by T. GormanPosted on Posted in SECActions

The SEC’s 2012 Agency Financial Report details its performance over the last government fiscal year which ended September 30, 2012. Two sections are devoted to the enforcement program, one which is an overview of the Division’s work and an Appendix which provides additional detail.

In discussing the work of the Enforcement Division the Report emphasizes what it calls the “full spectrum” of the program, referring to the different areas in which actions were brought in compiling a near record setting number of cases filed. Last year the Division brought 734 actions, second only to the record 735 initiated the prior year. Collectively, the actions resulted in about $3.1 billion in orders for disgorgement, penalties and other relief. The Division also made its “first whistleblower payout to an individual who provided high-quality significant information that helped stop a multi-million dollar fraud.” The Division clearly expects more from this program in the future.

Key areas and cases brought by the Enforcement Division last year include the following according to the Report:

Financial crisis: To date the Division has brought 80 financial crisis actions including 29 in the last fiscal year, up from 23 in the prior year. The Report emphasizes actions brought against individuals, noting that to date 117 individuals, including 57 CEOs, CFOs and other senior corporate officers, have been named in actions. Last year those included:

· Actions against senior executives at Fannie May and Freddie Mac, SEC v. Mudd, and SEC v. Syron, Lit. Rel No. 22201 (Dec. 20, 2011), both of which centered on claims that the firms made misleading disclosures regarding their exposure to the subprime market;

· The action against four Credit Suisse Group investment bankers, SEC v. Serageldin, Lit. Rel. No. 22247 (Feb. 1, 2012), which is based on a scheme to fraudulently overstate the prices for $3 billion in subprime bonds;

· Charges against four United Commercial Bank executives, SEC v. Wu, Lit. Rel. No. 22121 (Oct. 11, 2012), focused on delays in writing down loans which concealed the true financial condition of the bank; and

· In the Matter of OppenheimerFunds, Inc., Exchange Act Rel. No. 67142 (June 6, 2012), which claimed the management company made misleading statements about the losses at two funds.

Exchanges and market structure: The Division brought ground breaking actions against significant market players last year which included:

· Against two electronic stock exchanges and a broker-dealer for violations arising out of weak controls that resulted in millions of dollars in trading losses, In the Matter of EDGX Exchange, Exchange Act Rel. No. 65556 (Oct. 13, 2011).

· The first action involving a “dark pool” against Pipeline Trading Systems, LLC, alleging disclosure violations regarding the manner in which orders were filled, In the Matter of Pipeline Trading Systems LLC, Exchange Act Rel. No. 65609 (Oct. 24, 2011);

· A first of its kind action against the New York Stock Exchange for compliance failures that resulted in proprietary customers obtaining certain trading information prior to others, In the Matter of New York Stock Exchange LLC, Exchange Act Rel. No. 67857 (Sept. 14, 2012); and

· An action centered on naked short selling against optionsXpress, Inc., In the Matter of optionsXpress, Inc., Exchange Act Rel. No. 66815 (April 16, 2012).

Mutual funds and investment advisers: A number of actions involved funds and their advisers including:

· One against Morgan Stanley Investment Management alleging that investors were repeatedly charged fees for services they did not receive from a third party, In the Matter of Morgan Stanley Investment Management Inc., Advisers Act Rel. No. 3315 (Nov. 16, 2011);

· A case centered on failing to inform investors about the risks of their investment by not telling them about the broker’s control over the secondary market where the securities traded, In the Matter of UBS Financial Services Inc. of Puerto Rico, Exchange Act Rel. No. 66893 (May 1, 2012); and

· An action against a high profile hedge fund adviser and his advisory firm alleging claims which included misappropriation of client assets and market manipulation, SEC v. Harbinger Capital Partners LLC, Lit. Rel. No. 22403 (June 28, 2012).

Insider trading: This long time enforcement priority continued to be a key focus. Many of the Division’s highest profile cases were brought in conjunction with the U.S. Attorney’s Office for the Southern District of New York including:

· Its action against former Goldman Sachs diretor Rajat Gupta, SEC v. Gupta, Lit. Rel. No. 22140 (Oct. 26, 2011);

· The action centered on trading ahead of earnings releases for Dell and NVIDIA, SEC v. Adondakis, Lit. Rel. No. 22230 (Jan. 19, 2012);

· The case against hedge fund manager Douglas Whitman, SEC v. Whitman, Lit. Rel. No. 22257 (Feb. 10, 2012); and

· The action against former expert consulting firm official John Kinnucan, SEC v. Kinnucan, Lit. Rel. No. 22261 (Feb. 17, 2012).

FCPA: This is another key enforcement priority which continued to be a focus for the Division. Actions brought included:

· Once against Hungary telecommunications provider Magyard Telekom Plc centered on claims that executives bribed officials in Macedonia and Montenegro to obtain business, SEC v. Magyar Telekom Plc and SEC v. Straub, Lit. Rel. no. 22213 (Dec. 29, 2011); and

· Actions against medical devise company Bionet, Inc. for bribes paid in Argentina, Brazil and China and pharmaceutical giant Pfizer, Inc. based on bribes paid to doctors and others in areas including Bulgaria, China, Croatia, Russia and Serbia. SEC v. Biomet, Inc., Lit. Rel. No. 22306 (March 26, 2012); SEC v. Pfizer Inc. and SEC v. Wyeth LLC, Lit. Rel. No. 22438 (Aug. 8, 2012).

