by T. GormanPosted on Posted in SECActions

The SEC and the New York Attorney General brought high profile actions in the on-going “pay to play” cases. The new and long-rumored actions, are against the so-called car czar. The Commission’s case settled. The NYAG’s did not.

More guilty pleas were unsealed in the expanding Galleon criminal insider trading cases. As a result the SEC amended its parallel civil case and filed two additional actions. The Madoff scandal resurfaced this week with new charges being filed by the U.S. Attorney’s Office and the SEC against two employees of Mr. Maddoff’s investment advisory service. They are alleged to have managed investor funds and created false trading records to conceal the fraud.

The Assistant Attorney General in charge of the criminal division declared that this is a “new era” of FCPA enforcement (here). Mr. Breuer cited statistics demonstrating increasing enforcement efforts and urged issuers to cooperate and earn “meaningful credit.”

Finally, the Ontario securities commission brought insider trading charges against a corporate lawyer, two market professionals and their friends. The market professionals and their friends are alleged to have traded on confidential takeover information furnished by the attorney.

New York “Pay to play” — the “car czar” cases

The Commission settled its investigation regarding Steven Rattner and his involvement in the New York state pension fund “pay to play” scandal. SEC v. Rattner, Civil Action No. 10 CV 3699 (S.D.N.Y. Filed Nov. 18, 2010). Mr. Rattner is the former head of the Presidential Task Force on the Auto Industry or the so-called “car czar.” He is also a founder of Quadrangle Group LLC, a private equity fund which invested in media and communications companies. During the relevant period, Mr. Rattner was a managing principal of Quadrangle. He is also a former registered investment adviser.

The Commission’s complaint alleges that in 2005 and 2006 Mr. Rattner and Quadrangle obtained $150 million in investments from the New York State Common Retirement Fund. Prior to those investments, Mr. Rattner had arranged for the distribution of a DVD of a low budget film produced by former New York State Deputy Comptroller David Loglisci and his brother. He also agreed to pay a $1 million finders fee to Henry Morris, a top political adviser and chief fundraiser for former New York State Comptroller Alan Hevesi and Mr. Loglisci. At the time, Quadrangle had already retained a placement agent. The fee to Mr. Morris was in fact a sham, according to the complaint. Following the investment of $100 million by the Retirement Fund, Mr. Rattner arranged, at the request of Henry Morris, for friends to make a contribution to the Hevesi campaign for $50,000. Subsequently, the Retirement Fund invested another $50 million with Quadrangle.

At the time of the investment by the Retirement Fund, neither the DVD deal nor the fee arrangement with Mr. Morris were disclosed to the Retirement Fund’s Investment Advisory Committee. That group is required by state law to monitor and give advice regarding the Retirement Fund’s investments. The complaint alleges a violation of Securities Act Section 17(a)(2).

To resolve the case Mr. Rattner consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a)(2). He also agreed to pay $6.2 million and to be barred from associating with any investment adviser or broker dealer for at least two years. See also Litig. Rel. 21478 (Nov. 18, 2010). Previously, the Commission filed an action against Mr. Morris (here).

New York Attorney General Andrew Como also filed actions against Mr. Rattner based on the “pay to play” scandal. In the first the New York AG added Mr. Rattner as a defendant in his pending forfeiture action against Henry Morris and others. The suit seeks to recover $13 million obtained by Mr. Rattner and certain future profits. Cuomo v. Morris, Index No. 09/400605 (N.Y. S.Ct.). The second is a suit based on the Martin Act alleging securities fraud. State of New York v. Rattner (N.Y. S.Ct. Filed Nov. 18, 2010). The third is an application to permanently ban Mr. Rattner from engaging in the securities business in the State of New York. New York v. Rattner, Index No. 451435/2010 (N.Y. S.Ct. Filed Nov. 18, 2010). The cases filed by the New York AG are predicated on essentially the same facts as the Commission’s action. The application to bar Mr. Rattner from the securities business however is based on his assertion of the Fifth Amendment privilege in testimony during the state investigation. The SEC complaint does not mention this fact.

Madoff related cases

The U.S. Attorney’s Office and the SEC brought, respectively, criminal and civil charges against Madoff employees Joanne Crupi and Annette Bongiorno. Both defendants were employed in the investment advisory business. Ms. Bongiorno, who began working for Bernard L. Madoff Investment Securities in 1968, is alleged to have regularly created false books and records and confirmations for transactions which never occurred. She is also alleged to have created false trades in her own account. The false trades were based on transactions selected from the Wall Street Journal which met the profit requirements.

Ms. Crupi, who began working for the Madoff firm in 1983, was charged with managing the bank accounts. She monitored the balances on a daily basis. By keeping track of the funds in the investor accounts Mr. Crupi is alleged to have become aware that redemptions had no relation to the firm’s cash on hand which, by late 2008 was insufficient to meet the requests.

According to the indictment, both defendants profited from participating in the scheme. Ms. Bongiorno deposited about $920,000 in her investment account between 1975 and 2008, but withdrew over $14 million. In 2008, Ms. Crupi is alleged to have received more than $2.7 million from Mr. Madoff directly out of the firm’s bank account that held investor funds.

