by T. GormanPosted on Posted in SECActions

The IG Report

The SEC inspector general issued a report on Tuesday 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.

The statement and the report are here.

If this were the conclusion of the Madoff debacle for the SEC it would be a sad end to a sorry tale. Unfortunately it is not. What is essential however is that the Commission continue its efforts to return to the time when it was considered one of the best agencies in government. Many dedicated people are working hard to achieve that result. Whatever the outcome of the IG’s referral it is essential for investors, the markets and the public that those efforts not just continue but succeed.

Enforcement – insider trading

The SEC brought another “suspicious trading” insider trading case against unknown traders. This one of a series of similar insider trading cases based on little more than a take-over announcement and large, timely trading. In the past the Commission has been successful with these actions.

This time it involved the shares of Global Industries, Ltd. The suit centers on the acquisition by Technip SA, of Global. Technip is a Paris based company and is Europe’s second largest oil services enterprise. Global is based in Carlyss, Louisiana. It provides oil field construction services, including pipeline construction, platform installation, diving services and construction support to the offshore oil and gas industry.

The acquisition was 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. The purchases were made 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. 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 case is pending.

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.

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by T. GormanPosted on Posted in SECActions

The Second Circuit Court of Appeals vacated a preliminary injunction secured by the SEC and the CFTC freezing the assets a spouse received in a divorce settlement from her former husband who ran a massive Ponzi scheme. The court held that the agencies are only entitled to obtain disgorgement of ill-gotten funds to the extent a relief defendant “lacks a legitimate claim to them.” CFTC v. Walsh, Nos. 09-3742, 09-3787 (2nd Cir. Decided Sept. 15, 2011).

Relief defendant Janet Schaberg (named in the action as Janet Walsh) was married to Stephen Walsh for two decades. By the time of their separation in 2004 Mr. Walsh had amassed a substantial fortune. Under the terms of the final 2006 divorce settlement Mr. Walsh paid his former spouse $12.5 million in biannual installments through 2020. She also obtained nearly $5 million held in several checking accounts during the marriage as well as their home in Port Washington, New York and other real estate.

In 2009 the SEC and the CFTC accused Mr. Walsh of operating a Ponzi scheme. He and his partner supposedly fleeced investors out of $554 million. Investor funds which were suppose to be put in a vehicle to trade in equity index arbitrage were in fact used for the personal expenses of Mr. Walsh. Both agencies filed enforcement actions and requested a preliminary injunction freezing assets including those held by Ms. Schaberg. The district court granted the motions of the SEC and CFTC.

Critical to a resolution of this case is the question of whether Ms. Schaberg has a legitimate claim to the assets. To resolve this issue the court certified two questions to the New York Court of Appeals for resolution, rejecting the contention of each agency that it is one of federal law. Question one focused on whether “marital property can include the proceeds of a fraud.” The second, which the New York court recast, is whether a spouse paid fair consideration if all or part of the marital estate consists of the proceeds of a fraud. The answer to the first question is yes while the response to the second is no. The response to the second question is qualified however. The court stated that a spouse cannot be viewed as having paid fair value for the assets received by relinquishing a claim to a bigger share of the fraudulently obtained assets where the marital estate is primarily or all the proceeds of a fraud. Fair consideration giving the spouse a legitimate claim to assets can be given the court held by relinquishing rights such as maintenance, inheritance and child custody.

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.”

In reaching its conclusion that the preliminary injunction had to be vacated the court rejected arguments by the SEC and CFTC that the ruling could be affirmed on the basis that under the facts here valid consideration was not paid. First, the Court of Appeals held that there could be fair consideration under New York law. Second, at least some part of the funds spent on the residence in Port Washington, appear to have come from untainted sources. Third, Ms. Schaberg relinquished rights to maintenance and inheritance which might not have been worth much at the time, but at some point they may have value. Finally, it is possible that fair value may have been given for at least some of the assets. Accordingly, the case had to be remanded to the district court for further proceedings.

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.

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