This Week In Securities Litigation (Week ending Jan. 19, 2017)

The Supreme Court agreed to hear the appeal from the D.C. Circuit of Raymond J. Lucia Companies on the question of whether the Constitution’s Appointments Clause applied to SEC ALJs. While the Court will presumably resolve the split in the circuits on the question, the Commission has already settled the issue by switching its position and agreeing with Petitioner that the clause does apply, and then reappointing its ALJs. What will not be resolved is the question which stated the case along with others – the Commission’s decision to move many of its enforcement actions in-house to administrative proceeds rather than filing in federal court.

Supreme Court

The Court granted the petition for certiorari in Raymond J. Lucia Companies v. SEC, No. 17-130 on Friday, January 12, 2018 . The High Court agreed to hear the case and resolve the split in the circuits over the question of whether SEC ALJs must be appointed in accord with the dictates of the Constitution’s Appointments Clause.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC did not file any civil injunctive cases but did file 2 administrative proceedings, excluding 12j and tag-along proceedings.

Failure to Close out: In the Matter of Industrial and Commercial Bank of China Financial Services LLC, Adm. Proc. File No. 3-18341 (Jan. 18, 2018) is a proceeding which names the registered broker-dealer as a Respondent. The firm is a wholly owned subsidiary of the Industrial and Commercial Bank of China Limited. The proceedings focus on the close out requirements of Regulation SHO for fails to deliver. Specifically, Rule 204 of that Regulation imposes close-out requirements for fails to deliver resulting from sales of equity securities. The rule requires that if a participant of a registered clearing agency has a fails to deliver position at a registered clearing agency the participant must purchase or borrow securities of a like kind and quantity to close-out the fails to deliver position. For short sales the time period is T+4; for long sales and bona fide market making activity the time period is T+6. Rule 204 also permits a broker-dealer to claim pre-fail credit for certain purchases or borrows in advance of the applicable close out deadline. The firm’s Rule 204 procedures included the creation of a list which essentially detailed its obligations. Respondent notified the correspondent broker-dealers who had caused a particular failure to deliver in advance of the applicable deadline to minimize their expense. Those broker dealers often asked Respondent to claim certain credits. In over 4,000 instances between April 2013 and August 2016 Respondent claimed credits against its close out obligation, although the credits did not meet the requirements of Rule 204(e). The firm had institutional knowledge of its failures in this regard from a daily report called the Aged CNS Fails report which list prolonged fails to deliver positions. The Order alleges violations of Rule 204(a) of Regulation SHO. To resolve the matter Respondent consented to the entry of a cease and desist order based on the Rule cited in the Order and to a censure. In addition, the firm agreed to pay a civil penalty of $1.250 million.

Undisclosed principal transactions: In the Matter of John Tarpinian, Adm. Proc. File No. 3-18337 (Jan. 17, 2018). Respondent John Tarpinian was a Managing Director of Newport Coast Securities, Inc. The firm is a registered representative and a registered investment adviser. In return for advice the firm was paid an advisory fee from each client based on the assets under management. Using a brokerage proprietary account the Order calls “Principal Account,” over almost a two year period, beginning in March 2013, Mr. Tarpinian placed about 2,785 trades between the Principal Account and advisory client accounts. In most instances the brokerage arm of the firm collected at least 25 basis points per unit bought or sold. Neither the required written disclosures, nor the written waivers, were made in conjunction with these transactions. Likewise, the required consents from the clients were not obtained. About $50,000 in additional fees was obtained by Respondent from the transactions, according to the Order. The Order alleges violations of Advisers Act Section 206(3). To resolve the matter, Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. Respondent will also pay disgorgement of $50,000, prejudgment interest of $3,652.09 and a penalty of $25,000.


Exam priorities: The regulator released a letter detailing its exam priorities for 2018. Those include high-risk firms and brokers, technology governance, cyber security, sales of complex products to unsophisticated investors, the protection of customer assets and data, best execution and market manipulation across markets (here).

