On this Veterans Day we take a moment to honor and remember those who have served all of us. We honor every person who has served our country in the military and those who presently wear the uniform. We honor and remember those who made the ultimate sacrifice for all of us – they shall not be forgotten. Happy Veterans Day to all.

This week the Commission announced that the Enforcement program filed the largest number of actions in fiscal 2011 in the history of the Division. This was attributed to the recent reorganization of the Division.

The Commission also obtained a record $92.8 million civil penalty from convicted insider trader Raji Rajaratnam and sought to secure the entry of its settlement in the Citigroup market crisis case. Judge Rakoff is writing an opinion on the issues. Assistant AG, Criminal Division, Lanny Breuer, addressing the National Conference on the Foreign Corrupt Practices Act, highlighted the growing trend of countries to adopt anticorruption legislation and resisted calls to reform the FCPA. The FSA imposed the largest payment in its history on an individual for market abuse.

The Commission

Enforcement: Commissioner Elisse B. Walter delivered remarks at The FINRA Institute Wharton Certified Regulatory and Compliance Professional Program (Nov. 8, 2011) on the relation between public and private enforcement (here).

Money market funds: Chairman Mary Schapiro addressed SIFMA’s 2011 Annual Meeting in New York on November 7, 2011. Her remarks reviewed the need to reform money market funds (here).

Listing standards: The Commission approved new rules of the NYSE Amex, the NYSE and the NASDAQ which tighten the listing standards for companies that are the product of a reverse merger (here).

Enforcement statistics; For fiscal 2011 the Commission filed 735 enforcement actions, the largest number in the history of the Division. In those actions $2.8 billion in penalties and disgorgement was ordered. Key areas of emphasis include: 1) Market crisis cases: 15 separate actions naming 17 individuals were filed; 2) Insider trading: 57 insider trading cases were filed, an 8% increase over the prior year; 3) Financial fraud and issuer disclosure violations: 89 actions were brought; and 4) Regulated entities: The Commission brought 146 enforcement actions related to investment advisers and investment companies, a 30% increase over the prior year and a record for a single year. An additional 112 cases related to broker-dealers were filed, a 60% increase over the prior year.

New Commissioner: Daniel Gallagher was sworn in as a Commissioner. Previously he served on the staff as counsel to prior Commissioners and as Deputy Director of the Division of Trading and Markets.

Criminal referral: The Department of Justice declined to prosecute former SEC General Counsel David Becker. Conflict issues concerning Mr. Becker’s involvement in questions regarding the Commission’s position on certain clawback actions related to Bernard Madoff and his personal interest in the issue had been referred to the DOJ by the SEC IG.

Supreme Court

Arbitration: KPMG LLP v. Cocchi, No. 10-1521 (Nov. 7, 2011). The case centers on a motion to compel arbitration. Four underlying causes of action against the audit firm were brought by nineteen individuals and entities who purchased limited partnership interests in one of three limited partnerships. The funds were invested with Bernard Madoff. KPMG is one of the defendants. Its audit agreement requires arbitration. The four claims center on the adequacy of its audits. The Florida court of appeals held that two of the claims were not subject to arbitration. The court did not mention the other two claims but refused to compel arbitration. The Supreme Court reversed in a per curiam opinion. The Federal Arbitration Act reflects an emphatic federal policy in favor of arbitration. The key question here is whether the claims are direct or derivative. This is an issue of state law for the lower courts. However, the court of appeals refused to compel arbitration without ruling on if two of the claims are subject to arbitration. Accordingly, the case was reversed and remanded for consideration of whether the two claims are in fact subject to arbitration under KPMG’s audit agreement.

Citigroup settlement

The Court held a hearing on the proposed settlement in SEC v. Citigroup Global Markets, Inc., Civil Action No. 1:11-cv-07387 (S.D.N.Y.). Previously, Judge Rakoff entered an order posing a series of questions to the parties. The SEC filed a brief essentially arguing for deference to its prosecutorial discretion. In its memorandum Citigroup deferred to the SEC on enforcement policy questions. The company also argued that the settlement was a business judgment and that the remedies were more than adequate while minimizing the conduct alleged in the SEC’s complaint. A request by Better Markets, Inc., a public interest group, to intervene was denied. After closely questioning the parties Judge Rakoff stated that he planned to write an opinion.

