This Week In Securities Litigation (Week ending February 15, 2013)

SEC Chairman Elise Walter and CFTC Chairman Gary Gensler testified before a Senate Committee this week, focusing on the implementation of Dodd-Frank. The SEC also approved the budget for the PCAOB.

Two former senior executive in the organization of jailed Ponzi schemer Allen Stanford were sentenced to serve lengthy prison terms. A former hedge fund operation caught up in the Galleon insider trading cases was sentenced to a term of probation under a cooperation agreement.

Finally, FINRA issued another investor alert. This one focuses on duration risk for bonds.


Testimony: Chairman Elisse Walter testified before the Senate Committee on Banking, Housing and Urban Affairs (Feb. 14, 2013). The Chairman’s testimony covered a range of topics including hedge fund reporting, the whistleblower program, derivatives and the implementation of Dodd-Frank, staff studies on investment advisers and broker dealers, credit rating agencies, the Volker Rule, new Commission offices and economic analysis (here).

PCAOB: The Commission approved the Board’s budget at a level which represents about an 8% increase (here).


Testimony: Chairman Gary Gensler testified before the Senate Banking, Housing and Urban Affairs Committee (Feb. 14, 2013). In his testimony Chairman Gensler reviewed the implementation of Dodd-Frank, noting that 80% of the swap market rules have been implemented. He concluded with a review of the libor cases and a request for increased funding (here).

Remarks: CFTC Commissioner Bart Chilton addressed the Arkansas State University Agribusiness Conference (Feb. 13, 2013) in remarks titled “Red.” Commissioner’s remarks focused on the question: “Are these markets working for you?” (here).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 1 civil injunctive action and no administrative proceedings (excluding tag-along-actions and 12(j) actions).

Cherry picking scheme: SEC v. Berger, Civil Action No. CV-12 4728 (E.D.N.Y. Filed Sept. 21, 2012) is an action against Howard Berger, the founder and manager of Professional Traders Management LLC and Professional Offshore Traders Management LLC which managed and acted as the investment adviser for two hedge funds. Between July 2008 and March 2010 Mr. Berger engaged in a cherry picking scheme in which he took profitable trades from one of the funds and allocated them to his wife’s account. On January 15, 2013 the court entered a consent judgment against Mr. Berger, enjoining him from future violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4) and Section 204(4)-8. In addition, Mr. Berger agreed to pay disgorgement of $5,399,521.84, prejudgment interest and a $50,000 civil penalty. In a separate administrative proceeding he will also be barred from association with any broker, dealer, investment adviser, municipal securities dealer or transfer agent. See also Lit. Rel. No. 22616 (Feb. 12, 2013).

Offering fraud: SEC v. A Chicago Convention Center, LLC, Case No. 13cv982 (N.D. Ill. Filed Feb. 6, 2013) is an action against Anshoo Seithi and his controlled entities who are alleged to have defrauded 250 investors of millions of dollars. Mr. Seithi used the EB-5 Program, which promises foreign nationals an opportunity at a green card in return for certain investments in the U.S. which create jobs for citizens, to lure investors to purchase notes in A Chicago Convention Center. He claimed it would build and operate what he called the World’s First Zero Carbon Emission Platinum LEED certified hotel and conference center in the Chicago area. Investors were told that the work was progressing with major hotel chains signed and all permits in place. Mr. Seithi was also supposed to contribute real estate valued at $177 million. Investors were asked to wire a minimum of $500,000 each for their investment and, in addition, $41,5000 as an administrative fee. The claims were false and much of the money collected as fees misappropriated. The Commission’s complaint alleges violations of Securities Act Sections 17(a)(1) & (2) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22615 (Feb. 8, 2013).


Alert: The regulator issued a new investor alert titled: “Duration-What Interest Rate Hike Could Do to Your Bond Portfolio.” The Alert focuses on the importance of duration risk.

Criminal cases

Investment fund fraud: U.S. v. Lopez, 4:09-cr-0342 (S.D. Tx.) is the action against Gilbert Lopez, the former CEO of the Stanford Financial Group Companies, and Mark Kuhrt, former global controller of Stanford Financial Group Global Management. Each man was sentenced to serve 20 years in prison. The two men were each convicted on one count of conspiracy and 10 counts of wire fraud by a jury following a five week trial. Each was found not guilty on one count of wire fraud. At the hearing the court also found each defendant guilty of obstruction of justice by committing perjury at trial. The evidence at trial established that the two men were aware of and tracked Mr. Stanford’s misuse of Stanford Investment Bank’s assets, concealed these facts from others and helped cover them up.

Insider trading: U.S. v. Fortuna (S.D.N.Y.) is the action in which the co-founder of hedge fund S2 Capital LLC, Steven Fortuna, previously pleaded guilty to three counts of conspiracy to commit securities fraud and securities fraud pursuant to a cooperation agreement. This week Mr. Fortuna was sentenced to serve two years of probation. Mr. Fortuna had been charged with gathering inside information from other hedge fund operators and trading while in possession of it.


Market crisis: The UK Financial Services Authority announced a settled market crisis action in which UBS was fined £9.45 million for exposing sophisticated investors to unacceptable investment risk. From December 2003 through September 2008 the firm sold shares in the AIG Enhanced Variable Rate Fund to 1,998 investors. All were high net worth individuals. The investments totaled £3.5 million. The investments were in a money market fund seeking enhanced returns by putting a significant amount of its assets in mortgaged backed securities and floating rate notes.

As the market crisis unfolded, the value of some of the assets in the fund dropped below book value. Following the collapse of Lehman Brothers in September 2008 the share price dropped significantly. There was a run on the fund. Redemptions were halted and many investors could not recover their funds. UBS failed to ensure the suitability of its advise, the regulator concluded, since the firm did not carry out adequate due diligence before marketing the shares to investors or provide suffient training to its sales force to ensure that the shares were only sold to suitable customers. UBS has agreed to implement a remediation program. Since UBS agreed to settle at an early stage it was given a 30% reduction in the fine which otherwise would have been £13.5 million.


Investment fraud: The Australian Securities and Investment Commission obtained a freeze order against Gabriel Nakhi, a representative with the Sydney financial adviser, SydFA Pty Ltd. Mr. Nakhi had induced investors to loan him money for investments. Investors were promised a fixed return. The Commission obtained the ex parte order because it was concerned that the funds may not have been used solely for investor purposes.


False application: The Securities and Futures Commission banned Kuo Shou Min, a former licensed representative, from the securities business for nine months. The regulator concluded that Mr. Kuo failed to disclose on his license application that he had been disciplined in 2005 by the Securities and Futures Bureau of Taiwan where he had also been a licensed representative.

Tagged with: , , , ,