This Week In Securities Litigation (Week ending June 12, 2015)
The question of forum selection by the SEC was a key issue this week. While to date suits challenging the SEC’s right to bring an action as an administrative proceeding rather than in federal court have had little success – until now. This week a judge sitting in the Northern District of Georgia enjoined the Commission from proceeding with an administrative proceeding in which the Respondent was charged with insider trading. While the Court rejected most of the claims asserted against the Commission, it concluded that the plaintiff has a probability of success on the merits as to its claim based on the Constitution’s Appointment Clause regarding the manner in which SEC ALJ’s are appointed. A preliminary injunction was issued against the Commission.
In similar action, the DOJ told the Court that the Appointment Clause ruling was incorrect. There investment manager Lynn Tilton and her funds are also challenging the SEC’s right to file charges in and administrative proceeding rather than in federal district court. Tilton v. SEC, No. 1:15-cv-02472 (S.D.N.Y.). At the same time, in the underlying administrative proceeding Ms. Tilton claimed the Division did not have sufficient evidence to sustain its charges. The investment manager and her entities filed a motion to halt the Division from search for new evidence on the eve of trial, arguing that it was trying to create a “substitute case” for trial because, despite years of investigation, there was no evidence to support the charges. Respondents coupled that motion with a request for summary disposition. In the Matter of Lynn Tilton, Adm. Proc. File No. 3-16462 (Motion Filed June 5, 2015). The underlying case is discussed here.
Remarks: Commissioner Kara M. Stein delivered remarks titled “Quality Data and the Power of Prevention” at Meet the Market, North America, New York, New York (June 10, 2015). In her remarks the Commissioner discussed creating an Office of Data Strategy at the SEC that would be overseen by a Chief Data Officer (here).
Remarks: Chairman Timothy G. Massad delivered remarks to the FIA International Derivatives Conference, London, England (June 9, 2015). The Chairman discussed the regulation of clearing houses, trading and the margin for swaps (here).
Forum Selection Suits
In Hill v. SEC, Civil Action No. 1:15-cv-01801 (N.D. Ga. Filed June 8, 2015) the Respondent in an SEC administrative proceeding charging insider trading filed a complaint alleging: 1) That the proceeding violated Article II of the Constitution because ALJs are protected by two layers of tenure protection; 2) that Congress’ delegation of authority to the SEC to pursue cases against non-regulated persons before ALJs violates the delegation doctrine in Article I of the Constitution; 3) that Congress violated his Seventh Amendment right to a jury trial by permitting the SEC to bring the action in an administrative forum, and that the SEC ALJ’s appointment violated the Appointments Clause of Article II. After rejecting the SEC’s challenge to jurisdiction the Court held that the plaintiff had a substantial likelihood of prevailing on the merits of the Appointment Clause claim based largely on Free Enterprise. Fund. V. PCAOB, 561 U.S. 477 (2010). The Court issued a preliminary injunction against the SEC.
SEC Enforcement – Litigated Actions
Conflicts: In the Matter of The Robare Group, Ltd., Adm. Proc. File No. 3-16047 (Initial Decision June 4, 2015) is a proceeding which named as Respondents the investment adviser, its founder, Mark Robare and a limited partner, Jack Jones, Jr. The Order centered on alleged undisclosed conflicts between the adviser and its broker. It charged violations of Advisers Act Sections 206(1), 206(2) and 207. The action is discussed in detail here.Following a hearing on the merits SEC ALJ Grimes (also the ALJ in the Hill cases discussed above) concluded in an Initial Decision that the Staff had failed to establish the alleged violations.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 7 civil injunctive cases and 3 administrative actions, excluding 12j and tag-along proceedings.
