The President announced a new financial fraud task force focused on the root causes of the financial crisis in his State of the Union Address to Congress. The new task force is composed of DOJ and state prosecutors. It is charged with investigating the securitization process which many believe is at the center of the market crisis. While it is clear that the new task force differs from the one announced by the President in 2009, whether the group will simply reinvestigate areas which have been analyzed by the DOJ and SEC with a view toward bringing criminal actions, or will focus on other issues is unclear.

A new report on SEC enforcement settlements notes that the number of cases resolved in fiscal 2011 is about the same as in fiscal 2010 while the mean settlement value for cases against corporations and individuals increased. A comparable report on securities class actions reports a modest increase in the number of cases brought last year.

Finally, SEC enforcement this week focused on insider trading, financial fraud and account intrusion as well as failure to supervise. The Second Circuit handed down a decision interpreting Exchange Act Section 16(b).

Securities litigation trends

SEC enforcement: The Commission settled virtually the same number of cases in fiscal 2011 as in fiscal 2010, respectively 682 and 680, according to a recent report published by NERA. The median settlement value for companies in fiscal 2011 increased to $1.47 million from $800,000. For individuals the median value in fiscal 2011 was $175,000 which is a post-SOX high. The largest settlement reported by NERA for fiscal 2011 is a $330 million default judgment against Ponzi scheme operators Milowe Allen Brost and Gary Allen Sorenson. (Financial values reported by NERA combine disgorgement, prejudgment interest and civil penalties).

The case distribution for fiscal 2011 is similar to that of fiscal 2010. In fiscal 2011 the three largest groups of actions against corporations were: 1) financial services misrepresentations and misappropriation (89 cases); 2) Illegal securities offerings/market manipulation/microcap fraud (43); and 3) Ponzi schemes (27). This is similar to fiscal 2010. For individuals the three top categories were: 1) financial services misrepresentations and misappropriation (195); 2) illegal securities offerings/market manipulation/microcap fraud (143); and 3) insider trading (63). Again the results are similar to fiscal 2010.

Finally, in fiscal 2011 the SEC brought 63 insider trading cases compared to 70 in the prior year. The $92.8 million settlement with Raj Rajaratnam is the largest insider trading settlement ever reached by the Commission.

Class actions: The number of securities class actions filed in 2011 increased to 188 compared to 176 filings the prior year, according to a recent report from Cornerstone Research. That number is still below the average of 194 cases filed from 1997 through 2010. One large group of case is the 33 actions representing 17.6% of all securities class actions which are related to Chinese issuers listed on U.S. exchanges through reverse mergers. As the year progressed however, the number of these filings appeared to decline. A second large group of case were the 43 actions related to M & A activity. This appears to build on a trend which began in 2010.

Other key points indentified in the survey include:

• Stage of litigation: The survey analyzed the progress of securities class actions through the discovery process by taking a sample of cases from 1997 through 2011. Based on this sample 75% of the cases reached the motion to dismiss stage while only 8% reached a ruling on summary judgment.

• FCPA related cases: The survey also tracked the number of class actions related to FCPA investigations being conducted by the DOJ and the SEC. Since 1998 there have been 25 such actions filed. In 2011 the second largest number of these cases were filed. In 2005 the largest number of FCPA related cases were brought.

• Industry: In 2011 the largest number of cases was brought against companies in the telecommunications services industry. Over the years companies in the healthcare business have typically been a key target. Last year a number of securities class actions were brought against smaller health care companies.

• Whistleblowers: The new SEC whistleblower program received 334 tips. Most related to claims of market manipulation, corporate disclosures, financial statements and offering fraud. The data is only for seven weeks however.

SEC Enforcement: Filings and settlements

Insider trading: In the Matter of Spencer D. Mindlin, Adm. Proc. File No 3-14557 (Jan. 26, 2012) is an action instituted on September 21, 2011 against Spencer Mindlin, formerly an employee at Goldman, Sachs & Co. and his father, Alfred Mindlin for trading based on inside information obtained from Goldman’s Exchange Traded Funds Desk (here). Respondents agreed to settle the matter by consenting to the entry of a cease and desist order based on Exchange Act Section 10(b). Spencer Mindlin also agreed to the entry of an order barring him from the securities business and from participating in any penny stock offering. Respondents are jointly and severally liable for disgorgement of $57,481 along with prejudgment interest. Spencer Mindlin will also be required to pay a civil penalty of $25,000 (an affidavit on file demonstrates the cannot pay more than this amount).

Account intrusion: SEC v. Nagaicevs, Case No. CV-12-0413 (N.D. Cal. Filed Jan. 26, 2012) is an action against Igors Nagaicevs, a resident of Latvia. The complaint alleges that he conducted a widespread online account intrusion scheme. Mr. Nagaiceves is alleged to have broken into online brokerage accounts of customers at U.S. brokers and manipulated the stock prices of over 100 NYSE and Nasdaq securities by conducting unauthorized transactions in the hacked accounts. This occurred in about 150 instances over a period of 14 months. The defendant is alleged to have made more than $850,000 in illegal profits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Related administrative proceedings were brought against four electronic trading firms and individuals who are alleged to have given Mr. Nagaicevs online access to trade directly in the U.S. markets through an account held in the firm’s name without first registering as a broker. Respondents Mercury Capital, Lisa Hyatt and Richard Rizzo settled the proceedings by consenting to an order finding that they committed or aided and abetted and caused broker registration violations. Ms. Hyatt and Mr. Rizzo each also agreed to pay a $35,000 penalty. See, In the Matter of Alchemy Ventures, Inc., Adm. Proc. File No. 3-14720 (Jan. 26, 2012)(naming as Respondents are Alchemy Ventures, Inc., KM Capital Management, LLC, Zanshin Enterprises, LLC, Mark Rogers, Steven Hotovec, Joshua Klein, Yisroel Wachs, Frank McDonald and Douglas Frederick; this case will proceed to hearing); In the Matter of Mercury Capital and Lisa Hyatt, Adm. Proc. File No. 3-14719 (Jan. 26, 2012)(settled as noted above); In the Matter of Richard v. Rizzo, Adm. Proc. File No. 3-14718 (Jan. 26, 2012)(settled as noted above).

