The SEC debated proposed regulations to implement sections of Dodd-Frank as the U.S. Attorney for the Southern District of New York discussed what appears to be a renewed war on insider trading. Insider trading on Wall Street is “rampant” U.S. Attorney Preet Bharara told NBC. Soon there will be new arrests as a result of the “significant resources” his office is pouring into the battle. U.S. law enforcement was commended for its FCPA enforcement efforts this week by the Working Group of the Organisation for Economic Co-operation and Development.

SEC Enforcement concluded what is perhaps its most significant market crisis case, settling with three former Countrywide executives. Enforcement also filed settled Reg FD actions and additional investment fund fraud cases. Also this week, a criminal insider trading indictment was handed down which tracks an earlier SEC case and FINRA fined a former regional broker for having inadequate supervisory procedures.

Market reform

Basic principles: Commissioner Luis Aguilar outlined five key principles to guide the deliberations and actions of the agency as it continues to implement Dodd-Frank. (here). “An Insider’s View of the SEC: Principles to guide Reform,” available here. First, investor protections should be real and verifiable, protecting all market participants. They should also be based on the Commission’s judgments and not rely on systems used by large financial institutions. Second, it is critical that the SEC obtain the input of investors. Third, the SEC should resist the trend toward a two-tiered market. Fourth, the Commission must use its authority and expertise. Finally, it is critical that the SEC use the tools provided by Congress. Dodd-Frank will have far-reaching consequences, the Commissioner predicted, in conclusion. At the same time “The sixty-four million dollar question is whether the SEC can deliver in a way that enhances investor protection while maintaining and improving the world’s most efficient capital market.”

Say on pay: Under Dodd-Frank Section 951, the Commission issued proposed rules. They concern advisory votes on executive compensation and “golden parachutes.” Under the proposed rules, companies would be required to give shareholders an advisory vote on: executive compensation and on the desired frequency of these votes; compensation arrangements and understandings in connection with mergers (typically called “golden parachute” arrangements); and additional disclosure on “golden parachute” arrangements. Institutional investment managers would also be required to report their votes on executive compensation and “golden parachute” arrangements at least annually, unless the votes are otherwise required to be reported publicly.

SEC Enforcement

Reg. FD/financial fraud: SEC v. Office Depot, Inc., Civ. Action No. 9:10-cv-81239 (S.D. Fla. Filed Oct. 21, 2010) is one of four actions regarding alleged violations of Reg FD and/or unrelated claims centering on violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The civil action alleges that the company violated Reg FD in 2007 by selectively disclosing to eighteen analysts information suggesting that the company would not make street estimates (Home Depot did not furnish quarterly guidance).

Specifically, the complaint alleges that after discussions between the CEO and CFO, the director of investor relations spoke with the analysts regarding a series of talking points worked out with the CFO, based in part on the CEO’s suggestions. The points referenced public information about the difficulties of the market and cited specific companies which had released earnings impacted by the then current economic climate. Following the calls, many analysts were influenced to lower guidance. In unrelated claims, the Commission alleged that the company overstated earnings from the third quarter of 2006 through the second quarter of 2007 as a result of accounting violations. Those violations stem from the premature recognition of $30 million in funds obtained from vendors in exchange for the company’s merchandising and marketing efforts. The funds were recognized when received rather than over the relevant reporting periods as required by GAAP. A restatement resulted. To settle this action, the Company consented to the entry of an order requiring it to pay a penalty of $1 million. See also Litig. Rel. 21703 (Oct. 21, 2010). In a separate administrative proceeding Home Depot agreed to the entry of a cease and desist order. In the Matter of Office Depot, Inc., Adm. Proc. File No. 3-14094 (Oct. 21, 2010). The Commission acknowledged the cooperation of the company in resolving this matter.

Two related administrative proceedings charged the CEO and chairman of the board, Stephen Odland, and the former CFO, Patricia McKay, with violations of Reg FD based on the same facts contained in the civil complaint. In the Matter of Stephen Odland, Adm. Proc. File No. 3-14095 (Filed Oct. 21, 2010); In the Matter of Patricia McKay, Adm. Proc. File No. 3-14096 (Filed Oct. 21, 2010). In each matter, the Respondent consented to the entry of a cease and desist order based on Exchange Act Section 13(a) and Reg FD. Each also undertook to pay a civil penalty of $50,000.

Investment fund fraud: SEC v. Mannion, Civil Action No. (N.D. Ga. Filed Oct. 19, 2010) names as defendants Paul T. Mannion, Jr., Andrew Reckles and PEF Advisors LLC (here). Messrs. Mannion and Reckles are the principals and co-owners of PEF Advisors LLC and PEF Advisors Ltd., investment advisers to the feeder funds of Palisades Master Fund, L.P. Messrs. Mannion and Reckles materially overvalued fund assets thereby deceiving investors and inflating their fees, according to the SEC. They did this, according to the Commission, by putting in a “side pocket” securities (a device used to segregate assets) from World Health Alternatives, Inc. and failing to write them down to their true value. At the same time, the individual defendants were selling their holdings in World Health. As a result, the NAV used to solicit new investors and calculate management fees was overstated. During the same period, the individual defendants made material misrepresentations in connection with acquiring non-public information about a PIPE offering. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is in litigation.

