This Week In Securities Litigation (Week ending June 14, 2013)

The Commission filed a settled action alleging fraud in connection with a going private transaction based on Exchange Act Section 13(e). The agency also brought its first action penalizing an exchange for regulatory filings this week.

The SEC also added a managing director of a New York brokerage firm as a defendant in its case centered on bribes paid to an official of an Argentine bank. The Manhattan U.S. Attorney’s Office filed parallel criminal charges against the same person. In addition, the Commission filed another action against an investment adviser, this time centered on the theft of assets, and three new insider trading cases. One insider trading case involved tipping by a corporate executive; another tipping by the brother-in-law of a corporate director; and a third grew out of the expert network investigation.

Finally, the Commission lost another case in the D.C. Circuit. The Court remanded a FINRA panel decision, affirmed by the Commission, for failing to consider mitigating evidence before imposing a life-time industry bar. In the district courts the agency lost a statute of limitations ruling in the wake of Gabelli in an insider trading case. It did, however, prevail on a summary judgment motion centered on Morrison issues in its high profile market crisis action against a former Goldman Sachs employee.


Alert: The SEC, in conjunction with FINRA, issued an investor alert regarding pump-and-dump stock spam titled “Inbox Alert-Don’t Trade on Pump-And-Dump Stock E-mails.”


Remarks: Commissioner Bart Chilton delivered remarks titled “Cinema of Uncertainty” before the Institute of International Bankers, New York City (June 13, 2013). His remarks focused on the need for balance in regulation, the Volker Rule and the implementation of the cross-border rules (here).

Remarks: Commissioner Scott D. O’Malia delivered remarks titled “Taking the Time to Get it Right: the Cross-Boarder Regulatory Framework,” before the OpRisk Europe Conference, London, England (June 12, 2013). His remarks focused on the need for more time regarding the cross-border rules, the new SEF rules and the use of data (here).

Remarks: Chairman Gary Gensler delivered remarks at the Sandler O’Neill Conference, titled “Cross-border Application of Swaps Market Reform,”(June 6, 2013). His remarks focused on key aspects of market reform including transparency, clearing and oversight (here).

SEC Enforcement: Recent rulings

Statute of limitations: SEC v. Wyly, 10 Civ. 5760 (S.D.N.Y. Opinion June 6, 2013) is an insider trading case against Samuel Wyly and others centered on a scheme that is alleged to have occurred from 1992 through at least 2004. As part of the scheme Mr. Wyly and others concealed their ownership and trading activity in four companies where they had board membership and then engaged in insider trading. The Court granted a defense motion for summary judgment based on Gabelli v. SEC, 133 S.Ct. 1216 (2013). The court concluded that to the extent the transactions took place beyond the five year statute of limitations for obtaining a penalty in government actions, the Commission could not seek a monetary penalty. The court rejected the SEC’s claim that the running of the statute was halted by the doctrine of fraudulent concealment. In making that argument the “SEC fails to draw a meaningful distinction between acts of perpetration and acts of concealment . . .” Rather, the SEC relied on the very evidence used as the predicate for the fraud alleged in the complaint. The Court left open the “possibility that acts which go ‘beyond the [fraud]’ but are not directly analogous to ‘promising not to plead the statute of limitations,’ might form the basis for fraudulent concealment in an SEC enforcement action . . . “

Extraterritorial application:SEC v. Fabrice Tourre, 10 Civ 3229 (S.D.N.Y. Ruling June 4, 2013) is an action based on the settled Commission market crisis case against Goldman Sachs & Co. Defendant Fabrice Tourre is the only Goldman employee charged in connection with the action. The case centers on the sale of interests in a synthetic collateralized debt obligation by the firm. The CDO had been created at the behest of hedge fund Paulson & Co., Inc. which helped select the collateral and later shorted it. Interests in the CDO were sold to IKB Deutsche Industriebank AG and ABN AMRO Bank N.V. and unspecified domestic concerns. IKB and ABN are foreign purchasers. Mr. Fabrice’s motion for summary judgment, based on Morrison v. National Australia Bank, Ltd., 130 S.Ct. 2869 (2010), argued that the Commission’s claims under Securities Act Section 17(a) and Exchange Act Section 10(b) were barred. The Court rejected the claims. The defense motion focused on the fact that unlike Section 10(b), Section 17(a) includes an offer. That offer, when the sale is consummated, must be within the U.S. under Morrison, according to the motion. The Court rejected this theory as contrary to the statutory language. Rather, if the person making the offer is in the U. S. it is sufficient. Here there is evidence demonstrating that Mr. Tourre was primarily responsible for the fraudulent offering materials and that he participated in the marketing. The Court also granted the SEC’s cross motion, finding that there was sufficient evidence on the interstate commerce element for Section 17(a) and the domestic element of its Section 10(b) and 17(a) claims. There is no doubt that the mechanisms of interstate commerce were used the court stated. Likewise, the trade confirmations demonstrate that the transactions were concluded in the U.S.

