The Commission took the unprecedented of dismissing the insider trading action against former Goldman Sach director Rajat Gupta, noting that he challenged the administrative proceeding in district court. The SEC reserved the right to file a federal court action. No such action has been filed to date.

SEC Enforcement of focused on insider trading this week, settling another of its Galleon insider trading actions. The SEC also filed three other settled insider trading cases. The former CEO of a high tech company pleaded guilty to criminal securities charges while the PCAOB announced a settled action against a former E&Y partner and manager who furnished false and backdated documents during an inspection.

In the court of appeals the SEC won the reversal of a dismissal order in a case against a portfolio manager and the COO of the fund’s adviser. The court concluded that the Commission had adequately pleaded its misrepresentation claim concerning statements by the defendants about the market timing policies of the fund and their implementation and that its request for a penalty was not time barred. Ashland Inc. lost two cases in two different circuits against brokers who sold the company auction rate securities which are now illiquid.

SEC enforcement – litigation

Insider trading: In the Matter of Rajatt K. Gupta, Adm. Proc. File No. 3-14279 (Aug. 4. 2011) is the insider trading action brought against former Goldman Sachs director. The Commission entered an order dismissing the proceedings. The Order notes that on March 18, 2011 Mr. Gupta filed suit against the agency challenging this proceeding. It goes on to state that “The Commission has determined that it is in the public interest to dismiss these proceedings. Dismissing these proceedings will not prevent the Commission from filing an action against Mr. Gupta in the United States District Court.” Previously the court had refused to dismiss the action against the Commission and entered a discovery schedule.

SEC enforcement – filings and settlements

Insider trading: SEC v. Decinces, is an action against Douglas Decinces, a former major league baseball player, his physical therapist Joseph Donahoe, and two of his friends, Roger Wittenbach and Fred Jackson each of whom was named as a defendant. The action centers on the tender offer for Advanced Medical Optics Inc. by Abbott Laboratories Inc. which was announced on January 12, 2009. Prior to that date Mr. Decines learned from an employee at Advanced Medical about the pending transaction. Subsequently, he made several purchases of stock, eventually building his portfolio to 83,700 shares. During this period, and prior to the public announcement, he tipped Messrs. Donahoe, Jackson and Wittenbach who also traded. Mr. Wittenbach in turn tipped his sister. Each defendant settled, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Sections 10(b) and 14(e). In addition, Mr. DeCinces agreed to pay disgorgement of $1,282,691 along with prejudgment interest and a penalty of $1,197,998. Mr. Donahue agreed to pay disgorgement of $75,570 and a penalty of $37,785. Mr. Jackson agreed to pay disgorgement of $140,259 along with prejudgment interest and a penalty of $140,259. Mr. Wittenbach agreed to pay disgorgement of $201,692 along with prejudgment interest and a penalty of $214,906.

Insider trading: SEC v. Marovitz, 1:11-cv-05259 (N.D. Ill. Aug. 3, 2011) is an action against attorney William Morovitz, the former husband of then Playboy CEO Christie Hefner. According to the complaint, Mr. Morovitz traded on inside information he misappropriated from his wife in three instances. In 2009 he bought shares before a takeover announcement and sold most of the shares just before the deal collapsed, thus avoiding a loss. In 2008 he sold shares just before a poor earnings announcement, avoiding another loss. In 2004 he purchased shares shortly before the announcement of a new offering of another class of securities resulting in an unrealized profit. In 1998 Ms. Hefner had cautioned her husband that all information he learned from her was confidential. She also had the general counsel of the company reiterate that directive to her husband. Mr. Marovitz settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay $168,352 in disgorgement, prejudgment interest and civil penalties. The case originated from an inspection of a broker dealer according to the Litigation Release, No. 22059 (Aug 3, 2011).

Insider trading: SEC v. Tudor, Civil Action No. 10-CV-8598 (S.D.N.Y.) is one of the Galleon insider trading cases tied to the Arthur Cutillo and Brien Santarias ring. Franz Tudor was a proprietary trader at Schottenfeld Group, LLC and is alleged to have traded on inside information regarding the acquisition of Axcan Pharma Inc. Mr. Tudor settled with the Commission, consenting to the entry of a final judgment that permanently enjoins him from violations of Exchange Act Section 10(b) and directs him to pay disgorgement of $70,807 plus prejudgment interest. No penalty was imposed based on his financial condition. In a related administrative proceeding he consented to the entry of an order barring him from the securities business. Previously, Mr. Tudor pleaded guilty to criminal conspiracy and securities fraud charges in a related criminal case, U.S. v. Tudor, 09-CR-1057 (S.D.N.Y.). Mr. Tudor has not been sentenced.

False statements/insider trading: SEC v. Ferrone, Civil Case No. 1:11-cv-05223 (N.D. Ill. Filed Aug. 1, 2011). Biotech company Immunosyn Corporation was named as a defendant along with Argyll Biotechnologies, LLC, its major shareholder, two other shareholder entities, CEO Stephen Ferrone, CFO Douglas McClain Jr., Chief Scientific Officer Douglas McClain, Sr. and Argyll’s CEO James Miceli. Immunosyn stated in public filings over a four year period beginning in 2006 that Argyll, which controls its only drug, SF-1019, planned to commence the regulatory approval process for human clinical trials in the U.S. The FDA had twice halted any efforts to initiate the trials. Those actions were not disclosed until April 2010. During the period Messrs. Miceli, MClain Jr. and McClain, Sr. sold shares in the company, raising about $20 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 16(a) and 20(a). The case is in litigation.

