This Week In Securities Litigation (Week ending April 28, 2017)
Two former senior executives of Magyar Telecom, controlled by Deutsche Telekom AG, resolved long running FCPA charges with the Commission. The charges stem from the 2011 settlements of the company with the SEC and DOJ tied to corruption charges based on its efforts to stave off potential competition in the Macedonian telecom market.
The Commission also filed a settled action against a BlackRock affiliate. That action is based on causing a registered investment company it advised to operate in violation of the Investment Company Act. Insider trading charges were brought against a former investment banker who traded in advance of a going private transaction financed by his firm. In another action a portfolio manager was charged with repeatedly engaging in manipulative trading that profited his personal account at the expense of a fund controlled of his employer.
Whistleblowers: The SEC awarded nearly $4 million to a whistleblower who reported suspicious conduct to the staff and then assisted in the investigation. To date about $153 million has been awarded to 43 whistleblowers.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 6 civil injunctive cases and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Unsuitable trading: SEC v. Hallas, Civil Action No. 23813 (April 26, 2017) names as a defendant Demitrios Hallas, a registered representative at a New York City broker who has previously been sanctioned by FINRA for unsuitable trading. The Commission’s complaint alleges that Mr. Hallas repeatedly put unsophisticated investors into complex products such as ETFs, exchange traded notes and other similar instruments, generating commissions of about $150,000 and losses of almost $130,000. He then misappropriated another $170,000 in client funds. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23813 (April 26, 2017).
Short selling: In the Matter of Wilson-Davis & Company, Inc., Adm. Proc. File No. 3-17733 (April 26, 2017) is a proceeding against the registered broker-dealer centered on its proprietary trading group. Specifically, that group failed to properly comply with Reg. SHO from November 2011 through May 2013. The group repeatedly sold short and relied on the bona fide hedge exception to the “locate and borrow” requirement when in fact it was not entitled to invoke the exception. This resulted in improper trading profits. In addition, in 2012, 2013 and 2014 the firm failed to have controls and supervisory procedures in place to prevent the entry of orders that exceeded appropriate pre-set capital requirements, erroneous orders and orders unless all the regulatory requirements were met. The Order alleges violations of Rule 203(b) of Regulation SHO and Exchange Act Section 15(c) and Rules 153-5(b) and (e). To resolved the matter the firm undertook certain remedial acts and consented to the entry of a cease and desist order based on the Section and Rules cited in the Order and to a censure. In addition, the firm will pay disgorgement of $20,645.71, prejudgment interest and a civil penalty of $75,000.
Exemptions – ETFs: In the Matter of BlackRock Fund Advisors, Adm. Proc. File No. 3-17942 (April 25, 2017) is a proceeding against the registered investment adviser. From late 2010 through January 2015 the firm advised iShares MSCI Russia Capped ETF, Inc., a registered investment company. During the period iShares operated without obtaining the Investment Company Act exemptions typically obtained by ETFs. The adviser caused the investment company to operate during the period in violation of the Investment Company Act, according to the Order. The Order alleges violations of Investment Company Act Sections 22(d) and (e) and Rule 22c-1. To resolve the matter the firm consented to the entry of a cease and desist order based on the Sections and Rule cited in the Order. The firm also agreed to pay a penalty of $1.5 million.
Offering fraud: SEC v. Krimm, Civil Action No. 1:17-cv-00464 (D. Del. Filed April 25, 2017) names as defendants Matthew Krimm and his firm, Krimm Financial Services, LLC. Beginning in May 2012, and continuing for about two years, Defendants raised about $1.69 million from 25 investors through the sale of promissory notes. To induce investors to acquire the notes Defendants promised significant returns, told them about what they claimed was a highly successful mortgage business, furnished income and profit statements and promised to recruit new loan officers. All of the representations were false. Portions of the investor funds were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Investor Protection Unit of the Delaware Department of Justice filed a parallel action. See Lit. Rel. No. 23811 (April 25, 2017).
Manipulation: SEC v. Amell, Civil Action No. 1:17-cv-10707 (D. Mass. Filed April 24, 2017) names as a defendant Kevin Amell, a vice president and portfolio manager for a RIC managed by Firm A. Over a two year period beginning in December 2014, according to the complaint, Mr. Amell arranged matched trades of options in 265 instances between the Fund’s brokerage accounts and his personal accounts. The trades were managed so that the disadvantageously priced transactions were allocated to the fund while the advantageously priced ones went to his personal account. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2), Exchange Act Section 10(b) and Investment Company Act Section 17j. The action is pending. The USAO for Massachusetts filed a parallel criminal action. See Lit. Rel. No. 23812 (April 25, 2017).
