From Capital Hill, the SEC heard expressions of concern this week about the fact that its proposed rules regarding high speed trading, dark pools and market structure will not take effect until next summer. The Commission also received evidence about its renewed insider trading investigation into Pequot Capital Management.
Securities enforcement for the SEC and DOJ was dominated by cases involving investment fund fraud and insider trading, continuing trends from earlier in the year. DOJ also brought another FCPA case, while FINRA fined a firm and others for failing to properly supervise soft money payments for its hedge fund clients.
Market reform
High frequency trading: Senator Edward Kaufman, a member of the Senate Banking Subcommittee for Securities, Insurance, and Investments, sent a letter dated November 20, 2009 to SEC Chairman Mary Schapiro expressing concern regarding the Commission’s actions on high speed trading. Specifically, the letter recounts testimony before the Senate Committee raising concerns about high frequently trading, dark pools and other market structure issues and applauds the Commission’s efforts on these subjects. Senator Kaufman goes on to note that the proposed rules will not take effect until the middle of next year. Accordingly, the Senator wants the SEC to identify what action can be taken in the interim regarding these practices.
Joint SEC/CFTC Orders on Volatility Indexes and Security Futures. Under one order, futures on foreign and domestic volatility indexes that meet the criteria specified in the order are considered “broad based security indexes” and subject to the exclusive jurisdiction of the CFTC. Options on these volatility indexes are subject to the jurisdiction of the SEC. The second order allows security futures products based on any security eligible to underlie an exchange listed security option, including certain unregistered debt securities.
Pequot investigation: Senators Charles Grassley and Arlen Specter sent a letter to SEC Chairman Mary Schapiro regarding the renewed insider trading investigation of Pequot Capital Management Inc. and its founder Arthur Samberg. According to the letter, former Pequot employee David Zilkha told his therapist he was fired by the hedge fund because he stopped providing inside information. The letter also notes that Mr. Zilkha invoked his Fifth Amendment rights more than 100 times in a sworn interview on October 20 when asked about his finances.
SEC enforcement actions
Investment fund fraud: SEC v. Cook, Case No. 09 CV 3333 (D. Minn. Filed Nov. 23, 2009) names as defendants Trevor Cook, Patrick Kiley and their controlled entities. The complaint alleges that the defendants raised at least $190 million from over 1,000 investors beginning July 2006 through the sale of unregistered investments in a purported foreign currency trading venture. The complaint claims the defendants falsely told investors each would have a separate account in which foreign currencies would be traded that would generate returns of 10 to 12%. In fact the funds were pooled and large amounts were misappropriated. The SEC obtained a freeze order. The case is in litigation. See also Litig. Rel. 21313 (Nov. 24, 2009). The CFTC filed a parallel action. CFTC v. Cook, Case No. 0:09-cv-03332 (D. Minn. Filed Nov. 23, 2009).
Insider trading: SEC v. Dunn, Case No. 2:09-cv-02213 (D. Nev. Filed Nov. 19, 2009) is an insider trading action brought against R. Brooke Dunn, former executive at Shuffle Master, Inc., and Nicholas Howey. According to the Commission, after Mr. Dunn learned that Shuffle Master would have disappointing preliminary financial results in February 2007, he called Mr. Howey and tipped him. Following the call Mr. Howey immediately sold all of his stock and calls for the company and purchased Shuffle Master puts. Following the announcement by the company of its results the next day, Mr. Howey sold the positions he had purchased the prior day, yielding a profit (or avoided losses) of about $237,000. The case is in litigation. See also Litig. Rel. 21308 (Nov. 19, 2009).
Insider trading: SEC v. Donovan, Case No. 08 CA 10649 (D. Mass. Filed April 16, 2008) is an action against David Donovan, a former Fidelity equity trader and David Hinkle, a former registered representative at Capital Institutional Services. The SEC claimed that Mr. Donovan accessed the data base at Fidelity, learned that the firm planned to make substantial purchases of Covad securities and used the information to trade in his mother’s account and tipped Mr. Hinkle. The jury, following a week long trial, found Mr. Donovan liable, but rejected the Commission’s claims as to Mr. Hinkle as discussed here.
Insider trading. SEC v. Hashemi, Civil Action No. 09-CV-6650 (S.D.N.Y. Filed July 27, 2009) is an insider trading case in which the defendant settled with the SEC by consenting to the entry of a permanent injunction and agreeing to pay disgorgement and a penalty equal to the amount of the disgorgement. After entering the consent decree, the court, on its own motion, vacated it and set up a status conference, as discussed here. The defendant is Khaled Al Hashemi, a citizen and resident of Abu Dhabi, UAE. As discussed here, the complaint is based on trading in advance of a merger announcement made on February 23, 2009 involving Nova Chemicals.
