Regulators from six agencies including the SEC appeared on Thursday before the Senate Banking Committee to detail their plans for implementing Dodd-Frank. SEC Chairman Mary Shapiro told the Committee that the Commission has more than 100 rule-making provisions, 20 studies and five new offices to implement. Nevertheless, the Commission expects to meet the deadlines. A dispute over funding on Capital Hill could impact that schedule.

The new Supreme Court term began on Monday with two important securities cases due to be argued. SEC Enforcement, joining the USAO for the Southern District of Florida and the FBI, continued the increasing trend of employing “blue collar” tactics in securities cases with a sting operation against microcap stock manipulators that yielded six SEC enforcement actions and seven criminal cases. SEC enforcement also prevailed at trial this week while continuing to focus on insider trading and investment fraud cases. The U.S. Attorney’s Office also won at trial in an insider trading case. The CFTC released a series of statistics documenting the increasing enforcement efforts of the agency.

Supreme Court

The Supreme Court term opened this week with two important securities cases on the docket. One is Matrixx Initiatives v. Siracusano, No. 09-1158 cert. granted June 14, 2010, which presents a key question regarding materiality (discussed here). The complaint claims that Matrixx made false statements about its key product Zicam, a nasal spray. In 2003, the company issued statements about the success of the product. The statements did not disclose certain information from researchers suggesting there were side effects. In fact, the company denied these claims. A class action suit claims the company statements were false and misleading. The district court dismissed the case following decisions in the Second and other circuits which hold that drug manufacturers need not disclose results which are not material on a statistical basis. The Ninth Circuit reversed, holding that the complaint alleges a cause of action, is properly pleaded and that the traditional materiality standards apply.

The second is Janus Capital Group v. First Derivative Traders, No. 09-525, cert. granted June 28, 2010 (also discussed here) which focuses on the question of what constitutes primary liability. Defendant Janus Capital Group, Inc. is a publicly traded asset management firm which sponsors a family of funds. Plaintiffs claim that the defendants violated Exchange Act Section 10(b) because the prospectuses for the funds created the misleading impression that steps would be taken to curb market timing. In fact, the complaint claims there were secret agreements which permitted the practice. The district court dismissed the complaint, concluding that it did not contain any allegations that Janus Capital actually made or prepared the prospectuses or that any of the statements were attributable to it. The court of appeals reversed, concluding that defendants “made” the misleading statements. The court did not adopt an attribution rule.

Sting operation – more “blue collar” tactics

Blue collar tactics are quickly becoming a hallmark of securities enforcement as the SEC continues to team with the Department of Justice, various U.S. Attorneys’ Offices and the FBI. The Galleon insider trading cases made extensive use of wire taps and informants (here). The Goncalves cases represent the largest FBI FCPA sting operation.

Now the SEC, the U.S. Attorney’s Office for the Southern District of Florida and the FBI have brought six SEC enforcement actions against over a dozen persons and seven parallel criminal cases based on a sting operation. See, e.g., SEC v Sand, No. 1:10-cv-23603 (S.D. Fla. Filed Oct. 7, 2010) (and related cases) and U.S. v. Korem, Case No. 0-2-732-cr-UU (S.D. Fla. Filed Oct. 6, 2010) (and related cases). Each of the cases centers on a scheme to manipulate various microcap stocks by insiders or those related to the company. The company officials are alleged to have paid kickbacks to fund managers, brokers and others. Those officials were to use their control over various accounts to trade the stocks thereby impacting the price and volume. Insiders could then profit from the inflated prices. Typically the promoter of the stock would pay a kickback to a person believed to be, for example, a fund manager. In some instances the books of the company were then falsified to cover-up the payments. In reality, the so-called fund manager was an undercover FBI agent. The SEC complaints, which focus on various time periods ranging from 2008 to the present, allege violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Each case is in litigation. The criminal cases charge conspiracy, securities fraud, wire fraud and mail fraud. See also Litig. Rel. 21691 (Oct. 7, 2010). The U.S. Attorneys’ press release is here.

SEC Enforcement

Misappropriation: SEC v. Alexander, Case No. CV-10-4535 (N.D. Cal. Filed Oct. 7, 2010) is an action against Barbara Alexander, a national radio talk show host and former president of APS Funding, Beth Pina, former CFO of APS and Michael Swanson, former VP of APS. The SEC’s complaint alleges that the three defendants sold interests in APS, a real estate investment fund, to the public through the use of Ms. Alexander’s radio show. Approximately $7 million was raised from 50 investors who were told that their funds would be used to make short term real estate loans and would yield a return of 12%. In fact about $1.2 million went directly to the defendants while another $1.3 million was used for various projects beginning in 2006 and continuing through 2009. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Litig. Rel. 21690 (Oct. 7, 2010).