Investment fund fraud: SEC v. Online-Registries, Inc., Civil Action No. 10-CV-00433 (D.R.I. Filed Oct. 19, 2010) is an action against David Stern and his company. The defendants, according to the complaint, defrauded at least 10 investors who purchased shares in Online-Registries for a total of $170,000 based on misrepresentations. Mr. Stern, a convicted felon and disbarred attorney, told investors the company had developed technology to help permit the sharing of medical records, that it had thousands of subscribers and that they would be forming a partnership with a major technology company. The representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The court entered a temporary freeze order. The case is in litigation. See also Litig. Rel. 21702 (Oct. 21, 2010).

Financial fraud: SEC v. Mozilo, Case No. CV 09-03994 (C.D. Cal. Filed June 4, 2009) is a financial fraud action brought against the former senior officers of Countrywide Financial: CEO Angelo Mozilo; COO David Sambol; and CFO Eric Sieracki. The complaint, discussed here, details a series of false statements by each of the three defendants over a period of years not just to cover up the deteriorating financial condition of the huge sub-prime lender as the market crisis unfolded, but to affirmatively mislead investors. The case settled on the eve of trial (discussed here). Mr. Mozilo consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a) and agreed to pay disgorgement of $45 million, including prejudgment interest, and a civil penalty of $22.5 million. About $25 million of the disgorgement is being paid in a private action which previously settled. Mr. Mozilo also agreed to the entry of a permanent officer/director bar. Mr. Sambol consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a). He will disgorge $5 million, including prejudgment interest, and pay a civil penalty of $520,000. He also agreed to a three year director/officer bar. Mr. Sieracki consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 17(a)(2) and (3) and an order barring him from practicing before the Commission for one year. He also agreed to pay a civil penalty of $130,000.

Investment fund fraud: SEC v. Fifield, Civil Action No. cv 10-7709 (C.D.Ca. Filed Oct. 14, 2010) is an action against Jason Fifield. The complaint alleges that Mr. Fifield and his controlled entity, JJF Management Company, Inc., raised about $5.8 million from 70 investors. Those investors were induced to purchase unsecured promissory notes based on a series of misrepresentations as to how the funds would be used. Portions of the funds were used to make “Ponzi” type payments, according to the complaint, while others were diverted to the personal use of the defendant and his relatives. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See also Litig. Rel. 21695 (Oct. 15, 2010).

Criminal cases

Investment fund fraud: U.S. v. Moore (S.D.N.Y.) is a case in which defendant Vance Moore pleaded guilty to nine counts of wire fraud and one count of conspiracy to commit wire fraud. The defendant and his co-conspirator are alleged to have raised over $80 million from investors who thought they were buying interests in ATMs which would generate profits from fees from the withdrawal of cash. There were no ATMs. Mr. Moore pleaded guilty to conspiracy and nine counts of wire fraud. The date for sentencing has not been set.

Insider trading; obstruction: U.S v. Binette, No. 3:10-cr-30036 (D. Mass. Filed Oct. 14, 2010) is an action against Peter Talbot and Carl Binette (here). Mr. Talbot at one time was employed by the Hartford Investment Management Company. In April of 2008, he learned that his company was engaged in confidential acquisition talks with Safeco Corporation. He subsequently told his nephew, Carl Binette. Both men opened a brokerage account in Mr. Binette’s name. The account was used to purchase Safeco common stock and options. That company was later acquired not by Hartford, but Liberty Mutual. Trading profits of $615,833 were made. The indictment charges securities fraud, conspiracy and obstruction. Previously both defendants settled with the SEC (here). The criminal case is pending.


The Working Group on Bribery of the Organisation for Economic Co-operation and Development commended U.S. enforcement efforts against transnational bribery. The Group noted that the specialized units on FCPA enforcement at the Department of Justice and the FBI have made significant contributions to the success of the effort. The formation of such a group at the SEC should aid those efforts. Since the Phase 2 review in 2002, the U.S. had brought FCPA cases against 71 individuals and 88 enterprises. Over $3 billion in criminal and civil penalties, fines, criminal forfeiture and civil disgorgement have been obtained in FCPA cases.


Farris, Baker Watts, now part of RBC Wealth Management, was fined $500,000 and directed to pay about $190,000 in restitution to 57 account holders by FINRA. The regulator concluded that the broker had inadequate supervision of sales of reverse convertible notes to retail customers. Reverse convertible notes are a complex investments which use notes that have a coupon interest rate set for a fixed duration tied to the performance of a particular stock. Profit or loss for the customer is a function of the performance by the underlying stock. The firm sold this product to about 2,000 retail accounts between January 2006 and July 2008. In several instances the product was sold to elderly customers.


The Financial Services and Markets Tribunal added a financial penalty to the sanctions previously imposed on Andre Jean Scerri by the FSA. Mr. Scerri was found to have engaged in market abuse with respect to the shares of Amerisur. In May 2007, Mr. Scerri placed an order to increase his position in the shares. The same day, he cancelled the order and began selling after he learned from a private investor that the company planned to do a placement of shares at a discount to market the next day. Later the same day, a broker for the company called Mr. Scerri, formally made him an insider, and invited him to participate in the placement. Mr. Scerri continued to liquidate his position and, the following day rebuilt it, purchasing shares in the placement. Initially, the FSA ordered disgorgement of the loss avoided, but did not impose a penalty based on information Mr. Scerri furnished regarding his financial condition. The FSA petitioned the Markets Tribunal to impose a penalty when it turned out that the financial information furnished was incomplete and misleading. A penalty of about $30,000 was imposed in addition to the previously ordered disgorgement of about $70,000.