BLUE COLLAR TACTICS IN WHITE COLLAR CASES – CROSSING THE POND

Blue collar tactics in white collar cases has become the topic of discussion in the wake of the Galleon insider trading cases, discussed here. Informants, wire taps and wires were used in the Galleon investigation, yielding some of the most significant insider trading cases in years. While this was not the first time that tactics more typically seen in organized crime cases have been used in white collar prosecutions, it is one of the most high profile.

Now, however, these tactics seem to have crossed the pond. The UK’s FSA is adopting these tactics in a get tough campaign on insider trading. Shaking off critics who claimed the regulator is not aggressive, this week the FSA teamed up for the first time with London’s Serious Frauds Office in what is being called its biggest enforcement effort. The FSA and FSO dispatched 143 agents on a raid of 16 London and South England homes and business locations as part of an insider dealing investigation which has been underway for the two years. The agents seized documents and computers which supposedly are part of a large, long running insider dealing ring.

Six individuals were arrested during the raid, including an executive from Deutsche Bank, a senior employee of BNP Paribas, and a trader at New York City-based hedge fund Moore Capital, who supposedly was using his personal rather that firm accounts. The FSA apparently believes that London city professionals are passing inside information to traders either directly or through middlemen. Prior to this week, there have been five arrests in connection with this investigation.

In the last two years, the FSA has obtained convictions in six insider dealing cases. The agency currently is prosecuting three other criminal insider trading cases. As part of its campaign against insider dealing, the FSA is reportedly adopting the techniques of its U.S. counterparts, including the use of co-operating witnesses and telephone taping. Last week, the regulator proposed requiring London firms to record and retain conversations on mobile phones provided to employees to help track market abuse.

PONZI SCHEMES: THE NEW ENFORCEMENT STAPLE

Ponzi scheme cases continue to be the new staple of the Enforcement Division. While they come in all sizes and shapes, the overriding feature of each is a promise of great returns and safety. The only great returns, of course, go to the promoters who have the safety of good cash flow from investors – at least until they get caught.

SEC v. American Settlement Associates, LLC, Case No. 4:10-cv-00912 (S.D. Tex. Mar. 19, 2010) fits the pattern. Investors were promised great returns and safety for their investments. The promoters, here defendants Charles Jordan and Kelly Gipson, got rich at least for a while.

The scheme centered on the sale of an investment product known as a “viatical” or “life settlement.” This is a fractionalized interest in life insurance policies. Messrs. Jordan and Gipson, through their controlled entity American Settlement, began soliciting investor funds for their viatical offering in March 2007, the year the company was incorporated.

Defendants acquired a $5 million policy in the name of a particular insured through a life settlements broker. They raised over $3.7 million from approximately 50 investors in 10 states by selling fractionalized interests in the policy, according to the complaint. Investors were promised returns ranging from 42% to 48% after approximately three and one half years. These returns were promised even if the insured lived beyond the projected time period. In that event, a bonding company was supposed to step in and pay the promised returns. Overall the investors were promised a safe investment in which future premiums were covered and a high rate of return.

In fact, the representations were false. The defendants failed to put aside funds to pay premiums. The bonding company which was supposed to ensure the payments was, in fact, unlicensed to provide insurance in the U.S. Approximately $2.3 million in investor funds were used by the individual defendants to support their lifestyle. The policy lapsed when the premiums were not paid.

The SEC’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). A freeze order and the appointment of a receiver was obtained. The case is in litigation. See also Litig. Rel. 21458 (Mar. 22, 2010).