SEC Chairman Mary Schapiro testified on capitol hill this week, telling lawmakers that the agency needs a budget increase over last year. During her testimony the Chairman detailed additional staff needed by each division.

The SEC had a good week in court, prevailing after a bench trial in an action centered on violations of the broker customer protection rule and obtaining a favorable summary judgment ruling in a fraudulent note sale case. The Commission also filed a settled bid rigging case related to the municipal market and brought actions based on a fraudulent tender offer, financial fraud, a false registration statement and a fraudulent investment fund.

FCPA continues to be a priority. The Commission filed a settled FCPA case. Two defendants in separated FCPA actions pleaded guilty.

Market Reform

Market crisis: U.S. v. Deutsche Bank
(S.D.N.Y. Filed May 3, 2011) is an action based on the false claims act against the bank and its wholly owned subsidiary. The complaint alleges repeated false certifications to HUD in connection with residential mortgage originations and the sponsorship practices of the subsidiary. To date the FHA has paid insurance claims on more that 3,100 mortgages totaling $386 million related to mortgages endorsed by the Deutsche Bank subsidiary according to the court papers. The complaint seeks damages and civil penalties.

The SEC budget: Chairman Schapiro testified before the Senate Subcommittee on Financial Services regarding the Commission’s budget this week. For FY 2012 the Commission requested a budget of $1,407 billion which is an increase of $222 million over the new FY 2011 budget. This would permit the Commission to add a number of staff positions including: 49 in enforcement; 55 in the examination program; 37 for Corporation Finance; 15 in Investment Management; and 11 in the Division of Risk, Strategy and Financial Innovation.

SEC Enforcement

SEC v. North American Clearing, Inc., Civil Action No. 06-08-cv-829 (M.D. Fla. April 27, 2011) is an action which was tried to the court for five days ending in a verdict for the Commission and against defendant Richard Goble. The court found Mr. Globe liable for fraud and for aiding and abetting violations of the customer protection rule and the books and records provisions. The brokerage firm where Mr. Globe was employed, North American, had financial problems. Mr. Goble directed a sham transaction in which the firm falsely recorded a $5 million money market purchase which lowered its reserve requirement under the customer protection rule. That allowed the withdrawal of $3 million from its exclusive benefit of customers account. The court entered an injunction prohibiting future violations of Exchange Act Sections 109b), 15(c)(3) and 17(a). The court also entered an order precluding Mr. Globe from attempting to secure any securities licenses or otherwise engage in the securities business and imposed a civil penalty of $7,500. Other defendants in the case previously settled.

Financial fraud: SEC v. Orr, Case No. 11-CV-2251 (D. KA. May 4, 2011) is an action against six former senior executives of Brooke Corporation and its related entities. Those included publically traded Brooke Capital Corporation, an insurance agency franchisor, and Aleritas Capital Corporation, a lender to insurance agency franchises and other businesses and publically traded Brooke Capital Corporation.

According to the complaint, the defendants engaged in an extensive financial fraud in 2007 and the beginning of 2008 which inflated the number of franchise locations, concealed the nature and extend of Brooke Capital’s assistances to franchisees, hid the inability of Aleritas to repurchase millions of dollars in short-term loans sold to a network of regional lenders, sold or pledged the same loans as collateral to more than one lender and improperly diverted payments from borrowers to pay expenses. The financial fraud was discovered following a suit by lenders. In 2008 Brook Corporation and Brooke Capital filed for protection under Chapter 11. Eventually they were liquidated. The complaint alleges violations of the antifraud and reporting provisions. Defendants Robert Orr, Leland Orr, Michael Lowry and Michael Hess settled, consenting to the entry of permanent injunctions prohibiting future violations of the sections cited in the complaint. Defendants Robert and Leland Orr agreed to pay disgorgement and penalties as set by the court. Defendant Lowry will pay disgorgement of $214,500 and a penalty of $175,000. Defendants Hess and Vrbas agreed to pay, respectively, penalties of $250,000 and $130,000. Defendant Kyle Garst, former CEO of Brooke Capital, did not settle.

Bid rigging: SEC v. UBS Financial services Inc., Civil Action No. 11-CV-2885 (D.N.J. May 4, 2011). This is a settled a bid rigging action related to the investment of municipal bond proceeds. From 2000 through 2004, according to the complaint, UBS engaged in a series of fraudulent actions related to the temporary reinvestment of the proceeds from the sale of the bonds. The process for reinvesting those proceeds until they are used for their intended purpose to be by competitive bidding to insure the funds are invested at market rates in accord with the applicable tax regulations. Overall UBS is alleged to have rigged 100 municipal bond reinvestment transactions in 36 states. The UBS business unit involved closed in 2008. Mark Zaino at one point served as the director of that unit. The employees from the unit are no longer with UBS. The bank settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Section 15(c)(1)(A) of the Exchange Act. The bank also agreed to pay disgorgement of $9,606,5423 along with prejudgment interest and a penalty of $32.5 million. In addition, UBS also will pay $113 million to settle parallel cases brought by other federal and state authorities.

