The market crisis, past enforcement failures, insider trading and the FCPA dominated securities litigation this week. In the wake of the report on the collapse of Lehman, not surprisingly there are calls for a criminal investigation. Another Inspector General report, which became available this week, details yet another enforcement failure. At the same time the UK, the SEC and the U.S. Attorney’s Office in New York all focused on insider trading involving market professionals. DOJ and the SEC settled another significant FCPA case.

Market crisis

Senator Christopher Dodd, Chairman of the Senate banking committee, sent a letter to Attorney General Eric Holder calling for a task force to investigate the collapse of former Wall Street giant Lehman brothers. Citing the report of Examiner Anton Valukas, the letter states that “Lehman presented a misleading picture of it financial condition to the public by using extensive repurchase agreements known as Repo 105 transactions . . . The result was to conceal its holdings of bad assets and to temporarily remove approximately $50 billion of assets from its balance sheet at the end of the first and second quarters of 2008.”


A report by the SEC’s Office of Inspector General details another past failure by the agency. This one concerns the battle between hedge fund Greenlight Capital, managed by David Einhorn and Allied Capital. The battle between these competitors, and the history of the related SEC investigations, is detailed in Mr. Einhorn’s book, Fooling Some of the People All of the Time – A Long Short Story. According to the OIG Report, Allied successfully lobbied the SEC to open an investigation into Einhorn and his hedge fund despite a lack of evidence of wrong doing. The inquiry began in June 2002. During the same time period, Mr. Einhorn was furnishing the staff with evidence of wrongdoing by Allied. Thus, while enforcement was conducting its investigation of Mr. Einhorn, OCIE was examining Allied. The lead Enforcement attorney, however, was not permitted to contact OCIE. Shortly after the Enforcement inquiry began, the division concluded that there was no evidence of violations by Mr. Einhorn. Nevertheless, the matter languished and was not closed until December of 2006. Mr. Einhorn was never notified of the closing. Ultimately Enforcement concluded it has credible evidence of wrongdoing by Allied. The staff however, after lobbying by counsel for the company, did not bring a fraud charge. Evidence of stolen enforcement documents about Mr. Einhorn which found their way to Allied and the revolving door between the staff and private practice which created clear conflicts permeate the report. The Office of Inspector General Report concludes with a series of recommendations for improving enforcement which begin with ensuring that there is proper evidence for commencing an investigation.

SEC enforcement actions

Financial fraud: SEC v. Priddy, Civil Action No. 1:10-cv-00739 (D. Md. Filed Mar. 25, 2010) is an action against Richard Priddy, the former CEO and President of TVI Corporation, Charles Sample, the former EVP of the company and their personal accountant J. Michael Broullire. The complaint focuses on two schemes. In one, Messrs. Priddy and Sample are alleged to have sold products to the company through companies they controlled. Mr. Broullire created the entities they used. These related party transactions netted them significant profits which were not disclosed. In another, Mr. Priddy increased the compensation of defendant Sample, a portion of which was kicked back to him, without the required disclosures in the proxy statements. Messrs. Priddy and Sample agreed to settle with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Sections 10(b) and 14(a) of the Exchange Act and from aiding and abetting violations of Section 13(a). Mr. Broullire consented to the entry of an injunction prohibiting future violations of Section 10(b) and from aiding and abetting violations of Section 13(a) of the Exchange Act. Messrs. Priddy and Sample have also been charged in a related criminal case. See also Litig. Rel. 21462 (Mar. 25, 2010).

Investment fund: SEC v. Vaughn, Civil Action No. 1:10-cv-00263 (D. N.M. Filed Mar. 24, 2010) is an action against Douglas Vaughn and his company alleging violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The complaint alleged the defendants defrauded about 600 investors, selling promissory notes and interests in real estate investments which were suppose to pay fixed interest payments ranging from 10 to 25 percent over three years. Investors were lured with misrepresentations about the company and the claims about the security of the investment. In fact, Mr. Vaughan’s failing business accumulated losses of over $61 million. The $80 million owed to investors is 20 times the equity in the properties securing the notes. The court issued an emergency freeze order. The case is in litigation. See also Litig. Rel. 21459 (Mar. 24, 2010).

