To start the new year SEC enforcement partially settled a long running insider trading case. The Commission also brought cases alleging evasion of the registration requirements and a churning action in which an order of nuns was defrauded.

Two reports suggest the number of securities cases is increasing. One tracks the number of FCPA filings. It shows a significant increase in cases brought by DOJ and the SEC. The other chronicles a similar trend for the filing of private securities fraud actions.

Market reform

The Committee on Capital Markets Regulation has requested in a letter addressed to Senate and House leaders that each chamber hold hearings on the implementation of the Act through rule making (here). Essentially, the letter argues that critical new rules are being written to fast with inordinately short comment periods and, perhaps more importantly, in a somewhat piece meal fashion with an inadequate prospective on the overall issues. The letter contends that the process under new regulations are being written to implement the sweeping reforms in Dodd-Frank is “seriously flawed.” The Committee also told the legislators that those who will be impacted by the new regulations do not have sufficient time to analyze them. The letter concludes by noting that while “a long period of implementation creates uncertainty, with a possible drag on the economy . . . “ what may be far worse is a bad process which produces rules that might “interfere with the proper functioning of the financial system for years to come . . .”

SEC Enforcement

Insider trading: SEC v. Teo, Civil Action No. 04-CV-1815 (D.N.J. Filed April 22, 2004) is an action against Alfred Teo, Sr., a former director of Cirrus Logic, Inc., Mitchell Sacks and others. The complaint alleges that Mr. Teo, while a director of Cirrus Logic, Inc., misappropriated material non-public information about the potential acquisition of C-‘Cubed, Inc. Subsequently, he tipped Mr. Sacks. Both defendants traded in the shares of C-Cubed. Mr. Sacks is alleged to have made a profit of $115, 155 by selling his shares after the announcement that the company would be acquired by another firm. The complaint also claims that Mr. Teo traded on inside information and tipped others regarding additional deals. The other tippee defendants have settled. Mr. Sacks settled this week with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to pay disgorgement of $115,155 along with prejudgment interest and to pay a civil penalty in an amount equal to the disgorgement.

Financial fraud: SEC v. Braas, Case No. 11-cv-0087 (E.D. Pa. Filed Jan. 6, 2011) is a financial fraud action alleging violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(5) and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The defendants are Joseph Braas and Michael Schlager, two former senior officers at Equipment Finance, LLC, a subsidiary of Sterling Financial Corp. According to the complaint, from at least February 2002 through April 2007, Mr. Brass as the COO and Mr. Schlager as EVP, engaged in a pervasive and wide ranging scheme using fraudulent underwriting and reporting practices to conceal losses at the lending company. Essentially the two defendants subverted virtually all controls and each aspect of the loan procedures in order to effectuate their scheme. As a result the parent company’s filings with the Commission were false. The two defendants settled the action, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. Mr. Braas also agreed to pay disgorgement and prejudgment interest of $1,489,024 while Mr. Schlager was ordered to pay $1,121,302. Those amounts will be deemed satisfied upon entry of an order of restitution in the parallel criminal case, U.S. v. Braas, Crim. No. 10-cr-00753 (E.D. Pa. Nov. 18, 2010).

Evasion of registration: SEC v. Gendarme Capital Cop., Case No. 2:11-cv-00053 (E.D. CA Filed Jan. 6, 2011) is an action alleging violations of Securities Act Section 5 by Gendarme Capital Corp. and two of its executives, CEO Ezat Rahimi and VP Ian Lamphere as well as their attorney Cassandra Armento. According to the complaint the defendants engaged in a scheme which began in 2008 to evade the registration requirements. Specifically, the company entered into agreements with a number of penny stock issuers in which shares were obtained at a substantial discount based on a representation that they would be held for long term investment. In fact the shares were quickly sold into the market using false letters to the transfer agents authored by attorney Armento. Gendarme is alleged to have made more than $1.6 million. The case is in litigation.

