by T. GormanPosted on Posted in SECActions

Four years ago the SEC reorganized and refocused its Enforcement program. Specialty groups were added. Expertise was brought in to bolster the capabilities of the Enforcement Division. Record numbers of cases were brought. There can be no doubt that a program which rejuvenated in the wake of a series of failures and scandals.

Yet critics persist. Law makers on Capitol Hill, the media and the public continue to decry the fact that senior Wall Street executive were not put in prison as a result of the market crisis. The Commission’s long list of cases centered on the crisis has done little to silence those critics.

New SEC Chair Mary Jo White has launched a new get tough policy. She modified the much discussed and often criticized “neither admit nor deny” settlement policy of the agency. Now she has outlined a new policy centered on a series of basic principles which will govern SEC enforcement. While many of those principles are familiar, the key will be how they implemented to achieve the Commission’s statutory mission and goals.

The White enforcement doctrine

Ms. White outlined her vision for SEC Enforcement in remarks to the Council of Institutional Investors at its fall conference on September 26, 2013 (here).

Declaring that “A robust enforcement program is critical to fulfilling the SEC’s mission . . . [since] In many ways, [it is] the most visible face of the :SEC . . . “ Ms. White outlined five key principles to guide the Enforcement program.

First, the program will be “aggressive and creative . . . “ This means that the agency will not shrink from bringing the “tough cases” and the “small ones.” Sounding a theme that reverberates throughout her remarks, the new SEC Chair declared “And when we resolve cases, we need to be certain our settlements have teeth, and send a strong message of deterrence.” Ms. White went on to state that she thus favors legislation supported by her predecessor which would authorize the agency to impose penalties of up to three times the amount of the ill-gotten gain or the investor losses, whichever is greater.

Penalties will be considered in every corporate case, according to Ms. White. While she offered support for a prior Commission Release outlining a number of factors to be considered regarding the propriety of corporate penalties, each case will be considered based on its particular facts and circumstances.

Second, the Commission “should consider whether to require the company to adopt measures that make the wrong less likely to occur again.” Currently, the agency does this in “some case,” Ms. White noted, citing FCPA actions where frequently the resolution requires the adoptions of extensive compliance procedures as part of an effort to prevent a reoccurrence of the wrongful conduct.

Third, there must be accountability. This means that in some instances the settling party will be required to make admissions. In most cases the SEC can achieve an effective result utilizing its “neither admit nor deny” approach. In some cases, however, admissions will be required. This settlement approach will be used when there are: 1) a large number of investors who have been harmed or the conduct is egregious; 2) if the conduct presented a significant risk to the market or investors; 3) where admissions would aid investors in “deciding whether to deal with a particular party in the future;” and 4) if “reciting unambiguous facts would send an important message to the market about a particular case.”

Fourth, individuals must be held accountable. Declaring that this is “a subtle shift,” Ms. White insisted it is necessary. Critical to this point is an assessment of the remedies which might be employed as to an individual. In this regard a bar is “One of the most potent tools the SEC has . . .” since it not only punishes the past actions but prevents a replication in the future

Fifth, the program must cover the “whole market.” In offering this statement Ms. White identified three key areas: 1) investment advisers at hedge funds and mutual funds; 2) financial statement and accounting fraud; 3) insider trading; and 4) microcap fraud. At the same time it is critical that the agency continue to adopt to a diverse and rapidly changing market place.

Finally, the agency must win at trial. “For us to be a truly potent regulatory force, we need to remain constantly focused on trial redress,” according to Ms. White. Significant and consistent wins at trial give the program “credibility.”

Ultimately the success of the SEC’s enforcement program will be measured by its effectiveness in policing the market place. As Ms. White stated: “We should be judged by the quality of the cases we bring, by the aggressive and innovative techniques we use to pursue wrongdoers, by the tough sanctions and meaningful remedies we impose, and where appropriate by the acknowledgements of wrongdoing that we require.”

Analysis

The critical building blocks of Ms. White’s enforcement approach are not new. Bringing tough cases as well as small one, deterrence through monetary sanctions, accountability using admissions in select cases, winning at trial and remediation to protect against a replication of wrongful conduct in the future are all, with the exception of admissions, long standing elements of the SEC enforcement program.

