THIS WEEK IN SECURITIES LITIGATION (January 22, 2010)
This week, the Administration announced new proposals aimed at limiting the activities of financial institutions to end the “too big to fail” doctrine. The Justice Department unveiled more “blue collar tactics in white collar cases,” disclosing a sting operation which yielded sixteen FCPA indictments against twenty-two individuals, its largest such case.
SEC enforcement concluded a long running financial fraud investigation while filing a settled insider trading action and another investment scheme case. A jury in California returned a guilty verdict against a Ponzi scheme operator.
In remarks delivered yesterday, the President called for additional reforms targeted toward financial institutions. Called The Volcker Rule after former Fed Chairman Paul Volcker, the restrictions would:
1) Limit the scope of financial institution activities by precluding any institution that contains a bank from investing in, or sponsoring, a hedge fund or private equity fund or engaging in proprietary trading operations; and
2) Limit the size of the largest financial institutions.
While the specific details of the proposals were not announced, the Treasury White Paper released last June (here) did discuss strengthening the fire walls between commercial and investment banking units. The text of the remarks is available on the White House web site.
SEC enforcement actions
Financial fraud: SEC v. Assurant, Inc., Civil Action No. 10-Civ.-0484 (S.D.N.Y. Filed Jan. 21, 2010) is a settled financial fraud against an insurance company. The company, according to the complaint, improperly accounted for a $10 million recovery it obtained under a reinsurance policy following the 2004 Florida hurricane season. Under the terms of a reinsurance treaty with American Re-Insurance, the risk of certain losses was transferred from the company to American Re. However, a handshake agreement negated that transfer of risk. The payment was booked however as a bona fide reinsurance recovery, when in fact it was, under GAAP, the return of a deposit because of the handshake agreement. Improperly booking the payment caused the company to overstate reported net income in its filings. To settle the action, the company consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company also agreed to pay a civil penalty of $3.5 million. See also Litig. Rel. 21388 (Jan. 21, 2010).
Insider trading: SEC v. Marquardt, Civil Action No. 10-10073 (D. Mass. Jan. 20, 2010) is a settled action against Charles Marquardt, the former Senior Vice President and Chief Administrative Officer for operations of Boston-based Evergreen Investment Management Co., LLC. In June 2008, according to the complaint, Mr. Marquardt learned that Ultra Fund may soon reduce the value it assigned to several of its mortgage backed securities holdings. That action would reduce NAV. The next day Mr. Marquardt and a family member redeemed all of their Ultra Fund shares. In June 2008, Evergreen announced that Ultra Fund would be liquidated. As a result of the trades, the defendant and his family member avoided losses of, respectively, $4,803 and $14,304. To resolve the action Mr. Marquardt consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. He also agreed to pay $19,107 in disgorgement which includes the losses both he and his family member avoided, along with prejudgment interest, and a penalty equal to the total amount of the disgorgement. In a related administrative proceeding which will be filed Mr. Marquardt consented to being barred from association with any broker, dealer or investment adviser with the right to reapply after two years. See also Litig. Rel. 21383 (Jan. 20, 2010).
Investment fraud: SEC v. Braver, Case No. 10 Civ. 0469 (S.D.N.Y. Filed Jan 20, 2010) is a settled financial fraud action against Bernard Braver, who acted as a boiler room salesman from October 2006 through November 2007 for Rabinovich & Associates. Over a four year period beginning in 2003, the principals of the firm raised over $2.7 million from 169 investors nationwide, selling limited partnership interests in an unregistered fund. Mr. Braver is alleged to have sold $157,000 in interests for his employers and was paid about $49,800. The sales were made based on false representations about the firm and without disclosing that it had been barred from the industry by the NASD. Mr. Braver agreed to settle the action by consenting to the entry of an injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). He also agreed to disgorge the payments he received from the firm and prejudgment interest. Payment was waived based on his financial condition. See also Litig. Rel. 21386 (Jan. 21, 2010).
Financial fraud: SEC v. General Re Corporation, Case No. 10 CV 458 (S.D.N.Y. Filed Jan. 20, 2010). This settlement with General Re is one of a series of civil and criminal cases based on two financial fraud schemes discussed here. In one General Re, a wholly owned subsidiary of Berkshire Hathaway, Inc., aided and abetted a scheme from 2000 to 2001 by American International Group, Inc. to falsify its financial reports. In the second, the company participated in a scheme from 1997 to 2002 by Prudential Financial, Inc.
