The FCPA is the topic of the week following the New York Times article detailing claims of violations in the Mexican subsidiary of Walmart which supposedly have been ignored for years. While that matter is under investigation, the DOJ and the SEC settled another FCPA action which at the moment may be more significant. It was against a former Morgan Stanley employee who pleaded guilty in the criminal case and settled the civil action. Its significance lies in the discussion of the reasons for not prosecuting the firm. At a time when there is a large debate regarding a procedures defense, DOJ states that its declination was based in part on Morgan Stanley’s internal compliance procedures. The procedures are summarized in the release and outlined in the SEC’s complaint.

The SEC Chairman testified before Congress, reviewing the work of the agency and arguing in support of its proposed budget increrase. SEC enforcement brought a significant action against a rating agency claiming that the firm misrepresented its experience in an application. Another market crisis case charged the mortgage subsidiary of a prominent accounting firm with making false representations. The former CEO of CalPERS was also charged in a pay-to-play scheme involving his former employer and a hedge fund. Finally, the Commission brought an unusual pump-and-dump case against two UK twins who began their scheme to market a “stock picking robot” through a web site when they were sixteen.

The Commission

Testimony: Mary Schapiro, SEC Chairman, testified before the House Capital Markets and Government Sponsored Enterprises Subcommittee and Financial Institution and Consumer Credit Subcommittee of the Committee on Financial Services on April 25, 2012. Her testimony was tiled “SEC Oversight.” It reviews the Commission’s recent operational improvements, accomplishments, implementation of Dodd-Frank, the JOBS Act, its budget request and immediate undertakings (here).

Testimony: Robert Cook, director, Division of Trading and Markets, testified before the Senate Committee on Banking, Housing and Urban Affairs regarding the collapse of MF Global. In his testimony Mr. Cook reviewed key events prior to the bankruptcy, its liquidation and the impact on securities customers and the implications for market oversight (here).

SEC Enforcement: Filings and settlements

Statistics: Last week the Commission filed 5 civil injunctive actions and 2 administrative proceedings (excluding those which are derivative of other actions and 12(j) proceedings).

Insider trading: SEC v. Kluger, Case No. 11-cv-1936 (D.N.J. Filed April 6, 2011) and SEC v. Robinson, Case No. 12-cv-2438 (D.N.U. Filed April 25, 2012) are actions filed against, respectively, Matthew Kluger and Garrett Bauer, and Kenneth Robinson. The complaint alleges a serial insider trading ring in which Mr. Kluger, over a period of years, misappropriated inside information from three different law firms where he was employed which was eventually furnished to trader Garrett Bauer. Mr. Robinson passed along the information. The ring had profits of over $32 million. Each defendant previously pleaded guilty to criminal charges. Mr. Robinson is cooperating with the Commission. Each defendant settled with the SEC this week, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Sections 10(b) and 14(e) and admitting the facts from the parallel criminal cases. Mr. Bauer was ordered to disgorge $30,812,796 along with prejudgment interest and settled a related administrative proceeding in which he will be barred from the securities business and from participating in any penny stock offering. Mr. Kluger was ordered to disgorge $829,129 plus prejudgment interest and consented to the entry of an order in a related administrative proceeding which will permanently suspend him from practice before the Commission as an attorney. Mr. Robinson was ordered to disgorge $829,129 plus prejudgment interest. The disgorgement for each defendant will be deemed partially satisfied and offset dollar for dollar by assets seized by the U.S. Attorney’s Office.

Misrepresentations: In the Matter of Egan-Jones Ratings Company, Adm. Proc. File No. 3-14856 (April 24, 2012) is an action against the firm and its founder, president and owner Sean Egan. The Order alleges that the firm submitted a false and misleading registration statement to the SEC, made material misrepresentations in other filings and violated certain record keeping and conflict of interest provisions. Specifically, in its July 2008 application on Form NRSRO the firm represented that it had 150 outstanding credit ratings on issuers of ABS and 50 on government securities. The firm also claimed that it had been issuing ratings on a continuous basis for issuers of ABS since December 2005 and on issuers of government securities since April of that same year. The Order alleges that these representations are false. It also claims that supporting attestations were incorrect, that the firm made misrepresentations in other filings and that it failed to comply with its procedures and maintain required records. A hearing has been ordered.