The critical point of her remarks is not identifying these elements but, as Ms. White acknowledged, their application and how the elements are mixed and blended in specific cases over time. Deterrence, for example, is a standard law enforcement goal. Whether this can be achieved through monetary penalties, even if coupled with admissions in select cases is, however, at best a highly debatable point. Critics of monetary sanctions have long argued that the only real impact of corporate fines is the aggravation of the injury already suffered by shareholders from the wrongful conduct since they are ultimately the ones who pay. Others, such as Judge Rakoff, have noted that given the size of many corporations the fines imposed by regulators amount to little more than a cost of doing business.

Increasing the authority to impose penalties as Ms. White suggests is not likely to change this analysis. Indeed, it is difficult to see how coupling even large fines with admissions in select cases will create the sought after deterrence. The two cases in which the SEC has applied its newly minted admissions policy are illustrative. Shortly after hedge fund mogul Philip Flacone settled with the SEC based in part on admissions, he moved forward with a large IPO for one of his companies. While JPMorgan made a series of admissions in settling with the SEC over the London Whale episode, the deterrence effect of those statements is difficult at best to assess since much of the conduct admitted had been previously disclosed in filings made with the Commission or was well known in the market place.

To be sure, there is a certain element of accountability in having to pay a large fine. Likewise, it cannot be denied that making admissions demonstrates accountability. But for the Commission’s enforcement program the real impact of the fines and admissions may not be the specific statements but the impact of the requirement on the market place. Stated differently, it is the headlines and buzz generated in the market place that helps create presence which is critical. While market place presence is a key goal of law enforcement as Ms. White noted, care must be taken that any penalties and demand for admissions are based only on what is needed for an effective settlement. If more is demanded in the name of building market place presence it may well undercut the program.

In contrast, there is little doubt that Chair Mary Jo White is correct when she states that the SEC must win at trial, cover the market place and focus on remediation. Winning at trial is vital to the goals of market place presence and deterrence. A successful record at trial tells would be violators that they will be held accountable. It also garners buzz in the market place the can bolster the agency’s presence. Creating this, however, takes more than claiming to win a high percentage of its cases. Rather, the SEC must win in high profile cases. With the exception of the recent victory against former Goldman Sachs employee Fabrice Touree that has not been the track record of the agency as well illustrated by the losses in the Primary Reserve Fund action and the case involving former JPMorgan employee Brian Stoker.

Finally, it is clear that remediation should be a critical part of SEC enforcement settlements. This permits the agency to evaluate the wrongful conduct and its causes and take steps to protect shareholders, investors and the market place from future wrongful conduct. It is telling that Ms. White acknowledged that in “some cases” the agency utilizes this approach, pointing to FCPA settlements. This should be a key consideration in any of the agency’s cases.

Yet effective remediation can be difficult. In the financial fraud cases Ms. White identified as a key focus of future enforcement efforts, for example, the wrongful conduct may be driven by an inherent conflict. As former SEC Chairman Levitt noted in his now famous “Numbers Game” speech in 1998, financial fraud actions frequently stem from the pressure to make the numbers and meet street expectations. Nobody would argue with wanting to make the numbers. Yet that goal can, as history demonstrates, conflict with faithfully reporting the financial results of the company. In such cases effective remediation may require reordering the culture of the company and installing the necessary procedures.

The principles detailed by Ms. White clearly represent the building blocks of enforcement policy. What will be critical moving forward is how the Commission applies and blends those principles to craft effective results in its enforcement actions. And, it is those enforcement actions which will inform the market place about the meaning of the new “get tough” policy and ultimately determine the success of the SEC enforcement program.

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by T. GormanPosted on Posted in SECActions

The SEC has a busy week as the government, filing nineteen enforcement actions. Three of those cases were financial fraud actions, perhaps suggesting that the new financial fraud task force is starting to ramp-up. Four were insider trading actions, long a staple of the Enforcement Division. Another case was based on a company created from a Chinese reverse merger while several action centered on investment fund fraud or offering fraud claims. Finally, another Madoff related case was brought, this time against the Ponzi King’s former accountant.

ICAP Europe became the first brokerage to settle charges stemming from the on-going LIBRO investigations. The firm resolved claims with the CFTC and UK regulators in the on-going investigations.

