This Week In Securities Litigation (Week ending June 28, 2013)
The CFTC took center stage this week, bringing an aggressive enforcement action against former New Jersey governor and Goldman Sachs partner Jon Corzine and his collapsed firm, MF Global. In a settlement with the firm the agency secured and agreement to obtain as much as $1 billion in restitution and a $100 million fine.
The Chairman of the CFTC and the Chair of the SEC testified before Congress this week, seeking to justify the significant budget increases requested for their respective agencies in the President’ budget for the next fiscal year. In addition, SEC enforcement brought a fraud action against a medical device manufacturer for misstatements regarding the FDA approval process for a key product, another offering fraud action and a proceeding against a former Stanford Group employee tied to the sale of funds.
SEC
Testimony: SEC Chair Mary Jo White testified before the Senate Subcommittee on Financial Services and General Government (June 25, 2013). Her testimony focused on the reasons for requesting a budget of $1.674 million for the next fiscal year (here).
CFTC
Testimony: Chairman Gary Gensler testified before the Senate Appropriations Subcommittee on Financial Services and General Government (June 25, 2013). His testimony focused on the rationale for the President’s requested budget of $315 million compared to the current $195 million for the next fiscal year (here).
Remarks: Commissioner Mark P. Wetjen, addressed the Futures Industry Association and Futures & Options Association International Derivatives Expo (June 25, 2013). His remarks focused on cross-border guidance (here).
Remarks: Commissioner Bart Chilton addressed the Trading Show Chicago 2013, Chicago, Illinois (June 24, 2013). His remarks focused on the proposed PORTECT Act, high speed trading and proposals about wash blockers (here).
Remarks: Commissioner Bart Chilton delivered remarks to the Global Grain Chicago Conference, entitled “Future Boy” in Chicago, Ill. (June 21, 2013). His remarks focused on implementing the remaining Dodd-Frank rules (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 2 civil injunctive action and 1 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Misrepresentations: SEC v. Imaging3, Inc., Case No. CV 13-4616 (C.D. Cal. Filed June 25, 2013) is an action against the medical device manufacturer and its founder, Dean Norman Janes. A key product for the company is a Dominion Scanner. Based on proprietary technology, and under development for years, it is supposed to produce 3D medical diagnostic images in real time. To market its Dominion Scanner, Imaging3 needs FDA approval. Although the company applied for approval three times beginning in 2007, it was never obtained. In its last denial letter the FDA cited safety concerns and issues with image quality, among other reasons. Nevertheless, on November 1, 2010 Mr. Janes held a news conference at which he told investors that the company would again apply for clearance by the FDA. He also stated that the prior denials were not based on safety concerns or the quality of the images. The Commission’s complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22733 (June 26, 2013).
Offering fraud: SEC v. Hurd, Civil Action No. 13-cv-04464 (C.D. Cal. June 20, 2013). The case centers on the sale of interests in defendant Your Best Memories International, Inc., beginning in 2010 and continuing through the fall of 2012. Your Best Memories, formed by defendant Robert Hurd, was supposed to raise money for the promotion of memory improvement products created by another entity, Moving Pictures, Inc. Investors were told that most of their investment would go toward those products. In fact it did not. Investors were also falsely told that one of the Moving Pictures products had FDA approval. Over the approximately two years shares of Your Best Memories were sold, about $1.2 million was raised from 50 investors in 18 states. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 20(a). The case is in litigation. See also Lit. Rel. No. 22732 (June 21, 2013).
In the Matter of Jason A. D’Amato, Adm. Proc. File No. 3-15004 (June 21, 2013). Mr. D’Amato held various positions with the Stanford Group Companies and Stanford Capital Management, LLC over a period of years. Those included President of that company and senior investment officer. The Order alleges that beginning in 2000 SGC offered a mutual fund allocation program known as Mutual Fund Partners. In 2003 Mr. D’Amato was retained as an assistant analyst to track and calculate the performance of the strategies used and to create pitch-books for the SGC financial advisers to use in presentations. The results presented to investors consistently outperformed the S&P 500. Financial advisers, however, complained that clients could not achieve anything close to those results. The pitch books were deficient in several respects, according to the Order, including: The records to support the claimed results could not be located; certain data in them was labeled in a misleading fashion; and unaudited data was presented next to audited data. Mr. D’Amato also misrepresented his credentials, according to the Order. Mr. D’Amato resolved the proceeding, consenting to the entry of a cease and desist order based on Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 207. He also agreed to be barred from the securities business and from participating in any penny stock offering, with a right to apply for reentry after five years, and to pay a civil penalty of $50,000.
