One SEC Commissioner spoke out in favor of the merger of the SEC and CFTC this week, while a Justice Department official noted that, as part of building a stronger relationship with the SEC, criminal cases would no longer automatically proceed before the Commission’s parallel civil case. SEC enforcement continued to focus on investment fraud cases, while the Second Circuit clarified its primary liability standards for private fraud actions.

Market reform

Merger: SEC Commissioner Elisse B. Walter, in a recent speech, remarked favorably on the merger of the SEC and the CFTC. “Plans and Prospects for Financial Regulatory Reform,” April 23, 2010, before the UC San Diego Economics Round Table, available here.

Ms. Walter’s suggestion apparently stems from an effort to ensure uniformity of regulation for financial products as discussed here. In her remarks, she highlights key differences in the regulatory approach for swaps put forward by the House, Dodd and Lincoln proposals. After highlighting sections of each bill which are illogical, Commissioner Walter noted that the approaches being considered could, in part, result in a kind of “regulatory arbitrage” where market participants shop for the must desirable regulator. Other proposals could result in an illogical approach such as having securities-related products under the jurisdiction of a non-securities regulator. One resolution of these difficulties is to merge the SEC and CFTC.

Market supervision: Under a new agreement, FINRA will assume responsibility for performing the market surveillance and enforcement functions currently conducted by NYSE Regulation. Under the agreement, which is subject to SEC approval, FINRA will assume regulatory functions for NYSE Euronext’s U.S. equities and options markets – the New York Stock Exchange, NYSE Arca and NYSE Amex. NYSE Euronext, through its subsidiary NYSE Regulation, will remain ultimately responsible for overseeing FINRA’s performance of regulatory services of the NYSE markets.

SEC and DOJ cooperation

Lanny Breuer, head of DOJ’s criminal division, noted in remarks before the Council of Foreign Relations this week, that criminal cases will no longer automatically take priority over the SEC’s parallel civil action. This is part of efforts by the Department to build a stronger working relation with the SEC.

SEC enforcement actions

Offering fraud: SEC v. Keating, Civil Action No. 2:10-cv-00419 (D. Utah Filed May 6, 2010) is an action against Dennis Lee Keating II, a former registered representative and a part owner of San Diego based Torrey Pines Securities, Inc. According to the complaint, Mr. Keating lured over 100 investors to put their money in his company, Paseo Partners LLC, which was suppose to pay high rates of return from investing in scrap metal contracts. Investors were falsely led to believe that Torrey Pines and he had invested in Paseo, when in fact they had not. The funds were diverted to another property associated with Mr. Keating. To resolve the action, Mr. Keating consented to the entry of a permanent injunction prohibiting future violation of Securities Act Sections 5 and 17(a) and Exchange Action Section 10(b) and to the payment of disgorgement and a civil penalty, the amounts of which will be determined by the court. See also Litig. Rel. 21520 (May 6, 2010).

Short sales: In the Matter of Goldman Sachs Execution & Clearing, L.P., Adm. Proc. File No. 3-13877 (May 4, 2010) is a settled administrative proceeding against Goldman Sachs Clearing, formerly Spear, Leeds & Kellogg, L.P. The proceeding is based on the SEC’s September 17, 2008 emergency order enacting temporary rule 204T to Regulation SHO which was part of the response to concerns about naked short selling during the market crisis. The rule required participants of a registered clearing agency to either deliver securities by a trader’s settlement date or for short sales purchase or borrow the securities to close out the fail to deliver position by no later than the beginning of regular trading hours the day after settlement date. Respondent implemented procedures to comply with the rule which turned out to be deficient in several instances. As a result, the firm was in violation of the rule. Pursuant to a New York Stock Exchange Hearing Board decision, the Respondent agreed to pay a $225,000 fine. The Commission directed Respondent to cease and desist from committing or causing any violations and future violations of Exchange Act Rule 204. Respondent was also censured and directed to comply with the order of the NYSE Hearing Board.

Offering fraud: SEC v. New Day Atlanta, Civil Action No. 1:10-cv-13333 (N.D. GA. Filed May 4, 2010) is an action against the firm and its two principals, Andrew Avery and Lee Marks. According to the complaint, the defendants raised over $3.2 million from September 2007 through February 2010 using false and misleading statements to sell Real Estate Investment Notes. The sales were made through an internet website which attracted 72 investors across the country. The action was settled the day after filing when the defendants consented to the entry of permanent injunctions prohibiting future violations of Securities Act Sections 5 and 17(a). The defendants also agreed to the appointment of a corporate monitor and to orders requiring the payment of disgorgement and penalties in amounts to be determined by the court. See also Litig. Rel. 21512 (May 4, 2010).

