Four criminal securities cases moved to or toward resolution over the past week. The jury in the Martin Shkreli trial returned a verdict of guilty on three counts and not guilty on five others at the end of last week. The case is in post trial motions. In another action an investment adviser pleaded guilty to defrauding his clients. The defendant is awaiting sentencing. In a third a former broker who pleaded guilty to market manipulation was sentenced to fifteen months in prison. Finally, a former investment banker pleaded guilty to insider trading. The defendant is awaiting sentencing.
The SEC filed two actions this past week. One was centered on the misappropriation of company funds by the treasurer. The second is a proceeding against an investment adviser and its founder for filing a false registration application. That case will be set for hearing.
Report: The Division of Economic and Risk Analysis issued a report titled Access To Capital and Market Liquidity. The report assesses the impact of Dodd-Frank and in particular the Volcker Rule and Basel III on access to capital for consumers, investors and businesses as well as market liquidity (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 civil injunctive case and 1 administrative proceeding, excluding 12j and tag-along proceedings.
Misappropriation: SEC v. Blazer, Civil Action No. 16-cv-3384 (S.D.N.Y.) is a previously filed action in which the Court had entered a partial judgment by consent. The Court has now entered the final judgment which enjoined Defendant Louis Blazer, a registered investment adviser, from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(1) and 206(2). In addition, the Court directed that Mr.Blazer pay about $1.8 million in disgorgement and prejudgment interest and a penalty of $150,000. Previously, Mr. Blazer consented to the entry of an SEC order imposing an industry bar. The complaint alleged that he misappropriated client funds. See Lit. Rel. No. 23900 (August 10, 2017).
Insider trading: SEC v. McClatchey, Civil Action No. 16-cv-4029 (S.D.N.Y.) is a previously filed action which named as defendants Steven McClatchey and Gary Pusey. The complaint alleged that Mr. McClatchey, formerly an investment banker, repeatedly tipped his friend, plumber Gary Pusey, ahead of corporate acquisition announcements. Mr. Pusey traded, securing about $76,000 in trading profits. Mr. McClatchey received a few thousand dollars in cash and renovations on the bathroom in his home. Each defendant settled, consenting to the entry of a permanent injunction which the Court has entered, prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Disgorgement is deemed satisfied by the forfeiture order and criminal sentences in a parallel case; penalties were not imposed. In the parallel criminal cases each man pleaded guilty. Mr. Pusey was sentenced to time served and two years of supervised release. He was also ordered to forfeit his trading profits, jointly and severally, with Mr. McClatchey and to pay a fine of $5,000. Mr. McClatchy was sentenced to five months in prison and two years of supervised release. He was also directed to pay a fine of $10,000. In addition, the SEC entered associational and penny stock bars against him. See Lit. Rel. No. 23898 (Aug. 8, 2017).
False registration: In the Matter of Black Diamond Asset Management LLC, Adm. Proc. File No. 3-18099 (August 4, 2017) names as Respondents the firm and its founder, Robert Wilson. The firm has been registered with the Commission as an investment adviser since March 2015. In its registration statement the firm claimed to have over $583 million in assets under management. In fact it never had any assets under management. The Order alleges violations of Advisers Act Sections 206(1) and 206(2). The proceeding will be set for hearing.
Misappropriation: SEC v. Hudson, Civil Action No. 1:17-cv-00520 (S.D. Ohio Filed Aug. 4, 2017) is an action which names as a defendant Michael Hudson, formerly the assistant treasurer of Frisch’s Restaurants, Inc. from 2008 to 2014. During his tenure at the firm Mr. Hudson diverted payroll funds to accounts he controlled and falsified the firm’s accounting records. He also submitted false records to the internal accounting personnel and the firm’s auditors. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the action Mr. Hudson consented to the entry of a permanent injunction based on the Sections cited in the complaint, to the entry of an officer and director bar and an order directing the payment of disgorgement of about $3.9 million. That payment will be deemed satisfied by the restitution ordered in the parallel federal criminal case in which he pleaded guilty to wire fraud and filing false tax returns. Mr. Hudson was also suspended from appearing and practicing before the Commission as an accountant. See Lit. Rel. No. 23897 (August 4, 2017).
Insider trading: U.S. v. Krishnamoorthy, No. 17-cr-00323 (S.D.N.Y.) is a previously filed action which charged former investment banker Avaneesh Krishnamoorthy with insider trading. In three instances in 2016 Mr. Krishnamoorthy traded profitably after obtaining inside information from his firm. Specifically, he traded ahead of firm client Neustar, Inc before it was announced the company had obtained certain financing. He also received and traded on inside information on transactions involving Cabelas Inc. and Axiall Corporation. Overall he had trading profits of about $78,000. Mr. Krishamoorthy pleaded guilty to securities fraud. Sentencing is set for November 21, 2017. The SEC filed a parallel case. SEC v. Krishnamoorthy, Civil Action No. 17 cv 2953 (S.D.N.Y.).
Manipulation: U.S. v. Knippa, No. 16-cr-234 (E.D.N.Y.) is an action in which former registered broker Herschel Knippa was sentenced to serve fifteen months in prison followed by three years of supervised release and to pay $3,570,000 in restitution and $120,000 in forfeiture. He had previously pleaded guilty to securities fraud conspiracy based on his roll in the manipulation of the shares of ForceField Energy Inc. Between July 2014 and March 2015 Mr. Knippa was paid by a ForceField executive to promote the purchase of firm shares. Over a six year period beginning in 2009 he manipulated the firm’s shares, artificially controlling the price and volume by using nominees to purchase and sell the stock, orchestrating the trading of its shares and concealing secret payments to stock promoters.
Misappropriation: U.S. v. Erb, No. 17-cr-413 (E.D.N.Y.) is an action in which Eric Erb pleaded guilty to defrauding 38 investors of his advisory business out of about $3 million. Mr. Erb solicited the funds on the promise that they would be invested in accord with client directives. Instead he invested client money as he determined and transferred portions to his other businesses. To conceal his malfeasance clients were sent false account statements. The date for sentencing has not been set.
Misappropriation: U.S. v. Shkreli, No. 15-cr-637 (E.D.N.Y.) charged Martin Shkreil with eight counts of conspiracy and securities fraud. Following a six week jury trial Mr. Shkreil was convicted on three counts of conspiracy and securities fraud and acquitted on five other counts.
Mr. Shkreli was the managing partner and portfolio manager for MSMB and MSBM Healthcare and the managing member of MSB Adviser and MSB Healthcare Adviser. He is also the founder of Retrophin LLC, a publically traded pharmaceuticals company. Mr. Shkreli, through, MSMB Adviser or MSMB Healthcare Adviser, was alleged to have misappropriated investor funds from MSMB, made material misrepresentations to investors, sold short over 32 million shares of a company in MSMB’s account and represented to the executing broker that MSMB had located sources from which to borrow the shares. He was also alleged to have misappropriated about $900,000 from MSMB Healthcare to fund the settlement of an arbitration with a broker. The SEC’s parallel case is pending. SEC v. Shkreli, Civil Action No. 15-cv-07175 (S.D.N.Y. Filed December 17, 2015)
Janet Austin, What Exactly is Market Integrity? An Analysis of One of the Core Objectives of Securities Regulation, 8 Wm. & Mary Bus. L. Rev. 215 (2017).
Marco Bodellini, From Systemic Risk to Financial Scandals, The Shortcomings of U.S. Hedge Fund Regulation, 11 Brook. J. Corp. Fin. & Com. L. 417 (2017).
Charles R. Korsmo, The Audience for Corporate Disclosure, 120 Iowa L. Rev. 1551 (2017).