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 4 civil injunctive action and 2 administrative proceedings (excluding follow-on actions and 12(j) proceedings).

Disclosure/fraud: In the Matter of Revlon, Inc., Adm. Proc. File No. 3-15356 (June 13, 2013) is an action involving a going private transaction which closed on October 9, 2009. On that date 46% of the shares of Revlon Class A common stock not beneficially owned by MacAndrews & Forbes Holdings Inc., which owned about 58% of the class, was tendered in the transaction. Prior to the closing of the deal the trustee of Revlon’s 401(k) plan, which held a substantial block of stock, determined that it could only allow 401(k) members to tender their shares in an exchange offer designed to reduce the debt owed to MacAndrews & Forbes if an independent third party financial adviser determined that the offer provided for “adequate consideration.” The advisor retained determined that in fact the offer did not provide such consideration. In tendering their securities, shareholders were not informed about this opinion because the company engaged in what was called “ring fending” — essentially a series of steps taken to fence off the independent directors from the opinion and preclude disclosure. With the board’s processes compromised, shareholders were told that the “Board of Directors approved the Exchange Offer and related transactions based upon the totality of the information presented . . .” The Order alleges violations of Exchange Act Section 13(e), which governs going private transactions, and the related rules. To resolve the proceeding, the company consented to the entry of a cease and desist order based on Exchange Act Section 13(e). It also agreed to pay a civil money penalty of $850,000.

Insider trading: SEC v. Shah, Civil Action No. 12-CV-4030 (S.D.N.Y.) is a previously filed action against Reema Shah and Robert Kwok. The complaint alleged two insider trading schemes. In one Reema Shah, a former mutual fund and hedge fund portfolio manager, tipped Mr. Kwok, formerly a senior director at Yahoo! Inc., regarding the then upcoming acquisition of Moldflow by Autodesk, Inc. Mr. Kwok traded and realized profits. Later Mr. Kwok tipped Ms. Shah about the then upcoming announcement of an internet search engine partnership agreement between Yahoo and Microsoft Corporation. Ms. Shaw caused certain mutual funds and hedge funds to purchase shares of Yahoo. The court entered a final judgment against Mr. Kwok. He had consented to the entry of a permanent injunction and the entry of an order barring him from serving as an officer or director of a public company. He also agreed to pay disgorgement of $4,750 plus interest and a civil penalty equal to the amount of the disgorgement. In the parallel criminal case Mr. Kwok pleaded guilty to conspiracy to commit securities fraud. He was sentenced to serve two years probation and ordered to forfeit $4,754 and to pay a fine of $1,000. See also Lit. Rel. No. 22726 (June 12, 2013).

Insider trading: SEC v. Jacobs, Civil Action No. 1:13-cv-1289 (N.D. Ohio Filed June 11, 2013) is an action against Andrew Jacobs and his brother Leslie Jacobs. The case centers on the tender offer by Sanofi-Aventis, a French pharmaceutical company, for Chattem, Inc., announced on December 21, 2009. Prior to the announcement Andrew Jacobs learned about the tender offer in a confidential conversation with his brother-in-law, a Chattem executive. He then tipped his brother who traded and, after the announcement, had profits of $49,457.21. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. This is the eighth action brought by the Commission centered on this transaction. See also Lit. Rel. No. 22723 (June 11, 2012).

Regulatory failures: In the Matter of Chicago Board Options Exchange, Inc., Adm. Proc. File No. 3-15353 (June 11, 2013). Here the CBOE became the first exchange to be fined for regulatory failures. The proceeding centers on three key issues. First, the CBOE failed to adequately enforce the federal securities laws and its own regulations. While the exchange developed a surveillance program to identify possible violations of Regulation SHO which flagged exceptions, it consistently failed to follow-up and closed investigations despite evidence of possible violations. In this regard the exchange staff was inadequately trained. Second, the exchange interfered with a Commission enforcement investigation. During the course of a Commission investigation into possible violations of Regulation SHO, the CBOE staff advocated for the member and assisted in preparing an inaccurate Wells submission. Finally, the exchange, along with C2 Options Exchange, Inc., failed to propose rule changes until after it implemented certain trading functions. Following the commencement of the SEC’s investigation the CBOE and C2 undertook a series of remedial efforts and initiatives which the Commission considered in resolving this action. The proceeding was resolved with the CBOE consenting to the entry of a cease and desist order based on the Sections cited in the Order. C2 consented to the entry of an order based on Exchange Act Section 19(b)(1). The CBOE also agreed to pay a civil penalty of $6 million and is continuing to implement a series of undertakings.

