THIS WEEK IN SECURITIES LITIGATION (December 3, 2010)
Insider trading and FCPA enforcement were key topics this week. In the wake of the FBI raids on three hedge funds, Attorney General Eric Holder has confirmed that the U.S. Attorney in New York is conducting an insider trading investigation. That investigation continued to unfold with the admission that one of the funds raided is not a target of the inquiry.
The SEC, in conjunction with the FSA in London as well as the FBI and DOJ, brought an action centered on a family insider trading ring operating between San Francisco and London. One family member was also indicted for obstructing the SEC inquiry. The FSA brought criminal charges against several individuals in connection with the action.
A Senate subcommittee heard testimony on FCPA enforcement and possible modifications of the Act. In part, the testimony recapped recent DOJ enforcement efforts. In other testimony, the Committee was told that the FCPA required amendments.
Finally, the option backdating cases drew closer to the end as medical technology company Cyberonics, Inc. and its former CEO and CFO received letters from the SEC stating that its almost four year old probe is now closed.
Market manipulation: SEC v. BroCo Investments, Inc., Civil Action No. 10-cv-2217 (S.D.N.Y. Settled Dec. 2, 2010) is an action alleging that BroCo Investments and its president, Valery Maltsev, engaged in an account intrusion scheme that manipulated the shares of over 100 companies. The amended complaint, filed in connection with the settlement, claimed that the defendants controlled an omnibus account used to turn $2,080 into $627,633 in six months by repeatedly buying and selling securities contemporaneously with unauthorized trades placed in compromised accounts at various brokers. In the settlement, the company consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The company also agreed to disgorge all of its trading profits and pay prejudgment interest. Mr. Maltsev consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 17(a)(2) and (3) and to pay a penalty of $50,000. See also Litig. Rel. 21760 (Dec. 2, 2010).
Offering fraud: SEC v. Dodge, Civil Action No. 1:10-cv-00913 (W.D. Tex. Filed Dec. 1, 2010) is an action against Jennifer Dodge, Grant Carroll, Tamara Davis and The Cornerstone TKD, LLC. The complaint alleges that from April 2007 through May 2008 the defendants raised about $9 million from 20 investors, selling unregistered interests in a Prime Bank scheme. Investors were told that their funds would be pooled, placed in escrow and then used to secure money from high net worth funders. A blocked funds account would be used as collateral for traders to buy and sell bank notes and other instruments which would give investors returns ranging from 25% to as much as 100% per week without risk. The Commission’s complaint alleges that the scheme is a fraud which violates Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). Ms. Dodge partially settled the matter, consenting to the entry of a permanent injunction prohibiting future violations of each of the Sections cited in the complaint except Exchange Act Section 15(a). The court will determine the amount of disgorgement, prejudgment interest and any civil penalty. See also Litig. Rel. 21759 (Dec. 1, 2010).
Failure to disclose: In the Matter of Neil Godbole, Adm. Proc. File No. 3-14147 (Filed Dec. 1, 2010) is an action alleging violations of Advisers Act Sections 206(1), 206(2) and 206(4) against Neil Godbole, the owner of Trueblue Strategies. According to the Order, Mr. Godbole operated Opulent Lite, a hedge fund, through Trueblue. Opulent had about 70 investors and $30 million under management. It was registered at the time with the State of California. In February 2008, Mr. Godbole suffered a loss of about $8.3 million. Rather than tell the investors about the loss, Mr. Godbole concealed it for the next year. Subsequently, investors withdrew their money and the fund was liquidated. To resolve the action, Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to be barred from association with any investment adviser with a right to reapply after five years and to pay a civil money penalty of $40,000.
Insider trading: SEC v. McClellan, Case No. CV 10 5412 (N.D. Cal. Filed November 30, 2010) is an action involving an international family insider trading ring (here). The defendants are Deloitte Tax LLP M&A tax partner Arnold McClellan and his wife Annabel of San Francisco and her sister Miranda Sanders and her husband James Sanders who reside in London. Mr. Standers is a director, shareholder and co-founder of Blue Index Limited. Over a two year period beginning in 2006, Arnold McClellan disclosed confidential information on seven M&A deals he was working on to his wife according to the Commission. She in turn passed that information to her sister and brother-in-law. Mr. Sanders would then trade, purchasing “spread bet contracts,” a derivative. Four of the deals went forward and netted about $3 million in trading profits which the two couples split. Mr. Sanders told clients of his firm about two of the deals. Those clients traded and made profits of over $20 million. In one deal, Mr. Sanders is alleged to have told his best friend who traded and made $300,000. Three of the deals did not go forward. The Commission’s action alleges violations of Exchange Act Section 10(b). The case is in litigation. In a related action Mrs. McClellan was indicted for obstruction of justice in connection with the SEC’s investigation of this matter. U.S. v. McClellan, CR 10 0860 (N.D. Cal. Filed Nov. 24, 2010).
Previously, the FSA in London charged five individuals with seventeen counts of insider dealing in connection with the transactions detailed in the Commission’s complaint. James Sanders and his wife Miranda Sanders were jointly charged with seven offenses based on trading in advance of take over announcements. In addition, Mr. Sanders and Christopher Hossain, a senior trader at Blue Index, were charged with encouraging clients to trade on two of the deals. Mr. Hossain was also charged with insider trading on the two deals. A former employee of the firm, Adam Buck, was charged with insider trading on one of the deals.