Insider trading: SEC v. Krishnamoorthy, Civil Action No. 17-cv-2953 (S.D.N.Y. Filed April 24, 2017). This action centers on a going private transaction in which investment bank Golden Gate Capital would acquire then publically traded NeuStar, Inc., announced before the opening of trading on December 14, 2016. Defendant Avaneesh Krishnamoorthy obtained a position with Investment Bank in 2015. He was a vice president and market risk specialist. On April 10, 2015 he opened an IRA account for himself. His wife, Shreya Achar, also opened an IRA brokerage account. Mr. Krishnamoorthy failed to report the opening of these accounts to his employer as required. On November 21, 2016 Golden Gate approached Investment Bank in an effort to secure financing for a potential business transaction with NeuStar. Over the next few days Golden Gate furnished Investment Bank with confidential due diligence materials relating to the proposed transaction. Mr. Krishnamoorthy was furnished with two confidential, internal memos regarding the transaction. In each instance he traded through his account and/or his wife’s account traded. On December 14, 2016 NeuStar issued a press release before the markets opened announcing the going private transaction. The share price increased that day about 21% over the prior day’s close. Mr. Krishnamoorthy sold the remaining call options in his IRA account that day. The remaining stock and some of the call options in his wife’s account were also sold. Defendant’s account had a profit of $18,510 while his wife’s had profits of about $29,917 and unrealized gains on other positions. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office filed parallel criminal charges. Both cases are pending. See Lit. Rel. No. 23814 (April 26, 2017).
Manipulation: SEC v. Watts, Civil Action No. 4:17-cv-00539 (S.D. Tex. Filed Feb. 17, 2017) names as defendants brothers Kent and Michael Watts and Kirby Caldwell, respectively, the CEO and Chairman of Hydrocarbon Energy Corporation, counsel to that company and a nephew of Kent Watts. Beginning in 2012 Defendants engaged in a fraudulent plan to secure a listing on a major exchange for then OTC listed Hydrocarbon Energy to assist with raising capital. To facilitate the scheme a false Schedule 13D was filed with the Commission which failed to disclose the scheme. A series of sham transactions which permitted the brothers to secretly control millions of shares were arranged. And, misrepresentations were made to the auditors. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is pending. See Lit. Rel. No. 23810 (April 21, 2017).
Offering fraud: SEC v. Andrews, Civil Action No. 17-cv-00256 (D. Utah Filed April 5, 2017) is an action which names as defendants Thomas Andrews and Walter Christensen. The complaint alleges that Mr. Andrews, with assistance from Mr. Christensen, defrauded 23 investors over a period of five years beginning in 2010 by inducing them to liquidate investments they held and invest in either the “Jackson Trust” or the “Lincoln.” The former supposedly had guaranteed returns while the latter paid a specified rate of return. Both investment vehicles were fictitious. The investor funds were misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). In a parallel criminal case Mr. Andrews pleaded guilty to securities and wire fraud and was sentenced to serve 97 months in prison. Mr. Christensen pleaded guilty to securities fraud and making false statements. He was sentenced to serve 12 months and 1 day in prison. The SEC’s case is pending. See Lit. Rel. 23816 (April 26, 2017).
SEC v. Straub, Case No. 11 civ 9645 (S.D.N.Y. Filed Dec. 29, 2011). Former Magyar, Telecom CEO Elek Straub, and its former Director of Central Strategic Organization Andras Balogh, settled FCPA charges, agreeing to pay penalties of, respectively $250,000 and $150,000. Each former officer agreed to be barred from serving as an officer or director of a public company for a period of five years. Another former company official named in the complaint previously settled with the Commission. The action derives from the 2011 settlements of the company and its majority owner, Deutsche Telekom AG, with the SEC and the Department of Justice. SEC v. Magyar Telekom, Plc., Case No. 11 civ 9646 (S.D.N.Y. Filed Dec. 29, 2011). Those cases focused on bribes paid to Macedonian officials regarding potential legal changes in the telecommunications market in that country in early 2005 which could have been detrimental to the company. As part of an arrangement to delay the entry into the market of another player company officials paid $6 million that was funneled to officials through various means. The SEC’s complaint against Magyar and its parent alleged that the subsidiary violated Exchange Act Sections 30A and 13(b)(5) and that both companies violated Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To settle with the SEC, Magyar consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. The company also agreed to pay disgorgement and prejudgment interest in the amount of $31.2 million. The action against its parent was resolved in connection with the non-prosecution agreement Deutsche Telekom entered into with the DOJ.
With the DOJ, Magyar Telecom entered into a two year deferred prosecution agreement. The information charged the company with one count of violating the anti-bribery provisions of the FCPA and two counts of violating the books and records provisions of the FCPA. As part of the settlement the company agreed to pay a $59.6 million criminal penalty. The company also agreed to implement an enhanced compliance program and submit annual reports on its efforts. At the time Magyar’s ADRs were traded on the New York Stock Exchange. Deutsche Telekom, whose ADRs are traded on the NYSE, entered into a two year non-prosecution agreement. The parent company agreed to pay a $4.36 million penalty in connection with inaccurate books and records and to enhance its compliance program.
Cooperation agreement: The Australian Securities and Investment Commission and Indonesia’s Otoritas Jasa Keuangan entered into a Cooperative Agreement to promote financial services in their respective markets. The agreement calls for the two regulators to share information on emerging market trends and regulatory issues arising from growth in innovation. Indonesia, the largest economy in south-east Asia, has a fast growing financial technology sector. Fintechs are currently impacting various areas. The collaboration is designed to promote innovation in the financial markets of the two regulators.
Remarks: The Executive Director of the Financial Conduct Authority, Nausicaa Defas, titled “Expect the Unexpected” – Cyber Security – 2017 and Beyond to the Financial Information Security Network (here). Her remarks focused on getting the basics of cyber security right, moving to a secure culture and building capability (here).