Both defendants were charged in a superseding indictment with conspiracy, securities fraud, falsifying books and records of a broker dealer, falsifying books and records of an investment adviser and committing tax fraud.

The SEC complaints allege violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 15(c) and 17(a) and Advisers Act Sections 204, 206(1) and 206(2). SEC v. Crupi, Civil Action No. 10-CV-8702 (S.D.N.Y. Filed Nov. 18, 2010); SEC v. Bongiorno, Civil Action No. 10-CV-8701 (S.D.N.Y. Filed Nov. 18, 2010). See also Litig. Rel. 21750 (Nov. 18, 2010).

SEC Enforcement

Investment fund fraud: SEC v. Dalton, Civil Action No. 10-CV-02794 (D. Colo. Filed Nov. 17, 2010) is an action alleging violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a)(1) against Richard Dalton and Universal Consulting Resources LLC. According to the SEC, beginning in March 2007 and continuing through June 2010, the defendants raised about $17 million from 130 investors in several states based on misrepresentations. Specifically, investors were told their funds would be held in a U.S. bank, but leveraged by a European trader who would obtain returns of four to five percent per month. Investors actually did get monthly payments, but not from trading profits. Rather, the payments were investor funds. Portions of the investor money were also diverted to support Mr. Dalton’s life style. The case is in litigation. See also Litig. Rel. 21747 (Nov. 17, 2010).

In the Matter of The Buckingham Research Group, Adm. Proc. File No. 3-14125 (Filed Nov. 17, 2010) (discussed here) is a settled administrative proceeding against Buckingham Research Group, Inc., a registered broker-dealer, Buckingham Capital Management, Inc., a registered investment adviser which is a wholly owned subsidiary of Buckingham Research and Lloyd Karp, the chief compliance officer of both entities. The Order for Proceedings alleges that the two firms failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. In addition, prior to an inspection by the Commission’s staff, deficiencies were found in key records. Rather than produce the deficient records, Respondents created the missing documents. Those records were furnished to the staff without informing them about the actual deficiencies in the records. To resolve the action, each defendant consented to the entry of a cease and desist order from committing or causing any violations and any future violations of: with respect to Buckingham Research, Section 15(f) of the Exchange Act; with respect to Buckingham Capital, Advisers Act Sections 204(a), 204A and 206(4) along with the pertinent rules; and for Mr. Karp from causing any violations of these Sections. The two firms were also ordered to comply with their undertakings. Those include retaining a consultant with respect to their procedures and essentially adopting the recommendations for improvement. Each Respondent also agreed to pay a civil penalty as follows: Buckingham Research: $50,000; Buckingham Capital, $75,000; and Mr. Karp, $35,000.

Insider trading: The Galleon cases (here): Two more guilty pleas were unsealed in this expanding insider trading case, one by Tom Hardin and a second by Franz Tudor (here). Mr. Hardin is the former Lanexa Global Management trader referred to in court papers as Tipper X according to a Bloomberg report. He pleaded guilty last December and is cooperating with the government. Mr. Tudor is a former Galleon trader who pleaded guilty last month. The government now has fourteen guilty pleas in the Galleon related cases.

Following these actions the Commission amended one complaint and filed two others:

• SEC v. Hardin, Civil Action No. 10-CV-8600 (S.D.N.Y. Filed Nov. 12, 2010) is an action against Thomas Hardin that is related to the Galleon case. The insider trading complaint details three instances in which Mr. Hardin traded on inside he obtained from Roomy Khan (here) before passing it on to others. One involved the takeover of Hilton by The Blackstone Group. A second tip concerned Google’s second quarter 2007 earnings. The third concerned the acquisition of Kronos by Hellman & Friedman.

• SEC v. Lanexa Management LLC, Civil Action No. 10-CV-8599 (S.D.N.Y. Filed Nov. 12, 2010) and SEC v. Tudor, Civil Action No. 10-CV-8598 (S.D.N.Y. Filed Nov. 15, 2010) are related to SEC v. Cutillo (here). The first is against Mr. Hardin and Lanexa while the second names Mr. Tudor as a defendant. The complaint against Mr. Hardin and the fund alleges that they traded on inside information about the acquisition of 3Com. Mr. Hardin obtained the information through a chain of tips which began at the law firm of Ropes & Gray with two attorneys, Messrs. Santarias and Cutillo, according to the complaint. The complaint against Mr. Tudor claims that he received inside information which also traces to the two attorneys. It concerned the proposed acquisition of Axcan and traded. Both cases are in litigation.

FCPA

“We are in a new era of FCPA enforcement” Assistant AG Lanny Breuer declared in remakes at a conference this week (here). The Department of Justice is stepping up FCPA enforcement which is good for business, despite the contention of some critics. Mr. Breuer focused on three key points: First, statistics demonstrate that FCPA enforcement has increased dramatically. Second, the ability of enforcers to conduct industry wide investigations is increasing as reflected in several recent cases in the shipping industry. Third, there is “meaningful” cooperation credit available for those who self report and cooperate with the government.