Investment fund: SEC v. American Settlement Associates, LLC, Case No. 4:10-cv-00912 (S.D. Tex. Mar. 19, 2010) was brought against the fund and its promoters, Charles Jordan and Kelly Gipson, discussed here. The scheme centered on the sale of an investment product known as a “viatical” or “life settlement,” fractionalized interests in life insurance policies. Defendants acquired a $5 million policy in the name of a particular insured through a life settlements broker. They raised over $3.7 million from approximately 50 investors in 10 states by selling fractionalized interests in the policy, according to the complaint. Investors were promised returns ranging from 42% to 48% after approximately three and one half years, which were guaranteed even if the insured lived beyond the projected time period because there was suppose to be a bond. In fact, defendants used the money for their own purposes, failed to pay the policy premiums resulting in its cancellation and the bonding company was not licensed in the U.S. The SEC filed a fraud complaint and obtained a freeze order and the appointment of a receiver. The case is in litigation.

Criminal actions

Insider trading: U.S. v. Poteroba (S.D.N.Y. Filed Mar. 24, 2010); SEC v. Poteroba, Civil Action No. 10 (S.D.N.Y. Filed Mar. 24, 2010 are insider trading cases. The criminal case names as defendants Igor Poteroba, a former Managing Director at UBS Securities and Alexei Koval. The SEC complaint adds a third defendant, Alexander Vorobiev. The two cases allege that from 2005 through 2009 Mr. Poteroba tipped defendant Koval on upcoming mergers with information he learned at UBS. The criminal case is based on six illegal tips which the SEC action expands the number to eleven as discussed here. Both cases are in litigation.


Diamler AG reportedly has agreed to pay $185 million to settle a long-running FCPA investigation. According to the court papers, beginning in 1998 the company paid million of dollars in bribes to secure business in China, Nigeria, Russia and Vietnam among others. Overall bribes were paid in 22 countries. Under the terms of the settlement, $93.6 million will be paid to DOJ and $91.4 million will be paid in a settlement with the SEC. Two Diamler subsidiaries will plead guilty to conspiracy and FCPA bribery charges.

Private actions

The number of class action securities cases settling last year, as well as the value of those settlements, increased according to a new report by Cornerstone Research. Last year 103 cases settled, an increase from 97 in 2008. The value of those settlements increased significantly compared to the prior year. In 2009, the total value was $3.8 billion compared to $2.75 billion the prior year, up by 35%. Of the 103 settlements, 19 involved companies in the finance sector, 16 concerned companies in the pharmaceutical industry and 15 involved high tech companies. The number of cases lead by institutional investors also increased significantly. In 2009, 65% of the lead plaintiffs were institutions compared to 35% the prior year.

Foreign cases

U.K. The FSA and London’s Serious Frauds Office conducted their largest enforcement effort to date, targeting an insider trading ring. One hundred and forty three agents raided sixteen London and South England homes and business seizing documents and computers which supposedly are part of a large, long running insider dealing ring. Six individuals were arrested during the raid, including an executive from Deutsche Bank, a senior employee of BNP Paribas, and a trader at New York City based hedge fund Moore Capital, who supposedly was using his personal rather that firm accounts. The FSA believes that London city professionals are passing inside information to traders either directly or through middlemen.

New paper

Jonathan Katz, the long time Secretary of the SEC, now retired, has a forth coming paper titled “Reviewing the SEC Reinvigorating the SEC.” It will be published shortly in the University of Pittsburgh Law Review. The paper recounts the history of SEC enforcement during the years Mr. Katz was on the staff, noting that periodically over the years large frauds were missed. In this regard, the paper helps place the Enforcement’s current difficulties in prospective. It concludes with recommendations for reorganizing and revitalizing the enforcement program.