by T. GormanPosted on Posted in SECActions

DOJ and SEC officials repeatedly encourage cooperation. There are benefits for both sides. Cooperation can facilitate the Government’s investigation, providing a road to the scheme. Testimony can aid in obtaining a favorable result. For the cooperator there is the promise of cooperation credit – a shorter sentence in a criminal case for an individual or a lesser fine. Frequently, the value in a criminal case can be seen in the sentencing guideline calculation. While in an SEC enforcement action there is also the prospect of cooperation credit, its value may be more difficult to determine since Commission remedies are not churned out by a formula.

The Commission’s recent settlement with cooperator Frank Tamayo is an illustration of cooperation credit given by the agency, according to an agency press release. SEC v. Tamayo, Civil Action No. 3:14-cv-09844 (D. N.J.). Mr. Tamayo was the man in the middle of an insider trading ring composed of three friends. He had been friends with Steven Metro since law school. Mr. Metro later became a managing clerk at Simpson Thatcher. He has also been friends with Vladimir Eydelman, a registered representative with Oppenheimer & Co., for years.

The scheme traced to February 2009 at a New York City bar. Messrs. Tamayo and Metro met with friends for drinks but separated and discussed stocks. One was Mr. Tamayo’s holdings in Sirius XM Radio. Mr. Tamayo expressed concern that the firm would go bankrupt. Mr. Metro told his friend that it would not because Liberty Media Corporation planned to invest over $500 million in the company. He knew this from reviewing Simpson Thatcher documents he assured his friend.

Subsequently, the two men called broker Eydelman and ordered additional Sirius shares for Mr. Tamayo’s account. When the Liberty-Sirius deal was announced on February 17, 2009 Mr. Tamayo had potential profits of about $157,892. His friend had profits of about $54,922. When Mr. Tamayo offered $7,000 to his friend as a “thank you” he was told to keep it in his account.

From this beginning a scheme unfolded in which the men traded on inside information stolen from Simpson Thatcher thirteen times. The mechanics of the scheme were designed to shield the three from capture. Mr. Metro accessed the law firm’s non-public information through the computer system to identify possible corporate transactions. Messrs. Metro and Tamayo then met, typically met a New York City coffee shop. Mr. Metro would signal his friend the name of the stock and/or its ticker symbol. Messrs. Eydelman and Tamayo would meet later near the information booth in Grand Central Station. Another signal transmitted the name of the company whose shares were to be acquired. Mr. Eydelman then returned to his office and researched the company. Reports with a recommendation would be transmitted to Mr. Tamayo. The stock would be purchased. Profits made.

The plan seemed fool proof. It yielded about $5.6 million in trading profits. But it failed. The SEC and the U.S. Attorney’s Office for New Jersey brought charges. Mr. Tamayo decided to cooperate with the authorities.

Based on what the SEC termed “extensive cooperation” he resolved the civil enforcement action. Under the terms of the agreement Mr. Tamayo consented to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). He was also ordered to pay disgorgement of over $1 million. That amount will be deemed satisfied by the entry of orders of forfeiture or restitution in the parallel criminal case where he has pleaded guilty. No monetary penalty was imposed. He is also obligated to continue cooperating with the authorities. The settlement is subject to court approval. See Lit. Rel. No. 23202 (July 13, 2015).

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by T. GormanPosted on Posted in SECActions

When does a 180 day deadline not mean that in 180 days time is up? Answer: When the SEC says so and the DC Circuit gives the conclusion Chevron deference. That is the holding of Montford and Company, Inc. v. SEC, No. 14-1126 (Decided July 10, 2015).

The decision centers on the meaning of Exchange Act Section 4E which provides that not “later than 180 days after the date on which Commission staff provides a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action.” The Section was added to the Exchange Act as part of Dodd-Frank. Petitioners Montford and Company, a registered investment adviser, and Ernest Montford, its founder, claimed this provision was violated when an enforcement action was brought against them. They learned that 180 days in not 180 days if the SEC says so.

The underlying action is straight forward. Montford advises institutional investors. The firm claims in advertisements that is independent and conflict free. The adviser represents in its Form ADV that it is independent, avoids material misrepresentations in any investment recommendations and would disclose any matter that could reasonably impair its recommendations or make them unbiased.

In 2003 the firm began recommending Stanley Kowalewski, an investment manager specializing in hedge funds. When Mr. Kowalewski told the adviser in 2009 that he was leaving his current employment to launch his own firm, SJK Investment Management LLC, Mr. Montford stated he would try and convince clients to follow. Over a period of months Mr. Montford and his staff provided substantial assistance in transferring clients to the new enterprise. Nine clients transferred their accounts.

In view of the work involved with the transition Mr. Kowalewski agreed to pay the adviser $130,000. None of the clients were told about the payment. Later, when the clients learned about the payment many terminated their relationship.

In March 2011 the Commission issued the firm and Mr. Montford a Wells notice. 187 days later the SEC instituted an administrative proceeding alleging violations of the anti-fraud and reporting sections of the Advisers Act. A motion to dismiss based on Section 4E was denied by the ALJ who concluded that an extension had been granted by the Director of the Division of Enforcement because it was a complex matter. Eventually, the adviser and its principal were found liable and sanctioned. Disgorgement, a penalty and an industry bar were ordered. On appeal the SEC affirmed, concluding that even absent the extension of time from the Director, Section 4E does not require dismissal because it is essentially an internal deadline and not jurisdictional.

The DC Circuit affirmed. The Court concluded that the SEC’s interpretation was reasonable and entitled to deference. When a court reviews an agency construction of its statute there are two questions, according to the Court. The first is whether Congress has directly spoken to the issue. If it has and the answer is clear, the matter ends. If the statute is silent or ambiguous on the point the question for the reviewing court is if the agency conclusion is a permissible construction of the statute.

In this case the Court held that it did “not owe the Commission’s interpretation any less deference because the Commission interprets the scope of its own jurisdiction . . . Nor is it relevant that the Commission’s interpretation is the result of adjudication, rather than notice-and-comment rulemaking.” This is because for “traditional agencies” such as the SEC, adjudication is an appropriate forum in which to exercise lawmaking by interpretation.

Section 4E is ambiguous within the meaning of Chevron, the Court concluded. By not stating a consequence for exceeding the 180 days Congress has not addressed the issue. Viewed in this context, the SEC’s interpretation of the provision as not being jurisdictional or requiring dismissal even absent an extension is reasonable. That conclusion is based on a finding that such deadlines are for internal purposes only. In U.S. v. James Daniel Good Real Property, 510 U.S. 43 (1993) the Court held that when “’a statute does not specify a consequence for noncompliance with statutory timing provisions, the federal courts will not in the ordinary course impose their own coercive sanction.’” Likewise, there is nothing in the text or structure of Section 4E that “overcomes the strong presumption that, when Congress has not stated that an internal deadline shall act as a statute of limitations, courts will not infer such a result,” the Court concluded

While Petitioners are correct that the statute is written in mandatory terms, and argue that its purpose and legislative history all establish that the deadline is to be mandatory, this simply demonstrates that the Section is ambiguous. Petitioners have failed to demonstrate that the SEC’s interpretation is unreasonable.

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