by T. GormanPosted on Posted in SECActions

As the insider trading trial of a former Goldman director continued in Manhattan, another insider trading probe moved to the playing field, according to a Reuters report. The probe reportedly focuses on a prominent retired baseball player and other athletes. Other items at the top of the news were a suit against the SEC by a rating agency seeking to remove an administrative proceeding filed against it to Federal Court and a new report from the OECD which details methods for calculating ill-gotten gains in bribery cases in various jurisdictions.

SEC enforcement brought an insider trading case against three corporate executives, a proceeding against Oppenheimer and a market manipulation action. The Manhattan U.S. Attorney’s Office obtained guilty pleas from another former employee of Bernard Maddoff’s defunct operation.

The Commission

Market plan: The Commission approved proposals from the National Exchanges and FINRA addressed to market volatility. Specifically, one initiative is a limit-up limit- down mechanism to prevent trades in individual exchange listed stocks from occurring outside certain parameters. It replaces the current single stock circuit breakers. The second updates existing market-wide circuit breakers (here).

Speech: Craig Lewis, Chief Economist and Director, Division of Risk, Strategy and Financial Innovation, addressed the Risk Minds USA Conference (June 5, 2012). His remarks outlined the work of the Division, its contributions to other Divisions, and the manner in which academic and other research is being used to aid the Commission (here).

Egan-Jones Rating Company v. U.S. Securities and Exchange Commission, Case No. 1:12-cv-00920 (D.D.C. Filed June 6, 20120) is an action by the credit rating firm Egan-Jones Rating Company and its founder and principal Sean Egan against the Commission. The suit claims that the firm and its founder cannot receive a fair hearing in the administrative proceeding instituted against them. This is because the agency is bias against small rating firms as evidenced by the fact that it has ignored the directives of Congress to foster competition in the ratings business, has tried to crush it with administrative process and is impermissibly seeking to retroactively apply the penalty provisions of Dodd-Frank in the administrative proceeding. The complaint seeks the removal of the administrative proceeding to Federal Court as well as an order which declares the delegation of authority to issue a formal order to the staff contrary to law and another specifying that the new Dodd-Frank penalties do not apply retroactively.

SEC Enforcement: Filings and settlements

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

False statements: In the Matter of OppenheimerFunds, Inc., Adm. Proc. File No. 3-14909 (June 6, 2012) is a proceeding against OFI, a registered investment adviser and OppenheimerFunds Distributor, Inc. or OFDI, a wholly owned subsidiary of the adviser and a registered broker dealer. The case centers around two funds. One is the Oppenheimer Champion Income Fund and the other is the Oppenheimer Core Bond Fund. Both are fixed income retail mutual funds managed by OFI. Both invested in commercial mortgage backed securities or CMBS. Both obtained exposure in those markets largely through total return swaps or TRS. When the CMBS market crashed in late 2008 the funds suffered large losses on the TRS and were forced to sell assets. Investors were told however, that the losses were on paper and that as the market recovered so would the funds. Those statements were false. The funds also sold shares without adequately disclosing their exposure to the derivatives market. The Order alleges violations of Section 34(b) of the Investment Company Act of 1940, Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 206(4) of the Investment Advisers Act. Each Respondent consented to the entry of cease and desist orders based on each of the Sections cited in the Order for OFI and the Advisers Act Sections cited in the Order as to OFDI. Both were censured. In addition, they agreed to pay disgorgement of $9,879,706, prejudgment interest and a $24 million penalty.

False statements: In the Matter of David Mark Bunzel, Adm. Proc. File No. 3-14908 (June 6, 2012) is a proceeding against Mr. Bunzel, the sole owner of unregistered investment adviser Irving Management. The adviser is the general partner of the Irving Funds. Mr. Bunzel is alleged to have made false statements to the limited partners about the valuation of a key asset, overcharging his management fee and failing to have a timely annual audit. To resolve the proceeding Mr. Bonzel consented to the entry of a cease and desist order based on Advisers Act Section 206(4). He also agreed to a suspension from the securities business and from participating in any penny stock offering for one year. A fine of $100,000 was imposed.

Market manipulation: The SEC announced the filing of civil fraud charges against eleven individuals and eight companies in nine cases in conjunction with the U.S. Attorney’s Office for the Southern District of Florida. That office brought criminal charges against fifteen individuals in twelve cases. The actions are part of the The Southern District of Florida Securities and Investment Fraud Initiative. The cases brought by the SEC center on a market manipulation and kickback scheme. The market manipulation complaints are based on a scheme in which a broker was paid a bribe to purchase the shares of certain microcap stocks in the open market for his customers’ discretionary accounts. Other complaints detail a scheme involving the payment of undisclosed kickbacks to a pension fund manager in exchange for the fund’s purchase of restricted shares of microcap stocks. The complaints allege violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The cases are in litigation.