Investment fund fraud: SEC v. Anderson, Case No. 10 CV 6420 (N.D. Ill. Oct. 7 2010) is an action against Robert Anderson and an entity he controls, Rosand Enterprises. According to the complaint, Mr. Anderson raised about $12 million from 77 investors from 2005 through 2008 by telling them that their money would be invested in Rosand. That entity was supposed to be in the home rehabilitation business in Chicago and other areas. Investors were to receive a 10-20% return per month. In fact the funds were used to make Ponzi type payments back to other investors, put in various questionable investments and used for personal items of Mr. Anderson. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Litig. Rel. 21688 (Oct. 7, 2010).

Investment fund fraud: SEC v. Imperia Investment IBC, Civil Action No. 2:10 – CV-00986 (D. Utah Filed Oct. 6, 2010) is an action against Imperia which claimed to sell Traded Endowment Policies or viatical settlements through its website. The company, which claimed it was licensed and located in the Bahamas and Vanuatu, told investors that for $50 they could obtain and $80,000 loan which would be traded and yield them 1.24% per day in returns. Those returns could only be obtained by the use of a VISA card. Through the web site the company raised about $7 million world wide. Almost $4 million was from persons who are deaf. In fact all the allegations on the website are false. The company is not licensed or located in the jurisdictions claimed. The SEC obtained a freeze order on filing the complaint which charges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Litig. Rel. 21686 (Oct. 7, 2010).

Insider trading: SEC v. Jantzen, Case No. 1:10-cv-00740 (W.D. Tex. Oct. 5, 2010) is an insider trading action against former Dell Employee Marleen Jantzen and her husband John, a broker. The case centers on the tender offer by Dell for Perot Systems in September 2009. Prior to the announcement of the transaction Ms. Jantzen learned about the deal during the course of her employment. She was obligated to execute an agreement not to trade. The day before the announcement, Ms. Jantzen transferred funds to her brokerage account. Almost immediately her husband purchased 500 shares and 24 options in Perot. The position was sold immediately after the announcement at a profit of over $26,813.58. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See also Litig. Rel 21685 (Oct. 6, 2010). This is the second case based on this transaction. Earlier the Commission brought SEC v. Saleh, Case No. 3:09-cv-01778 (N.D. Tex. Filed Sept. 23, 2009). That case is settled.

Insider trading: SEC v. Poteroba, Civil Action No. 10-civ-2667 (S.D.N.Y. Filed March 24, 2010) is an insider trading action against former investment banker Igor Poteroba, securities industry professional Aleksey Koval, and their friend Alexander Vorobiev. This week, Mr. Poteroba partially settled the action against him by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Issues regarding disgorgement, prejudgment interest and penalties will be resolved later. Mr. Poterobia also consented to the entry of an order barring him from associating with any broker dealer or investment adviser. The complaint alleged that Mr. Poteroba was part of a serial insider trading ring. He is alleged to have misappropriated confidential inside information from his employer, UBS, regarding at least eleven acquisitions, tender offers or other business transactions. Prior to each deal he tipped his friend Aleksey Koval who traded and then tipped Mr. Vorobiev who traded on four deals. Overall approximately $1 million in illegal profits were made. See also Litig. Rel 21681 (Oct. 4, 2010).

Custody rule: In the Matter of Altschuler, Melvoin and Glasser LLP, Adm. Proc. File No. 3-1408 (Oct. 4, 2010) is an action based on alleged violations of Adviser Act Section 206(4) and Rule 102(e) against audit firm Altschuler, Melvion and Glasser and CPA George Johnson, II. According to the Order, the audit firm was to perform the annual Advisers Act surprise examination of Sentinel Management Group, a registered investment adviser. Sentinel was required by the Custody Rule to have an independent accountant verify all client funds and securities by surprise examination each year. The Respondent firm conducted the exams from 2002 through 2006. Mr. Johnson was the engagement partner for each year except 2004. In conducting the exams, the Respondents failed to comply with the applicable standards. This resulted in Sentinel’s violation of the Custody Rule and Section 206(4) of the Advisers Act. The failures also constituted improper professional conduct. Accordingly, the Commission ordered Respondents to cease and desist from causing any violations and any future violations of Advisers Action Section 206(4). The firm was censured and ordered to disgorge its fees of $18,700. Mr. Johnson is denied the privilege of appearing or practicing before the Commission as an accountant.

Misrepresentations: SEC v. U.S. Pension Trust Corp., Civil Action No. 07-22570 (S.D. Fla. Filed Sept. 28, 2007) is an action discussed here in which the court found defendants U.S. Pension Trust Corp., U.S. College Trust Corp., Iliana Maceiras, Leonardo Maceiras Jr. and Nildo Verdeja liable for violating Exchange Act Sections 10(b) and 15(a) and Securities Act Section 17(a) based on a multiyear fraud. The court entered its findings following a five day bench trial. In its opinion, the court concluded that the defendants violated the antifraud provisions by soliciting investors to purchase shares in U.S. mutual funds through agents largely in Latin America while failing to disclose that they would be charged excessive commissions, in some instances as high as 85%. The defendants also mislead investors about the registration of the investments with the Commission, the Federal Reserve Bank and the Office of the Comptroller of the Currency. The court also concluded that the companies had acted as unregistered broker dealers and that the individual defendants aided and abetted those violations.

