Congress reviewed the implementation of Dodd-Frank, hearing testimony from the SEC Chairman and others. The Commission, along with other agencies and the Fed also submitted a report on risk management to Senate and House Committees pursuant to Dodd-Frank.

In what may be a sign of the times the SEC rejected a proposed settlement reportedly finding the terms insufficient. Last week one Commissioner took the unusual step of dissenting from the approval of an enforcement settlement, apparently finding the terms to lenient.

SEC enforcement this week focused on its key areas: insider trading and investment fund fraud. There were seven insider trading cases on the document this week. In one the court entered an order regarding remedies and sanctions following a jury verdict. In another the SEC maybe signaling a redefining of what constitutes insider trading. Four others were settled and a fourth is in litigation.

The Commission also brought three investment fund fraud actions. Two of the three cases are resolved. A third is in litigation.

Finally, FINRA filed a settled action centered on unsuitability claims. The FSA settled a corruption case in which it assessed the highest fine imposed in a financial crime systems and controls case. The regulator also filed a settled action which focused on failure to supervise charges.

The Commission

Testimony: SEC Chairman Mary Schapiro testified before the Senate Committee on Banking, Housing and Urban Affairs (here). In her testimony Ms. Schapiro reviewed the implementation of Dodd-Frank and the impact of budgeting issues.

Report: The SEC, CFTC and the Board of Governors of the Federal Reserve System submitted a report to the Senate Committee on Banking, Housing and Urban Affairs and Agriculture, Nutrition and Forestry and the House Committees on Finanical Services and Agriculture pursuant to Dodd- Frank titled: Risk Management Supervision of Designated Clearing Entities (here).

Report: The staff prepared “The Report on Review of Reliance on Credit Ratings,” in accord with Section 939(A) of Dodd-Frank.

Bulletin: The SEC issued an Investor Bulletin on Retail Forex Transactions (here).

Settlement: The Commission rejected a proposed settlement in SEC v. Jenkins, Civil Action No. CV 09-1510 (D. AZ. Filed July 23, 2009). This is an action against Maynard Jenkins, the former CEO of now defunct CSK Auto. The case is based on SOX clawback Section 404. This is the first litigated action under this provision in which the Commission’s complaint admitted that the defendant had not engaged in wrongful conduct. Despite the admission the SEC demanded the repayment of certain incentive based compensation. According to a report in the Washington Post on July 19, 2011, the Commission rejected the recommendation of the Enforcement Division that the action be resolved for less than half of the amount claimed in the complaint.

SEC enforcement – litigated cases

Insider trading: SEC v. Gowrish, 09-5883 (N.D. Cal.) is an action against Vinayak Gowrish, a former private equity associate at TPG Capital, L.P., a hedge fund. The complaint alleged that Mr. Vinayak misappropriated information from his employer about three take over transactions and tipped a friend who then tipped others. Following a jury trial Mr. Vinayak was found liable. The court entered a final judgment enjoining Mr. Vinayak from future violations of Exchange Act Section 10(b). The order also directed that he pay $12,000 in disgorgement along with interest and a $100,000 civil penalty.

SEC enforcement – filings and settlements

Insider trading: SEC v. Doyle, Civil Action No. 11-cv-4964 (S.D.N.Y. July 20, 1011) centers on the acquisition of Brink’s Home Security by Tyco International, Inc. on January 18, 2010. Prior to the announcement defendant Robert Doyle obtained inside information about the transaction from a person identified as one of Tyco’s investment bankers, according to the SEC. Specifically, the SEC alleged that Mr. Doyle obtained inside information as a result of: a reference by the Banker that he was traveling on Tyco’s plane to Boca Raton and the fact that Mr. Doyle knew he often worked on mergers; a document the banker inadvertently left at his home which identified Tyco as the “Acquirer” and Brink’s as “Target;” and changes in the Banker’s travel plans gleaned from a phone conversation which suggested to Mr. Doyle that the transaction was imminent. After obtaining this information Mr. Doyle, on January 14 and 15, 2010, purchased call options and 250 Brink’s shares in breach of his duty to the Banker. Following the deal announcement the share price for Brink’s stock increased over 30%. Mr. Doyle sold the options and exchanged his shares under the terms of the deal. Overall Mr. Doyle had profits of $88,555. Mr. Doyle settled with the SEC by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits and pay a civil penalty of $44,277.50.

