As the year draws to a close, there are proposals on Capital Hill which could significantly redraw the regulatory landscape in 2010, beginning with a proposal to bring back the Glass-Steagall Act. A new report raises significant concerns regarding the health and vitality of the U.S. capital markets and their ability to support job creation for the future.

SEC enforcement over the last two weeks has continued to focus on insider trading cases as well as the new staple – the investment fund and Ponzi scheme case. Broadcom settled class actions brought against the company based on option backdating claims following the dramatic end of the related criminal trials earlier this month.

Market reform

Legislation: Senators Cantwell and McCain introduced Senate bill S.2886 before the holiday recess. The short, four-page bill is titled Banking Integrity Act of 2009. Essentially it would restore the Glass-Steagall Act. Also sponsoring the bill are Senators Barbara Boxer, Edward Kaufman, Bernard Sanders and Russell Feingold.

Capital markets study: Grant Thornton issued a new report on the structure of the U.S. capital markets titled “A wake-up call for America.” In the study, the firm urges Congress and the SEC to hold immediate hearings to understand the reason the U.S. capital markets have shed listings at a rate faster than other developed markets. Key findings include:

1) Problems in market structure are undermining U.S. global competitiveness. Since 1991, the number of listed companies has declined significantly.

2) The number of new listings needed just to maintain the status quo is larger than expected. 360 new listings per year are needed to maintain the status quo. That number has not been approached since 2000. 520 new listings are needed per year to grow the markets at about 3% per annum, roughly in line with GDP growth.

3) The lack of new listings threatens the job market. According to the report, up to 22 million jobs may have been lost because of the “broken” IPO market. The root cause of this difficulty is not Sarbanes-Oxley, but “an array of regulatory changes that were meant to advance low-cost trading, but have had the unintended consequence of stripping economic support for the value components (quality sell-side research, capital commitment and sales) that are needed to support markets, especially for smaller capitalization companies.” Higher transaction costs, the report argues, actually subsidized services that supported investors. Conversely, lower transaction costs have facilitated trading and the age of “Casino Capitalism.” This has harmed the economy.

The report proposes solutions to create new capital market options, expand choice for consumers and issuers, preserve the SEC and Sarbanes-Oxley and reserve private market participation to qualified investors. Those solutions fall into two segments. One is called the alternative public market segment, which would support “value components” such as research, sales and capital commitment in the market place. The other is enhancements for the private market for both institutional and large accredited investors.

Private actions: A new report by NERA Economic Consulting suggests that securities class action filings will be down by about 7% for 2009 compared to 2008. This may be the result of the fact that in 2008 many of the suits were driven by the credit crisis. A new type of case which arose in the second half of 2009 is suits on behalf of investors in exchange-traded funds. In these cases, investors claim they were not informed of the risks and potential losses.

Financial crimes: A recent DOJ report shows that prosecutions of financial crimes dropped significantly over the past six year. In 2009 there was a 55% drop in corporate fraud cases, a 44% drop in bankruptcy fraud cases and a 17% drop in securities fraud charges compared to 2003. Acting U.S. Attorney for the Southern District of New York Lev Dassin however, noted in a recent speech that his office has a lot of cases in the pipeline that are likely to be brought in 2010, making it potentially a busy year.

SEC enforcement actions

Financial fraud: SEC v. Forbes, Case No. 01 civ 987 (D.N.J. Filed Feb. 28, 2001) is a financial fraud action brought against the former Chairman of Cendant Corporation. The complaint alleged a twelve-year scheme to improperly inflate the financial results of the company in violation of the antifraud and books and records provisions of the federal securities laws. Mr. Forbes was convicted in 2007 of conspiracy to commit securities fraud and making false statements to the SEC. He is currently serving a sentence of 151 months in prison and has been ordered to pay criminal restitution of $3.275 billion. Mr. Forbes settled with the SEC this week, consenting to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions. He also agreed to the entry of an officer director bar. See also Litig. Rel. 21356 (Dec. 30, 2009).

Churning: SEC v. Jaschke, Case No. 6:09-CV-2178 (M.D. Fla. Filed Dec. 29, 2009) is an action against Harold Jaschke, a former registered representative associated with First Allied Securities, Inc. in its Houston, Texas as discussed here. The complaint alleges that the defendant, from June 2005 to August 2008, churned the accounts of two municipalities, the City of Kissimmee, Florida and the Tohopekaliga Water Authority of Florida. Although each municipality was required to have conservative investments Mr. Jaschke, unknown to his clients, adopted a risky strategy trading STRIPS, a particular type of long term zero-coupon Treasury Bond. He then multiplied the risk through leverage.

