This Week In Securities Litigation (Week ending August 9, 2013)

The Commission filed two additional market crisis cases this week. One named Bank of America as a defendant. The other charged UBS Securities. The SEC also filed an insider trading action against two close friends and cases charging manipulation, breach of duty and investment fund fraud.

In addition, the agency issued a Section 21(a) report of investigation centered on a German exchanged. It cautioned exchanges and investment professionals to monitor the comositon of indices when offering futures products.


Departure: Commissioner Tory A. Paredes departed from the Commission on August 3, 2013.

Report of investigation: Exchange Act Release No. 70148 (August 8, 2013) is a report on an investigation into Eurex, a foreign derivatives exchange based in Frankfurt, Germany. The report cautions exchanges and investment professionals to monitor the composition of indices when offering futures products. Here Eurex was offering and selling futures to customers on what was initially a broad-based index not subject to registration under the federal securities laws. The exchange had previously secured a no-action letter from the CFTC. Recently, the exchange determined that the composition of the index had altered over time from fluctuations. For the last 18 months it had been a narrow based security index as defined in Exchange Act Section 3(a)(55)(B) and thus was subject to registration. The firm self-reported, cooperated and took remedial steps. Accordingly the Commission determined not to bring an enforcement action.


Remarks: Commissioner Bart Chilton addressed the Amcot 2013 Business Conference, Lake Tahoe, California (August 6, 2013). His remarks were titled “Cowboy Company.” Those remarks included comments on the financialization of the commodity markets, high speed trading, wash trading and bank ownership (here).

SEC Enforcement: Filings and settlements

Filings this week: This week the Commission filed 6 civil injunctive actions and 2 administrative proceedings (excluding follow-on actions and 12(j) proceedings).

Enforcement of bar: SEC v. Taber, Civil Action No. 13-mc-0282 (S.D.N.Y. Filed Aug. 8, 2013) is an action against Michael Taber, CPA. The action seeks to enforce a bar order entered against Mr. Taber from 2004 that was based on Rule 102(e) and precludes him from appearing or practicing before the Commission. In 2004 he was employed as the controller of Sono-Tek Corporation, a public company. A bar order was entered against him. Nevertheless, he continued with his position for another year. Then he moved to Jefferson Wells International, Inc. a professional services firm that outsourced specialists to perform accounting and other work. Mr. Taber continued to perform accounting services for public companies until 2010. This action seeks to enforce the bar order and asks for disgorgement of $584,650.41 along with prejudgment interest. See Lit. Rel. 22773 (Aug. 8, 2013).

Investment fund fraud: SEC v. Cohen, Civil Action No. 1:13-cv-05586 (N.D. Ill. Filed August 6, 2013) is an action against Clayton Cohen alleging violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Mr. Cohen is alleged to have raised about $1.78 million from 24 investors by selling interest in his entity, Marketaction Capital Management LLC through his investment advisory firm, Marketaction Advisors, LLC. He targeted veterans and current military personnel, touting his trading successes and the amount of money he claimed to have invested. In fact he diverted much of the money to his personal use and lost most of the remainder trading. The case is in litigation.

Market crisis: SEC v. Bank of America, N.A., Civil Action No. 3:130-cv-0447 (W.D.N.C. Filed August 6, 2013); see also U.S. v. Bank of America Corporation, Civil Action No. 3:13-cv-446 (W.D.N.C. Filed August 6, 2013)(similar action based on FIRREA). This case is based on a failure to disclose the true nature of the residential mortgage backed securities or RMBS held in an entity called BOAMS 2008-A. That entity held 1,191 residential mortgages valued at about $855 million. Compared to earlier offerings, a disproportionate number had been originated from the bank’s wholesale channels. At the time the BOAMS 2008-A offering was being sold to investors, the bank knew, according to the complaint, that the wholesale channel loans were significantly more likely to be subject to material underwriting errors, become delinquent, fail early in the life of the loan or prepay compared to those written directly by the bank. These factors negatively impacted investors but were not disclosed as required by the Commission’s regulations in the filings made with the agency. Rather, those materials, as well as the ones furnished to rating agencies, stated that the mortgages had been underwritten in accord with bank guidelines. This was a misrepresentation since the bank knew, or should have known, that a large percentage of the mortgage loans had significant deviation from its guidelines. The bank, through its subsidiary, also provided investors and rating agencies with documents identifying key characteristics of the underlying mortgages. These documents falsely portrayed the mortgages as being less risky than they were. In fact, only a few investors were told about the loan composition in the entity. The Commission’s complaint alleges violations of Securities Act Sections 5(b)(1), 17(a)(2) and 17(a)(3). The case is in litigation.

