The collapse of MF Global was a key topic on Capital Hill this week. Lawmakers heard testimony from the former chairman of the firm as well as FINRA. In other congressional hearings the SEC Enforcement Director told a committee that members of congress and their staff are not exempt from the insider trading laws, although such prosecutions have unique difficulties.

In the courts, the first FCPA jury verdict against a business organization was vacated and the case was dismissed on post trial motions. The ruling was based on prosecutorial misconduct. The SEC, in conjunction with the DOJ and other federal regulators and state attorneys general, settled another bid rigging case related to the municipal bond markets. The Commission also brought another aggressive insider trading case based largely on suspicious trading and information and belief.

Finally, the FSA imposed its largest fine retail fine on a financial institution. The penalty was based on selling securities to elderly investors which were not suitable.

The Commission

Dodd-Frank: SEC Chairman Mary Schapiro testified before the Senate Committee on Banking, Housing and Urban Affairs on “Continued Oversight of the Implementation of the Wall Street Reform Act (here). Her testimony included a discussion of the staff studies on investment advisers and broker dealers, the whistleblower program, the Commission’s expanded enforcement authority, derivatives, clearing agencies, credit rating agencies, the Volker rule, asset backed securities, corporate governance, the FSOC and new Commission offices.

Insider trading: SEC Enforcement Director Robert Khuzami testified before the House Committee on Financial Services on December 6, 2011 on a bill which concerns insider trading by members of congress. Testimony by Robert Khuzami, Director, Division of Enforcement, SEC, on H.R. 1148, the Stop Trading on Congressional Knowledge Act. The Director’s testimony makes it clear that congressional members are subject to the securities laws but there may be special challenges in bringing insider trading charges against members and their staff (here).

Bid rigging, municipal bonds

SEC v. Wachovia Bank, N.A., Civil Action No. 2:11-cv-07135 (D.N.J. Dec. 8, 2011) is an action against the firm arising out of its fraudulent practices related to the municipal securities market. The action against Wachovia, now known as Wells Fargo Bank, N.A., is the most recent action in an on-going inquiry into anticompetitive practices in the municipal securities markets. This case, like earlier ones against J.P. Morgan and UBS Financial Services, concerns the competitive bidding process for the temporary investments made by municipalities of funds obtained from the sale of municipal securities prior to the actual use of the funds. IRS regulations require that those funds be invested at fair market value which is typically established through a competitive bidding process. Over an eight year period beginning in 1997, Wachovia won bids for these investments through fraudulent practices such as “last looks” under which they reviewed the bids of others before submitting their bid, or from a “set up,” a practice in which the bidding agent obtained non-winning bids from others in order to set up the field for Wachovia. The firm employed these practices in at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. The firm made millions of dollars as a result of these fraudulent transactions. To settle the action Wachovia consented to the entry of a permanent injunction prohibiting future violations of Section 17(a) of the Securities Act. The firm will also pay disgorgement of $13,80,984 along with prejudgment interest and a $25 million penalty. The amounts paid by Wachovia will be returned to the affected municipalities or conduit borrowers.

Wachovia also settled with the DOJ, entering into an agreement under which it will not be prosecuted. That agreement stems from its admission of wrong doing and its cooperation. It is conditioned on the firm fulfilling its obligations which include paying $148 million in restitution, penalties and disgorgement to federal and state agencies. Those include the Office of the Comptroller of the Currency, the IRS and 26 state attorneys general in addition to the SEC.

The Commission also filed a related, settled action. In the Matter of Dean Zenon Pinard, Adm. Proc. File No. 3-14655 (Dec. 8, 2011). This is an action against the former vice president and marketer at Banc of America Securities LLC. Mr. Pinard is the beneficiary of a grant of immunity from criminal prosecution by the DOJ to the parent of Banc of America Securities. Mr. Pinard cooperated with the investigation. He settled charges against him by consenting to the entry of a cease and desist order based on Section 15(c)(1)(A) of the Exchange Act. He also agreed to pay disgorgement of $32,489 along with prejudgment interest and to be barred from the securities business.