Market crisis: SEC v. Option One Mortgage Corporation, Civil Action No. SACV-12-633 (C.D. Cal. Filed April 24, 2012) is an action against the firm which was one of the largest subprime lenders in the country. In the first quarter of 2007 the firm sold more than $4.3 billion of RMBS in seven offerings. It represented that it would repurchase or replace any mortgage loan in the pools collateralizing the RMBS for which there was a breach of a representation or warranty that materially and adversely affected its value. Certain company officers signed agreements and certifications stating that they did not know of any reason why Option One would not be able to fulfill its obligations and noting that the offering documents did not contain any material misleading statements. In fact at the time the firm could not meet its obligations because of its deteriorating financial condition and needed money from its parent H&R Block Inc. Its parent had no obligations regarding the RMBS sold however. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). The defendant resolved the action by consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint and agreeing to pay disgorgement of $14,250,558, prejudgment interest and a $10 million civil penalty.

Financial fraud: SEC v. SinoTechEnergy Ltd., Civil Action No. 2:12-cv-00960 (W.D. Louisiana Filed April 23, 2012) is an action against the company, a Cayman Island corporation based in the PRC, its chairman and controlling shareholder, Qingzeng Liu, its CEO, Guoqiang Xin, and its former CFO, Boxun Zhang. The complaint alleges that the defendants mislead investors about the use of the $120 million raised in its IPO by representing in filings that it had purchased key equipment carried on the balance sheet at $94 million. In fact it had only made limited purchases worth less than $17 million. A separate count charges the Chairman with misappropriating over $40 million from the company. The complaint alleges violations of Securities Act Sections 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and seeks to impose liability under Section 20(a) as to the individuals. The case is in litigation.

Pay-to-play: SEC v. ARVCO Capital Research, LLC, Civil Action No. 3:12-cv-00221 (D. Nev. Filed April 23, 2012) is an action against the former CEO of CalPERS or the California Public Employees’ Retirement System pension funds, Federico R. Buenrostro. Also named as defendants are his long time friend Alfred JR. Villalobos along with his two companies, ARVCO Capital Research LLC and ARVCO Financial Ventures, LLC. . Mr. Villalobos and his two AVRCO entities are placement agents. Mr. Villalobos had a long standing and lucrative relationship with an investment manager at Apollo Global Management, a hedge fund. Beginning in 2007 Apollo required an “Investor Disclosure” letter. That letter had to be secured from an investor such as CalPERS where a placement agent was involved to insure full disclosure. CalPERS declined a request for such a letter in mid-2007 in connection with a placement. In January 2008 Mr. Villalobos created a letter using the CalPERS logo from Mr. Buenrostro’s business card. Mr. Buenrostro then executed the letter. It was submitted to Apollo who paid a placement fee of $3.5 million. In four other instances, according to the complaint, Mr. Villalobos created false investor letters on forged CalPERS letterhead which were executed by Mr. Buenrostro. Overall, Apollo was induced to pay ARVCO over $20 million based on the false documents. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.

Sale of unregistered shares: SEC v. Glisson, Civil Action No 2:09-cv-00104 (D. Nev.) is an action against Marco Glisson which alleges that he sold the deregistered securities of CMKM Diamonds, Inc. The shares had been delisted in 2005. Using referrals and internet chat rooms the defendant is alleged to have made a market in the deregistered shares. The Commission resolved the action with Mr. Glisson who consented to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, prohibiting future violations of Securities Act Section 5 and Exchange Act Section 15(a). The order also requires him to pay $2,765,650.65 in disgorgement, prejudgment interest and a civil penalty in the amount of $1.4 million. He is also permanently barred from participating in the offering of penny stock.

