This Week In Securities Litigation (Week ending February 6, 2015)

The DOJ’s settlement with S&P for $1.4 billion, coupled with admissions of fact, made headlines this week. The settlement was joined by 19 states and the District of Columbia. The DOJ and the states will essentially split the settlement amount.

The SEC brought cases this week centered on financial fraud, insider trading and misappropriation. The Commission also brought three actions centered on charges that investment advisers improperly registered with the agency.


Remarks: Commissioner Luis Aguiler delivered remarks at the American Retirement Initiative’s Winter 2015 Summit titled Advocating for Investor Saving for Retirement, Washington, D.C. (Feb. 5, 2015). In his remarks the Commissioner discussed target fund and the need for SEC action and municipal securities (here).

Remarks: Rick Fleming, Investor Advocate, delivered remarks to The American Retirement Initiative Winter Summit, titled Protecting Elderly Investors from Financial Exploitation: Questions to Consider, Washington, D.C. (Feb. 5, 2015)(here).


Alert: The Commission issued an alert regarding Cybersecurity (here)

PCAOB: The SEC approved the 2015 PCAOB budget and accounting support fee (here).

Market crisis actions

U.S. v. McGraw-Hill Companies, Inc., Case No. CV 13-00779 (C.D. Cal. Filed Feb. 4, 2013) is the DOJ action based FIRREA. It alleged wire fraud, mail fraud and financial institution fraud regarding a number of federally insured institutions that purchased interests in RMBS and CDOs based on the lofty ratings given the securities by S&P, one of the nation’s premier rating agencies. The complaint detailed an on-going scheme to defraud purchasers of securities rated by S&P in a series of transactions over years. It involved repeated representations that the firm’s credit ratings of RMBS and CDO traunches were objective, independent, uninfluenced by any conflicts that might compromise S&P’s analytic judgment when in fact they were not. The complaint demanded civil money penalties in an unspecified amount and other relief. A number of states joined the DOJ in its suit.

S&P settled, acknowledging conduct associated with its ratings of RMBS and DCOs during 2004 to 2007 in an agreed statement of facts. The firm also agreed to formally retract its allegation that the U.S. filed the lawsuit in retaliation for the decision regarding the credit rating of the United States. In addition, Standard & Poor’s agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia and to respond in good faith to any requests for information or material concerning possible violations of those laws. Under the terms of the settlement half of the sum paid, or $687.5 million, is a penalty that will be paid to the U.S. It is the largest penalty of its type ever paid by a ratings agency. The remaining half of the settlement will be divided among the 19 states and the District of Columbia.

Securities class actions

Cornerstone Research and NERA Economic Consulting issued reports tracking securities class actions. Each report found that the number of filings last year was essentially flat (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 4 civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along-actions.

Misappropriation: SEC v. Total Wealth Management, Inc., Civil Action No. 15-CV-0226 (S.D. Cal. Filed Feb. 5, 2015) is an action against the adviser and its principal, Jacob Cooper. It alleges that the defendants misappropriated at least $150,000 in part to fund a prior settlement with the Commission and in part for other expenses. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The Court entered a temporary freeze order. The case is pending.

Financial fraud: SEC v. Broadwind Energy, Inc., Civil Action No. 1:15-cv-01142 (N.D. Ill. Filed Feb. 5, 2015) is an action against the company, an alternative energy firm, its CEO, J. Cameron Drescoll, and its CFO, Stephanie Kushner. The action centers on two key allegations. First, the firm failed to disclose a $58 million impairment charge prior to a public offering in 2010. As early as 2009 senior management anticipated substantial impairment of its intangible assets and shared the information with the auditors. Nevertheless, it was not disclosed in the offering in which Mr. Drecoll sold over $6.3 million shares. Second, the company did not disclose that it was accelerating revenue recognition at a subsidiary to meet obligations and avoid default on certain debt. This resulted from a deterioration of customer relations. The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 13(a), 13(B)(2)(a) and 13(B)(2)(b). The defendants resolve the matter. The company agreed to pay a penalty of $1 million while Mr. Drecoll will pay disgorgement and prejudgment interest of $543,358 and a penalty of $75,000 and Ms. Kushner will pay disgorgement and prejudgment interest of $23,109 and a penalty of $50,000.

