This Week In Securities Litigation

by Dorsey & Whitney LLP

During the holiday period the SEC filed three insider trading cases as administrative proceeding. Three actions were brought involving major Wall Street banks; one centered on “parking” allegations involving Morgan Stanley and a broker; a second on undisclosed conflicts at JP Morgan in which admissions were required as part of the settlement; and a third based on false advertising at JP Morgan. In addition, the Commission brought actions alleging a failure to maintain audit work papers, for not securing best execution and two stop order proceedings.


Report: The Commission issued two staff reports on nationally recognized statistical rating organizations or NRSROs. Overall the reports show that the firms have made operational improvements and enhanced their processes. (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 3 civil injunctive cases and 7 administrative proceeding, excluding 12j and tag-along proceedings.

False advertising: In the Matter of J.P. Morgan, Adm. Proc. File No. 3-17036 (January 6, 2016). JPM Securities is a wholly-owned subsidiary of JPMorgan Chase & Co. The firm is a registered broker dealer and investment adviser. It provides brokerage services to a business unit called J.P. Morgan Private Bank which is a marketing name for a segment that provides banking and investment services in the U.S. to high net worth and ultra-high net worth customers. Over a period of four years beginning in 2009 JPM Securities used marketing materials where were false despite repeated warnings by personnel. Specifically, the materials stated that JPM Securities compensated registered representatives in Private Bank based solely on the performance of investments in customer accounts. In fact they were paid a salary and a bonus which depended on a number of factors that did not include client account performance. Over a three year period beginning in 2011 four JPM Securities employees noted that the statement about broker compensation was inaccurate. No changes were made. The Order alleges willful violations of Securities Act Section 17(a)(2). To resolve the proceeding Respondent undertook remedial action considered by the Commission. The firm also consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. In addition, JPM Securities will pay a penalty of $4 million.

Insider trading: In the Matter of Vivian S. Shields, Adm. Proc. File No. 3-17034 (January 4, 2016). The case centers on the tender offer for the shares of J. Alexander’s Corporation by Fidelity National Financial, Inc., announced on June 25, 2012. The deal which lead to the tender offer began on April 17, 2012 when Fidelity proposed a tender offer for 50.1% of J. Alexander’s common stock. The two companies entered into an exclusivity agreement the next day. Meetings between executives of the two firms were subsequently held between April 26, 2012 and May 2, 2012. On May 18, 2012 Ms. Shields “indirectly acquired material, nonpublic information relating to what was ultimately a tender offer . . .” from a J. Alexander’s employee, according to the Order. On June 1 and 6 Ms. Shields purchased a total of 12,000 shares of J. Alexander’s stock while in possession of that information. Ms. Shields sold 1,000 shares of the stock in mid-July and tendered the balance in September. In total Ms. Shields had profits of $71,401.12. The Order alleges violations of Exchange Act Section 14(e) and Rule 14e-3.

To resolve the action Ms. Shields consented to the entry of a cease and desist order based on the Section and Rule cited in the Order. She also agreed to disgorge her trading profits, pay prejudgment interest and a penalty equal to the amount of the trading profits.

Disclosure: SEC v. New Stream Capital, LLC, Civil Action No. 3:13-cv-264 (D. Conn.) is a previously filed action against the firm, David Bryson and Bart Cutekunsk, both owners of the firm, and Richard Pereira, its CFO. The complaint alleged that the defendants, who ran a hedge fund complex focused on illiquid investments, significantly altered its capital structure without informing investors. Eventually the firm collapsed leaving investors with lower recoveries. The court entered final judgment by consent against Messrs. Byson, Butekunst and Pereira, enjoining each from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). Messrs. Bryson and Guetkunst were also enjoined from future violations of Advisers Act Sections 206(1) and 206(2). The judgments against the three men require that each pay disgorgement in the amount of, respectively, $6,347,252.55, $6,258,445.49 and $454,471.50 which shall be satisfied by paying $57 million in a parallel criminal action. Penalties were not imposed in view of the prison sentences imposed. Each individual defendant was also barred from the securities business in a separate administrative proceeding. The Commission agreed to the dismissal of the claims against New Stream and New Stream Capital (Cayman), Ltd, both of which are now defunct. See Lit. Rel. No. 234404 (December 28, 2015).

Insider trading: SEC v. Huang, Civil Action No. 2:15-cv-00269 (E.D. Pa.) is a previously filed action alleging insider trading by Bonan Huang based on information misappropriated from his employer, Capital One Financial Corporation. The court entered a final judgment by consent against Mr. Huang, prohibiting future violations of Exchange Act Section 10(b) and directing that he pay disgorgement, prejudgment interest and a penalty totaling over $4.7 million. The case will proceed to trial against co-defendant Nan Huang, beginning on January 11, 2016. See Lit. Rel. No. 23438 (December 23, 2015).