Rule 105: SEC v. Langston, Civil Action No. 1:13-cv-24360 (S.D. Fla.) is a previously filed action which named as defendants Mr. Langston, CRL Management, LLC and Guaranteed Reinsurance, Ltd.. The complaint alleged violations of Rule 105 of Regulation M which prohibits short selling an equity security during a restricted period prior to a secondary offering and insider trading. Illegal short sales in advance of separate offerings by Wells Fargo, Mitsubishi UFJ Financial Group and Alcoa is alleged in the complaint. Defendants resolved the matter. Previously, the Court entered a final judgment of permanent injunction as to each defendant based on Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 105. In addition, Mr. Langston was ordered to pay disgorgement of $193,108, prejudgment interest and a civil money penalty equal to the amount of the disgorgement. The Court left open the monetary remedies under Rule 105. The Court has now entered final judgments finding the defendants jointly and severally liable for the payment of disgorgement in the amount of $912,854, prejudgment interest and a civil penalty of $502,069 on the Rule 105 violation. See Lit. Rel. No. 23281 (June 11, 2015).
Prime bank fraud: In the Matter of Spectrum Concepts, LLC, Adm. Proc. File No. 3-16358 (June 11, 2015) is an action which names as Respondents: Spectrum, its president and owner Donald Worswick, Michael Grosso and Michael Brown. The Order alleges a prime bank fraud from May through October 2012 in which investors were told that their funds would be placed in private funding projects and used to set up a credit facility that would be blocked for the benefit of a trading platform. It was represented to investors that they would earn returns of 900% in 20 days to 4,627% annually. Overall about $465,000 was raised by Respondents, although portions were returned when the investors backed out. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) along with Exchange Act Section 10(b). Respondents Spectrum and Worshwick settled, consenting to the entry of cease and desist orders based on the Sections cited in the Order. In addition, Mr. Worswick agreed to pay disgorgement of $166,500, prejudgment interest and a civil penalty of $120,000. A fair fund will be established. The other Respondents did not resolve the case.
Investment fund fraud: SEC v. Lattanzio (D. N.J. Filed June 10, 2015) is an action which names as defendants Mr. Lattanzio and his controlled entities, Black Diamond Investments, L.P., Black Diamond GP, LLC, Black Diamond Investments LLC and Black Diamond Capital Appreciation Fund, L.P. Beginning in August 2011, and continuing for the next three years, Mr. Lattanzio misappropriated about $5 million from investors who were induced to place their money in Black Diamond Capital Appreciation Fund. Investors were falsely told that he would arrange project financing for them and generate substantial returns on the money invested. In fact he misappropriated the money and used it for himself. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). A parallel criminal action was filed by the U.S. Attorney for the District of New Jersey. The cases are pending.
Rule 105: SEC v. Evans, Civil Action No. 3:15-cv-02551 (N.D. Cal. June 9, 2015) alleges that Mr. Evans, through is firm Maritime Asset Management, violated Rule 105 on nearly a dozen occasions from December 2010 to May 2012 by short selling an equity security during the restricted period and then purchasing the same security in the offering. Mr. Evans resolved the case, consenting to the entry of a permanent injunction based on Rule 105 and agreeing to pay disgorgement of $582, 175, prejudgment interest and a penalty of $364,389. See Lit. Rel. No. 23280 (June 9, 2015).
Insider trading: SEC v. Fefferman, Civil Action No. 15 CV 1276 (S.D. Cal. Filed June 9, 2015). The action centered on trading while in possession of inside information in the shares of Ardea Biosciences, Inc., over a three year period beginning in April 2009. The defendants are: Senior Director of Information Technology at Ardea, Michael Fefferman; his brother-in-law, broker Chad Wiegand; Mr. Wiegand’s friend and co-worker, broker Akis Eracleous. Other tippees not named as defendants are a Business Partner of Mr. Eracleous and Customer A, a brokerage customer of Mr. Eracleous who was also friends with Business Partner and Relief Defendant Eracles Panayioutou, a brokerage client and cousin of Mr. Eracleous. Mr. Fefferman is alleged to have tipped Mr. Wiegand who in turn tipped Mr. Eracleous who tipped the others in advance of four significant corporate events: 1) The April 29, 2009 announcement that the firm had entered into an agreement with Bayer HealthCare, LLC. Following the deal announcement the purchased shares were sold: Mr. Eracleous had profits of $13,504; Business Partner — $5,693; Mr. Eracleous — $5,184; and Mr. Wiegand — $19,132 in client accounts. 2) The December 1, 2009 announcement of test results for RDEA594. Following the announcement of the news the shares were sold: Mr. Wiegard had profits of $820; and Panayiouto’s account — $4,165; and Mr. Eracleous caused Panayioutou’s account to acquire 5,000 shares yielding $26,592 in illicit profits. 4) On April 23, 2012 Ardea and AstraZeneca announced a merger. Following the announcement the purchased shares were sold: Mr. Wiegand had profits of $215,297; Business Partner purchased 200 call options in the account of Panayioutou, yielding $167,037; and Mr. Eracleous and Business Partner tipped Customer A who agreed to purchase 100 options in his account and divide the profits among the three – the options yielded illegal trading profits of $83,493. The complaint alleges violations of Exchange Act Section 10(b). Each of the three named defendants agreed to settle the action subject to Court approval. Disgorgement, prejudgment interest and penalties will be determined at a later date. Messrs. Wiegand and Eracieous also agreed to be barred from the securities business. A parallel criminal action was brought by the U.S. Attorney’s Office for the Southern District of California against Messrs. Wiegand and Eracious.
