The Commission won a significant victory this week in the Second Circuit Court of Appeals in its Citigroup litigation. While technically the Court only granted a stay of the proceedings in the district court, the panel’s evaluation of the probability of success on the merits and the overall tone of the opinion clearly reflected the SEC’s position that the District Court overstepped its limited role in the settlement process.

The SEC also brought its first cases arising out of its year long investigation into the pre-IPO market and another market crisis case. The DOJ continued to focus on FCPA enforcement, resolving another inquiry with a deferred prosecution agreement. The CFTC stepped up enforcement, filing a settled action against a Goldman Sachs unit while the FSA announced the resolution of a significant market crisis case.

Finally, Cornerstone Research released its report on securities class actions. It shows a significant drop in settlements last year but suggests that there may be an increase in the future of class actions with a parallel SEC enforcement component.

The Commission

Speech: Chairman Mary Schapiro addressed the Society of American Business Editors and Writers Annual Convention, Indianapolis, Indiana (March 15, 2012). The Chairman’s comments included remarks on SEC reform, the state of Dodd-Frank rules, a critique of pending legislation regarding the wall between analysts and underwriters, initiatives regarding money market funds, the status of rules on derivatives and the flash crash (here).

Speech: Meredith Cross, Director, Division of Corporate Finance, addressed the Eleventh Annual Institute on Securities Regulation in Europe, London, England (March 8, 2012). The topics include rule making under Dodd-Frank, capital formation initiatives, the regulation of disclosure by foreign private issuers and the disclosure review program (here).

Securities class actions

Last year the number of court approved settlements in securities class actions dropped to 65, down by about 25% from 2010 and about 35% below the average over the prior 10 years. The total value of the settlements declined by 58% to $1.4 billion in 2011 from $3.2 billion in 2010, according to a report by Cornerstone Research. The average settlement in 2011 of $21 million was also far below the average for 2010 which was $55.2 million. The decline in value is due in part to the fact that there was no single settlement exceeding $1 billion, the Report notes.

Cases that involve SEC actions typically have significantly higher settlements, according to Cornerstone. Last year, however, the percentage of settled cases that involved the remedy of a corresponding SEC action prior to the settlement of the class case were less than 10% compared to 30% in the prior year. This decline occurred despite reports by the SEC that it filed a record number of enforcement actions in the last fiscal year. Accordingly, Cornerstone notes that “we would expect the percentage of class action settlement with corresponding SEC actions to increase in the next few years as these cases are resolved.”

The Citigroup appeal

The Second Circuit Court of Appeals granted the SEC’s request for a stay of its enforcement action against Citigroup Global Markets Inc. and held that it properly had jurisdiction of the matter. SEC v. Citigroup Global Markets, Inc., Docket Nos. 11-5227-cv (Decided March 15, 2012). The action stems from the refusal of the district court to execute a proposed settlement of the Commission’s market crisis enforcement action against Citigroup (here). Following that determination, the district court directed that the action proceed to trial. The SEC filed a direct appeal and, as an alternative measure, a writ of mandamus. In the Second Circuit the Commission, joined by Citi, requested a stay of the underlying enforcement action pending appeal.

The motion panel concluded that the Court has jurisdiction. While it expressed some doubt regarding the merits of a direct appeal, the Court concluded that it has jurisdiction under the writ.

In evaluating the traditional multi-prong test for granting a stay, the Court began by noting that the appeal raises important questions regarding the role of the district court and an administrative agency in the settlement process. Central to the ruling is the panel’s conclusion that the SEC has a likelihood of success on the merits. In evaluating this prong of the stay test the Court noted that an agency such as the SEC is entitled to deference in evaluating the public interest and a settlement. Despite the fact that the district court stated it gave the agency deference, in fact it appears that it did not. Indeed, the panel appeared to view the district court’s ruling as little more than impermissible second guessing of the agency. Accordingly, the panel concluded that there was a probability of success on the merits. In reaching this conclusion the Court made it clear that while the district court has a role in the settlement process, it is limited and not of the scope taken by the district court here.

The Court cautioned that its decision was being made without having the benefit of briefing from an opposing side and that it is not binding on the merits panel. The panel also directed that counsel be appointed to represent the other side for briefing on the merits. The Court rejected a request to expedite the appeal.

SEC Enforcement: Filings and settlements

Filings: The Commission filed eight (8) civil injunctive actions and three (3) administrative proceedings (excluding tag-a-long cases and Section 12(j) actions) this week.

