The Commission’s suit against Bank of America received a boost this week when the NY AG secured an agreement with the bank to produce privileged material in his investigation. Under the agreement, the material will be made available to the SEC. The Commission also brought enforcement actions alleging insider trading, financial fraud and Ponzi scheme claims. A former CEO of a brokerage firm and the firm pleaded guilty in a cherry picking scheme, while former Brocade CEO Gregory Reyes settled a derivative suit against him based on option backdating claims. The Ninth Circuit handed down another opinion construing SUSLA.

SEC v. Bank of America

This case appears to be moving toward trial following the court’s rejection of the settlement. The SEC’s enforcement action accused the bank of furnishing false materials to shareholders when they voted on the acquisition of Merrill Lynch as discussed here. Scheduling orders have been filed and the Commission made a jury demand.

Now, the action appears to be moving forward with the bank agreeing to waive privilege on certain subjects. Specially, under an agreement with the NY AG, the bank will waive privilege and produce documents on five topics: 1) disclosures to be made in or omitted from the proxy statement; 2) the bank’s consideration of whether to invoke the material adverse change clause in the acquisition agreement; 3) the disclosure or non-disclosure of any matter relating to any potential impairment of goodwill of Merrill Lynch in the fourth quarter of fiscal year 2008; 4) the public disclosure or non-disclosure prior to the merger of the financial performance, forecasts, and/or preliminary and interim results of Merrill Lynch for the fourth quarter; and 5) the bank’s communications with federal regulators regarding the terms of federal assistance in connection with the merger. The district court in the SEC’s case entered an order providing that this agreement did not waive privilege on other subjects.

Supreme Court

The court agreed to hear the appeal of former Enron executive Jeffrey K. Skilling. Skilling v. U.S, Case No. 08-1394. The court agreed to hear an issue concerning the proper construction of 18 U.S.C. §1346 “honest services” fraud. This is the third case the court has accepted for review this term on the question as discussed here.

SEC enforcement actions

Investment fund fraud: SEC v. Merrick, Civil Case No. 6:09-CV-1744 (M.D. Fla. Filed Oct. 15, 2009) is an action against David Merrick and his controlled entities. The complaint alleges that the defendants raised at least $22 million form 2,500 investors, claiming that their money would be invested in Forex International bonds, international stocks and other investments. In fact, portions of the investor funds were paid to other investors in the manner of a Ponzi scheme while portions of the money were misappropriated by defendants. The court entered an asset freeze order and a preliminary injunction. See also Litig. Rel. 21248 (Oct. 15, 2009). The CFTC brought a parallel action.

Financial fraud: SEC v. Milne, Civil Action No. 3:08-cv-00505 (D. Conn.) is a financial fraud case involving United Rentals, Inc., discussed here. John Milne, former vice chairman, president and CFO of the company agreed to settle with the Commission. Mr. Milne consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provision of the federal securities laws. He also agreed to the entry of an officer/director ban and to pay disgorgement and prejudgment interest of $6.25 million. The settlement follows a guilty plea by Mr. Milne in a parallel criminal case. See also Litig. Rel. 21247 (Oct. 13, 2009).

Insider trading: SEC v. Jones, Civil Action No. CV-09-4895 (N.D.CA. Filed Oct. 15, 2009) and SEC v. Kueng, Civil Action No. 09-CV-8763 (S.D.N.Y. Filed Oct. 15, 2009) are insider trading cases centered on the acquisition of Jamdat Mobile Inc., a software company which designed games for cell phones, by Electronic Arts, Inc. According to the SEC, Jamdat insider Ben Jones learned about the take over. Prior to the announcement, he tipped his brother Bill and several friends. Bill Jones then tipped Jeremiah Carroll and William Dailey. Mr. Dailey subsequently tipped J.P. Morgan broker Alissa Joelle Kueng, who recommended the stock to a trader at the firm as well as several institutional clients. Ben Jones did not trade, but all of the tippees did.

Ms. Kueng did not settle. Her case is in litigation. Each of the other defendants did settle, consenting to the entry of a permanent injunction prohibiting future violations of Section 10(b). Ben Jones agreed to disgorge about $20,000 plus prejudgment interest which the profits from some of his downstream tippees. He also agreed to pay a civil fine of about $80,000. Ben Jones agreed to disgorge $34,000 along with prejudgment interest and to pay a civil penalty of twice that amount. Mr. Dailey agreed to disgorge $20,000 and pay a civil penalty of about $81,000. Mr. Carroll agreed to disgorge about $5,100 plus prejudgment interest and to pay a civil penalty in the same amount. Mr. Daily, who is a securities professional, also agreed to be barred from associating with any broker or dealer or investment adviser with a right to reapply after five years. See also Litig. Rel. 21249 (Oct. 15, 2009).

