In Congress this week, a bipartisan bill was introduced to roll back part of the Dodd-Frank legislation related to swaps. It would expanded the swaps trading permitted by federally insured banks. Two high profile enforcement insider trading actions were also in the news. In one the court rejected a motion for summary judgment by defendant Mark Cuban and directed the case to trial in June. In the second Samuel Wyly requested that the Court dismiss the case based on the Supreme Court’s recent decision in Gabelli which concerns the commencement of the statute of limitation for the imposition of a financial penalty.
The Commission issued an investor alert regarding custody of investor securities. The agency also revisited an issue considered earlier, issuing a release requesting information on the standards that should govern brokers and investment advisers when giving advice.
The SEC filed four enforcement actions this week. One named a lawyer as a defendant for filing false Rule 144 opinions while a second focused on the author of a market report who did not disclose that he was being paid to tout certain stocks. Another action involved misrepresentation by the operator of two hedge funds while the fourth centered on a manipulation in which the defendant paid a confidential informant to participate in his scam which was taped by the FBI.
Proposed rule: The Commission issued for comment Rules to Improve Systems Compliance and Integrity (here). Proposed Regulation SCI is designed to replace the current voluntary compliance program with rules which would require self-regulatory organizations, certain alternative trading systems, plan processors and certain exempt clearing agencies to develop, design, test and maintain systems to ensure their core technology meets certain standards and to provide notifications if there is a disruption or for select other events.
Risk alert: The Commission issued a Risk Alert and Investor Bulletin on Investment Adviser Custody Rule (here). The Alert follows recent inspections which identified deficiencies concerning custody related issues at a significant number of the firms.
Comment: The Commission issued a Notice titled “SEC Seeks Information to assess Standards of Conduct and Other Obligations of Broker-Dealers and Investment Advisers.” The release requests data and other information for the agency to utilize in connection with possible rule making on the standards of conduct and regulatory obligations of investment advisers and broker-dealers (here). Previously, the staff issued a Report on this topic as required by Dodd-Frank.
Remarks: Chairman Gary Gensler addressed the Institute of International Bankers (March 4, 2013). His remarks focused on the recent difficulties in the LIBOR market and the implementation of swaps regulation (here).
Canadian securities enforcement actions
The Canadian Securities Administrators or CSA published their annual report recapping enforcement results for 2012. Last year there were 145 enforcement proceedings commenced. This is an increase over the 126 actions initiated in 2011 but down from the 178 reported in 2010. In 2012 the Report states that 135 cases were concluded, up from 124 in the prior year. At the same time, the number of cases resolved last year is far below that of 2010 when 174 cases were concluded. Over the last three years the amount of fines and administrative penalties imposed has steadily declined, according to the Report. In 2012 about $36.6 million in fines and administrative penalties were imposed while in 2011 it was $52.1 million and $63.9 million in 2010. In contrast, the amount of disgorgement ordered in 2012 increased to about $120.5 million, exceeding the $49.5 ordered in 2011 and the $58.5 million in 2010.
Shareholder suits following M&A deals
Last year the number of shareholder suits challenging M&A deals fell to 602 from the 742 filed in 2011 and the 792 brought in 2010. The percentage of deal announcements followed by a shareholder complaint, however, remained constant. Approximately 93% of deals valued over $100 million were challenged, according to a recent Report issued by Cornerstone Research (here). About the same percentage of deals were challenged in 2001 while 90% and 86% were subject to a shareholder lawsuit in 2010 and 2009, respectively. A slightly larger percentage of deals valued over $500 million were challenged. About 96% of those transactions drew a shareholder complaint. On average suit was filed 14 days after the announcement, although in some instances the complaint was lodged within hours. Most of the cases settled while a substantial number were voluntarily dismissed, following the trend of earlier years. In 2012 81% of these suits resolved with an agreement to make additional disclosures. Again, this is largely consistent with earlier years.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 4 civil injunctive actions and no administrative proceedings (excluding tag-along-actions and 12(j) actions).
Unregistered securities: SEC v. J.C. Reed & Co., Inc., Civil Action No. 3:08-CV-1112 (MD. Tn.) is a previously filed action against J.C. Reed & Co., J.C. Reed Advisory Group and Barron Mathis. The complaint claims that over a three year period beginning in 2005 the defendants facilitated the offer and sale of over $11 million of J. C. Reed’s unregistered securities to over 100 investors. Misrepresentations were made to those investors regarding the value of the stock and the profitability of the company. This week the defendants settled with the Commission. The final judgment against Mr. Mathis enjoined him from future violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). He was also directed to pay disgorgement of $11 million and prejudgment interest. The two entities were directed to pay disgorgement of $11 million and prejudgment interest. See also Lit. Rel. No. 22633 (March 7, 2013).
