by T. GormanPosted on Posted in SECActions

The SEC prevailed in a pair of litigated cases this week. First, in SEC v. EagleEye Asset Management, LLC, Civil Action No. 11-CV-11576 (D. Mass.) a jury returned a verdict in favor of the Commission and against registered investment adviser EagleEye Management and its sole principal Jeffrey Liskov based on a fraud on the advisory clients. Second, in SEC v. Greenstone Holdings, Inc., Civil Action No. 10-cv-1301 (S.D.N.Y.) the court granted in part the Commission’s motion for summary judgment, fining attorney Virginia Sourlis liable for aiding and abetting a fraud by issuing a false legal opinion.

The complaint in EagleEye Asset Management centered around a forex trading scheme. Between April 2008 and August 2010 Mr. Liskov made material misrepresentations to a dozen clients, according to the Commission. The representations were made to induce the clients to liquidate their securities holdings and use the cash to engage in high risk forex trading. The trades resulted in about $4 million in losses for the clients but generated over $300,000 in performance fees. In some instances Mr. Liskov used a strategy which resulted in short term profits to generate the fees. Later, however, the positions would decline sharply in value.

In the case of two clients Mr. Liskov liquidated their brokerage accounts without permission. He then transferred the proceeds to forex trading accounts where virtually all of their money was lost. The transfers were done by doctoring the documents. The complaint alleged violations of Exchange Act Section 109b) and Advisers Act Sections 206(1), 206(2) and 204. See also Lit. Rel. No. 22546 (Nov. 27, 2012).

In Greenstone Holdings the Commission claimed that attorney Sourlis authored a false legal opinion that was used by the firm to issue over six million shares of unregistered stock. The opinion described notes, note holders and communications with those note holders for which there was no basis in fact.

In ruling in favor of the Commission the Court concluded that Ms. Sourlis claimed to have spoken to note holders who do not exist and that for several other representations in the legal opinion there was no factual basis. Accordingly, the Court found that Ms. Sourlis aided and abetted violations of Exchange Act Section 10(b). The Court reserved ruling on the Securities Act Section 5 claim against the attorney while rejecting the SEC’s claim of primary liability against Ms. Sourlis. The Commission plans to file a motion seeking appropriate remedies. See also Lit. Rel. 22542 (Nov.. 26, 2012).

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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by T. GormanPosted on Posted in SECActions

Mary L Schapiro, one of the longest serving SEC Chairman, announced her resignation, effective December 14, 2012. Ms. Schapiro’s action has been long rumored. The White House immediately appointed Commissioner Elisse Walter as Chairman, a position she can hold over the next year until the President appoints a person to a full term.

Ms. Schapiro has served through one of the most difficult periods in the Commission’s history. Taking office in January 2009 she was immediately faced with an agency whose one proud enforcement program, critical to its investor protection mission, was in disarray following a series of scandals which kicked-off with the Madoff debacle. At the same time the agency faced the aftermath of the worst market crisis in history.

Rising to the task under Ms. Schapiro’s leadership, the Commission initiated the largest reorganization of the enforcement program in the history of the agency. Following the passage of the ground breaking Dodd-Frank legislation, she led the Commission through an unprecedented period of rule writing to implement legislation which is designed to completely rewrite the rules governing the financial markets.

Critical achievements under Ms. Schapiro’s tutelage include:

  • Reorganizing and reinvigorating the enforcement division;
  • Creating new specialty groups within the enforcement division;
  • Crafting a whistleblower program;
  • Bolstering expertise in key areas such as risk management, quantitative analytics, trading, portfolio management and valuation skills;
  • Filing a record number of enforcement actions;
  • Returning over $6 billion to harmed investors;
  • Bringing a series of market crisis actions, including those against major Wall Street players;
  • Building a risk based approach into the examination program while fostering the cooperation of that program with the enforcement division;
  • Establishing a new division to focus on risk and economic analysis;
  • Engaging in one of the most robust rule making periods in the history of the agency which, in part, helped create a new framework for derivatives;
  • Implementing a variety of circuit breakers to delimit the impact of technology errors in the markets;
  • Requiring broker dealers to adopt risk controls and effectively prohibit unfiltered access to the exchanges; and
  • Approving a first-ever consolidated audit trail system.

No doubt Ms. Schapiro has compiled an enviable record as Chairman. Still her successor will be faced with a daunting array of issues. The enforcement program is still a work in progress. Rule writing under Dodd-Frank is an on-going and challenging process. And, there are a series of other challenges ranging from high speed trading to the municipal markets and money market funds which must be addressed. Nevertheless, Ms. Schapiro has moved the agency forward in an effective, positive and constructive manner which gives her a proud legacy as Chairman.

Hurricane Sandy: During this holiday season please remember the victims of Sandy’s destruction by donating to the Red Cross (here).

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