This Week In Securities Litigation (Week ending January 4, 2013)
In this holiday shortened first week of the year, one of the most significant current cases moved forward with the entry of a not guilty plea by Mathew Martoma to insider trading charges. Mr. Martoma is the latest person charged in the on-going insider trading wars being waged by the Manhattan U.S. Attorney’s Office and the SEC. His former affiliation with SAC Capital, the huge trading profits in the case, and the manner in which they were made has fueled speculation about possible charges against that firm and its founder.
The SEC settled an investment fund fraud action filed initially in 2010 this week but did not bring any civil injunctive actions or administrative proceedings, excluding 12j and tag along actions. The CFTC filed two actions, one centered on the protection of customer funds and another based and on a cherry picking scheme. In New York another defendant was sentenced in the on-going bid rigging actions centered on the municipal bond market. The SFC announced that it lost an action based on aiding and abetting unlicensed activity.
The SEC
Report: The SEC’s 2012 Agency Financial Report details its performance over the last government fiscal year which ended September 30, 2012. The Report provides an overview of the work of the Commission during the period. Two sections focus on the Division of Enforcement and highlight many of its significant cases.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission did not file any civil injunctive actions or administrative proceedings (excluding tag-along-actions and 12(j) actions).
Investment fund fraud: SEC v. Online-Registries, Inc., Civil Action No. 10-CV-00433 (D.R.I. Filed Oct. 19, 2010) is an action against David Stern and his company. This week the Commission announced a settlement with each defendant. According to the complaint, the defendants defrauded at least 10 investors who purchased shares in Online-Registries for a total of $170,000 based on misrepresentations. Mr. Stern, a convicted felon and disbarred attorney, told investors the company had developed technology to help permit the sharing of medical records, that it had thousands of subscribers and that they would be forming a partnership with a major technology company. The representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Under the terms of the settlement each defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Mr. Stern agreed to pay disgorgement of $197,875 and prejudgment interest. Payment of those amounts was waived and a penalty not imposed based on financial condition. The company agreed to pay disgorgement of $197, 875 along with prejudgment interest. See also Litg. Rel. No. 22583 (Jan. 2, 2013).
CFTC
Customer funds: The agency issued an order fining Mizuho Securities USA Inc. $175,000 and directing that it cease and desist from violations of certain regulations regarding the reporting of deficiencies in customer segregated accounts and relating to supervision. Specifically, the order found that in October 2011 the firm discovered that it had a deficiency of over $12.4 million in its secured funds account which is suppose to hold funds sufficient to cover obligations to foreign futures and options customers. Futures Commission Merchants who fail to fully comply with this requirement must promptly report any deficiency to the CFTC. Here the firm failed to promptly report the deficiency and to reasonably supervise its personnel with regard to this matter.
Supervision: The regulator settled charges with R.J. O’Brien & Associates, LLC with the entry of an order requiring the firm to pay a penalty of $300,000 and to cease and desist from further violations of CFTC regulation 17 C.F.R. Section 166.3. The underlying action charged that an employee from January 2003 through February 2007 at the end of the trading day allocated profitable trades to his personal account and losing ones or less profitable ones to other accounts.
Criminal cases
Bid rigging: Adrian Scott-Jones, formerly a br oker for Tradition N.A. was sentenced to serve 18 months in prison in connection with his guilty plea in the on-going investigations into bid rigging in the municipal bond markets. Mr. Scott-Jones pleaded guilty to participating in multiple conspiracies with executives of General Electric Co. affiliates from 1999 to 2006. In conducting the auctions, which focused primarily on the investment of the proceeds from the sale of municipal bonds, Mr. Scott-Jones and others gave co-conspirators information about the prices, price levels or conditions in competitors’ bids, a practice known as “last look” which is prohibited by Treasury regulations. To date the government has charged 20 individuals in the on-going inquiry, 19 of whom have been convicted at trial or pleaded guilty. One is currently awaiting trial. One company has also pleaded guilty.
SFC
Aiding and abetting: The Securities and Futures Commission announced that Universal Insurance Consultants and Brokers and Ms. Au Mei Chun had been acquitted of claims that they aided and abetted unlicensed sales of securities. The company is a registered insurance firm but not securities broker. The two defendants had been charged with aiding and abetting unlicensed sales of securities by a third person who was immunized and testified at trial against them. The Magistrate found that the testimony was unclear that the company and Ms. Au requested that the person execute subscription forms on behalf of the clients.
Hurricane Sandy: As we begin the New Year please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).
In this holiday shortened first week of the year, one of the most significant current cases moved forward with the entry of a not guilty plea by Mathew Martoma to insider trading charges. Mr. Martoma is the latest person charged in the on-going insider trading wars being waged by the Manhattan U.S. Attorney’s Office and the SEC. His former affiliation with SAC Capital, the huge trading profits in the case, and the manner in which they were made has fueled speculation about possible charges against that firm and its founder.