Insider trading: SEC v. Cardillo, Civil Action No. 11-cv-0549 (S.D.N.Y. Filed July 18, 2011) is a case against former Galleon trader Michael Cardillo who is alleged to have traded on inside information regarding the acquisitions of 3Com Corp. and Axcan Pharma Inc. To resolve the case Mr. Cardillo consented to the entry of a permanent injunction prohibiting future violations of Exchange Act section 10(b). In addition, he agreed to pay disgorgement of $58,520 along with prejudgment interest and a civil penalty of $29,260. In a related administrative proceeding Mr. Cardillo consented to the entry of an order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. Previously he pleaded guilty to charges of securities fraud and conspiracy to commit securities fraud in a related criminal case. U.S. v. Cardillo, 11-CR-0078 (S.D.N.Y.). He is awaiting sentencing in that case.

Insider trading: SEC v. Wildstein, Civil Action No 11-01297 (D.D.C. Filed July 19, 2011) is an action alleging violations of Exchange Act Sections 10(b) and 14(e) against Howard Wildstein, a former Pitney Bowes, Inc. executive. Mr. Wildstein, according to the complaint, learned that his employer was considering the acquisition of MapInfo Corporation prior to the public announcement of the deal on March 15, 2007. Specifically, Mr. Wildstein is alleged to have learned that MapInfo was a potential acquisition target and that the mergers and acquisition people from the company had recently visited the company. Based on this information he purchased 8,000 shares of MapInfo. After the announcement of the deal he realized profits of $51,177. To settle the case Mr. Wildstein consented to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. He also agreed to pay $114,848 in disgorgement, prejudgment interest and civil penalties.

Insider trading: SEC v. Compania International Financier S.A., Civil Action No. 11 CV 4904 (S.D.N.Y. Filed July 15, 2011). The case centers on the July 11, 2011 announcement by Lonza Group Ltd. that it planned to acquire Arch Chemicals Inc. Defendant CIF has offices in Geneva, Switzerland as do defendants Coudree Capital Gestion S.A. and Chartwell Asset Management Services. Yomi Rodrik, a Turkish national, is alleged to own and/or control CIF and Coudree. Mr. Rodrik has been “sued in the past by the SEC for trading violations.” All of the trading in the case involved the purchase of the common shares of Arch on July 5 and 8 through the London offices of various brokerages. In total the defendants acquired just under one million shares. The complaint, which alleges violations of Exchange Act Section 10(b), states that a search of available information established that there was no news of the take-over available prior to the deal announcement. The share price of the company, however, appreciated significantly prior to the announcement of the deal. The complaint also claims that multiple accounts were used to conceal the trading. The Commission obtained an order freezing the assets. The case is pending.

Investment fund fraud: SEC v. Lowrance, Case No. CV 11 3451 (N.D. CA. Filed July 14, 2011) names as defendants Jeffrey Lowrance and his entity, First Savings & Loan, Ltd. According to the complaint, Mr. Lowrance ran a fraudulent investment scheme which raised about $21 million from investors in 26 states. He promised steady returns. Some investors were told those returns were guaranteed Investors were also told about a claimed specialized foreign currency program. In 2008 as his scheme was unraveling Mr. Lowrance was able to raise another $1 million from 36 investors. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. Mr. Lowrance is also facing criminal charges now that he has been brought back from Peru.

Insider trading: SEC v Galleon Management, LP, Civil Action No. 09-CV-8811 (S.D.N.Y) is the Commission’s action against the Galleon insider trading defendants. On July 15, the SEC settled with defendant Danielle Chiesi who was one of the key participants in the scheme. Previously Ms. Chiesi pleaded guilty to criminal charges in connection with the case. The judgment entered in this case permanently enjoins Ms. Chiesi from committing future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). It also orders her to pay disgorgement of $500,000 along with prejudgment interest. Ms. Chiesi was sentenced to a term of 30 months in prison this week in the related criminal case. U.S. v. Chiesi, 10 CR 1184 (S.D.N.Y.).

