Settlement trends in Commission enforcement actions last year show increases in most case categories, according to a study released by NERA economic consulting. In several categories the number of cases settled in the last fiscal year is the highest since the passage of Sarbanes-Oxley.
The SEC had mixed results in court this week. The Commission prevailed on a motion for summary judgment against all defendants in a prime bank fraud case, securing significant relief. The agency lost a bench trial against three defendants in a manipulation case.
The Commission filed two new insider trading cases this week. Both are settled. Also filed was a settled financial fraud action and a proceeding centered on a cherry picking scheme. Finally, a research firm executive who procured inside information and then sold it to clients was sentenced to serve 51 months in prison, one of the harsher sentences in the insider trading cases in New York.
Remarks: Commissioner Daniel Gallagher addressed the U.S. Chamber Center for Capital Markets Competitiveness (Washington, January 16, 2013). In his remarks the Commissioner discussed his views on Dodd-Frank, the Volker rule and referenced the position of the FSOC regarding the potential regulation of money market funds (here).
Statistics: A new report by NERA Economic Consulting titled “SEC Settlement Trends: 2H12 Update” (here) details trends in recent Commission enforcement settlements. For the last fiscal year the top ten settlements ranged from the $285 million Citigroup Global Markets, Inc. action, which is on appeal since the Court declined to enter it, to the $46.08 million in the case settled with Wachovia Bank N.A. The total number of settlements in fiscal 2012 increased over those obtained in the last several years. In fiscal 2012 there were 714 settlements compared to 670 in 2011 and 2010, 606 in 2009 and 657 in 2008.
SEC Enforcement: Litigated cases
Prime bank fraud: SEC v. Wilde, Civil Action No. SACV 11-315 (C.D. Cal.) is an action against Franis Wilde, Steven Woods, Mark Gelazela, Bruce Haglund, Matrix Holdings LLC, BMW Majestic LLC, IDLYC Holdings Trust LLC and IDLYC Holdings Trust. The Commission’s complaint alleged that the defendants engaged two schemes. The first began in 2008 with Mr. Wilde, using Matrix Holdings, obtaining a $5 million treasury bond from an investor under false pretenses. He used the bond as the predicate for a claimed private placement program. In fact the bond was used to secure a line of credit, the proceeds of which were diverted to personal use. In the second Mr. Wilde and Martrix, along with Messrs. Woods and Gelazela, created what they called a “bank guarantee funding program. In late 2009 and early 2010 Messrs. Woods and Gelazella, using BMW, IDLYC Holdings and IDLYC Trust, executed contracts with 24 investors to raise $6.3 million. Legitimate investment instruments were supposed to be acquired with the funds. None were acquired and the money was exhausted largely on undisclosed fees that went to the defendants.
The court granted the Commission’s motion for summary judgment. Messrs. Wilde, Woods and Gelazela along with the entity defendant were found to have violated Securities Act Sections 5(a), 5(c) and 17(a). In addition, the court concluded that Messrs. Woods and Gelazela violated Exchange Act Section 15(a) and that Messrs. Haglund and Wilde aided and abetted the other defendants’ violations of Exchange Act Section 10(b). The court entered injunctions against each defendant based on the Sections they were found to have violated. In addition, Mr. Wilde and Matrix were ordered to pay, on a joint and several basis, disgorgement of $12,106,810.75 along with prejudgment interest and a civil penalty equal to the sum of the disgorgement and interest for a total of $13,589,505.56. The other defendants were ordered to pay, on a jointly and several basis, disgorgement of $6,195,908 along with prejudgment interest and a civil penalty of $6,744,083.49. Messrs. Wilde and Haglund are also permanently barred from acting as an officer or director of a public company. Several relief defendants were directed to disgorge a total of $2,153,000. See also Lit. Rel. No. 22594 (Jan. 15, 2013).
Manipulation: SEC v. Exotics.com, Inc., Civil Action No. 2:05-cv-00531 (D. Nev. Filed April 25, 2005) is an action against the company, a group who held stock in Exotics.com, the outside auditors and accountants and outside attorneys. For a three year period beginning in 1999 there was a manipulation of the share price of Exotics.com securities, according to the complaint. During the same period the company engaged in an accounting fraud and material misrepresentations were made by the individual defendants. At trial the Commission claimed that attorneys Daniel Chapman and Sean Flanagan, whose firm took the company public through a reverse merger, located and negotiated the acquisition of the shell which became Exotics.com for the scheme. The SEC attempted to establish that the two attorneys also helped defendant Ingo Mueller conceal his control of the shell while assisting other defendants with the manipulation of the share price, according to the Court’s findings. Mr. Ericksteen, a Canadian citizen, was alleged to have been a consultant to the company who also participated in the fraudulent scheme.
The Court concluded in its January 7, 2013 Findings of Fact and Conclusions of Law that there may have been a fraud by others. However there was insufficient proof to hold the defendants liable. Each of the other defendants settled or defaulted earlier with the exception of one who was found liable on summary judgment.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 3 civil injunctive actions and 1 administrative proceeding (excluding tag-along-actions and 12(j) actions).
