THIS WEEK IN SECURITIES LITIGATION (August 26, 2011)
The price of gold continues to spiral upward this weeks while the European banking crisis continued. As the crisis has unfolded European regulators took steps to preclude the short sale of shares in financial institutions. At the same time FINRA issued an investor warning cautioning the public regarding possible scams in connection with the sale of shares in companies with gold mines. The SEC settled with two defendants in a long running enforcement action centered on a manipulative short selling scheme.
Courts in the U.S. and the UK handed down sentences for securities fraud. In New York a former brokerage firm account executive was sentenced to prison for running up unauthorized trading losses in one client account and then trying to conceal them with fraudulent cash transfers from the account of another firm client. A CEO was sentenced to prison for fraudulently inflating the revenue of his company and a former attorney was sent to prison for insider trading. In the U.K. a father and his two sons were sentenced to prison for running a large cross-boarder boiler room operation.
SEC enforcement – filings and settlements
Short selling scheme: SEC v. Andreas Badian, Civil Action No. 06 CV 2621 (S.D.N.Y. Filed Apr. 4, 2006). The SEC settled with two defendants in this on-going litigation centered on manipulative short selling. The action named as defendants Andreas Badian, an employee of unregistered investment adviser Rhino Advisors; three registered representatives then employed by now defunct Refco Securities, Jacob Spinner, Mottes Drillman, and Jeffrey Graham; and Pond Securities Corp., a registered broker dealer, along with two of its employees, Ezra Birnbaum and Shaye Hirsch. Mr. Badian, acting for Rhino, directed the scheme to manipulate down the share price of Sedona Corporation, according to the Commission. Under an agreement with Sedona, Amro International, S.A., a Rhino client, loaned Sedona $2.5 million. Three months later Amro was to be paid $3 million by Sedona. The agreement permitted Amro to convert Sedona’s debenture debt to shares of Sedona stock on certain specified dates. The lower the share price, the more shares Amro would receive. The agreement prohibited the company from selling Sedona’s shares short. Nevertheless, the defendants drove the share price down with a short selling scheme from about $1.43 per share in early 2001 to about $0.75 per share by March 23, 2001. Amro then exercised its conversion rights, receiving over 1.6 million shares of Sedona stock in repayment of $1.1 million due under the Agreement.
Defendants Mottes Drillman and Jacob Spinner settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a) and from aiding and abetting violations of Exchange Act Section 17(a). Each agreed to pay disgorgement of $4,000 representing their share of the ill-gotten gains, along with prejudgment interest and a civil penalty of $25,000.
Criminal cases
Unauthorized transactions: U.S. v. Shah (S.D.N.Y.). Sanjeev Jayant Kumar Shah, a former Smith Barney financial adviser, was sentenced to thirty-eight months in prison for securities fraud in connection with the handling of two client accounts. Mr. Shah pleaded guilty to one count of securities fraud and three counts of wire fraud. In the fall of 2008 Mr. Shah executed unauthorized foreign currency transactions in the account of one foreign bank client, incurring large losses. To try and conceal the losses he arranged for the transfer of about $3.25 million from the account of another client using false documents. That client was told that the transfer was to pay for bonds he had convinced the client to purchase. When the bonds were not listed on the account statement the defendant claimed they were erroneous.
Financial fraud: U.S. v. Cuti, No. 08-cr-00972 (S.D.N.Y.).The former Chairman of the Board and CEO of Duane Reade, Inc., Anthony Cuti, was sentenced to serve three years in prison for financial fraud and ordered to pay a $5 million fine. Mr. Cuti was convicted following a jury trial on one count of conspiracy to make false statements in annual and quarterly SEC reports and to auditors, one count of securities fraud and three counts of making false statements in SEC reports. The charges are based on a scheme implemented by Mr. Cutri and William Tennant, the former CFO of the company, to inflate the financial results of Duane Reade from November 2000 through June 2005. The scheme involved increasing the income of the company using the proceeds from the sale of fraudulent real estate transactions while reducing expenses through the use of fictitious vendor credits.
As a result the income of the company was artificially and materially inflated, defrauding its public shareholders and the private equity firm Oak Hill Capital Partners, L.P. which took the company private in 2004.
Insider trading: U.S. v. Goffer, No. 1:10-cr-00056 (S.D.N.Y.). Defendant Jason Goldfarb, who previously pleaded guilty, was sentenced to three years in prison for his part in an insider trading scheme. Mr. Goldfarb was involved in the insider trading ring with former Ropes and Gray associates Arthur Cutillo and Brien Santarlas. In 2007 and 2008 Messrs. Cutillo and Santarlas furnished inside information on deals being handled by the firm to Mr. Goldfarb who is also an attorney. The information concerned the then pending deals involving 3Com Corporation and Axcan Pharma, Inc. Mr. Goldfarb in turn furnished that information to Zvi Goffer, known as Octopussy because of his multiple sources of inside information. The information was exchanged for cash. Mr. Goffer traded on the information and passed it on to others who also traded.
FINRA
The regulator issued an investor warning titled: “Gold” Stocks – Some Investments Mine Your Pocketbook. The warning cautions investors about scams involving gold stocks in view of the run up in the price of the metal in recent months.
FSA
Three men who ran a string of 16 cross-boarder boiler rooms that victimized over 1,700 investors from 2003 to 2008 out of ?27.5 million were sentenced to prison this week following their conviction at trial. The defendants were Thomas Wilmot and his two sons, Kevin and Christopher. The father was sentenced to serve nine years in prison while each of the sons will serve five years. Many of the victims of the scheme were elderly and some were ill. To date there has been ?17 million in losses. The scheme came to light when 93 FSA and CoLP investigators carried out a series of coordinated searches at various residences of suspected participants and seized thousands of documents along with related computer files. Substantial portions of the money had been transferred out of the UK.