THIS WEEK IN SECURITIES LITIGATION (Week ending February 3, 2012)

Former Farris Baker Watts General Counsel Ted Urban finally prevailed in his long running battle with the SEC to clear his name and reputation. The Commission, on an evenly divided vote, affirmed the initial decision of the Administrative Law Judge, dismissing the failure to supervise charge brought against him.

As the new RMBS Task Force began to unfold the DOJ and the SEC filed, respectively, criminal and civil charges against former Credit Suisse trades tied to the market crisis. This is one of the few market crisis cases involving charges against former employees of a major Wall Street bank. The SEC also concluded a financial fraud action this week which traces to 2000.

The DOJ continued to have difficulty extending what it has called the “new era” of FCPA enforcement. The second African Sting trial ended with a split verdict, two defendants were acquitted by the jury. The court declared a mistrial as to three others after the jury hung. The first trial in this case ended in a hung jury.

Finally, the FSA sanctioned two more persons in connection with their roles in Greenlight Capital’s insider trading. Previously, the regulator sanctioned the firm and its founder.

SEC Enforcement: Litigated cases

Failure to supervise: In the Matter of Theodore W. Urban, Adm. Proc. File No. 3-13655 (Jan. 26, 2012) is an action against the former General Counsel of Farris Baker Watts, Inc. alleging failure to supervise. Previously, the initial decision dismissed the charges against Mr. Urban (here). On the Division’s appeal, the Commission canceled the oral argument after reviewing the briefs and directed that the proceeding be dismissed. The two participating Commissioners were split. Commissioners Aguilar, Paredes, Walter, Gallagher and Chairman Schapiro did not participate.

SEC Enforcement: Filings and settlements

Market crisis: SEC v. Kareem Serageldin, Civil Action 12 CIV 0796 (S.D.N.Y. Filed Feb. 1, 2012) is an action brought by the Commission, with a parallel case by the USAO in Manhattan, which charges four former Credit Suisse Group traders with fraudulently overpricing subprime bonds: Kareem Seregeldin, Global Head of Structured Credit Trading at Credit Suisse; David Higgs, Managing Director and Head of Hedge Trading who reported to Mr. Serageldin; Faisal Siddiqui, vice president in Credit Suisse Group’s CDO Trading Group in New York who reported to Mr. Higgs; and Salmaan Siddiqui, vice president in Credit Suisse Group’s CDO Trading Group in New York who also reported to Mr. Higgs. In late 2007 and 2008 the defendants engaged in a fraudulent scheme to overstate the prices of more than $3 billion of subprime bonds owned by Credit Suisse to ensure their bonuses and help Mr. Seregldin secure a promotion. Beginning in latter part of 2007 defendants marked the bonds to the P&L rather than to fair value to avoid the impact of the required write downs. Shortly after reporting the fourth quarter results, Credit Suisse senior management began to unravel the fraud. They detected abnormally high prices on certain bonds controlled by Defendants. On February 19, 2008 the firm issued a press release stating that its financial results were incorrect. Subsequently, the bank revised net income for 2007 downward from CHF 8.55 or $7.12 billion to CHF 7.76 or $6.47 billion and for the fourth quarter of 2007 from CHF 1.3 or $1.16 billion to CHF 540 or $471 million. The write downs centered on the defendants’ ABN1 book which recognized a write down of about $1.3 billion. The SEC’s complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation. The firm was not charged based on its cooperation.

Financial fraud: SEC v. Todd, Case No. 03-CV 2230 (S.D. Ca.) is the long running financial fraud action against Jeffrey Weitzen, former CEO of Gateway, Inc., and Robert Manza, former controller of the company. In brief, the complaint claimed that the defendants engaged in a fraud with respect to the recognition of revenue in the third quarter of 2000 while at Gateway. Previously, a jury found in favor of the Commission. The district court overturned that verdict on post trial motions. The Ninth Circuit, however, reversed those rulings and remanded the case to the district court. This week both defendants settled. Mr. Weitzen consented, without admitting or denying the allegations in the complaint, to the entry of an injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to pay a civil penalty of $110,000. Mr. Manza consented to the entry of a permanent injunction on the same basis which prohibits future violations of Exchange Act Section 10(b) and aiding and abetting violations of Section 13(a). Mr. Manza also agreed to be barred for five years from serving as an officer or director of a public company and to pay disgorgement of $85,150 along with prejudgment interest and a penalty of $110,000.

Short selling: In the Matter of Jeffrey A. Wolfson, Adm. Proc. File No. 3-14726 (Jan. 31, 2012) is an action against Jeffery Wolfson, his brother Robert, and the firm where they were employed, Anchor Trading II, LLC. It alleged repeated violations provisions of Reg. SHO. According to the Order, over a one year period beginning in July 2006, the Respondents earned at least $17,375,000 in illicit trading profits by engaging in a series of transactions which violated the locate and close out provisions of the Regulation. The proceeding is being scheduled for hearing.

