This Week In Securities Litigation (Week ending April 26, 2013)

George Canellos and Andrew Ceresney, two former colleagues in the Manhattan U.S. Attorney’s Office, became the first Co-Directors of the SEC’s Enforcement Division. The Division also secured a ruling this week which will permit its subpoena enforcement action against the PRC based affiliate of Deloitte to move forward. The ruling may set the stage for a precedent setting clash of U.S and PRC law on the question of whether audit work papers for a U.S. registered issuer based in the PRC and audited by a firm there are available to the SEC.

The Commission resolved an FCPA case this week in conjunction with the DOJ. For the first time the SEC and the DOJ both entered into non-prosecution agreements with the company. This is the first FCPA case settled by the SEC with such an agreement. It is also the first FCPA case resolved with two non-prosecution agreements. The Commission, in addition, filed a settled financial fraud action and an insider trading case involving a corporate executive. Finally, the PCAOB announced a new cooperation policy, encouraging cooperation with its investigations.


Remarks: Commissioner Luis A. Aguilar delivered remarks titled “Institutional Investors: Power and Responsibility” to the Georgia State University Department of Finance CEAR Workshop, Atlanta, Ga. (April 19, 2013). The remarks focused on the important role institutional investors, particularly regarding good disclosure which can aid a company, and in overall corporate governance (here).


Remarks: Chairman Gary Gensler delivered remarks titled “Benchmark Interest Rates” at the London City Week (April 22, 2013). His remarks focused on the challenges of transitioning from LIBOR (here).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 3 civil injunctive actions and 2 administrative proceeding (excluding tag-along-actions and 12(j) proceedings).

Investment fund fraud: SEC v. USA Real Estate Fund I, Civil Action No. CV-13-157 (E.D. Wa. Filed April 24, 2013) is an action against the Fund and Daniel Peterson who controlled it. Since 2010 Mr. Peterson is alleged to have soled interests in the Fund to at least 21 investors raising over $400,000. Potential investors were told that millions of dollars would be raised under the JOBS Act and reinvested in Washington State real estate to aid the economic recovery. Potential rates of return were projected to be 500% to as much as 1300% over ten years. In fact the allegations were false. Mr. Peterson diverted the investor funds to his personal use. The Commission’s complaint alleges violations of Exchange Act Section 10(b). The case is in litigation.

Loan loss reserves: In the Matter of Capital One Financial Corporation, Adm. Proc. File No. 3015299 (April 24, 2013) is a proceeding which names as Respondents the company, Peter A. Schnall and David A. Lagassa. Mr. Schnall was the Chief Risk Officer of Capital One while Mr. LaGass was a Managing Vice President within the financial services division. Beginning in October 2006 and continuing through the third quarter of 2007 Capital One’s consumer lending business experienced significantly higher charge-offs and delinquencies for its loans than it had forecast. By the second quarter of 2007 its Capital One Auto Finance segment was experiencing higher loss variances across all types of loans. The forecasting software ]projected increasing losses due primarily to external factors. Rather than incorporating the projected levels into the loss forecast for the segment, Capital One failed to include any of the projection based on the external factors for the second quarter and only part of it for the third quarter despite the fact that this was an integral part of its procedures. As a result Capital One’s consolidated provision for loan and lease losses was understated by about 18% for the second quarter and 9% for the third quarter of 2007. The Order alleges that Capital One violated the books and records and internal control provision of the federal securities laws as well as its own procedures. Messrs. Schnall and LaGassa were the cause of those violations. To resolve the proceeding each Respondent 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). Capital One also agreed to pay a civil money penalty of $3.5 million. Respondents Schnall and LaGassa agreed to pay, respectively, penalties of $85,000 and $50,000.

Unregistered securities: SEC v. Gibraltar Global Securities, Inc., Civil Action No. 13 Civ 2575 (S.D.N.Y. Filed April 18, 2013) is an action against the broker dealer and its owner and president, Warren Davis. The complaint alleges that over a four year period beginning in 2008 the Bahamas based broker dealer solicited U.S. customers through its website looking to ultimately sell shares of thinly traded microcap issuers. Once the shares were obtained they were resold through Gibraltar accounts in the U.S. About $100 million of microcap shares were sold on behalf of U.S. customers at commissions ranging from 2 to 3%. In addition, the defendants participated in the unregistered offering of over 10 million shares of Magnum d’Or. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is in litigation. See also Lit. Rel. No. 22683 (April 23, 2013). Previously, the Commission filed a related, settled case, SEC v. Magnum D’Or Resources, Inc., Case No. 0:11-cv-60920 (S.D. Fla. Filed April 29, 2011).

