This week the jury began deliberations in the Robert Allen Stanford Ponzi scheme case without hearing from Mr. Stanford despite promises to the contrary from defense counsel at the beginning of the trial. Granger announced an SEC FCPA probe centered on the use of gift cards in China.

The Chairman and three Commissions spoke at the annual SEC Speaks conference. The topics included a review of recent management changes and rule writing efforts, issues in failure to supervise cases, disclosure obligations in the wake of Citizens United and concerns about the Volker Rule and its impact.

SEC Enforcement announced partial settlements in two high profile cases. In the long running Nacchio financial fraud action the Commission settled with one defendant while dropping charges against another. In an insider trading case centered on expert network Primary Global, the SEC settled with two former employees of the firm who previously pleaded guilty to criminal charges and are cooperating with the government and the SEC.

Finally, the Commission brought FCPA charges against three former employees of Nobel Corporation. One employee settled while the other two are litigating.

The Commission

Identity theft: The SEC, in conjunction with the CFTC, issued a proposed Rule under Section 1088 of Dodd-Frank regarding identity theft. Specifically, the rule will require SEC regulated entities to adopt a written identity theft program that would include reasonable policies and procedures to identify relevant red flags and respond appropriately. The rule is modeled on one adopted by the FTC in 2007 (here).

Unauthorized Trading: The Office of Compliance, Inspections and Examinations issued a risk alert regarding unauthorized trading (here).

SEC Speaks: Remarks by the Chairman and Commissioners at the annual program included:

  • Chairman Schapiro (here) reviewed recent reorganizational efforts at the agency as well as selected rule making. The Chairman’s comments reviewed efforts to make better use of available resources, manage more effectively, efforts to craft new approaches to try and head off threats, and implementing segments of Dodd-Frank.
  • Commissioner Daniel Gallager (here) focused on issues regarding failure to supervise. A key question centers on who is a supervisor and at what point legal and compliance personnel can be reasonably deemed “supervisors.” A review of current case law demonstrates that “once a person becomes involved in formulating management’s response to a problem, he or she is obligated to take affirmative steps to ensure that appropriate action is taken,” according to the Commissioner. The critical difficulty in this context is to encourage legal and compliance personnel to participate and lend their talents to the organization which presents a challenge for the Commission and the SROs.
  • Commissioner Luis Aguilar (here) discussed the question of the disclosure of political contributions in the wake of the Supreme Court’s decision in Citizens United. He concluded that the Commission has a responsibility to “ensure that investors are not left in the dark while their money is used without their knowledge or consent.”
  • Commissioner Tory Paredes (here) voiced concerns regarding the Volker Rule which include, in his view, the fact that investors could be disadvantaged by higher costs, fewer investment options, lower returns and less wealth may result; the U.S. markets may become more volatile and less efficient; companies may find it more difficult to raise capital; and agencies, authorities, and instrumentalities of cities, counties, and states could end up struggling to raise funds to finance needed public works and infrastructure projects.


David Blass, Chief Counsel, Division of Trading and Markets, delivered remarks at the recent SIFMA Conference titled Broker-Dealer Anti-Money Laundering Compliance – Learning Lessons from the Past and Looking to the Future (February 29, 2012). His comments (here) included:

  • Tracing the evolution of anti-money laundering efforts following the passage of the PATRIOT Act which initially focused the adequacy of systems but have evolved to concerns about effectiveness. In part he focused on the obligations of firms to look past the labels and obtain customer information when omnibus accounts with subaccounts are used by foreign traders who have direct access to the U.S. markets. He also discussed issues SARS or suspicious activity reports, cautioning that the staff takes a very broad view of the statutory language which requires the reporting of transactions conducted or attempted “by, at or through” the broker-dealer. Finally, he urged firms to view their AML as one tool that is part of their overall compliance systems.

SEC Enforcement: Filings and settlements

Insider trading: SEC v. Longoria, Civil Action No. 11-cv-0753 (S.D.N.Y.) is an action against, among others, Jason Pflaum and Walter Shimoon. Both defendants were previously employed at expert network firm Primary Global Research LLC. As to Mr. Pflaum, the complaint alleges that he obtained inside information regarding several companies and furnished it to co-defendant Samir Barai who caused his fund Barai Capital, where Mr. Pflaum was previously employed, to trade. Mr. Pflaum pleaded guilty previously to criminal charges based on the same scheme and is cooperating with the government and the SEC. The court entered a final judgment against Mr. Pflaum which permanently enjoins him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It orders him to pay disgorgement of $101,943.00 and prejudgment interest. A civil penalty was not sought in view of his cooperation. Mr. Pflaum also consented to an order barring him from the securities business in a separate administrative proceeding.