Insider trading: SEC v. Andrade, Civil Action No. 15-cv-231 (D. R.I. Filed June 8, 2015). This action centers on the acquisition of Bancorp Rhode Island, Inc. by Brookline Bankcorp, Inc., announced on April 20, 2011. Defendant Anthony Andrade was a member of Bancorp RI’s board of directors for about 14 years. Defendants Fred Goldwyn, Robert Kielbasa and Kenneth Rampino are all long time business associates and friends of Mr. Andrade. The acquisition transaction traces to February 2011 when the Bancorp RI board of directors received a presentation from the firm’s financial advisers on strategic directions. By mid-April 2011 the board narrowed its choices and directed management to pursue a proposal with Brookline. By April 19, 2011 the two parties arrived at a deal. Brookline agreed to pay $48.25 per share for the stock of Bancorp RI which was trading at the time at $31 per share. The deal was announced the next day. Mr. Andrade, who participated in the discussions, is alleged to have tipped: Mr. Kielbasa, who acquired 3,000 shares of Bancorp RI which was sold after the announcement for a profit of $39, 645; Mr. Goldwyn who acquired 1,650 shares of a stock which were sold after the deal announcement for a profit of $21,458; and Mr. Rampino who acquired1,500 shares which yielded a post deal profit of $18,959. The complaint alleges the tips were “illicit gifts” or a “business opportunity.” It charges violations of Exchange Act Section 10(b). Messrs. Goldwyn and Kielbasa agreed to settle with the SEC. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Mr. Kielbasa also agreed to pay disgorgement of $39,645, prejudgment interest and a civil penalty equal to his trading profits. Similarly, Mr. Goldwyn agreed to pay disgorgement of $23,565, prejudgment interest and a civil penalty equal to his trading profits. Messrs. Andrade and Rampino did not settle. See Lit. Rel. No. 23278 (June 8, 2015).
In the Matter of Computer Sciences Corporation, Adm. Proc. File No. 3-16575 (June 5, 2015); SEC v. Edwards, Civil Action No. 15 CV 04339 (S.D.N.Y. Filed June 5, 2015); SEC v. Parker, Civil Action No. 15 CV 04341 (S.D.N.Y. Filed June 5, 2015); SEC v. Sutcliffe, Civil Action No. 15 CV 04340 (S.D.N.Y. Filed June 5, 2015). The action centers on fraudulent conduct that occurred over a two year period beginning in 2009 in connection with the falsification of earnings from a multi-billion dollar with the U.K.’s National Health Service or NHS. It also involved separate fraudulent conduct that occurred in the firm’s Australian subsidiary and its Nordic region.
The settled administrative proceeding named as Respondents the firm, CEO Michael Laphen, CFO Michael Mancuso, CFO of the Australian subsidiary Wayne Banks, Nordic Region Finance Manager Claus Zilmer and Nordic Region Finance Director Paul Wakefield. The separate actions, each of which is being litigated, named as defendants Nordic Finance Manager Chris Edwards, Australia Controller Edward Parker and Finance Director for the NHS Robert Sutcliffe.