SEC Enforcement: Filings and settlements

SEC v. Krantz, Civil Action No 0:11-cv-60432 (S.D. Fla. Filed Feb. 28, 2011) is an action against the outside directors of DBH Industries, Inc. The complaint followed and action brought by the SEC against the company and its former Chairman David H. Brooks and others for, essentially, looting the bullet proof vest manufacturer. Mr. Brooks and the former CFO of the company were also convicted on criminal securities fraud charges for essentially the same conduct. Krantz was brought against the three outside directors of the company for rubber stamping the actions of their close friend David Brooks and ignoring a series of red flags about his improper actions. Jerome Krantz, Cary Chasin and Gary Nadelman each agreed to settle with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Sections 10(b) and 14(a) and from aiding and abetting violations of Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). Each former director also agreed to pay a civil penalty in the amount of $100,000 and to be barred from serving as an officer or director of a public company. In addition, Mr. Chasin agreed to pay disgorgement of $100,000, Mr. Krantz $375,000 and Mr. Nadelman $820,000. Each former director will also pay prejudgment interest.

Misrepresentations: SEC v. Kapur, Civil Action No. 11-CIV-8094 (S.D.N.Y. Filed Nov. 10, 2011) is an action against investment adviser ThinkStrategy Capital Management and its principal, Chetan Kapur. ThinkStrategy managed two hedge funds. The complaint alleges that over a period of about seven years the defendants engaged in a deceptive pattern of conduct in which they made a series of misrepresentations about the funds concerning their performance, returns, assets and performance history. The complaint, which is in litigation, alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4).

Registration revocation: In the Matter of Longtop Financial Technologies Ltd., is an action brought under Exchange Act Section 12(j) to revoke the registration statement of the company. Longtop is a Cayman Island corporation based in China. The company failed to file its annual report with the Commission for the fiscal year ended March 31, 2011. It also failed to provide investors with annual reports for 2008 – 2010. The Commission recently brought a subpoena enforcement action against the firm’s outside auditor, Deloitte Touche Tohmatsu CPA, Ltd,, based in Shanghai.

Contempt: SEC v. Amundsen, Civil Action No. 83-cv-00711 (N.D. Cal. Filed Nov. 10, 2011) is a civil contempt action against Joseph Amundsen. The complaint alleges that in 1983 CPA Amundsen was barred from appearing or practicing before the Commission as part of a settlement of a Commission action. Nevertheless, he has repeatedly performed audits on broker dealers who have filed his audit reports with the Commission. The suit seeks a contempt order and disgorgement.

Inadequate procedures: In the Matter of UBS Securities LLC, Adm. Proc. File No. 3-14620 (Nov. 10, 2011) is an action for failure to comply with Regulation SHO regarding short selling. Specifically, the regulation prohibits a broker dealer from accepting a short sale order or effecting a short sale of an equity security for its own account unless it has borrowed the security or arranged to borrow the security. To document this process UBS had a book recording “locates.” In the book, however, the firm failed to distinguish between firms it had contacted regarding the borrowing transaction and others where the transaction arrangements had not been made. This violated Section 17(a) of the Exchange Act and Rule 203(b) of Regulation SHO. To resolve the matter the firm entered into a series of undertakings, including the retention of a consultant, agreed to the entry of a cease and desist order based on the sections cited in the Order and to a censure. The firm also agreed to pay an $8 million civil penalty.

Misrepresentations/conflicts: In the Matter of Western Pacific Capital Management, LLC, Adm. File No. 3-14619 (Nov. 10, 2011) is a proceeding against the named registered investment adviser and its founder, Kevin O’Rourke. The Order alleges that from 2005 to 2006 Western Pacific served as a placement agent for an offering of shares in Ameranth, Inc. The Respondents placed the shares without being a registered broker dealer and failed to disclose to investors that Western Pacific would obtain a success fee of 10%. Mr.O’Rourke also advised clients to invest in hedge fund Lighthouse Fund, LP without disclosing that it would initially invest primarily in Ameranth for which Western Pacific would obtain a fee. In addition, Mr. O’Rourke misused fund assets and made misrepresentations to investors, including falsely claiming that the fund was liquid when in fact it was not. The Order alleges violations of Securities Act Section 17(a), Advisers Act Sections 206(1), 206(2) and 206(4) and Exchange Act Section 15(a)(1). The action is proceeding to hearing.

Investment fund fraud: SEC v. Fry, Civil Action No. 0:11-CV-03303 (D. Minn. Filed Nov. 9, 2011) is an action against fund managers James Fry and Michelle Palm and their fund, Arrowhead Capital Management LLC. The defendants invested over $600 million in fund assets with Ponzi schemer Thomas Petters who allegedly was investing the funds to finance the purchase of vast amounts of consumer electronics that would be re-sold to Big Box retailers. Mr. Petters claims were false. He was operating a Ponzi scheme. The defendants in this action falsely assured investors that their funds were safe, hid the fact that Mr. Petters and his operation was on the verge of default, and falsely claimed that auditors conducted quarterly examinations of their fund. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206-4(8). The case is in litigation. Previously, Mr. Fry and Ms. Palm were charged criminally in connection with this scheme. Ms. Palm pleaded guilty to one count of securities fraud and one count of making false statements to the Commission. Mr. Fry pleaded not guilty.