Insider trading: SEC v. Mityas, Civil Action No. 12-Civ-1281 (E.D.N.Y. Filed March 15, 2012) is an action against Sherif Mityas, a partner and vice – president at a consulting firm. Mr. Mityas’ firm was retained by the Carlyle Group in connection with a proposed acquisition of NBTY Inc. Shortly after learning the identity of the target Mr. Mityas purchased shares of NBTY. He also tipped as relative who traded. Following the announcement of the deal on July 15, 2010, Mr. Mityas liquidated his shares at a profit of $25,895. The relative held the shares through the completion of the merger and had a profit of $12,035. Mr. Mityas settled the action consenting, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to pay disgorgement of his profits and those of his relative in the amount of $37,931 along with prejudgment interest and a penalty equal to the amount of the disgorgement. Mr. Mityas also pleaded guilty to criminal securities fraud charges based on these transactions.

Investment adviser fraud: SEC v. Murray, Case No. CV 12 1288 (N.D. Cal. Filed March 15, 2012) is an action against James Murray, an investment adviser of Market Neutral Trading, LLC. Defendant Murray is alleged to have started raising funds from investors in 2008. The next year he distributed an audit report to investors on the performance of the fund from Jones, Moore & Associates, Ltd. That report was false, according to the complaint. In fact, the firm is not an accounting firm but rather a shell company controlled by Mr. Murray. The audit report overstated the fund’s investment gains by about 90% and its income by about 35%. The complaint alleges violations of Adviser Act Section 206(4). The case is in litigation. A parallel criminal case has been filed.

Pre-IPO market: SEC v. Mazzola, CV-12-1258 (N.D. Ca. Filed March 14, 2012) is an action against Frank Mazzola, a registered representative who is the principal and owner of defendant Felix Investments, LLC, a registered New York City broker, and Facie Libre Management Associates, LLC, an investment adviser for two pooled investment vehicles. The two funds invested primarily in the shares of Facebook. The complaint alleges that shares were sold in the two funds based on a series of misrepresentations including: Failing to state that Facebook blocked share transfers to Facie Libre for about one year; failed to disclose the full compensation earned by Mr. Mozzola; assertions that Face Libre was about to get more Facebooks shares without having any reasonable basis; and a claim that the funds were “Facebook approved” so they were more likely to obtain additional shares when in fact they were not. Defendant Mazzola is also alleged to have made misrepresentations in connection with the sale of shares in funds for Zynga and Twitter. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Section 206(4). The case is in litigation.

Pre-IPO market: In the Matter of Laurence Albukerk, Adm. Proc. File No. 3-14801 (Filed March 14, 2012). This settled proceeding names as Respondents registered representative Laurence Albukerk and his company, EB Financial Group, LLC, investment adviser to funds holding Facebook shares. The action alleges that Respondents failed to properly disclose the fees they earned in connection with the sale of the shares. The matter was settled with Respondents consenting to the entry of a cease and desist order based on Securities Act Section 17(a)(2) and Advisers Act Section 206(4) in addition to paying disgorgement and prejudgment interest of $210,499 and a penalty of $100,000).

Pre-IPO Market: In the Matter of Sharespost, Inc., Adm. Proc. File No. 3-14800 (Filed March 14, 2012) is a proceeding which names as Respondents the company and its founder and president Greg Brogger. The Order alleges that Respondents facilitated the sale of pre-IPO shares without registering as a broker dealer. The action was resolved with Respondents consenting to the entry of a cease and desist order based on Exchange Act Section 15(a) and the company agreeing to pay a penalty of $80,000 while Mr. Brogger paid $20,000.

Insider trading: SEC v. McGee, Civil Action No. 12-cv-1296 (E.D. Pa. Filed March 14, 2012) is an action against two registered representatives, Timothy McGee and Michael Zirinsky, and three others, Robert Zirinsky, Paulo Lam and Marianne sze wan Ho. The complaint centers on the acquisition of Philadelphia Consolidated Holding Corporation, a Pennsylvania based insurance holding company, by Tokio Marine Holdings, Inc., announced on July 23, 2008. Mr. McGee, a financial advisor with Ameriprise Financial Services, learned about the transaction from a senior executive of the company with whom he had a long term, close relationship, stemming from their association at Alcoholics Anonymous. Mr. McGee traded and tipped his co-worker and friend Michael Zirinsky who also traded. Mr. Zirinsky in turn tipped his father, Robert Zirinsky and his friend, Paulo Lam, a resident of Hong Kong. Mr. Lam then tipped his business partner and the husband of defendant Ho, both residents of Hong Kong. Defendants Robert Zirinsky, Lam and Ho each purchased shares of Philly. Defendant Michael Zirinsky purchased shares for his account as well as in those of his wife, sister, mother and grandmother for which he was the account executive. Each defendant profited: Mr. McGee — $292,128; the Zirinsky family — $562,673; Mr. Lam — $837,975; and Ms. Ho — $110,580. Defendants Lam and Ho settled, consenting to the entry of final judgments prohibiting future violations of Exchange Act Section 10(b) without admitting or denying the allegations in the complaint. Mr. Lam agreed to pay disgorgement of $837,975 along with prejudgment interest and a penalty of $251,392. Ms. Ho agreed to disgorge $110,580 along with prejudgment interest and to pay a penalty of $16,587. The other defendants are litigating the case.

