This Week In Securities Litigation

Dorsey & Whitney LLP

The Newman personal benefit test in insider trading tipping cases is front and center this week as the Supreme Court agreed to consider the issue. The Court passed on the opportunity to consider the question when first presented in Newman at the request of the government. This week the High Court granted certiorari in Salman, a Ninth Circuit case in which the opinion was authored by Judge Rakoff sitting by designation. The petition was filed by the Defendant whose interpretation of Newman was rejected by the panel.

The Commission prevailed twice in court this week, once in the court of appeals and once in the district court. The Eleventh Circuit affirmed a grant of summary judgment in favor of the agency and against a lawyer who lied four times about the existence of an SEC investigation involving his corporate client. A jury returned a verdict in favor of the agency in a somewhat unusual insider trading case involving a Capital One employee who analyzed customer credit card data to determine store trends and then traded in the securities of the stores while in possession of the information.


Remarks: Keith Higgins, Director, Division of Corporation Finance, delivered the key note address to the Fifteenth Annual Institute on Securities Regulation in Europe titled “International Developments – Past, Present and Future,” London, England (January 21, 2016). His remarks focused on the staff report on the internationalization of the markets and reviewed significant changes over the last several years (here).


Remarks: Commissioner Sharon Brown addressed the District of Columbia Bar Association (January 12, 2016). Her remarks discussed position limits (here).

Supreme Court

Insider trading: The Supreme Court granted certiorari in Salman v. U.S., No. 15-628 (January 19, 2016). The key question for decision is the Newman personal benefit test for tipping.

SEC Enforcement –Litigated Actions

Insider trading: SEC v. Huang, Civil Action No. 15-cv-269 (E.D. Pa. Filed Jan. 22, 2015). The complaint alleged insider trading based on the misappropriation theory against two former employees of the financial institution, Bonan Huang and Nan Huang. From November 2013 through January 2015 the two defendants were alleged to have misappropriated material inside information from their employer and used that information not to trade in the shares of Capital One but those of retail establishments reflected in the credit card statements of Capital One card holders. The scheme generated over $2.8 million in trading profits in one of their accounts. During the period the defendants, employed as data analysts, were tasked with analyzing transactions for possible fraudulent credit card activity. As such the two men had access to customer data held by the financial institution. That included details on numerous consumer purchase transactions. Using their access to Capital One customer data, the two defendants conducted thousands of searches, analyzing retail transactions. The defendants accessed data regarding transactions at over 140 retail establishments that accepted Capital One credit cards. The defendants used this data to trade, according to the SEC. For example, prior to an earnings announcement by a retail store the defendants would retrieve data about a particular store from the charge accounts of Capital One cardholders and analyze the sales trends. Trades were then placed in the securities of the company prior to earnings announcements. This permitted the two defendants to successfully trade in the shares of the company in violation of the specific policies of their employer. Defendant Nan Haung was found to have violated Exchange Act Section 10(b) by a jury following trial. Remedies will be decided in the future. See Lit. Rel. No. 23445 (January 14, 2016).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 1 civil injunctive case and 2 administrative proceeding, excluding 12j and tag-along proceedings.

Investment fund fraud: SEC v. Marquis Properties, LLC, Civil Action No. 2:16-cv-00040 (January 21, 2016) is an action against the company, Chad Deucher, its CEO and President and Richard Clatfelter, an executive vice president of the firm alleging that about 250 investors lost $28 million as a result of defendants’ offering fraud. Specifically, the complaint alleges that beginning in early 2010 the defendants sold interests in the company, representing that the funds would be used to purchase properties. That representation was false. In fact the money was used in Ponzi fashion to repay other investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). A temporary freeze order issued on filing of the complaint. The case is in litigation. See Lit. Rel. No. 23451 (January 21, 2016).