Market manipulation: SEC v. Ling, Civil Action No. 23439 (D.N.J.) is a previously filed action against Michael Ling. It alleged that he manipulated the share price through matched trades and marking-the-close of Cyberdefender Corporation, a now defunct computer firm. The purpose was to maintain the share price at or above $4.00 for 90 days to aid the firm in securing a listing on Nasdaq Capital Market. The court entered a final judgment by consent, prohibiting future violations of Securities Act Section 17(a) and Exchange Action Section 10(b). The judgment also directs the payment of $454, 005.98 in disgorgement and prejudgment interest and $100,000 as a civil penalty. See Lit. Rel. No. 23439 (December 23, 2015).

Insider trading: In the Matter of Danny E. Carpenter, Adm. Proc. File No. 3-17021 (December 22, 2015) is a proceeding which names as Respondents: Mr. Carpenter, the CFO at Acadia Healthcare, Inc.; Alwyn Wyche, Jr., the owner of a home appliance business; Philip Holley who provided consultative services to Acadia; and Wayne Soud, Jr., who also provided professional and consultative services to Acadia. In late December 2010 and early January 2011 Mr. Carpenter learned that his firm was considering the acquisition of Pioneer Behavioral Health, Inc. On May 23, 2011 the two firms executed a merger agreement. The next morning, before the opening of the markets, the deal was announced. Mr. Carpenter told the information to his “good friends,” Messrs. Wyche and Holley. Both knew the disclosures were made in violation of Carpenter’s duties. Subsequently, Mr. Holey told Mr. Soud about the possible deal, knowing that he might trade. The conversation was followed with an email in which Mr. Holley disclosed to Mr. Soud the number of shares he purchased. Mr. Holley also recommended Pioneer as an investment to Individual A, a person with whom he had a close personal relationship. Mr. Holley bought 4,500 shares of Pioneer. Individual A purchased 2,000 shares of the firm while Mr. Soud bought 14,742 shares. Mr. Wyche purchased 37,000 shares of Pioneer. After the deal announcement the share price of Pioneer increased about 20%. Each trader profited. There is no direct allegation of a Newman personal benefit. Messrs. Carpenter, Holley, Soud and Wyche settled, consenting to the entry of cease and desist orders based on the Section cited in the Order. Mr. Carpenter will pay a civil penalty of $39, 242. Mr. Holley will pay disgorgement of $8,120 which covers his profits and those of Individual A, prejudgment interest and a penalty of $4,060 (Messrs. Holley and Wyche agreed to undertakings to cooperate). Mr. Soud will pay disgorgement of $13,710, prejudgment interest and a civil penalty of $13,710. Mr. Wyche will pay disgorgement of $7,116, prejudgment interest and a penalty of $7,116 (based on cooperation as noted above).

Audit documents: In the Matter of Spicer Jeffries LLP, Adm. Proc. File No. 3-17018 (December 22, 2015) is a proceeding which names as a Respondent, the audit firm. From 2009 through 2013 the firm failed to properly maintain the audit work papers for six engagements for broker dealers. During the period the firm also failed to have in place reasonable procedures to ensure compliance. The Order alleges the firm engaged in unprofessional conduct. To resolve the proceeding the firm agreed to implement certain undertakings, including the retention of a consultant and to the entry of a censure.

Parking: In the Matter of Morgan Stanley Investment Management Inc., Adm. Proc. File No. 3-17016 (December 22, 2015) is a proceeding which names as Respondents the firm, a registered investment adviser, and Sheila Huang, a former Managing Director. The action centered on six sets of trades. The first five were effectuated as prearranged cross trades that resulted in undisclosed favorable treatment to the purchasing clients. The sixth set of trades involved certain accounts subject to ERISA where Ms. Haung became aware that losses would be incurred if the positions were sold. To avoid this Ms. Huang orchestrated a scheme to sell the bonds at above market prices to brokerage SG Americas Securities, LLC while at the same time selling two bonds from the unregistered fund to the broker at below market prices for no legitimate purpose except to offset the above market prices of the bonds sold from the ERISA accounts. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(2) and 206(4). To resolve the proceeding Morgan Stanley consented to the entry of a cease and desist order based on Securities Act Section 17(a)(3) and Advisers Act Sections 206(2) and 206(4), as well as a censure. The firm will also implement a series of undertakings and pay a penalty of $8 million and reimburse certain client accounts $857, 534. Ms. Huang consented to the entry of a cease and desist order based on Securities Act Section 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). She also consented to the entry of an order barring her from the securities business with a right to reapply after 5 years and which requires the payment of a penalty of $125,000. See also In the Matter of SG Americas Securities LLC, Adm. Proc. File No. 3-17017 (December 22, 2015), a proceeding against the broker and its trader involved in the transactions detailed above, resolved by the broker with a consent to a cease and desist order based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b) and the payment of a penalty in the amount of $800,000 (cooperation was considered) and disgorgement of $198,338 along with prejudgment interest and by the consent of the broker to a cease and desist order based on the same Sections, the entry of an order barring her from the securities business with a right to reapply after 3 years and the payment of a penalty of $25,000).

