THE STATE OF SEC ENFORCMENT
Ponzi schemes, insider trading and discussions about the vitality of the enforcement program are the staples of SEC enforcement these days.
First, the Ponzi scheme. SEC v. Capital Mountain Holding Corp., Civ. Action No. 3:09-CV-02222-F (N.D. Tex. Filed Nov. 23 2009) names as defendants Capital Mountain Holding Corporation, its president Derek Nelson and two other entities controlled by Mr. Nelson. According to the SEC, over an eighteen month period beginning in June 2008, the defendants raised over $25 million from unsuspecting investors. The funds were raised by Capital Mountain and the two related entities selling promissory notes through a website and Canadian based investment club. Investors were told their money would be put in distressed properties which would be rehabbed and then sold. The notes promised significant interest payments to investors.
The representations by Mr. Nelson, Capital Mountain and the other entities were, according to the SEC, false. In fact, much of the money was used to make Ponzi payments to investors, purchase luxury items for Mr. Nelson as well as his personal expenses and the overhead for the controlled entities. The scheme collapsed in the summer of 2009. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a), and Exchange Act Section 10(b).
At present, the action is partially resolved. The defendants have consented to the entry of permanent injunctions prohibiting future violations of the sections cited in the complaint. In addition, they have agreed to the entry of a freeze order and the appointment of a receiver. The Relief Defendants, alleged to have received portions of the investor funds, have also consented to the freeze order. See also, Litig. Rel. 21311 (Nov. 23, 2009). This is one of a stream of similar cases brought in recent months by the SEC.
Second, insider trading. SEC v. Hashemi, Civil Action No. 09-CV-6650 (S.D.N.Y. Filed July 27, 2009) names as a defendant Khaled Al Hashemi, a citizen and resident of Abu Dhabi, UAE. As discussed here, the complaint is based on trading in advance of a merger announcement made on February 23, 2009 involving Nova Chemicals. The complaint centers on the substantial trading of Mr. Hashemi prior to the deal announcement. The claim that he possessed inside information is made on information and belief. The allegation that he was either tipped or misappropriated that information is made on information and belief. That information and belief appears to be largely the significant trading by the defendant coupled with the sale of his other holdings to effectuate the trades in Nova shares.
The case was settled with the entry of a consent decree on November 18, 2009 as discussed here. That settlement contained the usual terms: consent to the entry of a permanent injunction and disgorgement of the over $450,000 in trading profits and prejudgment interest and the payment of a penalty equal to the trading profits. The decree was entered by the Court on November 18, 2009.
The day after the entry of the decree, something unusual happened. The Court, on its own motion, vacated the settlement. No papers had been filed by either side. No hearing was held. The order states in part that “the Court has reconsidered its endorsement of the proposed final judgment and has determined that more information relating to the settlement and the facts underlying his case are necessary to determine whether a final judgment on consent is appropriate … .” A pretrial conference is scheduled for December 1, 2009. Whether this is another Bank of America or there is some other reason for the Court’s action is unclear at present.
Third, perceptions about and the vitality of SEC enforcement. In remarks to the ABA Business Law Section last week David Becker, SEC General Counsel and Senior Policy Director, discussed, among other things, the cloud under which the SEC currently operates and the fact that public perception about the Commission only partially reflects reality. In truth, Mr. Becker noted, the SEC has always been an aggressive and effective regulator, “sometimes more so, sometimes less.” As an example, he cited the recent insider trading actions involving the founder of Galleon and others stating “[t]hese are a wonderful example of the new SEC. But they are a fine exemplar of the old SEC as well.” These are certainly noteworthy cases. But they are built on wire taps obtained by the U.S. Attorney’s Office, not the SEC.