This week the entire Federal Government, including the home office of the SEC, has been buried in snow, snow and more snow. Nevertheless, there were significant developments in securities litigation, starting with the call by Commissioner Aguilar for a revamping of the 2006 corporate penalty guidelines. While not new, it comes at a significant time as the Commission is retooling enforcement.

The week opened with more disconcerting news for the SEC and Bank of America: The judge raised questions about the proposed settlement papers filed last week at the same time that the NY AG filed a similar suit, but which named two individuals as defendants. The SEC did obtain a preliminary injunction in an investment fund case, while the criminal prosecutors expanded their insider trading case involving the founder of Galleon. The Government also obtained a plea in a case where a computer hacker entered brokerage accounts and used them to manipulate share prices. In addition, DOJ obtained another guilty plea in an FCPA case.

Reform efforts

Commissioner Louis Aguilar, in remarks at SEC Speaks last Friday, called for a revamping of the Commission’s 2006 guidelines on corporate penalties, discussed here. See Remarks of Commissioner Luis Aguilar, SEC Speaks, Washington, D.C., February 5, 2010.

In his remarks, Commissioner Aguilar termed the 2006 guidelines “misguided” and called for them to be revamped. Under the existing guidelines, the use of corporate penalties is largely a function of two factors: 1) whether there is a direct benefit to the corporation as a result of the violation; and 2) if the penalty will recompense or further harm the injured shareholders. Since the purpose of a penalty is to punish and deter, the key question in determining whether one should be imposed is the conduct, not these factors, in the view of Commissioner Aguilar. The Commissioner did not outline specific proposals for revamping the guidelines.

Bank of America

Earlier this week, the court again raised questions regarding the proposed SEC – Bank of America settlement papers filed last week, discussed here. The settlement would cover the two suits the Commission has pending against the Bank arising out of its acquisition of Merrill Lynch. Both complaints focus on alleged omissions from the proxy materials used in connection with the December 2008 shareholder vote which approved the merger of the bank and the broker. The first complaint focuses on omissions regarding bonuses to Merrill employees while the second concerns the failure to update financial information about the broker.

Two critical questions raised by the court when the earlier settlement was rejected concerned the amount of the penalty and the failure to name individuals. The size of the new proposed penalty is addressed in very general terms in a brief filed by the SEC with the settlement papers.

The second question is clearly presented again since neither of the SEC’s complaints name any individuals. At the same time a similar suit file by the NY AG, also discussed here, named as defendants the bank, as well as its former CEO Ken Lewis and CFO Joseph Price. Court papers filed by the Commission and the NYAG which detail the chronology of the deal are substantially similar. There are differences, discussed here, which suggest the reason the SEC did not name individuals as in the NY AG complaint.

One critical difference which emerges clearly from the court papers is the legal standards. The SEC’s prior comments on this point have focused on a lack of evidence of scienter. The NY papers allege scienter and, alternatively, negligence.

A second is the role of the lawyers as to the disclosure of the Merrill financial information. Both sets of papers suggest that the outside attorneys and bank GC at one point decided disclose of the financial information about the huge fourth quarter losses Merrill was suffering would be appropriate. As the shareholder vote on the deal approached, the NY papers state that the bank GC was given incomplete information by an executive ensuring an opinion that the financial data would not be disclosed while outside counsel played a decreasing role after their initial advice was not followed.

A third, difference concerns the failure to include the bonus material. The New York complaint does not record how the decision was made not to disclose the approval of the bonuses. The SEC papers, in contrast, note that an attorney working on the deal thought the bonuses did not have to be disclosed because they were not special transactional bonuses and were consistent with the prior year. Outside counsel did not actually discuss the issue with the bank.