Market Crisis: In the Matter of UBS Securities LLC, Adm. Proc. File No. 3-15407 (August 6, 2013). This proceeding focuses on the failure to disclose certain fees in connection with the sale of interest in a largely synthetic collateralized debt obligation or CDO known as ACA ABS 2007-2. UBS structured the CDO and marketed it along with its collateral manager, ACA Management LLC. The collateral for the CDO was largely credit default swaps or CDS referencing subprime residential mortgage backed securities.

ACA was responsible for the price the CDO paid for the collateral. Typically the collateral manager would solicit bids. The counterparty selected would pay a spread to purchase protection against default on a designated reference obligation. The spread would ultimately go to the CDO. Here UBS and ACA agreed on a different plan. Under their agreement ACA had bidders split their bid. One part would be the spread that in the end would go to the CDO. The other part would be “upfront points,” a one- time cash payment that would go to UBS. At the launch of ACA 07-2, about $23.6 million in upfront points had been paid. The marketing materials did not disclose that UBS would retain those fees but only its transaction fee of about $9.7 million. The Order alleges violations of Securities Act Section 17(a)(3) and Advisers Act Section 206(2). UBS settled with the Commission, consenting to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm also agreed to pay disgorgement of $34,408,183 (the upfront points and its disclosed fees), prejudgment interest and a civil money penalty of $5,655,000.

Manipulation: SEC v. Poyner, Civil Action No. 4331 (E.D.N.Y. Filed July 31, 2013) is an action against Cort Poyner and Mohammad Dolah. It alleges that the two men engaged in a scheme to manipulate the shares price of Resources Group International, Inc. and Gold Rock Resources Inc. Specifically, the defendants entered into an arrangement with a third party under which they promised to pay kickbacks to that individual in return for executing trades in customer accounts in the two securities. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 22771 (August 6, 2013).

Breach of duty: In the Matter of Thomas Gary Cooper, Adm. Proc. File No. 3-15409 (August 6, 2013) is a proceeding against Mr. Cooper, a former registered representative, and the owner of Second Mile Wealth Management, Inc., a registered investment adviser and broker-dealer. In late 2007 Mr. Cooper convinced 17 of his clients at a brokerage firm to transfer their accounts to Second Mile. The clients, who trusted him, did. Those clients assumed that their accounts would continue to be managed conservatively. To the contrary, Mr. Cooper operated Second Mile like an omnibus account. He day traded the fund and netted out his positions at the end of the day, making allocations on an inconsistent basis. From January 2008 through April 2009 Second Mile had losses of about $7.8 million while it earned fees of about $48,300.23. The Order alleges violations of Advisers Act Sections 206(1) and (2) and 207. Mr. Cooper settled with the Commission, consenting to the entry of a cease and desist order based on the Sections cited in the Order. An order barring him from the securities business and participating in any penny stock offering was also entered along with a directive to pay disgorgement of $48,300.23 and prejudgment interest. Payment of those amounts was waved along with any penalty based on financial condition.

Unregistered securities: SEC v. Rizzo, Civil Action No. 13CV1801 (S.D. Cal. Filed August 2, 2013) is an action against John Rizzo, CEO of iTrackr Systems, Inc. The firm is a software company registered with the Commission whose shares are quoted on OTC Link. In 2008 and early 2009 Mr. Rizzo hired “boiler rooms” in Europe to solicit investments in iTrackr from U.K. citizens. The transactions were effected through an off-shore entity he controlled. The paper work was handled by Mr. Rizzo’s Florida based administrative assistant who directed investors to wire funds to various entities and individuals, including an escrow agent in San Diego. The money was then siphoned to a bank account in Belize controlled by Mr. Rizzo. About $2.5 million was raised from 120 investors who purchased shares. The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 22770 (Aug 5, 2013). The U.S. Attorney filed a parallel criminal action.

Insider trading: SEC v. McGinnis, Civil Action No. 3:13-cv-1047 (D. Conn. Filed July 24, 2012) is an action against Chad McGinnis, a Systems Administrator for Green Mountain Coffee Roasters, Inc. in Vermont and his long-time friend, Sergey Pugach of Connecticut. In 2012 and 2013 each man purchased Green Mountain options quarterly. From tracing the IP addresses the Commission determined that the trades were made from the same location. At the end of each quarter the two men exchanged dozens of phone calls and/or text messages. They typically bought options which often were out of the money. For 12 of 13 quarters each man correctly predicted the price movement of Green Mountain shares. Mr. McGinnis had about $2.5 million in trading profits. Mr. Pugach had just over $5 million in trading profits. The SEC’ complaint alleges insider trading in violation of Exchange Act Section 10(b) and Securities Act Section 17(a). The complaint was initially filed under seal. A freeze order was obtained over the accounts. The case is in litigation. See Lit. Rel. No. 22769 (Aug. 2, 2013).