CFTC Enforcement
Misuse of customer funds: CFTC v. MF Global Inc. (S.D.N.Y. Filed June 27, 2013) is an action against the futures commission merchant, MF Global Holdings Ltd., Jon S. Corzine, former CFO, and Edith O’Brien, former treasurer. The complaint alleges misuse of customer funds, failing to notify the CFTC of deficiencies in customer accounts and filing false reports with the agency. Mr. Corzine is charged with the firm’s violations as a control person and Ms. O’Brien with aiding and abetting the misuse of customer funds. The complaint centers on claims that customer funds, which are required to be segregated, were misused by the firm as it was collapsing in the fall of 2011. Specifically, during that period MF Global was on the brink of collapse from large proprietary trading positions directed by its CEO. At the time the firm not only had deficient internal systems but it ultimately violated its own procedures in utilizing segregated customer funds to meet its obligations. The firm settled, agreeing to make full restitution which is approximately $1 billion, and to pay a $100 million fine. The complaint requests injunctions, restitution, penalties, and registration and trading bans as to the individual defendants. The individual defendants are litigating the case.
Criminal cases
Investment fund fraud: U.S. v. Berkman, No. 13-mg-00732 (S.D.N.Y.) is an action against Craig Berkman, a one-time aspiring political figure. Over a period of about two years beginning in 2010 Mr. Berkman raised an estimated $13.2 million from over 120 investors for three fraudulent investment scheme. Essentially the schemes either promised access to pre-IPO shares of stocks like Facebook or those of select start-ups. The claims were false. In fact Mr. Berkman misappropriated much of the money raised from investors. Mr. Berkman pleaded guilty this week to one count of securities fraud and one count of wire fraud. He is scheduled for sentencing on October 1, 2013. The SEC has a parallel action pending. In the Matter of Craig Berkman, Adm. Proc. File No. 3-13249 (Filed March 19, 2013).
Investment fund fraud: U.S. v. Mattera, 1:12-cr-00127 (S.D.N.Y.) is an action against Florida businessman John Mattera. This week he was sentenced to serve 11 years in prison. Previously he pleaded guilty to securities and wire fraud charges. From 2010 through 2011 Mr. Matteria served as Chairman of the Advisory Board of Praetoria Global Fund Ltd., a mutual fund. In that capacity he was responsible for the investment decisions. Beginning in the late summer of 2010 Mr. Mattera and others offered investors the opportunity to purchase shares in special purpose entities related to the Praetorian which supposedly owned pre-IPO shares of companies such as Facebook and Groupon. Based on those representations about $11 million was raised. Investors were assured that their funds would be held in escrow until after the IPOs. In fact the representations were false. Most of the investor money was transferred to other entities with which Mr. Mattera was associated. About $4 million was spent by Mr. Mattera for personal items. The SEC has a parallel case pending. SEC v. Mattera, Civil Action No. 11-cv-8323 (S.D.N.Y. Filed Nov. 18, 2011).
Financial fraud: U.S. v. Skilling (N.D. Tx.) is the long running case against former Enron CEO Jeffrey Skilling. Last week Mr. Skilling was resentenced to 168 months in prison, substantially reducing his sentence. He was also ordered to forfeit $42 million. Following his conviction for one count of conspiracy, 12 counts of securities fraud and one count of insider trading, Mr. Skilling was sentenced to serve 292 months in prison on October 23, 2006. The Fifth Circuit Court of Appeals concluded the sentence had been improperly enhanced and remanded for resentencing. Subsequently, Mr. Skilling and the government entered into the arrangement reflected in the resentencing which effectively reduced the term of imprisonment by about nine years. This resolution brings the long running case to a conclusion and permits the money to be distributed to victims of the fraud.