Misappropriation: SEC v. Bethke, Civil Action No. 4:12-cv-01638 (S.D. Tex. June 1, 2012) is an action against Mr. Bethke which alleges that from January 2009 through May 2010 he misappropriated share certifications from Bederra Corporation while he controlled the stock transfer agent. He later sold the shares for over $350,000 after forging a purchase agreement and falsifying letters to claim they were freely tradable. Mr. Bethke resolved the action by consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The order also bars him from serving as an officer or director of a public company or participating in any penny stock offering. Disgorgement was ordered but the amount waived based on his financial condition.

Insider trading: SEC v. Mazur, Case No. 2:12-cv-00731 (W.D. Pa. Filed June 1, 2012) is an action against Charles Mazur, Jr., James Poland and Joseph Ceranzia, each of whom was an executive at CONSOL Energy, a producer of coal and natural gas based in Canonsburg, Pennsylvania. CONSOL entered into an agreement to purchase a business segment from Dominion Resources, a power and energy company. Prior to the announcement of the deal, which caused the share price of CONSOL to drop by 10%, each executive traded in the securities of his employer. Mr. Mazur purchased 140 in-the-money CONSOL put options. When the deal was announced he sold the options at a profit of $47,355. Mr. Poland accessed his 401(k) account and sold 2,000 shares of company stock at about $53.85. He avoided a loss of $9,552. Mr. Cerenzia logged into this employee incentive account and exercised two sets of stock options. He immediately sold the shares, avoiding a loss of $5,690. Each defendant settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, Mr. Mazur agreed to pay approximately $97,171, Mr. Poland about $19, 600 and Mr. Cerenzia about $15,453 in disgorgement, prejudgment interest and civil penalties.

Manipulation: SEC v. Dial, Case No. 4:12-CV-01654 (S.D. Tex. Filed June 1, 2012) is an action against James Dial, the former president, CEO and sole director of Grifco International, Inc., Evan Jarvis, a stock promoter and Alex Ellerman, another stock promoter. From December 2004 through November 2006 Messrs. Dial and Jarvis caused Grifco, purportedly an international oil and gas services equipment company, to issue over 13 million shares which were supposedly unrestricted. The defendants then manipulated the market for Grifco shares and sold their securities, netting almost $3.3 million in ill-gotten gains. They also looted the company, misappropriating about $600,000. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Each defendant settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. The orders also bar them from serving as an officer or director and participating in a penny stock offering. In addition, Messrs. Dial, Jarvis and Ellerman are required to pay, respectively, disgorgement and prejudgment interest of $1,600,628, $2,095,524 and $939,650 which will be deemed satisfied by paying the restitution orders in the parallel criminal case, U.S. v. Ellerman, No. H-10-56 (S.D. Tex.). Previously, Messrs. Dial and Jarvis were each sentenced to five years in prison. Mr. Ellerman received a reduced term of 40 months based on his cooperation.

Criminal cases

False filings: U.S. v. Kugel (S.D.N.Y.) is an action against Craig Kugel, a former employee of Bernard I. Madoff Investment Securities LLC or BLMIS from 2001 through December 2008. He pleaded guilty to a five count superseding information charging him with one count of conspiracy as well as a count of making false statements in relation to documents required by the Employee Retirement Income Security Act and subscribing to false U.S. tax returns. Mr. Kubel was responsible at BLMIS for budget forecasting and overseeing the company health care plan and maintaining its internal employee records. Although he was aware that the payroll listed people who received salaries and benefits that did not work at the firm, he maintained the records and submitted annual returns to the Department of Labor which require that the information about employees be accurate. He also charged over $200,000 of personal expenses to a firm credit card which were not reported as income. Mr. Kubel is cooperating with the government.

FINRA

Testimony: Richard Ketchum, Chairman and CEO testified before the House Committee on Financial Services (June 6, 2012). His testimony focused on the benefits of the SRO model in relation to investment adviser supervision (here).

Misrepresentations: A FINRA hearing panel found Brookstone Securities, its owner and CEO Antony Tuberville and one of its brokers, Christopher Kline liable for fraudulent sales of CMOs to retired and elderly clients from 2005 through 2008. The customers were told that the securities were as safe as government bonds and paid a good rate of interest. The panel fined Brookstone $1 million and ordered it to pay restitution of over $1.6 million to customers. Of that amount $440,600 was imposed jointly and severally with Mr Tuberville and the remaining $1,179,500 was imposed jointly and severally with Mr. Kline. Both men were barred from the securities industry. Brookstone’s former COO, David Locy was suspended for two years and fined $25,000.

Anti-corruption/FCPA

The OECD and the World Bank/UNODC Stolen Asset Recover Initiative released a new study on the Identification and Quantification of the Proceeds of Bribery. The report details the main methods used in calculating ill-gotten gains in different legal systems. The report can be accessed through the website of the OECD.

Hong Kong

The Securiteis and Futures Commission revoked the license of Mr. Hong Hui Lung, the former managing director of Mega Capital (Asia) Company Limited to act as a representative and his approval to act as a responsible officer. The firm was the sponsor for the lisitng application of Hontex international Holdings Co. Mr. Hong was one of two responsible officers and principals in charge of supervision. The order concluded that he failed to discharge his dutines and take responsibility as required.