From June 2005 through March 2008 Mr. Jaschke placed a total of 478 trades to purchase $2.8 billion of STRIPS in the account for Kissimmee. This resulted in a profit of $4.3 million when the market swung in favor of the municipality. Mr. Jaschke made $6.1 million in commissions. The Water Authority account was similar. There, the defendant place 563 trades resulting in the purchase of $3.1 billion of STRIPS. When the market moved in its favor, the Water Authority was able to avoid a loss and make $5.5 million. Mr. Jaschke generated $8.1 million in commissions. The complaint alleges violations of the antifraud provisions of the securities laws. The case is in litigation.

A related administrative proceeding was brought against Jeffrey Young, a vice president of supervision at Allied. The Order alleges a failure to supervise Mr. Jaschke. In the Matter of Jeffrey C. Young, Adm. Proc. File No. 3-13731 (Dec. 29, 2009). The proceeding was settled with Mr. Young consenting to the entry of an order suspending him from association in a supervisory capacity with any broker, dealer or investment adviser for a period of nine months. Mr. Young also agreed to pay a civil penalty of $25,000.

Financial fraud: SEC v McDonald, Case No. 09-CV-01685 (W.D. Pa. Filed Dec. 23, 2009) alleges that defendants Richard McDonald, former president, CEO and Chairman of World Health Alternatives, Inc. along with Deanna Seruga, the former company controller, Marc Roup, the former CEO and Joseph Emas, the former outside securities counsel, engaged in fraudulent conduct from 2003 through 2005 at the company. World Health Alternatives is a now defunct medical staffing company. According to the complaint Messrs. McDonald, Seruga and Roup engaged in fraudulent conduct which included understating income and expenses. This falsified the financial results of the company as well as its filings and the related certifications. In addition, Mr. McDonald is alleged to have misappropriated about $6.4 million of company funds for his personal benefit and improperly attempted to issue and register for immediate sale millions of shares of company stock. The complaint alleges violations of the registration, antifraud and books and records provisions.

To settle the case, Messrs. McDonald and Roup each consented to the entry of permanent injunctions precluding future violations of the registration, antifraud and books and records provisions of the securities laws. Mr. McDonald also agreed to the entry of an order which will bar him from serving as an officer or director of a public company and to pay disgorgement of about $6.4 million plus prejudgment interest, the payment of which, along with any penalty, was waived based on his financial condition. Mr. Roup also agreed to the entry of a bar order and to pay disgorgement and prejudgment interest of about $5.3 million and a $120,000 civil penalty. His assets will be transferred to a court appointed receiver to satisfy the payments. Mr. Seruga consented to the entry of an injunction prohibiting him from violating the antifraud provisions and certain books and records provisions. Based on his financial condition, payment of about $383,000 in disgorgement and a penalty was waived. Mr. Emas consented to the entry of a permanent injunction prohibiting future violations of the registration provisions and Securities Act Sections 17(a)(2) & (3). He also agreed to disgorge about $163,000 and to pay a civil penalty of $15,000. See also Litig. Rel. 21350 (Dec. 23, 2009).

Investment funds: SEC v. Rockwell Energy of Texas, LLC, Civil Action No. 4:09-cr-4080 (S.D. Tex. Filed Dec. 23, 2009) is an action based on claimed violations of the registration and antifraud provisions against Gregory Shindler, Bradley James and their controlled entities, discussed here. According to the complaint, over about a one year period ending in February 2009, the funds raised about $5.5 million from 139 investors with claims that they would receive about 1.5% per month from oil and gas properties. The claims were false and portions of the few payments made to investors came from other investors in Ponzi scheme fashion. The complaint also names three individuals as defendants who acted as salesmen for the fund. The case is in litigation.

Investment funds: SEC v. Triton Financial, LLC., Civil Action No. A00CA924 (W.D. Tex. Filed Dec. 22, 2009). The defendants in this fraud action are Kurt Barton and his controlled entities as also discussed here. According to the SEC, over a five-year period, Mr. Barton has raised over $50 million from investors, primarily by selling units in Triton. From late July 2008 through October 2009, Triton’s primary fund-raising vehicle was the Triton insurance offering which raised about $8.4 million from 90 investors to acquire an insurance company. A key part of the promotion to investors was the use of NFL football stars who touted the supposed returns. Despite the representations to investors, the funds were not used to acquire that company. Rather, an equipment company was purchased in part from funds solicited from other investors. When state officials began an inquiry, they were furnished with false documents. This case is in litigation.