Insider trading: SEC v. Shafer, Civ. Action No. 1:12-CV-00062 (S.D. Ohio Filed Jan. 24, 2012) and SEC v. Ward, Civ. Action No. 1:12-CV-00061 (S.D. Ohio Filed Jan. 24, 2012) center on the acquisition of Oak Hill Financial, Inc. by WesBanco, Inc., announced on July 20, 2007. Shafer names as defendants Dale Schafer, interim CFO of Oak Hill, his cousin, Jason Gonski and the cousin’s friend, Joseph Mroz. On May 14, 2007 the President of Oak Hill advised Mr. Schafer that the company was in merger negotiations with WesBanco. Subsequently, Mr. Shafer told Mr. Gonski who traded. After Mr. Gonssku told his friend this fact, Mr. Shafer continued to update him on the merger. Mr. Shafer also told his friend, defendant Mroz, about the pending deal. Both traded. Mr. Gonski had profits of about $43,000 while Mr. Mroz had over $7,400.

The defendants in Ward are Robert Ward, a loan officer at Oak Hill, Benjamin Lewis, his childhood friend, Jamie Lewis, sister of Benjamin and Stanley Lewis, father of Benjamin and Jamie. Mr. Ward learned about the pending deal from an Executive Vice President of the bank. Shortly thereafter Mr. Ward told his friend Benjamin Lewis about the deal. The information was then passed to other Lewis family members. Each traded. All of the defendants settled with the Commission. Each defendant in each case consented to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, prohibiting future violations of Exchange Act Section 10(b). In addition, each agreed to pay as follows: Mr. Shafer: A civil penalty of $33,484.08 in addition to consenting to being barred from serving as an officer or a director for five years and to an order suspending him from appearing or practicing before the Commission as an accountant with a right to reapply after five years; Mr. Gonski: Disgorgement and prejudgment interest of $59,565.24 and a civil penalty of $50,686.38. Mr. Shafer is jointly and severally liable for $38,957.81 of the disgorgement while Mr. Mroz is jointly and severally liable for $8,766.74 of it; Mr. Mroz: In addition to the amount noted above, a civil penalty of $7,459.95; Mr. Ward: Is jointly and severally liable for the disgorgement and prejudgment interest for which the Lewis defendants are liable but that amount, along with any penalty, has been waived based on his financial condition; Benjamin Lewis: Disgorgement and prejudgment interest of $50,209.77 along with a penalty of $44,574.55; Stanley Lewis: Disgorgement and prejudgment interest totaling $54,715.77 along with a civil penalty of $48,842.66; and Jamie Lewis: Disgorgement and prejudgment interest totaling $17,564.70 along with a civil penalty of $14,995.58.

Financial fraud: SEC v. Familant, Civil Action No. 1:12-CV-00119 (D.C. Filed Jan. 25, 2012) is an action against Len Familant, then a senior vice president of InPhonic, Inc., and Paul Greene, president of Americas Premier Corporation. The complaint alleges that the two men engaged in a financial fraud from late 2005 through early 2007 to conceal the true financial condition of InPhonic. The defendants caused the two companies to engage in a series of fraudulent round-trip transactions to artificially inflate the financial results. Mr. Familant settled with the Commission, consenting to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, which precludes future violations of Exchange Act Section 10(b) and from aiding and abetting InPhonic’s violations of Sections 13(a) and 13(b)(2)(A). He also agreed to pay a $50,000 civil penalty and to be barred from serving as an officer and director of a public company. Mr. Greene is charged with violating, and aiding and abetting InPhonic’s and Mr. Familant’s violations of, the sections cited in Mr. Familant’s injunction. The action is pending as to him.

Insider trading: U.S. v. Newman, 12 mag 0124 (S.D.N.Y. Filed Jan. 18, 2012) and SEC v. Addondakis, 12-cv-0409 (S.D.N.Y. Filed Jan. 18, 2012) are the Dell insider trading cases. Diamondback Capital, LLC was named in the Commission’s action. Two employees of the firm were involved, according to the court papers. The DOJ and the SEC settled insider trading charges with Diamondback. The firm entered into a non-prosecution agreement with the U.S. Attorney’s Office and agreed to forfeit $6 million based on the profits it obtained/losses avoided. The firm also provided the U.S. Attorney’s Office with a detailed Statement of Facts relating to the alleged wrongful conduct of two of its employees named as defendants and represented, based on an investigation by outside counsel, that the misconduct under investigation does not extend beyond that described in the Statement of Facts and was not known by the co-founders of the firm. To settle with the Commission Diamondback consented to the entry of a permanent injunction which precludes future violations of the antifraud provisions of the federal securities laws and agreed to disgorge its trading profits and to pay a civil penalty of $3 million. The settlement papers do not specify that the firm neither “admits nor denies” the allegations in the complaint.

Failure to supervise: In the Matter of AXA Advisors, LLC., Adm. Proc. File No. 3-14708 (Jan. 20, 2012) is an action against a registered broker dealer and investment adviser for failure to supervise. From December 2005 through December 2008 the firm failed to properly supervise Leo Buggy. During that period Mr. Buggy fraudulently induced customers to redeem securities held at the firm based on false representations that the funds would be reinvested. In fact he misappropriated the client funds. In a related criminal action Mr. Buggy pleaded guilty to criminal charges and was sentenced to 46 months in prison. To settle the action the firm agreed to implement a series of undertakings including the retention of an independent compliance consultant. The firm also agreed to the entry of a censure and to pay a fine of $100,000. In accepting the settlement, the Commission acknowledged the cooperation of the firm and the fact that it reached out to each of the clients assigned to Mr. Buggy and no additional substantive concerns were identified.

Court of appeals

Short swing profits: Huppe v. WPCS International, Inc., No. 08-4463 (2^nd Cir. Decided Jan. 20, 2012) is derivative suit on behalf of WPCS International, Inc. against two funds under Section 16(b) of the Exchange Act. The two funds sold company shares from December 2005 through the end of January 2006. Following the restatement of its financial statements in March 2006, the share price of WPCS securities dropped, ending company plans for a secondary offering to finance an acquisition. The company approached the funds about acquiring shares in a PIPE. In April 2006 the funds, in conjunction with other affiliated investment vehicles, purchased 876,951 shares of WPCS at $7.00 per share. That price represented a discount of approximately 7% from the market price. The transaction was approved by the WPCS board of directors which used the capital infusion from the PIPE to make the acquisition. The share price for WPCS began to improve. Nevertheless, WPCS shareholder Maureen Huppe brought a derivative action in the name of the company against the funds based on Section 16(b). The district court ruled in her favor and the Second Circuit affirmed. The Court rejected contentions by the funds that since the transaction was initiated by the company and approved by the board it should be viewed as an exception to Section 16(b). Here the sales and purchases not only fall within Section 16(b) but also present the kind of potential congress sought to bar when drafting the Section the Court concluded. Accordingly, it is precluded by Section 16(b).