Insider trading: SEC v. Gray, Civil Action No. 15-cv-00551 (N. D. Cal. Filed Feb. 5, 2015) is an action against: John Gray, a one time equity research analyst and representative at Barclays Capital; Christian Keller, a financial analyst first at Applied Materials and later a vice president of IR at Ravi; Kyle Martin, at one time employed at a car dealership; and Aaron Shepard, self employed. For about three years beginning in 2009 Messrs. Gray and Keller lead an insider trading ring The ring traded on information from Mr. Keller’s employer such as a potential acquisition and earnings announcements. Mr. Gray acted as the hub between the two men and was primarily responsible for placing the trades. Disposable telephones were used as part of the efforts to conceal the ring. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The three defendants settled the action. Mr. Gray agreed to pay disgorgement of $287,487.55, prejudgment interest and a penalty of $448,876.02 and will be barred from the securities business and participating in any penny stock offering. Mr. Keller will pay disgorgement of $52,000, prejudgment interest and a penalty of $417,468.73 (total profits from transactions placed through Mr. Martin’s account) and will be bared from serving as an officer or director for 10 years. Mr. Martin will pay disgorgement of $243,276.10, plus prejudgment interest. No penalty was imposed based on his cooperation.

Registration: In the Matter of New Line Capital, LLC, Adm. Proc. File No. 3-16371 (Feb. 4, 2015) is a proceeding against the investment adviser and its owner, David Nagler. Prior to Dodd-Frank the firm registered with the SEC as an investment adviser based on having $25 million in assets under management. After Dodd-Frank it no longer qualified. Rather, the adviser was required to register in the state where it was based, New Mexico. The Act also provided that if the state did not provide for registration, then the adviser had to register with the SEC. Subsequently, New Line claimed it moved to Wyoming, the only state that does not provide for registration. It also claimed its primary office was there. In fact those claims were not true – Mr. Nagler continued to run it from New Mexico. In addition, the adviser overstated its assets under management and failed to keep accurate books and records. The Order alleges violations of Advisers Act Sections 203A, 204(a) and 207. The Respondents settled the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. The firm was also censured. In addition, Respondents will pay a civil penalty of $25,000. See also In the Matter of Arete Ltd., Adm. Proc. File No. 3-16369 (Feb. 4, 2015)(adviser improperly claimed to be based in Wyoming and registered with SEC); In the Matter of Brenda L. Ridley, Adm. Proc. File No. 3-16370 (Feb. 4, 2015)(proceeding against CCO of Arete Ltd.; In the Matter of Wyoming Investment Management Services, LLC, Adm. Proc. File No. 3-16368 (Feb. 4, 2015)(same).

Insider trading: SEC v. Epstein, Civil Action No. 15-cv-0506 (E.D. Pa. Filed February 3, 2015). The case centers on the acquisition of Harleysville Group, Inc., an insurer of small and midsized businesses and individuals in Harleysville, Pennsylvania, by Nationwide Mutual Insurance Company. The deal was announced on September 29, 2011. During the due diligence on the deal in August 2011 Girlfriend, a legal assistant working on the deal, told her live-in Boyfriend of 8 years about the transaction which had been causing her to work nights and weekends. He in turn told his father, defendant Joel Epstein. The two men had a close personal relationship and worked at the Epstein tire store together. Mr. Epstein, an avid stock trader, began purchasing shares. He also told four friends about the deal, instructing each to purchase 1,000 shares. Each did as instructed. After the deal announcement the share price rose, closing up 87% compare to the prior day’s close. Mr. Epstein had trading profits of $113,501. The four tippees had trading profits of $123,511. The complaint alleges violations of Section 10(b). To resolve the action Mr. Epstein consented to the entry of a final judgment of permanent injunction based on the Section cited in the complaint. In addition, he agreed to pay disgorgement of $237,014 which includes the profits of the four individuals he tipped, prejudgment interest and a civil penalty of $237,014. See Lit. Rel. No. 23187 (Feb. 3, 2015).

Financial fraud: In the Matter of AirTouch Communications, Inc., Adm. Proc. File No. 3-16033 (August 22, 2014) is a previously filed action which is now partially settled. The proceeding named as Respondents the firm Hideyuki Kanakubo, its founder and former CEO, and Jerome Kaiser, its former CFO. The scheme involved improper revenue recognition and defrauding an investor as discussed here. The Order alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). AirTouch and Mr. Kanakubo settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, for a period of five years, Mr. Kanakubo is prohibited from serving as an officer or director of any issuer whose shares are registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of that Act. He also agreed to pay a civil money penalty of $50,000 and disgorgement of $15,000 which represents the profits gained on the conduct described, according to the Order. The Order does not provide for the payment of prejudgment interest.


Report: The Board issued a report on the deficiencies in broker-dealer audits under its standards (here).


Alert: The regulator issued a Report on Cybersecurity Practices, Cybersecurity Investor Alert (here).

Hong Kong

Insider trading: A disqualification order was entered against Salina Yu Lai Si, former CEO of Water Oasis Group Limited along with a directive to pay disgorgement of $281,346. She is also disqualified for two years from being an officer or director of a public company. The order is predicated on the fact that Ms. Yu knew at the time she sold shares of Water Oasis to avoid a loss that her firm was about to terminate a major contract with Water Oasis.

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