Unregistered brokers: SEC v. Zufelt, Civil Action No. 2:10-cv-00574 (D. Utah) is a previously filed action against Anthony C. Zufelt and others for operating a Ponzi scheme. Defendants Cache Decker and David Decker, Jr. were alleged to have acted as unregistered brokers in selling shares of Zufelt, Inc. from July 2006 through December 2006. On March 6, 2013 the court entered final judgments against the two Decker defendants prohibiting future violations of Securities Act Sections 5, 17(a)(2) and 17(a)(3) and Exchange Act Section 15(a). In addition, Cahce Decker is required to disgorge $43,000 along with prejudgment interest. A civil penalty was not imposed based on financial condition. David Decker was ordered to pay disgorgement of $141,000 along with prejudgment interest and a civil penalty of $25,000. The case is pending as to the other defendants. See also Lit. Rel. No. 22684 (April 23, 2013).

Insider trading: SEC v. Begelman, Civil Action No. 113-CV (S.D. Fla. Filed April 22, 2013) is an action against Mark Begelman, the former chief operating officer of Office Depot. It centers on the merger of Bluegreen Corporation and BFC Financial Corporation, announced on November 14, 2011. An Executive of both companies was a longtime friend of Mr. Begelman. The two men were members of the World Presidents’ Organization or WPO and a small group within that organization known as Forum 91. That group was designed to give presidents of companies a confidential setting in which to exchange ideas and receive advice about business and personal issues. Accordingly, all discussions of the group were deemed confidential. At its annual retreat in November 2011, Mr. Begelman learned about the deal from his friend and, the next day purchased 25,000 shares of Bluegreen. Those shares were sold the day of the deal announcement, yielding a profit of $14,949.34. The complaint alleges violations of Exchange Act Section 10(b). To resolve the case Mr. Begelman consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. He also agreed to disgorge his trading profits and to pay prejudgment interest and a civil penalty equal to the amount of the trading profits. See also Lit. Rel. No. 22682 (April 22, 2013).

False representations: SEC v. Woolf, Civil Action No. 1:08 cv 235 (E.D. Va.) is a previously filed action against Linda Woolf, Hand On Capital, Inc. and others. The complaint alleged that the defendants sold a course called Teach Me To Trade in which they represented that they had a successful trading record using the approach in the course. In fact they did not. Ms. Woolf, who has filed for bankruptcy, and the company settled with the Commission. The court entered by consent a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The order also directs that Ms. Woolf pay a civil penalty of $225,000 and precludes her and the company from receiving any profits from the sale of the course. See also Lit. Rel. No. 22681 (April 19, 2013).

Compliance procedures: In the Matter of Foxhall Capital Management, Inc., Adm. Proc. File No. 3-15293 (April 19 2013) names as Respondents the firm, a registered investment adviser, and it majority owner and CEO, Paul Dietrich. The Order alleges that beginning in January 2007, and continuing through early September 2009, the firm failed to adopt and implement written compliance policies and procedures and keep required records. The failure to have adequate procedures resulted in the firm’s failing to have an adequate interface between its primary broker dealer and custodian’s systems. As a result, at times customers placed trades without having adequate cash in their accounts for the transaction. When this happened the trades were reallocated to other clients within the same investment portfolio but without regard whether the price increased or decreased from the original trade date. Mr. Dietrich, as CCO, also failed to conduct a timely annual review in 2007 of the firm’s procedures. The firm had been instructed by the inspection staff to cure these deficiencies but it did not. To resolve the matter the Respondents consented to the entry of a cease and desist order based on the Section cited in the Order which were Advisers Act Sections 204 and 206(4). Both Respondents were censured. In addition to implementing certain remedial procedures, the firm was directed to pay disgorgement of $20,183, prejudgment interest and a penalty of $100,000. Mr. Dietrich was directed to pay a civil penalty of $25,000.