Municipal securities: This in an area in which the Division has been bringing an increasing number of cases. Last year those included:

· Bid rigging actions against Wachovia and General Electric Funding, SEC v. Wachovia Bank, N.C., Lit. Rel. No. 22183 (Dec. 8, 2011); SEC v. GE Funding Capital Market Services, Inc., Lit. Rel. No. 22210 (Dec. 23, 2011); and

· An action against Goldman Sachs for non-cash campaign contributions made to the then-Massachusetts state treasurer, In the Matter of Goldman, Sachs & Co., Exchange Act Rel. No. 67934 (Sept. 27, 2912).

Other areas: The Division also brought actions in other areas including:

· Once against a rating agency alleging misrepresentations in its application to the Commission, In the Matter of Egan-Jones Ratings Company, Exchange Act Rel. No. 66854 (April 24, 2012); and

· An action against Goldman Sachs claiming that the firm had inadequate procedures to protect confidential information regarding changes in its analyst ratings, In the Matter of Goldman, Sachs & Co., Exchange Act Rel. No. 66791 (April 12, 2012).

Hurricane Sandy: Please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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by T. GormanPosted on Posted in SECActions

In this holiday shortened week the Commission amended an insider trading case brought against two former brokers to identify the source of the information, a research analyst who befriended a lawyer working on the underlying deal. The agency also resolved financial claims with convicted inside trader Raji Rajartnam in the case involving former Goldman Sachs director Rajat Gupta.

FINRA filed a settled action with five brokers who improperly charged lobby expenses to municipal bond offerings. The regulator also filed a settled action against a broker for improperly pricing mutual fund shares received on paper. The shares were priced on the day the order was processed rather than at the time it was received.

Finally, Australian securities regulators announced that a former corporate official has been imprisoned for insider trading. The case centered on the announcement of a strategic alliance by the trader’s company.

The SEC

Bulletin: The SEC issued an investor Bulletin to Help Investors Assess Municipal Bond Credit Risk (here).

Rules: The Commission approved new Rules Regarding Lost Holders of Securities (here).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 2 civil injunctive actions and 2 administrative proceedings (excluding tag-along-actions and 12(j) actions).

Failure to disclose: In the Matter of 1st Financial Services, LLC, Adm. Proc. File No. 3-15157 (Dec. 27, 2012) is a proceeding against the firm, an inactive investment adviser, and its owner and managing member, Jeffry Eissnaugle. The Order alleges that from at least the beginning of 2009 through the end of 2010 the firm failed to adequately disclose its precarious financial condition to clients, which would have triggered guarantee obligations on the part of the Respondents to certain clients. The firm also failed to disclose that it is no longer eligible to be a registered investment adviser. The firm was liquidated in Chapter 7. The Order alleges violations of Advisers Act Sections 206(1), (2) and (4). The proceeding was resolved with the entry by consent of a cease and desist order against Mr. Eissnaugle based on the Sections cited in the Order. He was also barred from the securities business and prohibited from serving with a registered investment company. Mr. Eisnaugle was ordered to pay $588,000 in disgorgement along with prejudgment interest. Payment was waived based on financial condition.

Insider trading: SEC v. Gupta, Civil Action No. 11-CV-7566 (S.D.N.Y.) is the insider trading action against former Goldman Sachs director Rajat Gupta and Raj Rajartnam. This week the court entered an order on consent directing Mr. Rajartnam to pay $1,299,120 in disgorgement along with prejudgment interest. This case is based on tips furnished by Mr. Gupta to Mr. Rajartnam. The claims against Mr. Gupta are pending.

Penny stock fraud: SEC v. Garber, Civil Action No. 12 CIV 9339 (S.D.N.Y. Filed Dec. 21, 2012) is an action against Danny Garber, Michael Manis, Kenneth Yellin, Jordan Feinstein and twelve related companies. The complaint claims that over a three year period beginning in 2007 the individual defendants acquired billions of shares of penny stocks by either purchasing them at deep discounts based on misrepresentations about the availability of certain exemptions or through the acquisition of convertible notes. Attorney opinions incorporating the misrepresentations were used to ensure that the shares did not have restrictive legends. The shares were then sold into the market in violation of the registration provisions, yielding about $17 million in illicit profits for the defendants. 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 also Lit. Rel. No. 22579 (Dec. 21, 2012).

Beneficial ownership: SEC v. Rosen, Civil Action No. 9:12-CV-81395 (S.D. Fla. Filed Dec. 21, 2012) is an action against Lee Rosen, former chairman of the Board of New Generation Biofuels Holdings, Inc. The Commission’s complaint alleges that Mr. Rosen engaged in a fraudulent scheme to evade the reporting requirements regarding his interest in company shares held in three trusts from which he received direct cash payments and indirect benefits since he attempted to use the shares in an unsuccessful effort to purchase a yacht. The complaint alleges violations of Securities Act Section 17(a)(1), (2) and (3) and Exchange Act Sections 10(b), 13(d) and 16(a). To resolve the case Mr. Rosen consented to the entry of a permanent injunction prohibiting future violations of each Section cited in the complaint. He also agreed to pay disgorgement of $666,000, prejudgment interest, and a civil money penalty of $195,000. See also Lit. Rel. No. 22578 (Dec. 21, 2012).

