Senator Schumer sent the Commission a letter this week requesting that it review certain trading practices such as high speed trading, quote stuffing and sub-penny pricing. SEC enforcement filed another settled option backdating case along with actions based centered on an offering fraud and misrepresentations by a rating agency. In addition, an ALJ concluded in an initial decision that the Division did not prove its claim that the former general counsel of a broker dealer failed to reasonably supervise a broker. In criminal cases, the Virginia Financial and Securities Fraud Task Force brought fraud charges against individuals alleged to have conducted an offering fraud. Finally, the FSA sanctioned the London based unit of Goldman Sachs & Company for failing to advise the regulator about the SEC’s investigation of the U.S. company.

Market reform

Senator Charles Schumer, a member of the Senate Banking Committee, sent a letter to SEC Chairman May Schapiro dated September 7, 2010 discussing high speed trading and other market practices. Specifically, the letter requests that the Commission reconsider its position on high speed trading. According to the Senator, high speed trading now accounts for “roughly” two-thirds of trading volume in the equity markets. Some reports suggest that much of this trading is not real, because thousands of trades are sent and cancelled in a fraction of a second.

The letter goes on to request that a formal investigation be conducted into “quote stuffing” and “sub-penny pricing” to determine what role, if any, they played in the May 6 Flash Crash. The letter also requests that the Commission consider imposing a minimum quote duration to preclude the practice of sending and canceling orders in a fraction of a second. Finally, Senator Schumer requests that the SEC consider banning “sub-penny pricing” because the practice may have contributed to market volatility on May 6.

SEC enforcement actions

Option backdating: SEC v. Affiliated Computer Services, Inc., Civil Action No. 1:10-cv-1515 (D.D.C. Filed Sept. 9, 2010) is a settled action against business process and information technology services company, Affiliated Computer. The company was acquired by Xerox Corporation in February 2010. The complaint alleges that from 1995 through 2006 the company backdated option grants to officers and employees. During an internal investigation into those practices, the former CEO and CFO of the company made public statements denying that there was any intentional backdating. In January 2007, the company restated its financial statements recording a $51 million compensation expense for 72 of the 73 grants awarded between 1994 and 2005. The company settled the matter, consenting to the entry of a permanent injunction prohibiting violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The settlement reflects the cooperation of the company. See Litig. Rel. 21643 (Sept. 9, 2010).

Investment adviser fraud: In the Matter of Neal R. Greenberg, Adm. Proc. File No. 3-14033 (Sept. 7, 2010). Respondent Neal Greenberg is a registered investment adviser, the controlling shareholder of Tactical Allocation Services (“TAS”) and the head portfolio manager of its subsidiary Agile Group, LLC. which serves as the investment adviser to several funds. According to the Order, Mr. Greenberg made a series of misrepresentations and omissions to induce investors to purchase shares in the various funds. Most of the investors were not suited for these investments. By mid-September 2008, the funds limited redemptions due to a lack of liquidity. By month end, redemptions were suspended because of substantial losses resulting from significant investments with fraudster Tom Petters and Ponzi king Bernard Madoff. The Order for Proceedings (discussed here) alleges willful violations by Mr. Greenberg of Exchange Act Section 10(b) and Advisers Section 206(1), 206(2) and 206(4). Agile is alleged to have willfully aided and abetted and caused by Mr. Greenberg willfully violated Advisers Act Section 206(4). The case is in litigation.

Offering fraud: SEC v. Berkshire Resources, LLC, Civil Action No. 09-0704 (S.D. Ind. Filed June 8, 2009) named as defendants David Rose and Jason Rose and the company they controlled, Berkshire Resources, and Mark Long. Brian Rose and Joyce Rose were named as relief defendants. Over more than two years beginning in April 2006, Berkshire Resources raised about $15.5 million from 265 investors in the U.S. and Canada through a series of unregistered fraudulent securities offerings according to the complaint. The company purported to be in the oil and gas exploration business. Investors were falsely assured that all of their funds would be put in oil and gas development projects and that Jason Rose had substantial experience in the business. In fact much of the money was not invested as claimed. Portions of the funds were diverted to the personal use of the Rose family.

The SEC settled with David Rose, Jason Rose and Mark Long and two relief defendants (as discussed here). David and Jason Rose each consented to the entry of permanent injunctions prohibiting future violations of Securities Act Section 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). In addition, David Rose agreed to pay disgorgement of $15,400,000 along with prejudgment interest and a civil penalty of $130,000. Jason Rose agreed to disgorge $182,896.42 and prejudgment interest and to pay a civil penalty of $130,000. Defendant Long consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 5 and agreed to disgorge $446,775 along with prejudgment interest and to pay a civil penalty of $130,000. The two relief defendants agreed to disgorge in excess of $600,000 along with prejudgment interest. David and Jason Rose and Mark Long also agreed to be barred from future association with any broker or dealer.