SEC

Remarks: Chair Mary Jo White delivered remarks titled “Deploying the Full Enforcement Arsenal” to the Council of Institutional Investors fall conference, Chicago Ill. (Sept. 26, 2013). Topics discussed include Commission priorities, enforcement principles, being aggressive, accountability, and prevailing at trial (here).

Investor alert: The Commission, along with six other regulators, issued guidance on reporting financial abuse of older adults (here).

CFTC

Remarks: Commissioner Scott D. O’Malia delivered remarks titled “Regulatory Harmonization, Not Imperialism: A Workable Cross-Border Framework” to The Global Forum for Derivatives Markets, Geneva, Switzerland (Sept. 26, 2013). Topics discussed included a framework for cross-board regulation, disclosure, and upcoming rules (here).

SEC Enforcement

Statistics: This week the Commission filed 17 civil injunctive actions and 2 administrative proceeding (excluding follow-on actions and 12(j) proceedings).

Unregistered securities: SEC v. Thought Development, Inc., Civil Action No. 1:13-cv-23476 (S.D. Fla. Filed September 26, 2013); SEC v. Advanced Equity Partners, LLC, Civil Action No. 0:13-cv-62100 (S.D. Fla. Filed September 26, 2013). Thought Development names as defendants the company and its founder and chairman, Alan Amron. It alleges violations of Securities Act Sections 5(a) and 5(c) in connection with the unregistered sales of company stock from October 2010 through February 2012. The defendants resolved the case, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and agreeing to pay a $10,000 civil penalty. Advanced Equity names as defendants the company, Premier Consulting, LLC, Peter Kirschner, a repeat securities law violator, and Stuart Rubens. This action also focuses on the sale of unregistered shares of Thought Development stock. In addition, the complaint alleges that the defendants solicited about 200 investors who were largely senior citizens. Those investors were lured to purchase shares through false representations. Investors were told that the funds would be used to develop technology that put a laser-line on a football field and that eventually there would be an IPO. In addition to violations of the registration provisions, the complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). This case is in litigation. See Lit. Rel. Nos. 22815 & 22814 (Sept. 26, 2013).

Looting/insider trading: SEC v. Ngon, Civil Action No. 13-cv-6828(S.D.N.Y. Filed September 26, 2013) is an action against Chan Tze Ngon, former CEO of ChinaCast Education Corporation, and Jiang Xiangyuan, former President of operations for the company in the PRC. ChinaCast became a public company through a reverse merger. Its shares were listed on NASDAQ. The company provided educational services. The complaint alleges two schemes. In the first the former CEO transferred $41 of $43.8 million raised by the company in a public offering to a subsidiary in December 2009. Although filings represented that the subsidiary was majority owned by the company, in fact it had a minority interest. The CEO actually owned a controlling interest. He then transferred to proceeds to another entity. In 2010 and 2011 defendant Chan also pledged about $30.3 million of ChinaCast subsidiaries’ assets to secure the debts of unrelated companies. A significant portion was lost. In a second scheme defendant Jiang sold shares of the company prior to disclosing that revenue generating colleges were sold to him. Following the announcement the share price dropped significantly. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(5). The case is in litigation.

Offering fraud: SEC v. Walblay, Civil Action No. 9:13-cv-80978 (S.D. Fla. Filed September 26, 2013) is an action against Ronald Walblay, Energy Securities, Inc., and RyHolland Fielder, Inc. The complaint alleges that from 2009 through late 2012 about $12 million was raised from more than 195 U.S. and foreign investors by falsely claiming that RyHolland Fielder had millions of barrels of oil and significant natural gas reserves. The unregistered securities sold by defendant Walblay were in various firms he controlled. The offering materials also misled investors about the use of the offering proceedings and misrepresented Mr. Walbley’s industry experience. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 3493 (September 26, 2013).

Financial fraud: SEC v. Mercantile Bancorp, Inc., Civil Action No. 3:13-cv-3341 (C.D. Ill. Filed September 24, 2013) is an action against the bank holding company and two of its officers, CEO Ted Awerkamp and CFO Michael McGrath. The complaint alleges that in the third quarter of 2010 Mercantile failed to recognize a loss on a loan for a large residential real estate development as required by GAAP. The two individual defendants also learned that the borrower missed a loan payment and declared bankruptcy after the third quarter but prior to the bank’s quarterly report filing. The bank should have recognized a $5.28 million loan loss in the third quarter but failed to do so as required. This meant that the bank understated its net loss for the quarter and the nine months ending September 30. The complaint alleges violations of Securities Act Section 17(a)(3), and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(A). The defendants resolved the action, each consenting to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Messrs. Awerkamp and McGrath agreed to the entry of an office and director bar and to each pay a penalty of $100,000. See Lit. Rel. No. 3492 (Sept. 26, 2013).

