This Week In Securities Litigation (Week ending April 5, 2013)
Speculation about SAC Capital and Steve Cohen, insider trading and Facebook dominated securities enforcement litigation this week. Although SAC Capital has tentatively resolved matters for the moment with enforcement officials, a ruling in private litigation involving Mr. Cohen sparked fresh speculation. Prosecutors in the Manhattan U.S. Attorney’s Office continued to focus on market professionals, obtaining a guilty plea in an insider trading case and in a fraud action. And, the SEC resolved its investigation into the use of Facebook by the president of Netflix, issuing a report giving the market place valuable guidance on the use of social media as a disclosure mechanism.
Clearing agencies; The SEC adopted a final rule applicable to clearing agencies registered with the Commission and the CFTC which expands on an earlier provision. The final rule is designed to streamline the rule making process for duel registered agencies. Under the earlier interim provision, the rules of such agencies became effective immediately where they did not relate primarily to securities futures and did not significantly affect the clearing agencies’ securities clearing operations. The final rule expands on the interim rule, providing that rules become effective immediately for other products that are not securities including swaps that are neither mixed swaps nor security based swaps and forwards in addition to those in the interim rule (here).
Remarks: Commissioner Bart Chilton delivered remarks titled “The End-User Bill of Rights” on April 3, 2013. In his remarks the Commissioner reviewed basic concepts which should underlie final Dodd-Frank rules that apply to end-users (here).
SEC Enforcement: Litigated cases
Investment fund fraud: SEC v. St. Anselm Exploration Co., Civil Case No. 11-cv- 00668 (D. Col. Decision issued March 29, 2013) is a case against the company, and four of its officers. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The SEC claimed that between 2007 and 2010 the company sold notes to about 200 investors, raising $49 million while making misstatements about the use of the offering proceeds and failing to tell investors their funds may be used to service debt – claims characterized as Ponzi like. Following a bench trial the Court ruled in favor of the defendants. In reaching its conclusion the Court emphasized the fact that the company is an on-going, viable entity and that the offering documents permitted the note proceeds to be used for any legitimate corporate purpose. That includes servicing its debt and paying other notes – actions which do not make the company a Ponzi scheme. In reaching its conclusion the Court rejected expert testimony offered by the Commission because it was predicated on a truncated view of the factual record.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed one Report of investigation and no civil injunctive actions or administrative proceeding (excluding tag-along-actions and 12(j) proceedings).
Reg FD: Exchange Act Release No. 69279 (April 2, 2013), Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Netflix, Inc., and Reed Hastings. This is a report on the investigation into statements made on the personal Facebook page of Netflix president Reed Hastings. Specifically, on July 3, 2012 Mr. Hastings stated on his Facebook page that in the prior month Netfilix had exceeded the 1 billion hours of streaming metric for the first time for one month. This was an important metric for the firm. No press release was made announcing the metric and Mr. Hasting’s Facebook account was not an established site on which the company released information. Nevertheless, the Commission chose not to bring an enforcement action. In its Release the agency emphasized that when using social media Reg FD must be considered. The Commission also noted, in accord with its August 2008 Release on the use of websites, that it is important to inform investors about which social media sites issuers plan to use.
Investment fund fraud: SEC v. Garfield Taylor, Inc., Civil Action No. 1:11-CV-02054 (D.D.C.) is a previously filed action alleging that Maurice Taylor and others raised about $27 million by defrauding 130 investors between 2005 and 2010 into a Ponzi scheme in the Washington, D.C. area. Mr. Taylor, who was the chief investment officer of Gibraltar Asset Management Group, LLC, one of two entities involved in the scheme, consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and an order permitting the Court to determine monetary relief. This week, following an evidentiary hearing, the Court entered final judgment requiring Mr. Taylor to pay $463,785 in disgorgement along with prejudgment interest. See also Lit. Rel. No. 22665 (April 3, 2013).
Excessive risk: U.S. v. Taylor, Case No 13-cr-251 (S.D.N.Y.) is an action against former Goldman Sachs & Co. stock trader Matthew Taylor. The action is based on the outsized trading of Matthew Taylor in violation of internal procedures at his employer, Goldman Sachs & Co. Mr. Taylor was a member of the Capital Structure Franchise Trading group which was responsible for equity derivatives trades. In late 2007 his trading profits plunged. He was told his bonus would be cut and to reduce risk. In an effort to enhance his reputation as a trader and win back the lost compensation, Mr. Taylor placed unauthorized futures trades totally $8.3 billion. The position exceeded his risk limits and those of the entire trading group. To avoid detection Mr. Taylor manually made entries into the firm systems, falsifying the records. This week he pleaded guilty to wire fraud charges. At his sentencing, set for July 26, 2013, prosecutors will seek a sentence of 33 to 41 months and a fine of $7,500 to $75,000. At the time of the guilty plea the Court suggested that any such agreement may not be honored, according to a report by Reuters.
Insider trading: U.S. v. Martin, Case No. 12-cr-0087 (S.D.N.Y.) in an action against Thomas Conradt, a former stock broker, among others. The case centers on the acquisition of SPSS Inc. by International Business Machine, announced on July 29, 2009. Following the announcement of the deal the share price of SPSS common stock rose 41%. Mr. Conradt learned about the deal from his roommate, Trend Martin, a former financial analyst who in turn learned about it from a lawyer working on the deal who confided in him in confidence. Contrary to that understanding, Mr. Martin traded, tipped Mr. Conradt who traded and then tipped David Weishaus who also traded and told two others. The trading profits for the group were about $1 million. Mr. Conradt pleaded guilty this week to one count of conspiracy and two counts of securities fraud under a cooperation agreement. He is scheduled for sentencing on October 3, 2013.