SEC Enforcement: Litigated cases

Fraudulent offering: SEC v. Integrity Financial AZ, LLC, Civil Action No. 10-CV-782 (N.D. Ohio) is an action against, among others, the firm, Steven Long and Stanley Paulic. The complaint alleges that Messrs. Long and Paulic, the founders of the company, raised more than $8 in a fraudulent unregistered offering of promissory notes supposedly secured by real estate in Arizona. The court granted the Commission’s motion for summary judgment. Final judgments were entered against Messrs. Long and Paulic, permanently enjoining each from future violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). Mr. Long was also directed to pay disgorgement in the amount of $41,481,736 along with prejudgment interest and a civil penalty in the amount of $1,465,306. Mr. Paulic was directed to pay disgorgement of $586,225 plus prejudgment interest and a civil penalty equal to the amount of the disgorgement. Previously, a default judgment was entered against the company.

SEC Enforcement: Filings and settlements

Prime bank scheme: SEC v. The Milan Group, Inc., Civil Action No. 11-cv-02132 (D.D.C. Filed Nov. 30, 2011)(see also Lit. Rel. 22181, Dec. 6, 2011) is an action against the company and defendants Frank Pavlico III and Washington D.C. attorney Brynee Baylor, among others. According to the complaint, the defendants offered investors an opportunity to participate in an international investing program involving complex financial instruments which supposedly generated large profits. The program was a fraud. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation. Mr. Pavlico has also been charged in a parallel criminal case with wire fraud. .

Market manipulation: SEC v. Baldassarre, Civil Action No. 11 Civ. 5970 (E.D.N.Y. Filed Dec. 7, 2011) is an action against Giuseppe Baldassarre, the former CEO of Dolphin Digital Media, Inc., Robert Mouallem, a registered representative and Malcolm Stockdale, a Dolphin shareholder. Essentially the complaint alleges that the defendants attempted to manipulate the stock of Dolphin from October 2009 through April 2010 through a kickback arrangement with an unidentified individual who claimed to represent a group of brokers with discretion over the accounts of wealthy individuals. The individual was given detailed instructions on how to trade the stock. Those sales were then, for the most part, matched. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.

Insider trading: SEC v. All Know Holdings Ltd., Case No. 11 cv 8605 (N.D. Ill. Filed Dec. 5, 2011) centers on the acquisition of Global Education and Technology Group Ltd. by Pearson plc. Global is a Cayman Islands corporation headquartered in Beijing, China. It provides English language services in China. Global’s American Depository Shares or ADSs are traded on NASDAQ. Pearson is a British corporation headquartered in London whose shares are traded in New York and London. On November 21, 2011 Pearson announced the acquisition of Global at a premium of 105% over the previous day share closing price. Global’s share price spiked 97% from $5.37 to $10.60. Named as defendants are All Know Holdings Ltd, a British Virgin Islands Company, Lili Wang, Sha Chen, the president of All Know, and ZhiYao. Each of the defendants made large purchases of Global ADSs in the days shortly prior to the deal announcement. None of the purchasers had a history of trading in these shares, although Ms. Wang had bought shares in Global’s IPO. In some instances the traders do not appear to have the financial means to conduct the trading.

Ms. Wang is the only defendant which the complaint connects to the transaction other than through trading. She has an undefined relationship with Xiaodong (Veronica) Zhang, the co-founder and Chairman of the Board of Global. On information and belief the complaint claims Ms. Zhang financed the trading of Ms. Wang. The complaint does not allege a source of information for the other trading groups. It also does not allege a connection between the four groups. The Commission’s complaint alleges violations of Exchange Act Section 10(b). At the time the complaint was filed the SEC obtained an emergency freeze order over $2.7 million is trading profits. A hearing on the Commission’s motion for a preliminary injunction is set for December 15, 2011.

Financial fraud: SEC v. Chu, Case No. CV 11-09859 (C.D. Cal. Filed Nov. 29, 2011) is an action against Nancy Shao Wen Chu, the largest shareholder of Soyo Group, Inc. with 47% of its shares, and Elizabeth Tsang who was employed as an accounting manager by the company from 2002 through 2009. The complaint claims that the two defendants orchestrated a scheme in which over $47 million in fraudulent sales were booked. Revenue was overstated as a result of the scheme in 2007 and 2008 by a range of 14.4% to 76.8% at the company. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as control person liability under Exchange Act Section 20(a). The case is in litigation.

