This Week In Securities Litigation (Week ending February 22, 2013)
The Commission filed another “suspicious trading” insider trading case this week. The action centers on the highly publicized acquisition of H.J. Heinz Co. In recently filed court papers the Commission has identified the unknown trader as a private wealth client of the Zurich, Switzerland affiliate of Goldman Sachs. The SEC also brought an offering fraud case, an investment adviser fraud action that parallels a criminal case and resolved a previously filed investment fund fraud action.
The Business Round Table, along with over thirty other business groups, sent a letter to the DOJ and the SEC regarding the guidance offered in the recently published A Resource Guide to the U.S. Foreign Corrupt Practices Act. The letter revisits a number of issues which the groups have previously raised including the lack of a procedures defense and the need for clarity regarding the definitions of the terms “foreign official” and “instrumentality.”
Finally, the Australian Securities and Investment Authority announced the imposition of the largest fine imposed on an individual for operating a fraudulent investment scheme.
The SEC
Remarks: SEC Commissioner Luis Aguilar delivered remarks titled “Shareholders Need Robust Disclosure to Exercise Their Voting Rights as Investors and Owners” in Washington, D.C. (Feb. 20, 2013). The Commissioner’s remarks focused on disclosures which facilitate the proxy process such as those regarding executive compensation, leadership structure and risk oversight, board diversity and political contributions (here).
Remarks: SEC Chairman Elisse Walter addressed the American University School of Law in remarks titled “Harnessing Tomorrow’s Technology For Today’s Investors and Markets” (Feb. 19, 2013)(here). The Chairman’s remarks focused on efforts by the Commission to use technology and innovative techniques to meet the challenges of the future.
Canadian Securities Class Actions
Filings for securities class actions in Canada declined last year, following the trend in the U.S., according to a recent report by NERA Economic Consulting (here). Specifically, last year nine new securities class actions were filed, down from the 15 actions filed in 2011 and the 12 brought in 2010. The number of filings last year is also below the average of 12 new cases per year since 2008. Eight of the nine new filings were Bill 198 cases. That is consistent with the average number of these cases since 2008. Six of the nine cases had a parallel U.S. filing.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed two civil injunctive actions and two administrative proceedings (excluding tag-along-actions and 12(j) actions).
Investment fund fraud: In the Matter of James S. Tagliaferri, Adm. Proc. File No. 3-15215 (Feb. 21, 2013) is a proceeding against the president, chief compliance officer and one of two owners of TAG Virgin Islands, Inc., a registered investment adviser. This is the companion action to a criminal case brought in the Southern District of New York (below). The Order alleges that from 2007 through 2010 Mr. Tagliaferri failed to disclose to investors that he was being paid kickbacks to invest their funds in certain securities. In addition, when promissory notes that he put client money in neared or passed maturity and clients demanded payment, Mr. Tagliaferri raised the necessary cash by causing client accounts to purchase shares of a penny stock entity and then obtaining those funds from the seller and/or his brother to make the payments. Mr. Tagliaferri is also alleged to have misappropriated client funds. The proceeding will be set for hearing.
Investment fund fraud: SEC v. Vaughan, Civil Action No. 10-263 (D.N.M.) is an action against Douglas Vaughan and his controlled real estate companies. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). Mr. Vaughan used the companies to conduct a Ponzi scheme, according to the SEC, in which he promised investors above market returns. Following the filing of the Commission’s complaint, Mr. Vaughn was indicted and pleaded guilty to mail and wire fraud charges and making false statements to the Commission. He was sentenced to 12 years in prison. He then settled with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and agreeing to pay disgorgement of $43,658,321. That obligation will be deemed satisfied by payment of that amount in the criminal case. The action was also resolved as to the companies with the entry of permanent injunctions based on the Sections cited in the complaint. See also Lit. Rel. No. 22621 (Feb. 20, 2013).
Insider trading: SEC v. Certain Unknown Traders in the Securities of H.J. Heinz Co., Civil Action No. 13-CIV-1080(S.D.N.Y. Filed Feb. 15, 2013) is an insider trading action based on the February 14, 2013 announcement that Berkshire Hathaway and 3G Capital would acquire H.J. Heinz for $72.50 per share. The complaint was filed one day after the deal announcement against purchasers who traded through the Zurich, Switzerland office of Goldman Sachs. They purchased 2,533 naked, out of the money options for $90,000 the day before the announcement. The purchase yielded the buyer $1.8 million in trading profits in one day. The complaint alleges a violation of Exchange Act Section 10(b). The court granted a temporary freeze over the account. The case is in litigation.
Offering fraud: In the Matter of Gregg C. Lorrenzo, Adm. Proc. File No. 3-15211 (Feb. 15, 2013) is a proceeding which names as Respondents Gregg Lorenzo, who has been a registered representative, Frank Lorenzo, a registered representative and Charles Vista, LLC, a registered broker-dealer controlled by Gregg Lorenzo and at which Frank Lorenzo served as head of investment banking. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c) in connection with the solicitation of investors in 2009 and 2010 to purchase convertible debentures in Waste2Energy, a company which is purported to have technology for converting waste to energy. During that solicitation Respondents are alleged to have made fraudulent misrepresentations to several customers regarding the company and its prospects. Those misrepresentations focused on the risk of the investment, the upside for the investment, the future prices for W2E stock, the assets held by W2E and the prospects for its securities being listed on the NASDAQ. The proceeding will be set for hearing.
