior EVO and Regions’ CCO. The Orders allege that in the first calendar quarter of 2009 the special asset department initiated procedures to place about $168 million of commercial loans into non-accrual status. Mr. Neely circumvented the banks controls and, without supporting documentation, took steps to keep the loans in accrual status. His actions, which evaded the bank’s controls, prevented Regions from appropriately measuring impairment in accordance with GAAP. The books and records which included the loans were incorporated into the financial statements for the quarter ended March 31, 2009. As a result, income before taxes, net income applicable to common shareholders and earnings per common share for the quarter were overstated. The Order as to Mr. Neely alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) , 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). This case will be set for hearing. The Order as to Messrs. Kuehr and Willoughby alleges violations of the same Sections and, in addition, Exchange Act Section 20(b). Messrs. Kuehr and Willoughby each consented to the entry of a cease and desist order based on the Sections cited in the Order. Each Respondent also agreed to the entry of an order barring them from serving as an officer or director of a public company for five years. In addition, Respondent will pay a penalty of $70,000. The bank entered into a deferred prosecution agreement, in recognition of its cooperation and extensive remedial undertakings. It will also pay a penalty of $26 million that will be offset provided it pays a $46 million penalty assessed by the Federal Reserve. The bank will pay a $5 million penalty to the Alabama Department of Banking.
Registration-pay-to-play: In the Matter of TL Ventures Inc., Adm. Proc. File No. 3-1594 (June 2, 2014); In the Matter of Penn Mezzanine Partners Management, L.P., Adm. Proc. File No. 3-15939. The Respondents in these proceedings are both unregistered investment advisers. Each claimed an exemption from registration but files reports with the Commission. Each firm is charged with violating Section 203(a) of the Advisers Act regarding registration. TL Ventures is also charged with violating Rule 206(4)-5 under the Advisers Act, the pay-to-play rule enacted in the wake of Dodd-Frank. The claim is predicated on the Section 203(a) violation. Generally, the pay-to-play rule prohibits investment advisers from furnishing advisory services for compensation to a government client, or an investment vehicle in which a government entity invests, for two years after the adviser, or certain of its executives or employees, make a campaign contribution to certain elected officials or candidates. The pay-to-play rule on its face does not apply to TL Ventures since it is unregistered – unless it must register. Here the Order alleges that the firm is required to register and not entitled to the exemption claimed because, effectively, TL Ventures and Penn Mezzanine operated as one. Under those circumstances each must register. In addition, TL Ventures violated the pay-to-play rule because over a period of years the Pennsylvania State Employees’ Retirement System and the Philadelphia Retirement Board invested in its funds. At the same time a TL Ventures covered employee—generally those who have a direct stake in the enterprise – made campaign contribution to a candidate for mayor of Philadelphia and the state governor, each of whom have the authority to appoint members to the board of their respective funds. The Order as to TL Ventures Inc. alleges violations of Advisers Act Sections 203(a), 206(4) and 208(d). The Order as to Penn Mezzanine alleges violations of Advisers Act Sections 203(a) and 208(d). Each firm resolved the proceeding. The Commission considered the remedial acts of each, including the adoption of appropriate policies and procedures. TL Ventures consented to the entry of a cease and desist order based on the Sections cited in the Order in which it is named as a Respondent and to a censure. The firm also agreed to pay disgorgement of $256,697, prejudgment interest and a $35,000 penalty. Penn Mezzanine consented to the entry of a cease and desist order based on the Sections cited in the Order in which it is named as a Respondent and to a censure.
Investment fund fraud: SEC v. Weston Capital Asset Management LLC, Civil Action No. 14-cv-80823 (S.D. Fla. Filed June 23, 2014) is an action against the registered investment adviser, Albert Hallac, its founder, and Keith Wellner, its general counsel and COO. In late 2011 the defendants transferred over $17 million from a hedge fund they managed. The money was transferred to another investment and consulting firm. Shareholders were not notified of the transaction which was contrary to the operating documents. To the contrary, shareholders continued to receive statements falsely stating that their investment was performing well. Portions of the transferred funds were used by the defendants and $3.5 million went to pay down part of a loan from another fund managed by the firm. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Each of the defendants settled, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. Mr. Wellner agreed to pay disgorgement of $120,000. The court will determine monetary sanctions against the other two defendants. See Lit. Rel. No. 23026 (June 23, 2014).
Financial fraud: U. S. v. Higgs, 1:12-cr-00088 (S.D.N.Y. Plea February 1, 2012) is an action in which former Credit Suisse Managing Director David Higgs previously pleaded guilty under a cooperation agreement to conspiracy to falsify the books and records of the bank. He was sentenced to time served with no supervised release. He was also directed to pay forfeiture in the amount of $900,000, a $50,000 fine and a $100 special assessment. The case was based on a scheme in which Mr. Higgs and three others at the bank falsified the books of the bank. Specifically, they mispriced mortgage backed securities in the trading department to avoid the huge loses that would have resulted from properly valuing the securities. Previously, he settled with the SEC, consenting to the entry of a permanent injunction based on Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). No disgorgement or penalties were ordered. The settlement cited Mr. Higgs’ cooperation. SEC v. Kareem Serageldin, Civil Action 12 CIV 0796 (S.D.N.Y. Settled January 21, 2014).
Inflated NAV: U.S. v. Balboa, No. 1:12-cr-00196 (S.D.N.Y.) is an action against the former portfolio manager for Millennium Global Emerging Credit Fund, Michael Balboa. He was convicted following a jury trial of securities fraud, wire fraud and investment adviser fraud. The charges were based on a scheme in which the hedge fund represented that its securities were independently valued to calculate NAV when in fact one was not. Rather they were falsely marked-up. When regulators began investigating Mr. Balboa took steps to conceal his involvement. This week he was sentenced to serve four years in prison followed by three years of supervised release. He was also ordered to forfeit $2.23 million and pay a $500 special assessment fee and restitution in excess of $390 million.
Investment fund fraud: After a hearing an order was entered expelling Success Trade Securities, Inc. from membership and barring its CEO and President, Faud Ahmed. Over a period of four years beginning in 2009 the firm and Mr. Ahmed sold $19.4 million in Success Trade promissory notes while failing to tell investors that the company had lost money every year but one. Portions of the funds raised were used for Mr. Ahmed’s personal expenses. The order also directs the payment of about $13.7 million in restitution to 59 investors, the majority of whom are current and former NFL and NBA players.
Broker audits: The Board release Staff Guidance for Auditors of SEC-Registered Brokers and Dealers (here).
Dark pools: The New York AG has expanded his Insider Trading 2.0 investigation to include additional market issues. Now it includes dark pools with the first action being brought against Barclays. It centers on claims that the bank made misrepresentations to clients about the pool. Specifically, the complaint alleges that the bank misrepresented how it used the pool. Barclays stated that it did not favor its pool when seeking execution for orders. In fact the statement is not true. In addition, the bank misrepresented the safety of trading in the pool. Barclays claimed that it monitored the dark pool to eliminate high speed, predatory trading. Participants were told that the firm operated a surveillance system called Liquidity Profiling which tracked each trader to identify predatory traders, rate them based on certain characteristics and hold them accountable. In fact Barclays never precluded a participant from trading in the pool. The firm also did not regularly update ratings on high-frequency traders monitored by Liquidity Profiling. Indeed, in some instance Barclays overrode ratings from the system regarding high speed traders and assigned them safe ratings. Overall, in marketing the pool the financial institution misrepresented the number of high speed traders using it and the safety of the pool. This action is pending in New York State court.
Report: The Securities and Futures Commission released its annual report (here).