Sale of unregistered securities: In the Matter of Edward H. Spiegel, Adm. Proc. File No. 3-17062 (January 21, 2016) is a proceeding which names as Respondents Mr. Spiegel and ARRG Corporation. The order alleges that in March 2011 the company, controlled by Mr. Spiegel, purchased and converted about $193,000 of MusclePharm Corporations aged debt into 7.7 million shares in violation of the registration provisions of the federal securities laws. The shares were then resold the into the public market at a profit of $338,000. The proceeding was resolved with each Respondent consenting to the entry of a cease and desist order based on Securities Act Sections 5(a) and 5(c). Each Respondent also consented to the entry of a penny stock bar and they agreed to pay, on a joint and several basis, disgorgement of $337,601, prejudgment interest and a civil penalty of $22,500.

Disclosure: In the Matter of Equinox Fund Management, LLC, Adm. Proc. File No. 3-17057 (January 19, 2016). Equinox Fund Management is an asset management firm that specializes in managed futures and a registered investment adviser and a commodity pool operator. Equinox is the managing owner of The Frontier Fund, a managed futures fund, which operates as a series trust with numerous series engaged in separate trading strategies. The assets of each series are valued and accounted for separately. Frontier Fund failed to adhere to disclosed policies and procedures regarding three key items. Those included the manner in which fees were charged and the procedures used to value certain options and the transfer of an option. The firm also failed to properly disclose subsequent events. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The adviser will also pay disgorgement of $6,000,067, prejudgment interest and a penalty of $400,000.

Internal controls: In the Matter of Ocwen Financial Corp., Adm. File No. 3-17060 (January 20, 2016) is a proceeding which centers on the failure of Ocwen to adopt policies and procedures regarding related party transactions despite the fact that its Executive Chairman of the Board repeatedly dealt with two related firms. Ocwen disclosed that it had such policies when in fact it did not. While the Executive Chairman did recuse himself at times when related party issues arose, the practice was inconsistent. The firm’s failure to have appropriate polices is an internal control weakness and resulted in the Executive Chairman repeatedly approving transactions between Ocwen and the two related party entities. In addition, the firm materially misstated its net income for three quarters in 2013 and the first quarter of 2014 by relying on an improper valuation from one of the related parties. The Executive Chairman expected that valuation to have a significant variance from fair value but it was larger than expected. The Audit Committee also failed to review the valuation. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(b). To resolve the proceeding the company consented to the entry of a cease and desist order based on the Sections cited in the Order. It also agreed to pay a penalty of $2 million.


Refusal to cooperate: The Board announced settled disciplinary proceedings against a Hong Kong audit firm and three individuals. The action centered on the audit work for a public company in the PRC. The individuals refused to testify, citing the need to process the request through Chinese authorities. Each consented to the entry of an order barring them from being an associated person (here).

Criminal cases

Investment fraud: U.S. v. Wessel (S.D.N.Y.). Defendant Stephen Wessel was sentenced to serve 55 months in prison for securities fraud, wire fraud and aggravated identity theft. Mr. Wessel claimed to be Chairman and Executive Managing Member of Steeplechase USA, LLC. He represented to one investor that he would invest their funds in securities. The investor gave Wessel $200,000. In fact the money was misappropriated. Later when the investor requested the capital and the profits Mr. Wessel claimed the investment made, the defendant secured a loan from another investor. That loan was to be used to finance a commercial real estate project. Instead the money went to the first investor. In addition to the prison term, the court ordered three years of supervised release and the payment of $499,000 in restitution.

Court of Appeals

False statements: SEC v. Merkin, No. 13-13929 (11th Cir. January 13, 2016) is an action against attorney Stewart Merkin. In the district court the Commission alleged that attorney Merkin wrote letters falsely stating that his client, StratoComm Corporation, was not under investigation by the agency. The district court granted the SEC’s motion for summary judgment, finding violations of Exchange Act Section 10(b). The Circuit Court affirmed. See Lit. Rel. No. 23449 (January 20, 2016).

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.

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