Market crisis: SEC v. Goldstone, Case No. 12-257 (D.N.M. Filed March 13, 2012) is an action against Larry Goldstone, the former CEO and president of Thornburg Mortgage, Inc., Clarence Simmons, its former CFO and senior executive v.p. and Jane Starrett, former chief accounting officer. Thornburg was the second largest independent residential mortgage company behind Countrywide. Shortly before the filing of the 2007 Form 10-K on February 28, 2008, the institution was suffering from a liquidity crisis. In the fourth quarter of 2007 the company had about $360 million in margin calls from securities collateralizing its repurchase agreements. As the company prepared to file its 2007 10-K its financial condition continued to plummet. Adjustable rate mortgage or ARM securities it held dropped in value. The company faced $300 million more in margin calls. Paying late meant that Thornburg violated its lending agreements with at least three lenders. If the firm was declared in default its financial condition would sink further. That default would trigger another default under the cross-default clauses with its other lenders which would lead to the seizure of its ARM securities that were the collateral for its loans. The defendants chose not to inform the auditors or disclose these items in its Form 10-K. Within hours of that filing the company got more margin calls. Within days it was forced to restate its financial statements to reflect a write down of its securities, the impact of the margin calls and reverse a fourth quarter profit to a loss. Eventually Thornburg filed for bankruptcy. The complaint alleges 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). The case is in litigation.

Offering fraud: SEC v. United American Ventures, LLC, Civil Action No. 1:10-cv-00568 (D. N.M. Filed June 14, 2010) is an action against the company, Philip Thomas, Eric Hollowell, Mathew Dies, Integra Investment Group, LLC and Anthony Olivia. The complaint alleged that false statements were utilized to induce about 100 persons to invest about $10 million in a program involving convertible bonds. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10( b) and 15(a)(1). Each defendant consented to the entry of an injunction based on the sections cited in the complaint. Issues regarding disgorgement and penalties were reserved to the court. In an order dated March 2, 2012 the court held Defendants Hollowell, Thomas and United American Ventures jointly and severally liable for disgorgement in the amount of $8,652, 942 along with prejudgment interest and individually liable for a civil penalty of $1 million. Defendants Oliva and Integra were held jointly and severally liable for disgorgement of $294,039 along with prejudgment interest while Defendant Oliva was directed to pay a civil penalty of $130,000. Defendant Dies was ordered to pay disgorgement of $54,381 along with prejudgment interest and a civil penalty of $54,382. A default judgment was entered against All American Capital for disgorgement in the amount of $592,529.

Investment fund fraud: In the Matter of Armando Ruiz, Adm. Proc. File No. 3-14388 (March 12, 2012) is an action against Mr. Ruiz, a registered representative, and his controlled entity, Maradon Holdings, LLC. From April 2008 through May 2009 Mr. Ruiz raised about $705,000 from eight equity investors and $112,500 from a ninth investor who loaned funds to Maradon. The company was represented to have been formed to develop in to a financial services firm serving the Hispanic community. In fact none of the shares were issued and much of the offering proceeds were used by Mr. Ruiz for personal expenses. Six of the nine investors were repaid about $180,000. To settle the proceeding the Respondents consented to the entry of a cease and desist order based on Securities Act Section 17(a)(2). In addition, Mr. Ruiz is barred from the securities business with a right to reapply after three years. He also agreed to pay disgorgement of $112,500 along with prejudgment interest and to pay a civil penalty of $75,000. The amount of the disgorgement equals the investment made by an investor who put in $112,500 as a loan which was purportedly converted to equity.