The cases are the result of parallel investigations by DOJ, the FBI, the SEC and the FSA.
Material misrepresentations:In the Matter of Priscilla G. Sabado, Adm. Proc. File No. 3-14145 (Filed Nov. 30, 2010) is a proceeding against Ms. Sabado, who worked as a broker and investment adviser representative of AXA Advisors, a registered broker dealer. The Order alleges that Ms. Sabado sold interests in Halek Energy which purports to drill and operate oil and gas wells in Texas. That entity, along with CBO Energy, Inc. and Jason Halek, is a defendant in another Commission enforcement action alleging the fraudulent sale of securities. In selling interests in Halek to her clients, Ms. Sabado is alleged to have made material misrepresentations regarding the risks and the projected returns. She also falsely represented that dividends would be paid shortly. The Order alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 15(a). The hearing date has not been set.
Investment fund fraud: U.S. v. Levin (S.D.N.Y) is an action in which defendants Igor Levin and Yevgeny Shvartesshteyn pleaded guilty to one count of conspiracy to commit wire and mail fraud. The defendants operated A.R. Capital Global Fund. Through that company the defendants solicited more than $7 million by telling investors the hedge fund would invest in international real estate companies and in real estate, oil, gas and other commodities. The representations were false. The investor money was wired to various banks in the Ukraine. The defendants also agreed to forfeit $7 million which is the proceeds they obtained. Sentencing is set for February 25, 2010.
Investment fraud: U.S. v. McDonald (S.D.N.Y. Filed Dec. 1, 2010) charges Robert E. McDonald with one count of securities fraud, one count of wire fraud and one count of mail fraud in connection with a fraudulent investment scheme. Specifically, Mr. McDonald is alleged to have secured a $1.5 million investment based on claims that he was purchasing a portfolio of hotels and that he had funds in an account at J.P. Morgan Chase for the transaction. To facilitate the scheme Mr. McDonald provided the investor with fake bank records. Once he secured the investment, the funds were largely diverted to his personal use.
The Senate Judiciary Committee, Subcommittee on Crime and Drugs, heard testimony on FCPA enforcement and possible amendments to the Act (here). Acting Deputy Assistant Attorney General Greg Andres recounted DOJ’s enforcement efforts noting “over approximately the last two years, we have substantially increased the number of our prosecutions against corporations and individual executives, and we have collected more in fines than in any other period in the history of our FCPA enforcement.”
Andrew Weissmann, testifying on behalf of the U.S. Chamber of Commerce, reiterated proposals for reform from the report issued by the Chamber earlier this year. Those included: 1) adding a compliance defense; 2) clarifying the definition of “foreign official;” 3) adding a “willfulness” requirement for corporate criminal liability; 4) limiting a company’s liability for the prior actions of an acquired entity; and 5) limiting a parent company’s liability for acts of a subsidiary.
Michael Volker detailed a proposal crafted by Judge Stanley Sporkin for the Committee. Under that proposal a company would essentially be insulated from FCPA liability if it agreed to:
1. Conduct a full and complete FCPA compliance review of the past five years;
2. Have the review conducted by a major accounting firm or specialized forensic accounting firm and law firm;
3. Disclose the results to DOJ, the SEC and the public;
4. Take appropriate steps to eliminate any violation or difficulty discovered and ensure against future violations;
5. Submit to an annual review for five years to ensure compliance; and
6. Retain an FCPA compliance officer who will annually certify compliance by the participating company to DOJ and the SEC.
In exchange for taking these six steps, DOJ and the SEC would agree not to initiate an enforcement action against the company during the period except for flagrant or egregious violations.
Neil Rollins, former senior manager of PM Onboard Ltd., a waste industry firm, was convicted on five counts of insider dealing and four counts of money laundering. Mr. Rollins, according to the charges, learned from his senior position, about the deteriorating financial condition of the company. He then sold all of his holdings in PM Group plc. before the information became public. He also encouraged his wife to sell her shares. When he became aware of the investigation by the FSA he attempted to conceal his conduct by laundering the trading proceeds.
FCPA Program: Thursday, December 9, 2010 from 12:00 to 1:30 p.m. Tom Gorman and Frank Razzano will co-chair the “Third Annual FCPA Update: Current SEC & DOJ Enforcement Activities.” The program is sponsored by the ABA Criminal Justice Section, White Collar Securities Fraud Subcommittee of which Mr. Gorman is co-chair.
The panel of speakers includes: Judge Stanley Sporkin, Law Offices of Stanley Sporkin, Peter B. Clark, Cadwalader, Wickersham & Taft, F. Joseph Warin, Gibson Dunn, and Tammy Eisenberg, Chief Compliance Officer and General Counsel of DIAM, New York City.
The program will be webcast nationally and live in Washington, D.C. at the offices of Pepper Hamilton where Mr. Razzano is a partner, 600 14th Street, Washington, D.C. Lunch will be served during the program. To register please click on the following link: http://www.abanet.org/cle/programs/t10fpa1.html.