As the insider trading trial of a former Goldman director continued in Manhattan, another insider trading probe moved to the playing field, according to a Reuters report. The probe reportedly focuses on a prominent retired baseball player and other athletes. Other items at the top of the news were a suit against the SEC by a rating agency seeking to remove an administrative proceeding filed against it to Federal Court and a new report from the OECD which details methods for calculating ill-gotten gains in bribery cases in various jurisdictions.

SEC enforcement brought an insider trading case against three corporate executives, a proceeding against Oppenheimer and a market manipulation action. The Manhattan U.S. Attorney’s Office obtained guilty pleas from another former employee of Bernard Maddoff’s defunct operation.

The Commission

Market plan: The Commission approved proposals from the National Exchanges and FINRA addressed to market volatility. Specifically, one initiative is a limit-up limit- down mechanism to prevent trades in individual exchange listed stocks from occurring outside certain parameters. It replaces the current single stock circuit breakers. The second updates existing market-wide circuit breakers (here).

Speech: Craig Lewis, Chief Economist and Director, Division of Risk, Strategy and Financial Innovation, addressed the Risk Minds USA Conference (June 5, 2012). His remarks outlined the work of the Division, its contributions to other Divisions, and the manner in which academic and other research is being used to aid the Commission (here).

Egan-Jones Rating Company v. U.S. Securities and Exchange Commission, Case No. 1:12-cv-00920 (D.D.C. Filed June 6, 20120) is an action by the credit rating firm Egan-Jones Rating Company and its founder and principal Sean Egan against the Commission. The suit claims that the firm and its founder cannot receive a fair hearing in the administrative proceeding instituted against them. This is because the agency is bias against small rating firms as evidenced by the fact that it has ignored the directives of Congress to foster competition in the ratings business, has tried to crush it with administrative process and is impermissibly seeking to retroactively apply the penalty provisions of Dodd-Frank in the administrative proceeding. The complaint seeks the removal of the administrative proceeding to Federal Court as well as an order which declares the delegation of authority to issue a formal order to the staff contrary to law and another specifying that the new Dodd-Frank penalties do not apply retroactively.

SEC Enforcement: Filings and settlements

Statistics: This week the SEC filed 12 civil injunctive actions and 2 administrative proceedings (excluding tag-along and 12(j) actions).

False statements: In the Matter of OppenheimerFunds, Inc., Adm. Proc. File No. 3-14909 (June 6, 2012) is a proceeding against OFI, a registered investment adviser and OppenheimerFunds Distributor, Inc. or OFDI, a wholly owned subsidiary of the adviser and a registered broker dealer. The case centers around two funds. One is the Oppenheimer Champion Income Fund and the other is the Oppenheimer Core Bond Fund. Both are fixed income retail mutual funds managed by OFI. Both invested in commercial mortgage backed securities or CMBS. Both obtained exposure in those markets largely through total return swaps or TRS. When the CMBS market crashed in late 2008 the funds suffered large losses on the TRS and were forced to sell assets. Investors were told however, that the losses were on paper and that as the market recovered so would the funds. Those statements were false. The funds also sold shares without adequately disclosing their exposure to the derivatives market. The Order alleges violations of Section 34(b) of the Investment Company Act of 1940, Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 206(4) of the Investment Advisers Act. Each Respondent consented to the entry of cease and desist orders based on each of the Sections cited in the Order for OFI and the Advisers Act Sections cited in the Order as to OFDI. Both were censured. In addition, they agreed to pay disgorgement of $9,879,706, prejudgment interest and a $24 million penalty.

False statements: In the Matter of David Mark Bunzel, Adm. Proc. File No. 3-14908 (June 6, 2012) is a proceeding against Mr. Bunzel, the sole owner of unregistered investment adviser Irving Management. The adviser is the general partner of the Irving Funds. Mr. Bunzel is alleged to have made false statements to the limited partners about the valuation of a key asset, overcharging his management fee and failing to have a timely annual audit. To resolve the proceeding Mr. Bonzel consented to the entry of a cease and desist order based on Advisers Act Section 206(4). He also agreed to a suspension from the securities business and from participating in any penny stock offering for one year. A fine of $100,000 was imposed.

Market manipulation: The SEC announced the filing of civil fraud charges against eleven individuals and eight companies in nine cases in conjunction with the U.S. Attorney’s Office for the Southern District of Florida. That office brought criminal charges against fifteen individuals in twelve cases. The actions are part of the The Southern District of Florida Securities and Investment Fraud Initiative. The cases brought by the SEC center on a market manipulation and kickback scheme. The market manipulation complaints are based on a scheme in which a broker was paid a bribe to purchase the shares of certain microcap stocks in the open market for his customers’ discretionary accounts. Other complaints detail a scheme involving the payment of undisclosed kickbacks to a pension fund manager in exchange for the fund’s purchase of restricted shares of microcap stocks. The complaints allege violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The cases are in litigation.