Misrepresentations:In the Matter of Lace Financial Corp., Adm. Proc. File No. 3-14028 (Sept. 2, 2010); In the Matter of Damyon Mouzon, Adm. Proc. File No. 3-14029 (Sept. 2, 2010) are proceedings which name as respondents, respectively, NRSRO LACE Financial Corp., and its founder and controlling shareholder Barron Putnam and Damyon Mouzon, the firm’s president. The Order is each case is based on the same key allegations. Each alleges that the firm made a material misrepresentation in its application to be an NRSRO and for an exemption from a conflict of interest provision. That provision, Rule 17g-5(c)(1), prohibits an NRSRO from issuing or maintaining a credit rating solicited by a person that in the last year provided the agency with net revenue equaling or exceeding 10% of its total revenue. In its application, Lace materially misrepresented the amount of revenue for its largest customer during 2007. Lace also failed to disclose that it had carried out an extra layer of review when formulating ratings for certain issuers whose securities comprised pools of asset-backed securities managed by the firm’s largest customer. Lace also failed to keep written policies and procedures regarding that layer of review. The firm also failed to maintain e-mail as required. Mr. Putnam is alleged to have violated Rule 17g-5(c)(2) by participating in determination of a credit rating for an entity whose stock he owned. He is also alleged to have caused the violations of Lace. The proceeding as to Lace and Mr. Putnam was resolved with each respondent consenting to the entry of a cease and desist order from committing or causing any violations or future violations of Exchange Act Sections 15E(a)(1), 15E(h)(1), 15E(h)(1)m 15E(k) and 17(a). Lace was also censured and ordered to pay a civil penalty of $20,000. The action with regard to Mr. Mouzon will be set for hearing.

Initial decision

Failure to supervise: In the Matter of Theodore W. Urban, Adm. Proc. File No. 3-13655 (Sept. 8, 2010) is a proceeding against the former General Counsel and Executive Vice President of Ferris, Baker Watts, Inc. The case centers on claims that Mr. Urban failed to reasonably supervise registered representative Stephen Glantz and detect fraud. Mr. Glantz pleaded guilty to securities fraud in 2007. That fraud occurred while he was employed at FBW. It involved fraudulent trading by a firm client who was operating a Ponzi scheme and later pleaded guilty to fraud charges. After a hearing on the merits, the ALJ dismissed the proceeding, concluding that the Division failed to prove its allegations. (This case will be discussed in detail in an article on Monday).

Criminal cases

Investment fund fraud: U.S. v. Allmendinger, Case No. 3:10-cr-00248 (E.D. Va. Filed Sept. 7, 2010) names as defendants Christian Allmendinger, Adley Abdulwahab and David White. The three defendants were the principals of A&O Resources Management Ltd. The indictment contains one count of conspiracy to commit mail fraud, six counts of mail fraud, one count of conspiracy to commit money laundering, six counts of money laundering and four counts of securities fraud. It also seeks the forfeiture of about $103 million. According to the indictment, the defendants and others raised more than $100 million from about 800 investor victims in the U.S. and Canada. False representations were used to induce investors to purchase life settlement investments through A&O Resources and its related entities. When state authorities initially began to investigate, the indictment claims that the defendants crafted two sham transactions in an effort to conceal the fraud. Portions of the investor funds are alleged to have been diverted to the personal use of the defendants. Four others implicated in this case have entered into plea agreements. This case has been coordinated with the Virginia Financial and Securities Fraud Task Force.


The U.K.’s Financial Services Authority fined Goldman Sachs International, the London based unit of Goldman Sachs & Co. approximately $26 million for failing to comply with FSA principles 2 and 3. Those principles require, respectively, that a firm conduct its business with due skill, care and diligence and that it deal with its regulators in an open and cooperative way, disclosing “anything relating to the firm of which the FSA would reasonably expect notice.” Here, the London-based unit of the firm failed to disclose to the FSA the SEC investigation into the Abacus transaction and the issuance of a Wells notice which ultimately resulted in the enforcement action against the firm (here). The FSA concluded that this was not intentional. Since the firm cooperated with the investigation, it received a 30% discount on the fine.

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Postings For SEC Enforcement Positions
Chief Counsel. Details are listed here.

Associate Director – Office of Whistleblower Coordinator
The person selected for this role will be responsible for building and managing the new Whistleblower Office and overseeing the implementation of policies and procedures to ensure that the SEC is in compliance with the Whistleblower provisions of the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”
The posting is open until September 22, 2010. Details are listed here.

Associate Director
The person selected for this position will lead a staff engaged in investigations involving matters in many of the enforcement program’s priority areas including insider trading, market manipulation, financial reporting and accounting fraud, violative conduct by broker-dealers, investment advisers and investment companies and offering frauds. The posting for Associate Director, Division of Enforcement is listed on USA Jobs, Announcement # 10-380443-WG. The posting will close on 09/17/10. Here’s the link.