SEC Amends Its Complaint In NY Political Corruption/Kickback Case

In what is essentially a New York state political corruption case, the SEC amended its complaint adding two more individuals and three more entities as defendants. Last month, as discussed here, the SEC filed an action against Henry Morris, David Loglisci and three entities controlled by Mr. Morris. The complaint alleged a fraudulent scheme running 2003 to 2006 to obtain sham finder or placement agent fees in connection the investment of billions of dollars of New York state retirement funds with private equity firms and hedge fund managers. Mr. Loglisci is the former Deputy Comptroller and Chief Investment Officer of the New York State Common Retirement Fund. Mr. Morris is a top political advisor and chief fundraiser for former New York State Comptroller Alan Hevsi. SEC v. Morris, Civil Action No. 09 CV 2518 (S.D.N.Y. Filed Mar. 19, 2009).

The amended complaint adds as defendants Raymond Harding, Barrett Wissman and three entities allegedly used by Mr. Wissman in the scheme — Flandana Holdings Ltd., Tuscany Enterprises LLC and W Investment Strategies LLC.

According to the amended complaint, Mr. Wissman is a long time family friend of defendant Loglisci. He worked with Messrs. Loglisci and Morris to extract sham finder fee payments from the investment managers. Mr. Wissman, the SEC claims, was paid million of dollars in sham fees. Mr. Harding, a political ally netted $800,000 in sham fees through deals he was inserted into by defendants Morris and Loglisci. Some fee payments were funneled through off shore entities to conceal them.

In partial settlement of this action, defendants Wissman and Flandana Holdings consented to the entry of permanent injunctions prohibiting future violations of the antifraud provisions. Issues regarding disgorgement and penalties were deferred. HFV Management and HFV Asset Management also consented to the entry of permanent injunctions prohibiting future violations of Securities Act Sections 17(a)(2) and (3) and Section 206(2) of the Advisers Act. The two entities also agreed to pay a penalty in the aggregate amount of $150,000.

The amended complaint filed by the Commission follows the filing of criminal charges against Raymond Harding and Barrett Wissman by New York Attorney General Andrew Cuomo. It is based on essentially the same allegations. In that action, Mr. Wissman pled guilty to criminal violations of the New York Martin Act. Mr. Wissman will pay $12 million in penalties and forfeiture to New York State. His sentencing date has not been set.

The SEC Settles A Long Running And Significant Insider Trading Case

The SEC settled a long running and significant insider trading case. The action was initially dismissed by the district court and was later reinstated by the Ninth Circuit Court of Appeals. With the entry of a final judgment against J. Thomas Talbot, former director of Fidelity National Financial, Inc., on March 9, 2009, the case came to an end about five years after it began. SEC v. Talbot, Case No. CV 04-04556 (C.D. Cal. Filed June 24, 2004). Mr. Talbot agreed to settle the case by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Rule 10b-5. Mr. Talbot also agreed to the entry of an order requiring him to disgorge $67,881 along with $26,916 in prejudgment interest for a total of $94,797. In addition, he agreed to pay a civil penalty of $135,762. Although the complaint sought an officer and director bar, the settlement did not include this provision.

This case arouse out of the take-over of the LendingTree by USA Interactive in May 2003. Prior to that transaction, according to the Commission’s complaint, LendingTree was in negotiations to be acquired. The CEO of LendingTree, Douglas Libda, told a vice-president of Fidelity, Brent Bickett, about the proposed transaction. The consent of Fidelity would be required, since the company owned about 12% of LendingTree.

Subsequently, Mr. Bickett told William Foley, CEO of Fidelity, about the proposed transaction. Mr. Foley, in turn discussed the matter at a regular board meeting attended by Mr. Talbot. While the board was not told to keep the information confidential, one board member noted at the conclusion of the meeting that the information about LendingTree was inside information.

Two days after the board meeting Mr. Talbot purchased 5,000 shares of LendingTree at about $13.50 per share. Later he purchased an additional 5,000 shares at $14.50 per share. A few days later, on May 5, 2003, the acquisition of LendingTree was announced. Mr. Talbot sold his shares for a profit of over $67,000.

The district court granted summary judgment in favor of Mr. Talbot. The court held that the SEC had failed to establish a breach of duty because it did not demonstrate that there was a continuous chain of fiduciary relationships back from Mr. Talbot to the source of the information. The court read U.S. v. O’Hagan, 512 U.S. 642 (1997), which upheld the misappropriation theory, as requiring a continuous link.

The Ninth Circuit reversed. The circuit court held that under the misappropriation theory as defined by O’Hagan, a breach of duty is required since it supplies the key element of deception. That breach however, need not be to the shareholder involved in the trading. Rather, the breach of duty and deception runs to the source of the inside information. Stated differently, the breach runs to the source of the information who is deceived. Accordingly, a continuous chain back to the source of the information as the district court concluded is not required.

The ruling by the Ninth Circuit is significant for SEC enforcement. A ruling upholding the district court’s conclusion would have significantly narrowed the scope of liability under the misappropriation theory. In contrast, the ruling of the Ninth Circuit gives insider trading a far broader reach than the rejected continuous chain would have permitted.