FINRA

Merrill Lynch was fined $1 million for failing to arbitrate disputes with its employees. FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated persons. Here, after its acquisition by Bank of America, Merrill Lynch entered into bonus arrangements structured as promissory notes with certain high produces to retain their services. The notes however were structured in a manner which was intended to circumvent FINRA rules and preclude arbitration. In fact they required litigation in the New York courts which severely restrict counter claims. Merrill filed over 90 actions in the New York courts based on the notes against individuals who left the firm.

PCAOB

The Board again proposed its auditing standard on communications with audit committees. Previously, it had proposed a standard to improve communications with audit committees in December 2010. Recently, Congress gave the Board authority over the audits of broker dealers. The re-proposed standard will cover those audits.

FSA

Insider trading: The regulator imposed a fine of ₤7.2 million on Greenlight Capital, Inc. and its owner, David Einhorn for insider dealing. According to the FSA, Mr. Einhorn was party to a telephone call on June 9, 2009 in which it was disclosed to him by a corporate broker acting for Punch Taverns Plc that the company was in an advanced stage of negotiating a significant equity fundraising. Immediately after the call Mr. Einhorn directed that his fund liquidate its Punch position which constituted about 13.3% of the outstanding shares. Over a four day period the firm reduced its position to 8.89%. On June 15, 2009 the Punch announced its fundraising. Its share price, fell 29.9%. In resolving the matter the FSA concluded that Mr. Einhorn’s trading was not deliberate because he did not believe the what he learned constituted inside information. Although the regulator accepted this statement, it concluded that this was not a reasonable belief for a market professional. The fine of ₤3,638,000 paid by Mr. Einhorn included the disgorgement of ₤638,000. The fine paid by Greenlight of ₤3,650,795 included disgorgement of ₤650,795.

After resolving insider trading charges against Diamondback Capital in the Dell insider trading cases, the Commission filed two more settled insider trading actions. SEC v. Shafer, Civ. Action No. 1:12-CV-00062 (S.D. Ohio Filed Jan. 24, 2012); SEC v. Ward, Civ. Action No. 1:12-CV-00061 (S.D. Ohio Filed Jan. 24, 2012).

Each case centers on the acquisition of Oak Hill Financial, Inc. by WesBanco, Inc., announced on July 20, 2007. Each involves a chain of traders initiated by an insider who learned about the transaction.

Shafer names as defendants Dale Schafer, interim CFO of Oak Hill, his cousin, Jason Gonski and the cousin’s friend, Joseph Mroz. On May 14, 2007 the President of Oak Hill advised Mr. Schafer that the company was in merger negotiations with WesBanco, a West Virginia based holding company. Although Mr. Mr. Schafer understood that this was material non-public information that he had an obligation not to disclose, according to the complaint, he called Mr. Gonski the next day and discussed the matter. At the time he confided to his cousin, as he had done in the past. During the conversation Mr. Shafer stated that he was angry over the merger because it might have a negative impact on his career despite all the personal sacrifices he had made for Oak Hill.

The day after his conversation with Mr. Schafer, Mr. Gonski purchased shares of Oak Hill and opened a brokerage account in his girlfriend’s name. In a subsequent telephone conversation Mr. Gonski told Mr. Schafer about the purchase. Mr. Gonski responded “Okay” and later updated him on the merger. Mr. Gonski bought more stock in his account and in the account of his girlfriend. He also told his friend, defendant Mroz, who also traded through an account which contained his funds as well as those of Mr. Gonski. Following the deal announcement Mr. Gonski had trading profits of about $43,000 while Mr. Mroz had over $7,400.

In November 2007 Mr. Shafer coordinated Oak Hill’s response to a FINRA questionnaire related to suspicious trading in the shares of the company. Mr. Shafer indicated that he recognized the names of Messrs. Gonski and his girlfriend but stated that he had no knowledge why they bought Oak Hill stock.

The defendants in Ward are Robert Ward, a loan officer at Oak Hill, Benjamin Lewis, his childhood friend, Jamie Lewis, sister of Benjamin and Stanley Lewis, father of Benjamin and Jamie. Mr. Ward, according to the complaint, initially observed a series of events which lead him to believe that Oak Hill was in merger negotiations. Eventually the Executive Vice President of the bank told him about the merger negotiations and that he had a fiduciary duty not to disclose the information.

Shortly thereafter Mr. Ward saw his friend Benjamin Lewis at a wedding reception and told him about the pending merger. Later Benjamin told his father Stanley who in turn told his daughter Jamie. Each purchased shares. By July 20, 2007 the Lewis family had accumulated 10,330 shares of Oak Hill stock for over $238,000. Following the public announcement Jamie sold her shares at a profit of over $14,995.58. Stanley Lewis transferred about 4,250 shares to his daughter and sold his remaining shares for a profit of $46,842.66. Benjamin also sold his shares for a profit of $44,574.55.

All of the defendants settled with the Commission. Each defendant in each case consented to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, prohibiting future violations of Exchange Act Section 10(b). In addition, each agreed to pay as follows:

• Mr. Shafer: A civil penalty of $33,484.08 in addition to consenting to being barred from serving as an officer or a director for five years and to an order suspending him from appearing or practicing before the Commission as an accountant with a right to reapply after five years;

• Mr. Gonski: Disgorgement and prejudgment interest of $59,565.24 and a civil penalty of $50,686.38. Mr. Shafer is jointly and severally liable for $38,957.81 of the disgorgement while Mr. Mroz is jointly and severally liable for $8,766.74 of it;

• Mr. Mroz: In addition to the amount noted above, a civil penalty of $7,459.95;

• Mr. Ward: Is jointly and severally liable for the disgorgement and prejudgment interest for which the Lewis defendants are liable but that amount, along with any penalty, has been waived based on his financial condition;

• Benjamin Lewis: Disgorgement and prejudgment interest of $50,209.77 along with a penalty of $44,574.55;

• Stanley Lewis: Disgorgement and prejudgment interest totaling $54,715.77 along with a civil penalty of $48,842.66; and

• Jamie Lewis: Disgorgement and prejudgment interest totaling $17,564.70 along with a civil penalty of $14,995.58.

The DOJ and the SEC settled insider trading charges with Diamondback Capital Management, LLC in the Dell insider trading cases. The firm entered into a non-prosecution agreement with the U.S. Attorney’s Office to resolve possible criminal charges. Under the terms of that agreement the firm will forfeit $6 million based on the profits it obtained/losses avoided. Diamondback also provided the U.S. Attorney’s Office with a detailed Statement of Facts relating to the alleged wrongful conduct of two of its employees named as defendants. The firm also represented, based on an investigation by external counsel, that the misconduct under investigation does not extend beyond that described in the Statement of Facts and was not known by the co-founders of the firm. Diamondback agreed to cooperate with the government’s on-going investigation. See also U.S. v. Newman, 12 mag 0124 (S.D.N.Y. Filed Jan. 18, 2012)(insider trading charges filed against the individuals in the Dell insider trading case, including two persons formerly of Diamondback; the firm was not named as a defendant).