Criminal Cases

Front running: HSBC Holdings plc, a U.K. based global financial services company, entered into a deferred prosecution agreement with the Department of Justice based on its conduct in 2010 and 2011 in trading ahead of two clients in the foreign currency markets. Specifically, in March 2010 and December 2011 the firm traded ahead of its client in multimillion dollar transactions in the Pound Sterling market that directly benefited HSBC by driving up the transaction price. Those actions injured the firm’s client in each instance. In connection with the deferred prosecution agreement the firm will pay a criminal penalty of $63.1 million and disgorgement and restitution to one client of $38.4 million. The other client has settled with HSBC for about $8 million. The firm will also enhance its compliance programs. In connection with the deferred prosecution agreement the DOJ filed a two count information charging fraud. A review of the DPA is being conducted. In resolving the case the firm was not given credit for self-reporting but did receive credit for its cooperation later in the matter and its remedial efforts. Previously, former HSBC executive Mark Johnson, the former head of the firm’s foreign exchange cash trading, was found guilty of one count of conspiracy and eight counts of wire fraud after a four week trial. Sentencing is scheduled for February 15, 2018.

Front running: U.S. v. Bogucki, No. 5:18-cr-00021 (N.D. Cal. Filed Jan. 16, 2018) is an action which charges Robert Bogucki, the former head of Barclays Capital Inc.’s New York foreign exchange trading operation with fraud. Specifically, the charges relate to the manipulation of foreign exchange options and front running in advance of a transaction which required the sale of options valued at 6 billion British pounds in September 2011. The transaction was for firm client Hewlett-Packard Company. The Defendant and others had assured H-P that the confidentiality of the information about the transaction would be maintained. The case is pending.

Insider trading: U.S. v. Fung, No. 3:16-cr-00107 (D.N.J.) is an action in which defendant Jay Fung previously pleaded guilty to a one count information charging conspiracy to commit securities fraud. The underlying facts focused on the acquisition by Pharmasset of Gilead, announced on November 18, 2011. Prior to the deal announcement Mr. Fung purchased shares and options in the target while in possession of inside information about the transaction obtained from a person who worked at a global wealth management firm. Following the deal announcement Mr. Fung sold his securities, yielding trading profits of over $250,000. The Court sentenced him to serve one year and a day in prison followed by three years of supervised release. He has already forfeited $345,245.

FCPA – Anti-Corruption

U.S. v. Lambert, Criminal No. 8:18-cr-00012 (D. Md. Filed January 19, 2018). Defendant Mark Lambert is one of three executives and owners of a transportation company identified in the indictment as Transportation Corporation A. He served as co-president of the firm from January 2010 through September 2016. Identified as a co-conspirator is Daren Condrey, charged separately. Mr. Condrey was also an owner of Transportation Corporation A and served as an executive from August 1998 through October 2014 and as president for a portion of that time period. Co-conspirator One was also an executive at the firm from 1998 through 2009 after which he continued as a consultant until 2011 when he passed away. The charges center on an arrangement with Vadim Mikerin, a Russian national, who was a director of TENAM Corporation, a wholly owned subsidiary of JSC Techsnabexport or TENEX, a firm indirectly owned and controlled by the government of the Russian Federation. TENEX is alleged to have performed functions of the government of the Russian Federation. TENAM, established in October 2010, is the official representative of TENEX in the United States. The subsidiary is owned and controlled by, and performs functions for, the Russian Federation, according to the indictment. Mr. Mikerin, a foreign official, was a resident of Maryland from 2011 through October 2014. The corrupt scheme at the center of the indictment traces to some point in 2009 when Defendant Lambert and Mr. Condrey leaned that their fellow executive, Co-Conspirator One, had entered into a bribe and kickback arrangement with Mr. Mikerin to secure business for Transportation Corporation A. Each corrupt payment was based on an agreement with Mikerin to kickback a percentage of certain contracts that TENEX awarded to Transportation Corporation A. Defendant Lambert and Mr. Condrey agreed to continue the arrangement. To conceal the arrangement a number of steps were taken. The payments were wired to shell companies in Latvia, Cyprus and Switzerland. Mr. Lambert was indicted on one count of conspiracy, seven counts of violating the FCPA, two counts of wire fraud, and one count of money laundering. The case is pending.

U.K. – SFO: The Serious Frauds Office confirmed that it has opened a criminal investigation into briber, corruption and money laundering by Chemring Group plc and its subsidiary which self-reported the matter. Chemring is a UK based defense technology firm whose shares are traded on the London Stock Exchange. The investigation related to two contracts, one in 2010 before the firm owned the business and a second in 2011 when it did own the business.

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