Misappropriation: SEC v. Bethke, Civil Action No. 4:12-cv-01638 (S.D. Tex. June 1, 2012) is an action against Mr. Bethke which alleges that from January 2009 through May 2010 he misappropriated share certifications from Bederra Corporation while he controlled the stock transfer agent. He later sold the shares for over $350,000 after forging a purchase agreement and falsifying letters to claim they were freely tradable. Mr. Bethke resolved the action by consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The order also bars him from serving as an officer or director of a public company or participating in any penny stock offering. Disgorgement was ordered but the amount waived based on his financial condition.

Insider trading: SEC v. Mazur, Case No. 2:12-cv-00731 (W.D. Pa. Filed June 1, 2012) is an action against Charles Mazur, Jr., James Poland and Joseph Ceranzia, each of whom was an executive at CONSOL Energy, a producer of coal and natural gas based in Canonsburg, Pennsylvania. CONSOL entered into an agreement to purchase a business segment from Dominion Resources, a power and energy company. Prior to the announcement of the deal, which caused the share price of CONSOL to drop by 10%, each executive traded in the securities of his employer. Mr. Mazur purchased 140 in-the-money CONSOL put options. When the deal was announced he sold the options at a profit of $47,355. Mr. Poland accessed his 401(k) account and sold 2,000 shares of company stock at about $53.85. He avoided a loss of $9,552. Mr. Cerenzia logged into this employee incentive account and exercised two sets of stock options. He immediately sold the shares, avoiding a loss of $5,690. Each defendant settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, Mr. Mazur agreed to pay approximately $97,171, Mr. Poland about $19, 600 and Mr. Cerenzia about $15,453 in disgorgement, prejudgment interest and civil penalties.

Manipulation: SEC v. Dial, Case No. 4:12-CV-01654 (S.D. Tex. Filed June 1, 2012) is an action against James Dial, the former president, CEO and sole director of Grifco International, Inc., Evan Jarvis, a stock promoter and Alex Ellerman, another stock promoter. From December 2004 through November 2006 Messrs. Dial and Jarvis caused Grifco, purportedly an international oil and gas services equipment company, to issue over 13 million shares which were supposedly unrestricted. The defendants then manipulated the market for Grifco shares and sold their securities, netting almost $3.3 million in ill-gotten gains. They also looted the company, misappropriating about $600,000. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Each defendant settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. The orders also bar them from serving as an officer or director and participating in a penny stock offering. In addition, Messrs. Dial, Jarvis and Ellerman are required to pay, respectively, disgorgement and prejudgment interest of $1,600,628, $2,095,524 and $939,650 which will be deemed satisfied by paying the restitution orders in the parallel criminal case, U.S. v. Ellerman, No. H-10-56 (S.D. Tex.). Previously, Messrs. Dial and Jarvis were each sentenced to five years in prison. Mr. Ellerman received a reduced term of 40 months based on his cooperation.

Criminal cases

False filings: U.S. v. Kugel (S.D.N.Y.) is an action against Craig Kugel, a former employee of Bernard I. Madoff Investment Securities LLC or BLMIS from 2001 through December 2008. He pleaded guilty to a five count superseding information charging him with one count of conspiracy as well as a count of making false statements in relation to documents required by the Employee Retirement Income Security Act and subscribing to false U.S. tax returns. Mr. Kubel was responsible at BLMIS for budget forecasting and overseeing the company health care plan and maintaining its internal employee records. Although he was aware that the payroll listed people who received salaries and benefits that did not work at the firm, he maintained the records and submitted annual returns to the Department of Labor which require that the information about employees be accurate. He also charged over $200,000 of personal expenses to a firm credit card which were not reported as income. Mr. Kubel is cooperating with the government.


Testimony: Richard Ketchum, Chairman and CEO testified before the House Committee on Financial Services (June 6, 2012). His testimony focused on the benefits of the SRO model in relation to investment adviser supervision (here).

Misrepresentations: A FINRA hearing panel found Brookstone Securities, its owner and CEO Antony Tuberville and one of its brokers, Christopher Kline liable for fraudulent sales of CMOs to retired and elderly clients from 2005 through 2008. The customers were told that the securities were as safe as government bonds and paid a good rate of interest. The panel fined Brookstone $1 million and ordered it to pay restitution of over $1.6 million to customers. Of that amount $440,600 was imposed jointly and severally with Mr Tuberville and the remaining $1,179,500 was imposed jointly and severally with Mr. Kline. Both men were barred from the securities industry. Brookstone’s former COO, David Locy was suspended for two years and fined $25,000.


The OECD and the World Bank/UNODC Stolen Asset Recover Initiative released a new study on the Identification and Quantification of the Proceeds of Bribery. The report details the main methods used in calculating ill-gotten gains in different legal systems. The report can be accessed through the website of the OECD.

Hong Kong

The Securiteis and Futures Commission revoked the license of Mr. Hong Hui Lung, the former managing director of Mega Capital (Asia) Company Limited to act as a representative and his approval to act as a responsible officer. The firm was the sponsor for the lisitng application of Hontex international Holdings Co. Mr. Hong was one of two responsible officers and principals in charge of supervision. The order concluded that he failed to discharge his dutines and take responsibility as required.

Program: Webcast by Thomas O. Gorman: How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends, presented by Celesq and West Legal Ed, June 14, 2012 from 12 -1:00 p.m. EST. For further information please click here.

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