Criminal And Civil Securities Cases

Many commentators have discussed the increasing criminalization of securities enforcement. There clearly are many cases in which there are criminal and civil securities investigations. In some instances, they are parallel, but the result in the criminal case drives the outcome of the civil case. This is clearly evident in the FCPA action, illustrated by the Novo Nordisk case discussed here yesterday. In other instances, the civil case may precede the criminal case, as happens in many investment fund fraud cases. In still others, there is an interplay between the inquiries, sometimes with criminal charges backstopping the civil investigation.

These trends are evident this week in cases involving the on-going “pay to play” investigation in New York, the inquiries regarding financier Allen Stanford and the cases involving attorney Marc Dreier. In the New York pension fund inquiries, the SEC is investigating in tandem with New York Attorney General Andrew Cuomo. Yesterday, the New York Attorney General announced that he had obtained another guilty plea in the on-going pension fund inquiries discussed here. Julio Ramirez, an unlicensed placement agent formerly associated with Wetherly Capital Group, pled guilty to securities fraud under the New York Martin Act.

Mr. Ramirez participated in two key fraudulent schemes. First, in January 2003, he was hired by FS Equity Partners V and the Ares Corporate Opportunities Fund II to secure investments from institutional investors, including the New York State Common Retirement Fund. Mr. Ramirez, for Wetherly, entered into a arrangement with Henry Morris, a former top political adviser to then Comptroller Alan Hevesi, to secure New York State Common Fund investments for both funds in exchange of 40% of the placement fees. Investments were made in both funds generating more than $630,000 in fees for Wetherly and Mr. Ramirez and yielding more than $250,000 for Mr. Morris.

A similar arrangement was entered into in 2004. This deal involved investments by the New York Common Fund emerging manager fund which was suppose to focus on minority and women owned funds. Mr. Ramirez arranged for a $175 million investment from the fund in Aldus Equity in exchange for a fee to Mr. Morris of $175,000.

Following the guilty plea in the New York action, the SEC amended its complaint in SEC v. Morris, Civil Action 09-CV-2518 (S.D.N.Y. Filed March 19, 2009), discussed here, adding Mr. Ramirez. The factual claims are similar to those in the New York state action.

In contrast, in the Stanford inquiry the SEC has brought actions in advance of the criminal prosecutors. In SEC v. Stanford International Bank, Case No. 3:09-cv-00298 (N.D. Tex. Filed Feb. 17, 2009) the SEC brought an action against financier Alan Stanford and his off-shore bank alleging financial fraud as discussed here. This case, called “Madoff junior” by some, may involve one of the largest Ponzi schemes in history. Presently, the SEC has a freeze order over Mr. Stanford’s empire. At the same time, a receiver has been appointed in the U.K. over the Mr. Stanford’s bank in Antigua. Investors appear to be in the middle of the two orders.

Yesterday, a grand jury in Houston returned a two count indictment against Laura Pendergest-Holt, the chief investment officer of Stanford Financial Group. The indictment contains two counts. The first alleges that Ms. Pendergest-Holt conspired to obstruct the SEC investigation, while the second is a substantive count of obstruction.

According to the indictment, Ms. Pendergest-Holt lied to the SEC during its investigation. First, in response to SEC questions, she did not disclose a meeting in Miami where she discussed with other executives how to structure her testimony and what subjects to cover. In addition, she is alleged to have falsely stated that she did not know the contents or allocations of so-called Tier III assets where most of the assets for the group were held. Second, following this testimony she wired $4.3 million group funds to a Houston operating account. Finally, the indictment alleges that in a February 2009 meeting in Houston with SEC attorneys, Ms. Pendergest-Hold told investigators that if she “knew anything about Tier III,” she would tell them. In fact, she had previously worked on documents relating to Tier III. U.S. v. Pendergest-Holt, Case No. 09-mj-56 (N.D. Tex. Filed Feb. 26, 2009).

The U.S. Attorney and the SEC have parallel cases pending involving New York attorney Marc Dreier who pled guilty to all eight counts in a superseding indictment yesterday. Mr. Dreier, the founder and managing partner of Dreier LLP in New York, is charged in the indictment with an investment scheme in which he defrauded investors in connection with the sale of fraudulent notes as discussed here. Mr. Dreier pled guilty to one count of conspiracy to commit securities and wire fraud, one count of securities fraud, five counts of wire fraud and one count of money laundering. According to the U.S. Attorney’s Office there was no plea agreement. U. S. v. Dreier, Case No. 1:09-cr-00085 (Filed Jan. 29, 2009). The Commission has a parallel civil action. SEC v. Dreier, Case No. 08 Civ. 1061 (S.D.N.Y. Filed Dec. 8, 2008).

Finally, in U.S. v. Woolf, Case No. 08-cr-12 (E.D. Va. Filed March 6, 2008), there is no parallel SEC action, but the case is based on claims about a stock trading instructional course. Here, a jury returned a verdict against Linda Woolf and David Gengler, finding both guilty of conspiracy and wire fraud related to false representations they made to market stock trading classes. According to court documents Ms. Woolf and Mr. Gengler spoke at investment seminars around the country and used infomercials to promote their three-day course on stock trading. Students were supposedly taught successful stock trading techniques, while the defendants operated as “trading mentors.” The defendants convinced participants to pay $15,000 to attend the seminar, netting millions of dollars. In fact, the seminar was based on a series of false presentations. Both defendants are awaiting sentencing.