Program: Webcast by Thomas O. Gorman: How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends, presented by Celesq and West Legal Ed, June 14, 2012 from 12 -1:00 p.m. EST. For further information please click here.

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by T. GormanPosted on Posted in SECActions

The SEC is facing the latest challenge to the way it utilizes its Congressionally delegated authority. Specifically, credit rating firm Egan-Jones Rating Company and its founder and principal Sean Egan filed a complaint against the Commission claiming that it can not receive a fair hearing in the administrative proceeding instituted against the firm and its founder because the agency is bias against small rating firms as evidenced by the fact that it has ignored the directives of Congress to foster competition in the ratings business, has tried to crush it with administrative process and is impermissibly seeking to retroactively apply the penalty provisions of Dodd-Frank in the administrative proceeding. The complaint seeks the removal of the administrative proceeding to Federal Court. Egan-Jones Rating Company v. U.S. Securities and Exchange Commission, Case No. 1:12-cv-00920 (D.D.C. Filed June 6, 20120).

Egan-Jones is a small, independent rating agency. The firm’s fees are paid by its subscribers. This contrasts with large Wall Street rating firms who are paid by the issuer whose securities it is rating, an inherent conflict of interest Congress sought to regulate in the Dodd-Frank Act. The small rating firm has consistently performed at a high level, according to the complaint, predicting key events which lead to the corporate scandals at the beginning of the century and the current market crisis before the giants of Wall Street. This record has won the firm accolades from the public and in academic studies.

Nevertheless, the SEC brought an administrative proceeding against the firm in April 2012 predicated on claims that in filing an application to rate two additional lines of securities the firm falsified its experience. There is no claim in the Order for Proceedings that the firm’s ratings were deficient. The Order seeks, among other things, to impose a civil penalty on the Respondents under the provisions of Dodd-Frank which became effective in 2010 despite the fact that the conduct occurred years before the passage of the statute.

The Order instituting the administrative proceeding is the product of a defective, bias and tainted process, according to the complaint. It emanates from a history of inaction by the SEC against the Wall Street rating agencies despite repeated failures. It is the product of repeated failure by the agency to adhere to the direction of Congress to enhance and encourage competition in the ratings industry by encouraging independent firms which would undercut the monopoly of the Wall Street issuer paid rating giants. It follows a crushing regulatory process imposed on the small firm which cost it significant portions of its revenue that began shortly after the Egan-Jones filed its application with the SEC in July 2008 regarding ratings on two additional securities:

  • November 2008 OCIE gives notice of an exam and requests information;
  • May 2009 OCIE requests more information;
  • June 2009 OCIE is on-site for an exam;
  • July 2009 OCIE requests additional information;
  • August 2009 OCIE threatens an enforcement action for inadequate documentation and e-mail retention;
  • February 2010 Enforcement opens an informal inquiry;
  • From March to May 2010 the firm receives four requests for additional information;
  • July 2010 a Formal Order of Investigation is issued;
  • August 2010 OCIE gives notice of another exam;
  • August 2010 Enforcement issues subpoenas;
  • October 2010 Trading and Markets notifies the firm of an exam;
  • January 2011 OCIE conducted an on-site exam;
  • July 2011 the firm downgrades U.S. debt and receives a demand for documentation regarding the decision from OCIE;
  • October 2011 Enforcement makes a Wells call;
  • November 2011 OCIE questions the basis for downgrading Jefferies credit rating;
  • February 2012 OCIE requests additional information;
  • March 2012 OCIE conducts an on-site exam; OCIE staff are moving between the enforcement investigation and the exam functions prior to an amendment of the Formal Order permitting the OCIE staff to participate in the enforcement inquiry;
  • July 2012 the firm again downgrades U.S. debt; OCIE calls again and asks for the basis; and
  • April 2012 there are numerous news stories about non-public Commission deliberations regarding a possible enforcement action being brought against the rating firm before the Order is issued.

Under these circumstances the firm and its founder assert, they can not receive a fair hearing in the administrative proceeding initiated by the Commission. Therefore the complaint seeks: 1) an order that the Dodd-Frank penalty provisions cannot be applied retroactively; 2) a declaration that the delegation of authority to issue formal orders of investigation to the staff is improper; 3) an injunction prohibiting those members of OCIE who serves as officers in the enforcement investigation from participating in future inspections; 4) an injunction halting the administrative proceedings; and 5) an order removing the administrative proceeding to Federal District Court.

Litigants rarely succeed in suits such as this. While the events which form the backdrop of the Egan-Jones complaint were unfolding however, Rajit Gupta brought a similar action against the Commission after being named as a respondent in an administrative proceeding alleging which requested civil penalties based on insider trading allegations. The Commission dropped that proceeding after the District Court let the case proceed past the motion to dismiss stage. Mr. Gupta is, however, currently on trial on criminal insider trading charges. Egan-Jones and its founder have clearly assumed a difficult burden.

Program: Webcast by Thomas O. Gorman: How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends, presented by Celesq and West Legal Ed, June 14, 2012 from 12 -1:00 p.m. EST. For further information please click here.

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