In the closing two weeks of the year the SEC continued to implement Dodd-Frank. A business group, which is typically critical of the Commission, issued a new report calling for what it termed “transformational change” at the agency.

In court the SEC prevailed in a contested hearing centered on the issuance of fraudulent notes while taking a high stakes appeal from Judge Rakoff’s ruling rejecting its proposed settlement in the market crisis case with Citi. The Commission also resolved possible charges relating to the market crisis with Fannie Mae and Freddie Mac while filing enforcement actions against senior officers of each firm centered on charges of failing to disclose and making misrepresentations about the true exposure of their firm to the subprime market. Another settlement was obtained in the on-going investigation into bid rigging in the municipal securities market.

Finally, a significant ruling was entered in the African sting FCPA trials while additional corruption cases were brought. In the African sting case the court granted a motion for acquittal for one defendant at the conclusion of the government’s case. In addition, settled FCPA charges were brought against a giant insurance broker and a German telecom giant and its subsidiary. The SEC also filed FCPA charges against senior officers of the telecom’s subsidiary which are in litigation.

The Commission

Accredited Investors: The Commission amended its rules regarding the net worth calculations for determining who qualifies as an accredited investor (here).

Disclosure of mine safety information: New rules under Dodd-Frank regarding the disclosure of mine safety and health by the SEC (here).

Report on Commission: The Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, published a new report calling for what it terms “transformational change” at the SEC. It is aptly titled: “U.S. Securities and Exchange Commission: A Roadmap for Transformational Reform” The Report notes that while the SEC has for much of its history been “the preeminent financial regulator,” that time has passed. It goes on to call for transformational change, defined in four key points as to enforcement: 1) Development of a bold clear plan, “including how to make rulemaking, supervisory inspections, and enforcement more effective;” 2) Putting a person in charge of implementing this plan by increasing the size of the Commission from five to seven members, including adding a new Deputy Chairman for Management and Operations to take charge of the transformation; 3) The removal of statutory and practical obstacles to permit the Commission to hire the right people with the appropriate skill set to ensure “that staff are put in positions to succeed – or are removed;” and 4) Increasing the funding and resources, tied to the implementation of the transformation process. The Report includes an evaluation of the Division of Enforcement and its recent reorganization which it views as positive. It offers a series of recommendations for the Enforcement Division focused on: training, reducing open case inventory, the manner in which investigations are assigned, the overall case mix of the division and the manner in which problems are resolved and the utilization of that experience. It also suggests that additional specialty units be created and that the Seaboard standards be updated and that additional metrics for evaluating performance be developed

SEC v. Citigroup: The Commission appealed Judge Rakoff’s ruling to the Second Circuit Court of Appeals, seeking to overturn the Court’s rejection of its proposed settlement. The complaint in the underlying enforcement action centers on allegations of non-disclosure in connection with the sale of interests in a largely synthetic CDO. The bank is alleged to have played a key but undisclosed role in the collateral selection which it later shorted with out disclosing that fact. The proposed settlement called for an injunction based on Securities Act Sections 17(a)(2) & (3), disgorgement, a penalty and the implementation of certain procedures. Judge Rakoff rejected the settlement, noting that he had no facts on which to evaluate the intentional claims of fraud, the negligence charges and what the Court viewed as the inadequate proposed remedies.

SEC Enforcement: Litigated cases

Investment fund fraud: SEC v. Evolution Capital Advisors, Civil Action No. 4:11-cv-02945 (S.D. Tx. Filed Aug 10, 2011) is an action centered on a fraudulent note offering in which the Commission prevailed at a hearing and secured the entry of a permanent asset freeze as well as a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants are Damian Valdez and his controlled entities, Evolution Capital Advisers, LLC and its subsidiary, Evolution Investment Group I, LLC or EIGI. Beginning in early 2008, and continuing through mid- 2010, the defendants raised about $10.1 million from over 80 investors through two fraudulent offerings of redeemable secured notes, according to the complaint. The offerings were made as private placements. The PPMs claimed that the notes would be backed by the full faith and credit of the U.S. Government when in fact they were not. Defendants also paid themselves about $2.4 million for management fees and expenses. Many of those expenses appear to be unrelated to the business, according to the SEC. In addition, defendants took about $2.7 million from one group of investors to pay off others in Ponzi like payments. This left the two entity defendants in dire financial condition with about $1.1 million less than was owed to note holders. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). Following a contested evidentiary hearing, the Court found in favor of the SEC. Issues concerning disgorgement, prejudgment interest and penalties are pending before the Court.

