At the start of the second quarter the focus was on the White House where two pieces of securities litigation were signed into law by the President. First, the STOCK Act, prohibiting the already illegal insider trading by Congress was signed. Later in the week the President signed the JOBS Act which is intended to facilitate raising money by small companies by adopting provisions which deregulates portions of the initial offering process for smaller companies, raises the ceiling for Exchange Act reporting, lifts certain restrictions on the sale of private placement share, pulls back portions of the consent decrees in the analysts cases and contains crowdfunding provisions.

The SEC brought another SOX 304 strict liability clawback cases against a CEO and CFO who had no involvement in the underlying financial fraud. The CFTC brought two significant enforcement cases. One was brought against the Royal Bank of Canada alleging millions of dollars in wash sales – a claim denied by the bank. The second is a settled action against JPMorgan for violating the customer segregation rules regarding Lehman clients before and after the firm collapsed.

Finally, the OECD made available a report on UK corruption enforcement. While the report was complementary to the increased enforcement efforts it also contains a number of recommendations for improvements in the future.

The Commission

Consultations: Senior staff met with their counter parts at the Ontario Securities Commission in the last week of March 2012 to discuss closer coordination on cross-boarder oversight. The meeting stems from a June 2010 memorandum of understanding regarding consultations, cooperation and the exchange of information.

Target date retirement funds: The Commission issued a proposed rule and reopened the comment period on the question of certain disclosures regarding target date retirement funds (here).

False statements: In the Matter of John P. Flannery, Adm. Proc. File No. 14081 (March 30, 2012) is a proceeding against John Flannery, formerly Fixed Income Chief investment officer for a fund which is a division of State Street Bank and Trust, and James Hopkins, formerly Vice President and head of North American Product Engineering of State Street. The initial Order for Proceedings alleged that the Respondents made certain false statements and omissions in connection with the operation of the funds. Following a hearing the ALJ entered an Initial Decision dismissing the proceeding. The Division filed a petition for review and Respondents sought summary affirmance. The Commission rejected the request for summary affirmance but granted the petition for review and established a briefing schedule. In entering its Order the Commission noted that the Initial Decision contains a significant issue of first impression regarding the applicability of Janus Capital Group, Inc., v. First Derivative Traders, 131 S.Ct. 2296 (2011), which concerns primary liability under Section 10(b) and Rule 10b-5(b), and the application of that decision to Securities Act Section 17(a) and Rule 10b-5(a) and (c). The Commission’s determination appears to assume that Janus applies to its cases based on Rule 10b-5(b).

SEC Enforcement: Filings and settlements

Filings: In the first calendar quarter of 2012 the Commission filed 43 civil injunctive actions and 16 administrative proceedings (excluding tag-a-long proceedings and Section 12(j) actions). Since April 1, 2012 the Commission has filed 1 civil injunctive action and no administrative proceedings (excluding the previously noted matters) including:

Clawback: SEC v. Baker, Case No. 1:12-cv-00285 (W.D. Tx. Filed April 2, 2012) is an action against Michael Baker and Michael Gluck, respectively, the former CEO and CFO of ArthroCare Corporation. From 2006 through the first quarter of 2008 two company sales executives, John Raffle and David Applegate, engaged in a channel stuffing scheme which resulted in the improper inflation of company revenue and earnings. As a result of this misconduct the company was required to restate its financial statements. While neither defendant was involved in the wrongful conduct, the complaint seeks the return of certain incentive based compensation and stock profits under SOX 304. The case is in litigation.

Criminal cases

Investment fund fraud: Eric Aronson, Vincent Buonauro and Fredric Aaron were indicted (E.D.N.Y. April 5, 2012) on charges of conspiracy, securities fraud and money laundering in connection with the sale of promissory notes and their operation of Permapave Industries and Permapave USA. From 2006 through 2010 the three defendants operated their companies as a Ponzi scheme. During the period they raised about $26 million through false representations. The companies claimed to import paving stone from Australia. In fact portions of the funds raised were used to repay some investors while at least $3 million was diverted to the personal use of the defendants


UK Bribery Act: The OECD Working Group On Bribery highlighted the efforts of the UK in the anti-corruption area in a most recent report. The Working Group concluded that the SFO and other relevant law enforcement agencies have significantly increased foreign bribery enforcement and commended UK officials. The Working Group also made a series of recommendations including: Maintaining the current role of the SFO; Reconsidering the SFO’s policy of systematically settling self-reporting foreign bribery cases civilly whenever possible and taking steps to ensure that in these cases there are proportionate and effective sanctions; Clarifying guidance on what constitutes “reasonable and proportionate” hospitality and promotional expenditures, including the reference to industry norms; Developing firm criteria for assessing if companies are moving toward “zero tolerance” of facilitation payments; and on corporate monitors, providing guidance regarding when and under what terms one would be sought; and


Segregated customer accounts: The CFTC settled an action against JPMorgan Chase Bank, N.A. that arose out of the improper handling of customer segregated funds belonging to Lehman Brothers Inc. customers prior to and after that firm’s bankruptcy. As early as November 17, 2006 Lehman’s customer segregated funds were included in the calculation of “net free equity” the investment firm held at JPMorgan which was the predicate for the bank’s daily advances to Lehman. That violated the prohibitions regarding customer segregated funds. In addition, after the September 15, 2008 Lehman bankruptcy filing the bank improperly declined a request to release the customer segregated funds from Lehman. JPMorgan maintained its refusal for another two weeks until directed to release the funds by CFTC officials. No customer suffered a loss. To resolve the action JPMorgan agreed to pay a $20 million civil monetary penalty. The bank also agreed to implement undertakings to ensure the proper handling of customer segregated funds in the future.

Wash sales: CFTC v. Royal Bank of Canada (S.D.N.Y.) is an action against the bank alleging a scheme which began in June 2007 and continuing to May 2010. During the scheme the bank engaged in a series of wash sales in which it traded hundreds of millions of dollars worth of narrow based stock index futures and single stock futures contracts with two of its subsidiaries. The scheme was orchestrated by a small group of bank employees. While such transactions were suppose to be at arms length and in accord with the price discovery goals of the markets in fact they were crafted to be riskless and create certain Canadian tax benefits. The bank also tried to cover up the transactions. The complaint seeks a permanent injunction and a civil monetary penalty. The case is in litigation.

Derivatives: The CFTC issued an order prohibiting the North American Derivatives Exchange or Nadex from listing or making available for clearing or trading a set of self-certified political event derivative contracts which pay out based on results in various U.S. federal elections to be held in 2012.


A FINRA arbitration panel concluded that David Lerner Associates had charged excessive markups on municipal bond and collateralized mortgage obligations. From January 2005 through January 2007 the panel concluded that markups were charges which ranged from 3.01% to 5.75% on municipal bonds and from 4.02% to 12.39% on CMOs. The markups were charged on more than 1,500 municipal bond transactions and over 1,700 CMO transactions. While FINRA rules require that the amount of the markup be fair and reasonable under the circumstances here they reflected a pattern of “intentional excessive markups” the panel found. The firm was fined $2.3 million and ordered to pay over $1.4 million in restitution and interest. Head trader William Mason was fined $200,000 and suspended for six months from the securities industry. The sanctions considered the firm’s relevant disciplinary history which included a warning about its markup practices following an exam and the fact that following a Wells notice the practice continued.

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