Hearings began on Capital Hill focusing on modifying a provision of Dodd-Frank the SEC has long sought. Chairman Schapiro claimed the provision is key to the SEC’s inspection program since it permits the agency to withhold certain proprietary materials. SEC Enforcement lost most of its claims against a hedge fund manager following a three-day bench trial while DOJ prosecutors won convictions against two former executive charged with looting the company at which they were employed. FCPA enforcement continued with more actions being filed. PWC reported that the number of securities class actions filed in the first half of the year declined compared to the same period last year.


Dodd-Frank Section 929I: Chairman Mary Schapiro testified before the House Financial Services Committee regarding the need for this provision. Essentially the Section, which was passed at the request of the SEC, permits the agency to withhold proprietary information obtained through the inspection process. Concerns have been expressed that the section is overly broad. Four bills have been introduced to modify it. Ms. Schapiro told the committee that the provisions “is central to our ability to develop a robust examination program . . .” Current FOIA exemptions are insufficient to protect this information the Chairman stated. To allay fears that the Section will permit the Commission to inappropriately withhold information, Ms. Schapiro told the Committee that she had issued a directive to the staff specifying that Section 929I can only be used to protect confidential and proprietary information of regulated entities, not the Commission or any of its employees. Accordingly, the Commission will not rely on the Section in any litigation to which it is a party. It will, however, continue to invoke the provision in third-party litigation and only produce the information if a “substantial need” is demonstrated.

Diversity: Commissioner Louis A. Aguilar discussed the Commission’s rule issued earlier this year requiring certain disclosures about a company’s diversity policy. Specifically, the rule requires issuers to disclose whether diversity is a factor in considering board candidates, how diversity is considered in that process and how the company assesses the effectiveness of its policy. Commissioner Aguilar went on to note that many companies have not made the requisite disclosures in the spirit of the rule. Citing studies demonstrating the positive benefits of diversity, he urged companies to do better. Commissioner Aguilar went on to state that the SEC also needs to do better and is taking active steps in its recruiting to effectuate this goal. His remarks, titled “Diversity in the Boardroom is Important and, Unfortunately, Still Rare,” are available here.

SEC enforcement actions

Insider trading: SEC v. Slaine, Civil Action No. 10-CV-754 (S.D.N.Y.) is an insider trading case against David Slaine, formerly a hedge fund portfolio manager with Chelsey Capital. That fund previously settled insider trading charges in connection with SEC v. Guttenberg, No. 07 cv 1774 (S.D.N.Y.), discussed here. The complaint against Mr. Slaine alleges that he used inside information obtained from a former UBS Securities LLC executive to trade ahead of analyst recommendations. To settle the case, Mr. Slaine 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 of $836,385. In a related administrative proceeding, he agreed to be barred from association with any investment adviser. Based on his cooperation, no penalty was imposed. In the parallel criminal case, Mr. Slaine previously pleaded guilty to securities fraud and conspiracy to commit securities fraud. See also Litig. Rel. 21653 (Sept. 16, 2010).

Misrepresentations: SEC v. Berlacher, Civil Action No. 07-3800 (E.D. Pa. Filed Sept. 13, 2007) is an action based on claims of insider trading and misrepresentations made in connection with four PIPE offerings, discussed here. Essentially, the SEC claimed that Robert Berlacher and his hedge funds: by violating Securities Act Section 5 by shorting one PIPE offering and covering with the shares from the resale registration statement; by trading on inside information with respect to another when he sold the shares of the company short after learning of the offering; with respect to each offering by breaching an oral confidentiality agreement entered into when he was first told about the deal by then taking a position in the shares of the company; and by making additional misrepresentations in executing the stock purchase agreements. Following a three-day bench trial the court, which had previously dismissed the Section 5 claim, rejected the insider trading claim concluding that the information was not material, rejected the claims based on the oral agreements finding insufficient proof about the agreements and rejected two of the four misrepresentation claims finding the defendant did not take positions in the stock contrary to the agreement. The court did find that Mr. Berlacher made misrepresentations with in executing two share purchase agreements since he represented not to be holding a short position when in fact he did. Accordingly, the court ordered Mr. Berlacher to pay disgorgement with respect to those two deals, but rejected a request for an injunction, prejudgment interest and a penalty.

Insider trading: SEC v. Khan, Civil Case No. 1:10-cv-2865 (N.D. Ga. Filed Sept. 10, 2010). Defendant Dr. Bobby Khan, a cardiologist, is charged with insider trading in violation of Exchange Act Sections 10(b) and 14(e) as discussed here. The Commission claims he trading in the securities of Sciele prior to the announcement of a tender offer for its shares by Shionogi, is a Japanese pharmaceutical company. According to the complaint, Dr. Khan was illegally tipped by a person identified as the “Sciele Officer,” his long time business associate, friend and a member of the advisory board of a company he founded. The Sciele Officer is alleged to have participated in key events as the bid for his company unfolded beginning in the spring of 2008 and continuing through the summer. Shortly after discussions between the two companies began, the complaint claims Dr. Khan learned of the planned bid from his friend. Later after due diligence he was updated on the negotiations. Shortly before the bid was announced Dr. Khan, who had not traded in the securities markets since 2003, opened a brokerage account. He purchased 4,000 shares of Sciele. After the bid was announced the price rose significantly. Dr. Khan sold his shares of Sciele for a profit of $45,000. The case is in litigation.

