by T. GormanPosted on Posted in SECActions

The Eighth Court held that a person who pleads guilty to a criminal violation of Section 10(b) and Rule 10b-5 is entitled at sentencing to invoke the “no knowledge” provision of Exchange Act Section 32(a) to try and avoid a term of imprisonment. U.S. v. Behrens, No. 10-3505 (8th Cir. Filed July 13, 2011). The defendant has the burden to establish the defense.

Bryan Behrens was indicted on one count of securities fraud, six counts of mail fraud, five counts of wire fraud and nine counts of money laundering. Eventually he pleaded guilty to a singe count of securities fraud alleging violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder. At sentencing he attempted to invoke the “no knowledge” provision in Section 32(a) to avoid a prison sentence. The district court held that this defense does not apply because the defendant pleaded guilty to a statutory offense and the provision does not apply to persons “convicted of violating criminal securities laws.”

The Eight Circuit reversed. Section 32(a) provides in pertinent part that “no person shall be subject to imprisonment under this section [which provides for criminal liability for willful violations of the Act] for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.” Here Mr. Behrens pleaded guilty to a violation of Section 10(b) which by its plain terms includes a violation of a Commission rule or regulation: “It shall be unlawful . . . To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . .” Based on this language the Court concluded that Section 10(b) “makes the violation of a Securities and Exchange Commission . . rule or regulation an element of the offense.”

The Court bolstered its conclusion by citing the Supreme Court’s decision in U.S. v. O’Hagan, 521 U.S. 642 (1997). There the Court held that in criminal securities “there are two sturdy safeguards . . regarding scienter.” One is the requirement that to establish a violation of Section 10(b) and Rule 10b-5 the government must prove the person acted “willfully.” The other it that “a defendant many not be imprisoned for violating Rule 10b-5 if he proves that he had no knowledge of the rule.”

Here the district court incorrectly concluded that the “no knowledge” defense did not apply. Accordingly the case was remanded for resentencing.

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by T. GormanPosted on Posted in SECActions

The SEC filed another “suspicious purchases” insider trading case. SEC v. Compania International Financier S.A., Civil Action No. 11 CV 4904 (S.D.N.Y. Filed July 15, 2011). Typically these cases are brought against “one or more unknown purchasers” of the securities of a take-over stock. Frequently, they involve traders who have taken huge positions in naked options shortly prior to the take over announcement. The Commission’s aggressive positions in the past have frequently paid off.

In this instance the Commission had more than in the typical “unknown trader” actions – it identified the corporate entities that made the purchases. The complaint, which alleges a violation of Exchange Act Section 10(b), centers on the July 11, 2011 announcement by Lonza Group Ltd. that it planned to acquire Arch Chemicals Inc. The former is a Swiss based company. The latter is based in Norwalk, Connecticut and its shares are traded on the New York Stock Exchange. Defendant CIF is a British Virgin Islands entity with offices in Geneva, Switzerland. The other defendants are Coudree Capital Gestion S.A. and Chartwell Asset Management Services, both based in Geneva, Switzerland. Yomi Rodrik, a Turkish national, is alleged to own and/or control CIF and Coudree. Mr. Rodrik has been “sued in the past by the SEC for trading violations.”

All of the trading in the case involved the purchase of the common shares of Arch between July 5 and 8, just days before the deal announcement. In that time period:

CFI for its own account made a purchase through one firm:

  • Bank of America/Merrill Lynch in London: July 5 – purchase 30,000 shares

Courdee for its own account made a purchase through the same firm:

  • Bank of America/Merrill Lynch in London: July 5 – 15,000 shares

CFI and Coudree made joint purchases through two firms on two dates:

  • Credit Suisse Securities Ltd, London: July 6 and 8: 460,000 shares
  • Raymond James: July 5 and 8: 107,000 shares

Chantwell made a purchase through one firm:

  • Chevreaux de virie, a Paris based broker with an office in London: July 5 and 8 – 425,300 shares

The complaint states that a search of available information establishes that there was no news of the take-over available prior to the deal announcement. It also alleges that multiple accounts were used to conceal the trading.

Despite having more information than in many similar cases whether the SEC can prevail in this action will involve the resolution of a number of issues evident from the face of the complaint. First, there is no obvious source of inside information. There is no allegation that any defendant had any apparent contact with either company. Second, while the trading positions standing alone appear significant, they are not the huge option purchases taken in many similar cases. Indeed, whether these positions are significant will depend on an analysis of the trading history of each trader and the reasons offered to buy the shares.

Third, while the complaint claims that there was no public information available about the deal prior to the announcement, there was clearly some reason to trade. The complaint admits that in the days leading to the take over the share price for Arch increased 21% to $42.17. In fact the pre-announcement increase appears to have been more significant than the one following the announcement which resulted in the share price increase about $5 to $47.37. The huge pre-announcement price run appears to be based on what economists call “leakage,” a occurrence which typically precedes a deal announcement. The pre-deal share price increase here certainly suggests that there were reasons to trade the shares of Arch in the days prior to the announcement.

Fourth, while the complaint suggests that both CIF and Coudree may have been traded by the same person no facts are alleged to support the supposition. The allegation that Mr. Rodrig controlled each entity is based on information and belief. There are no facts specified to support the supposition. Likewise there is no specific claim regarding who placed the trades or that the principals of CIF and Coudree knew anyone a Chartwell. And, while the complaint states that Mr. Rodrig has been the subject of a prior Commission suit the result is not stated.

Finally, there are no facts specified to support the “information and belief” claim that multiple accounts were used as a cover. Whether the Commission can prevail in this case as it has in others may well depend on its ability to discover the facts to support the assumptions in the complaint.

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