by T. GormanPosted on Posted in SECActions

The SEC partially prevailed in a proceeding brought against the Securities Investor Protection Corporation or SIPC. The Court agreed with the Commission that the appropriate manner in which to seek an order compelling SIPIC to file an application for a protective decree is by a summary application rather than a civil complaint. At the same time the Court rejected the Commission’s contention that its determination on the question of SIPIC fulfilling its duties is conclusive and not subject to judicial review. SEC v. Securities Investor Protection Corporation, Case No. 11-mc-678 (D.D.C.). The case is one of first impression according to the Court.

The SEC’s application stems from the collapse in 2009 of a group of companies controlled by Robert Allen Stanford. Stanford International Bank, Ltd. is reputed to have sold more than $7 billion worth of certificates of deposit. Those instruments were marketed by the Stanford Group Company or SGC, a now defunct broker dealer which was registered with the Commission. The SEC eventually brought an enforcement action against Mr. Stanford, claiming that he misappropriated much of the investor money. Criminal charges were also brought. Mr. Stanford is currently on trial in the criminal case. A receiver has been appointed to oversee the assets of SGC which had about 32,000 active accounts for which that company served as the introducing broker.

SIPIC declined to file an application with the Court for a protective decree for the SGC customers, concluding that they were not covered because Stanford Group Company did not perform a custody function for the customers. SIPIC claims that the SEC agreed with its conclusion until June 2011 when it changed course, allegedly at the behest of a U.S. Senator. Despite the Commission’s change of position, SIPIC continued to refuse to petition for a protective decree.

Subsequently, the SEC filed an Application for an order directing SIPIC to file a petition. In filing is application “the SEC contends that its ‘preliminary determination that SGC has failed or in danger of failing to meet its obligations to customers is not subject to judicial review by this Court,’” quoting the SEC papers. SIPIC responded by claiming that the Federal Rules of Civil Procedure apply and that the Commission is therefore required to file a complaint and proceed through discovery.

The Court concluded that the SEC correctly filed its application. Here the governing statute, 15 U.S.C. Section 78ggg(b), provides that “the Commission may apply to the district court . . .for an order requiring SIPIC to discharge its obligations . . .” (emphasis original). In view of the plain language of the statute the Court concluded that it is appropriate for the SEC to commence this proceeding by filing an application, rather than a civil complaint. This procedure, which is summary in nature, is consistent with the statutory intent of proceeding quickly on these matters since the focus is to aid and protect customers. Although this is a summary proceeding, the Court concluded that it still has discretion to apply some if not all of the Federal Rules of Civil Procedure. Accordingly, additional briefing on this issue was ordered.

Finally, the Court rejected as “untenable” the SEC’s contention that its preliminary determination regarding SGC is not subject to judicial review. Again the plain language of the statute governs. In this regard it provides that in “the event of the refusal of SIPC to commit its funds or otherwise to act for the protection of customers of any member of SIPC, the Commission may apply to the district court . . . for an order requiring SIPIC to discharge its obligations . . . “ The statute thus makes it clear that relieve is available to the SEC on application. That relief however is contingent on an affirmative determination that SIPIC has failed to carry out its duties. That determination is to be made by the Court, not the SEC according to the ruling.

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by T. GormanPosted on Posted in SECActions

The Commission has reportedly settled one of its earliest and most high profile market crisis cases, the action against former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. SEC v. Cioffi, Case No. 08-2457 (E.D.N.Y. Filed June 19, 2008). The SEC’s action was brought in tandem with a parallel criminal case against the two men. U.S. v Cioffi, 08-CR-001415 (E.D.N.Y.). In November 2009, prosecutors were stunned when a jury returned not guilty verdicts as to both defendants after only hours of deliberation.

Despite the repudiation of the criminal case, and reports of post trial juror interviews that were highly favorable to the defense, the SEC persisted with its case to the brink of trial. The action centered on the collapse in July 2007 of two Bear Stearns hedge funds once valued at about $20 billion tied to the subprime real estate market, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund and the High-Grade Structured Credit Strategies Master Fund, Ltd.

The SEC’s complaint alleges an intentional fraud in which the defendants misrepresented the true condition of the two funds to investors as the market crisis began to unfold. The purpose was to prevent a run on the funds. Despite internal discussions regarding the fact that certain assets were over valued and a possible change in investment strategy, investors were told by the two managers that they were “very comfortable” with the investment strategy of the funds. Investors were not told the truth regarding the size and scope of the redemptions being demanded. Indeed, in May 2007 as the funds were collapsing the defendants continued to misrepresent the true financial condition of the funds, according to the SEC. Investors also were not told that Mr. Cioffi began moving about one third of his $6 million investment out to another fund. Investors lost about $1.8 billion when the funds collapsed.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It seeks an injunction, disgorgement, prejudgment interest and civil penalties.

Under the terms of the proposed settlements, Mr. Coffi agreed to disgorge $700,000 and pay a $100,000 civil penalty. He will also be barred from the securities business for three years. Mr. Tannin will pay disgorgement of $200,000 and a $50,000 civil penalty. He will be barred from the securities business for two years.

The Court directed the parties to file papers regarding the arrangement next week. The SEC reportedly is pleased with the settlement. Judge Frederic Block, who is presiding over the case, stated that it is being settled for “relatively speaking, chump change,” according to a report published by Businessweek. The Judge indicated that he expected to sign off on the settlement.

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