High speed trading and insider trading were key topics this week. Author Michael Lewis released a new book on high speed trading and, in an interview claimed the markets are “rigged.” The Commission focused on insider trading. This week the agency filed three new insider trading actions while resolving others. The Commission also filed a new offering fraud action and another centered on a pyramid scheme.
The DOJ unsealed an indictment which named six foreign nationals in an FCPA related bribery scheme. One of the defendants is a foreign official who solicited the bribes. The scheme focused on mineral production in India.
Proposed rules: The SEC reissued for comment proposed rules regarding the marketing materials used for target date retirement funds (here).
Testimony: Chair Mary Jo White testified before the House Subcommittee on Financial Services and General Government (April 1, 2014). Her testimony reviewed recent rule making initiatives, expanded oversight of investment advisers, provided an overview of recent enforcement initiatives and referenced the use of technology and oversight of the markets (here).
Remarks: Commissioner Luis Aguilar delivered remarks titled “Taking an Informed Approach to Issues Facing the Mutual Fund Industry´ (April 2, 2014). In his remarks the Commissioner discussed oversight of the industry, the FSOC and OFR and money market funds, the need for Commission expertise in regulating mutual funds and the growing cyber threat (here).
Remarks: Chair Mary Jo White delivered remarks titled “All-Encompassing Enforcement: The Robust Use of Civil and Criminal Actions to Police the Markets.” Her remarks focused on the vigorous use of all enforcement tools, the benefits of a strong partnership with the DOJ and the FBI, the importance of “stand alone” SEC actions, insider trading, microcap fraud and financial reporting fraud (here).
Remarks: Kenneth Higgins, Director, Division of Corporation Finance delivered the Keynote Address at the 2014 Angel Capital Association Summit, Washington, D.C. (March 28, 2014). His remarks included comments on the elimination of the general solicitation prohibition, reasonable steps to verify an accredited investor and Regulation A (here).
Distributions: The agency announced that the MF Global Inc. Trustee will being making final distributions to customers to satisfy its obligation of full restitution for the $1.212 billion in loses sustained by customers when the firm failed in 2011.
Securities Class Actions
Settlement trends: Last year 67 securities class actions settled. That is the largest number since 2010 when 85 cases settled, according to a new report. Cornerstone Research. Securities Class Action Settlements, 2013 Review and Analysis. In 2012 57 securities class actions settled while in 2011 65 cases were resolved. The total settlement dollars evidenced similar trends. The 67 settlements recorded last year yielded $4,774 million compared to the prior year when the total value was $3,264 million and 2011 when the amount was $1, 411 million. The total settlement dollars last year was the largest since 2007 when it was $8,131 million.
The most prevalent claim in the post reform act period has been one based on Exchange Rule 10b-5. Suits based only Securities Act Sections 11 and/or 12(a)(2) were the least prevalent. However, the highest median settlement value over the period was achieved when the claims were combined. The median settlement value for Rule 10b-5 cases was $6.8 million during the period compared to $3.4 million for Section 11 and/or 12(a)(2) cases. When the Exchange Act and Securities Act claims were combined the median settlement amount increased to $11.7 million.
Finally, the number of settled securities class actions with a parallel SEC case continued to fall last year. In 2013 about 19% of those actions had a parallel case brought by the Commission. That compares to 21% the prior year and 23% in the post reform act era. Interestingly, the median settlement of cases with a parallel SEC action in the post reform act period is $12.9 million, more than twice the median settlement value for cases without a parallel SEC action. A more detailed discussion of the report is available here.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 5 civil injunctive, DPAs, NPAs or reports and 1 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Insider trading: SEC v. Wagner, Civil Action No. 8:14-cv-01036(W.D. Md. Filed April 3, 2014) is an action against Walter Wagner and Alexander Osborn. It centers on the acquisition by Chicago Bridge & Iron Company, N.V. of The Shaw Group Inc., announced on the morning of July 30, 2012. Prior to that date John Femenia, a personal friend of Mr. Wanger, was employed in the investment banking division of Wells Fargo Securities, LLC. Through that position he learned about the transaction and gifted the information to his friend who had lost his job. Mr. Wagner shared the information with his friend, Alexander Osborn. Both traded in the securities of the Shaw Companies and, following the deal announcement, had profits of, respectively, $517,784 and $439,830. The Commission’s complaint alleges violations of Exchange Act Section 10(b). Mr. Wagner resolved the action, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement and prejudgment interest. The Court will determine any financial penalty. A parallel criminal action against Mr. Wagner was announced by the U.S. Attorney’s Office for the Western District of North Carolina. See Lit. Rel. No. 22965 (April 3, 2014).