Pump-and-dump: SEC v. Hunter, Civil Action No. 12-cv-3123 (S.D.N.Y. Filed April 20 2012) is an action against twin brothers Thomas and Alexander Hunter. Beginning in 2007 when the UK residents were age 16, “Marl” was touted on their website,, as a “stock picking robot.” Investors who followed Marl could earn returns of 34% per week, according to the website. Over 47,000 investors, mostly from the United States, signed-up. From late April 2007 through early July 2009 subscription fees earned the teenage brothers over $1.2 million. More money was earned from selling a home version of the software. What newsletter subscribers were not told it that the brothers had another website that was actually the source of the stock picks. On the defendants offered their services as stock promoters, claiming that they could “rocket” a stock’s price through their newsletters. Stock promoters paid the brothers about $1.8 million to promote specific stocks in their newsletters. When the news letter was distributed the selected stock typically spiked up and shortly thereafter collapsed. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.

Misrepresentations: In the Matter of GMB Capital Management LLC, Adm. Proc. File No. 3-14854 (Filed April 20, 2012) is a proceeding against the firm, a registered investment adviser; GMB Partners, an unregistered investment adviser; Gabriel Bitran, a founder of GMB Management and joint owner; and Marco Bitran, Gabriel’s son and former co-owner of the management company and the founder and owner of GMB Partners. The Order alleges that GMB Capital was founded to manage hedge funds using quantative models he developed. The individual Respondents solicited investors claiming that they had a successful track record in actual trades, that the model would be used to trade ETF and Gabriel’s pedigree and involvement. About $500 million was raised. In fact the representations were false. Their track record was on models, not actual transactions. Much of the investor money was put in funds of hedge funds rather than as promised. Finally, in May 2008 the business was divided. Although Gabriel had no involvement with GMB Partners, investors were told that he was involved in the management. The Order alleges violations of Securities Act Section 17(a)(2), Exchange Act Section 10(b), and Advisers Act Sections 206(1) and (2) and (4) and 204(a). To resolve the proceeding the Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the individual defendants were barred from the securities business and prohibited from serving in any capacity with an investment adviser. Reentry is conditioned on a number of factors. The Respondents were ordered to jointly and severally disgorge $4.3 million and each individual defendant was directed to pay a civil penalty of $150,000. Respondent GMB Partners was also censured and prohibited from receiving management or other fees for 60 days following the entry of the Order.


U.S. v. Peterson, 1:12-cr-00224 (E.D.N.Y. Filed March 26, 2012) and SEC v. Peterson, Case No. 1:12-cv-02033 (E.D.N.Y. Filed April 25, 2012) are actions against Garth Peterson, the former head of Morgan Stanley’s Shanghai office. Mr. Peterson, a U.S. citizen, pleaded guilty to one count of conspiracy to evade the company’s internal accounting controls. He also settled with the SEC, whose complaint alleged violations of the bribery and books and records and internal control provisions. He consented to the entry of an injunction and an order directing the payment of $250,000 in disgorgement, that he relinquish real estate valued at about $3.4 million and which bars him from the securities industry.

The violations stem from Mr. Peterson’s dealings with the former Chairman of Yongye Enterprise (Group) Co., a Chinese state owned entity involved in real estate. From 2004 through 2008 Morgan Stanley partnered with Yongye on a number of significant Chinese real estate investments. At the same time Mr. Peterson and the Chairman expanded their dealings in real estate, secretly acquiring real property from Morgan Stanley and investing in other endeavors. Mr. Peterson, who negotiated for both sides of the transactions, did not disclose these dealings to his firm as required or inform his employer that on one deal a company in which he had an interest along with the Chairman and a Canadian lawyer realized in instant profit. He also arranged for the Chairman to receive discounts on interests in real estate purchased from his employer despite being told to drop the arrangement.

