A QUICK AND EFFECTIVE SEC ENFORCEMENT EFFORT

Much has been written about the rejuvenation of SEC enforcement. No doubt much more will be written in the future. Perhaps the insider trading case filed Wednesday is a harbinger of good things to come for SEC Enforcement. SEC v. Saleh, Case No. 3:09-cv-01778 (N.D. Tex. Filed Sept. 23, 2009).

On Monday, September 21, 2009, Dell, Inc. announced the acquisition of Perot Systems at $30 per share for a total of approximately $3.9 billion. Following the announcement, the share price of Perot Systems shot up about 65% to close at just under $30 per share from the prior day close of just under $18 per share.

Two days later, the SEC filed its insider trading case against Reza Saleh. The complaint alleges that Mr. Saleh traded options in advance of the merger based on inside information, reaping huge profits.

Mr. Saleh is not an employee of either company. The assertion that Mr. Saleh traded based on inside information is predicated on conversations he had with other employees, violations of company policy and large option trades. Drawn from what was clearly a very quick investigation, the complaint alleges that:

• Mr. Saleh is employed by Parkcentral Capital Management, L.P. through which he did work for non-public affiliate Perot Investments, Inc. and Perot Systems. He also has two e-mail accounts, one of which is a Perot Systems account.

• On or before September 8, 2009 – the deal negotiations began on September 4, 2009 — Mr. Salem asked questions of a Perot Systems director who also is a director of Parkcentral that “demonstrated Saleh’s awareness of material, nonpublic information about a pending transaction pursuant to which Perot Investments would be acquired at a ‘premium.’” The conversations confirmed the deal was moving forward.

• After the SEC contacted Mr. Saleh, he made statements to the same director and another employee acknowledging that the bought stock based on his knowledge about the deal.

• Between September 4, 2009 and September 18, 2009, the last trading day before the deal announcement, Mr. Saleh purchased through two accounts 9,332 call options expiring in October 2009 and January 2010. Following the September 21 announcement the options were sold, generating over $8.6 million in profits.

• Mr. Saleh’s trading violated the policies of the company which required pre-notification for any trading in the shares of a public company and which also specified that any open positions be maintained for at least 30 days unless closed to a loss.

Based on these facts, the Commission filed an insider trading complaint against Mr. Saleh. Previously TD Ameritrade, Inc., where the two accounts were located, froze the trading profits. The case is in litigation.

This case is an example of the aggressive posture of SEC enforcement in insider trading cases. While a careful reading of the allegations in the complaint suggest the Commission’s evidence is not definitive, overall it represents a very quick and effective investigative effort by the Commission, coordinating with the Options Regulatory Surveillance Authority. Gathering the relevant trading records, quickly interviewing key players in the transaction and filing a complaint within two days is clearly a good enforcement effort.

BE CAREFUL WHO YOU PARTNER WITH

The SEC’s enforcement action against Regions Bank should serve as a warning to issuers as well as their directors, officers and general counsels about their business partners. SEC v. Regions Bank, Civil Action No. 09-CV-22821 (S.D. Fla. Filed Sept. 21, 2009); In the Matter of Regions Bank, Adm. Proc. File No. 3-13618 (Filed Sept. 21, 2009). In the civil injunctive action, the SEC alleged that the bank aided and abetted its business partners’ violations of Exchange Act Section 15(a)(1). In the administrative proceeding, the Commission claimed that the bank was a cause of the same partners’ violations of Sections 17(a)(2) & (3) of the Securities Act.

Regions Bank, a subsidiary of Regions Financial Corporation, is an Alabama state chartered institution which provides banking services in sixteen states. In 2001, the bank entered into a business relationship with unregistered broker dealers U.S. Pension Trust Corporation and U.S. College Trust Corp., both of which are based in Florida (collectively USPT). USPT used a network of 2,000 unregistered sales agents to sell mutual funds from well-known U.S fund companies through several retirement and college investment plans primarily to investors in Latin America. Investors entered into arrangements under which they either made multiple year annual contributions or a lump sum payment.

Under its arrangement with USPT, the bank served as a trustee of the plans and entered into individual trust agreements with each investor. Based on instructions from USPT, the bank distributed part of the investor funds to that company while the remainder was used to purchase mutual funds. In soliciting investors, USPT did not disclose to until March 2006 that it took up to 85% of their annual contributions and as much as 18% of investors’ lump-sum contributions. The bank deducted these sums from the amounts it received from investors. USPT took part of these amounts as profits and used the balance to pay commissions to its salesman and for insurance premiums. The bank then sent statements to investors showing the total amount of their investment, but not the amount paid in fees. According to the SEC, the bank knew or should have known that the extremely high commissions charged by USPT were not disclosed to investors.

From 1995 to the present, according to the SEC, over $255 million was received from about 14,000 investors and placed in the USPT plans. Regions Bank held about $95 million in mutual fund assets on behalf of approximately 11,000 investors.

The bank assisted in soliciting investors by providing USPT with a short video that featured two of its employees from the trust department touting the history of Region’s trust services. USPT also used the name of the bank and its history in other promotional materials to assure investors about the safety of their investment. Both US. Pension Trust and U.S. College Trust were named as defendants in a Commission enforcement action filed in 2007. SEC v. U.S. Pension Trust Corp., Case No. 07-22570 (S.D. Fla. Filed Sept. 28 2007). That action, which is in litigation, alleges violations of the antifraud provisions of the securities laws in connection with soliciting investors for the plans. See also Litig. Rel. 20315 (Sept. 28, 2007).

To settle the action, Regions Bank consented to the entry of a cease and desist order in the administrative proceeding. In the civil injunctive action the bank agreed to pay a civil penalty of $1 million which will be paid into a Fair Fund for the benefit of investors. See also Litig. Rel. 21215 (Sept. 21, 2009).