Criminal cases

Misleading investors: U.S. v. Bromseth, (E.D. Va.) named as a defendant Tomme Bromseth in an information which charges one count of mail fraud and one count of structuring financial transactions to evade reporting requirements. Defendant Bromseth pleaded guilty to both charges. The information alleges that he made misrepresentations about the risks associated with A&O investments as well as his qualifications to sell them. Over $3 million in A&O products were sold to 15 investors between July 2006 and November 2007. The date for sentencing has not been set.

Financial fraud: U.S. v. Brooks (E.D.N.Y.) the former CEO, David Brooks, and COO, Sandra Hatfield, of one of the primary manufactures of body armor for the U.S. military were convicted of fraud and insider trading following an eight-month jury trial as discussed here. Mr. Brooks was also found guilty of obstruction of justice. Essentially, the indictment charged Mr. Brooks and Ms. Hatfield with looting DHB Industries, Inc., now known as Point Blank Solutions, Inc. for their personal benefit. According to the government, the defendants enriched themselves and their families, using corporate funds to finance a lavish lifestyle, including the purchase of travel, personal jewelry, cosmetic surgery, country club bills and other items. The date for sentencing has not been set.

Investment fund fraud: U.S. v. Starr (S.D.N.Y) is an action against investment adviser Kenneth Starr, previously discussed here. Mr. Starr was an investment advisor with high net-worth and celebrity clients. According to the court papers, Mr. Starr diverted millions of dollars of client funds to his own use. Mr. Starr pleaded guilty to one count each of wire fraud, money laundering and investment adviser fraud. He also agreed to forfeit his multimillion dollar Upper East Side condominium. The government reserved the right to seek to forfeit up to $50 million in assets owned or controlled by Mr. Starr. It also may seek up to $50 million I restitution. Sentencing is scheduled for December 15, 2010.


U.S. v. Aguilar (C.D. Cal.) charges Enrique Faustino Aguilar Noriega and Enrique Faustino Aguilar Noriega, directors of Grupo Internacional de Asesores S.A., with serving as intermediaries in a bribery and money laundering scheme. According to the indictment, Grupo served as an intermediary to pay and launder bribes to Mexican government officials at the Comision Federal de Electridad (“CFE”), a state owned utility company in Mexico. Grupo is alleged to have served as an intermediary for a California based company to obtain contracts from CFE. From about March 2002 through March 2009, the defendants ran a scheme in which they were paid a 30% commission on all the goods and services the California based company sold to CFE. All or part of that commission was used to pay bribes to Mexican officials in exchange for CFE contracts. The commission was added to the cost of the goods sold. False invoices were used as part of the transactions. The money was then laundered in a Grupo brokerage account. Portions of the funds were used to purchase a yacht, a Ferrari and pay about $170,000 in American Express bills for a CFE official. Enrique Aguilar was charged with conspiracy to violate the FCPA, violations of the FCPA money laundering conspiracy and money laundering. Angelo Aguilar was charged with money laundering conspiracy and money laundering.

U.S. v. Bistrong, 10-cr-00021 (D.D.C.) names as a defendant former Armor Holdings vice president Richard Bistrong who has acted as a government informant. Mr. Bistrong pleaded guilty to conspiring to violate the FCPA and the export control laws. According to the court papers, Mr. Bistrong helped make payments to a Nigerian government official in exchange for business. He also helped ship certain ballistic armor vests and helmets to the Kurdistan Regional Government without first obtaining the consent of the Department of Commerce. A date for sentencing has not been set.


Illicit trading: The regulator censured and fined Trillium Brokerage Services, LLC, its Director of Trading, the firm’s Chief Compliance Officer and nine of its traders for illicit high speed trading. The firm was assessed a $1milion fine. The eleven individuals were fined and suspended for varying periods of time. According to FINRA, the trading strategy adopted by the firm induced others to enter orders to execute against limit orders that had been entered by Trillium traders. Once the ordered filled the Trillium traders cancelled their orders. Through this strategy, which gave a false appearance of market activity, the Trillium traders obtained a price advantage. The strategy was used on 46,000 occasions.

Private actions

The number of securities class action complaints brought in the first half of 2010 fell by 4%, according to a report published by PWC. At the current rate the number of filings will be down by about 10% for the year compared to last year if the present trends continue. The decline is attributable to the fall in the number of market crisis cases. Cases against the financial services industry make up the largest number of actions filed. The health industry is second. The largest settlements are the $624 million Countrywide and $235 Charles Schwab deals. The most of the cases are filed in the Second and Ninth Circuits according to the PWC report.

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