The SEC also resolved its charges with Diamondback. SEC v. Addondakis, 12-cv-0409 (S.D.N.Y. Filed Jan. 18, 2012)(naming Diamondback as a defendant along with others). To settle with the SEC the firm consented to the entry of a permanent injunction which precludes future violations of the antifraud provisions of the federal securities laws. The settlement also requires that the firm disgorge its trading profits – a point covered in the settlement of the criminal inquiry – and pay a civil penalty of $3 million. In connection with the settlement the SEC was furnished with a Statement of Facts as in the resolution of the criminal case. The settlement papers do not specify that the firm neither “admits nor denies” the allegations in the complaint as in traditional Commission settlements (here). The SEC acknowledged the cooperation of the firm as did the U.S. Attorney’s Office.

The underlying charges center on trading in the shares of Dell, Inc. and NAVIDIA based on inside information. According to the court papers, Todd Newman a portfolio manager at Diamondback, Jesse Tortora, an analyst at the firm, and others obtained inside information regarding forth-coming earnings releases for each firm and used the information to trade and illegally tip others in 2008 and 2009. Mr. Tortora previously pleaded guilty in the criminal case (here).

In previous criminal insider trading cases stemming from the Galleon and expert network inquiries, criminal charges were not filed against the entities involved. However, Galleon Management, Level Global Investors, Loch Capital Management and Barai Capital ceased operations. In contrast, Diamondback did not.

The number of securities class actions filed in 2011 increased to 188 compared to 176 filings the prior year, according to a recent report from Cornerstone Research. That number is still below the average of 194 cases filed from 1997 through 2010. One large group of case is the 33 actions representing 17.6% of all securities class actions which are related to Chinese issuers listed on U.S. exchanges through reverse mergers. As the year progressed however, the number of these filings appeared to decline. A second large group of case were the 43 actions related to M&A activity. This appears to build on a trend which began in 2010.

Other key points indentified in the survey include:

• Stage of litigation: The survey analyzed the progress of securities class actions through the discovery process by taking a sample of cases from 1997 through 2011. Based on this sample 75% of the cases reached the motion to dismiss stage while only 8% reached a ruling on summary judgment.

• FCPA related cases: The survey also tracked the number of class actions related to FCPA investigations being conducted by the DOJ and the SEC. Since 1998 there have been 25 such actions filed. In 2011 the second largest number of these cases were filed. In 2005 the largest number of FCPA related cases were brought.

• Industry: In 2011 the largest number of cases was brought against companies in the telecommunications services industry. Over the years companies in the healthcare business have typically been a key target. Last year a number of securities class actions were brought against smaller health care companies.

• Whistleblowers: The new SEC whistleblower program received 334 tips. Most related to claims of market manipulation, corporate disclosures, financial statements and offering fraud. The data is only for seven weeks however.

Exchange Act Section 16(b) is typically applied as a “blunt instrument,” according to the courts. Crafted as the only provision to specifically address insider trading at the time the Exchange Act was written in 1934, the Section precludes what are called “short swing” profits. Those are trading profits from transactions in company securities by directors, officers and 10% shareholders where there is a purchase and sale within six months. Transactions which fall within the literal reach of the Section are barred. The profits are forfeit to the corporation in a suit brought for its benefit in its name.

The Second Circuit recently affirmed this “blunt instrument” interpretation of Section 16(b), finding for the shareholder who initiated the suit. Yet in that case the transaction was initiated by the company and was beneficial to it. Huppe v. WPCS International, Inc., No. 08-4463 (2^nd Cir. Decided Jan. 20, 2012).

Huppe centers on transactions in the shares in WPCS International, Inc. by two investment funds. The first part of the transaction took place from December 2005 through the end of January 2006. During that period the funds sold WPCS securities in a series of open market transactions at prices between $9.183 and $12.62 per share.

The second part of the transaction took place in April 2006. Following the restatement of its financial statements in March 2006, the share price of WPCS securities dropped. This ended the plans of the company to raise money for a strategic acquisition through a secondary offering. Accordingly, the company approached the funds about a PIPE offering. In April 2006 the funds, in conjunction with other affiliated investment vehicles, purchased 876,951 shares of WPCS at $7.00 per share. That price represented a discount of approximately 7% from the market price. The transaction was approved by the WPCS board of directors which used the capital infusion from the PIPE to make the acquisition. The share price for WPCS began to improve.

WPCS shareholder Maureen Huppe brought a derivative action in the name of the company against the funds. It alleged a violation of Exchange Act Section 16(b) since the funds first sold WPCS shares within six months of the purchases. On cross motions for summary judgment, the district court ruled in favor of the plaintiff, concluding that Section 16(b) had been violated.

The Second Circuit affirmed. Section 16(b) was “designed to prevent these [directors, officers and 10% shareholders] from engaging in speculative transactions on the basis of information not available to others” the court noted, citing the legislative history. Here there can be no doubt that the transactions fall within the literal prohibitions of the Section.

The funds however argued that the transactions here should be exempt from the prohibitions of the Section because they were the product of direct negotiations with the company and were approved by the board. Thus even if the funds had access to inside information, the board which approved the deal had the same information. Accordingly, the funds could not have obtained any informational advantage, the difficulty the Section was designed to address.

The Court rejected the contention of the funds. In limited circumstances the Court will scrutinize what it called “borderline” or “unorthodox” transactions in a pragmatic manner to determine whether they might serve as a vehicle for the type of transactions congress sought to prevent the Court noted. The predicate for the implementation of this approach however is an involuntary transaction by an insider having no access to inside information. Thus“we have been clear that Section 16(b) should be applied without further inquiry if there is at least the possibility of speculative abuse of inside information.” (internal quotes eliminated).

In this case the PIPE deal was not a “borderline” transaction the Second Circuit noted. In it the funds gave WPCS “a wholly volitional capital infusion and had access to inside information.” The sales and purchases not only fall within Section 16(b) but also present the kind of potential congress sought to bar when drafting the Section. Accordingly, the judgment of the district court was affirmed. In the end WPCS thus benefited twice – once from the capital infusion and a second time from the trading profits forfeit to it through the suit. It seems questionable at best that Congress intended the original insider trading provision to create such a windfall for the company and its shareholders.