Investment fund fraud: SEC v. Capital Mountain Holding Corp., Civil Action No. 3:09-CV-02222-F (N.D. Tex. Filed Nov. 23 2009) names as defendants Capital Mountain Holding Corporation, its president Derek Nelson and two other entities controlled by Mr. Nelson as discussed here. Over an eighteen month period beginning in June 2008, the defendants raised over $25 million from unsuspecting investors. The funds were raised by selling promissory notes through a website and Canadian based investment club. Investors were told their money would be put in distressed properties which would be rehabbed and then sold and that they would receive significant interest payments. The representations by Mr. Nelson, Capital Mountain and the other entities were, according to the SEC, false. In fact, much of the money was used to make Ponzi payments to investors and purchase items for Mr. Nelson. The scheme collapsed in the summer of 2009.
At present the action is partially resolved. The defendants consented to the entry of permanent injunctions prohibiting future violations of the sections cited in the complaint. They also agreed to the entry of a freeze order and the appointment of a receiver. The Relief Defendants, alleged to have received portions of the investor funds, have also consented to the freeze order. See also Litig. Rel. 21311 (Nov. 23, 2009).
Investment fund fraud: SEC v. Shidaal Express, Inc., Case No. 09 cv 2610 (S.D. Cal. Filed Nov. 19, 2009) named as defendants Shidaal Express, Inc. and its principal, Mohamud Abdi Ahmed. The complaint alleges a fraud in which Mr. Ahmed raised over $3 million from 40 investors for his alleged stock trading business as discussed here. Investors were promised exorbitant returns of 5% per month or 60% per year. They were assured that the investment was safe. Portions of the investor funds were used to repay others. Other portions of the money were misappropriated. The case is in litigation.
Criminal cases
U.S. v. Pizzolato, Case No. 2:09-cr-00378 (E.D. La. Filed Nov. 20, 2009) charges Matthew Pizzolato with operating a Ponzi scheme. According to court papers, Mr. Pizzolato raised about $19.5 million from 160 investors. The money was raised through several entities the defendant allegedly controlled. Investors were told that the funds would be safely invested and pay above average returns. In fact, portions of the money were put in high risk futures trading and other risky ventures. Other portions were misappropriated. Mr. Pizzolato was charged with 52 counts of mail, wire and securities fraud as well as money laundering and one count of witness tampering and one count of obstruction of justice.
FCPA
U.S. v. O’Shea, Case No. 4:09-cr-00629 (S.D. Tex. Filed Nov. 16, 2009) charges John O’Shea in an 18-count indictment with conspiracy, violations of the FCPA, money laundering and the falsification of records. The case centers on a scheme involving the award of contracts from Mexican utilities, including CFE, to the Texas business unit of a Swiss company. The Texas business unit used a Mexican company as its representative. Fernando Maya Basurto was employed by that company and participated in the scheme.
According to the court papers, one contract was awarded in 1997 to Mr. O’Shea’s company to upgrade the backbone of Mexico’s electrical system. It generated more than $44 million in revenue for the company. In October 2003, CFE awarded the company a second multi-year contract for maintenance and upgrades known as the Evergreen contract. Under that agreement, which generated more than $37 million in revenue for the company, 10% was kicked back to CFE officials while another 1% went to Mr. O’Shea. More than $900,000 in corrupt payments were made to CFE officials before the deal was discovered as a result of an internal investigation and halted. Subsequently, the company self-reported to DOJ.
Mr. Basurto pleaded guilty in connection with the scheme to a one count information charging him with conspiracy in connection with his role in the scheme.
FINRA
Terra Nova Financial, LLC, Chicago, and two current and one former employee were sanctioned in connection with their failure to properly supervise, as well as implement their own policy, regarding soft dollar payments they made on behalf of hedge fund clients. FINRA requires that firms properly supervise such payments to ensure that they are proper.
Here, the firm was fined $400,000 for making more than $1 million in improper soft dollar payments. Cleovan Jordan, the firm’s soft dollar administrator who managed the relationship with the clients, was suspended from associating with a securities firm for 30 days and fined $20,000. Joshua Teube, who supervised the soft dollar operations, was charged with failure to supervise and suspended from acting in a supervisory or principal capacity for 20 days and fined $15,000. David Persenaire, formerly the firms Chief Compliance Officer, was charged with failing to ensure the implementation of adequate written systems and procedures. He was suspended from acting in a supervisory or principal capacity for 10 days, fined $10,000 and required to pass a Compliance Official Qualifications Exam.
