This Week In Securities Litigation (Week ending December 9, 2016)

The Supreme Court handed down its much anticipated decision in Salman this week, essentially reaffirming its seminal decision on illegal tipping in Dirks. In affirming the Petitioner’s conviction the Court rejected his contention that the personal benefit to the tipper had to be pecuniary and that of the Government claiming that any transmission of inside information where it is know that the recipient will trade is barred. The Court also modified the Second Circuit’s decision in Newman.

The SEC filed another case centered on securities-based swaps and the failure to comply with the exchange/disclosure requirements this week as well as an action against audit giant KPMG for losing a portion of its work papers for a client engagement. An action was also brought alleging an internal control failure that more closely resembled an FCPA bribery case. Finally, the agency brought cases alleging insider trading, the sale of unregistered securities and a disclosure failure by an adviser regarding certain charges.


Resignation: Andrew Ceresney, Director of the Division of Enforcement will step down by the end of the year.

Remarks: Wesley R. Bricker, Chief Accountant, delivered the key note address before the 2016 AICPA Conference on Current SEC and PCAOB Developments titled Working Together to Advance High Quality Information in the Capital Markets, Washington, D.C. (Dec. 5, 2016). Topics discussed include internal controls, audit committees, auditors and independence and IFRS (here).

Supreme Court

The Supreme Court handed down its first decision on insider trading in years, affirming the conviction of Bassam Salman for insider trading in violation of Exchange Act Section 10(b). Salman v. United States, No. 15-628 (December 6, 2016). The unanimous opinion, written by Justice Alito for the Court, hewed closely to the Court’s seminal decision in Dirks v. SEC, 463 U.S. 646 (1983). The Court concluded that the facts in Salman came within the “heartland” of Dirks, rejecting the positions of both parties while noting that the Second Circuit’s decision in U.S. v. Newman, 773 F. 3d 438 (2nd Cir. 2014) had gone to far.

In Salman the Court affirmed and reiterated the basic principles of Dirks regarding tipper liability. Those principles make it clear that liability stems from a breach of duty resulting in a personal benefit to the tipper measured by an assessment of the objective facts. Liability also results from gifting inside information to a trading friend or relative – circumstances which support an inference that the insider obtains a personal benefit. By reiterating these principles, the Court adhered to the bright line drawn in Dirks between the permissible and the impermissible — not every communication of inside information is a violation of Section 10(b). Rather, there is only a violation where there is a breach of duty and a resulting personal benefit or a gift to a friend or relative.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 2 civil injunctive case and 6 administrative proceedings, excluding 12j and tag-along proceedings.

Unregistered securities: In the Matter of Robert L. Baker, Adm. Proc. File No. 3-17716 (December 8, 2016) is a proceeding which names as Respondents Mr. Baker, Jacob Herrera, Michael Bowen and Terrence Ballard. Each man formerly worked as a sales person for various energy firms. Respondents participated in an offering fraud conducted by Christopher Faulker that began in 2011. Each Respondent sold, or participated in selling, securities to hundreds of investors through cold calls and other means. The securities were not registered; Respondents were not registered as broker-dealers. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). The proceeding will be set for hearing.

Disclosure: In the Matter of Harold D. Garrison, Adm. Proc. File No. 3-17713 (December 7, 2016). Respondent was the CEO and part owner of HDGM Advisory Services, LLC and is predecessor, HDG Mansure Investment Services, Inc. Both firms are in liquidation. The firm was a registered representative that served as an adviser to two funds. In 2012 Respondent caused the adviser to charge $5.8 million in certain prepaid transaction fees to the funds without adequately disclosing the charge to the Board of Directors. This violated Advisers Act Sections 206(2) and 206(4). To resolve the proceeding Respondent consented to the entry of an order based on the two Sections cited in the Order. He is also bared from the securities business with the right to apply for reentry after one year. Respondent will pay a penalty of $350,000.