SEC Enforcement: Filings and settlements

Misrepresentation/Unregistered broker network: SEC v. Walker, Case No. 11-cv-03655 (D. Minn. Filed Dec. 21, 2011); SEC v. Collyard, Case No. 11-cv-03656 (D. Minn. Filed Dec. 21, 2011) are actions centered on Bixsby Energy Systems, Inc. and its former chief executive officer Robert Walker. The first action charges Mr. Walker and Dennis Desender, the former CFO of the company, with making false statements regarding the key product of the company, a machine that supposedly made synthetic natural gas through a proprietary clean coal technology. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The second complaint alleges that from 2001 to 2010 a large network of unregistered brokers sold over $21.7 million in Bixby securities to at least 560 investors. The complaint names as defendants Gary Collyard, Collyard Group LLC, and several other defendants. It alleges violations of Exchange Act section 15(a). The cases are in litigation.

Insider trading: SEC v. Easom, Civil Action No. 2:11-CV-7314 (D. N.J. Filed Dec. 16, 2011)[see also Lit. Rel. No. 22205 (Dec. 21, 2011)] is an action against seven individuals. It centers on the acquisition of Vital Signs, Inc. by a subsidiary of the General Electric Company in a deal announced on July 24, 2008. At the time defendant John Easom was an Executive Vice President for Global Business Development and officer of Vital Signs. On June 5, 2008 the CEO of Vital Signs met with the CEO of GE to finalize the acquisition and subsequently announced the deal to Mr. Easom and other executives. Mr. Eason sent a text message to the husband of his cousin, William Echeverri who tipped five others who traded: his Rory Trigali, Robert Miketich, Victor Esheverri, Joseph Mancuso and Paul Qassis who in turn tipped Gary Saggu. Defendants Easom, Echeverri, V. Echeverri, Miketich, Mancuso, Qassi and Saggu each consented to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b). Mr. Easom also agreed to be barred for five years from serving as an officer or director of a publically traded company. In addition, each agreed to pay disgorgement, prejudgment interest and a civil penalty as follows: Mr. Easom, $327 in disgorgement and a penalty of $10,000; Mr. Echeverri $150,121.19 in disgorgement and a civil penalty of $227,428.22; V. Esceverri $12,477.19 in disgorgement and no civil penalty based on his financial condition; Mr. Miketich $31,455 in disgorgement and a civil penalty of $41,455; Mr. Mancuso $61,367.01 and a civil penalty of $61,367.01; and Mr. Qassis $111,494.29 and a civil penalty of $55,747.14. Mr. Easom entered into a cooperation agreement with the Commission which is reflected in the terms of his settlement.

False books and records: SEC v. Cotellessa-Pitz, Case No. 11-Civ-9302 (S.D.N.Y. Filed Dec. 16, 2011) is an action against Enrica Cotellessa-Pitz, a employee of Madoff Investment Securities LLC for thirty years. The complaint alleges that the defendant falsified financial statements filed with the SEC and other regulators in connection with Madoff’s fraudulent scheme. Under Madoff’s instructions hundreds of millions of dollars were moved from accounts holding investor funds to the firm’s operating bank accounts to conceal losses in those accounts. The defendant prepared calculations which overstated the trading income in Madoff’s proprietary trading operations. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Advisers Act Section 204. The case was partially settled with the entry of a permanent injunction by consent which will require the defendant to pay disgorgement. In a parallel criminal action Enrica Cotellessa-Pitz pleaded guilty to criminal charges.

Fraudulent transaction: SEC v. Folan, Civil Action No. 1:11-cv-8905 (N.D. Ill. Dec. 15, 2011) is an action against Stephen Folan, a former registered representative in the Chicago office of FTN Financial Securities Corp. The complaint claims that over the year end 2006 Sentinel Management Group, Inc. and FTN engaged in a five-day reverse repurchase transaction involving about $35 million of CDOs. Mr. Folan advocated the transaction involving his client, FTN and Sentinel despite the fact that he knew it would be used by Sentinel to temporarily and improperly reduce its outstanding bank loan balance. The complaint alleges violations of Advisers Act Section 206(2). Mr. Folan resolved the case by consenting to the entry of a permanent injunction prohibiting future violations of that Section and agreeing to pay a $50,000 civil penalty. He also agreed to the entry of an order barring him from the securities business with a right to reapply after three years. FTN resolved a similar case with the Commission earlier.