In a related administrative proceeding, Mr. Zaino consented to the entry of an order barring him from association with any broker, dealer or investment adviser. In the Matter of Mark Zaino, Adm. Proc. File No. 3-14369 (May 4, 2011). That proceeding was based on a guilty plea entered by Mr. Zaino to two counts of conspiracy and one count of wire fraud last year in U.S. v. Zaino, No. 10-CR-00434 (S.D.N.Y.). Sentencing is scheduled for December 2011.

Day trading scheme: SEC v. Butler, Case No. 11-03792 (C.D. CA. Filed May 3, 2011) is an action against Robert Butler alleging violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). From January 2009 through March 2011 defendant Butler raised about $3.3 million from 17 investors who were mostly elderly. According to the complaint, Mr. Butler dazzled investors with multiple computer screens, claims of a proprietary trading system and promises of large returns. He also furnished them with false statements showing they had made huge profits when in fact they had not. The SEC obtained a freeze order. The case is pending.

Fraudulent tender offers: SEC v. Weintraub, Case No. 1:11-cv-21549 (S.D. Fla. May 3, 2011) is an action against Allen Weintraub and AWMS Acquisitions, Inc. alleging violations of Exchange Act Sections 10(b) and 14(e). According to the complaint, in March 2011 the defendants sent written tender offers by e-mail to Eastman Kodak and AMR, the parent of American Airlines. Each offered to buy all the outstanding shares of the company at about a 50% premium to market in billion dollar deals. Defendants also generated publicity about the offers. In fact the defendants did not have the financial ability to proceed with either offer and failed to disclose that Mr. Weintraub had previously been enjoined in a Commission action, had been convicted of fraud and grand larceny and filed for personal bankruptcy. The case is pending.

Registration fraud: SEC v. Magnum D’Or Resources, Inc., Case No. 0:11-cv-60920 (S.D. Fla. Filed April 29, 2011). The complaint names as defendants the company, a Florida based converter of scrap tires into rubber compounds and Joseph Glusic, its CEO and President, along with Shannon Allen, Dwight Flatt and David Sciucca. It alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) as to the company and Mr. Glusic and Section 5 as to the other individual defendants. Essentially, the complaint claims that the company and Mr. Glusic used an S-8 registration which falsely stated the shares would be issued for certain services, to furnish shares to Messrs. Allen, Flatt and Sciucca. False press releases were then issued which increased trading volume. The shares were sold and portions of the profits put back into the business. The company and Mr. Glusic settled with the SEC, consenting to the entry of permanent injunctions based on each Section cited in the complaint. Mr. Glusic also agreed to pay disgorgement of $1,878, prejudgment interest and a $50,000 civil penalty and consented to the entry of officer and director and penny stock bars. Mr. Allen settled, consenting to the entry of a permanent injunction based on Securities Act Section 5 and agreed to pay disgorgement of $80,742 along with prejudgment interest and a $25,000 civil penalty. He also agreed to the entry of a 5 year penny stock bar and to cancel about 1.4 million shares of Magnum stock. A separate administrative proceeding was initiated to determine if the registration of Magnum’s shares should be revoked. The other two defendants did not settle.

Investment fund fraud: SEC v. Allen, Civil Action No. 11-CV-882-0 (N.D. Tx. Filed April 28, 2011) is an action against David Allen, the co-founder and CFO of China Voice Holding Corp, the former CEO of the company, William Burbank and a number of other individuals and entities. According to the complaint, since at least 2006 China Voice and defendants Allen, Burbank and others made a series of false statements about the company to create a prosperous façade while the principals enriched themselves. When the Commission began investigating the defendants launched a new scheme. Beginning in November 2008 and continuing to the present, the defendants and others used at least sixteen entities to sell limited partnership interests in fraudulent offerings, raising about $8.6 million. Investors were promised rates of return of at least 25% within one year with minimal risk. Ponzi type payments were made. To keep the scheme going the defendants increased the rate of sales. The complaint alleges violations of registration, antifraud and books and records provisions of he securities laws. The Commission obtained a freeze order over the assets of China Voice.