Insider trading, implementing Dodd-Frank, asset valuations and old scandals dominated the securities enforcement litigation this week. The U.S. Attorney’s Office in Manhattan and the SEC brought more high profile insider trading cases focused on the hedge fund industry. These cases however look more like the traditional insider trading actions built on bits and pieces of evidence – aided by three defendants who pleaded guilty – in contrast to the Galleon and expert network cases which center largely on wire tap evidence.

Congress continued to debate the so-called Volker Rule. Two House subcommittees heard testimony from SEC Chairman Mary Schapiro on the proposed rule to implement the provision. While Ms. Schapario’s testimony highlighted the proposal, many commentators consider it so long and complex as to be unworkable.

Finally, SEC enforcement brought another market crisis case and two actions focused on asset valuation. The market crisis case named as a defendant the holding company for the largest bank in Florida. Like other market crisis cases, it centers on claims that the true condition of certain loan assets was not disclosed. It charges intentional fraud. The two asset valuation cases focus on the manner in which funds valued assets and the resulting impact on NAV.

The Commission

Volker Rule: SEC Chairman Mary Schapiro testified before the House Subcommittee on Capital Markets and Government Sponsored Enterprises Subcommittee and Financial Institution and Consumer Credit Subcommittee on “Examining the Impact of the Volker Rule on Market, Businesses, Investors and Job Creation.” The testimony largely reviews the proposed rule and the section of the Act it implements (here).

Conflicts/settlements: Former SEC staff member Spencer Barasch, once the head of Enforcement for the SEC’s Forth Worth office, entered into a civil settlement of ethics and conflict of interest charges with the Department of Justice. The matter stems from his supervisory role regarding Stanford matters while on the staff and his subsequent representation of Mr. Stanford’s company, Stanford Financial Group. Mr. Barasch agreed to pay a $50,000 fine to settle with the DOJ. The Department and Mr. Barasch dispute the factual predicate for the claimed conflicts. The Commission rejected a proposed settlement which called for Mr. Barasch to be barred from practicing before the Commission for six months with an automatic right to re-enter.

The Dell insider trading cases

U.S. v. Newman, 12 mag 0124 (S.D.N.Y. filed Jan. 18, 2012); SEC v. Adondakis, Civil Action No. 12-CV-0409(S.D.N.Y. Filed Jan. 18, 2012). These cases center on trading in the securities of Dell, Inc. and NAVIDA on inside information. Named as defendants in the criminal case are: Todd Newman, a portfolio manager at Diamondback Capital Management, LLC, an investment manager; Anthony Chiasson, a founding partner at Level Global Investors, L.P., an unregistered investment adviser; Jon Horvath, a technology research analyst at an unidentified hedge fund; and Danny Kuo, a vice president and fund manager at an unidentified investment adviser. The Commission’s complaint names each of these individuals as defendants along with: Spyridon Adondakis, an analyst at Level Global; Sandeep Goyal, an analyst at an unidentified investment adviser and formerly a manager of corporate planning at Dell; Todd Newman, a portfolio manager at Diamondback; Jesse Tortora, an analyst at Diamondback; Diamondback Capital; and Level Global. Messrs. Tortora, Adondakis and Goyal were not named in the criminal complaint because each previously pleaded guilty to criminal charges.

The charges center on alleged insider trading in the securities of the two companies in 2008 and 2009. As to Dell, the charges focus on inside information furnished by an unidentified company employee to his friend, Sandeep or Sandy Goyal, regarding future earnings releases in 2008. Mr. Goyal learned that the company would miss market expectations. He passed the information on to Mr. Tortora who conveyed it in an e-mail to his superior, Mr. Newman, and then to Messrs. Adondakis, Horvath and Kuo. Diamondback, Level Global and the unidentified fund which employed Mr. Horvath, sold Dell shares short. They made profits, respectively, of $2.8 million, $50 million and $1 million. In a second part of the scheme Mr. Kuo is alleged to have obtained inside information regarding the revenues, gross profit margins and other financial metrics of NVIDIA prior to the release of the information in 2009. He used this information for the benefit of his employer, an unidentified investment adviser, according to the court papers. Mr. Kuo also passed the information about NVIDIA on to Mr. Adondakis who in turn furnished it to his superior Mr. Chiasson who traded on it for Level Global hedge funds. He also furnished the information to Mr. Tortora who transmitted it to his superior, Mr. Newman, who used it to trade on behalf of Diamondback hedge funds. As a result Level Global’s hedge funds obtained profits or avoided losses of at least $15.6 million. Diamondback’s hedge funds reaped profits of at least $75,000 while the unidentified investment adviser obtained profits and avoided losses of at least $90,000.

The criminal complaint contains two counts of conspiracy to commit securities fraud and four counts of securities fraud. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Both are pending. The investigation which resulted in these cases is on-going.

SEC Enforcement: Filings and settlements

Market crisis/failure to disclose: SEC v. BankAtlantic Corp., Case No. 0:12-CV60082 (S.D. Fla. Filed Jan 18, 2012) is an action against the firm which is the holding company to one of Florida’s largest banks, and its CEO and Chairman, Alan Levan. The complaint alleges that as the market crisis unfolded, the defendants failed to disclose, and made false statements regarding, the bank’s commercial residential portfolio and its deteriorating condition. The defendants knew of that condition because a number of the loans were kept current by granting extensions. Specifically, Mr. Levan knew about the deteriorating condition of the portfolio from participating on the bank’s Major Loan Committee which approved the extensions and related principal increases. Despite this knowledge, the disclosure documents for the first two quarters of 2007 continued only generic warnings about what might occur in the future if Florida’s real estate downturn continued. They also failed to disclose the downward trend already occurring in its own portfolio. The MD&A should have disclosed these matters. Mr. Levan signed the filings. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is in litigation.

Investment fund fraud: SEC v. Morriss, Case No. 4;12-cv-00080 (E.D.Mo. Filed Jan. 17, 2012) is an action against Burton Morriss and his funds. The Commission claims that between 2003 and 2011 the defendants raised about $88 million from at least 97 investors. The funds were supposed to be invested in their investment funds which would purchase interests in early to mid-stage companies in the financial services and technology sectors. In fact, Mr. Morriss diverted portions of the money to his personal use. The complaint alleges violations of Securities Act Sections 17(a)(1), (2) and (3) and Exchange Act Section 10(b). The Commission obtained emergency relief, including an asset freeze. The case is in litigation.

