George Canellos and David Burger were appointed, respectively, the Acting Director and Acting Deputy Director of the SEC’s Division of Enforcement this week. The Division brought two insider trading cases this week as well as a case alleging fraudulent mark-ups in which six of the victims were TARP related funds.
The founder of Peregrine Financial Group, whose misappropriation of millions of dollars of investor funds and triggered the collapse of the firm, was sentenced to serve 50 years in prison. Roomey Kahn, a key cooperating government witness at the center of the Galleon insider trading cases, was sentenced to serve one year in prison.
Finally, the SFC in Hong Kong fined two individuals for unregistered solicitations. The men were offering investments in gold on their Facebook page.
Remarks: SEC Commissioner Daniel Gallagher addressed the Corporate Directors Forum (San Diego, Jan. 29, 2013). His remarks focused on the role of the federal government in corporate governance (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 4 civil injunctive actions and 2 administrative proceedings (excluding tag-along-actions and 12(j) actions).
Insider trading: SEC v. Wellington, Case No. 6:13-cv-00172 (D. Or. Filed Jan. 30, 2013) is an action against two employees of Clear One Health Plans, Blake Wellington and Daniel Vance. On December 16, 2009 Mr. Vance was asked by the CEO of his company to assist with an e-mail issue. While doing so he saw confidential merger documents that were sent to the CEO of PacificSource. Mr. Vance informed his supervisor, Blake Wellington. The next day each man purchased shares of the company with borrowed funds. When the deal was announced on December 31, 2009, Clear One’s share price increased over 150%. The two men resolved the case by each consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Messrs. Wellington and Vance each agreed to disgorge their trading profits of, respectively, $55,891.50 and $17,509.75, pay prejudgment interest and a penalty equal to their trading profits. See also Lit. Rel. No. 22606 (Jan. 30, 2013).
Soft dollars: SEC v. Hovan, Civil Action No. CV-11-4795 (N.D. Cal.) is a previously filed action against Kurt Hovan, Hovan Capital Management LLC, Lisa Hovan and Edward Hovan, Jr. which alleged the misuse of “soft dollars” that were rebates on commissions for client accounts in their investment advisory business. Each defendant settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b), Advisers Act Sections 204(a), 206(1), 206(2) and 207. In addition, the judgment as to each defendant, except Ms. Hovan, includes Section 17(e)(1) of the Investment Company Act. The judgment against Kurt Hovan directs him to pay disgorgement of $65,000 which is deemed satisfied by the payment of restitution in the parallel criminal case and a $75,000 civil penalty. Mr. Hovan’s consent was based on admissions he made in the related criminal case. The judgment against the company requires the payment of disgorgement of $14,942 along with prejudgment interest. Ms. Hovan will pay a $50,000 penalty. The judgment against Edward Hovan direct him to pay disgorgement of $50,000 but waives payment based on his financial condition. The judgments were entered on January 14, 2013. See also Lit. Rel. No. 22605 (Jan. 30, 2013).
Unregistered broker: In the Matter of CentreInvest, Inc., Adm. Proc. File No. 3-13304 (Jan. 30, 2013) is a previously filed proceeding against the firm and others, including settling Respondent Dan Rapoport. The proceeding centered on the claim that over a period of about three years beginning in 2004 CI-Moscow, a Moscow based broker, directly and through its New York City subsidiary, solicited institutional investors in the U.S. to purchase and sell thinly traded stocks of Russian companies. Mr. Rapoport, a Russian resident, served as a managing director in the New York office for a time before returning to Moscow where he held a similar title. To resolve the case Mr. Rapoport consented to the entry of a cease and desist order based on Exchange Act Section 15(a). He also agreed to pay disgorgement of $22,084.75, prejudgment interest and a civil penalty of $39,000.
