More Settlements In the “Merrill Lynch/Business Week” Insider Trading Case

The SEC announced its latest settlements in the “Merrill Lynch/Business Week” insider trading case on Friday, an action which involved a wide spread serial insider trading ring. These settlements were with defendants Nickolaus Shuster, Juan C. Renteria, Jr. and Monika Vujovic, participants on the Business Week side of the scheme. SEC v. Anticevic, 05-Civ. 6991 (S.D.N.Y. Filed Aug. 5, 2005) (there are also parallel criminal actions).

The case began in August 2005, when the SEC filed an emergency action against Sonja Anticevic, a Croatian national and resident. The complaint centered on allegations of suspicious trading in out of the money call options of Reebok International just prior to the announcement that the company had agreed to be acquired by adidas-Salomon AG. The complaint claimed that Ms. Anticevic purchased 1,997 call options for Reebok at a cost of about $130,000 on August 1 and 2, 2005. When the acquisition was announced on August 3, the share price of Reebok rose almost 30%. The options in Ms. Anticevic’s account were then liquidated at a profit of over $2.4 million. That same day, the brokerage received instructions to wire $870,000 to Salzburg, Austria. The Commission however, was able to obtain an emergency freeze order preventing the transfer.

Approximately two weeks later, the SEC amended its complaint by adding a number of defendants. Specifically, the amended complaint added as defendants: David Pajcin of New Jersey, who is the nephew of Ms. Anticevic; Henry Siegel, a resident of New York; Monika Vujovic, also a resident of New York; Elvis Santana, a resident of New York; Zoran Sormaz, a resident of Croatia; Perica Lopandic, a resident of Germany; Ilija Borac, a resident of Croatia; and unknown persons trading in an account at an Austrian broker, Direktanlage.at AG. In July 2006, the three defendants who are alleged to have traded through that account were added as defendants.

The amended complaint claimed Mr. Pajcin, a former broker, placed or directed some of the Reebok trades and tipped others who placed Reebok trades. Those trades were placed in two groups on August 1 and 2. One group was through four domestic accounts. There, defendants Anticevic, Siegel, Vujovic and Santana purchased 4,097 Reebok out of the money call options representing about 80% of the buy volume in those options at that time. The second group involved foreign accounts. There defendants Anticevic, Sormaz, Lopandic and Borac purchased another 145,240 shares of Reebok through foreign accounts with the same broker. Collectively, the proceeds from the foreign trading were more than $2 million. A preliminary injunction was obtained against each defendant and freezing all of these account in September 2005.

In April 2006, the SEC filed a second amended complaint adding Eugene Plotkin, a research analyst at Goldman Sachs, as a defendant. That complaint alleged that Messrs. Plotkin and Pajcin directed a wide spread insider trading scheme which had two key facets. In one, known as the Merrill Lynch scheme, Messrs. Plotkin and Pajcin obtained confidential deal information from Merrill analyst Stanislav Shpigelman in return for a share of the profits. Using this information, defendants Plotkin and Pajcin traded in six deal stocks prior to the public announcement of the transactions. The information was also passed on to other traders in the U.S. and Europe. The Merrill Lynch scheme is alleged to have yielded over $6.4 million in illegal trading profits.

In the second, known as the Business Week scheme, Messrs. Plotkin and Pajcin recruited Nickolaus Shuster and Juan Renteria to obtain positions at the plant where the magazine was published so that advance information from about-to-be-published editions could be obtained. Using this information, defendants Plotkin and Pajcin traded in the securities of at least twenty companies yielding illicit profits of over $345,000.

In May 2006, the SEC again amended its complaint. This time, the Commission added Jason Smith, a resident of New Jersey and a postal service employee as a defendant. According to the SEC, Mr. Smith was serving on a federal grand jury investigating Bristol-Myers Squibb. Messrs. Plotkin and Pajcin recruited him to obtain information about the proceedings. Defendants Plotkin and Pajcin then used this information to trade and tipped others.

The SEC settled with Eugene Plotkin, Jason Smith, Elvis Santana and Stanislav Shpigelman in June of last year. Each defendant consented to the entry of a permanent injunction prohibiting future violations of the federal securities laws. Messrs Shpigelman and Santana were also ordered to pay disgorgement. The SEC did not seek disgorgement orders against the other settling defendants because they did not obtain any of the trading profits. Likewise, the SEC did not seek an order imposing penalties against Shpigleman, Plotkin and Smith in view of their prison sentences in a parallel criminal case.

In the settlements announced Friday, each defendant was enjoined by consent from future violations of the federal securities laws. Defendant Vujovic was also ordered to pay disgorgement of $261,364 to be satisfied by payment of all the funds in a brokerage account in her name which has been frozen since 2005. No disgorgement orders were entered against defendants Shuster and Renteria who had been paid for the Business Week information. Likewise, no civil penalties were imposed on any of the settling defendants.

This Week In Securities Litigation (March 27, 2009)

SEC Commissioner Elisse Walter outlined the current investigations the SEC is conducting related to the market crisis in congressional testimony this week. The SEC continued its stream of Ponzi scheme cases this week. The Commission also obtained emergency relief against a Chicago-based investment advisor while filing a financial fraud case based on an investigation initially conducted by Spanish Authorities. The SEC also settled another in a series of option backdating cases relating to Mercury Interactive, while dropping all such claims against Kent Roberts, former General Counsel of MacAfee.

The Market Crisis

SEC Commissioner Elisse B. Walter outlined enforcement investigations related to the current market crisis which are under way for the House Financial Services Committee as discussed here. These investigations are being conducted primarily by three working groups in addition to those related to the crash of the auction rate securities market. The groups are the Subprime Working Group, the Rumors and Market Manipulation Working Group and the Hedge Fund Working Group.

