This Week In Securities Litigation (Week ending August 14, 2015)

A second insider trading action was brought by the Commission against a senior banking official based on the same take-over for which he was previously charged — but a different securities trading account is at the center of the new case. The SEC also brought its first action against a municipal underwriter based on the price at which the bonds were initially sold and its third case focused on a dark pool. In addition, the SEC brought actions based on offering fraud, revenue recognition and the FCPA.


Statement: Commissioner Luis Aguilar issued a statement titled “Statement on the Importance of Clarity in Commission Orders.” The statement discusses the necessity for ensuring that Orders instituting actions clearly define the conduct being charged, particularly where compliance personnel are concerned (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 3 civil injunctive cases and 8 administrative actions, excluding 12j and tag-along proceedings.

Insider trading: SEC v. Maillard, Civil Action No. 15-cv-6380 (S.D.N.Y. Filed August 13, 2015) is the second insider trading action brought against Cedric Canas Maillard, a former executive advisor to Banco Santander. Both actions center on the involvement of the bank with the efforts of BHP Billiton to acquire Potash Corporation. The prior settled action was based on trading by Mr. Maillard in contracts for a difference. This action is based on purchasing call options in a Swiss based account the day before the deal announcement. The complaint, which is pending, alleges violations of Exchange Act Sections 10(b) and 14(e). See Lit. Rel. No. 23306 (August 13, 2015).

Municipal bonds: In the Matter of Edward D. Jones & Co., L.P., Adm. Proc. File No. 3-16751 (August 13, 2015) is a proceeding against the broker-dealer based on two claims. First, from February 2009 through December 2012 the firm, when serving as co-manager of municipal bond offerings, did not sell the bonds to customers at the initial offering price agreed in the underwriting. Rather, it took the bonds into inventory and later sold them at higher prices. Second, it failed to properly supervise mark-ups in the secondary market for municipal bonds from January 2011 through October 2013. The Order alleges violations of Securities Act Sections 17(a)(2) and (3), Exchange Act Section 15B(c)(1) and MSRB Rules G-17, G-11, G-30 and G-27. To resolve the proceeding the firm undertook remedial efforts and consented to the entry of a cease and desist order based on the Sections and Rules cited in the Order, to the entry of a censure and will pay disgorgement of $44,524,332.60, prejudgment interest and a penalty of $15 million. The disgorgement and prejudgment interest will be used to repay customers. See also In the Matter of Stina R. Wishman, Adm. Proc. File No. 3-16752 (August 13, 2015)(proceeding naming as Respondent the head of the firm’s municipal syndicate desk alleging violations of the same Sections and Rules except MSRB Rule G-27; the action resolved with a consent to a cease and desist order based on those Sections and Rules, the entry of a bar order from the securities business with the right to reapply after two years and the payment of a $15,000 penalty). See also Statement of each SEC Commission except the Chair (here) calling for the writing of rules governing mark-ups in the municipal bond market.

Offering fraud: SEC v. Colonial Tidewater Realty Income Partners, LLC, Civil Action No. 1:15-cv-2401 (D. Md. Filed August 13, 2015) is an action which names as defendants the firm, which owns and operates residential and commercial properties in Maryland and other states; James Glover, a registered representative and investment adviser representative with Signtor Investors, Inc., and Sherman Hill, the managing member of Colonial Tidewater. Beginning in early 1998, and continuing for the next fourteen years, Mr. Glover is alleged to have defrauded at least 125 investors out of about $13.5 million in connection with the sale of the unregistered securities of Coloniol. The sales were effectuated through the use of a PPM and oral representations that falsely overstated the financial condition of the firm, the liquidity of the investment and the returns while failing to disclose fees and other money taken without justification. Mr. Hill assisted by preparing false property valuations and other materials used in the solicitations. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 20(b) and Advisers Act Sections 206(1) and (2). The defendants settled the action, consenting to the appointment of a receiver. In addition: the firm agreed to pay $527,844 in disgorgement along with prejudgment interest and a penalty of $725,000; Mr. Glover will pay disgorgement of $839,128 along with prejudgment interest and a $450,000 penalty and will be barred from the securities business; and Mr. Hill will pay a $75,000 penalty. See also In the Matter of Signator Investors, Inc. Adm. Proc. File No. 3-16753 (August 13, 2015)(action against the adviser and its Director of Compliance Gregory Mitchell for failure to supervise Mr. Glover; resolved with the agreement of the firm to retain a consultant, the entry of a censure and its agreement to pay a $450,000 penalty and Mr. Mitchell’s suspension from the securities business for twelve months and payment of a $15,000 penalty); In the Matter of Cory D. Williams, Adm. Proc. File No. 3-16754 (August 13, 2015)(registered representative and investment adviser representative with Signator alleged to have participated in the offering fraud charged with violations of Advisers Act Sections 206(1) and (2); he settled, consenting to the entry of a cease and desist order based on the cited Sections, a bar from the industry and from participating in any penny stock offering and the payment of $94,191 in disgorgement, prejudgment interest and a penalty equal to the amount of the disgorgement). See Lit. Rel. No. 23317 (August 13, 2015).