Investment fund fraud: SEC v. Konigsberg, Civil Action No. 13 CV 6859 (S.D.N.Y. Filed September 26, 2013) is an action against Paul Konigsberg, long time accountant to Ponzi scheme king Bernard Madoff. From the mid-1990s through late 2008 Mr. Konigsberg kept the accounts for Bernard L. Madoff Investment Securities LLC. Mr. Konigsberg is alleged to have provided advice to a number of firm clients and aided and abetted in the falsification of books and records over the years. Specifically, he is alleged to have helped decide items such as which tax gains and losses should be created for clients, conferred on backdated trades and fictitious accounts and similar matters. The complaint alleges violations of Securities Act Section 17(a) and Advisers Act Section 204. The case is pending. The U.S. Attorney filed a parallel criminal action.

Financial fraud: SEC v. ImageXpres Corporation, Civil Action No. 6:13-cv-6526 (W.D.N.Y. Filed September 26, 2013) is an action against the company, its CEO John Zankowski and its CFO, Kevin Zankowski. The complaint alleges that the defendants utilized misstatements in press releases, unaudited financial statement and other materials to falsely portray the company as an increasingly profitable start-up when in fact it was not. Since the end of 2008 the company has reported substantial sales revenue and growth which was no factual. The defendants settled the action with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b). In addition, the individual defendants consented to the entry of officer and director and penny stock bars. Kevin Zankowski also agreed to pay a civil penalty of $50,000 while John Zankowski will pay a fine of $25,000. See Lit. Rel. No. 22816 (September 26, 2013).

Investment fund fraud: SEC v. Polhill, Civil Action No. EDCV13-1729 (C.D. Cal. Filed September 24, 2013) is an action against Larry Polhill , the former president of American Pacific Financial Corporation. The complaint alleges a years long scheme which defrauded about 485 investors out of about $160 million. The scheme had two facets. In one investors purchased notes from the company which supposedly invested in distressed real estate that backed the notes. The notes were represented as paying a high rate of return. In fact the notes were often unsecured and in many instances the underlying investments were non-existent or impaired. Eventually American Pacific filed for bankruptcy, leaving the note holders as unsecured creditors. In a second facet of the scheme investors were solicited to purchase limited partnership interests called “funds.” These pooled instruments were claimed to pay a good rate of return from purchasing distressed assets. Most of the investments failed, a fact that was unknown to investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Mr. Polhill settled with the Commission and agreed to be barred from acting as an officer or director of any public company. The Court will consider monetary sanctions at a later date. See Lit. Rel. No. 22811 (September 25, 2011); SEC Press Release, No. 2013-197 (September 24, 2013).

Financial fraud: SEC v. Lyndon, Civil Action No. CV13 00486 (D. Haw. Filed September 24, 2013) is an action against Troy Lyndon, the founder, CEO, CFO and Chairman of the Board of Left Behind Games, Inc., and Ronald Zaucha a consultant to the company and the founder of Lighthouse Distributors, Inc. The financial fraud centers on apparent efforts to prop-up Left Behind Games, d/b/a Inspired Media Entertainment. Since its founding, Left Behind has never had a profitable year. At some point Mr. Lyndon had Left Behind retain Mr. Zaucha as a consultant under three separate agreements. Each was vague. Mr. Zaucha preformed few actual duties under the agreements, according to the complaint. In mid-2009 the two men orchestrated a scheme to inflate the revenue of Left Behind. Under the consulting agreements the company began issuing shares to Mr. Zauha for his services. Those shares, which were not registered, were promptly sold into the market, netting Mr. Zauha about $4.6 million. Portions of those funds were kicked back to the company under various methods. Part of the proceeds were recognized as revenue on a supposed sale of inventory from Left Behind to Lighthouse. This permitted the company to report $1.6 million in revenue in its March 31, 2013 form 10-K. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13b2-5 and 20(a). The case is in litigation. See Lit. Rel. No. 22813 (September 25, 2013).