Bid rigging: SEC v. GE Funding Capital Market Services, Inc., Civil Action No. 2:11-cv-07465 (D.N.J. Filed Dec. 23, 2011) is the most recent settlement in the on-going investigation into bid rigging in the municipal bond market. GE Funding Capital Market Services, Inc. settled with the DOJ, the SEC, the IRS, and 25 state attorneys general, agreeing to pay $70 million in restitution, penalties, disgorgement and prejudgment interest. The inquiries centered on the reinvestment of funds from the sale of municipal bonds. IRS regulations require that those funds be invested at fair market value which is generally established through a competitive bidding process. GE Funding is alleged to have manipulated the bidding process from 1999 through 2004 by engaging in a variety of anti-competitive practices. Collectively its actions involved at least 328 municipal bond reinvestment transactions in 44 states and Puerto Rico and jeopardized the tax-exempt status of billions of dollars in municipal securities. The firm settled with the DOJ by admitting and accepting responsibility for its anticompetitive and manipulative actions and entering into a non-prosecution agreement. With the SEC the firm consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a). GE Funding also agreed to pay $10.5 million as a civil penalty along with disgorgement of $10,625,775 with prejudgment interest. The Commission acknowledged the cooperation of the company.

Market crisis: SEC v. Mudd, Case No. 11 CIV 9202 (S.D.N.Y. Filed Dec. 18, 2011) names as defendants former Fannie Mae Chief Executive Officer Daniel Mudd, former Chief Risk Officer Enrico Dallavecchia and former Executive Vice President of Fannie Mae’s Single Family Mortgage business, Thomas A. Lund. The case centers on claims that the company and the named defendants failed to disclose and made misrepresentations regarding, the exposure of the firm to the subprime real estate market as the market crisis was unfolding. The allegations related to the time period December 6, 2006 to August 8, 2008. Throughout that period Fannie Mae and the named defendants are alleged to have misrepresented the exposure of the firm to subprime and Alt-A loans. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), Securities Act Section 17(a)(2) and the pertinent Rules. The case against the individuals is in litigation. The Commission entered into a non-prosecution agreement with the company.

Market crisis: SEC v. Syron, Case No. 11 CIV 9201 (S.D.N.Y. Filed Dec. 18, 2011) names as defendants former Freddie Mac Chairman of the Board Richard Syron, former Executive Vice President and Chief Business Officer Patricial Cook and former Executive Vice President for the Single Family Guarantee business, Donald Bisenius. The case centers on claims that the company and the named defendants failed to disclose and made misrepresentations regarding, the exposure of the firm to the subprime real estate market as the market crisis was unfolding. Specifically, the claims allege that from March 2007 through May of 2008 in statements, speeches and filings with the SEC the defendants misled investors regarding the exposure of the firm to the subprime market. During the period the firm significantly understated its exposure to that market, falsely claiming that it had “basically no subprime exposure.” The complaint alleges violations of Exchange Act Sections 10(b), 13(a), Securities Act Section 17(a)(2) and the pertinent Rules. The case against the individuals is in litigation. The company entered into a non-prosecution with the Commission.

Criminal cases

Insider trading: U.S. v. Benhamou (S.D.N.Y.) is an insider trading case against a French doctor who served on the steering committee of Human genome Sciences, Inc. Dr. Benhamou pleaded guilty to charges alleging that he furnished inside information regarding the termination of certain clinical trials of at the company to hedge fund manager Joseph Skowron who traded and avoided a $30 million loss as discussed here. The Doctor was sentenced to time served and three years of supervised release for his participate in securities fraud, conspiracy to engage in insider trading, obstruction of justice and for making false statements to the FBI. The court granted the government’s motion to for a substantial downward departure from the sentencing guidelines based on the defendant’s substantial cooperation.

Insider trading: James Fleishman, formerly of the expert network firm Primary Global, was sentenced to 30 months in prison for his participating in an insider trading scheme. Mr. Fleishman was convicted following a three week trial (discussed here).