Insider trading: SEC v. Cutillo, Civil Action No. 09-CV-9209 (S.D.N.Y.) is a previously filed action against, among others, Emanuel Goffer, a former proprietary trader at broker dealer Spectrum Trading, LLC. Mr. Goffer’s brother, Zvi, is alleged to have orchestrated an insider trading ring involving attorneys formerly with the law firm of Ropes and Gray. Those attorneys furnished inside information on take-over transactions to Zvi who in turn passed it to his brother and others. Emanuel Goffer traded on the information resulting in illicit profits of $1.3 million. To settle the action the defendant consented to the entry of a final judgment of permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to pay disgorgement and prejudgment interest. The disgorgement will be off-set in part by a forfeiture order in the related criminal case. The remainder was waived in view of his financial condition. In a related administrative proceeding Mr. Goffer was barred from the securities business and from participating in any penny stock offering. In the related criminal case Mr. Goffer was convicted and sentenced to three years in prison. See also Lit. Rel. No. 22721 (June 11, 2013).

Misappropriation: SEC v Mayfieldgentry Realty Advisors, LLC, Civil Action No. 13-cv-12520 (E.D. Mich. Filed June 10, 2013). The Commission charged the investment adviser and its principals and owners, Chauncey Mayfield, Blair Ackman, Marsha Bass, W. Emery Mathews and Alicia Diaz. The adviser has long managed real estate for the fund and controls one of its bank accounts. In January 2007 MGRA agreed to purchase select shopping center properties for $4.3 million. The adviser secured a bank loan for about $4.3 million of the purchase price. At year end with only $200,000 in cash the firm could not fund the balance of the purchase. Accordingly, in January 2008 Mr. Mayfield directed his CFO to send two wires totaling $3.1 million from the fund’s account. Subsequently, reports were periodically furnished to the fund which highlighted in part the performance of the managed properties but never mentioned the money taken to pay for the shopping centers. The defendants had agreed to return the money but without informing the client. Just prior to the filing of another Commission action against the adviser, the firm finally informed the fund. The SEC complaint alleges violations of Advisers Act Sections 206(1) and (2). Mr. Mayfield and the firm settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, they agreed to pay disgorgement of $3,076,365.88. The remaining defendants are litigating the case. See also Lit. Rel. No. 22720 (June 10, 2013).

Insider trading: SEC v. Dosti, Civil Action No. 13-cv-3897 (S.D.N.Y. Filed June 7, 2013) is the latest insider trading case stemming from the expert network inquiry. Here fund manager Victor Dosti, employed at defendant Whittier Trust Company, obtained inside information regarding the shares of Dell, Inc., NVIDIA Corporation and Wind River Systems, Inc. from his colleague, Danny Kuo. Specifically, in 2008 Mr. Kuno, as a member of a group that shared such information, obtained inside information regarding the earnings announcements of Dell. In 2009 and 2010 Mr. Kuo obtained inside information regarding the earnings of NVIDIA from Hyung Lin who obtained it from a friend at the company. Likewise, in 2009 Mr. Kuo obtained advanced information about the acquisition of Wind River by Intel from a friend at the company. In each instance Mr. Dosti caused the fund to trade, garnering profits and avoiding losses of over $724,000. The defendants settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, Whittier agreed to pay disgorgement of $724,051.62 along with prejudgment interest and a penalty equal to the amount of the disgorgement. Mr. Dosti agreed to pay disgorgement of $77,900 along with prejudgment interest and a penalty equal to the amount of the disgorgement. The SEC acknowledged the cooperation of Whittier in the investigation.

Insider trading: SEC v. Tomlinson, Civil Action No. CV 13-1549 (N.D. Cal. Filed June 7, 213) is an action against Bruce Tomlinson, former vice president of finance at Intermune, Inc. The case centers on the potential approval by the European Medicines Agency of an application by the company which was submitted in March 2010. By mid-November 2010 Mr. Tomlinson learned that the process was proceeding much more rapidly than had been expected. He e-mailed his friend Michael Sarkesian about this, noting that it had significant implications for the company. Mr. Sarkesian bought 400 out-of-the-money call options prior to the announcement by the Committee for Medicinal Products for Human Use of the European Medicines Agency on December 17, 2010. Following the announcement he had profits of $616,000. To resolve the case Mr. Tomlinson consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and the entry of an order barring him from serving as a director or officer of a public company for five years. He also agreed to pay a civil penalty of $616,000. In a separate administrative proceeding he will be suspended under Rule 102(e)(3) from appearing or practicing before the Commission as an accountant with a right to apply for reinstatement after five years. See also Lit. Rel. No. 22717 (June 7, 2013).

