INSIDER TRADING AND PONZI SCHEME CASES — THE KEY FOCUS
The SEC continued to focus on two key areas this week — insider trading and Ponzi schemes. First, the Commission brought an insider trading action against Khaled Al Hashemi, a citizen and resident of Abu Dhabi, UAE. SEC v. Hashemi, Civil Action No. 09-CV-6650 (S.D.N.Y. Filed July 27, 2009). The complaint is based on trading in advance of a merger announcement. Specifically, the Commission claims that the defendant traded in the shares of Nova Chemicals prior to the February 23, 2009 announcement that the company would merge with International Petroleum Investment Company.
Defendant Hashemi purchased 120,000 shares of Nova common stock through an online brokerage account shortly prior to the merger announcement, according to the SEC. Over half of those purchases were made the day before the announcement. To fund these transactions, the defendant liquidated most of his stock portfolio and wired an additional $100,000 to his account. When the merger was announced, the share price spiked 289%, yield profits of $458,000. The Commission obtained a freeze order over the accounts. The case, which alleges violations of Section 10(b) and Rule 10(b)-5, is in litigation. See also Lit. Rel. 21154. This case follows ruling in two high profile insider trading cases last week, where the SEC lost a motion to dismiss in Cuban, but prevailed in the Second Circuit in Dorozhko, both of which are discussed here.
Second, the SEC continued its string of Ponzi scheme cases, filing SEC v. Clark, Case No. C09-03423 (N.D.Ca. Filed July 27, 2009). Clark is a follow-up action to an action brought initially in July 2007. SEC v. AOB Commerce, Inc., Case No. CV 07-4507 (C.D. Cal. July 16, 2007). There, the SEC filed an emergency action against AOB Commerce, its two principals and related entities, claiming that since at least mid-2004 the defendants had raised more than $45 million from hundreds of investors from the sale of unregistered promissory notes that claimed to pay a guaranteed return of up to 5.5%. The fund was supposed to make loans in Asia and China. Although some loans were made, most of the offering proceeds were used to pay interest on the notes. In the initial action. the SEC obtained a temporary freeze order. See also Lit. Rel. 20196. Subsequently the SEC obtained a preliminary injunction and the appointment of a receiver. See Lit. Rel. 20241.
The action this week is against a sales agent at AOB Commerce. The complaint claims that Mr. Clark failed to conduct adequate due diligence as to the fund, assisted with the creation of a misleading investor brochure and failed to register or become associated with a registered broker-dealer at the time that he participated in the sale of notes. The complaint alleges violations of Section 5 of the Securities Act and Section 10(b) of the Exchange Act. The case is in litigation. See also Lit. Rel. 21153. While there was a time when Ponzi schemes were believed to be difficult to detect, as the market crisis has continued, the Commission has brought a steady stream of these cases.