General Re’s settlement with the SEC was done in conjunction with a resolution of the parallel criminal inquiry and a private securities fraud action. With the SEC the company consented to the entry of a permanent injunction prohibiting it from aiding and abetting violations of Exchange Act Sections 13(b)(2)(A) & (B) and to pay $12.2 as disgorgement and prejudgment interest. In the criminal inquiry the company agreed to pay $19.5 million and executed a non-prosecution agreement. Previously, General Re paid $5 million to the U.S. Postal Inspection Service Consumer Fraud Fund as the forfeiture of the fee it received from AIG. The company also agreed to pay $60.5 million to resolve the private suit. The resolution with the SEC is based in part on a series of steps taken by the company which are detailed in the Commission’s releases. See also Litig. Rel. 21384 (Jan. 20, 2010).
U.S. v. Goncalves, Case No. CR-09-335 (D.D.C. Unsealed Dec. 19, 2009) is one of sixteen indictments naming twenty-two individuals unsealed this week alleging FCPA violations. The indictments arise from a sting operation in which an undercover FBI agent, posing as a sales agent, met with executives of various companies in the defense supply business. The executives were told that the defense minister for an African country was prepared to spend $15 million to outfit the country’s presidential guard. The so-called agent then told the executives that a 20% “commission” was required. Half of the commission would go to the agent and half to the minister. To participate, the executive would then agree to create two price quotes for the equipment. One quote did not have the commission and participate in an initial test transaction. The test transactions were documented in e-mails and, ultimately, the deals culminated in executed contracts which contained prices that included so-called commissions.
The indictments contain counts alleging conspiracy to violate the FCPA, violations of that Act and conspiracy to commit money laundering. They also contain a forfeiture count. This is the largest FCPA sting operation conducted by the FBI and the Department.
U.S. v. Zaman, Case No. 3:09-cr-01178 (N.D. Cal. Filed Dec. 16, 2009) is an action against Adnan Zaman, a former investment banker with Lazard Ltd. Mr. Zaman pleaded guilty to insider trading, admitting that while at the investment bank he misappropriated inside information about pending mergers, restructurings and capital raising information from his employer and illegally tipped friends who used the information to trade. The traders made profits of over $400,000 and paid Mr. Zaman cash and other benefits worth about $68,800. Sentencing has been scheduled for April 23, 2010.
U.S. v. Retana, Case No. 2:08-cr-01433 (C.D. Cal. Filed Dec. 12, 2008) is a securities fraud case against Milton Retana which charged him with operating a Ponzi scheme. The charges claimed he bilked over 2,000 investors out of more than $62 million. The defendant is alleged to have targeted Spanish-speaking investors and promised large returns. This week he was convicted on six counts of mail fraud and one count of making a false statement to investigators by a jury.
Siegel v. SEC, Case No. 08-1379 (D.C. Cir. Decided Jan. 12, 2010) is an appeal from an NASD proceeding in which a broker was sanctioned for “trading away.” Part of the sanction affirmed by the SEC was an order that the broker respondent pay restitution to the clients for whom the trades were placed. The sophisticated clients chose to invest in a high risk speculative start-up in which respondent Michael Siegel was involved and lost their investment according to the court. Mr. Siegel did not make anything on the transactions. The D.C. Circuit reversed the restitution order, as discussed here, because there was no causation standard linking the claimed loss to the violations.
Securities Class Action Services published its report listing the top 100 settlements in private damage actions for the period 1996 through 2009. Settlements from 2009 on the list are:
No. 10, UnitedHealth (D. Minn.) — $925,500,000;
No. 11, Xerox Corp. (D. Conn.) $750,000,000;
No. 14, IPO Sec. Lit. (S.D.N.Y.) — $586,000,000;
No. 15, HealthSouth (N.D. Ala.) — $554,000,000;
No. 17, Merrill Lynch (S.D.N.Y.) — $450,000,000;
No. 23, Quest Comm. (D. Colo.) — $445,000,000;
No. 25, March & McLennan (S.D.N.Y.) — $400,000,000;
No. 30, General Motors (E.D. Mich.) — $303,000,000;
No. 39, The Mills Corp. (E.D. Va.) — $202,750,000;
No. 45, Schering-Plough Corp. (D.N.J.) — $165,000,000;
No. 47, Brocade Communications (N.D. Cal.) — $160,098,500;
No. 48, Merrill Lynch (Bonds or preferred shares offerings) (S.D.N.Y.) — $150,000,000;
No. 64, Bristol-Myers Squibb (S.D.N.Y.) — $125,000,000;
No. 70, Peregrine Systems (S.D. Cal.) — $117,567,922;
No. 76, Homestore.com (C.D. Cal.) — $107,421,216.