As the jury considers the fate of Raja Rajaratnam in the largest insider trading case brought in years, the Commission continued to implement Dodd-Frank, issuing more proposed rules. The Supreme Court heard oral argument this week in a case which may significantly impact the class certification process in securities class actions.
Insider trading continued to dominate securities litigation. A defendant in the expert network cases pleaded guilty. The Commission filed a settled insider trading case against a former hedge fund manager and partially settling another. And, in an administrative proceeding an initial decision was rendered against the Respondent fund employee in an insider trading action.
Market Reform
The SEC issued two sets of proposed rules this week in connection with it on-going efforts under Dodd-Frank:
• One set is part of a continuing review regarding references to credit rating agencies. This week draft rules were issued to remove references to the agencies in the Net Capital Rule for Broker-Dealers and in the definition of Major Market foreign Currency (here).
• A second set defined the terms “swap” “security-based swap,” and “security-based swap agreement” were issued (here).
Supreme Court
The Court heard oral argument in Erica P. John Fund, Inc. v. Halliburton Co., No 09-1403. The issue to be determined is whether plaintiffs in a securities fraud class action must establish loss causation at the class certification stage. The case is on review from a decision of the Fifth Circuit which crafted a rule requiring securities law plaintiffs to establish loss causation by a preponderance of the evidence at the certification stage (here). None of the parties advocated the Fifth Circuit standard at oral argument.
SEC Enforcement
Insider trading: SEC v. Hollander, Civil Action No. 11-CV-2885 (S.D.N.Y. Filed April 28, 2011) is a settled insider trading action against Jonathan Hollander, a former hedge fund professional. The case centers on the acquisition of Albertsons, LLC by a group of buyers announced on January 23, 2006. Prior to the announcement Mr. Hollander learned about the deal from a friend employed by Albertsons financial advisor. Subsequently, Mr. Hollander told a family member and a friend. Each traded in the securities of Albertsons. Mr. Hollander purchased shares of stock while the family member and friend each acquired options. After the deal announcement each trader sold yielding profits for Mr. Hollander of $17,742, for the family member of $72,815 and the of friend, $5,250. Mr. Hollander settled the case, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b). He also agreed to pay $95,807 in disgorgement plus prejudgment interest and a civil penalty equal to the amount of the disgorgement.
Investment fund fraud: SEC v. IU Group, Inc., Civil Action No. CV 11-00556 (C.D. Ca. Filed April 22, 2011) is an action against the company, its principal Elijah Bang and its salesman, Daniel Lee. The defendants were soliciting investors for their hedge fund, targeting devoted Christians, retirees and university professors. They falsely claimed the fund had a successful operating history, that most of its clients were professional athletes, actors, and professionals and that there was over $800 million under management. On May 19, 2009 the California Department of Corporations ordered the defendants to cease and desist from their sales efforts. To date defendant apparently have not secured any investors. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Advisers Act sections 206(1) and 206(2). A temporary freeze order was obtained. The case is in litigation.
Investment fund fraud: In the Matter of Robert David Beauchene, Adm. Proc. File No 3-14353 (April 22, 2011) is an action against an unregistered investment adviser who raised about $160,000 from four investors between August 2005 and July 2007. Investors were falsely told that their funds would be placed in Rhombus Amalgamated Enterprises, Inc., a hedge fund with $10 million in assets under management. They were also told their investment would earn returns of 10-20%. Those returns supposedly came from trading based on analytical models developed by the fund. In fact the fund was little more than bank accounts containing the investor cash. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The action is proceeding to hearing.
Market manipulation: In the Matter of Huntleigh Securities Corporation, Adm. Proc. File No. 3-14354 (April 25, 2011); In the Matter of Donald L. Koch, Adm. Proc. File No. 3-14355 (April 25, 2011). The former is settled while the latter will be set for hearing. Huntleigh Securities names as Respondents the broker dealer and Jeffrey Christanell, formerly employed at the firm as Head of Institutional Trading. Donald L. Koch names as Respondents Mr. Koch who is the founder, President and Chief Compliance Officer of Respondent Koch Asset Management LLC. The firm is a registered investment adviser that provides advisory services to about 40 discretionary accounts containing approximately $40 million in assets. The two Orders allege that from September 30, 2009 through the end of the year Mr. Koch instructed the broker to purchase certain thinly traded securities at the close to push up the price. In some instances the strategy was successful. In some it was not.