Breach of fiduciary duty: In the Matter of Top Fund Management, Inc., Adm. Proc. File No. 3-15154 (Dec. 21, 2012) is a proceeding which named as Respondents Top Fund, a registered investment adviser and Barry Ziskin, its founder and president. Top Fund managed Z Seven Fund, Inc. The prospectus for the fund specified that it was a stock fund seeking long-term capital appreciation. Beginning in September 2009 the fund invested in options. Within weeks it had losses that exceeded half of its assets which, when coupled with redemptions, resulted in the liquidation of the fund. The Order alleges violations of Advisers Act Sections 206(1) and (2) and Securities Act Section 17(a)(3) and Exchange Act Section 10(b). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Top Fund also agreed to the entry of a censure. Respondent Ziskin will be barred from the securities business and from serving with a registered investment company. No penalties were imposed based on financial condition.

Investment fund fraud: SEC v. GLR Capital Management, LLC, Civil Action No. 12-02663 (C.D. CA. Filed May 24, 2012) is an action that was originally brought against the fund and its manager John Geringer. The complaint essentially alleged that the defendants were operating a fraudulent investment fund. Investors were told that the fund was trading in well know stock indices and making double digit returns when in fact it was heavily invested in two private, illiquid startup companies. This week the SEC authorized the amendment of the complaint to add Christopher Luck and Keith Rode as defendants. Both are principals of GLR Capital Management LLC which managed the GLR Growth Fund, L.P. The amended complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). See also Lit. Rel. No. 22580 (Dec. 21, 2012).

Insider trading: SEC v. Conradt, Civil Action No. 12-cv-8676 (S.D.N.Y. Filed Nov. 29, 2012) is an action against Thomas Conradt and David Weishaus, two former brokers who are alleged to have traded on inside information involving the acquisition of SPSS Inc., by International Business Machine Corporation, announced on July 28, 2009. This week the SEC and the Manhattan U.S. Attorney’s Office added the reputed source of the inside information to their actions, Trent Martin, an Australian citizen who is a former research associate at an international financial services firm. Court papers assert that he was friends with an associate working at a New York City based law firm that was retained in connection with the transaction. The associate told Mr. Martin about the transaction in confidence. Mr. Martin is alleged to have misappropriated the information and passed it on to Messrs. Conradt and Weishaus who, along with others, traded. Instant messages exchanged between the Messrs. Conradt and Weishaus confirm that the two men believed they were in possession of material non-public information. Those messages also reference “Trent.” In the criminal case Mr. Martin has been charged with one count of conspiracy to commit securities fraud and one count of securities fraud. The SEC’s action alleges violations of Exchange Act Section 10(b). The actions are pending. See also Lit. Rel. No. 22549 (Nov. 29, 2012).

FINRA

Improper fees: The regulator imposed a total of $4.4 million in fines and disgorgement payments on five firms for improperly billing the California Public Securities Association for lobby fees. From January 2006 through December 2010 the firms made payments to Cal PSA, an association that engages in a variety of political activities including lobbying on behalf of companies seeking to influence California state government. They then requested that those voluntary payments be reimbursed as underwriting expenses from the proceeds of municipal and state bond offerings. Those fees were not underwriting expenses or directly tied to municipal bond offerings yet the five firms each included them in their underwriting expenses. The firms and payments are: Citigroup: $888,000 fine and $391,106 in restitution; Goldman Sachs: $568,000 fine and $115,997 in restitution; JP Morgan: $465,700 fine and $166,676 in restitution; and Morgan Stanley: $647,700 fine and $170,054 in restitution. The firms also failed to have adequate supervisory procedures with respect to this issue.

Improper pricing: Pruco Securities, LLC was fined $550,00 and ordered to pay $10.7 million in restitution to mutual fund customers whose shares were improperly priced. One of the firm’s retail brokerage units incorrectly believed that it could price orders received on paper on the date they were processed rather than prior to 4:00 p.m. on the date received as required by the Investment Company Act. As a result, from late 2003 through June 2011 about 34,000 customer orders were mispriced. The firm also failed to have adequate procedures to ensure that the orders were properly priced. The fact that the company self-reported and cooperated was taken into consideration.

ASIC

The former executive vice president of BG Group plc, Dr. Stuart Alfred Fysh, was convicted by a jury following a four week trial of two counts of insider trading. He was ordered to serve at least twelve months and up to two years in prison and to pay a penalty of $640,857.18. He will also be barred from managing a public company in Australia for a period of five years. Dr. Fysh was charged with trading while in possession of inside information about an upcoming announcement of a strategic alliance between his company and QGC. When the deal was subsequently announced the share price appreciated significantly.

Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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