This Week In Securities Litigation (Week ending July 8, 2016)

Just prior to the July 4th holiday a legend of the federal securities bar passed away. Irving Pollock, or Irv as he was known, was the father of the SEC’s Enforcement Division.

A New Mexico jury handed the Commission a split verdict. In an action based on a market crisis financial fraud the jury found for the defendants on half of the counts. It was unable to reach a verdict on the most significant charges based on fraud and lying to the auditors allegations.

SEC Enforcement – Litigated Actions

Market crisis: A jury found for the defendants on half of the claims brought by the SEC against two senior executives of Thornburg Mortgage, Inc., former CEO Larry Goldstone and CFO Clarence Simmons. The charges centered on a market crisis era scheme in which the Commission alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A, 13(b)(2)(B) and 13(b)(5) as well as control person liability under Section 20(a). SEC v. Goldstone, Case No. 12-257 (D.N.M. Filed March 13, 2012).

The SEC claimed that shortly before the filing of the 2007 Form 10-K on February 28, 2008 the institution was suffering from a liquidity crisis. The cash for the long-term lender came from the short term capital markets through repurchase or repo agreements which could result in margin calls. In the fourth quarter of 2007 the company had about $360 million in margin calls. Those followed the payment of $2 billion in margin calls which had forced the firm to liquidate about $22 billion in mortgage backed securities at an estimated loss of $1.1 billion.

As the company prepared to file the 2007 10-K its financial condition continued to deteriorate. By late February 2008 the company could not meet the more than $300 million in margin calls it had recently received. Late payments could violate loan covenants. That in turn could trigger cross-default clauses with other lenders; questions by the auditors could be sparked resulting in a huge write-off.

Just hours before filing the Form 10-K the company made the final payment on its margin calls. The Form 10-K was approved and certified by defendants Goldstone and Simmons. The filing represented that Thornburg had successfully met its margin calls without being required to sell assets. It also stated that the firm had the ability to hold its ARM securities until they recovered their market value. Within two hours of filing the Form 10-K the company received more margin calls. Eventually the firm defaulted. The jury deadlocked on the key fraud and lying to the auditors counts while finding for the defendants on others.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC did not file any civil injunctive actions or administrative proceeding, excluding 12j and tag-along proceedings.

Criminal cases

Offering fraud: U.S. v. Caspersen, No. 16-cr-0414 (S.D.N.Y.). Andrew Caspersen, a former managing principal of Blackstone Group, and a partner at Park Hill Group which raises capital for private equity, pleaded guilty to one count of securities fraud and one count of wire fraud. The SEC filed a parallel action. SEC v. Caspersen, Civil Action No. 16-cv-2249 (S.D.N.Y. Filed March 29, 2016).

Mr. Caspersen has been a managing principal at his firm, a registered broker dealer, since 2013, according to the facts detailed in papers from each case. Beginning in 2014, and continuing until his arrest in March 2016, Mr. Caspersen solicited investors to invest in what he clamed would be secure loans made to private equity firms. In fact none of the money was invested. Rather, he misappropriated the funds. Much of the investor money was lost trading options while other portions were used to pay earlier investors. In October 2015 Mr. Caspersen also obtained a $25 million investment from a non-profit charitable affiliate of an investment limited partnership, offering a promissory note that paid 15% annual interest on a quarterly basis. It was not. The note was supposedly secured by a well known fund. Later Mr. Caspersen solicited the same investor who became suspicious as did a second investor. Sentencing is scheduled for November 2, 2016.


Whistleblowers: The Federal Financial Supervisory Authority or BaFin, announced the establishment of a reporting platform for whistleblowers, effective July 2, 2016. Persons can use the platform to report violations of supervisory provisions. Anonymity is a top priority of the program.

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