The Hunderleigh Order alleges violations of Exchange Act Sections 10(b) and 15(b)(4)(E), failure to supervise. Respondent Christanell was ordered to cease and desist from committing or causing violations, and any future violations, of Section 10(b). In addition, he was barred from the securities business with a right to reapply after one year and was directed to pay a civil penalty of $15,000. The firm was censured and directed to comply with a series of undertakings. The Order regarding Mr. Koch and his firm alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4) and 204. The case is proceeding to hearing.
Unregistered broker: SEC v. Sky Way Global LLC, Case No. 8:09-cv-445 (M.D. Fla. Filed March 13, 2009) is an action against Kenneth R. Kramer who is one of several defendants in the case. The underlying action centers on a pump-and-dump scheme. The SEC did not claim that Mr. Kramer was involved in the scheme which is at the center of the complaint. Rather the complaint claimed he acted as an unregistered broker, helping find potential shareholders for Sky Way. Following trial the Court rejected the SEC’s claims. While Mr. Kramer did receive compensation based on the fact that his family and friends purchased shares the Court found that his activities were limited to sharing his opinion that Sky Way was a good company and investment and directing their attention to Sky Way’s web site and press releases. This, without more, is not sufficient to conclude that he acted as a broker under Exchange Act Section 15(b).
Insider trading: In the Matter of David W. Bladt, Adm. Proc. File No. 3-13887 (Initial Decision April 21, 2011) is an insider trading case against the head portfolio manager at the Philadelphia office of Schroder Investment Management. The Order alleged that Mr. Bladt tipped members of his family about the condition of the fund he managed. At the time the market crisis was unfolding and the fund was suffering liquidity difficulties and facing significant redemptions. Based on a conversation one family member had with Mr. Bladt in which he suggested she liquidate her holdings, four family members attempted to redeem their interests. Following an internal investigation most of the requests were blocked. After a hearing the ALJ concluded that Mr. Bladt violated Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). Accordingly a cease and desist order was entered based on those Sections. Mr. Bladt was also barred from association with an investment adviser and ordered to pay disgorgement based on the redemptions of the family members. The ALJ declined to order a penalty, finding there was no significant harm to others, no person was enriched in a material way and in view of Mr. Bladt’s years of service in the industry.
Insider trading: SEC v. Garcia, Civil Action No. 10C 5268 (N.D. Ill. Filed Aug. 20, 2010). This week the Commission settled with defendant Jose Fernandez Garcia. Defendant Martin Carlo Sanchez is litigating the case. The complaint alleges insider trading in advance of the announcement of the bid by Potash Corporation for BHP Billton Plc. Both men took large positions in the options market shortly prior to the deal announcement. Both traded through Interative Brokers. Both profited following the deal announcement. To settle Mr. Garcia consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). He also agreed to disgorge his trading profits of $576,033 and pay a civil penalty of $50,000.
Criminal cases
Insider trading: U.S. v. Longueuil (S.D.N.Y.) is one of the “expert network” insider trading cases. The defendant is former portfolio manager Donald Longueuil (here). In essence the indictment alleges that over a four year period beginning in 2006 Mr. Longueuil and others engaged in a conspiracy to trade on inside information in the shares of numerous public companies including Marvell Technology Group, Ltd., Fairchild Semiconductor Corporation, Advanced Mirco Devices, Inc., Actel Corporation and Cypress Semiconductor Corporation. Frequently the conspirators communicated with, and paid their sources of information through, an expert networking firm. Mr. Longueuil pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud and wire fraud. Sentencing is scheduled for July 29, 2011.
FCPA
U.S. v. Noriega, Case No. 2:10-cr-01031 (C.D. Ca.) is an FCPA case currently on trial. The pending indictment charges defendants Keith Lindsey, President of privately owned Lindsey Manufacturing, Steve Lee, Vice President and CFO of the company and Lindsey with conspiracy to violate the FCPA as well as substantive violations. The defendants are alleged to have paid bribes to two high ranking employees of the Comision Federal de Electricidad or CFE, an electric utility company wholly owed by the Mexican government.
The defendants moved to dismiss the indictment claiming that officers and employees of state owned enterprises are not foreign officials within the meaning of the FCPA. The court rejected the claim based largely on the definition of the term “instrumentality” in the definition of a foreign official. Although both sides claimed the legislative history supported them, the court concluded it is equivocal.