Alert: The regulator issued a New Investor Alert, titled “Cold Calls From Brokerage Firm Imposters – Beware of Old-Fashioned Phishing” (here).

Inadequate procedures: FINRA settled with Oppenheimer & Co. in a proceeding which alleges that the investment firm permitted the sale of over a billion shares of twenty low-priced, highly speculative penny stocks that were unregistered. Specifically, from mid-August 2008 through mid-September 2010 Oppenheimer, through its branch offices across the country, permitted the sale of the unregistered shares. Customers deposited large blocks of penny stocks shortly after opening accounts and then liquidated the shares and transferred the proceeds out of the firm. Oppenheimer missed a series of red flags, according to FINRA. The regulator determined that Oppenheimer’s systems and procedures governing penny stock transactions were inadequate and unable to determine if those shares were restricted or freely tradable. In addition, the firm’s anti-money laundering program did not focus on securities transactions and thus failed to monitor patterns of suspicious activity. The firm also failed to conduct adequate due diligence regarding a correspondent account for a broker-dealer customer in the Bahamas. To resolve the proceeding the firm agreed to pay a penalty of $1.4 million. Oppenheimer will also retain an independent consultant to conduct a comprehensive review of the pertinent firm procedures.

Criminal cases

Investment fund fraud: U.S. v. Banet (N.D. Cal.) is an action in which Hausmann-Alain Banet previously pleaded guilty to two counts of wire fraud and two counts of mail fraud. The charges were based on an investment scheme. Specifically, Mr. Banet raised about $1.2 million from investors by inducing them to invest in his firm, Lion Capital Management Group, LLC. The money was supposed to be invested in hedge funds. Instead, he diverted the funds to his personal use but concealed that fact by sending false account statements to investors. Initially, the defendant was charges with six counts of wire fraud, eleven counts of mail fraud and six counts of money laundering. At the time of his plea he also admitted making false statements to the SEC. This week he was sentenced to serve 56 months in prison.

Court of appeals

Primary liability: SEC v. Pentagon Capital Management PlC, No. 12-1680-cv (2nd Cir. Decided August 8, 2013) is an appeal by the company and Lewis Chester from a judgment finding them liable for violations of Securities Act Sections 17(a) and Exchange Act Section 10(b) for market timing violations. The district court ordered that the defendants jointly and severally pay disgorgement and a civil penalty. The Circuit Court affirmed the determinations on liability and disgorgement but reversed the decision as to the penalty and ordered reconsideration of the amount in view of Gabelli v. SEC, 133 S. Ct. 1216 (2013). First, on the question of liability the court concluded that the defendants were primarily liable since they crafted and executed a market timing scheme. Although the broker placing the trades with the mutual fund actually made the misrepresentations to the fund, in fact the defendants controlled those representations and engaged in a scheme, all of which violated Sections 10(b) and 17(a). Second, as to the penalty, the court held that under Gabelli profits earned more than five years prior to the suit could not be considered. Thus that part of the district court’s determination was vacated. The Court also reversed the imposition of joint and several liability for the civil penalty as contrary to the statute which specifies that such awards be based on the “gross amount of the pecuniary gain to such defendant.” (emphasis original). Finally, the Court concluded that it was not error to impose the disgorgement award jointly and severally on all defendants since they “collaborated” in the late trading scheme.

Disgorgement: SEC v Razmilovic, No. 12-0357 (2nd Cir. Opinion July 22, 2013) is an appeal by Tomo Razmilovic of the order entered against him directing that he pay disgorgement, prejudgment interest and a civil penalty in connections with the financial fraud at Symbol Technologies, Inc. following his default. The Circuit Court largely affirmed the order of the district court but remanded for the recalculation of prejudgment interest. The district court opinion contains an extensive discussion of disgorgement which is summarized here.


The Australian Securities and Investment commission announced that John Gay pleaded guilty to insider trading. Mr. Gay had been the Chairman of Guns Limited from 2002 through 2010. On December 2, and 4, 2009 while in possession of material, non-pubic information about the financial performance company, Mr. Gay sold 3.4 million shares of the company. On February 22, 2010 the company issued a release disclosing its financial condition. The share price declined significantly. Mr. Gay will be sentenced on August 14, 2013.

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