by T. GormanPosted on Posted in SECActions

The SEC seems to be haunted by the ghosts of debacles past. Past ghosts still haunting the SEC included the failure to discover Madoff multiple times over multiple years. The General Counsel, the Director of the Division of Enforcement and other senior staff refusing to tell Congress what happened with the Madoff inquiries, effectively taking the Fifth Amendment. The Stamford debacle, the computer porn disclosures and others just added to the ghosts of debacles past haunting the SEC.

Each time the Commission told Congress the event was in the past. Each time the Commission assured Congress the agency had learned from the experience and reformed. Each time the public that relies on the agency wondered if the ghosts were gone.

Last week a new ghost surfaced. This time it is a referral to the Department of Justice of a former SEC general counsel regarding possible criminal violations of the ethics statutes. The charges tie back to the ghost of Madoff. The former general counsel says he told the Chairman before he acted on certain Madoff matters, that an SEC ethics counsel approved and he did nothing wrong. The Chairman says she talked to the former GC about his Madoff link and he is a dedicated public servant. Congress and the public have again been told that the matter is in the past, the SEC has learned and new procedures are being put in place.

What happened in this latest scandal will ultimately be sorted out by the Department of Justice. What is important is the future of the agency. How many times should Congress accept a claim that its all in the past? Is the investing public suppose to believe that this time the agency is going to finally get it right?

Unfortunately repeated debacles and persistent ghosts undermine the assurances given to Congress and the public. More importantly, it also means the culture which spawned these repeated scandals and created those ghosts is wrong. It means the tone at the top which spawned that culture is wrong.

This is not to say that there are not many hard working and dedicated people at the Commission. There are. The fact that the work of the agency is moving forward and the public interest is being cared for and protected day after day is a testament to the dedication, skill, hard work and expertise of the hundreds of men and women employed at the agency.

Likewise, there is no doubt that the Commission in recent years has worked hard to move past the scandals and return to the days when the agency was considered among the best in government. Dozens of initiatives, regulations and cases have been brought. As new issues arise, congressional inquiries come in and the markets innovate new products and procedures, the Commission has moved to address them.

Tone at the top and culture is not however about how many new rules are issued or how much was paid in penalties. More rules have probably been issued in recent years than in any similar period in the history of the Commission. More dollars have been paid in fines and penalties that in any year in the history of the Commission. At the same time it might be good to recall that when the SEC was one of the best agencies in government with a highly regarded enforcement programs, it did not have authority to impose penalties. Its remedies were about halting violations and preventing their reoccurrence in the future. This suggests that tone at the top and culture are not about counting rule making initiatives, dollars of penalties or responding to the flavor of the week, month and year.

Tone at the top that flows down into a positive culture begins with the mandate of the statutes, congress and the public. It begins in the 1930s with the reasons the agency was created. It continues with the building of the reputation of the agency through the years by Commission members and staff who shared a vision, a concept, an understanding, an intuitive feel for the statutes and their meaning and how to implement them. Those people understood what it means to bring a new ethics to the market place. It began at the top, flowed down through the agency. What the SEC, and all those who rely on it need today, is a vision from the top rooted in the history of the agency and its mission to guide it back to being the best in government.

Tagged with: , , , , ,

by T. GormanPosted on Posted in SECActions

Scandal surfaced again at the SEC this week. The SEC IG referred a matter involving the former general counsel of the agency to the DOJ. The matter centers on conflicts arising out of his handling of the Madoff clawback claims for the Commission. That referral was followed by testimony before a House subcommittee by the SEC Chairman and the former General Counsel regarding the matter.

SEC enforcement brought tree significant actions this week. Once ended with a ban from the securities industry for a significant Wall Street player. A second centered on a father and son insider trading ring which is in litigation while the third was a quickly filed “suspicious trading” case brought against unknown securities purchasers.

The Galleon and expert network cases continued to move forward this week with the conviction of a former employee of an expert network. Also key figures in the Galleon insider trading cases were sentenced to prison.

The Commission

Conflicts of interest: SEC Chairman Mary Schapiro testified before the House Subcommittee on Oversight and Investigations regarding “Potential Conflicts of Interest at the SEC: the Becker Case” (here).

Conflicts of interest; Former SEC General Counsel David Becker testified before the House Subcommittee on Oversight and Investigations regarding potential conflicts of interest concerning certain of his actions while a member of the Commission’s staff (here).

Small business capital formation: Meredith Cross, Director, Division of Corporation Finance, testified before House Subcommittee on Capital markets and Government regarding Legislative Proposals to Facilitate Small Business Capital Formation and Job Creation” (here).