Investment fund fraud: SEC v. Jawed, Civil Action No. 3:12-CV-01696 (D. Or.) is a previously filed action against Yusaf Jawed and his two entities, Grifphon Asset Management, LLC and Grifphon Holdings, LLC. The complaint alleged that the defendants operated a long-running Ponzi scheme which defrauded more than 100 investors of over $30 million. This week the Court entered final judgments against the defendants which prohibit future violations of Exchange Act Section 10(b), Securities Acct Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). The defendants were also directed to pay disgorgement and prejudgment interest of $33,909,974. In a related administrative proceeding an Order was entered barring Mr. Jawed from the securities business. See Lit. Rel. No. 22812 (September 25, 2013).

Insider trading: SEC v. Wang (C.D. Calif. Filed Sept. 23, 2013) is an action against two longtime friends, Jing Wang and Gary Yin. Mr. Wang is a former executive vice president and president of Global Operations for Qualcomm, Inc. Mr. Yin is a former senior vice president, International Wealth Management Adviser, Merrill Lynch. Beginning in the first quarter of 2010 Mr. Wang traded in the shares of Qualcomm on three occasions while in possession of material non-public information, according to the complaint. His friend Mr. Yin followed his actions in two instances, although the complaint does not specify that he was tipped. The first centered on the March 1, 2010 announcement by Qualcomm that it would increase the dividend and begin a stock repurchase plan. The second was based on the January 5, 2011 Qualcomm announced that Qualcomm would acquire Atheros Communications, Inc. The third focused on the January 26, 2011 Qualcomm announced that it would increase guidance. Mr. Wang learned about each event through his work and at a board meeting. Both he and Mr. Yin traded through off shore accounts they had established years earlier in an effort to evade taxes. Mr. Wang had total trading profits of $244,199.66. Mr. Yin had profits of $27,444.02. Mr. Wang became concerned that Merrill Lynch or others might discover his trading. His concerns intensified once he learned that the SEC had issued a subpoena for his records. The two took steps to try and conceal the transactions.. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and 16(a). A parallel criminal case brought by the U.S.A.O. for the Central District of California charges include conspiracy, securities fraud, money laundering and obstruction. Both cases are pending.

Investment fund fraud: SEC v. Spinosa, Civil Action No. 0:13-cv-62022 (S.D. Fla. Filed September 23, 2013); In the Matter of TD Bank, N.A., Adm. Proc.. File No. 3-15512 (September 23, 2013) are actions that arise out of the huge investment fund fraud operated at one time by attorney Scott Rothstein and his law firm. In 2009 Mr. Rothstein, now in prison, raised millions of dollars by selling investors interests in what he claimed was a stream of payments from various law suit settlements. The funds were claimed to be in accounts at TD Bank, one of the 10 largest banking institutions in the country. Mr. Rothstein made representations that the accounts were secure and locked, neither of which was true. Defendant Frank Spinosa, who at one time worked at the bank, also repeatedly assured investors that the funds were secure which in fact was false. The Order charging TD Bank alleged violations of Securities Act Section 17(a)(2). The Bank resolved the action, consenting to the entry of a cease and desist order based on that Section. The Bank also agreed to pay a penalty of $15 million. The complaint against Mr. Spinosa alleges violations of each subdivision of Securities Act Section 17(a) and Exchange Act Section 10(b). That case is pending.

Insider trading: SEC v. Robbins, Civil Action No. 13 Civ. 6694 (S.D.N.Y. Filed September 23, 2013) is an action against Lawrence Robbins. It alleges that the he traded on inside information in two take-over transactions. Specifically, the complaint claims that Mr. Allen tipped Messrs. Robbins and Bennett regarding two take over transactions. One involved the acquisition of Millennium Pharmaceuticals Inc., announced on April 10, 2008. A second involved the purchase of Sepracor Inc., announced on September 3, 2009. Mr. Allen obtained the information through his position at a global consulting firm. He then tipped Mr. Bennett who in turn tipped Mr. Robbins. Messrs. Robbins and Bennett are alleged to have established substantial positions in the shares and options of Millennium prior to its acquisition by Takeda Pharmaceutical Company. The two men took similar actions after being tipped that Dainippon Sumitomo Pharmaceutical Co. Ltd. would acquire Sepracor. Overall they had about $2.6 million in trading profits. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Mr. Robbins resolved the case, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of $865,000, prejudgment interest and a penalty of $150,000. Messrs. Allen and Bennet were previously named by the SEC as defendants in an enforcement action. They have also pleaded guilty in a parallel criminal action. See Lit. Rel. No. 22809 (September 23, 2013).