Investment fund fraud: SEC v. Ryan, Civil Action No. 1:10-cv-00513 (N.D.N.Y. Filed May 3, 2010) is an action alleging that defendant Ryan and his controlled vehicle, Prime Rate and Return, LLC, are operating a Ponzi scheme as discussed here. According to the complaint, they have raised over $6.5 million from investors since 2002, who were told they were investing in American Integrity. That entity, however, is nothing more than a bank account and all the facts told investors about it are false. Their money was diverted to the use of the defendants, according to the Commission. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The court granted the Commission’s request for a TRO and a freeze order. The case is in litigation.

Fraud in offering: SEC v TierOne Converged Networks, Inc., Civil Action No. 3:10-CV-00840 (N.D. Tex. Filed Apr. 30, 2010) is a settled action against TierOne Converged Networks, Inc., a wireless internet service provider, and its two principals, Kevin Weaver and Ronald Celmer, discussed here. The Commission’s complaint claimed that, from July 2006 through April 2009, the company raised about $9.5 million from approximately 200 investors in 34 states through a continuous unregistered offering of its securities. During this three year period, the defendants disseminated seven private placement memoranda under Rule 506 of Regulation D. Those memoranda did not contain audited financial statements, failed in some instances to include material information while in others they contained exaggerated or misstated material facts.

To resolve the case, each of the defendants consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a)(2) & (3). In addition, Messrs. Weaver and Celemer each agreed to pay a civil penalty of $25,000. A special master was appointed as part of the consent decrees to monitor TierOne’s disclosures, stock offerings and processes for qualifying accredited investors for two years.


Westpark Capital, Inc. was ordered to pay a total of $400,000 for supervisory system failures related to two officers in the firm’s Long Island offices. Those officers, who were suspended, were, despite their inexperience, responsible for the supervision of the operation. As a result of their failures two account executives repeatedly churned customer accounts. Westpark’s former Chief Compliance Officer, William Morgan, was suspended for four months in any principle capacity and directed to pay a fine of $5,000. Jason Stern, COO, was suspended for three months in any principal capacity and fined $20,000.

In a related action a former branch manager, Robert Bellia, Jr., was barred permanently from association with any securities firm in a principal capacity and ordered to pay a $10,000 fine. Dale Menendez, Jr., a former broker, was barred permanently from the industry and directed to pay $100,000 in restitution to his customers for excessive and unauthorized trading. Michael Quattalaro, a former broker, was also barred permanently from the industry for churning and unsuitable trades.

Circuit courts

Primary liability: Pacific Investment Management v. Mayer Brown, Case No. 09-1619 (2nd Cir. Apr. 27, 2010) is an action in which the circuit court clarified a portion of its jurisprudence on the question of primary liability as discussed here. The action arises out of the collapse of Refco. Defendants Mayer Brown, and firm partner Joseph Collins, were the primary outside counsel for Refco. Plaintiffs purchased securities from Refco prior to its collapse. According to the complaint, Refco engaged in a massive fraud. To conceal huge trading losses at the end of each accounting period, the firm engaged in a series of sham loan transactions with the assistance of the Mayer Brown defendants. As a result of these transactions Refco’s financial statements were false.

Mayer Brown and Mr. Collins also are responsible, according to plaintiffs, for false statements which appear in: 1) an Offering Memorandum for an unregistered bond offering; 2) a Registration Statement for a subsequent registered bond offering; and 3) a Registration Statement for Refco’s initial public offering of common stock in August 2005. According to plaintiffs, each of these documents are false because they conceal the true financial condition of the company. Mayer Brown and Mr. Collins helped draft these documents and reviewed them. The firm’s name appeared as outside counsel in the Offering Memorandum and IPO registration.

The Second Circuit affirmed the dismissal of the complaint. Generally the circuit’s decisions require that there be attribution of the claimed false statement to a defendant who is outside the corporation under its leading case, Wright v. Ernst & Young, LLP, 152 F.3d 169 (2nd Cir. 1998). In this case involving those outside the company, the court reaffirmed Wright and its bright line test, including its attribution requirement. This test is consistent with the Supreme Court’s recent decision in Stoneridge because it keys to reliance which was an important part of the high court’s analysis. Here, dismissal of plaintiffs’ claims is appropriate because none of the statements alleged to have been false are specifically attributed to either the law firm or its former partner. The fact that the firm’s name appeared on two of the documents as outside counsel is not sufficient to attribute the specific claimed false statements to the law firm.