The SEC IG Report: The SEC inspector general issued a report on Tuesday (here) referring the matter regarding former SEC General Counsel David Becker’s involvement with the Madoff clawback suits to the DOJ. The report also contains a number of recommendations including that the Commission take another vote on its position regarding the valuation of Madoff victim accounts. SEC Chairman Schapiro issued a brief statement noting that it would be inappropriate to comment on the criminal referral but stating that Mr. Becker was a dedicated civil servant.

Proposed Rule: The SEC published for comment proposed rules to prohibit conflicts of interest in certain asset-backed securities transactions. The rules are intended to prohibit certain conflicts between those who package and sell asset backed securities and those who invest in them (here).

Legislation: Two bills pending before Congress would revamp the SEC. One is the SEC Modernization Act of 2011 while the second is the SEC Regulatory Accountability Act. The Modernization Act proposes to legislatively mandate the internal organization of the SEC. The Regulatory Accountability Act focuses on reforming the Commission’s rule making processes.

SEC enforcement – filings and settlements

Misrepresentations: In the Matter of Barr M. Rosenberg, Adm. Proc. File No. 3-14559 (Sept. 22, 2011) is a proceeding against Barr Rosenberg, the co-founder of AXA Rosenberg Group, LLC and owner of the Barr Rosenberg Research Center. He also developed a model for quantitative investment strategies. In June 2009 employees of the firm discovered an error in the computer model which had been introduced in 2007. Mr. Rosenberg directed the employees to be quiet about the error. When clients complained that the model under performed he attributed it to other causes. Eventually it was reported to the Commission. The error impacted more than 600 client portfolios and caused about $217 million in losses. The Order alleges violations of Advisers Act Sections 206(1) and 206(2). To resolve the matter, the Respondent consented to the entry of a cease and desist order, agreed to pay a $2.5 million penalty and to the entry of an order which bars him from the securities business.

Insider trading: In the Matter of Spencer Mindlin, Adm. Proc. File No. 3-14557 (Sept. 21, 2011) is an action against Alfred Mindlin, and his son, Spencer Mindlin. Spencer was employed at Goldman Sachs Execution & Clearing, L.P. on the ETF desk. His father is a CPA who conducted his own practice. Goldman maintained large net long positions in the SPDR S7P retail ETF or XRT which replicates the S&P Retail Select Industry Index. The XRT rebalances each quarter adding or deleting securities to mirror the S&P Retail Index. To hedge its long positions Goldman shorted the securities underlying the XRT. To maintain these positions Goldman had to rebalance its short positions each quarter, placing large trades which would impact the market. From his position on the ETF desk Spencer knew about Goldman’s net long XRT positions. He also understood the rebalance process. After securing internal information regarding Goldman’s positions on four occasions the defendant used it to trade profitably. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is proceeding to litigation.

In the Matter of Delta Global, Adm. Proc. File No. 3-14329 (Sept. 20, 2011) is an action against registered investment adviser Delta Global and its founder and owner Charles Hanlon. Delta, according to the Order, made numerous misrepresentations regarding its operations to investors including false claims that it was an adviser to a registered investment company and that it had managed as much as $1.5 billion. Delta also failed to comply with its representation to the inspection staff that it would disclose its misstatements. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The Respondents resolved the action by consenting to the entry of a cease and desist order based on the sections cited in the Order. Delta’s registration was also revoked.

Investment fund fraud: SEC v. K2 Unlimited, Inc., Case No. 11cv11649 (D. Mass. Filed Sept. 19, 2011) is an action against Diane Glatfelter, Robert Rice, Robert Anderson, K2 Unlimited, Inc. and 211 Ventures LLC. According to the complaint, defendants Glatfelter and Rice, through their two controlled entities, defrauded investors out of about $1.8 million by selling them fictitious interests in a securities and trading program on the promise of high returns. In addition, defendants Glatfelter and Anderson sold investors fictitious interests through fraudulent investments n E-Trust Clearing House. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.

Insider trading: SEC v. One or More Unknown Purchasers of Securities of Global Industries, Ltd., Civil Action No. 11 Civ. 6500 (S.D.N.Y. Filed Sept. 16, 2011). The suit centers on the acquisition by Technip SA, of Global Industries, Ltd. announced on September 12, 2011. Four days before that announcement unknown purchasers bought 285,840 shares of Global common stock. The next day, September 9, 2011, an additional 400,000 shares were acquired through an omnibus account in the name of Raiffeisen Bank International AG Vienna, Austria at Brown Brothers Harriman & Co. Following the deal announcement the share price of Global increased about 55% over its prior close. All of the shares held in the account were immediately sold at a profit of $1,728,810. Four days later on September 16, 2011 the Commission filed suit and obtained an emergency freeze order of the account. The case is pending.