The Subprime Group has focused its investigative efforts on subprime lenders, investment banks and other large financial institutions, the sellers of securitized subprime debt, credit rating agencies, home builders and companies that provided mortgages to investors to enable them to finance securities purchases. The Rumors and Market Manipulation Group, according to Commissioner Walter, has keyed its efforts to matters such as the spreading of false rumors in combination with short selling schemes. Finally, the work of the Hedge Fund Group centers on possible Ponzi schemes and limitations on withdrawals and redemptions where customers may be unfairly disadvantaged as also discussed here.

SEC Enforcement

Ponzi schemes

SEC v. Millennium Bank, Civil Action 7:09-cv-0050 (N.D. Tex. Filed March 26, 2009) is another action in which the SEC alleged the defendants were conducting a Ponzi scheme. The Commission’s complaint alleged that defendants William Wise and Kristi Hoegel used an offshore bank, its Swiss based affiliate and their U.S. affiliates to raise over $68 million from investors. Investors were solicited to purchase certificates of deposit which defendants claimed paid extraordinary returns. In fact, the defendants simply took the investor funds according to the complaint. The SEC obtained an emergency asset freeze order in this case.

In SEC v. Donnelly, Civil Action No. 03-09CV0015 (W.D. Va. Filed March 11, 2009), the SEC obtained a preliminary injunction on March 25, 2009, by consent, freezing all assets and prohibiting future violations of the federal securities laws. The SEC’s complaint alleged that Mr. Donnelly obtained over $11 million from as many as 31 investors through a fraudulent offering scheme in which he sold limited partnership interests in three entities. To solicit investors, Mr. Donnelly claimed that he generated annual returns as high as 22%. In fact, virtually none of the money raised from the public was invested. Rather, it was used to repay other investors and Mr. Donnelly’s salary. At the time the action was brought, Mr. Donnelly was soliciting investor money for a new fund based on his claimed returns in the securities markets.

In SEC v. James, Case No. 08-61516-CIV (S.D. Fla.), the court entered a final judgment against defendant Anthony James in a Ponzi scheme case. The court ordered Mr. James, who earlier had consented to the entry of a permanent injunction, to pay approximately $2.3 million in disgorgement along with prejudgment interest and a $130,000 civil penalty. The SEC’s complaint claimed that over a seven-year period Mr. James and his investment advisory firm obtained about $5.2 million for 44 investors. Rather than invest the money, Mr. James misappropriated about half of it.

Investment adviser

SEC v. The Nutmeg Group, LLC, Case No. 09CV1775 (N.D. Ill. Filed March 25, 2009) is an action brought against an investment adviser, The Nutmeg Group, and its principals Randall and David Goulding. The complaint claims that the defendants misappropriated about $4 million in client assets, made misrepresentations to clients and failed to keep required records. The SEC obtained an emergency freeze order in this case.

Financial fraud

In SEC v. Escala Group, Inc., Case No. 09 CV 2646 (S.D.N.Y. March 23, 2009), the Commission filed an international accounting fraud case with the assistance of the Special prosecutions office for Financial Offenses relating to Corruption, Madrid, Spain as discussed here. The case was brought against Escala Group, Inc., formerly traded on Nasdaq, whose parent is Afinsa Bienses Tangibles, S.A., a Spanish company, Gregory Manning, its and Larry Lee Crawford, the CFO of Escala. The alleged fraud centered on undisclosed party transactions between Escala and its Spanish parent in the collectables market where Mr. Manning allegedly had the ability to essentially fix prices. As a result of the scheme, the share price and market cap of the company dramatically increased, according to the complaint.

The scheme ended in 2006 when Spanish authorities raided Afinsa’s offices. Charges were brought against certain individuals claiming that they had engaged in an unlawful pyramid scheme. The SEC’s complaint alleges violations of the antifraud and reporting provisions of the federal securities laws. The action is pending although there is a tentative settlement with the company.

Option backdating

In SEC v. Mercury Interactive, LLC, Case No. 07-2822 (N.D. Cal. Filed May 31, 2007) the Commission obtained another in a series of settlements. This settlement is with the former CFO of the company, Sharlene Abrams as discussed here.

The Commission’s complaint alleged that Ms. Abrams and others engaged in a scheme to backdate options grants to themselves and others from 1997 through 2005 as a form of secret compensation. In addition, the SEC also claimed that there was false disclosure during the same period regarding a backlog of sales revenue and that the defendants structured fraudulent loans for options exercised by overseas employees to avoid recording expense.

Ms. Abrams settled by consenting to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and proxy provisions and agreeing to the entry of an order requiring the payment of about $2.2 million in disgorgement along with prejudgment interest and a civil penalty of $425,000. She also agreed to be barred from being an officer or director of a public company and consented to the entry of an order in an administrative proceeding under Rule 102(e)(3) barring her from appearing or practicing before the SEC as an accountant.

In SEC v. Roberts, Case No. 07-CV-00407 (D.D.C. Feb. 28, 2007) the Commission dropped all claims against Kent Roberts, the former General Counsel of McAfee as discussed here. The dismissal with prejudice of the SEC’s complaint follows his acquittal on criminal charges last fall which were based on similar allegations. U.S. v. Roberts, Case No. 1:07 cv 00407 (N.D. Cal. Feb. 28, 2007). In that case, the jury acquitted Mr. Roberts on two counts of securities fraud which were based on option backdating claims, but was unable to decide a third count based on falsifying records. That count was later dropped at the suggestion of the trial judge as discussed here. The SEC had claimed that Mr. Roberts engaged in securities fraud in violation of the antifraud and proxy provisions of the federal securities laws in connection with an option backdating scheme.