FINRA
Improper markups/downs: State Trust Investments, Inc., and its head trader Jose Luis Turnes, were sanctioned by the regulator for improper markups and markdowns in bond transactions. Specifically, the firm was fined $1,045 million and ordered to pay restitution of $353,000 plus interest to its customers who received unfair prices. Mr. Turnes was suspended for six months and fined $75,000. FINRA concluded that the firm charged excessive markups or markdowns to customers in a total of 563 transactions. Previously, the regulator suspended Jeffrey Cimbal, the firm’s CCO, for five months in a principal capacity for failing to supervise Mr. Turnes and fined him $20,000.
Court of appeals
Insider trading: U.S. v. Rajaratnam, Docket No. 11-4416-cr (2nd Cir. Decided: June 24, 2013) is the appeal of Galleon Fund founder Raji Rajaratnam of his conviction on conspiracy and insider trading charges for which he is serving an eleven year prison term. The focus of Mr. Rajaratnam’s appeal was his challenge to the district court’s conclusion that the wire tap evidence was admissible.
Mr. Rajaratnam moved to suppress the wiretap evidence on which the charges against him were centered, claiming that the government made misstatements and omissions regarding the reliability of informant Roomy Khan and that the evidence regarding the need for a warrant in the application had serious omissions. The district court rejected these claims and admitted the wiretap evidence.
The Second Circuit affirmed. Under Franks v. Delaware, 438 U.S. 154 (1978)suppression is only warranted if it is demonstrated that the inaccuracies or omission in the affidavit offered when requesting the warrant are the result of the affiant’s deliberate falsehood or reckless disregard for the truth and the alleged falsehoods or omissions were necessary to the probable cause or necessity decision, according to the Court. Here, even assuming that this standard was met with regard to Ms. Kahn’s background which omitted her prior conviction and the two paraphrased statements of conversations with Mr. Rajaratnam were inaccurate, the errors were not material to the district court’s determination and analysis on the probable cause issue. Likewise the omission of evidence about the SEC investigation on the issue of whether a wiretap was needed does not meet the required standard. In fact that the evidence actually supported the application for a warrant because it demonstrated that Mr. Rajaratnam carefully limited his exchanges to phone calls thus necessitating the wiretaps.
Finally, the Court rejected Mr. Rajaratnam’s claim that the jury instructions were erroneous. Those instructions specified in part that the jury had to find that the material non-public information given to Mr. Rajartanam “was a factor, however small” in his decision to buy or sell the stock. The claim that this permitted the jury to convict him without finding the necessary causal connection between the inside information and the trades executed is incorrect the Court found. Indeed, the jury is only required to find that the defendant purchased or sold the securities while knowingly in possession of material non-pubic information.
SFO
Financial fraud: The U.K. Serious Frauds Office secured the conviction of Mark Woodbridge, an executive at Torex Retail plc, a company involved in the rental of software. The charges centered on an alleged financial fraud at the company which is now in administration. A jury returned a verdict of guilty as to Mr. Woodbridge but acquitted a co-defendant. Previously a jury acquitted another defendant but was unable to reach a verdict as to another. Two other defendants have been sentenced to prison in connection with the collapse of the company.
SFC
Annual report: The Securities and Futures Commission published its 2012-2013 annual report, themed Regulation for Quality Markets (here).
ASIC
Investment fraud: The Australian Securities and Investment Commission announced that Carlo Cini, formerly a director of C Cini & Company Pty Ltd. which is now in liquidation, has been charged with obtaining property by deception, fraudulently inducing persons to invest money, obtaining financial advantage by deception and dishonestly using his position as a director. The charges are based on allegations that Mr. Cini raised over $1 million from investors for property development in 2007 and 2008 and then diverted the funds to other purposes. During that period he also issued valueless checks to investors and abused his position as a corporate director.