Manipulation: SEC v. Curshen, Civil Action No. 1:11-cv-20561 (S.D. Fla.) is a previously filed action against several defendants including Yitzchak Zigdon, alleging the manipulation of the shares of CO2 Tech Ltd., essentially a shell company listed for trading in the Pink Sheets. Mr. Zigdon settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). In addition, he will be required to pay disgorgement of $260,000, prejudgment interest and a civil penalty of $130,000. Mr. Zigdon will also be barred from participating in any penny stock offering. See also, Lit. Rel. No. 22604 (Jan. 29, 2013).
Investment fund fraud; SEC v. Graham, Case No. 4:13-cv-1001 (S.D. Fla. Filed Jan. 30, 2013) is an action against Fred Clark, Jr., David Schwarz, Cristal Coleman, Barry Graham and Ricky Stokes, each an officer of Clay Clubs Reports and Marinas. In the four years prior to its collapse in July 2008, the defendants and Cay Clubs raised about $300 million from 1,400 investors through the offer and sale of units in what was claimed to be a five star resort with 17 locations around the country. Investors were told that the properties would be developed, were undervalued giving them “instant equity” and that typically investors in the properties saw the value increase by as much as 300%. In addition, investors understood that they would get an immediate benefit from the lease back of their properties. While some investors received the lease payments for a period in fact the properties were not developed. Defendants “flipped” the properties among themselves at increasing prices, creating the illusion of success while misappropriating more than $33 million. Eventually the scheme collapsed. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Sections 10(b) and 15(a)(1). The case is in litigation.
Procedures: In the Matter of IMC Asset Management, Inc., Adm. Proc. File No. 3-15190 (Jan. 29, 2013) is a proceeding which names the registered investment adviser as a Respondent. In 2008 the firm, then operating under another name, was registered as a broker and an investment adviser. In 2009 it withdrew the broker registration and changed to the current name. Since that date, however, the firm has had a compliance officer who performed virtually no compliance functions, has had policies and procedures addressed primarily to a broker dealer and failed to annually review the adequacy of its policies and procedures. To resolve the proceeding the firm will be ordered to comply with certain undertakings, agreed to the entry of a cease and desist order based on Advisers Act Sections 203(e) and (k) and will pay a civil penalty of $30,000.
Excessive mark-ups: SEC v. Litvak, Civil Action No. 3:13-cv-00132 (D. Conn. Filed Jan. 28, 2013); U.S. v. Litvak (D. Conn. Jan. 25, 2013). Defendant Jesse Litvak was a managing director and a trader in the mortgaged backed securities or MBS group of Jefferies. His compensation at Jeffries depended in part on sales. The MSB sold by Mr. Litvak were generally illiquid and the markets were opaque. Purchasers were aware that a charge for their compensation was added to the purchase price of the security by Jefferies as either part of the price or an add-on. At the same time, the lack of transparency in the market meant that there was no way for a purchaser to determine the accuracy of representations made to them about the purchase prices which were the predicate for the broker transaction charges. Mr. Litvak is alleged to have overcharged customers by about $2.6 million in 25 transactions between 2009 and 2011 involving six TARP related funds and others by either misrepresenting the purchase price paid by his firm for the security or misrepresenting or the nature of the transaction. In both instances purchasers were given false information about the purchase price. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The parallel criminal indictment contains eleven counts of securities fraud, one count of TARP fraud, and four counts of making false statements. Both cases are pending.
Investment fund fraud: SEC v. Hamdan, Case No. 4:13:00215 (S.D. Tx. Filed Jan. 29, 2013). Defendant Firas Hamdan is, according to the complaint, well known in the Lebanese and Druze communities in the Houston area and had a reputation as a successful day trader. Over the last five years Mr. Hamdan is alleged to have raised at least $6.1 million from 37 investors based on his skill as a day trader. Targeting members of his community, he told investors that their funds would be pooled with his and traded using a proprietary system which had an established track record. Returns of 30% or more could be expected. Safety was assured through a reserve account in which much of the investor funds were to be held and an insurance policy. He also shared brokerage records showing substantial balances with prospective investors. His claims were false and the records forged, according to the complaint. In fact he had substantial trading loses. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.
