This Week In Securities Litigation (Week ending December 13, 2013)

The SEC, in conjunction with four other regulatory agencies, implemented the Dodd-Frank Volker Rule. The rules essentially preclude depository institutions from engaging in proprietary trading. SEC Commissioner Michael Piwowar called for a new special study of the securities markets. The study would be similar to the comprehensive Special Study initiated in 1961 and would inform the SEC going forward to ensure that U.S. markets remain competitive.

SEC Enforcement brought four actions this week. Two settled actions focused on the market crisis while a third settled proceeding centered on inadequate valuation procedures. A fourth case, based on three offering schemes, is in litigation.


Rule making: Five federal regulatory agencies — the SEC, CFTC, the Board of Governors of the Federal Reserve System, the Office of the Comptroller and the FDIC — implemented the 900 plus page Volker Rule. Many consider the Volker Rule to be the center piece of the Dodd-Frank Wall Street Reform Act. The final rules generally prohibit banking entities from engaging in short term proprietary trading. The rules also prohibit banking entities from owning, sponsoring or having certain relationships with what are called “covered funds,” essentially hedge or private equity funds. The rules apply to insured depository institutions and their affiliates and contain certain exemptions for underwriting, hedging, purchasing government securities and market making activities. The final rule becomes effective April 1, 2014. The Federal Reserve has extended the conformance period until July 21, 2015.

Remarks: SEC Chief Accountant Paul Beswick, delivered Remarks at the AICPA 2013 Conference on Current SEC and PCAOB Developments, Washington, D.C. (Dec. 11, 2013)(here). He remarks included a discussion of efforts by the FASB to improve GAAP, reporting by issuers of municipal securities, valuation standards and audit committees and audit fees (here).

Remarks: Deputy Chief Accountant Brian Croteau, Office of the Chief Accountant, addressed the 2013 AICPA National Conference on Current SEC and PCAOB Developments (Dec. 9, 2013). His remarks focused, on auditor independence, PCAOB matters, select enforcement cases and internal controls (here).

Remarks: Deputy Chief Accountant Julie Erhardt, Office of the Chief Accountant, addressed the 2013 AICPA National Conference on Current SEC and PCAOB Developments (Dec. 9, 2013). Her remarks focused on aspects of the capital markets that differ in other countries and the prospective of investors in those areas (here).

Remarks: SEC Commissioner Michael Piwawar delivered remarks titled The Benefit of Hindsight and the Promise of Foresight: A Proposal for a Comprehensive Review of Equity Market Structure, London, England (Dec. 9, 2013). In his remarks the Commissioner called for a new Special Study of the securities markets (here).


Remarks: CFTC Chairman Gary Gensler delivered remarks at a D.C. Bar Event titled A Transformed Marketplace (Dec. 11, 2013). His remarks reviewed the transformation of the swaps market place under Dodd-Frank (here).

SEC Enforcement – filed and settled actions

Weekly statistics: This week the Commission filed, or announced the filing of, 1 civil injunctive district court action, DPA or NPA and 3 administrative proceeding (excluding follow-on actions and 12(j) proceedings).

Market crisis: In the Matter of Merrill, Lynch Fenner & Smith, Inc., Adm. Proc. File No. 3-15642 (Dec. 12, 2013); In the Matter of Joseph Parish, Adm. Proc. File No. 3-15643 (Dec. 12, 2013). The proceeding against Merrill Lynch focuses on the sale of interests in three CDOs in 2006 and 2007, Octans CDO I, Norma CDO I and Autiga DCO Ltd. The collateral for each was primarily CDS referenced to subprime residential real estate. In selling interests in Octans and Norma the offering documents failed to disclose that hedge fund Magnetar Capital LLC and its affiliates purchased equity interests but that its interests were not necessarily the same as other investors. Investors were also not told that the hedge fund had the right to object to collateral for Octans and held the equivalent of a veto for Norma. Rather, the documents represented that the Collateral Manager made the selection. Merrill Lynch was also charged with books and records violations with respect to Autiga, a deal managed by an affiliate of the broker. In this deal the firm agreed to pay “carry” from warehouse to Magnetar. It delayed booking many of the trades as they occurred for its benefit. If the deal did not close the firm hoped to evade the obligation. Later, after closing the obligation was recorded. The order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceeding Merrill Lynch consented to the entry of a cease and desist order and agreed to pay disgorgement of $56,286,000, prejudgment interest and a penalty equal to the disgorgement.

The Parish proceeding, which is related to the Norma transaction, names as Respondents Mr. Parish and Scott Shannon, principles in NIR Capital Management, LLC. The firm served as the collateral manager for the CDO and permitted the improper influence. The firm has entered into an undertaking to dissolve. Mr. Parish consented to the entry of a cease and desist order based on Advisers Act Section 206(2) and to pay disgorgement of $116,553, prejudgment interest and a $75, 000 civil penalty. An order suspending him from the securities business for twelve months was also entered. Mr. Shannon consented to the entry of a cease and desist order based on Advisers Act Sections 206(1) and 206(2). In addition, he agreed to pay disgorgement in the amount of $116,553 along with prejudgment interest and a penalty equal to the amount of the disgorgement. An order barring him from the securities business with a right to reapply after two years was also entered.