Suitability: In the Matter of Donald J. Anthony, Jr., Adm. Proc. File No. 3-5514 (September 23, 2013) is a proceeding against ten brokers previously employed at brokerage McGinn, Smith & Co., Inc. The proceeding centers on the sale of MS&C private placements. Previously, the Commission brought an action against the brokerage and its principals who were also charged criminally. That case, which is still pending, alleges that the 750 investor who purchased the unregistered notes for about $80 million were defrauded. The brokers here sold the notes to those investors. Nine of the brokers are alleged to have violated Sections 5(a) and 5(c) of the Securities Act in selling unregistered notes. Each was also charged with violating Securities Act Section 17(a) and Exchange Act Section 10(b) for failing to perform reasonable due diligence to form the basis for a recommendation to sell the notes. The charges are based on missing red flags such as the fact that note purchasers could not sell the notes unless a substitute investor was found. That claim was contrary to the offering documents. One broker was charged with failure to supervise in violation of Exchange Act Section 15(b)(6). The proceeding will be set for hearing.

Investment fund fraud: SEC v. Kirkland, Civil Action No. 1:13-cv-3150 (N.D. Ga. Filed September 23, 2013) is an action against Stephen Kirkland and his company, Kirkland Organization, Inc. The complaint alleges that beginning in 2008, and continuing until late 2010, the defendants solicited investors and raised about $800,000. Investors were lured with misrepresentations which included claims that there would be no risk of loss to their principal; that they would earn 2-3% per month; and that a New York real estate developer/owner’s substantial wealth would be used to indemnify investors against loss. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Section 206(1) and 206(2). The case is in litigation. See Lit. Rel. No. 22808 (September 23, 2013).

Insider trading: SEC v. Klein, Civil Action No. 9:13-cv-80954 (S.D. Fla. Filed September 20, 2013) is a case which centers on the acquisition of King Pharmaceuticals, Inc. by Pfizer, Inc., announced October 12, 2010 before the opening of the markets.

Defendant Tibor Klein is the owner of Klein Financial Services, an investment adviser. Defendant Michael Schechtman was a registered representative at Ameriprise Financial, Inc. The two men have been friends for years. Mr. Klein was also a long time friend of attorney Robert M. Schulman who learned about the merger negotiations from one of his law partners because he represents King in litigation. During the weekend of August 13-15, 2010 Mr. Schulman visited Mr. Klein and his family, spending the night at their home. At one dinner Mr. Schulman drank several glasses of wine and became intoxicated. During the conversation he “blurted out to Klein, ‘It would be nice to be King for a day.’” On August 16, 2010, the first trading day after the dinner, Mr. Klein purchased 800 shares of King stock for himself and 59,800 for 46 of his clients. He continued to acquire King shares. Over a two month period the investment adviser accumulated 65,150 shares for himself and 46 of his clients at a total cost of $585,216.66. This was the largest purchase of a single security made by Mr. Klein in 2010. Mr. Klein also called his long time friend, Michael Shechtman. While the two men spoke periodically on the phone, on August 16 they had six times telephone calls. Mr. Sheehtman opened an options trading account at his firm and traded.

Following the announcement of the Pfizer-King deal, Mr. Klein sold all of the King shares he had purchased. He realized profits of $8,824 for his account and $319,550 for his clients, including $15,500 for Mr. Schulman. Mr. Shechtman liquidated his October call options on the day of the announcement and sold other King shares he had purchased, realizing profits of $109,040.53. His September options had expired worthless. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See Lit. Rel. No. 22803 (September 20, 2013).