Criminal cases

Insider trading: U.S. v. Shimoon, Case No 10 Mag 2923 (S.D.N.Y.) is one of the cases arising out of the expert network insider trading investigation. James Fleishman, formerly employed at Primary Global Research LLC as a sales manager was convicted following a jury trial of one count of conspiracy to commit securities fraud and one count of conspiracy to commit wire fraud. Mr. Fleishman promoted his firm’s consultation services by arranging for clients to speak with consultants knowing that they would furnish inside information to clients. Sentencing is scheduled for December 21, 2011.

Insider trading: U.S. v. Jiau, 11-cr-00161 (S.D.N.Y.) is an action against Winifred Jiau for insider trading. The case arose out of the expert network investigations. Ms. Jiau was a consultant to Primary Global Research LLC. From 2006 through 2008 she is alleged to have obtained inside information and furnished it to hedge fund managers who were clients of the network. During the period she passed on information regarding pending earnings releases of NVIDIA Corporation and Marvell Capital to hedge fund managers. A jury found her guilty of conspiracy to commit securities and wire fraud and securities fraud. This week she was sentenced to four years in prison.

Insider trading: U.S. v. Goffer, 10-cr-0056 (S.D.N.Y.) is one of the Galleon insider trading case. One of the defendants in the case is Zvi Goffer who obtained inside information from attorney Arthur Cutilo of the Ropes and Gray firm and others. Mr. Goffer was a key participant in an insider trading ring reputed to have made about $10 million in profits from trading on information regarding potential acquisitions involving 3Com Corporation and Axcam Pharma, Inc. Mr. Goffer was convicted on twelve counts of securities fraud and two counts of conspiracy following a jury trial. This week he was sentenced to ten years in prison.

Insider trading: U.S. v. Shimoon, Case No. 10 Mag 2923 (S.D.N.Y.) is one of the cases arising out of the expert network investigations. Manosha Karunatilaka was formerly employed at Taiwan Semiconductor Manufacturing Company as an account manager. Between 2008 and 2010 he participated in a conspiracy to furnish sales and shipping information about his firm through the expert network. Previously he pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud. This week he was sentenced to 18 months in prison.

Insider trading: Bassam Yocoub Salman was charged with conspiracy and securities fraud in connection with an insider trading ring alleged to have made trading profits of over $1.1 million. Mr. Salman is charged along with Maher Fayez Kara, a former investment banker at Citigroup Global Markets, his brother Mounir Feyez Kara, and Emile Yuoussef Jilwan. According to the indictment Maher Kara misappropriated inside information regarding corporate acquisitions and financings from Citigroup and its clients. He then tipped his brother who tipped Salman who traded. The case is pending in the Northern District of California.

Financial fraud: U.S. v. Marsh (E.D.N.Y.) is a case against the president of financial advisory firm Gryphon Holdings Inc. Kenneth March and four employees since at least January 207 defrauded investors of more than $17.5 million paid for fees and investment services. Firm clients paid fees for investment advice which typically caused them to lose money. Clients were induced to work with the firm through a series of misrepresentations about the firm and its business. Mr. Marsh, who previously pleaded guilty, was sentenced to eight years in prison this week.

Court of appeals

Relief defendants: CFTC v. Walsh, Nos. 09-3742, 09-3787 (2nd Cir. Decided Sept. 15, 2011). These actions centered on the question of whether a relief defendant who obtained a substantial divorce settlement would have to disgorge it because it came from her husband who conducted a massive Ponzi scheme. The district court granted a preliminary injunction freezing the assets of the defendant. The Circuit Court reversed based on the responses to state law questions obtained from the New York Supreme Court. In this case the preliminary injunction was predicated on the notion that Ms. Schaberg had no legitimate claim to the assets because the estate was largely if not wholly the fruits of the Ponzi scheme. However, under New York law it is clear from the ruling of the Court of Appeals that a “divorce decree may cleanse such a taint [from a Ponzi scheme] where the innocent spouse acts in good faith and gives fair consideration.” Even if most or all of the marital property came from the Ponzi scheme the innocent spouse could still give good consideration by relinquishing rights such as those to maintenance and inheritance.

Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For furhter information please click here.

Tagged with: , , , , , ,