Unregistered securities: In the Matter of Donald J. Anthony, Jr., Adm. Proc. File No. 3-15514 (April 3, 2014) is a previously filed proceeding against a number of individuals centered on a series of offerings through MS&Co. undertaken in violation of Securities Act Sections 5 and 17(a), discussed here. Richard Feldmann, one of the registered representatives named as a Respondent, resolved the charges this week. He consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of a bar from the securities business and from participating in nay penny stock offering. Mr. Feldmann will pay disgorgement of $299,000, prejudgment interest and a civil money penalty of $130,000.
Insider trading: SEC v. Terpins, Civil Action No. 13-CIV-1080 (S.D.N.Y.) is a previously filed action arising out of the acquisition of H.J. Heinz (here). This week the Court entered final judgments against two brothers in Brazil, Rodrigo and Michel Terpins. The order enjoins them from future violations of Exchange Act Section 10(b) and directs the payment of disgorgement, on a joint and several basis with Alpine Swift Ltd., in the amount of $1,809,857. In addition, each brother was directed to pay a civil penalty of $1.5 million. See Lit. Rel. No. 22964 (April 3, 2014).
Fee discounts: In the Matter of Transamerica Financial Advisors, Inc., Adm. Proc. File No. 3-15822 (April 3, 2014) is a proceeding against the registered investment adviser and broker dealer. In its Form ADV the firm represented that clients could obtain certain advisory fee discounts. The firm’s policies and procedures also stated that certain discounts were available. Despite those statements, and a warning from the inspection staff, the firm failed to make them available in certain instances and did not have procedures reasonably designed to ensure that they would be made available. The Order alleges that the firm willfully violated Sections 206(2), 206(4) and 207 of the Advisers Act. To resolve the proceeding the firm undertook certain remedial efforts including providing refunds and credits to 2,304 accounts of clients and former clients totaling $553,624.32, including interest. It will also retain an independent consultant who will compile a report and make recommendations which will be implemented. In addition, the firm consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm will pay a civil money penalty in the amount of $553,624 and to comply with its undertakings.
Insider trading: SEC v. Kinnucan, Civil Action No. 12-CV-1230 (S.D.N.Y.) is a previously filed action against John Kinnucan and his firm, Broadband Research Corporation that arises out of the expert network insider trading investigations discussed here. Previously, Mr. Kinnucan pleaded guilty to two counts of securities fraud and one count of conspiracy to commit securities fraud and was sentenced to prison. This week the Court granted the Commission’s motion for summary judgment against Mr. Kinnucan and his firm. The Court entered orders of permanent injunction against each defendant, prohibiting future violations of Exchange Act Section 10(b). It also directed the payment, on a joint and several basis, of disgorgement in the amount of $1,583,445.96 along with prejudgment interest and a civil penalty of $4,750,337.88. See Lit. Rel. No. 22963 (April 2, 2014).
Kickbacks: SEC v. Molinari, Civil Action No. 13-cv-80807 (S.D. Fla.) is a previously filed action against several microcap companies and their CEOs centered on a broker kickback and manipulation scheme discussed here. The Court granted the Commission’s motion for judgment on the pleadings as to defendant Stephen Molinari who previously was convicted and sentenced to prison in the parallel criminal case. The Court entered an injunction based on Securities Act Section 17(a)(1) and Exchange Act Section 10(b) against Mr. Molinari and, in addition, officer and director and penny stock bars. Claims for monetary relief were dismissed in view of the criminal conviction. The Court also entered a final judgment by consent as to his company, Nationwide Pharmassist Corporation. The Court entered an injunction based on the same Sections as the order against Mr. Molinari. The firm was ordered to pay a civil penalty of $20,000. The Court dismissed the Commission’s claims for disgorgement and prejudgment interest. See Lit. Rel. No. 22959 (April 1, 2014).
Unregistered broker: SEC v. Sheinwald, Civil Action No. 12-iv-5811 (S.D.N.Y.) is a previously filed action against Alan Sheinwald and his firm, Alliance Advisors. The complaint alleged that they acted as unregistered brokers in violation of Exchange Act Section 15(a) by receiving transaction based compensation in exchange for actively soliciting investors to participate in securities offerings as discussed here. On March 17, 2014 the Court entered permanent injunctions prohibiting future violations of the Section cited in the complaint as to each defendant and ordered them to pay disgorgement of $177,166, prejudgment interest and a civil penalty of $25,000. In a related administrative proceeding the two defendants consented to the entry of an order barring them from the securities business and from participating in any penny stock offering with the right to apply for reentry after two years. See Lit. Rel. No. 22961 (April 1, 2014).
Insider trading: SEC v. Hawk, Case No. 5:14-CV-01466(N.D. Cal. Filed March 31, 2014) centers on the tender offer by Oracle Corporation for Acme Packet Inc., announced on February 5, 2013. Tyrone Hawk’s wife was a finance manager at Oracle.