Criminal cases

Mark Kaiser, formerly an executive of U.S. Foodservice, Inc., then a subsidiary of Royal Ahold,, N.V., was sentenced to serve 46 months in prison stemming from his participation in an accounting fraud at the company. Specifically, he is alleged to have participated in a scheme from 2000 through 2003 in which the earnings of the company were falsely inflated by booking hundreds of millions of dollars in fictitious promotional allowances that had not been earned. As part of the scheme, suppliers of the company were induced to furnish fraudulent audit confirmations to the outside auditors. Eventually the company restated its financial statements. Mr. Kaiser was initially convicted at trial of once count of conspiracy, one count of securities fraud and four counts of making false filings with the SEC. The Second Circuit reversed his conviction. On remand he pleaded guilty to one count of conspiracy to commit securities fraud, to file false statements with the SEC and to keep false books and records for his former employer and its parent.


U.S. v. Aguillar, 2:10-cr-01031 (C.D. Cal. Order Filed Dec. 1, 2011) is the first FCPA case in which a corporation was convicted by a jury. FCPA charges were brought against

Lindsey Manufacturing, its owner and President, Keith Lindsey, Steve Lee, the CFO and vice president and Angela Aguilar. Ms. Aguilar is the wife of Enrique Aguilar of Grupo International which served as an agent in Mexico for Lindsey. The company and its employees were alleged to have paid bribes to the Comision Federal de Electricidad or CFE in Mexico through Grupo. CFE is a state owned utility company. Following a jury trial the company and Messrs. Lindsey and Lee were each convicted on one count of conspiracy and five counts of FCPA violations. Ms. Aguilar was convicted on one count of conspiracy to commit money laundering.

The Court granted the Lindsey defendants’ post verdict motions and vacated the verdict and dismissed the case with prejudice. The court concluded that the government engaged in a pattern of pervasive misconduct which included: Improperly delaying the production of key grand jury transcripts; procuring search and seizure warrants through materially false and misleading affidavits; improperly obtaining attorney-client privileged communications;

violated court orders; improperly questioned witnesses; failed to timely produce information required under Jenks; and engaged in questionable conduct during closing argument.


MF Global: Stephen Luparello, vice chairman of FINRA, testified before the House Committee on Agriculture regarding the MF Global debacle, reviewing oversight of the entity, its exposure to European sovereign debt and the bankruptcy proceedings (here).


Agreement: The Board entered into a cooperative agreement with the Netherlands Authority for the Financial Markets or AFM regarding the oversight of auditors that practice within the jurisdiction of each. The agreement also provides for the exchange of confidential information.

Audit Practice Alert: The Board published Staff Audit Practice Alert No. 9: Assessing and Responding to Risk in the Current Economic Environment. It updates Alert No. 3. The Alert focuses on issues which might affect the risk of material misstatement in the financial statements.


HSBC was fined ?10.5 million for inappropriate investment advise given by its subsidiary, NHFA Limited, to elderly customers. Approximately ?29.3 million will be paid to those customers in addition to the fine. The fine is the largest ever retail fine imposed by the FSA.

The action is based on the conduct of NHFA prior to the time it was acquired by HSBC. Advice was given and sales made to elderly customers who had an average age of almost 83. Those customers were told to invest in asset backed investment products, typically investment bonds, to fund long-term care costs. The products were sold to individuals entering, or already in, long term care. In many instances the investors were reliant on the investments to pay for their case. The recommended term for these investments is a minimum of five years. In a number of cases the individuals had a shorter life expectancy than the five year period. This resulted in customers making withdrawals from the investments sooner than recommended causing a faster reduction of capital. A review by a third party found that the investments were unsuitable for 87% of the customers. HSBC agreed to settle at an early stage, entitling it to a 30% discount on its fine. It also demonstrated a commitment to changing its operations.

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