Criminal cases

Investment fund fraud: U.S. v. Barry (E.D.N.Y.) charged Philip Barry, an investment manager, with operating a large scale Ponzi scheme since the late 1970s. Investors were told that their funds would be invested in stock options through the Leverage Group, his business. Over time Mr. Barry stopped investing in options and used funds obtained from investors to repay those who made withdrawals. Approximately 800 investors entrusted Philip Barry with over $40 million. A jury returned a verdict finding him guilty on each of the 34 counts in the indictment including securities fraud and mail fraud. A date for sentencing has not been set.

Canada

The Ontario securities commission brought insider trading charges against two market professionals, their friends and an attorney. Paul Azeff and Korin Bobrow are employed at CIBC. Toronto lawyer Mitchell Finkelstein is a partner at Davies Ward Phillips & Vineberg. According to the charging papers Mr. Finkelstein provided Messrs. Azeff and Bobrow with inside information on four corporate takeovers in 2004, 2005 and 2007. Mr. Finkelstein’s firm was involved in the deals. The two market professionals and their friends used the information to trade. Approximately $2.6 million in illegal profits were made. In the Matter of Paul Azeff, Korin Bobrow, Mitchell Finkelstein, Howard Jeffrey Miller and Man Kin Cheng, available here.

by T. GormanPosted on Posted in SECActions

Altering compliance records prior to their production for an examination and inadequate procedures to control the flow of nonpublic information became the predicate for sanctions against a broker dealer, an investment adviser and the chief compliance officer of both. In the Matter of The Buckingham Research Group, Adm. Proc. File No. 3-14125 (Filed Nov. 17, 2010). The Respondents in this proceeding are: Buckingham Research Group, Inc., a registered broker-dealer and institutional equity research firm; Buckingham Capital Management, Inc., a registered investment adviser which is a wholly owned subsidiary of Buckingham Research; and Lloyd Karp, the chief compliance officer of both entities in which he has a small equity interest.

The two firms have a close working relationship. They share space, have common officers and about 25% of Buckingham Research’s commission revenue comes from trades by Buckingham Capital.

Both firms failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information according to the Order for Proceedings. Buckingham Research created a policy regarding the use of material research information designed to document compliance with the firm’s confidentiality policy and to make sure that analysts were aware of their responsibility to restrict the disclosure of such information. The policy was not followed, according to the Order.

In contrast, prior to February 2007 Buckingham Capital did not have a written policy to address the potential misuse of Buckingham Research’s material research information. While the firm did adopt certain practices designed to prevent misuse, they were not consistently followed.

Buckingham Capital did have policies regarding material non-public information. They were not followed. The firm also had a written Insider Trading Prohibitions policy which required that persons with access to inside information report all relationships that may result in access to such information. It was not followed.

In 2005 Mr. Karp created a compliance review log form to ensure that compliance reviews were conducted by the investment adviser. The purpose was to prevent violations of the anti-fraud provisions. There were no written procedures that adequately set forth the use of the log. Thus personnel had no uniform understanding of its use.

The firm and Mr. Karp also failed to implement remedial steps in response to deficiencies identified by the SEC exam staff despite a written representation that each item would be adequately addressed. Indeed, although Mr. Karp was aware of the compliance weaknesses and failures, he did not require correction.

Finally, as Buckingham Capital prepared for its 2006 examination, the firm learned that it was missing pre-approval forms for more than 100 employee trades during 2005. The firm also discovered that its compliance review logs were incomplete. Rather than producing the incomplete records, the firm created the missing documents and furnished them to the staff without disclosing what they had done.

The Order concludes that Buckingham Research willfully violated Exchange Act Section 15(f) and Buckingham Capital willfully violated Advisers Act Section 204A. These Sections essentially require that brokers and dealers in the case of Section 15(f) and investment advisers in the case of Section 204A establish and maintain written policies and procedures to prevent the misuse of material nonpublic information.

The Order also finds that Buckingham Capital violated: 1) Advisers Act Section 206(4), which prohibits fraud and deceptive acts, and Rule 206(4)-7, which requires the adoption of written procedures to implement the provision, by failing to adopt adequate procedures with respect to the use of the compliance log; 2) Rule 206(4)-7(b) under Section 206(4), which requires that an annual compliance review be conducted, by failing to have a review in 2005; and 3) Advisers Act Section 204(a), which provides that all records are subject to examination by the Commission, by not producing records as they existed and creating others without informing the staff.

To resolve the action, each defendant consenting to the entry of a cease and desist order from committing or causing any violations and any future violations of: with respect to Buckingham Research, Section 15(f) of the Exchange Act; with respect to Buckingham Capital, Advisers Act Sections 204(a), 204A and 206(4) along with the pertinent rules; and Mr. Karp from causing any violations of these Sections. The two firms were also ordered to comply with their undertakings which include retaining a consultant with respect to their procedures and essentially adopting the recommendations for improvement. Each Respondent also agreed to pay a civil penalty as follows: Buckingham Research: $50,000; Buckingham Capital, $75,000; and Mr. Karp, $35,000.