Insider trading: SEC v. Taylor, Civil Action No. 13 CV 6670 (S.D.N.Y. Filed September 20, 2013) is an action against Kieran Taylor, formerly Senior Director of Marketing at Akamai Technologies, Inc. Mr. Taylor learned through his employment that Akamai was planning to lower guidance for the year when it announced the second quarter 2008 financial results on July 30, 2008. He sold 2,500 shares of company stock and telephoned Danielle Chiesi, a portfolio manager at hedge fund advisory firm New Castle funds LLC, a long time friend, who also traded. She in turn telephone another long time friend, Raji Rajaratnam. In a telephone call captured on tape pursuant to a wire tap, Ms. Chiesi told her friend that according to her Akamai source, yearly guidance would be lowered at the time of the quarterly earnings announcement. Ms. Chiesi also tipped Steven Fortuna of hedge fund advisory firm S2 Capital which traded. On July 30, 2008, after the close of the markets, Akamai announced its second quarter financial results. It also lowered its guidance for 2008. On the next trading day the price of Akamai shares, which had closed at $31.25 before the announcement, opened down at $25.06 and fell to $23.34 by the close. Mr. Taylor avoided losses of about $20,000. Galleon and New Castle had substantial trading profits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Taylor settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of $20,635, prejudgment interest and a penalty of $120,635. In addition, he agreed to the entry of an officer director bar for five years.

Fraud: SEC v. Staples, Civil Action No. 1:13-2575 (D..S.C. Filed September 20, 2013) is an action against Benjamin Sydney Staples and his son, Benjamin ONeal Staples. From early 2008 through June 2012 the defendants operated what they called an Estate Assistance Program. Under the program they solicited terminally ill patients to open brokerage accounts in return for payments for their funeral expenses. The participants transferred their assets into the accounts and relinquished all rights. The defendants then used the proceeds to purchase corporate bonds at a discount which had a “survivor’s option permitting redemption at full price if an owner died. When one of the patients passed away the defendants falsely represented that the person had an interest in the bonds so they could be redeemed. The scheme netted the defendants about $6.5 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and unjust enrichment. The case is in litigation.

Investment fund fraud: SEC v. Hoffman, Civil Action No. 22804 (September 20, 2014) is an action against Jenifer Hoffman and John Boschert, the principles of Assured Capital Consultants, LLC, and Bryabn Zuga. The complaint alleges that over a nine month period beginning in January 2009 the defendants raised at least $25 million from investors that was supposed to be placed in a off-shore fund. Investors were promised huge returns. They were also assured that the funds were safe and would remain in an account and used to secure a bank line of credit. In fact the representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 22804 (Sept. 20, 2013).

Investment fund fraud: SEC v. Fujinaga, Civil Action No. 2:13-cv-01658 (D. Nev. Filed under seal September 11, 2013) is an action against Edwin Fujinaga and MRI International, Inc. Since late 1998 the defendants have been soliciting investors for MRI which purposed to be in the business of buying medical accounts receivable that medical providers held against insurance companies. Investors were told that their funds would be used to purchase these accounts at a discount and profit would come from trying to recover the full value. More than 8,000 people invested about $813 million in the company. In fact the investor money was used to pay general operating expenses, sent to other entities and repaid investors. In 2011 the company defaulted on its payments to investors. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The Commission obtained an asset freeze. The case is in litigation.

CFTC

Manipulation: An order was entered by the agency settling charges against ICAP Europe Limited tied to the manipulation of LIBOR. Specifically, the regulator concluded that for over four years from late 2006 through January 2011, ICAP brokers on its Yen derivatives and cash desks knowingly disseminated false and misleading information regarding Yen borrowing rates to market participants in an effort to manipulate the official fixing of the daily Yen LIBOR. ICAP was ordered to: pay a $65 million civil monetary penalty; cease and desist from the conduct; and take certain remedial steps.

UK

Manipulation: The Financial Conduct Authority fined ICAP Europe Limited £14 million for misconduct tied to the London Interbank Offered Rate or LIBOR. ICAP is the first broker fined in the probe. The regulator concluded that firm brokers colluded with traders at UBS to manipulate rates. This involved deliberately disseminating incorrect or misleading LIBOR submissions. The FCA also found that firm’s risk management systems and controls were inadequate to monitor the pertinent brokering activity.

Hong Kong

Record keeping: The Securities and Futures Commission reprimanded Law Kwan Ming, a representative of UOB Kay Hian (Hong Kong) Limited and fined him $50,000 for failing to make and keep proper records of orders. The regulator found that Mr. Law had accepted instructions from a client to purchase shares on his mobile phone but failed to make any record of the transaction. The penalty took into account the fact that Mr. Law did not have a disciplinary record.

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