Improper valuation: In the matter of UBS Global Asset Management (Americas) Inc., Adm. File No. 3-14699 (Jan. 17, 2012) is an action against the firm, a registered investment adviser. According to the Order, in June 2008 UBS Global purchased about 54 fixed income securities from various brokers for its funds. The securities were not listed or sold on any exchange and there was no active market for them. In initially valuing all but six of the securities, UBS Global used data obtained from various dealers. This resulted in valuations that far exceeded the purchase price. In contrast, the firm’s written procedures required that they follow a different valuation method and that the securities initially be valued at the purchase price. As a result, the NAVs for the funds were overstated between one cent to 10 cents per share for several days in June 2008. By failing to comply with its own written procedures the funds violated Rule 22c-1 of the Investment Company Act and UBS Global aided and abetted that violation. To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Rule, a censure and agreed to pay a civil penalty of $300,000.

Valuation/breach of duty: In the Matter of Lisa B. Premo, Adm. Proc. File No. 3-14697 (Jan. 17, 2012) is an action which names as a Respondent Ms. Premo, an investment adviser to the Evergreen Ultra Short Opportunities Fund. From March 2008 through early June 2008 the NAV of the Fund was materially overstated, according to the Order. This resulted from the fact that in late March 2008 the Respondent learned that a CDO owned by the fund experienced an event of default. Ms. Premo failed to report this matter to the valuation committee or the board. Later when the committee became aware of this fact it reduced the value assigned to the CDO from $6.98 million to $0 resulting in a $0.10 per share drop in the NAV of the fund. Within a week of the time the valuation was corrected, the fund was liquidated. The Order alleges that Respondent breached her fiduciary duty. It alleges violations of Sections 206(1) and (2) of the Advisers Act. The Order directs that a public hearing be held for the purpose of taking evidence on the questions set forth in it.

Insider trading: SEC v. Bazshushtari, Civil Action No. CV 12-00354 (C.D. Ca. Filed Jan. 13, 2012) is an action against Farzin Bazshushtari, the Director of Industrial Distribution for STEC Inc. After learning that the company would have positive first quarter earnings, and during a black out period, he repeatedly purchased company shares. He also purchased options. When the earnings announcement was released he made total profits of $76,675.50. To settle the action Mr. Bazshushtari consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits and pay a civil penalty equal to those profits.

FCPA

U.S. v. Marubeni Corporation, (S.D.Tx.). The company entered into a two year deferred prosecution agreement with the DOJ and agreed to pay a criminal fine of $54.6 million to settle FCPA charges stemming from its role as an agent of the TSKJ consortium. That joint venture was composed of Technip S.A., Snamprogetti Netherlands B.V, Kellogg Brown & Root, Inc. and JGC Corporation, all of whom have settled FCPA charges. The purpose of the venture was to secure contracts from Nigeria LNG, Ltd., a company created by the Nigerian government to capture and sell natural gas associated with oil production in that country. The government retained a 49% interest in Nigeria LNG. The joint venture determined that bribes had to be paid to secure business. As part of its efforts, the venture retained two agents, according to the court documents. One was Jeffrey Tesler, a U.K. solicitor. The other was Marubeni, a Japanese trading company headquartered in Tokyo. Mr. Tesler served as a consultant to the venture and paid bribes to high-level Nigerian government officials. Those included top level executive branch officials. Marubeni was retained to pay bribes to lower level government officials. At key points, a number of the co-conspirators, including employees of Marubeni, met with senior executive level government officials to determine with whom they should meet to negotiate bribes in connection with the awarding of contacts, according to the court papers. The joint venture is alleged to have paid about $132 million to a Gibraltar corporation controlled by Mr. Tesler and $51 million to Marubeni during the course of the scheme. The payments were intended to be used at least in part to bribe Nigerian government officials.

FINRA

Citigroup Global Markets, Inc. agreed to pay a fine of $725,000 for failing to disclose certain conflicts of interest in its research reports and in the public appearances of its research analysts from January 2007 through March 2010. FINRA found that the deficiencies were primarily due to technical deficiencies. The firm also failed to have reasonable supervisory procedures in place to ensure that it was making the proper disclosures in the reports.

The SEC and the Manhattan U.S. Attorney’s Office continued their war on insider trading, filing civil and criminal insider trading charges involving seven individuals and two hedge funds. The new criminal and civil charges, which revolve around trading in the shares of Dell, Inc. and NVIODIA, differ significantly from the Galleon and Expert Network cases. The new charges are built on trading and phone records and e-mails and instant messages authored and sent by those involved in the scheme. The criminal and civil complaints are replete with quotes from e-mails and details about the time the message was sent and the trades were placed. The new charges are also bolstered by the cooperation of two key participants who pleaded guilty and are assisting enforcement officials. This contrasts sharply with the Galleon and expert network cases which, while using similar evidence, center largely on dozens of wire tap tape recorded conversations. U.S. v. Newman, 12 mag 0124 (S.D.N.Y. filed Jan. 18, 2012); SEC v. Adondakis (S.D.N.Y. Filed Jan. 18, 2012).

Named as defendants in the criminal case are: Todd Newman, a portfolio manager at Diamondback Capital Management, LLC, an investment manager in Connecticut to hedge funds; Anthony Chiasson, a founding partner at Level Global Investors, L.P., an unregistered investment adviser in Connecticut and New York; Jon Horvath, a technology research analyst at an unidentified hedge fund; and Danny Kuo, a vice president and fund manager at an unidentified investment adviser. The Commission’s complaint names each of these individuals as defendants along with: Spyridon Adondakis, an analyst at Level Global; Sandeep Goyal, an analyst at an unidentified investment adviser and formerly a manager of corporate planning at Dell; Todd Newman, a portfolio manager at Diamondback; Jesse Tortora, an analyst at Diamondback; Diamondback Capital; and Level Global. Messrs. Tortora, Adondakis and Goyal were not named in the criminal complaint because each previously pleaded guilty to criminal charges.

The charges center on alleged insider trading in the securities of the two companies in 2008 and 2009. The charges regarding Dell focus on inside information furnished by an unidentified company employee, who at times worked in the investor relations department, to his friend, Sandeep or Sandy Goyal, regarding future earnings releases. Specifically, beginning in July 2008 Mr. Goyal obtained inside information regarding Dell’s revenues and or gross margins for the second quarter. Following the close of the quarter, but prior to the August 28, 2008 earnings announcement, the Dell employee told Mr. Goyal that the gross margin for Dell would be lower than market expectations. Mr. Goyal in turn passed the information on to Mr. Tortora who conveyed it in an e-mail to his superior, Mr. Newman. On August 5, 2008 Mr. Tortora also forwarded the e-mail to Messrs. Adondakis, Horvath and Kuo. Later Mr. Goyal confirmed the information which was again circulated among the group.