Security-based swaps: In the Matter of Equidate, Inc., Adm. Proc. File No. 3-17708 (December 6, 2016) is a proceeding which names as Respondents Equidate, Inc., and Equidate Holdings LLC, respectively, a firm established to foster investments in contracts whose value is tied to that of certain privately held shares, and its subsidiary. Beginning in August 2014 Equidate marketed its self as a marketplace for pre-IPO equity. The firm solicited shareholders and potential investors to purchase security-based swaps whose shares related to those of private companies. This permitted investors to circumvent restrictions on the underlying shares. About $31 million was raised. The security-based swaps were not sold on an exchange and investors were not furnished with the required disclosures, thereby violating Section 5(e) of the Securities Act and Section 6(i) of the Exchange Act. To resolve the proceeding Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. They will also pay a penalty of $80,000.

Lost work papers: In the Matter of KPMG LLP, Adm. Proc. File No. 3-17709 (December 6, 2016) is a proceeding which names the audit firm as a Respondent. During the investigation of certain statements made by The St. Joe Company, a subpoena was issued to the audit firm for select work papers related to the audits of the St. Joe financial statements. After producing the documents it appeared certain papers were missing. Following an inquiry KPMG informed the staff that the pertinent binder had been checked out by a junior staff member and when it was returned the papers were missing. The Order alleges violations of Rule 2-06 of Regulation S-X which requires that the audit firm retain the relevant papers for seven years after a review of a firm’s financial statements to which Exchange Act Section 10A(a) applies. The firm will also pay a penalty of $230,000.

Insider trading: SEC v. Ly, Civil Action No. 2:16-cv-01855 (W.D. Wash. Filed December 5, 2016). Jonathan Ly was employed at Expedia, Inc. as a Senior IT Support Technician in the firm’s Corporate IT Services Department from March 2013 through April 2015. In that capacity he was entrusted with IT administrative access privileges such as a username and password designed for IT personnel. In some instances he had various employees’ corporate computer network credentials. Using his access Mr. Li was able to obtain Expedia earnings announcements for Q2 2013, Q3 2013, Q4 2013, Q2 2014, Q2 2015, Q3 2015 and Q4 2015. He was also able to obtain confidential information regarding an exclusive marketing agreement between his employer and Travelocity, Inc. and the DOJ approval of Expedia’s acquisition of Orbitz Worldwide. This access continued after he left the firm in April 2015 since he took a firm laptop. In each instance that he obtained inside information, Mr. Li traded in the shares of Expedia. Overall he had $348,515.72 in trading profits. The complaint alleged violations of Exchange Act Section 10(b) and Securities Act Section 17(a). To resolve the action Mr. Li agreed to pay disgorgement equal to the amount of his trading profits and prejudgment interest. The U.S. Attorney’s Office for the Western District of Washington filed a parallel criminal case. Mr. Ly pleaded guilty in that action.

Internal controls: In the Matter of United Continental Holdings, Inc., Adm. Proc. File No. 3-17705 (December 2, 2016). United Continental is a Chicago based issuer and the parent of United Airlines. The official is David Samson, a member of the Port Authority, a political subdivision of the states of New York and New Jersey. The Authority operates Newark Airport, a United Airline hub. Beginning in February 2011 Mr. Samson, after becoming Chairman of the Port Authority, began pressing United through a consultant and registered lobbyist to initiate a non-stop flight route from Newark to Columbia, South Carolina. Mr. Samson maintained a home in that city. Previously, Continental Airlines, later merged into United, had a route between the two points. It was terminated because it was unprofitable. During the summer and fall of 2011 United was negotiating a lease of three acres of land at the Newark Airport to construct a maintenance hangar that the company estimated would drive $47.5 million in value to the United network on an annual basis. During the summer and fall the negotiations regarding the Hangar proceeded. In September 2011 Mr. Samson, the CEO of United and others attended a dinner where he brought up the route. The CEO said he would look into it. Subsequently, United personnel at the Newark Planning Group analyzed the potential financial performance of the proposed Samson route and concluded it would be unprofitable. That determination, made without following the usual procedures to consider a route, was communicated to Mr. Samson. Following that communication the lease was removed from the Port Authority agenda in two consecutive months. When this was reported to United’s CEO he approved the route. The same day the lease was approved. The Order alleges violations of Exchange Act Section 13(b)(2)(A) and (B). To resolve the proceeding United undertook a series of remedial actions. Those included enhancing its Ethics and Compliance Office as well as its global code of conduct and anti-bribery policies. The firm also conducted extensive anti-bribery and corruption training. United consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will pay a civil penalty of $2.4 million. In resolving the action United did not make admissions. The Order omits the standard neither admits nor denies language while stating that United consented to the entry of the order.