A notable feature of the case is the fact that the DOJ specifically declined to prosecute Morgan Stanley based on its self-reporting and cooperation and its internal controls and compliance procedures which are highlighted in its press release and the SEC complaint. Those policies provided reasonable assurances that the firm’s employees were not violating the FCPA, according to the DOJ. They were regularly updated to reflect regulatory developments and specific risks and prohibited bribery. They also addressed the corruption risks associated with giving gifts, business entertainment, travel, lodging, meals, charitable contributions and employment and provided for periodic training. In addition, the firm regularly monitored transactions and required employees to disclose outside business interests.

Mr. Peterson received FCPA training seven times, was reminded to comply with the Act on 35 occasions and was cautioned that the Chairman was a foreign official for FCPA purposes. He was also furnished with written materials which he maintained in his office. Periodically Morgan Stanley required Mr. Peterson to certify compliance with the Act. Those certifications were maintained as a part of his permanent record.

Criminal cases

Fraud: U.S. v. Cassidy, No. 1:08-cr-01101 (S.D.N.Y. Filed Nov. 12, 2008) is an action against Kevin Cassidy, the former CEO of commercial brokerage Optionable. Mr. Cassidy pleaded guilty to one count of conspiracy to commit wire fraud. The charge was based on his participation a scheme to defraud Bank of Montreal by misstating the value of the bank’s natural gas portfolio. His participation helped cover up the scheme of David Lee who was deliberately overstating the fair market value of some of the positions in his book to make it look more profitable to the bank and earn larger bonuses. Mr. Cassidy was sentenced to serve 30 months in prison.

Investment fund fraud: U.S. v. Kerye, No. 2:12-mj-00410 (E.D.N.Y. Filed April 23, 2012) is an action against Jason Kerye, Anthony Massaro, Anthony Cicone and Diane Kaylor. All are former account representatives of Agape World, Inc. and Agape Merchant Advance or AMA. Those entities were founded by Nicholas Cosmo in, respectively, 2000 and late 2007. Investor funds were solicited for specific short term bridge loans to commercial borrowers or for short term small business loans. In fact the defendants significantly oversubscribed what was needed to fund the available loans and began to operate a Ponzi scheme. Portions of the funds were used for high risk trading. Other portions were used to repay investors. Each defendant was paid large commissions. Eventually the scheme unraveled and about 4,100 investors sustained losses of about $179 million. The case is in litigation. Previously, Mr. Cosmo was sentenced to a 25 year prison term in connection with the scheme.U.S. v Cosmo, 09 CR 255 (E.D.N.Y.).

Investment fund fraud: U.S. v. Miltner, 1:12-cr-00291 (S.D.N.Y. April 12, 2012) is an action which names as defendants S. George Milter and Cliff R. Bodden who are charged with conspiracy and wire fraud. Beginning in 2005 Mr. Miltner told investors that he was the CEO of Lempert Brothers International, a registered broker dealer and President and CEO of Lempert Capital Management, Ltd, a company purportedly incorporated in the Cayman Islands. Mr. Bodden claimed to be a Managing Director of Lempert Capital. The two men are alleged to have raised almost $1 million from investors who were told that their funds would be invested in a safe manner. In fact the money was misappropriate by the defendants, according to the court papers. The case is in litigation.


Testimony: Richard G. Ketchum, FINRA Chairman & CEO testified before the Senate Committee on Banking, Housing and Urban Affairs. His testimony focused on FINRA’s oversight regarding MF Global (here).


Remarks: Hector Sants, Chief Executive of the FSA delivered remarks on April 24, 2012 reviewing the progress of financial reform and discussing effective corporate governance (here).

Boiler room: The SFO arrested Brian O’Brien, James Pye and Lynne D’Albertson in connection with the operation of a boiler room based in Spain and Ireland. The scheme centered on raising money for Golden Dynasty Resources Ltd., an oil and gas company listed on the Toronto Venture Exchange, and Claimtracker Ltd, a UK technology company. The shares of other companies were also involved. Key to selling the shares was an assurance to investors that the money was safe because it was sent to a third party in the UK for their protection. In fact when the money arrived the defendants shipped it to the Guernsey bank account of a company set up by defendants O’Brien and D’Albertson. That account was then used to pay the boiler room staff.