Criminal cases

Fraudulent share issuance: U.S. v. Knabb (N.D. CA.) is an action against Jasper Knabb, the former CEO of Pegasus Wireless Corporation. Mr. Knabb pleaded guilty to a three count information alleging conspiracy to commit securities fraud, securities fraud and falsifying books and records. According to the information, between May 2005 and January 2008 Mr. Knabb caused Pegasus to issue over 490 million shares of stock to satisfy thirty-one promissory notes and other documents. The notes were bogus and the shares were issued to him and his family and friends. The scheme netted about $25 million. Mr. Knabb is scheduled to be sentenced on November 3, 2011. Previously, the CFO of Pegasus, Stephen Durland, pleaded guilty to similar charges.


The Board announced a settlement of a proceeding against Peter O’Tool, a former E&Y partner, and the manager on the engagements, Darrin Estella. The Board found that shortly before a PCAOB inspection Messrs. O’Toole and Estella created, backdated and added a document to the audit working papers related to the most significant transaction in the engagement. Other papers were also altered, added and backdated to other working papers prior to the inspection. In addition, Messrs. O’Toole and Estella furnished written document to inspectors representing that no changes had been made to the audit working papers following the completion of the engagement. The proceeding was brought in December 2010 and, for good cause shown, made public over the objection of Messr. O’Toole and Estella. The Board order that Mr. O’Toole be barred from associating with a PCAOB registered accounting firm with a right to petition to remove the bar in three years. This is the longest bar imposed by the Board. He was also directed to pay a $50,000 fine. Mr. Estella was similarly barred with a right to petition after two years.

Court of appeals

SEC v. Gabelli, Nos. 10-3581, 10-3628 and 10-3660 (2nd Cir. August 1, 2011). The Commission’s action centered on claimed false statements made by Marc Gambelli, the portfolio manager of Gabelli Global Growth Fund, and Bruce Alpert, the COO of the Fund’s adviser, Gabelli Funds, LLC. The complaint alleged that the defendants mislead the board and investors regarding the market timing policies of the fund, implying that the practice was not tolerated when in fact they permitted one trader to time millions of dollars in trades for years. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).

The district court dismissed the claims, concluding that their statement which discussed effort to preclude market timing was literally true, that the SEC could not recover a penalty for aiding and abetting under the Advisers Act and, in any event, that no injunction could be entered here. The Second Circuit reversed. First, there is no doubt that the statement was literally true. That is not sufficient however. Here the statement was a half truth that did not disclose the fact that a large trader was permitted to market time. Thus is was false and misleading. Second, the law in the Second Circuit is settled that the SEC can seek a civil penalty for aiding and abetting a violation of Section 206 of the Advisers Act.

Likewise, the claim for a civil penalty is not time barred. Section 2442 of title 28 requires that the claim for civil penalties be brought within five years. Here the SEC correctly argues that its claim did not accrue until September 2003 when, as the complaint alleges, it discovered the claim. This is correct according to the Court. Finally, here, where there are allegations which plausibly allege that for almost three years the defendants aided and abetted the violations of the investment adviser, the complaint sufficiently pleads a reasonable likelihood of future violations.

ARS: Ashland, Inc. v. Oppenheimer & Co., No. 10-5305 (6th Cir. July 28, 2011) is a case brought by Ashland, a diversified global chemical company, based on its purchases of auction rate securities on the advise of Oppenheimer & Co. The company began purchasing auction rate securities or ARS in May 2007. The company was assured that ARS were liquid and as safe as money market funds. Although Ashland raised questions about the market as the subprime crisis unfolded and when one prominent broker permitted an auction to fail, Oppenheimer repeatedly reassured the company that the market was safe. By February when Ashland made its last purchase the company had built a portfolio of about $194. Just days later Oppenheimer concluded there were problems in the market. By then however it was too late. The ARS market collapsed and Ashland’s holdings were illiquid. Ashland filed suit claiming the securities firm failed to tell it that the continued health of the ARS market depended on the intervention of underwriters who had no obligation to supporting it. The district court dismissed the complaint. The Circuit Court affirmed.

The key issue, according to the Court, is whether plaintiff adequately pleaded a strong inference of scienter as required by the PSLRA. This means that the facts alleged must be taken collectively to asses if they meet the requirements of the statute as interpreted in Tellabs, Inc v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). In this case while the facts may support an inference of scienter, it is outweighed by those which are contrary. Ashland has failed to explain “why or how Oppenheimer possessed advance, non-pubic knowledge that underwriters would jointly exit the ARS market and cause its collapse in February 2008 . . . “ While Oppenheimer employees were aware of what might happen if the underwriters chose to exit the market, this was a seemingly remote risk in view of past history. Indeed, it is likely that the market collapse “caught Oppenheimer and its employees off guard” the Court concluded. Furthermore, the complaint here differs significantly from those which have survived a motion to dismiss. In cases which have survived a motion to dismiss the plaintiff explained why or how the defendant knew about the impending difficulties with the ARS markets. Here the complaint does not. Accordingly it must fail. See also Ashland Inc. v. Morgan Stanley & Co., Docket No. 10-1549-cv (2nd Cir. July 28, 2011)(Similar suit in which the dismissal by the district court was affirmed on appeal).

Program: Is FCPA Enforcement To Aggressive? August 5, 2011, ABA Annual Meeting Toronto.
The program links are here and here. The program is co-chaired by Thomas Gorman, Dorsey & Whitney, and Frank Razzano, Pepper Hamilton. The panel includes Ret. Judge Stanely Sporkin, Greg Andres, Deputy AG, DOJ; Peter Clark, Cadwalder, Wickersham & Taft; Joseph Warin, Gibson, Dunn & Crutcher; and Eric Bruce, Kobre & Kim.