Insider trading: SEC v. Dowd, Civil Action No. 3:13-cv-00494 (D. N.J. Jan. 25, 2013); U.S. v. Dowd (D.N.J.). Defendant Kevin Dowd was charged by the SEC and the U.S. Attorney with insider trading centered on the acquisition of Pharmasset, Inc., by Gilead Sciences, Inc., announced before the market opened on Monday, November 21, 2011. Mr. Dowd had been employed for a number of years as a registered representative in the Florida office of a broker. A Director of Pharmasset was a long term client of the firm. During the acquisition process, the Director informed a Portfolio Manager at the firm who served as his financial adviser about the deal on a confidential basis. He in turn told Mr. Dowd and other employees, instructing that since the firm had inside information nobody could trade. Nevertheless, on the last trading day before the deal announcement Mr. Dowd is alleged to have informed a long time friend who worked as a Penny Stock Promoter about the proposed transaction. That person purchased 2,700 shares of Pharmasset on the same day as the call. He also tipped a friend who traded. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The SEC’s case and that of the U.S. Attorney are pending.
Misappropriation: U.S. v. Wasendorf (D. Iowa) is the action against Russell Wasendorf Sr., founder of Peregrine Financial Group. Mr. Wasenddorf has admitted bilking brokerage firm customers out of millions of dollars which led to the collapse of the firm. This week he was ordered to serve 50 years in prison.
Insider trading: U.S. v. Kahn (S.D.N.Y.) is the action in which Roomey Kahn pleaded guilty in 2009 to securities fraud, conspiracy and obstruction of justice. Ms. Kahn furnished inside information on a number of deals involving companies such as Polycom and Google to traders. Those included Raja Rajaratnam and Doug Whitman. Since her plea, Ms. Kahn has been cooperating with the government. This week she was sentenced to serve one year in prison.
Commodities fund fraud: U.S. v. Hatfield (N.D. Cal.) is an action against Rodney Hatfield. Mr. Hatfield operated a commodity pool in which he initially traded in currencies. When losses mounted, however, rather than inform investors he concealed them. Eventually his scheme cost investors over $1 million. This week he pleaded guilty to conspiracy to commit wire fraud. His sentencing is scheduled for June 24, 2013.
Insider trading: U.S. v. Whitman, 1:12-cr-00125(S.D.N.Y.) is the action in which Doug Whitman of Whitman Capital, LLC was convicted on two counts of conspiracy to commit securities fraud and two counts of securities fraud. He executed trades based on inside information in the shares of Marvell Technology Group, Ltd, Polycom, Inc. and Google, Inc. reaping illegal trading profits of over $900,000. Mr. Whitman was sentenced this week to serve 24 months in prison. See also SEC v. Whitman, Case No. 12-cv-01055 (S.D.N.Y. Filed Feb. 10, 2012).
Investment fund fraud: U.S. v. Price (E.D.N.Y.) is an action against former bank director Aubrey Price charging securities and wire fraud. The court papers allege that Mr. Price raised about $40 million from about 115 investors for a trading program focused on purchasing securities and real estate in South America. After misappropriating portions of the investor funds he lost others through poor investments and then lied in an effort to cover it up. The action is pending.
The regulator announced that the Court had directed Swift Trade, a Canadian based global company, pay a fine of ₤8 million for market abuse, in this case layering, which is a practice that feigns market activity. The defendant’s claim that because it was using derivatives and hedging corresponding orders in other markets that had not engaged in market abuse was rejected as contrary to common sense and market experience.
The Hong Kong regulator announced that Lai Ka Ki and Lam Yiu Kwan were fined $3,000 each for advertising on their Facebook accounts for investors to purchase an interest in gold. Investors were told that the transaction would be risk free.