Related party transactions: SEC v. China Natural Gas, Inc., Civil Action No. 12-cv-3824 (S.D.N.Y.) is a previously filed action against the company, and its chairman Qinan Ji. The case centered on an undisclosed $14.3 million loan Mr. Ji authorized without board approval to a real estate company owned by his son and nephew and about which he repeatedly lied to the auditors. To resolve the case the company consented to the entry of a permanent injunction prohibiting future violations Securities Act Sections 17(a)(2) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). The company also agreed to pay a penalty of $815,000. Mr. Ji consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 15(a) and Section 304 of Sarbanes-Oxley. He also agreed to be barred from serving as a director or officer of a public company for 10 years and to pay a penalty of $100,000. See also Lit. Rel. No. 22719 (June 7, 2013).


Investor alert: The regulator issued an investor alert titled “Alternative Funds Are Not Your Typical Mutual Funds.” The Alert cautions investors that “alt” mutual funds hold more non-traditional investments and employ complex trading strategies in comparison to more traditional funds.

Criminal cases

Bribes: U.S. v. Lujan (S.D.N.Y.) is a case in which Ernesto Lujan, a managing partner of a U.S. broker dealer, has been charged in a bribery scheme involving an official at Venezuela’s state economic development bank, Banco de Desarrollo Economico y Social de Venezuela or BANDES. Mr. Lujan was charged with one count of conspiracy to violate the FCPA, violating the FCPA, conspiracy to violate the Travel Act and violating the Travel Act. The charges are based on the same scheme alleged by the SEC in its previously filed action, SEC v. Clarke, Civil Action No. 13 CV 3070 (S.D.N.Y. Filed May 7, 2013). The SEC also amended its complaint to add Mr. Lujan as a defendant.

Court of appeals

Sanctions: Saad v. Securities and Exchange Commission, No. 10-1195 (D.C. Cir. Decided June 11, 2013) is an action based on the largely undisputed fact that John Saad submitted several false expense claims to his employer and later tried to conceal the wrongful conduct. Mr. Saad had been employed by Penn Mutual and registered with its broker-dealer affiliate, HTK, a FINRA member. In July 2006 after a business trip was canceled he submitted false expense reports seeking reimbursement as if he had traveled. When the company discovered this he was terminated. Later FINRA investigated and Mr. Saad attempted to cover-up the falsification, misleading investigators several times. A FINRA hearing panel found against him and imposed a life time bar from the industry that was affirmed by the NAC and the Commission.

The propriety of the life time bar was a critical issue before the Circuit Court. The Court began by noting that it does not second guess the Commission on sanctions. At the same time the Court stressed, the “Commission must be particularly careful to address potentially mitigating factors before it affirms an order . . . barring an individual . . . ” Under the applicable statute, the SEC can affirm the bar not as a penalty but as a means of protecting investors. In doing so, however, the agency must explain its reasons. In this case the decision of the Commission, as well as that of the FINRA Hearing Panel and the NAC, ignores potential mitigating factors asserted by Mr. Saad and supported by the record. Here Mr. Saad established that he had been terminated by his employer prior to any action by FINRA, a point that was not considered. Yet under FINRA Sanction Guidelines this factor must be considered. Similarly, the SEC’s decision referenced, but did not address, Mr. Saad’s contention that he was under severe stress at the time of the incident. While this factor is not specifically mentioned in the FINRA Sanction Guidelines, those are only illustrative and not exhaustive. This factor should have been considered. “Because the SEC failed to address potentially mitigating factors with support in the record, it abused its discretion . . . “ Accordingly, the Court remanded the case for further proceedings.


The U.K. regulator fined Xcap Securities PLC ₤120,900 for failing to adequately protect client assets. Specifically, from the end of June 2010 through August 2011 the firm failed to properly segregate client funds from its own, did not maintain accurate records and account for client assets and did not accurately reconcile client accounts.


The Securities and Futures Commission of Hong Kong fined Credit Suisse Securities (Hong Kong) Limited $1.6 million for regulatory breaches. Specifically, in October and December 2011 the firm exceeded the position limits for open positions in Industrial and Commercial Bank of China Limited stock. Although the firm had procedures in place they did not generate warning reports for the SFC’s position limits. Traders thus had to rely on their memory. Here the lapses occurred because the trader did not correctly remember the firm’s position.


The German Federal Financial Supervisory Authority announced that it had obtained a conviction for market manipulation against a business man. The defendant was sentenced to serve five years and three months in prison and ordered to pay a fine of €3.5 million as restitution to injured parties. The case centered on a capital increase. Specifically, the defendant furnished falsified bank confirmations to a registration court causing it to reflect a false capital increase – one had not occurred. The defendant then implemented share transactions, selling securities at a price that did not reflect the reality of the company.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to Webcast nationally by the ABA and available in other Dorsey & Whitney offices. For further information please click here.

Tagged with: , , , , , ,