Insider trading: SEC v. Rogers, Civil Action No. 13-CV-0374 (S.D.N.Y. Filed Jan. 16, 2013) is an action against registered representative and Spectrum Trading, LLC proprietary trader Eric Rogers which stems from the Galleon and Cutillo investigations. Mr. Rogers is alleged to have traded on inside information about the September 2007 acquisition of 3Com by Bain Capital and Huawei Technologies, reaping illegal trading profits of $207,000. The information initially came from Ropes & Gray lawyers Atrhur Cutillo and Brien Santarlas who, through Jason Goldfarb, furnished it to Zvi Goffer who in turn tipped his brother Emanuel who tipped Mr. Rogers. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action Mr. Rogers consented to the entry of a permanent injunction prohibiting future violations of Section 10(b). He also agreed to disgorge his trading profits and pay prejudgment interest. Under the terms of the settlement Mr. Rogers will be barred from the securities business and from participating in any penny stock offering. No financial penalty was sought in view of his financial condition. See also Lit. Rel. No. 22595 (Jan. 17, 2013).
Insider trading: SEC v. Darden, Civil Action No. 1:13-cv-00138 (N.D. Ga. Filed Jan 15, 2013) is an action against the owner of a non-profit consulting company. Mr. Darden learned about AirTran Holdings, Inc. board member about its pending merger. The day before the September 27, 2010 announcement he purchased 40,000 shares of company stock and 200 out-of-the-money call options. Following the public announcement he had trading profits of $159,160. The Commission’s complaint alleges violations of Exchange Act Section 10(b). Mr. Darden settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Section 10(b) and agreeing to disgorge his trading profits and prejudgment interest. He also agreed to pay a civil penalty equal to the amount of his trading profits. See also Lit. Rel. No. 22596 (Jan. 17, 2013).
Cherry picking scheme: In the Matter of MiddleCove Capital, LLC, Adm. Proc. File No. 3-14993 (Jan. 16, 2013) is a proceeding against the firm, a registered investment adviser, and its principal, chief investment officer and sole owner, Noah Myers. From late 2008 through early 2011Respondents engaged in a day trading cherry picking scheme. Frequently Respondents purchased a security and held it in an omnibus account. If the price declined before the end of the day the security was sold and the loss allocated to a client account. Conversely if it appreciated the security was sold and the profits were allocated to a personal or family account in many instances. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and 207. Respondents settled the proceeding by each consenting to the entry of a cease and desist order based on the Sections cited in the Order. The registration of MidddleCove will be revoked and Mr. Myers is barred from the securities business, from participating in a penny stock offering and from being affiliated with a registered investment company. Respondents were also directed to pay disgorgement of $462,022 along with prejudgment interest and a civil penalty of $300,000.
Financial fraud: SEC v. Volt Information Sciences, Inc., Civil Action No. 13 CV 237 (S.D.N.Y. Filed Jan 10, 2013); SEC v. Egan, Civil Action No. 12-CV-236 (S.D.N.Y. Filed Jan 10, 2013). Volt names as defendants the company and Debra Hobbs, the CFO of operating subsidiary Volt Delta Resources, LLC, while Egan is against Jack Egan, Jr.,Volt’s CFO. Both cases are based on a transaction with a large Customer that resulted in the improper recognition $7.55 million as income in the fourth quarter and at fiscal year end 2007 by Volt. During that period the defendants booked a fictitious transaction with a customer to help it obtain $10 million in internal funding. Portions of the money were paid to Volt as a down payment on a large leading transaction that had been under negotiation for months. The Volt complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The Egan action alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5).
The company and Ms. Hobbs settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. The court will determine issues regarding penalties and other remedies at a later date. Ms. Hobbs has agreed to cooperate with the Commission. Mr. Eagn’s case is in litigation. See also Lit. Rel. No. 22589 (Jan. 11, 2013).
Investment fund fraud: U.S. v. Ritter, Case No. 1:12-cr-00704 (S.D.N.Y.) is an action in which accountant Alan Ritter previously pleaded guilty to three counts of wire fraud. This week he was sentenced to serve three years in prison. Mr. Ritter is alleged to have conducted an investment fund fraud over an 11 year period which raised about $6 million. The scheme began when he suffered business losses and started raising money from clients and friends on the promise it would be invested. In fact he misappropriated the funds.
Insider trading: U.S. v. Kinnucan , Case No. 1:12-cr-00163 (S.D.N.Y.) is an action in which John Kinnucan, President of Broadband Research, LLC, previously pleaded guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud. He was sentenced this week to serve 51 months in prison. Mr. Kinnucan, based in Portland, Oregon, cultivated contacts at public companies to obtain inside information. From 2008 through 2010 he obtained inside information and sold it to firm clients. That information concerned companies such as F5 Networks, Inc., Sandisk Corporation and Flextronics International, Ltd. For example, in June and early July 2010 he obtained inside information about the quarterly earnings of F5. Immediately after learning that earnings would be better than expected he tipped Broadband clients who traded, earning profits and avoiding losses of more than $1.5 million. See also SEC v. Kinnucan, 1:12-cv-01230 (S.D.N.Y. Filed Feb. 17, 2012).
Investment fund fraud: U.S. v. Hu (N.D. Cal.). Albert Ke-Jeng Hu was convicted on seven counts of wire fraud following a three week jury trial. The defendant was accused of operating a Ponzi scheme from 2002 to 2008 in which he targeted members of the Chinese – American business community. He claimed to have operated large hedge funds which would generate returns of 20% to 30% per year. In fact he never invested any of the investor funds, misappropriating them to his personal use. He was sentenced to serve 12 years in prison.
Mediation: The regulator announced the institution of a pilot program under wich those with claims under $50,000 can submit them to a telephone mediation for resolution. The program is designed to be a lower cost alternative to arbitration.