Offering fraud: SEC v. Ellis, Civil Action No. 12-cv-1203 (E.D. Pa. Filed March 8, 2012) is an action against Edward Ellis, Sr. and Jennifer Seidel, alleging that the two defrauded investors in connection with the purchase of shares in their company, Sederon, Inc. From August 2007 through October 2008 stock was sold to about 54 investors. The company raised approximately $519,500. In selling the shares the defendants made a series of misrepresentations, according to the complaint, including: Claims that Sederon was highly profitable; statements that the business was rapidly expanding; a claim that an IPO would be forth coming; a representation that IPO investors would be able to sell their shares in the open market at profits from 900 to 1,300 percent; and a claim that the shares were limited or then available at a “special discount.” The defendants also failed to disclose the fact that Mr. Ellis had previously spent time in prison in connection with a guilty plea to charges based on a fraudulent securities offering, that he had been enjoined by the SEC and ordered to cease and desist by state securities regulators. The Commission’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation.


U.S. v. Bizjet International Sales and Support, Inc., Case No. 12 cr 61 (N.D. Okla. Filed March 14, 2012) is a case in which the company was charged in a one count criminal information. It charged the company with conspiracy to violate the FCPA anti-bribery provisions. Bizjet is an indirect subsidiary of Lufthansa Technik AG, a German provider of aircraft related services. The company, according to the court documents, paid bribes to officials employed by the Mexican Policia Federal Preventiva, the Mexican Coordination General de Transportes Aereos Presidenciales, the air fleet for the Gobierno del Estado de Sinaloa, the air fleet for the Goblerno del Estado de Sonora and the Republica de Panama Autoridad Aeronautica Civil. In some instances the bribes were paid directly. In others they were paid through a shell company owned by a company official. Bizjet resolved the matter by entering into a deferred prosecution agreement. As part of the agreement the company will pay an $11.8 million criminal fine which is about a 30% reduction from the bottom of the guideline fine range. The company also agreed to implement a compliance and ethics program and report to the DOJ at no less than twelve month intervals during the three year term of the agreement. The agreement reflects the cooperation of the company. The DOJ also entered into an agreement with Lufthansa Technik under which the firm will not be prosecuted as long as it complies with its undertakings which are to continue cooperating and implementing rigorous procedures over three years.

U.S. v. Duperval (S.D. Fla.) is an FCPA related action against Jean Duperval, the former director of international relations for Telecommnications D’Haiti S.A.M. or Haiti Teleco. Following a jury trial Mr. Duperval was convicted on two counts of conspiracy to commit money laundering and 19 counts of money laundering. The charges stem from the period 2003 to 2006 during which about $500,000 was paid to two shell companies for bribes for Mr. Duperval in connection with the issuance of preferred telecommunication rates, a continued telecommunications connection with Haiti and the continuation of a favorable contract with Haiti Telco. The payments were documented with invoices for consulting services although no real services were rendered. Previously, seven other individuals have been convicted on charges related to the scheme.


Goldman Sachs Execution & Clearing, L.P., a registered futures commission merchant, agreed to the entry of a cease and desist order, to implement improved procedures and to pay a $5.5 million civil penalty and $1.5 million in disgorgement to resolve a proceeding. The action was based on allegations that it failed to diligently supervise accounts during the period May 2007 through December 2009. The firm provided back-office and other services to some clients who are broker dealers. One of those clients permitted investors to trade commodities in subaccounts. Goldman Sachs Execution failed to diligently supervise the handling of the subaccounts, failing to investigate signs of questionable conduct regarding rule violations. During the period the firm received about $1.5 million of gross fees and commissions from transacts it executed and/or cleared on behalf of the broker dealer involved.


Market crisis: The FSA brought an action against HBCS Group and its primary subsidiary, the Bank of Scotland PLC, centered on the market crisis. From January 2006 through December 2008 the FSA concluded that Bank of Scotland: Pursued an aggressive growth strategy that focused on high-risk, sub-investment grade lending; increased the complexity and size of its high risk transactions as the crisis unfolded; continued to increase its market share in this high risk area as others pulled out of the market; and had an internal structure more focused on profits than risk. These actions stemmed from serious control deficiencies. As the market crisis continued to unfold, and the stress in the bank’s transactions became apparent, it was “slow” to move the transactions to the High Risk area despite a significant risk to the firm’s capital. This failure meant that the extent of the risk was not fully known to the Group’s board or auditors. Ultimately as a result of these failures the government and the taxpayers were forced to bail out the Bank. For failing to take reasonable care to organize and control its affairs with adequate risk management the FSA imposed a censure. The agency explained that ordinarily a fine would be imposed but that would be a double cost to the taxpayer under the circumstances.

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