Insider trading: In the Matter of Marc Winters, Adm. Proc. File No. 3-17706 (December 2, 2016) is an action which names as a Respondent, the registered representative at a broker-dealer for firm client Robert Munakash. In February 2011 Mr. Winters received information that GSI Commerce, Inc. would be acquired by eBay, Inc. The information came from his client, Robert Munaksh, who had misappropriated it from his close friend, a GSI executive. Respondent traded while in possession of the information, reaping profits of $4,103 for himself and about $13,864 for two clients. The Order alleges violations of Exchange Act Section 10(b). To resolve the action Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay disgorgement of $4,103, prejudgment interest and a penalty of $31,944.

Offering fraud: SEC v. Calleja, Civil Action No. 16-cv-24872 (S.D. Fla. Filed Nov. 22, 2016) is an action which names as a defendant Rafael Antonio Calleja, Jr. The complaint alleges that beginning in March 2014, and continuing for the next four months, Mr. Calleja raised about $2.7 million firm ten mostly elderly or retired investors through the sale of unregistered securities of Tower Trade Group USA LLC. Mr. Calleja misappropriated a portion of the money while failing to invest the balance. The funds were transferred to a foreign firm affiliated with Tower Trade. Later the foreign firm refunded the money. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Mr. Calleja resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. No penalty was imposed based on an inability to pay. See Lit. Rel. No. 23698 (December 2, 2016).


AML systems: The regulator fined Credit Suisse Securities (USA) LLC $16.5 million in connection with deficiencies in its anti-money laundering system. Specifically, from January 2001 through September 2013 the firm failed to effectively review transactions in two respects. First, it relied on its registered representatives to flag and elevate to supervisors suspicious activity but this was not always done. Second, its automated system was not properly configured to detect suspicious activity that would require the filing of a SAR.


False reports: The Board imposed an $8 million fine – its largest ever – on Brazil based Deloitte Touche Tohmatsu Aduitores Independentes. The penalty is based on the firm’s conduct in advance of a 2012 Board inspection regarding the audit of a Brazilian airline. The engagement partner ordered that work papers be altered in advance of the inspection. The altered papers and other misleading documents were then presented to PCAOB inspectors. After the investigation began the firm took additional steps to conceal the improper conduct. Twelve individuals were involved in the conduct.

Hong Kong

Insider dealing: The Securities and Futures Commission instituted proceedings against Augustine Cheong Kai Tjieh, formerly a senior executive and affiliate of Titan Petrochemicals Group Ltd., and his mother, Gan Ser Soon for insider dealing in Titan’s shares. Specifically, the Order alleges that in January 2012 the Respondents sold their shares in Titan while in possession of undisclosed information that the firm would default on certain outstanding bank loans.


Manipulation: The Securities and Exchange Surveillance Commission recommended that proceedings be instituted against Morgan Stanley MUFG Securities Co., Ltd. in relation to its trading in late September, early October and later in October 2015 in the shares of Seibu Holdings Inc. The firm is alleged to have placed orders without the intention of executing them to deceive other investors. Specifically, during the period the firm placed purchase orders for over 9 million shares of Seibu Holdings on the Tokyo Stock Exchange while executing only about 400,000 trades. This constituted misleading transactions in the market place.

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