Confidential information: In the Matter of ITG Inc., Adm. Proc. File No. 3-16742 (August 12, 2015). Respondents in this action are ITG Inc., a subsidiary of Investment Technology Group, Inc., and a registered broker-dealer, and AlterNet, also a subsidiary of ITG Group and a registered broker-dealer. This action centers on the improper use of proprietary customer data and a failure to follow published policies and procedures. ITG has historically operated as an independent agency-only brokerage firm. The firm did not engage in proprietary trading for its account. In 2010 the parent company approved the creation of a proprietary trading desk as a trial. It was known as Project Omega and managed by Liquidity Executive. The team assembled had significant experience in algorithmic trading design and writing computer code but none in proprietary trading. Initiation of Project Omega was kept on a need to know basis even within the firm. When Project Omega began in early 2010 the ITG compliance department issued written policies to the Liquidity Executive precluding the use of customer order information. The Liquidity Executive was not walled off from confidential trading information. Two strategies based on using proprietary customer trading data were developed. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Rules 301(b)(2) and 301(b)(1)) of Regulation ATS. To resolve the action Respondents admitted that they violated the Federal securities laws. ITG Inc. consented to the entry of a cease and desist order based on the Sections and rules cited in the Order. Both ING Inc. and AlterNet consented to the entry of a censure. In addition, Respondents will pay disgorgement of $2,081,304, prejudgment interest and a penalty of $18 million.

Offering fraud: SEC v. Inofin, Inc., Civil Action No. 1:11-cv-10633 (D. Mass.) is a previously filed action naming as defendants the company, a subprime auto firm, and Thomas Keough. The complaint alleged an offering fraud which raised at least $110 million for the sale of unregistered Inofin notes. Mr. Keough earned commissions promoting and selling those notes. The Court entered an order imposing a $50,000 penalty on Mr. Keough. Previously, he had consented to the entry of an injunction prohibiting future violations of Exchange Act Section 15(a) and Securities Act Sections 5(a) and 5(c) and directing the payment of disgorgement in the amount of $368,430 along with prejudgment interest. The question of a penalty had been reserved for the Court. See Lit. Rel. No. 23315 (August 12, 2015).

Revenue recognition: In the Matter of DJSP Enterprises, Inc., Adm. Proc. File No. 3-16741 (August 12, 2015) is a proceeding which names as a Respondent the firm, which provides non-legal processing services in connection with residential mortgage foreclosures. In 2008, 2009 and the first two quarters of 2010 the firm prematurely recognized revenue because it underestimated the average time required to process foreclosures and, at times, misallocated revenue. As a result revenue was overstated by 7% in 2008, 10% in 2009, 20% in the first quarter of 2010 and 7% in the second quarter of 2010. The Order alleged violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter the firm consented to the entry of a cease and desist order based on the Sections cited in the Order. The resolution reflects the cooperation of the company. See also In the Matter of Kumar Gursahaney, Adm. Proc. File No. 3-16744 (August 12, 2015)(proceeding naming as Respondent the firm’s CFO, resolved with the entry of a cease and desist order based on the same Sections as the order regarding the firm and the payment of a $50,000 penalty).

Insider trading: SEC v. Dubovoy (D. N.J. Unsealed August 11, 2015). The SEC, in conjunction with prosecutors in the District of New Jersey and the Eastern District of New York, filed charges against thirty-two defendants – 17 individuals and 15 entities — alleging an international hacking and insider trading scheme. There were two insider trading groups which netted over $100 million in illegal trading profits over five years and which may be continuing. The defendants divide into three groups: 1) The hacker defendants: Oleksandr Ieremanko and Ivan Turchynov, both residents of Kiev, Ukraine. 2) The trader defendants—the Dubovoy Group: a group of twelve individuals and entities headed by Arkadiy Dubovoy of Alpharetta, Georgia whose members reside in Georgia, Ukraine, New York and Pennsylvania; and 3) the foreign traders, a group of eighteen persons. The hacker defendants penetrated the computer services of at least two newswire services. As a result they were able to acquire advance copies of corporate press releases before distribution to the public. The hacker defendants – Messrs. Ieremanko and Turchynov – transmitted the information to the traders. The information had to be transmitted in a narrow window of time before the release by the news wires of the press releases. The members of the trader group placed trades through a variety of accounts using the information prior to the public release of the information. The hacker defendants were paid either a flat fee or a percentage of the trading profits. Trading in this fashion has continued through at least May 2015. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 20(a) and 20(e). The cases are pending.