Fraudulent scheme: SEC v. Kegley, Civil Action No. 1:12-CV-1605 (N.D. Ga.) is a previously filed action against Gerald Kegley. Mr. Kegley is alleged to have introduced six individuals to a fraudulent scheme involving the potential use of bank guarantees. He also forwarded misrepresentations to them. The individuals invested about $1.95 million. This week Mr. Kegley 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). He was also ordered to pay disgorgement of $99,940 along with prejudgment interest and a penalty of $209,731.92. See also Lit. Rel. No. 22634 (March 7, 2913).
Investment fund fraud: SEC v. McAdams, Civil Action No. 4:10-CV-00701 (D.S.C.) is a previously filed action against M. Mark McAdams and R. Dane Freeman. The defendants sold interests in Global Holdings, raising about $3.5 million from investors in 2008 based on claims that high returns would be paid. The funds were to be used to buy and sell Standard and Poor’s AAA or AA rated bonds and medium term notes on overseas trading platforms. Most, if not all, investors did not receive the promised rates of returns. This week the court entered final judgments of permanent injunction by consent against each defendant prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants were held jointly and severally liable for the payment of disgorgement of $3.5 million along with prejudgment interest. Each defendant was also directed to pay a civil penalty of $120,000. See also Lit. Rel. No. 22635 (March 7, 2013).
False legal opinions: SEC v. Reiss (S.D.N.Y. Filed March 7, 2013) is an action against California lawyer Brian Reiss who operated the website 144letters.com to promote his services. During 2008 on several occasions he issued Rule 144 opinions to transfer agents to facilitate the removal of the restrictive legends on shares, permitting them to become free trading. In issuing the letters Mr. Reiss did not conduct even a basic inquiry regarding the facts and made misrepresentations, according to the Commission. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Section 10(b). The case is in litigation.
False recommendations: SEC v. McCabe, Civil Action No. 2:13-cv-00161 (D. Utah Filed March 5, 2013) is an action against Colin McCabe alleging violations of Exchange Act Section 10(b). Mr. McCabe is the publisher of three newsletters, the Elite Stock Report, The Stock Profiteer and Resource Stock Adviser. Subscribers were told that the newsletter recommendations were based on extensive research when in fact they were not, according to the complaint. Subscribers were also not told that between January 2008 and February 2010 Mr. McCabe was paid more than $16 million to conduct mass mailing promotions and tout specific stocks to his newsletter subscribers. While Mr. McCabe’s touting frequently caused a short term boost in the price of the stock, the impact did not last, harming investors who followed his advice as the stock declined in value. The case is in litigation. See also Lit. Rel. No. 22632 (March 5, 2013).
Misrepresentations: SEC v. Hansen, Civil Action No. 12 CV 1403 (S.D.N.Y. Filed March 1, 2013) is an action against Randal Hansen, the owner of Defendant RAHFCO Management Group, LLC which is the general partner of the two funds and Vincent Puma, the owner of defendant Hudson Capital Partners Corporation or HCP, a sub-adviser and portfolio manager for the two funds. The complaint alleges that after raising over $23 million from about 100 investors between April 2007 and May 2011 based on a series of misrepresentations, the funds devolved into insolvency, leaving investors with an estimated $10 million in losses. Randal Hansen interacted with the public and potential investors on behalf of the hedge funds, falsely assuring them that their investment was safe and would be used to implement a trading strategy in which the funds invested in options and futures on the S&P Index and equities. Mr. Puma bolstered those misrepresentations by provided a stream of information regarding the funds and their trading performance to Mr. Hansen or RAHFCO Management, the auditors and ultimately to investors which was false. Investors were told that from 2007 to early 2011 the two hedge funds earned over $9 million which would have represented a return of about 25%. In fact the two funds earned about $280,000, a return of less than 2%. During their four years of operation Mr. Hansen and RAHFCO Management received about $1.95 million in what were supposed to be investment profits and management fees. Mr. Puma and HCP received about $1.65 million in investor funds. While some investors received payments from the two hedge funds, many suffered losses. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation. See also Lit. Rel. No. 22631 (March 4, 2013).
Stock manipulation: SEC v. Falcon Ridge Development, Inc., Civil Action No. 13-1101 (E.D. Pa. Filed March 1, 2013) is an action against the company, a New Mexico real estate firm, and its president, Fred Montano. Beginning in mid-2008 Mr. Montaro had conversations with an individual he believed could help him implement a scheme to manipulate the share price of Falcon Ridge. In fact the individual was a cooperating witness. As a result of those conversations arrangements were made to execute test trades in October 2008. The test trades were matched orders crafted to create an artificial price and illicit trading profits for Mr. Montario. The trades were arranged by Mr. Montario and executed with the FBI. Mr. Montario received the profits and paid the cooperating witness $1,000 for participating in the scheme. The conversations between Mr. Montario and the cooperating witness were taped. The Commission’s complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22630 (March 1, 2013). The U.S. Attorney’s Office for the Eastern District of Pennsylvania announced the filing of parallel criminal charges.