As to Mr. Shimoon, the complaint alleges that he provided inside information regarding his former employer, Flextronics International Ltd., to co-defendant Bob Nguyen, an employee of Primary Global, and to the firm’s clients, who traded. Mr. Shimoon pleaded guilty in a related criminal case and is cooperating with the government and the SEC. A final judgment was entered against Mr. Shimoon which enjoins him from violations of Exchange Act Section 10(b) and orders him to pay disgorgement of $44,175.00 along with prejudgment interest. It also bars him from serving as an officer or director of a public company. Based on his cooperation no request for a penalty was made.

Financial fraud: SEC v. Nacchio, Civil Action No 05-cv-480 (D. Colo.) is the Commission’s long running financial fraud action centered on events at Qwest Communications from early 1999 through 2002. The defendants are former CEO Joseph Nacchio, CFO Robert Woodruff, president and COO Afshin Mohebi, director of financial reporting James Kozlowski and senior manager and then director of financial reporting Frank Noyes.

The complaint focused on what it called a massive fraud which concealed the true source and nature of Qwest’s revenue and earnings growth. During the time period Qwest touted its claimed growth in service contacts that were suppose to provide a continuing revenue stream when in fact they came from one time sales of assets. Mr. Woodruff settled, consenting to the entry of a permanent injunction without admitting or denying the allegations in the complaint, prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of Sections 13(a) and 13(b)(2). In addition, he agreed to pay disgorgement of $1,731,048 along with prejudgment interest and a civil penalty of $300,000. He will also be barred from serving as a director or officer of a public company. Mr. Noyes had been charged with violations of each of the sections cited in Mr. Woodruff’s settlement. The Commission dropped all charges against him.

Criminal cases

Investment fund fraud: U.S. v. Wise (N.D. Ca.) is an action against William Wise and Melinda Haag. It alleges that the two defendants sold fraudulent certificates of deposit to more than 1,200 individuals. Investors paid over $129.5 million for the CDs which were claimed to pay returns in some instances of more than 16%. The funds were suppose to be put in overseas investments. Instead they were diverted to the personal use of the defendants and to pay other investors. At the time the scheme was shut down by the SEC more than $75 million had been lost. The indictment charges conspiracy, mail and wire fraud, money laundering, tax fraud, obstruction of justice and making false statements.


SEC v. Jackson (S.D. Tx. Filed Feb. 24, 2012) and SEC v. O’Rourke, (S.D.Tx. Filed Feb. 24, 2012) are FCPA actions against three Nobel Corporation executives. The former names as defendants Mark Jackson, former CEO of the company and James Ruehlen, current Director and Division Manager of the firm’s subsidiary in Nigeria. The latter names as a defendant Thomas O’Rourke, former controller and head of internal audit at Nobel. The focus of the scheme was to permit the company to keep its drilling equipment in the country and avoid significant import charges. Specifically, temporary import permits allowed the rigs to be in the country for one year. Officials could grant up to three extensions of six months each. After that the rigs had to be exported and then re-imported under a new temporary permit. This required the payment of sizable duties.

Messrs. Jackson and Ruehlen are alleged to have arranged and facilitated the payment of bribes to induce Nigerian customs officials to grant new permits and extend others. The two men arranged to pay hundreds of thousands of dollars in bribes to obtain eleven illicit permits and twenty-nine extensions, according to the complaint. Mr. Jackson is also alleged to have approved the bribe payments and concealed them from the audit committee and auditors. Mr. Ruehlen prepared false documents for the bribes, according to the charging papers. The complaint against Messrs. Jackson and Ruehlen alleges violations of Exchange Act Sections 30A, 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation.

The complaint against Mr. O’Rourke claims that he aided and abetted violations of the bribery, books and records and internal control provisions of the FCPA and that he directly violated the internal control and false records provisions of the Exchange Act. Mr. O’Rourke settled with the SEC, consenting to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, which prohibits future violations of Exchange Act Sections 13(b)(2)(A), 12(b)(2)(B, 12(b)(5) and 30A. He also agreed to pay a civil penalty of $35,000.

Previously, Nobel Corporation was charged with FCPA violations. The firm entered into a non-prosecution agreement with the Department of Justice and settled with the SEC (here).

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