Offering fraud: SEC v. Southern Cross Resources Group, Inc., Civil Action No. 15-cv-11506 (N.D. Ill. Filed December 22, 2015) is an action against the firm, an asset based trading company, and its CEO Michael Nasatir and President Andrew Madenberg. Defendant are alleged to have raised about $5 million from almost 100 investors in 12 states over two years. In soliciting investors, defendants misrepresented the assets Messrs. Nasatir and Madenberg were claimed to have placed in the firm, and the amount of coal reserves supposedly owned by the company. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23436 (December 22, 2015).

Stop order: In the Matter of the Registration Statement of Blue Mountain Eco Tours, Inc., Adm. Proc. File No. 3-17011 (December 21, 2015); In the Matter of the Registration Statement of Scription Work Solutions, Inc., Adm. Proc. Proc. File No. 3-17010 (December 21, 2015). These are stop order proceedings involving two firms with one person in control where there is little or false information. Each will be set for hearing.

Best execution: In the Matter of KCG Americas LLC, Adm. Proc. File No. 3-17012 (December 21, 2015) is a proceeding which names as a Respondent the registered broker-dealer, a subsidiary of Knight Capital Holdings LLC. For a three year period beginning in 2010 the broker-dealer failed to obtain best execution for clients through a system malfunction. The Order alleged violations of Securities Act Sections 17(a)(2) and 17(a)(3). 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. Respondent will also pay disgorgement of $685,900, prejudgment interest and a civil penalty of $300,000. The Commission considered Respondent’s remedial acts in determining to accept the settlement.

Conflicts: In the Matter of JPMorgan Chase Bank, N.A., Adm. Proc. File No. 3-17008 (December 18, 2015) names as Respondents the Bank and J.P. Morgan Securities LLC. Both are wholly owned subsidiaries of JPMorgan. Securities is a registered investment adviser. Over a five year period beginning in early 2008 Securities failed to disclose that it designed and operated Chase Strategic Portfolio, a retail unified managed account program, with a preference for Proprietary Mutual Funds. It also failed to inform clients that there were less expensive Proprietary Mutual Funds. The Bank failed to disclose its preference for Proprietary Funds to discretionary managed clients. In addition, it failed to disclose a preference for Proprietary Hedge Funds. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Advisers Act Sections 206(2), 206(4) and 207. To resolve the proceeding each Respondent admitted to the facts in the Order and to violating the federal securities laws. In addition, the Bank consented to a cease and desist order based on the Sections of the Securities Act cited in the Order. Securities consented to the entry of a cease and desist order based on the Advisers Act Sections cited in the Order and to a censure. Respondents will, jointly and severally, pay disgorgement of $127.5 million, prejudgment interest and a penalty equal to the amount of the disgorgement.

Offering fraud: SEC v. Durante, Civil Action No. 1:15-cv-09874 (S.D.N.Y. Filed December 18, 2015) is an action which names as a defendant Edward Durante, a securities law recidivist. The scheme began while Mr. Duarte was serving a 10 year prison sentence. Using the fictitious name “Anthony Walsh” he negotiated to acquire control of VGTel, a shell company. Through the acquisition he obtained control. He then sold shares of the shell to about 50 relatively unsophisticated investors, raising $11 million. He was aided in this effort by two financial industry workers he bribed and through his manipulation of the share price by engaging conducting matched orders with a stock broker. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1) and 10(b). The complaint is pending. A parallel criminal action was brought by the U.S. Attorney’s Office for the Southern District of New York. See also Lit. Rel. No. 23434 (December 18, 2015).

Insider trading; In the Matter of Eric E. Shear, Adm. Proc. File No. 3-17009 (December 18, 2015) is a proceeding against Mr. Shear, formerly the Director of Business Development of Pioneer Behavioral Health, Inc. He learned in the first half of April 2011 through his position that the firm was about to engage in a significant transaction. Subsequently, he traded in the firm’s shares through the account of a family member, generating gains of $2,968. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. He will also pay disgorgement of $2,968, prejudgment interest and a penalty equal to his trading profits.


Rules: The Board adopted rules requiring disclosure of the engagement partner and other accounting firm participation in an audit (here).

Hong Kong

MOU: The Securities and Futures Commission entered into an agreement with the CFTC for cross-border cooperation between the two regulators.

Procedures: The SFC reprimanded and find former ABN Amro Bank N.V. account executive Lui Chi Hang for failing to follow account opening procedures and lending money to a client which created a conflict of interest. The fine was $300,000. The agency took into account his cooperation and clean disciplinary record.

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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