On January 14, 2013 Mr. Hawk’s wife learned that her firm may acquire Acme Packet. She began working on the due diligence and was aware of the scheduled announcement date. Mr. Hawk overheard some of his wife’s telephone calls regarding the transaction. He was also told by his wife while she was working on the due diligence that Oracle had imposed a securities trading blackout for three weeks because of a potential acquisition.
On January 17 Mr. Hawk began purchasing shares of Acme Packet. Over the next two weeks he acquired a total of 28,000 shares valued at $669,000. Prior to the open of the market on February 4, 2013 Oracle and Acme Packet announced an all-cash offer of $29.25 per share for Acme’s outstanding stock. That represented a premium of about 22% over the then current trading price. The next day the share price for Acme rose 23% to $29.59. Mr. Hawk sold all of his shares, realizing profits of $151,490. The complaint alleged a violation of Exchange Act Section 10(b). To resolve the case Mr. Hawke consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. In addition, he agreed to pay disgorgement of $151,480, prejudgment interest and a civil penalty equal to the amount of his disgorgement. See Lit. Rel. No. 22957 (March 31, 2014). This case is also discussed here.
Insider trading: SEC v. Chen, Case No. 5:14-cv-01467 (N.D. Cal. Filed March 31, 2014). Defendant Ching HwaChen’s wife was employed by Informatica Corporation as its Senior Tax Director. She was informed on June 28, 2012 that the firm would not meet its previously disclosed revenue guidance. This would be the first time in 31 consecutive quarters that the company would not meet guidance. The firm also needed to finalize its quarterly results earlier that anticipated to determine if the earnings miss should be disclosed prior to the earnings call. During a long weekend vacation the next week Mrs. Chen took work related calls and worked. Mr. Chen heard the substance of the calls. He “gleaned from his wife’s business calls and behavior” that Informatica might miss its revenue numbers. Despite an earlier admonition by his wife to never trade shares of her firm, on July 2 and 3, 2012 Mr. Chen sold Informatica shares short, sold call options and bought put options in four family brokerage accounts he controlled. The firm disclosed that it would not meet its previously issued revenue guidance after the close of the market on July 5, 2012. The next day its share price tumbled over 27% from the prior day’s closing price. On July 6 Mr. Chen closed all of his positions, realizing profits of $138,068. The Commission’s complaint alleges a violation of Exchange Act Section 10(b). To resolve the action Mr. Chen consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. In addition, he agreed to pay disgorgement of $138,068, prejudgment interest and a civil penalty equal to the amount of the disgorgement. See Lit. Rel. No. 22956 (March 31, 2014). This case is also discussed here.
Kickback scheme: SEC v. Syndicated Food Services International, Inc., Civil Action No. 04-CV-1303 (E.D.N.Y) is a previously filed action against, among others, Adam Klein, William Keeler and Jeffrey Richardson, discussed here. Previously the Court entered permanent injunctions against each of the men base on Securities Act Section 17(a) and Exchange Act Section 10(b). The order as to Mr. Keeler also included Securities Act Section 13(a) and contained an officer director bar. The order as to Mr. Klein contained a penny stock bar. Last week final judgments were entered which directed Mr. Klein to pay disgorgement of $151,500 and a civil penalty of $5,500; Mr. Richardson to disgorge $274,000 and pay a $55,000 civil penalty; and Mr. Keeler to pay a $220,000 civil penalty. See Lit. Rel. No. 22956 (March 31, 2014).
Offering fraud: SEC v. Halek, Civil Action No. 3:14-cv-01106 (N.D. Tx. Filed March 28, 2014) is an action against Jason Halek, Joshua Spivey, Patrick Booths and Steven Little centered on an offering fraud. Specifically, from September 2009 through mid-2010 the defendants sold more than $5.5 million in what were represented to be interests in various companies in the oil and gas business. In fact the companies were straw men used by Mr. Halek in an effort to avoid Commission scrutiny since he was named in another enforcement action. Rather the projects were owned by newly formed Halek Energy, owned by Messrs. Halek and Booths. Over 100 investors purchased shares in the fraudulent scheme. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 15(a) and Securities Act Sections 5(a), 5(c) and 17(a). Defendants Booths, Spivey and Little resolved the action, consenting to the entry of injunctions based on the Sections cited in the complaint and to bars from the securities business and from participating in any penny stock offering in a related administrative proceeding. The Commission is seeking civil penalties and disgorgement with prejudgment interest against each defendant. See Lit. Rel. No. 22954 (March 28, 2014).