SEC enforcement actions

Investment fund fraud: SEC v. Elkinson, Case No. 10-CA-10015 (D. Mass.), discussed here. Last week, the SEC obtained a preliminary injunction in this case. The complaint, which charged violations of the registration and antifraud provisions, alleges that while working from home, Richard Elkinson was able to raise about $28 million over a period of several years from 130 investors in twelve states. Mr. Elkinson apparently lured investors to purchase promissory notes in a business that was suppose to be brokering contracts on behalf of a Japanese firm. Investors received promissory notes with interest rates ranging from 9% to 13%, signed by Mr. Elkinson. The SEC claimed that Mr. Elkinson had no relationship with a Japanese uniform manufacture, that there were no contracts, that some investors were paid with funds from others and that money was diverted to the personal use of the defendant.

Criminal cases

Theft of high speed trading program: U.S. v. Aleynikov (S.D.N.Y. Filed Feb. 11, 2010) is an action which charges Sergey Aleynikov with one count of theft of trade secrets, one count of transportation of stolen property in foreign commerce and one count of unauthorized computer access. Mr. Aleynikov previously was employed by Goldman Sachs from May 2007 through June 2009 as a computer programmer. In that position, he was responsible for developing computer programs for the firm’s high frequency trading on various commodities and equities markets. The firm considered these programs proprietary and took significant steps to preserve their confidentiality. Prior to resigning from the firm in April 2009 to take a similar position with a start-up attempting to develop such programs, Mr. Aleynikov is alleged to have transferred a substantial portion of Goldman’s proprietary computer code for its high speed trading platform. He is also alleged to have transferred thousands of computer files related to the trading platform.

Insider trading: U.S. v. Rajaratnam, Case No. 09 mg 2306 (S.D.N.Y.), discussed here, is the insider trading case against the founder of the Galleon fund. This week the Government filed a superseding indictment. Since the original indictment the Government has obtained three additional guilty pleas. The new allegations, which are substantially similar to those in the SEC’s recently amended complaint discussed here, focus largely on Mr. Rajaratnam’s alleged involvement with Mr. Kumar, one of the individuals who recently pleaded guilty. The superseding indictment also contains a forfeiture count and increases the illegal sums claimed to have been made by Galleon to $45 million. New Castle is alleged to have made another $4 million in illegal trading profits.

Investment fund fraud: U.S. v. Stein, Case No. 1:09-cv-03125 (E.D.N.Y. Filed April 2, 2009), discussed here, is an action against investment adviser Edward Stein. Mr. Stein pleaded guilty in June to operating a Ponzi scheme from 1998 through April 2009. As a result of the scheme about 100 investors lost $45 million. This week he was sentenced to nine years in prison for securities fraud and wire fraud.

Brokerage hacking: U.S. v. Marimuthu, (D. Neb. Feb. 5, 2010) is a case in which Jaisankar Marimuthu, a resident of India, pleaded guilty to: conspiracy to commit wire fraud; securities fraud; computer fraud and aggravated identity theft and aggravated identity theft. The indictment centers on a conspiracy operated from Thailand and India from February through December 2006. Its purpose was to hack into various brokerage accounts and use them to make large and unauthorized trades to influence the price of thinly traded securities. Previously another member of the conspiracy, Thirugnanam Ramanathan pleaded guilty.


U.S. v. Warwick (E.D. Va.) is an action against John Warwick for FCPA violations. Mr. Warwick pleaded guilty this week to a one count indictment charging him with conspiring to make payments in violation of the FCPA. Specifically, the indictment centers on efforts to secure a maritime contract from certain Panamanian government officials for Ports Engineering Consultants Corporation. According to the indictment, Mr. Warwick conspired with Charles Jumet who previously pleaded guilty as discussed here. As part of the plea, Mr. Warwick admitted that from 1997 through July 2003 he and others made corrupt payments of more than $200,000 to the former administrator and deputy administrator of the Panama Maritime Authority and to a former high ranking elected official of the Panama government. Mr. Warwick will forfeit $331,000 which is the proceeds of the crime. Sentencing is set for May 14, 2010.