Insider trading: SEC v. Guttenberg, Case No. 07 CV 1774 (S.D.N.Y. Filed March 1, 2007). The SEC settled with three more defendants in this high profile case which is discussed here. They are Erik Franklin, Q Capital Investment Partners and David Tavdy. Mr. Franklin and his company consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions and orders requiring the payment of disgorgement of $5.4 million, on a joint and several basis, with all but $290,000 waived based on a demonstrated inability to pay. Mr. Franklin also agreed, in a related administrative proceeding, to an order barring him from future association with any broker, dealer, or investment adviser.

Mr. Tavdy also consented to the entry to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he agreed to an order requiring the payment of $10.3 million. In a related administrative proceeding Mr. Tavdy agreed to the entry of an order barring him from future association with any broker or dealer.

Insider trading: SEC v. Queri, Case No. 2:08-cv-01363 (W.D. Pa. Sept. 30, 2008), discussed here, is an insider trading case in which the SEC charged sixteen individuals with trading in advance of the announcement on June 21, 2004 that Dick’s Sporting Goods would acquire Galyan’s Trading Company. This week, the Commission announced settlements with the final three defendants. Defendants Johnston, Jerome and England each consented to the entry of a permanent injunction prohibiting future violations of Sections 10(b) and 14e). In addition, each defendant agreed to disgorge his trading profits along with prejudgment interest and to pay a penalty equal to the trading profits. The penalty for Mr. Johnston, who is alleged to have tipped five others who traded, was limited based on financial condition. See also Litig. Rel. 21246 (Oct. 9, 2009).

Criminal cases

U.S. v. Motz, Case No. 08-598 (E.D.N.Y. Filed Aug. 27, 2008) named as defendants the brokerage firm of Melhado, Flynn & Associates and its CEO and Chairman George Motz. Both pleaded guilty this week based on allegations involving a “cherry picking” scheme. Mr. Motz cherry picked trades initially for the proprietary account of Melhado Flynn and later for a fund. After placing the trades, typically he waited several hours before telling the trading desk where to allocate particular trades. If it was profitable at first he allocated the trade to the firm’s account and later to an investment fund he and the firm courted. The unprofitable trades were allocated to other accounts. In 2003 during examinations by the NASD and the SEC, defendant Motz took steps to conceal his scheme. Specifically, he altered the order tickets to ensure that the scheme would not be detected. A sentencing date has not been set. DOJ’s Press Release is available at

Previously, the SEC brought an administrative proceeding against Mr. Motz, Jeanne McCarthy, the comptroller and financial and operations principal of the firm, and the broker dealer. In the Matter of Melhado, Flynn & Associates, Inc., Adm. File No. 3-12574 (Filed Feb. 26, 2007).


FINRA censured Citigroup and imposed a $600,000 fine on the firm. According to FINRA, the firm failed to supervise and control trading activities. Specifically, Citigroup lacked procedures designed to detect and prevent improper trades between the firm and certain counterparties as well as among entities within the firm.

Private actions

In re Brocade Communications Systems, Inc. Derivative Litig., Case No. 05-2233 (N.D. Cal.) is a derivate action based on option backdating claims at Brocade Communications. Former CEO Gregory Reyes agreed to settle the claims as to him for $12.5 million. Previously Mr. Reyes settled with the SEC and had his criminal conviction reversed as discussed here.

Circuit courts

Proctor v. Vishay Int., Inc., Case No. 07-16527 (9th Cir. Oct. 9, 2009) is a suit initially brought by the minority shareholders against the majority shareholders of Siliconix, Inc. Alleging misappropriation of assets and breach of fiduciary duty. Later a short form merger was effected at a price plaintiffs claim in an amended complaint is unfair. The suit, which has class action and derivative claims, started in state court. It was removed under SLUSA and then dismissed. The circuit court affirmed in part and reversed in part. Following two other circuits, the court concluded that the portion of the suit covered by SLUSA was properly dismissed. However, the remaining claims should not have been dismissed. Rather, those claims should have been remanded to state court.