Pyramid scheme: SEC v. World Capital Market Inc., Civil Action No. CV14-2334 (C.D.Ca. Filed March 27, 2014) is an action against Ming Xu or Phil Ming Xu, the Chairman of a number of the entity defendants, World Capital Market Inc., WCM777 Inc. and WMC777 Ltd, also known at WCM777 Enterprises, Inc. The complaint centers on a classic pyramid scheme that raised $65 million in a matter of months from thousands of investors. Specifically, the defendants began soliciting investors in March 2013 using the umbrella name WCM777. Investors were told that WCM777 was incubating a number of high tech companies which would generate profits from the sale of packages of cloud services to investors and that over 700 major companies were involved. Investors were told that they could participate at various levels, all of which would reap huge profits. In fact, the entire operation is a pyramid scheme, according to the Commission. WCM777 sells its products exclusively to investors. It has no apparent source of revenues other than investor funds. It does not actually offer or sell any of the cloud services it describes to investors. The claims regarding the partnerships with major firms were false. Much of the money was siphoned off for the personal use of the promoter and to a Hong Kong account. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 17(a), 5(a) and 5(c). It also asserts a claim for control person liability under Exchange Act Section 20(a). A request for an emergency freeze order by the SEC was granted. The case is pending. See Lit. Rel. No. 22953 (March 28, 2014). This case is discussed in detail here.
The DOJ unsealed this week and indictment against six foreign nationals, including one foreign official, which had been returned last year. Those named as defendants are: Dmitry Firtash, a Ukrainian national; Andras Knopp, a Hungarian businessman; Suren Gevorgyan, a Ukraine national; Gjendra Lal, an Indian national and permanent U.S. resident; Periyasamy Sunderalingam of Sri Lanka; and K.V.P. Ramachandra Rao, a Member of Parliament in India who was an official of the state government of Andhra Pradesh and a close advisor to the deceased chief minister of the state of Andhra Pradesh.
The case centers on $18.5 million in bribes allegedly paid to secure mining licenses in the Indian coastal state of Andhra Pradesh and involved 57 money transfers in furtherance of the conspiracy between late April 2006 and mid-July 2010. U.S. financial institutions were used to facilitate the transfers. The five count indictment charges each defendant with one count of racketeering conspiracy and money laundering conspiracy and two counts of interstate travel in aid of racketeering. Each defendant, except Mr. Rao, was charged with one count of conspiracy to violate the FCPA. A more detailed discussion of the cases is available here.
Insider trading: U.S. v. Hixon, 1:14-mj-0341 (S.D.N.Y.) is an action against former investment banker Frank Hixon who was a senior managing director of Evercore Group LLC. Between April 2010 and January 2014 he used inside information obtained from his employment to trade in a number of securities in the account of the mother of his child as discussed here. This week Mr. Hixon pleaded guilty to a six count information which charges securities fraud and obstruction. The SEC filed a parallel case which is pending.
Investment fraud: U.S. v. Zarkiewicz (S.D.N.Y.) is an action against Scot Zaarkiewicz, the co-founder and former CEO of SingleClick Systems Corp, a software company. From mid-2009 through June 2013 he raised about $6.3 million from 35 investors who purchased shares of the firm based on representations that it was very successful. In fact it had little revenue. Mr. Zarkiewicz previously pleaded guilty and this week was sentenced to serve 63 months in prison.
Agreement: The Board announced an agreement with the Supervisory Board of Public Accountants (RN) of Sweden related to the oversight of audit firms subject to the jurisdiction of each regulator. The agreement provides for cross-border cooperation and a framework for inspections and the sharing of confidential information.
Insider trading: Christopher Jordinson, the former CEO of UCL Resources Ltd, his nephew Joe Turner and Jonathan Breen were convicted of insider trading. Mr. Jordinson admitted communicating inside information to Mr. Turner in November 2013 regarding the takeover of his firm by Mawarid Mining LLC. Mr. Turner then tipped Mr. Breen who traded for Mr. Turner and another. Overall the trading yielded profits of $20,000. Messrs. Turner and Breen were ordered to be on good behavior for two years and to pay pecuniary penalty orders of $2,769 and $13,805.10 respectively. Mr. Jordinson was ordered to serve two years in prison. The sentence was suspended on condition that he enter into a two year good behavior bond.
Breach of duty: The Securities and Futures Commission suspended representative Chan Chi for six months. The action was based on the fact that he operated a client’s futures account as if it were discretionary when it was not and failed to ensure that the assets were properly accounted for.
Contempt: The SFO prevailed in the Supreme Court in an action centered on a contempt order against convicted boiler room operator Brian O’Brien. An order had been entered directing Mr. O’ Brien to repatriate all of his movable assets held outside the U.K. Mr. O’Brien failed to comply and returned to his home in Chicago. The court found him in contempt and sentenced him to prison. He was extradited from the U.S. and, after appealing the contempt order, lost the appeal.
Manipulation: The Serious Frauds Office announced the institution of criminal proceedings against three former employees of ICAP Plc. in connection with the manipulation of the bench mark interest rate LIBOR between August 2006 and early September 2010. They are Danny Wilkinson, Darrell Read and Colin Goodman. To date nine individuals have been charged in the investigation.