Insider trading: SEC v. Longoria, Civil Action No. 11-CV-0753 (S.D.N.Y.) is one of the expert network insider trading cases. The Commission settled with defendant Daniel DeVore who previously was a Global Supply Manager at Dell. According to the complaint, he regularly provided Primary Global Research LLC, an expert network, with inside information. Mr. DeVore resolved the action with the SEC by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, he was ordered to pay disgorgement of $145,848.50 along with prejudgment interest. An officer and director bar was also entered. No penalty was assessed because Mr. DeVore is cooperating with the Commission.

Investment fund fraud: SEC v. Peister, Civil Action No. 11-cv-3388 (E.D.N.Y.) is an action against Mr. Peister and Northstar International Group, Inc. According to the complaint, the defendants overstated the assets of the North American Globex Fund, LP from 2003 through 2009. Investors were provided with false and misleading data based on the overstated assets of the fund. The defendants settled with the SEC, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). The amount of the disgorgement and civil penalties will be determined at a later date.

Investment fund fraud: SEC v. West, Civil Action no. 6:09-cv-1419 (M.D.Fla.) is an action based on an alleged pyramid scheme in which defendant Darrel West sold interests in defendant Own My Travel, LLC. The court, on motion of the Commission, set disgorgement at $606,413.31 which is the profits alleged in the complaint, along with prejudgment interest. Mr. West was also ordered to pay a penalty of $606,413.31. Previously, the Court entered judgments of permanent injunction against Mr. West and the company based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b).

Court of appeals

In U.S. v. Behrens, No. 10-3505 (8th Cir. Filed July 13, 2011) the Circuit Court reversed a sentence imposed on a defendant who pleaded guilty to a single count of securities fraud based on Exchange Act Section 10(b) and Rule 10(b) – 5. The district court erroneously precluded the defendant from presenting a “no knowledge” defense under Section 32(a) of the Exchange Act to a possible term of imprisonment. Under that provision a person who proves that he or she has no knowledge of the rule or regulation which is the predicate for the conviction can not be imprisoned. Since the violation of an SEC “rule or regulation [is] an element of the offense . . .” under Section 10(b) to which the defendant pleaded guilty in this case, the “no knowledge” defense is available. The defendant has the burden to establish it.


Suitability: The regulator suspended William Bailey, a former NEXT Financial Group, Inc. broker in Mesa, Arizona for two years for excessive and unsuitable trading of mutual funds and variable annuities. From January 2006 through December 2007 he recommended 484 short term mutual fund trades to elderly and unsophisticated investors who had held the funds less than one year. In many instances he traded the accounts without informing the customers first. This generated over $120,000 in commissions for Mr. Bailey. He also convinced here customers to switch their variable annuities for new ones after they had been held for only a short period of time.


Bribery: Willis Limited settled an anti-bribery and corruption systems and controls action, agreeing to pay a fine of about $10 million. This is the largest fine imposed by the FSA in relation to financial crime reporting and controls systems.

The action is based on payments made to obtain business between January 2005 and December 2009. During that period the firm paid about $40 million in bribes. The FSA found that until 2008 the firm failed to: 1) ensure that it established and recorded an adequate commercial rationale for its payments to overseas third parties; 2) ensure that adequate due diligence was carried out on third parties with whom business was done overseas; and 3) to adequately review its third party relationships on a regular basis to confirm that they were still necessary and appropriate. During the period the senior management of the company did not receive sufficient information about the performance of the relevant policies of the company to permit them to determine whether bribery and corruption risks were being mitigated effectively. The company cooperated with the investigation of the FSA and noted early on that it would settle. It has also taken significant steps to improve its procedures and has committed to carrying out a review of past practices. In view of its cooperation the fine was discounted by 30%.

Failure to supervise: Financial advisers Paul Banfield and Anthony Moss, formerly of Best Advice Financial Planning, were both sanctioned for failing to have adequate supervisory systems. Specifically, the firm did not have systems to meet FSA standards to ensure that customers were properly advised. The FSA found 22 instances in which customers were advised to invest in unregulated collective investment schemes but found no evidence that the firm either understood the regulatory requirements or took reasonable care to ensure customers received suitable advice. Both men are now prohibited from holding any significant influence function. Mr. Banfield has also been prohibited from being a investment adviser and fined about $22,000. Mr. Moss would have been fined about $30,000 except for a demonstrated inability to pay.

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