While the NHL contract was projected to be profitable, it quickly became unprofitable largely because the firm could not meet the deadlines. Rather than report a loss, the company continued to report profits largely by falsifying the projections from the revenue model. Those false projections were bolstered by misleading statements to the public.
Accounting violations also occurred in the internal business segments of Computer Sciences. In Australia regional CFO Wayne Banks and Controller Edward Parker manipulated the earnings through excess accruals maintained in “cookie jar” reserves. They also failed to record expenses as required. This permitted them to meet analysts’ earnings targets while causing the firm’s consolidated pretax income to be overstated by 5% in Q1FY2009. Similarly, in FY 2010 the firm’s Nordic region manipulated its operating results. Nordic Region Finance Director Paul Wakefield, and others, improperly accounted for client disputes, overstated assets and capitalized expenses. The accounting fraud in Denmark resulted in the overstatement of the firm’s consolidated pre-tax income by 5% in Q1FY 2010, 3% in Q2FY2010, 4% in Q3FY2010 and 7% in Q4F2010. As a result of these actions the financial statements of Computer Science for FY 2010, 2011 and 2012 contained material errors. A restatement was required. During the 12 month period that followed the filing of those periodic reports Messrs. Laphen and Mancuso received bonuses and incentive-based compensation. Neither official reimbursed the firm. The Order alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5).
To resolve the proceeding the firm consented to the entry of a cease and desist order based on Securities Act Sections 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay a civil penalty of $190 million.
Mr. Laphen consented to the entry of a cease and desist order. It is based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) as well as SOX Section 304. He is denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after three years. Mr. Laphen will also pay a civil money penalty of $750,000 and, under SOX Section 304, $3,771,000 to the firm. Mr. Mancuso consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a) and SOX Section 304. Mr. Mancuso will pay a penalty of $175,000 and, under SOX Section 304, $369,100 to the firm. Mr. Zilmer consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Wakefield also agreed to the entry of a cease and desist order based on the same Sections and, in addition, Exchange Act Section 13(b)(5). Both men are denied the privilege of appearing or practicing before the Commission as an accountant with a right to apply for reinstatement after, respectively, four years and three years. In addition, Mr. Wakefield is barred from serving as an officer or director of a public company for three years. Mr. Banks consented to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). In addition, he is barred from serving as an officer or a director of a public company for four years and denied the right to appear or practice before the Commission as an accountant with a right to apply for reinstatement after four years. Mr. Banks will also pay disgorgement of $10,990 along with prejudgment interest. A fair fund was created for the civil penalties. Messrs. Edwards, Parker and Sutcliffe did not settled with the Commission.
In the separate civil injunctive actions the SEC alleged violations of: As to Mr. Edwards, Sections 17(a)(1) & (3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5); and as to Messrs. Parker and Sutcliffe, Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). These actions are being litigated.
Unregistered broker: In the Matter of Mark G. Brickman, Adm. Proc. File No. 3-16576 (June 5, 2015) is a proceeding which names as Respondents Mr. Brockman and Mark Baratto. The Order alleges that over a period of five years, beginning in October 2008, the two men founded, owned and conducted business through three day trading firms that operated as unregistered broker-dealers. Respondents used the three entities to create sub-accounts for traders, hold customer funds and securities and provide margin. Trading was arranged through electronic trading platforms. Trades were cleared through an omnibus account. In exchange for the services, customers were charged commissions. The Order alleges violations of Exchange Act Section 15(a)(1). Each Respondent settled, consenting to the entry of a cease and desist order based on Exchange Act Section 15(a)(1). In addition, the two men will pay, jointly and severally, disgorgement in the amount of $67,446.62 and prejudgment interest. Each will separately pay a penalty in the amount of $25,000.
Continuous disclosure: Rhinomed Limited was fined $33,000 for failing to comply with its continuous disclosure obligations. The failure is based on the fact that the firm entered into an agreement on June 6, 2014 with Fitness First regarding a promotional campaign for its Turbine Product used by some gyms. However, the firm failed to disclose the agreement as required to the Australian Securities Investment Commission until July 9, 2014.