by T. GormanPosted on Posted in SECActions

In this holiday shortened first week of the year, one of the most significant current cases moved forward with the entry of a not guilty plea by Mathew Martoma to insider trading charges. Mr. Martoma is the latest person charged in the on-going insider trading wars being waged by the Manhattan U.S. Attorney’s Office and the SEC. His former affiliation with SAC Capital, the huge trading profits in the case, and the manner in which they were made has fueled speculation about possible charges against that firm and its founder.

The SEC settled an investment fund fraud action filed initially in 2010 this week but did not bring any civil injunctive actions or administrative proceedings, excluding 12j and tag along actions. The CFTC filed two actions, one centered on the protection of customer funds and another based and on a cherry picking scheme. In New York another defendant was sentenced in the on-going bid rigging actions centered on the municipal bond market. The SFC announced that it lost an action based on aiding and abetting unlicensed activity.

The SEC

Report: The SEC’s 2012 Agency Financial Report details its performance over the last government fiscal year which ended September 30, 2012. The Report provides an overview of the work of the Commission during the period. Two sections focus on the Division of Enforcement and highlight many of its significant cases.

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission did not file any civil injunctive actions or administrative proceedings (excluding tag-along-actions and 12(j) actions).

Investment fund fraud: SEC v. Online-Registries, Inc., Civil Action No. 10-CV-00433 (D.R.I. Filed Oct. 19, 2010) is an action against David Stern and his company. This week the Commission announced a settlement with each defendant. According to the complaint, the defendants defrauded at least 10 investors who purchased shares in Online-Registries for a total of $170,000 based on misrepresentations. Mr. Stern, a convicted felon and disbarred attorney, told investors the company had developed technology to help permit the sharing of medical records, that it had thousands of subscribers and that they would be forming a partnership with a major technology company. The representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Under the terms of the settlement each defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Mr. Stern agreed to pay disgorgement of $197,875 and prejudgment interest. Payment of those amounts was waived and a penalty not imposed based on financial condition. The company agreed to pay disgorgement of $197, 875 along with prejudgment interest. See also Litg. Rel. No. 22583 (Jan. 2, 2013).

CFTC

Customer funds: The agency issued an order fining Mizuho Securities USA Inc. $175,000 and directing that it cease and desist from violations of certain regulations regarding the reporting of deficiencies in customer segregated accounts and relating to supervision. Specifically, the order found that in October 2011 the firm discovered that it had a deficiency of over $12.4 million in its secured funds account which is suppose to hold funds sufficient to cover obligations to foreign futures and options customers. Futures Commission Merchants who fail to fully comply with this requirement must promptly report any deficiency to the CFTC. Here the firm failed to promptly report the deficiency and to reasonably supervise its personnel with regard to this matter.

Supervision: The regulator settled charges with R.J. O’Brien & Associates, LLC with the entry of an order requiring the firm to pay a penalty of $300,000 and to cease and desist from further violations of CFTC regulation 17 C.F.R. Section 166.3. The underlying action charged that an employee from January 2003 through February 2007 at the end of the trading day allocated profitable trades to his personal account and losing ones or less profitable ones to other accounts.

Criminal cases

Bid rigging: Adrian Scott-Jones, formerly a br oker for Tradition N.A. was sentenced to serve 18 months in prison in connection with his guilty plea in the on-going investigations into bid rigging in the municipal bond markets. Mr. Scott-Jones pleaded guilty to participating in multiple conspiracies with executives of General Electric Co. affiliates from 1999 to 2006. In conducting the auctions, which focused primarily on the investment of the proceeds from the sale of municipal bonds, Mr. Scott-Jones and others gave co-conspirators information about the prices, price levels or conditions in competitors’ bids, a practice known as “last look” which is prohibited by Treasury regulations. To date the government has charged 20 individuals in the on-going inquiry, 19 of whom have been convicted at trial or pleaded guilty. One is currently awaiting trial. One company has also pleaded guilty.

SFC

Aiding and abetting: The Securities and Futures Commission announced that Universal Insurance Consultants and Brokers and Ms. Au Mei Chun had been acquitted of claims that they aided and abetted unlicensed sales of securities. The company is a registered insurance firm but not securities broker. The two defendants had been charged with aiding and abetting unlicensed sales of securities by a third person who was immunized and testified at trial against them. The Magistrate found that the testimony was unclear that the company and Ms. Au requested that the person execute subscription forms on behalf of the clients.

Hurricane Sandy: As we begin the New Year please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

In this holiday shortened first week of the year, one of the most significant current cases moved forward with the entry of a not guilty plea by Mathew Martoma to insider trading charges. Mr. Martoma is the latest person charged in the on-going insider trading wars being waged by the Manhattan U.S. Attorney’s Office and the SEC. His former affiliation with SAC Capital, the huge trading profits in the case, and the manner in which they were made has fueled speculation about possible charges against that firm and its founder.

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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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