Churning: In the Matter of Paul George Chironis, Adm. Proc. No. 3-13869 (Jan. 6, 2011) is an action in which the named Respondent was a registered representative at Capital Growth Financial, Inc., a now defunct broker dealer. Mr. Chironis was the representative for two accounts of the Sisters of Charity of New York. Over a one year period beginning in January 2007 the Order alleges that the Respondent churned the account and charged undisclosed excessive markups and markdowns through his defacto control. During the period Mr. Chironis repeated traded the accounts, which held primarily mortgage backed securities, frequently selling one bond and replacing it with a very similar security. Over the time period about $20.1 million in bonds were purchased while about $18 million were sold. The accounts, which initially had a value of about $8.3 million, lost over 10.8% of their value. To resolve the case Respondent consented to the entry of a cease and desist order from committing or causing any violations or future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He was also ordered to pay disgorgement of $250,000 and a civil penalty of $100,000. Finally, the Respondent was barred from associating with any broker or dealer and from serving or acting in any capacity for a registered investment company.

Evasion of registration: SEC v. K&L International Enterprises, Inc., Case No. 6:09-cv-1638 (M.D. Fla. Filed Sept. 24, 2009) is an action against Stephen Carnes, Lawrence Powalisz and their companies, KL International Enterprises, Inc. Signature Leisure, Inc and Signature Worldwide Advisors LLC, along with Jared Hochstedler and Enzyme Environmental Solutions, Inc. The complaint alleges violations of Securities Act Section 5. It claims that the defendants engaged in a scheme to evade the registration requirements of the Securities Act by purporting to convert loans to microcap companies into equity and then immediately dumping the shares on the market. Over $7 million was made through this scheme according to the Commission. This week defendants Jared Hochstedler and Enzyme Environmental Solutions settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Section 5. In addition, the company consented to the entry of an order requiring the payment of disgorgement in the amount of $346,135 along with prejudgment interest and a civil penalty of $25,000. Mr. Hochstedler agreed to the entry of an order requiring the payment of disgorgement in the amount of $1,445,000 along with prejudgment interest. Payment of all but $385,000 was waived based on his financial condition. The other defendants in this action previously settled with the Commission.

Criminal cases

U.S. v. La Madrid, Case No. 3:09-cr-02582 (S.D.Ca). is an action against two brothers, Matthew and Lance La Madrid, who are alleged to have run a $30 million Ponzi and mortgage scheme, the Plus Money Premium Return Funds and related entities. The brothers pleaded guilty to conspiracy and mail fraud charges. The defendants admitted at the time of their plea that between 2004 and 2008 they obtained over $30 million from investors, falsely promising that the funds would be invested in “covered calls” option trading. In fact portions of the money were funneled to a secret bank account while some was used to repay other investors. Beau La Madrid also admitted to defrauding investors in connection with a scheme in which he obtained investor funds by falsely claiming it would be put into real estate investments. Sentencing is scheduled for April 4, 2011.


In 2010 the number of FCPA enforcement actions brought by the SEC and DOJ rose significantly according to a report prepared by Gibson Dunn. Last year the SEC brought 26 actions which eclipsed its previous high of 20 in 2007. DOJ brought 48 cases compared to 26 in the prior year. The report is available here. .

Private actions

A recent study by NERA based on 11 months of data and projections for December 2010, concludes that the number of private securities actions filed last year increased significantly over the prior year. This is based largely a significant increase in the second half of the year. The report projects a total of 239 filings by year end compared to 220 the prior year. It also notes that the average settlement was $42 million, adjusted for outliers, which is consistent with the prior year. However, the median settlement of $11.1 million is significantly higher than the $8.5 million in the prior year. The report is available at here. An excellent summary of the report is available from the D&O Diary here.

New York

Cuomo v. Rattner, No 451435-2010 (S.Ct. NY Filed Dec. 30, 2010) is the second action against financier Steven Rattner based on the NYAG’s “pay-to-play” investigation. The suit involves essentially the same allegations as those in the SEC case (here). In sum, it claims that Mr. Rattner provided more than $1 million in “sham placement fees” to Henry Morris, the former political adviser to former New York State Comptroller Alan Hevesi, in return for investments by state pension funds in investment fund Quadrangle. Mr. Rattner was formerly affiliated with that fund. In addition, the complaint claims that Mr. Rattner arranged a DVD distribution deal for a movie produced by David Loglisci, the former pension fund Chief Investment Officer. Mr. Rattner agreed to pay $10 million to resolve the suit and to be banned from any affiliation with a New York pension fund for five years.