The Court ordered the companies to pay disgorgement of $62.6 million based on investor contributions that were fraudulently raised from 1995 through 2008. Those companies were also directed to pay a $50 million civil penalty. The individuals were ordered to pay disgorgement which ranged from $674,567 to $1,093,364, representing the salaries they paid themselves during the time period. Each individual was also ordered to pay a $200,000 civil penalty. See also Litig. Rel. 21680 (Oct. 1, 2010).

Investment fund fraud: SEC v. Chiaese, Civil Action No. 10-cv-5110 (D.N.Y. Filed Oct. 5, 2010) is an action against Carlo G. Chiaese, a registered representative associated with a broker dealer, his wife Micol, and a controlled entity C.G.C. Advisors, LLC as discussed here. The complaint chronicles the investment efforts of six clients identified with various code names. Each investor gave the defendants express instructions for investing their funds. Each was assured those instructions were followed. Each received account statements to bolster those claims. Each claim was false. Overall, at least $2.5 million was invested by the six clients with the defendants. The money was misappropriated and used by the individual defendants to enhance their life style according to the complaint. The SEC’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Sections 206(1) and 206(2) of the Investment Advisers Act. The case is in litigation.


The CFTC released statistics regarding is enforcement program for FY 2010. Those statistics demonstrate that the number of enforcement actions brought in FY 2010 increased by 14% to 57 cases compared to the prior fiscal year. This represents a 42% increase over FY 2008. In addition, the Enforcement Division opened 419 investigations in FY 2010, an all time high. This represents a 66% increase over FY 2009.

Criminal cases

Insider trading: U.S. v. Contorines (S.D.N.Y.) is an insider trading case against Joseph Contorines. The defendant was convicted following trial on one count of conspiracy to commit securities fraud and seven counts of securities fraud. The case was based on trading by Mr. Contorines from 2004 through 2006. During that time, he was furnished with confidential inside information regarding upcoming mergers by Nicos Stephanou, an employee of an investment banking firm who resided in London and New York. Mr. Contorines made over $7 million in illegal profits. Mr. Stephanou also tipped Michael Koulouroudis who previously pleaded guilty. Mr. Contorines is scheduled to be sentenced on February 4, 2011.

Court of appeals

SOX Section 304: Cohen v. Viray, Case No. 08-3860-cv (2nd Cir. Sept. 30, 2010)(In re: DHB Industries, Inc. Derivative Litig.), discussed here, centers on efforts to settle class action and derivative litigation where the settlement agreements indemnified the former CEO from Section 304 liability. The initial suits focused on disclosures regarding the inferior material used to manufacture body armor by the company. Subsequently, there was a restatement of the firm’s financial statements. Mr. Brooks, the former CEO, and others were indicted on securities fraud and other charges which claim they essentially looted the company. Mr. Brooks was recently convicted (here). Parallel SEC enforcement actions are pending (here).

Mr. Cohen filed objections to the proposed settlement, challenging the fees to be paid. DOJ also objected arguing that the proposed settlement limited the government’s remedies in the then pending criminal cases and undermined the efforts of the SEC to hold individuals liable under SOX Section 304. The government’s objections were based on two provisions of the proposed settlement agreement. In one, DHB released Mr. Brooks and another officer from any liability under Section 304. In another, the company agreed to indemnify Mr. Brooks and another officer for any liability under Section 304. The district court overruled the objections and approved the settlement.

The Second Circuit reversed. The court began by considering the question of whether Section 304 contains a private cause of action. On this point the court concluded, based on the language of the Section, its legislative history and the structure of the Act, that Section 304 does not provide for a private cause of action. The court went on to hold that the settlement provisions violate Section 304. Only the SEC has authority to enforce Section 304 and to exempt a CEO or CFO from liability. In view of this fact, it is clear that the settlement is an end run around the provision and undermines the SEC’s authority. It also undermines the important public policy the section was designed to implement.


The chief executive of the FSA gave a keynote address last week focused on the place of values and trust in regulation. Hector Sants stressed in his remarks that another crisis cannot be prevented until the trust of the society in the financial system is restored. It is up to those who manage financial institutions to restore that trust. Regulators have a role in this. The starting point for regulators should be to encourage individuals to make appropriate judgments and to act at all time with integrity. In this regard, the regulator should focus “on what an unacceptable culture looks like and what outcomes that drives …” The regulator, however, should not define the culture. Mr. Sants went on to stress that regulators should focus on the outcomes from the culture and ensure that there is a proper framework for assessing and maintaining a proper culture.