Valuation procedures: In the Matter of GLG Partners, Inc., Adm. Proc. File No. 3-15641 (Dec. 12, 2013) is a proceeding against GLG Partners, Inc., a NYSE listed firm, and its subsidiary GLG Partners L.P., a London based investment adviser registered with the U.K. Financial Conduct Authority. During a two year period beginning in late 2008 the firm had inadequate valuation procedures. Specifically, firm policies called for certain assets for which prices were not readily available to be valued by a Committee. The firm, however, did not have adequate procedures to ensure that the Committee obtained the necessary information or a mechanism to ensure that there was sufficient time to do the valuation. As a result a significant asset was overvalued by about 25% during the period. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A) and 13(b)(2)(B. To resolve the proceeding the Respondents agreed to implement certain undertakings and to the entry of a cease and desist order based on the Sections cited in the Order. In addition, they will pay disgorgement of $7,766,667 along with prejudgment interest (the overcharged management and administrative fees) and the U.K. subsidiary will pay a penalty of $375,000.

Disgorgement: SEC v. Taber, Civil Action No. 13-mc-0282 (S.D.N.Y.) is a previously filed action against CPA Michael Taber who had been denied the right to practice before the Commission as an accountant but continued to do so, contrary to the Commission order. This week the Court entered an order directing Mr. Taber to pay $400,000 in disgorgement, representing the compensation he earned on engagements while practicing in violation of the Order. See Lit. Rel. No 3517 (Dec. 12, 2012).

Investment fund fraud: SEC v. Helms, Civil Action No. 1:13-cv-1036 (W.D. Tx. Filed Dec. 3, 2013) is an action against Robert Helms and Janniece Kaelin, their controlled entities, and Deven Sellers and Roland Barrera. The action centers on three offering schemes. The first involved the sale of securities for Vendetta Royalty Partners, Ltd., a partnership with certain oil and gas royalty rights, under a notice on Form D filed with the Commission in August 2011. The Form stated that Vendetta Partners sought to raise $50 million by selling limited partnership interests. The PPM contained a series of misrepresentations regarding prior sales, the experience of Mr. Helms, outstanding litigation, commissions and the use of the proceeds, most of which were misappropriated. About $17.9 million was raised from 80 investors who purchased securities issued by Vendetta Royalty beginning in July 2011. In 2012 the defendants launched Vstra Partners while in 2013 Rock Partners was initiated. Each partnership told investors there would be returns of 300% to 500% within five to seven years. In fact there was no basis for making these representations, according to the complaint. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The Court granted a freeze order at the time the complaint was unsealed. The case is pending. See Lit. Rel. No. 2286 (Dec. 6, 2013).

Criminal cases

Obstruction: U.S. v. Tomasetta, 10 crim 1205 (S.D.N.Y.) is a case against the founder and CEO of Vitesse Semiconductor Corporation, Louis Tomasetta, and its former CFO, Eugene Hovanec. Each man previously pleaded guilty to a superseding information charging conspiracy to destroy, alter, or falsify records relating the Vitesse’s April and October 2001 stock option grants. Last week each man was sentenced to serve three years probation. Each will also pay a $30,000 fine. The charges stem from an effort to impede an SEC investigation into the option granting practices of the company. Specifically, the two men directed the creation of minutes for compensation committee meetings years after the events and altered a company computer in an effort to conceal the fact that options were backdated. The two men, the company, and others previously settled option backdating charges with the Commission. SEC v. Vitesse Semiconductor Corporation, Civil Action No. 10 Civ. 9239 (S.D.N.Y. Filed Dec. 10, 2010). See Lit. Rel. No. 3295 (Sept. 27, 2013).

Investment fraud: U.S. v. Chapman (E.D. Va.) is an action against William Chapman, founder and owner of Alexander Capital Markets. Mr. Chapman defrauded at least 122 investors who lost over $35 million in a stock lending scheme. Specifically, he induced investors to give him their stock in return for a loan of 85% to 90% of the value. The investors were supposed to be able to later recover their securities by paying off the loan and accrued interest. In fact Mr. Chapman never held the securities. Rather, he immediately sold them and gave 85% to 90% of the proceeds to the investor while keeping the balance. Mr. Chapman pleaded guilty to one count of wire fraud in May 2013. Last Friday he was sentenced to serve 144 months in prison.


Mark-ups: The regulator found that David Sinanni and his firm, Oppenheimer & Co., charged customers unfair markets on municipal securities sold from July 2008 through June 2009 in a series of transactions. The firm also failed to have an adequate system of supervision in place. As a result Oppenheimer was fined $675,000 and will pay restitution of $246,000. Mr. Siriani will pay a fine of $100,000 and was suspended for 60 days.


Report: The Board issued a report on the implementation of Auditing Standard No. 7 which concerns engagement quality review. That standard requires an engagement quality review of every audit engagement and every engagement to review interim financial information. Generally, the report found that in a number of engagements the engagement quality reviewer failed to identify audit deficiencies which should have been identified according to the Board staff.

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