Insider trading: SEC v. Galleon Management LLP, Civil Action No. 09-CV-8811 (S.D.N.Y.) is the Commission’s action against the founder of the Galleon hedge funds. Mr. Rajaratnam was convicted on 14 counts of conspiracy and securities fraud by a jury on May 11, 2011. He has been sentenced to 11 years in prison and ordered to pay $53.8 million in forfeiture and a $10 million criminal fine. To resolve the SEC case Mr. Rajaratnam consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay disgorgement and prejudgment interest. That obligation is deemed satisfied by the criminal forfeiture and fine. Finally, he agreed to pay a record $92.8 million civil penalty.

False statements: SEC v Atlantis Technology Group, Civil Action No. 10-61824 (S.D. Fla.) is an action against the company and Christopher Dubeau. The complaint alleges that the defendants made false statements from August 2009 through April 2010 regarding the operations of a subsidiary and its claimed internet protocol television and video phone services. The defendants settled the action, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Dubeau will also be barred from participating in any penny stock offering and from serving as a director of a public company. In addition, he is required to disgorge $312,000 along with prejudgment interest and to pay a $100,000 civil penalty.

Financial fraud: SEC v. Espuelas, Civil Action No. 06 CV 2435 (S.D.N.Y.) is an action against eight former executives of StarMedia Network, Inc. The amended complaint alleges that the defendants participated in a scheme to falsify the earnings of the firm in 2000 and 2001 and made false statements. This week Walther Moller, the former president of the Mexican subsidiary of the company, settled. He consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A). Mr. Moller, a resident of Mexico, is the fifth defendant to settle in the case.

Sale of unregistered securities: In the Mater of Ronald St. Clair, CPA, Adm. Proc. File No. 3-14615 (Nov. 7, 2011) is an action against Mr. St. Clair, the operator of a Florida tax planning and preparation firm, and Lawrence Swan, a co-owner of that firm. The Order alleges that the Respondents sold interests in an unregistered investment program for Boston Trading and Research LLC. That program was suppose to invest in a foreign currency or FOREX trading program. Interests were sold to 269 investors and about $19.7 million. The program was not registered with the Commission. Neither Respondent was registered with the SEC as a broker-dealer. Neither was an associated persons of a registered broker dealer. Each Respondent settled, consenting to the entry of a cease and desist order based on Securities Act Section 5 and Exchange Act Section 15(a). Each man will be barred from the securities business with a right to apply for reentry after one year. In addition, each Respondent agreed to pay disgorgement of $256,495 along with prejudgment interest and a civil penalty of $50,000.


Lanny A. Breuer, Assistant Attorney General, Criminal Division, addressed the National Conference on the Foreign Corrupt Practices Act, Washington, D.C. on November 8, 2011 (here). In his remarks Mr. Breuer noted that the FCPA does not require amendment while citing the growing trend for countries to adopt anti-corruption measures.


Morgan Stanley & Co. and Morgan Stanley Smith Barney LLC were filed $1 million and ordered to pay $371,000 in restitution and interest to customers for charging excessive markups and markdowns and supervision violations. The charges were imposed on customers on corporate and municipal bond transactions.


Rameshkumar Goenka, a Dubai based private investor, paid $9,621,240 to resolve a market abuse case with the agency. The payment is composed of a $6,517,600 penalty and $3,103, 640 paid as restitution. The fine is the largest ever imposed on an individual for market abuse by an individual. It represents a 30% discount for settling at an early stage of the investigation.

Mr. Goenka was charged with manipulating the closing price for the securities of Reliance Industries on the London Stock Exchange. The charges allege that on October 18, 2010 Mr. Goenka placed orders and executed trades which artificially inflated the closing price of Reliance shares. The orders were executed in the final seconds of trading. At the time Mr. Goenka held a structured product which matured on the date of the trades. The pay-out depended on the closing price of Reliance securities. By increasing the closing price Mr. Goenka avoided a loss of $3,103,640.

Add note: For those who have not heard enough about fraudster Bernard Madoff, HBO Films recently signed actor Robert DeNiro to pay the Ponzi King in an upcoming movie about his huge scam.

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