Criminal cases

Investment fraud: U.S. v. Hampton, Case No. 13 Crim 301 (S.D.N.Y.). Fund manager Thomas Hampton pleaded guilty to one count of commodity fraud. Previously, he was the Managing Director of Hampton Capital which invested in exchange traded funds or ETFs. Hampton Capital’s strategy was to use specially designed computer software to trade ETFs based on pricing inefficiencies. Mr. Hampton bought and sold various securities and futures contacts on behalf of the fund to implement the strategy. When the fund began to suffer losses rather than tell investors the truth Mr. Hampton chose to deceive them. Specifically, as early as April 2011 rather than admit there were losses and risk withdrawals, Mr. Hampton began creating false statements which represented to investors that the fund had positive returns, not the losses that in fact were incurred. This encouraged investors to leave their capital in the fund and, in some instances, add to it. As the trading losses continued investors eventually lost millions of dollars. The date for sentencing has not been set.


Ralph Lauren Corporation: The company settled FCPA charges with the DOJ and the SEC under non-prosecution agreements. For the SEC, this was first non-prosecution agreement.

The case stems from actions taken by Ralph Lauren’s indirect, wholly-owned, subsidiary in Argentina. Under the terms of the DOJ non-prosecution agreement Ralph Lauren agreed to pay a penalty of $882,000. Under the terms of the SEC agreement the company agreed to pay disgorgement of $593,000 and prejudgment interest.

The charges trace to the actions a Ralph Lauren subsidiary in Argentina beginning in 2003 and continuing for the next five years. During that period the subsidiary retained a customs broker to assist with clearing its merchandise. The General Manager of the subsidiary approved the payment of bribes to permit clearance of items without the necessary paper work, of prohibited goods and to avoid inspections. The bribes were paid by falsifying the books and records.

Ralph Lauren leaned about the conduct in 2010 when implementing a new FCPA policy after employees reviewed it and informed company officials. The company terminated its custom broker and took a series of remedial steps including ending its retail operations in Argentina. Ralph Lauren also cooperated with enforcement officials. It self-reported, produced all documents, voluntarily furnished translations of documents, made witnesses available for interview and conducted a world- wide risk assessment.


The Board Issued a Policy Statement on Extraordinary Cooperation in connection with its investigations. Such cooperation can result in a reduction in charges and/or sanctions or no disciplinary action in exceptional instances. Extraordinary cooperation is voluntary and timely, going beyond compliance with legal or regulatory obligations, according to the Board. Examples include self-reporting, remedial or corrective action to reduce the potential for a reoccurrence and substantial assistance in Board investigation. In some instances the cooperation may be acknowledged in the papers.


Procedures: The Financial Conduct Authority (UK) fined EFG Private Bank Ltd. about $6.3 million for failing to take reasonable steps to establish and maintain effective anti-money laundering controls for high risk customers. The failings went on for a period of three years.


Insider trading: The Australian Securities and Investment Commission announced that Colin Hebbard, formerly a broker at Citigroup, was sentenced. Previously he pleaded guilty to an insider trading charged based on the fact that he tipped another broker about a possible takeover of Vision systems Limited. The plea was accepted by the court and Mr. Hebbard was fined $20,000.


Manipulation: The Securities and Futures Commission of Hong Kong announced that Lee Lan Chong pleaded guilty to market manipulation. The charge was based on his actions during a pre-opening session in relation to the Callable Bull Bear Contract, linked to a market index. Prior to the open he placed contradictory buy and sell orders for the contract enabling the final equilibrium price to be fixed at a higher price than at the end of the prior session. Less than two seconds before the end of the trading period he placed a bid order for one million contracts which pushed up the indicative equilibrium price by over 25% compared to the prior day’s final equilibrium price. This gave him a notional profit of $66,870. He was sentenced to serve one month in prison and pay a fine of $67,000.

Misappropriation: The SFC instituted proceeding against Yeung Chung Lung, founder and former chairman of First Natural Foods Holdings Ltd. The papers allege the embezzlement of $84 million of corporate assets and false accounting entries. The case is pending.

Internal controls: The SFC reprimanded Sun Hung Kai Investment Services Ltd., and fined the firm $1.5 million for internal control failures. Specifically, on September 8, 2011 the firm received an order for 25,000 shares of China Life at $18.82. The account executive erroneously imputed the order as 2,500,018,000 shares. The system automatically split the order into 834 orders for execution. The system did not have a limit on how many parts an order cold be split into and there was a lack of segregation between the maker and checker. Fortunately, the account executive realized the error and was able to cancel 97% of the order. The cooperation of the company was credited.

Tagged with: , , , , ,