Investment fraud: SEC v. ABS Manager, LLC, Case No. 13 CV 0319 (S.D. Ca. Filed Feb. 8, 2013) is an action against ABS Manager, whose state investment adviser application is pending, and George Price, its sole manager and owner and a San Diego radio investment talk show host. The complaint alleges that since 2009 the defendants have raised about $18.8 million from 35 investors for three funds. Investors were told that their funds were safe and secured by government backed bonds yielding double digit returns. In fact the money was invested in the most high risk version of CMOs which lost value. Mr. Price also misappropriated about $500,000 in the form of claimed fees. The case is in litigation. See also Lit. Rel. No. 22622 (Feb. 20, 2013). The court denied the SEC’s request for a freeze order and the appointment of a receiver citing a failure to plead the claims with particularity.
CFTC
Material nonpublic information: The agency filed an enforcement action against the New York Mercantile Exchange, Inc., owned by the CME Group, and two former CME NYMEX employees, William Byrnes and Christopher Curtin. The complaint, filed in the Southern District of New York, alleges that 2008, 2009 and 2010 non-public information about CME NYMEX trading and customers was repeatedly disclosed to a commodity broker. The conversations were frequently captured on tape. The complaint alleges that the Commodity Exchange Act specifically prohibits the disclosure of this type of information.
FINRA
Customer agreement: A FINRA arbitration panel returned a split ruling in the regulator’s proceeding against Charles Schwab & Co. The action focused on two points. First, it claimed that amendments to Schwab’s customer agreements which required customers to waive their rights to bring or participate in class actions against the firm violate FINRA rules. The panel concluded that this does violate FINRA rules but that the regulator may not enforce those rules because they are in conflict with the Federal Arbitration Act. Second, it claimed that a provision in the customer agreement which prevented the customer from permitting an arbitration claim to be consolidated with others also violated FINRA rules. The panel concluded that this violates FINRA rules. The panel directed Schwab to take corrective action and pay a $500,000 fine.
E-mail retention: Four subsidiaries of ING Groep N.V. were fined $1.2 million and directed to conduct a comprehensive review of their e-mail systems by the regulator. The sanctions were based in part on the failure of the subsidiaries to retain or review e-mails over and eight year period beginning in 2004. During the period the firms did not properly configure hundreds of employee e-mail accounts to make sure that items sent to and from them were maintained and reviewed. In addition, from 2005 through 2011 nearly six million e-mails were not reviewed despite the fact that they were flagged for review.
Criminal cases
Investment adviser fraud: U.S. v. Taliaferri (S.D.N.Y.) is an action against Virgin Island based investment adviser James Taliaferri who managed TAG Virgin Island Inc., a registered investment fund. A parallel action was filed by the SEC (above). The charges allege that he accepted millions of dollars in fees to place client investments in certain securities without making the required disclosures; improperly used client funds to, ultimately, make payments to other clients; and placed fictitious securities in client accounts. He is charged with investment adviser fraud, securities fraud, wire and mail fraud and violations of the Travel Act.
FCPA
Letter of business groups: Prior to the issuance of A Resource Guide to the U.S. Foreign Corrupt Practices Act by the Department of Justice and the Securities and Exchange Commission late last year, there were calls for additional guidance on the application of the Act and demands for Congressional reform. Now, in a letter to Assistant Attorney General Lanny Breuer and Acting SEC Director of Enforcement George Canellos dated February 19, 2013, the Business Roundtable and thirty two other business groups are seeking clarification of the Guide and the Act. The letter addresses a series of point seeking at times clarification and at others offering an interpretation of the Guide. The points covered include: the need for a compliance defense; a request for examples of cooperation credit; a request for clarification of the terms foreign official and instrumentality; and a discussion of parent-subsidiary liability, successor liability, and intent. It concludes with a discussion of the meaning of the term declination and a urges officials to continue making information available about declinations.
ASIC
Investment fund fraud: The Australian Securities and Investment Commission announced that David Hobbs of New Zealand was ordered to pay a $500,000 fine in connection with the operation of a $30 million Ponzi scheme. The scheme solicited investors with promises that the funds would be invested off shore in safe investments which would pay a monthly rate of return. In fact the representations were false. Others associated with one of the funds involved here have been sentenced to prison. The fine was the largest in ASIC history.
Insider trading: The regulator announced that Calvin Zhu was sentenced to serve twenty-seven months in prison for insider trading. Previously, the executive pleaded guilty. The underlying conduct occurred from December 2006 through July 2011 while he was an executive at three companies: Calburn Partnership Pty Ltd; Credit Suisse Management (Australia) Pty Ltd; and Hanlong Mining. The court took into account the fact that Mr. Zhu pleaded guilty and cooperated.
Program: The “New” DOJ and SEC FCPA Guidance: Is there Anything New? A webcast at noon on February 28, 2013 presented by Tom Gorman on behalf of Celesq and West Legal Ed (here).