THIS WEEK IN SECURITIES LITIGATION (October 2, 2009)
The staple of SEC enforcement appears to be investment fund fraud cases with five new actions brought this week. The Commission also settled with former executives of General Re and filed a settled administrative proceeding based on a failure to have adequate procedures. Finally, the SEC filed a settled FCPA case along with DOJ.
SEC enforcement actions
Financial fraud: SEC v. Ferguson, Case No. 06 Civ. 0778 (S.D.N.Y.) is an action against five former senior executives of General Re Corporation and AIG. The complaint alleges that the defendants aided and abetted AIG’s financial fraud, discussed here. Essentially the case was based on a sham insurance transaction. Previously the defendants were convicted in a criminal case based on the same conduct. U.S. v. Ferguson, Case No. 3:06-CR-137 (D. Conn.). Defendants Ronald Ferguson, Elizabeth Monrard, Christian Milton, Robert Graham and Christopher Garand each consented to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions of the Exchange Act. Each defendant also agreed to the entry of an officer director bar. See also Litig. Rel. 21235 (Oct. 1, 2009).
Investment fund fraud: SEC v. Huber, Civil Action No. 09-CV-6068 (N.D. Ill. Filed Sept. 30, 2009) is an action against William Huber and Hubadex, Inc., based on three different investment funds operated by Mr. Huber. According to the SEC, Mr. Huber falsely represented the amount of assets he had under management to inflate his fees, made false statements about the trading by the fund and provided investors with false account balances. The complaint alleges violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Section 206 of the Investment Advisers Act. The case is in litigation. Litig. Rel. 21230 (Sept.30, 2009).
Internal controls: In the Matter of Commonwealth Equity Services, LLP, Adm. Proc. File No. 3-13631 (Sept. 29, 2009). Respondent is a broker dealer. Under Section 30(a) respondent is required to adopt written policies and procedures to protect customer information. The company recommended, but did not require, its representatives to maintain antivirus software on their computers. As a result, customer information was not adequately protected. In November 2008, an intruder obtained the login credentials of a registered representative to access customer accounts. The intruder used the information to make unauthorized purchase in those accounts. To resolve the action, Respondent consented to the entry of a cease and desist order and agreed to pay a civil penalty of $100,000.
Boiler Room: SEC v. 3001 AD, LLC, Case No. 09-Civ-81453 (S.D. Fla. Filed Sept. 29, 2009) and the parallel criminal case charge several individuals with conducting a boiler room operation as discussed here. https://www.secactions.com/?p=1542 The cases center on the fraudulent sale of shares in 3001 AD and its related entities. Essentially, investors were induced to invest in the company with false promises of a forthcoming IPO. From the late 1990s the defendants raised about $20 million by selling interests in the company and its related entities. Those interests, sold for $5,000 each, were treated as interchangeable. The Commission’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See also Litig. Rel. 21227 (Sept. 29, 2009).
Investment fund fraud: SEC v. Harris, Civil Action No. 3:09-cv-01809 (N.D. Tex. Filed Sept. 28, 2009) is an action against George Harris and Giant Operating, LLC. The complaint alleges that the defendants made five offerings in oil and gas securities offerings, raising over $13 million from 150 investors. Defendants then misappropriated at least $2 million from the offering. The complaint alleges violations of Sections 5 and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act. The defendant consented to the entry of a preliminary injunction and the appointment of a receiver. Litig. Rel. 21226 (Sept. 28, 2009).
Investment fund fraud: SEC v. Bluestein, Case No. 2:09-CV-13809 (E.D. Mich. Filed Sept. 28, 2009) is an action against stock broker Frank Bluestein, alleged to have acted as a feeder for Edward May and his Ponzi scheme E-M Management LLC, discussed here. Mr. Bluestein targeted elderly investors, sometimes inducing them to refinance their homes, to secure funds for the scheme. Using investor seminars to lure investors and gain their confidence, Mr. Bluestein assured investors about the safety of his fund and raised about $74 million from more than 800 investors over a five year period. The Commission’s complaint alleges violation of the antifraud and registration provisions of the securities laws. The case is in litigation. Litig. Rel. 21223 (Sept. 28, 2009).
Investment fund fraud: SEC v. K&L International Enterprises, Inc., Case No. 6:09-CV-1638 (M.D. Fla. Filed Sept. 28, 2009) is an action in which the SEC obtained emergency relief against defendants Stephen Carnes, Lawrence Powalisz and their related companies also discussed here. This scheme focuses on dumping unregistered shares on the market using two groups of companies in a series of sham transactions. The shares were quoted in the Pink Sheets or the Over-the-Counter Bulletin Board. Over a two year period the defendants raised about $7 million through this scheme. The complaint alleges violations of Section 5 of the Securities Act. It is in litigation. Litig. Rel. 21224 (Sept. 28, 2009).
SEC v. AGCO Corporation, Civil Action No. 1: 09-CV-01865 (D.D.C. Filed Sept. 30, 2009) is a settled FCPA case brought against Duluth, Georgia agricultural equipment manager AGCO discussed here. From approximately 2000 through 2003 the company paid approximately $5.9 million in kickbacks in connection with sales of equipment to Iraq under the United Nations Oil for Food Program. The payments were made using a Jordanian agent and booked as Ministry Accrual in an account created by the marketing staff. To resolve the matter the company consented to the entry of an injunction prohibiting future violations of the antifraud provisions and agreed to pay disgorgement of about $13.9 million in profits plus pre-judgment interest. The company will also pay a $1.6 million penalty under a deferred prosecution agreement entered into with DOJ. The Danish State Prosecutor will also confiscate over $600,000. Litig. Rel. 21229 (Sept. 30, 2009).