Investment fund fraud: U.S. v. Harris, Case No. 3:12-cr-00170 (E.D. Va. Verdict March 4, 2013) in an action in which a jury convicted Michael Harris of securities, mail and wire fraud in connection with the solicitation of investments in his company, M.F. Harris Research, Inc. Investors were told beginning in 2005 that the company was developing a treatment for the HIV/AIDS based on a discovery by Mr. Harris that hyperbarie chambers used to treat divers for the bends inhibited the virus. In fact the claims were false. Most of the $880,000 in investor funds was misappropriated by Mr. Harris and used for his personal benefit. The date for sentencing has not been set.
Insider trading: U.S. v. Tang, No. 10-80 (N.D. Cal.) is a insider trading action in which defendant King Chuen Tang previously pleaded guilty to one count of conspiracy and one count of insider trading. Mr. Tang was the CFO of a private equity fund. He learned that Tempur-Pedic International, Inc was planning a pre-announcement of its regularly scheduled earnings announcement and that his employer was planning to purchase $50 million in Temur shares. He shared the information with two friends and the three traded, making $1.9 million in profits. In a separate scheme in April 2007 Mr. Tang received a tip from his brother-in-law who was the CFO of another private equity fund. Mr. Tang and others traded making about $3.7 million. He was sentenced to serve one year and a day in prison followed by three years of supervised release. While on supervised release he will also be required to serve twelve months of home confinement.
Market manipulation: SEC v. Crane, Case No. 1:13-cv-00261 (E.D. Va. Filed Feb 26, 2011) is an action against Robert Crane. The complaint alleges that Mr. Crane manipulated two penny stocks in June 2010 by engaging in several wash sales. The purpose of the transactions was to raise the funds to purchase a home. The scheme was unsuccessful – Mr. Crane did not make any money. He settled the matter with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the complaint which were Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to the entry of a penny stock bar. No penalty was sought based on Mr. Crane’s financial condition. See also Lit. Rel. No. 22636 (March 7, 2013).
Suitability: Jeffrey Rubin operated of Pro Sports Financial, which provided financial and other services to professional athletes. From March 2006 through June 2008 while he was registered as a broker at Lincoln Financial Advisors Corporation and Alterna Capital Corporation he recommend that one of his NFL clients invest $3.5 million in four high-risk securities. The largest investment was $2 million in an Alabama casino project. This was the bulk of the player’s liquid net worth. Mr. Rubin did not inform his employer. The customer lost about $3 million. The recommendations were not suitable according to FINRA.
Approximately 30 other clients of the Sports firm were referred to the casino projcct by Mr. Rubin while he was employed at Alterna and International Assets Advisory, LLC without the firms’ knowledge or approval. They invested a total of $40 million in the project. Mr. Rubin received a 4% ownership stake and $500,000 from the project promoter. The regulator barred him from the securities business.
Supervisory systems: The regulator fined Amriprise Financial Services, Inc. and its affiliate, American Enterprise Investment Services, Inc. $750,000 for failing to have reasonable supervisory systems in place to monitor wire transfer requests regarding customer funds and accounts. Specifically, the firms did not have policies and procedures in place to detect or prevent multiple transmittals of funds to third part accounts. Rather, it relied on a manual review of wire requests without the benefit of exception reports. As a result the firms to miss multiple red flags with regard to wire requests from a customer’s account to a bank account which were forged.
Client funds: The Securities and Futures Commission initiated proceedings against two representatives of China Pacific Securities Limited, a company incorporated in Hong Kong and licensed to deal in securities. Previously, a freeze order had been obtained against the two individuals. The proceeding resulted from an inspection which demonstrated that there was a discrepancy in client securities accounts of about $156 million.
Investment fund fraud: The Australian Securities & Investment Commission banned former Astarra Asset Management Pty Ltd director Eugene Liu from the securities business for his activities in connection with Astarra Strategic Fund, a fund of funds. Mr. Liu was a director and chief investment strategist for Astarra Asset Management which was appointed by Trio Capital Ltd as the investment manager of Astarra Strategic Fund. While in that position he was responsible for incorrect statements in the product disclosure statement, furnished misleading research reports about the fund, failed to inform investors how their funds would be invested and took improper compensation outside of his salary. The ASIC has brought a series of enforcement actions related to Trio Capital. As a result 10 individuals have either been jailed, banned from the securities business, disqualified from managing corporations or agreed to remove themselves from participating in the financial services industry.
Insider trading: The regulator announced that Norman Graham, the former managing director of stockbroking firm Lonsec Limited pleaded guilty to two charges of insider trading. In February 2013 Mr. Graham learned that Clean Seas Tuna had suffered financial losses for the second half of the year. Prior to the public announcement he sold a total of 200,000 shares of Clean Seas Tuna across two client accounts.