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.