Magyar Telecom Plc. (E.D.Va. Filed Dec. 29, 2011); SEC v. Magyar Telekom, Plc., Case No. 11 civ 9646 (S.D.N.Y. Filed Dec. 29, 2011); SEC v. Straub, Case No. 11 civ 9645 (S.D.N.Y. Filed Dec. 29, 2011) are three FCPA actions centered on the largest telecommunications company in Hungary, Magyar Telecom, and its majority owner, Deutsche Telekom AG. Also named as defendants in a complaint filed by the SEC are three former senior executives of Magyar Telecom, Chairman and CEO, Elek Straub, Director of Central Strategic Organization, Andras Balogh, and Director of Business Development and Acquisitions, Tamas Morval. The case focuses on potential legal changes in the telecommunications market in Macedonia beginning in early 2005. At that time the government was liberalizing the market in ways Magyar Telekom deemed detrimental to its subsidiary. To resolve those issues the company entered into what was called a “protocol of cooperation” under which government officials agreed to delay the entrance into the market of a third mobile license as well as other regulatory benefits. Under the agreement company officials paid $6 million under circumstances in which they knew, or were aware of, a high probability that circumstances existed in which all or part of the money would go to Macedonian officials. The payments were funneled through various mechanisms including intermediaries and a sham consultancy. The books and records of the company were also falsified. Deutsche Telekom reported the results of Magyar’s operations in its consolidated financial statements.

With the DOJ, Magyar Telecom entered into a two year deferred prosecution agreement. The information charged the company with one count of violating the anti-bribery provisions of the FCPA and two counts of violating the books and records provisions of the FCPA. As part of the agreement the company will pay a $59.6 million criminal penalty. The company also agreed to implement an enhanced compliance program and submit annual reports on its efforts. At the time Magyar Telekom’s ADRs were traded on the New York Stock Exchange. The parent of the company, Deutsche Telekom, whose ADRs are traded on the NYSE, entered into a two year non-prosecution agreement. The company agreed to pay a $4.36 million penalty in connection with inaccurate books and records and to enhance its compliance program.

The SEC’s complaint against Magyar and its parent alleges that the subsidiary violated Exchange Act Sections 30A and 13(b)(5) and that both companies violated Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To settle with the SEC, Magyar consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. The company also agreed to pay disgorgement and prejudgment interest in the amount of $31.2 million. The action against its parent was resolved in connection with the non-prosecution agreement Deutsche Telekom entered into with the DOJ. The complaint against the individuals alleges violations of the same Sections. That case is in litigation.

U.S. v. Goncalves, Case No 1:09-cr-00335 (D.D.C. Sup. Indt. Filed April 16, 2010) is the SHOT – Show cases (here). The court, in late December 2010, granted defendant Stephen Gioradanella’s motion for acquittal after twelve weeks in trial. The ruling was made at the conclusion of the government’s case. The previous trial in this action ended with a hung jury.

SEC v. Aon Corporation, Civil Action No. 1:11-cv-02256 (D.D.C. Filed Dec. 20, 2011) is a settled FCPA action with the insurance broker. The firm entered into a non-prosecution agreement with the DOJ, agreeing to pay a $1.76 million criminal fine and to adhere to rigorous compliance and internal control procedures. With the SEC the company consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) without admitting or denying the allegations in the complaint except as to jurisdiction. The firm also agreed to pay disgorgement of $11,416,814 along with prejudgment interest.. Aon also paid a fine in the amount of ₤5.25 million to the UK’s Financial Services Authority.

The criminal investigation focused on payments made between 1997 and 2005 by Aon Limited, the firm’s United Kingdom subsidiary. That subsidiary administered certain training and education funds in connection with its reinsurance business with Instuto Nacional De Seguros or INS, Costa Rica’s state-owned insurance company. The supposed purpose of the payments was for the education and training of INS employees. In fact, significant portions of the money were used for other purposes, according to the DOJ. Those included travel with spouses to overseas tourist locations or for purposes which could not be determined. Many of the invoices did not specify a legitimate business purpose for the expenditure. The Commission’s complaint also focused on payments made in Costa Rica as well as those in Egypt, Vietnam, Indonesia, United Arab Emirates, Myanmar and Bangladesh. The settlement in the criminal investigation is based on what criminal prosecutors termed the “extraordinary” cooperation of the firm with the DOJ and the SEC. The SEC did not disclose the predicate for its settlement.


Reg SHO: Credit Suisse Securities was fined $1.75 in connection with violations of regulation SHO. From June 2006 through December 2010 the firm’s supervisory system regarding locates and the marking of sale orders was flawed. This resulted from a systemic supervisory failure that contributed to significant Reg SHO failures across its equities trading business.

Subprime securitizations: Barclays Capital Inc. was fined $3 million for misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations. From March 2007 through December 2010 the firm misrepresented the historical delinquency rates of three subprime RMBS it underwrote and sold. Those rates are material to investors in determining the value of the securities.


The Board announced that it entered into a cooperative arrangement with the Dubai Financial Services Authority. It relates to the oversight of auditors that practice in each jurisdiction.

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