The Commission prevailed in three litigated decisions. The agency secured a favorable jury verdict in an action centered on an offering fraud. In two other cases — one based on misrepresentations regarding the only company product and a second alleging an investment fund fraud – the SEC prevailed on summary judgment motions.
The SEC also brought its first action centered on high-speed trading, alleging that a firm marked the close repeatedly over a six month period. In addition, actions were brought based on the failure of a broker to produce documents during an investigation, for aiding and abetting violations of the broker registration requirements and for insider trading and investment fund fraud.
SEC
Remarks: Commissioner Michael S. Piwowar delivered remarks at the Securities Enforcement Forum 2014, Washington, D.C. (October 14, 2014). His remarks centered on the need for due process and fairness, questioned if broken windows is an effective approach to enforcement and suggested that the 2006 statement on corporate penalties might be revisited (here).
Statistics: The Commission issued a release titled: FY 2014 Enforcement Actions Span Securities Industry and Include First-Ever Cases. The Release tabulates the number of cases brought during the last fiscal year and highlights selected cases in a number of areas (here).
CFTC
Remarks: Chairman Timothy G. Massad addressed the Managed Funds Association (October 16, 2014). His remarks focused on ensuring that the new Dodd-Frank rules do not impose undue burdens and cross-border harmonization (here).
SEC Enforcement – Litigated Actions
Offering fraud: SEC v. iShopNoMarkup.com, Inc., Civil Action No. 04-CV-4057 (E.D.N.Y.) is an action against the company and its co-founder and former Chairman, Anthony Knight, and others. The complaint alleged that from 1999 to 2000 the defendants sold nearly 6.75 million shares of stock to over 350 investors, raising about $2.3 million. There was no registration statement in effect and material misrepresentations were made to investors. On October 14, 2014 a jury returned a verdict in favor of the Commission and against Mr. Knight, concluding that he violated Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Remedies will be determined at a later date. Mr. Knight was the sole remaining defendant in the action. See Lit. Rel. No. 23112 (Oct. 15, 2014).
Misrepresentations: SEC v. Ferrone, Civil Action No. 1:11-cv-05223 (N.D. Ill.) is an action against Douglas McClain Sr., Douglas McClain Jr., Immounosyn Corporation, Argyll Biotechnologies. LLC, Stephen Ferrone and James T. Micell. The complaint claims that from 2006 through 2010 misrepresentations were made about the sole product of the company, a drug known as SF-1019. Specifically, investors were told that the company planned to commence the regulatory approval process for human clinical trials but were not told that the FDA had twice issued clinical holds on the applications which prevented the trials from moving forward. The Court granted the SEC’s motion for summary judgment as to Mr. McClain Sr., concluding that he failed to deliver Immunosyn shares to investors and made misrepresentations to them about the FDA approval process. The motion was also granted as to both McClain defendants for insider trading since each sold firm shares without disclosing the correct FDA status of the drug in violation of Exchange Act Section 10(b) and Securities Act Section 17(a). Remedies will be determined at a later date. See Lit. Rel. No. 23114 (Oct. 15 2014).
Investment fund fraud: SEC v. Funinaga, Civil Action No. 2:13-CV-1658 (D. Nev. Order entered Oct. 3, 2014) is an action which names as defendants Edwin Yoshihiro Funinaga and MRI International, Inc. The complaint alleged an investment fund fraud which began in 1998, and continued through 2013. Over $800 million was raised from investors. Those investors were largely in Japan. Investors were told that the firm purchased medical accounts receivables at a discount. Full value would be realized from the insurance companies. Investors were assured that their funds were safe because of certain procedures. In fact the defendants were operating a Ponzi scheme, according to the complaint. Mr. Funinaga invoked his Fifth Amendment rights in the action.
In considering a series of motions, the Court initially rejected defendants’ claim that it lacked subject matter jurisdiction based on the application of 28 U.S.C. Section 2462, the five year statute of limitations. The Court concluded that the statute of limitations does not apply to disgorgement claims based on controlling Ninth Circuit precedent. Second, the Court rejected a claim that the action should be dismissed under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) which held that a cause of action under Exchange Act Section 10(b) does not have extraterritorial application. While the SEC claimed that Morrison has been overruled for government enforcement actions by Dodd-Frank, the Court did not reach that issue. Rather, the Court concluded that the securities transactions involved here closed, and title was transferred, in Nevada. That is sufficient under Morrison the Court found.