Conflicts: In the Matter of Guggenheim Partners Investment Management, LLC, Adm. Proc. File No. 3-16735 (August 10, 2015). GPI is a registered investment adviser that provides services to institutional clients, high net worth individuals and private funds. It is a wholly owned, indirect subsidiary of Guggenheim Partners, LLC, a private financial services firm based in Chicago and New York. The primary violation alleged in the Order centers around a July 29, 2010 loan for $50 million from a GPI Client to Senior Executive of the advisor used it to invest in two transactions GPI put clients in along with the lending client. While executives at the firm knew about the loan it was never reported to compliance or disclosed as firm policies required. The Order also alleges that in 2009 GPI inadvertently charged fees to a client which were inappropriate. The fees were repaid after a considerable period of time. In addition, GPI employees failed to comply with firm policy regarding gifts from clients and the treatment of errors. The firm also furnished incorrect records to the staff because they included client information from other advisers that was incorrectly coded as resulting from GPI transactions. The Order alleges violations of Advisers Act Sections 204, 204A, 206(2) and 206(4). To resolve the proceeding the firm will implement certain undertakings, including the retention of a consultant and, generally, the implementation of the recommendations made by that person. The firm also consented to the entry of a cease and desist order based on the Sections cited in the Order, a censure and to pay a penalty of $20 million.


U.S. v. Garcia (N.D. Cal.); In the Matter of Vicente E. Garcia, Adm. Proc. File No. 3-16750 (August 12, 2015). These actions charge Mr. Garcia with violations of the FCPA. Specifically, Mr. Garcia pleaded guilty to one count of conspiracy to violate the FCPA. Previously, he was the Vice-President of Global and Strategic Accounts for SAP. In late 2009 his firm sought a multi-million dollar contract for a Panamanian state agency for a technology upgrade package. To secure the contract Mr. Garcia and others paid bribes to two Panamanian government officials and an agent to a third official with the understanding that at least part of the money would go to the official. The firm secured a $14.5 million contract. Later it obtained other Panamanian government contracts. The payments were disguised with false documents. The date for sentencing has not been set. The SEC Order alleged violations of Exchange Act Sections 30A and 13(b)(5). The action was resolved with Mr. Garcia consenting to the entry of a cease and desist order based on the Sections cited in the Order and payment of $85,965 in disgorgement (the amount of a kickback he received) together with prejudgment interest.

Criminal cases

Investment fund fraud: U.S. v. Movalia (M.D. Fla.) is an action in which the founder and manager of OM Global Investment Fund LLC, Gignesh Movalia, pleaded guilty to perpetrating a $9 million investment fraud scheme. Beginning in 2011 Mr. Movalia solicited investments touting access to pre-initial public offering shares of Facebook Inc. By the end of 2012 he had raised about $15 million, $9 million of which was for the pre-IPO shares. In fact he diverted the funds to other investments and eventually the firm went into receivership. The date for sentencing has not been set.

Insider trading: U.S. v. Stewart (S.D.N.Y.) is an action naming as a defendant Robert Stewart. His son, Sean Stewart, worked for two different Manhattan based investment banks during the period 2011 to 2014. During that period the son tipped his father regarding five different merger transactions. A co-conspirator in the scheme had taped his conversations with Mr. Stewart regarding the trading. In each instance the father traded profitably. This week Mr. Stewart pleaded guilty to one count of conspiracy to insider trade. The date for sentencing has not been set.

Obstruction: U.S. v. Hart (S.D.N.Y.) is a action against Steven Hart who was a portfolio manager at an investment firm and controlled Octagon Capital Partners LP. Mr. Hart was sentenced to four months in prison on obstruction of justice and perjury charges related to an SEC investigation. Specifically, during an inquiry regarding certain matched and crossed trades Mr. Hart gave false testimony to the staff claiming they were directed by his superior. On phone calls with the SEC staff he impersonated his superior.


Reg SHO: The regulator imposed an $800,000 fine on StockCross Financial Services, Inc. for failing to comply with the close out provisions of Regulation SHO. Specifically, those provisions require that firms deliver the shares to a registered clearing agency for settlement at the end of the close out period so they are net flat or long. Here the firm failed to comply with this obligation on 1,826 occasions between November 209 and May 2013 because it misunderstood the requirements of the Regulation and its tracking system was fundamentally flawed.


Suitability: The Financial Conduct Authority banned Robert Shaw, a former director of advisory firm TailorMade Independent Ltd., from senior positions in the financial services business and imposed a fine of £165,900. TMI was an unregulated introducer that referred clients to TailorMade Alternative Investments, Inc. Between 2010 and 2013 they referred 1,661 customers who transferred assets from existing pension funds into unregulated investments without considering suitability. TMI has ceased trading.

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