Based on the information Mr. Goyal obtained from the Dell insider, Diamondback, Level Global and the unidentified fund which employed Mr. Horvath, sold Dell shares short. Those entities are alleged to have obtained profits, respectively, of $2.8 million, $50 million and $1 million.

In a second part of the scheme Mr. Kuo is alleged to have obtained inside information regarding the revenues, gross profit margins and other financial metrics of NVIDIA prior to the release of the information in 2009. He used this information for the benefit of his employer, an unidentified investment adviser, according to the court papers.

Mr. Kuo also passed the information about NVIDIA on to Mr. Adondakis who in turn furnished it to his superior Mr. Chiasson who traded on it for Level Global hedge funds. Mr. Kuo also furnished the information to Mr. Tortora who transmitted it to his superior, Mr. Newman, who used it to trade on behalf of Diamondback hedge funds. As a result Level Global’s hedge funds obtained profits or avoided losses of at least $15.6 million. Diamondback’s hedge funds reaped profits of at least $75,000 while the unidentified investment adviser obtained profits and avoided losses of at least $90,000.

The criminal complaint contains two counts of conspiracy to commit securities fraud and four counts of securities fraud. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Both are pending. The investigation which resulted in these cases is on-going.

The TSKJ joint venture is the gift that just keeps on giving, at least for FCPA prosecutors. The most recent involves Marubeni Corporation which admitted to being an agent of the venture and agreed to settle FCPA charges. The company entered into a two year deferred prosecution agreement with the Department of Justice and agreed to pay a criminal fine of $54.6 million. Marubeni also agreed to retain a corporate compliance consultant, to install new procedures and improve others and to cooperate with the DOJ’s on-going investigation. The underlying information charges the company with one count of conspiracy and one count of aiding and abetting FCPA violations. At the end of the two year term the information will be dismissed if the company complies with its obligations. U.S. v. Marubeni Corporation, (S.D.Tx.).

The TSKJ joint venture was formed in 1990 by Technip S.A., Snamprogetti Netherlands B.V, Kellogg Brown & Root, Inc. and JGC Corporation. The purpose of the venture was to secure contracts from Nigeria LNG, Ltd., a company created by the Nigerian government to capture and sell natural gas associated with oil production in that country. The government retained a 49% interest in Nigeria LNG.

The joint venture determined that bribes had to be paid to secure business. As part of its efforts, the venture retained two agents, according to the court documents. One was Jeffrey Tesler, a U.K. solicitor. The other was Marubeni, a Japanese trading company headquartered in Tokyo. Mr. Tesler served as a consultant to the venture and paid bribes to high-level Nigerian government officials. Those included top level executive branch officials. Marubeni was retained to pay bribes to lower level government officials. At key points, a number of the co-conspirators, including employees of Marubeni, met with senior executive level government officials to determine with whom they should meet to negotiate bribes in connection with the awarding of contacts, according to the court papers. The joint venture is alleged to have paid about $132 million to a Gibraltar corporation controlled by Mr. Tesler and $51 million to Marubeni during the course of the scheme. The payments were intended to be used at least in part to bribe Nigerian government officials.

Previously, each member of the TSKG joint venture resolved FCPA charges with the DOJ:

• Technip entered into a deferred prosecution agreement in 2010. As part of that agreement the company paid a $240 million criminal fine and retained an independent compliance monitor for two years. Technip also settled with the SEC. The company paid a total of $338 million to settle criminal and civil FCPA related charges.

• Snamprogetti also entered into a deferred prosecution agreement with the DOJ in 2010. The company agreed to pay a criminal fine of $210 million. Snamprogetti also settled with the SEC, along with its former parent ENI, S.p.A., despite the fact that neither an issuer or a domestic concern. In total, $365 million was paid to resolve the inquiries.

• KBR pleading guilty to FCPA related charges and agreed to pay a criminal fine of $402 million and to retain an independent compliance monitor for a period of three years in 2009. The company, along with its parent Halliburton Company, also settled with the SEC. In total it paid $579 million to resolve the criminal and civil inquiry.

• JGC Corporation also entered into a deferred prosecution agreement to resolve the DOJ criminal inquiry. In 2011 the company agreed to pay $218.8 million in connection with that agreement.

The settlements with the four members of the TSKJ joint venture are among the largest in FCPA history. Indeed, each is part of the current “top ten” largest FCPA settlements.

Finally, three individuals have pleaded guilty in connection with the activities of the venture. Mr. Tesler was extradited from the UK. Subsequently, he pleaded guilty to conspiring to, and violating, the FCPA. As part of that plea agreement he agreed to forfeit $148,964,568. Wojeiech J. Chodan, a former sales person and consultant of the UK subsidiary of KBR, was also extradited and pleaded guilty to conspiring to violate the FCPA. He agreed to forfeit $726,885. Albert Stanley, the former head of KBR, pleaded guilty to conspiracy to violate the FCPA and a count of wire fraud.

The Madoff and Stanford debacles seems to never fade away for the Commission. Madoff of course is in prison but the litigation goes on. The failures of the Commission and others such as FINRA continue to linger. The Stanford case appears to be finally heading for trial. Again however the memory of the Commission’s failure continues to linger, tarnishing its reputation despite much work to overcome the scandal.

Last week another chapter in the sad saga of these matters came to a partial end. Former SEC staff member Spencer Barasch, one time head of Enforcement for the SEC’s Forth Worth office, entered into a civil settlement of ethics and conflict of interest charges with the Department of Justice stemming from his supervisory role regarding Stanford matters while on the staff and his subsequent representation of Mr. Stanford’s company, Stanford Financial Group. No settlement was reached with the SEC.

The civil settlement with the DOJ is based on 18 U.S. C. § 207. That statute restricts the right of federal employees to handle certain matters following the termination of their government service. Under the terms of the settlement Mr. Barasch agreed to pay a $50,000 civil fine, the maximum permitted for a violation of the statute. Mr. Barasch did not admit the factual assertions on which the DOJ predicated its claim.

The positions of the DOJ and Mr. Barasch contrast sharply. According to the DOJ:

• Mr. Barasch was the head of Enforcement for the SEC’s Fort Worth Office from 1998 through April 2005;

• During that period the Stanford Financial Group made materially false statements to investors which caused significant injury;

• In August 1998 Mr. Barasch directed that a preliminary investigation into the activities of Stanford Financial Group be closed;

• In December 2002 Mr. Barasch declined a referral regarding Stanford Financial Group from the SEC examination staff;

• In the Fall of 2003 Mr. Barasch declined to open an investigation into the Stanford Financial Group;

• Once in private practice Mr. Barasch was orally advised by the Commission staff that he could not represent the Stanford Financial Group; and

• Mr. Barasch represented the Stanford Financial Group from September 29, 2006 through December 18, 2006 and appeared before the Commission, communicating with the SEC in an effort to influence.