Insider trading: SEC v. Condroyer, Case No. 1:09-cv-3600 (N.D. Ga. Filed Dec. 22, 2009) is an action against two French citizens residing in Belgium, discussed here. The complaint, which is litigation, centers on the December 21, 2009 announcement by Chattem, Inc. that it was acquiring Sanofi-Aventis. Chattem is based in Chattanooga, Tennessee. Sanofi-Aventis is a French corporation based in Paris.

Shortly before the announcement of the deal which cased the share price to rise over 32%, Mr. Condroyer purchased approximately 1,970 Chattem call options for $42,000 through a recently opened account at optionsXpress, Inc., an on-line brokerage firm based in Chicago. Mr. Rogers purchased about 940 Chattem call options at a cost of about $38,000 through a recently opened account at optionsXpress, Inc.. Both defendants sold their positions the day after the take over announcement. Mr. Condroyer had a profit of $2.8 million while Mr. Rogers realized about $1.4 million. The Commission obtained a temporary freeze order over each account.

Stock sale scheme: SEC v. Jacobson, Case No. 2:09-cv-00669 (D. Idaho Filed Dec. 22, 2009) and In the Matter of Applied Minerals, Inc. (formerly known as Atlas Mining Company), Adm. Proc. File No. 3-13728 (Filed Dec. 22, 2009), discussed here, are a settled actions against, respectively, William Jacobson, former CEO of Atlas Mining, and the company. The Commission alleged that from 2002 through 2005 Mr. Jacobson used two illegal stock schemes to try and raise funds for the company in violation of the registration, antifraud and other provisions of the securities laws.

Mr. Jacobson settled the case by consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting, internal control, certification and registration provisions of the federal securities laws. He also agreed to pay a penalty of $50,000 and to the entry of an order barring him from serving as an officer or director of any issuer or from participating in any offering of a penny stock for five years. The company, now known as Applied Minerals, Inc., consented to the entry of a cease and desist order barring violations of the registration and reporting provisions. See also Litig. Rel. 21345 (Dec. 21, 2009).

Fictitious trades: In the Matter of ICAP Securities USA LLC, Adm. Proc. File No. 3-13726 (Dec. 18, 2009) is a settled administrative proceeding against ICAP Securities USA LLC, the U.S. subsidiary of the world’s largest inter-dealer broker, ICAP plc. It also names seven employees of the firm as Respondents.

The Order, based on alleged violations of Securities Act Sections 17(a)(2)&(3) and Exchange Act Section 15C, claims Respondents posted fictitious flash trades, made misrepresentations regarding certain workup protocols and other misrepresentations regarding whether the firm conducts proprietary trades. The Order also alleges books and records violations in connection with these violations as well as a failure to supervise as discussed here.

To resolve the action, the firm agreed to a number of undertakings. Those include the retention of an independent consultant who will conduct a review of the current controls, trading activities and books and records. The firm also agreed to the entry of a cease and desist order and to pay disgorgement of $1 million and to pay a civil penalty of $24 million.

Each of the individual Respondents agreed to the entry of a cease and desist order and to a suspension from association with any broker or dealer for period of three months. In addition, each agreed to pay a $100,000 penalty except one who retired nearly four years ago who will pay a $50,000 penalty.


The Office of the General Counsel issued a no-action letter dated December 23, 2009 permitting the offer and sale in the U.S. of Singapore Exchange Derivatives Trading Limited’s (SGX-DT) mini futures contracts based on the Nikkei 225 Stock Index.


On December 29, 2009, FINRA issued a new investor alert titled Save Your Greenbacks—Don’t Fall for Green Energy Scams. The alert cautions investors about investment schemes promising large returns based on green energy such as solar stock companies and similar investments. The alert tells investors to be wary of unsolicited and hard sell investment recommendations in this area.

Civil cases

In re Broadcom Corp., No. 06-5036 (C.D. Cal.) is the class action suit brought against the California based chip maker and its executives centered on option backdating claims. The company agreed to settle the suit for approximately $160 million. This makes it one of the largest option backdating settlements, following UnitedHealth at about $925 million and Comverse Technology at $225 million. Previously, the court dismissed criminal charges against the co-founder of the company and others as discussed here.