Unregistered securities: SEC v. Radical Bunny, LLC, Case No. 2:09-cv-01560 (D. Ariz. Filed July 28, 2009) is a case in which the court granted summary judgment in favor of the Commission. The complaint alleged violations of the registration, antifraud and broker dealer registration provisions by defendants Tom Hirsch, a CPA, Berta “Bunny” Walder, a grade school principal, her husband Howard Walder, a pharmacist and Harish Shah, a CPA. According to the complaint, from late 2005 through June 2008 the defendants raised over $197 million from at least 900 investors through a nationwide offer of unregistered securities in the form of promissory notes or investment contracts. Many of the investors came from the accounting practice of defendants Hirsch and Shah. A series of false statements were made to induce investors to purchase the securities. Those included claims that the notes were not subject to the securities laws which their attorneys told them was not true and that they were collateralized – a representation the lawyers told them was not supported by the documents. The final judgment entered in the case permanently enjoins each individual defendant from future violations of the registration, antifraud and broker dealer registration provisions of the securities laws. It also orders the payment of disgorgement by Mr. Hirsch of $1,245,220, by Mr. & Mrs. Walders of $1,245,217 and by Mr. Shah of $740,160 along with prejudgment interest. Each defendant was also ordered to pay a civil penalty of $120,000.


In the Matter of Rockwell Automation, Inc., Adm. Proc. File No. 3-14364 (May 3, 2011) is a settled FCPA action against the company alleging violations of the books and records and internal control provisions centered on a former subsidiary in China. From 2003 to 2006 employees for RAPS-China paid about $615,000 to Design Institutes which were typically state owned enterprises for design engineering and technical integrations services that can influence contract awards by end user state owned customers. The payments were made through third party intermediaries. They were made with the expectation of influencing the state owned companies to purchase RAPS products. The subsidiary also paid about $450,000 for sightseeing and other non-business trips for employees of Design Institutes. On the contracts the company had a profit of about $1.7 million. The Order alleges that Rockwell failed to accurately record the payments and to “implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments.” However the company discovered the violations as part of its normal financial review process which was part of the global corporate compliance and internal controls program, investigated and self-reported. The company also took certain remedial steps. To resolve the case the company consented to the entry of a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). It was ordered to pay disgorgement of $1,771,000 along with prejudgment interest and a civil penalty of $400,000.

U.S. v. Rocotti (C.D. Ca.). Flavio Ricotti, a citizen of Italy and the former vice president of sales for Control Components, Inc. pleaded guilty to a one count superseding information charging him with conspiring to make a corrupt payments to foreign government officials, and officials of private companies in several countries in violation of the FCPA. Mr. Ricotti was initially indicted along with five other former CCI executives in a sixteen count indictment in 2009. In connection with his plea Mr. Ricotti admitted to conspiring with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company in connection with efforts to obtain a valve contract. He also admitted conspiring with others in connection with making a payment to an employee of a private company so that the employee would assist in obtaining a valve contract in Quatar. During the bidding process Mr Rocitti learned that an employee of the private company would furnish confidential information about the bids of competitors and would exercise influence on behalf of the company to secure the contract. Previously, CCI and two other executives of the company pleaded guilty to FCPA charges. Mr. Ricotti is cooperating with the government. Trail is scheduled this fall for the remaining defendants.

U.S. v. Geri, 09-cr-335 (D.D.C.). Haim Geri pleaded guilty to a one count superseding indictment charging conspiracy to violate the FCPA in the shot-show cases which stem from the largest FCPA sting operation in history. In connection with his plea Mr. Geri admitted entering into an agreement to pay a 20% commission to a sales agent he understood to be a representative of Gabon’s minister of defense. The bribe was intended to obtain a portion of a $15 million contract to outfit the presidential guard. In reality the agent was an undercover FBI agent. Under the sentencing guideline calculation in the plea agreement Mr. Geri would be sentenced to 18 –24 months. The calculation is not binding on the court. Mr. Geri is the fourth person to plead guilty in this case.


Investor alert: FINRA issued an investor alert for pump and dump schemes tied to the recent disasters in Japan. The efforts tie to various services linked to the recent earthquakes there.

Delayed prospectus delivery: Wells Fargo Advisors, LLC was fined $1 million for delivering mutual fund prospectus from one to 153 days late. Approximately 934,000 customers received their prospectus late. The firm also failed to promptly report information about its current representatives.

Insider trading: The regulator barred Michael Hendry, a former divisional vice president of Pacific Select Distributors, Inc. from the securities business for insider trading and failing to respond truthfully during an inquiry. Mr. Hendry learned about the acquisition of Boots & Coots, Inc. from an insider. During the time he was barred from purchasing stock in that company he bought 73,000 shares. Following the announcement of the deal the share prices increased about 25% giving Mr. Hendry a profit of $69,955. When questions about the transactions during a FINRA inquiry he failed to answer truthfully.