These facts constitute a violation of Section 207, according to the DOJ.

Mr. Barasch denies the claims asserted by the Department of Justice. He contends that:

• His representation of the Stanford Financial Group did not constitute a violation of Section 207;

• He never personally and/or substantially participated in the SEC’s investigation of Mr. Stanford and his company;

• While the head of Enforcement for the SEC’s Forth Worth office he referred the Stanford matter to other agencies based on pressure from his superiors in Washington to devote the resources of the office to other matters;

• He was not told that he was permanently barred from representing Stanford;

• He only had a telephone call on November 27, 2006 with the SEC staff to determine whether he could work on the case; and

• He only settled with the DOJ in an effort to bring the matter to an end.

Mr. Barasch reportedly attempted to settle the matter with the SEC, offering to be barred from practicing before the Commission for a period of six months. The proposal also provided for his automatic readmission to practice, in contrast to the usual time consuming readmission process. The Commission reportedly rejected the proposed settlement.

This is the second ethics case referred to the Justice Department by the SEC Inspector General in recent months. Earlier, the SEC IG made a criminal referred of a matter regarding a former SEC General Counsel arising out of his work as a staff member on matters related to Mr. Madoff. The Department of Justice declined to prosecute. The Commission did not take any action.

This week the Commission prevailed in a litigated action, securing the relief it sought against a defendant and his company after prevailing on summary judgment. The agency also brought two insider trading actions, one centered on a financial fraud case, and two investment fraud actions.

The Commission

The Division of Enforcement altered its long standing policy on one of its key settlement terms. Traditionally, the Division has permitted defendants to settle enforcement actions without admitting or denying the allegations in the complaint expect as to jurisdiction. Under a revision to the policy announced the Division will no longer permit those convicted, or who otherwise admitted the facts in a parallel criminal action, to settle with the Commission based on “not admitting or denying” the facts.

SEC Enforcement: Litigation cases

Fraudulent tender offer: SEC v. Weintraub, Case No. 11-21549 (S.D. Fla.) is an action against Allen E. Weintraub and his company AWMS Acquisitions, Inc. The compliant centers on claims that Mr. Weintraub and his company made false tender offers for all of the outstanding stock of AMR Corporation, the parent of American Airlines, and Eastman Kodak Company. At the time of the offers, which were for, respectively, $1.3 billion in case and $3.25 billion in cash, the defendants did not have any ability to enter into the transactions. Mr. Weintraub also failed to disclose key facts about his background including the fact that he had pleaded guilty to criminal charges. The complaint alleged violations of Exchange Act Section 10(b) and 14(e). The court granted summary judgment in favor of the Commission. It also entered permanent injunctions against both defendants and requires the defendants to pay $400,000 in civil money penalties.

SEC Enforcement: Filings and settlements

Insider trading: SEC v. Arrowood, Civil Action No. 1;12-cv-00082 (N.D. Ga. Filed Jan. 11, 2011) is an action against Parker Petit, the former Chairman and CEO of Matria who is alleged to have tipped his friend, Earl Arrowood. At a time when Matria was shopping for strategic alternatives, and several companies were conducting due diligence on the firm, Mr. Petit is alleged to have furnished this information to his friend Earl Arrowood who purchased about 17,500 shares. In January 15, 2008 the company made an announcement stating that it was considering strategic alternatives, including being acquired. The share price rose 20% following the announcement. Mr. Arrowood’s account had unrealized gains of about $94,0000. Ultimately the company was acquired in late January 2008. The Commission’s complaint alleges violations of Section 10(b) of the Exchange Act. It seeks a permanent injunction, disgorgement, prejudgment interest, a civil penalty and an officer and director bar. The case is in litigation.

Financial fraud/insider trading: SEC v. Farha, Civil Action No. 8/12-cv-00047 (M.D. Fla. Filed Jan. 9. 2012) is an action which names as defendants the former CEO of WellCare Health Plans, Inc., Todd Farha, its former CFO Paul Behrens and former General Counsel Thaddeus Bereday. From 2003 through 2007 the three former executives are alleged to have implemented a scheme to deceive the Florida Agency for Health Care Administration and the Florida Healthy Kids Corporation. This permitted them to improperly retain over $40 million in health care premiums that were required by law and contract to be spent on certain health care services or reimbursed to state agencies. As a result of the fraud, the company improperly withhold over $40 million which went to the bottom line. During the course of the scheme the defendants sold about 1.6 million of WellCare stock. Those sales were made by fraudulently amending 10b-5-1 plans. Ultimately the company uncovered the fraud after the initiation of a regulatory inquiry. An internal investigation resulted in a restatement of the financial statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and13(b)(2)(B). It seeks a permanent injunction, disgorgement, prejudgment interest, civil penalties, an officer and director bar and the repayment of certain incentive based compensation under SOX Section 304(a). The case is in litigation.

Investment fraud: SEC v. Dobens, Civil Action No. 10-CA-10360 (D. Mass.) is an action against Kathleen Dobens and Charles Dobens and Joseph Roche along with certain entities they used to solicit investments for their alleged real estate ventures. The money, according to the complaint, was diverted to the personal use of the individual defendants. This week the three individuals agreed to settle with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5and 17(a) and Exchange Act Section 10(b). The three individual defendants agreed to be jointly and severally liable for the payment of disgorgement in the amount of $284,300 plus prejudgment interest. Mr. & Mrs. Dobbens alo agreed to pay a civil money fine of $80,0000. No penalty was impose against Mr. Roche based on his financial condition along with other remedial relief.

Investment fraud: SEC v. Imperiali, Inc., Civil Action No. 9:120 cv 080021 (S.D. Fla. Filed Jan. 9, 2012) is an action against Imperiali, Inc, Daniel Imperato who controlled the company, Charles Fiscina, its CFO and Lawrence O’Donnell, its outside auditor. The complaint alleges that between 2005 and 2008 Daniel Imperato orchestrated a scheme in which he portrayed his controlled company as a successful multinational entity. He then raised about $2.5 million by selling securities to investors. Defendant Fiscina drafted and reviewed at least 16 materially false and misleading registration statements, periodic reports and current reports with the Commission on behalf of the company. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) as well as Sections 18(d), 31(a) and 34(b) of the Investment Company Act. Defendant Fiscina settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(g) and 13(b)(5) and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). No penalty was imposed based on Mr. Fiscina’s financial condition.