Financial fraud: SEC v. Senior, Civil Action No. 3:12CV60 (N.D. Ind. Filed Jan 30, 2012) is one of four actions centered on a years long financial fraud at Sheffield, England based Symmetry Medical Sheffield LTD f/k/a Thorton Precision Components, Ltd or TPC. Charged with the fraud were Richard Senior, then VP for European Operations, Matthew Bell, then Finance Director, Lynne Norman, then Controller, and Shaun Whiteley, then the Account Manager. The four executives systematically engaged in a fraudulent scheme to inflate the financial results of TPC by understating expenses and overstating assets and revenues beginning in 1999. As a result of the scheme net income was overstated for fiscal 2004 by 39%, 2005 by 421%, 2006 by 30%, for the first quarter of 2007 by 131% and for the second quarter of 2007 by –6.4%. In April 2008 Symmetry restated its financial statements for fiscal years 2006, and the first two quarters of 2007. The complaint alleges violations of Securities Action Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(B) and 13(b)(5).

Each defendant settled, consenting to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, based on the sections they were alleged to have violated. Messrs Senior, Bell and Norman will also be barred from serving as an officer or director of a public company. Mr. Bell agreed to pay disgorgement of $136,209 along with prejudgment interest but payment is waivered based on his financial condition. Mr. Senior’s consent defers the resolution of the monetary component of the case pending the completion of assets discovery. Finally, Messrs. Bell, Norman and Whitley also agreed to be barred from appearing or practicing before the Commission as an accountant.

Related actions:

  • Company & CFO: In the Matter of Symmetry Medical, Inc., Adm. File No. 3-14723 (Jan. 30, 2012) is a proceeding against the company and its CFO and Senior Vice President, Fred Hite. The company consented to a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Hite consented to the entry of a cease and desist order based on Exchange Act Section 13(b)(5) and SOX Section 304(a), agreed to pay a civil penalty of $25,000 and to reimburse the company for $185,000 in bonuses and other incentive based or equity based compensation and for stock sale profits.
  • CEO: SEC v. Moore, Civil Action No. 3:12 CV 61 (N.D. Ind., Filed Jan 30, 2012) is and action against Brian Moore, CEO and president of Symmetry based on SOX Section 304. Mr. Moore resolved the matter by agreeing to the issuance of a final judgment ordering him to reimburse $450,000 to Symmetry which represents certain discretionary compensation paid to him in during the 12 month period following the restated financials.
  • Auditors: In the matter of Christopher Kelly, ACA, Adm. Proc. File No. 3-14724 (Jan. 30, 2012). This is a proceeding against outside auditors, Christopher Kelly and Margaret Hebb, alleging improper professional conduct. The matter was resolved with the entry of an order by consent suspending each Respondent from appearing or practicing before the Commission as an account with a right to reapply after two years.


The jury acquitted defendants Patrick Caldwell and Johathan Godsey in the SHOT-Show or Africa Sting cases. The court declared a mistrial after the jury failed to reach a verdict as to defendants John Mushriqui, Jeana Mushriqui and Mark Morales. The court previously dismissed the conspiracy count as to each defendant. Defendant Giordanella, who was only named in that count, was thus released.

Initially, twenty-two executives and employees of military supply companies were indicted in the largest FCPA sting operation in history. The cases were lauded by the Department of Justice which has declared this to be a “new era” of FCPA enforcement. The first trial, which began in May 2011, ended in a mistrial when the jury deadlocked. The defendants were Andrew Bigelow, Pankesh Patel, John Weir and Lee Tolleson. Prior to submitting the case to the jury the court dismissed a substantive FCPA count as to Messrs. Patel and Tolleson and dismissed a money laundering count as to each defendant.

Criminal cases

Investment fund fraud: U.S. v. Schneider (E.D.N.Y.) is a securities fraud action against Laurie Schneider which alleges that she operated a Ponzi scheme. According to the court papers, beginning in September 2006 the defendant solicited investments in Janitorial Close-Out City Corp., a company which supposedly invested in industrial equipment and machinery manufactured by companies in China. Investors were falsely told that their investment was guaranteed, that there were rates of return as high as 60% and that the equipment could be purchased at discount prices and resold in the U.S. at a profit. In fact investors who received returns were paid with other investor funds. Approximately 25 investors paid over $5 million to the defendant. The case is pending.


The agency initiated a proceeding against Charles Schwab & Co., alleging it violated FINRA rules in two respects. First, it amended its customer agreements to require that they waive their rights to bring class actions against the firm. Second, the firm added a provision which requires that customers agree that arbitrators in a proceeding cannot consolidate their action with more than one person’s claim. FINRA is seeking an expedited hearing.


The regulator imposed penalties on two more persons tied to the sale by Greenlight Capital of part of its shares of Punch based on inside information (here). This time the FSA sanction Alexander Ten-Holder, the former compliance officer at Greenlight Capital (UK) ₤130,000 for failing to question and make reasonable inquiries before selling the shares. Mr. Ten-Holder received the order to liquidate the firm’s position in Punch knowing that there had been conversations with management. He should have inquired to satisfy himself that the sales were not being ordered based on inside information. Mr. Ten-Holder however failed to take any steps.

The FSA also fined Caspar Agnew, a trading desk director at JP Morgan Cazenova, ₤65,000 in connection with the transaction for failing to identify and act on a suspicious order from Greenlight to sell Punch. As a result of his inaction the firm failed to identify the trade as suspicious and report it to the FSA.

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