Finally, the Court concluded that there was sufficient evidence to grant summary judgment in favor of the SEC. The evidence demonstrates that the defendants made material misrepresentations regarding the investments. Mr. Funinaga had sole control over the investment fund and used the cash for his personal benefit. His control over the scheme, use of the funds, misrepresentations regarding the safety of the funds, when coupled with his assertion of the Fifth Amendment, were sufficient to establish the key elements of a claim. Accordingly, summary judgment was entered in favor of the Commission. See Lit. Rel. No. 23111 (October 10, 2014).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the SEC filed 2 civil injunctive action and 4 administrative proceeding, excluding 12j and tag-along-actions.
Marking the close: In the Matter of Athena Capital Research, LLC, Adm. Proc. File No. 3-16199 (October 16, 2014) is a proceeding against the high speed trading firm, alleging marking the close, a form of market manipulation scheme. The scheme centers on trading during the NASDAQ closing auction and imbalances. Each day at about 4 p.m. NASDAQ ran a closing auction known as the closing cross. During the auction as many buyers and sellers are matched as possible. At times there are imbalances and notices are furnished to traders who can enter specific types of orders. Respondent implemented a series of high speed strategies, taking positions during the process and then overwhelming the market fractions of a second before the close, at times trading as much as 70% of the market during at the moment, to push the price in a direction favorable to its positions. The complex strategy was implemented daily over a six month period beginning in June 2009. The Order alleges violations of Exchange Act Section 10(b). The proceeding was resolved with Respondent consenting to the entry of a cease and desist order based on the cited Section and to a censure. The firm will also pay a $1million penalty.
Producing records: In the Matter of Judy K. Wolf, Adm. Proc. File No. 3-016195 (October 15, 2014). Ms. Wolf was a compliance consultant for Wells Fargo Advisors prior to her termination in June 2013. In 2009 she drafted the firm’s policies and procedures governing how “look back” reviews would be conducted. On September 2, 2010, the day the acquisition of Burger King was announced, Ms. Wolf began a look back review of the trading surrounding the deal. She concluded that: 1) Wells Fargo account executive Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers purchased Burger King stock within 10 days of the announcement; 3) Mr. Prado and his customers each had profits that exceeded the $5,000 threshold specified in the look back review procedures; 4) Mr. Prado and Burger King were located in Miami; and 5) Mr. Prado, his customers and the acquiring company were all Brazilian. News articles about the event were not printed and included in the file despite a provision in the procedures requiring this step. The review was closed and therefore not forwarded to her supervisor. In July 2012 the Commission requested as part of its on-going investigation, and after charging Mr. Prado with insider trading, that Wells Fargo produce its compliance files relating to Mr. Prado. Although the production was eventually certified as complete, it did not include Ms. Wolf’s file. When a second request was made in January 2013, her file was included in the production. Ms. Wolf’s log stated “09/02/10 opened 24% higher@$23.35 vs. previous close of $18.86. Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12 [sic], the day prior to the announcement.” Ms. Wolf provided contradictory testimony during the investigation. Initially, she denied altering the document. Later she admitted it. The Order alleges violations of Exchange Act Section 17(a) and the related rules. The proceeding will be set for hearing.
Unregistered broker: In the Matter of Edward L. Maggiacomo, Jr., Adm. Proc. File No. 3-16197 (October 15, 2014); In the Matter of Edward J. Hanrahan, Adm. Proc. File No. 3-16197 (October 15, 2014). The Respondent in each of these proceedings is a registered representative of a broker-dealer. Each proceeding centers on the fraudulent scheme of Joseph Camarmadre who defrauded insurance companies by recruiting individuals who were terminally ill to purchase variable annuities. The annuities, in effect, were short term investments that practically guaranteed an immediate return of the investment. To assist Mr. Camarmadre, who is under indictment as a result of the scheme, recruited Messrs. Maggiacomo and Hanrahan to facilitate the scheme and act as the brokers. Each Respondent is charged with aiding and abetting violations of Exchange Act Section 15(a). In addition, Mr. Maggiacomo is charged with violations of Exchange Act Section 10(b) for submitting false forms to his broker in connection with the annuity scheme. Each Respondent settled, consenting to the entry of a cease and desist order based on the Section or Sections cited in the respective Order. Each is also barred from the securities business and from participating in any penny stock offering with a right to reapply after five years. Mr. Maggiacomo will also pay disgorgement of $216,752.21 and prejudgment interest which will be offset by payments made in related actions. Mr. Hanrahan will pay disgorgement of $83,349.76 along with prejudgment interest but the amount will be offset by the $200,000 he has already paid to settle related claims.
Insider trading: SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014) is an action against Zachary Zwerko, formerly a senior financial analyst at a major pharmaceutical company identified only as Pharma Co. His job responsibilities included conducting analysis in support of business combination and divestiture opportunities, giving him access to a shared hard drive where all deal information was stored. Mr. Zwerko’s longtime friend is Trader. Trader traded in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire Idenix Pharmaceuticals, Inc. While Mr. Zwerko did not work on that deal, he learn about it by accessing the hard drive and through an e-mail chain sent to him by his supervisor. He contacted Trader after learning the identity of Idenix which had been coded in deal documents. Trader began purchasing Idenix shares. Over time Mr. Zwerko continued to access information and contact Trader. Following the deal announcement Trader sold his shares, reaping profits of about $579,000. In 2012 Mr. Zwerko is also alleged to have tipped his friend Trader in advance of the April 23, 2012 pre-market open announcement that Ardea Biosciences, Inc. had agreed to be acquired by AstraZeneca PLC. In the months prior to the deal announcement, Aredea engaged in a series of confidential discussions with several companies, including Pharma Co., regarding possible acquisitions. Mr. Zwerko worked on the proposed deal. Although Pharma did not acquire Areda, the firm participated in the negotiations until at least a week prior to the announcement. During the negotiations Mr. Zwerko and Trader spoke on the phone, sometimes shortly after a meeting about the deal. Ultimately he purchased 9,800 shares through three brokerage accounts. Following the deal announcement he had trading profits of over $105,000. The Commission’s complaint alleges violations of Exchange Act Section 10(b). A parallel criminal case brought by the Manhattan U.S. Attorney’s Office filed criminal charges. Both cases are pending.
Investment fund fraud: SEC v. The Estate of Vincent James Saviano, Civil Action No. 14-cv-13902 (Oct. 9, 2014) is an action against the estate and Palmetto Investments LLC, operated by Mr. Saviano prior to his death. Defendants claimed to be operating a pooled investment vehicle that conducted “extreme day trading.” Investors were told it was highly profitable and received investment advice from an SEC registered adviser. In fact Mr. Saviano lost most of the $2 million of investor funds raised and misappropriated portions. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). It was brought to preserve assets for investors. A receiver has been appointed. See Lit. Rel. No. 23109 (Oct. 10, 2014).
Manipulation: SEC v. 8000, Inc., Civil Action No. 12-cv-7261 (S.D.N.Y.) is a previously filed action against the company, Thomas Kelly, the CEO of 8000, Jonathan Bryant and Carl Duncan. The complaint alleges that in 2009 and 2010 the defendants manipulated the shares of the company and sold unregistered securities using false legal opinions. This week the Court entered a final judgment against Mr. Kelly, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The order bars him from serving an officer or director and directs that he pay disgorgement of $415, 592 and prejudgment interest. See Lit. Rel. No. 23110 (Oct. 10, 2014).
Criminal cases
Investment fund fraud: U.S. v. Huggins, Case No. 1:13-mj-00301 (S.D.N.Y.) is an action in which Charles Huggins was found guilty of one count of conspiracy and one count of wire fraud following a two week jury trial. From 2008 through 2011 Mr. Huggins and others raised millions of dollars from investors through JYork Industries Inc. and Urogo Inc. Investors were told that their funds would be used to mine gold and diamonds from Sierra Leone and Liberia. Investors were also promised a high rate of return. In fact much of the money was misappropriated.
Australia
Insider trading: Hui Xiao, the firmer managing director of Hanlong Mining Investment Pty Ltd, appeared in court on 104 counts of insider trading. The charges stem from two schemes. In the first, from July 1-8, 2011, while in possession of inside information relating to a proposed takeover by Hanlong Mining of Bannerman Resources Ltd, Mr. Xiao procured his wife and two companies to acquire Bannerman contracts for a difference and shares. In the second, which took place from July 13-15, 2011, while in possession of inside information relating to a proposed takeover by Hanlong Mining of Sundance Resources Ltd, Mr. Xiao had his wife and two entities acquire Sundance contracts for a difference.
Hong Kong
Misappropriation: The Securities and Futures Commission banned Roger John and Hamish Cruden, both former directors and responsible officers of Salisbury Securities Ltd, from the securities business for life. The order is based on findings that the two misappropriated securities and sale proceeds belonging to clients in order to settle the instructions of another client and their own obligations. In addition, they failed to maintain the required level of capital and made false and misleading statements to the SFC.
