This Week In Securities Litigation (Week ending March 21, 2014)

The Commission improved its trial record this week, prevailing in a ten day jury trial centered on fraud in connection with the sale of mortgage backed securities that caused a $5 million loss to Ginnie Mae. The agency prevailed on each claim it brought against the principal of the mortgage firm.

Insider trading was a key focus for the SEC this week. The agency brought an action, paralleled by the USAO for New Jersey, against a serial insider trading ring. It also filed two other settled insider trading cases, one against a friend of a corporate insider who had been gifted inside information and another involving an accountant who used client information to trade in advance of a takeover. The Commission also resolved previously filed actions involving an offering fraud, kickbacks and a false take-over rumor.

Finally, the Department of Justice announced that a Japanese firm pleaded guilty in an FCPA action to charges of conspiracy and multiple counts of FCPA violations based on a years long bribery scheme engaged in with a Connecticut based firm. The Japanese firm, an FCPA recidivist, failed to self-report, did not have an effective compliance system and refused to cooperate despite being under a deferred prosecution agreement from a prior FCPA action. This is one of the few parent level guilty pleas in FCPA cases, according to the Department.


Remarks: Keith F. Higgins, Director, Division of Corporation Finance, delivered the keynote address at PLI-Thirteenth Annual Institute on Securities Regulation in Europe, London, England (March 20, 2014). Topics discussed included the JOBS Act and the related rules, disclosure reform, disclosure overload and foreign issuers (here).

Remarks: Craig M. Lewis, Chief Economist and Director, Division of Economic and Risk Analysis, delivered the keynote address at the Investment Company Institute 2014 Mutual Funds and Investment Management Conference, Orlando, FL (March 18, 2014). His remarks focused on forward guidance and economic analysis and rule making (here).

Remarks: Norm Champ, Director, Division of Investment Management, addressed the 2014 Mutual Funds and Investment Management Conference, Orlando, Fl. (March 17, 2014). Topics covered in his remarks included the reorganization of the division, rule making, efforts to provide guidance and monitoring efforts (here).

Shareholder Litigation

M&A deals are a focus of the private securities litigation bar, according to a new report from Cornerstone Research. Specifically, 94% or more of M&A deals filed last year resulted in private damage actions, according to the report. Cornerstone Research, Shareholder Litigation Involving Mergers and Acquisitions (March 13, 2014) (here). The findings are consistent with the trend since 2007 for large M&A deals. In that year only 44% of the deals over $100 million resulted in private damage actions. Since that time, however, the number has steadily increased. For example, in 2010 90% of the M&A deals valued over $100 million resulted in one or more private damage actions while in 2011 and 2012 93% of the deals were challenged.

Finally, most of the suits were resolved before the deal closed. In 2013 75% of the actions filed were resolved before closing. 88% of those resolutions were settlements while 9% of the cases were withdrawn and 3% were dismissed. Concluding most of these actions by closing is consistent with the overall trend for this type of litigation. Since 2007, when 60% of the suits were concluded by closing, the number of actions resolved by the end of the deal has generally increased or remained about constant each year.

SEC Enforcement – Litigated Actions

Market crisis: SEC v. Radius Capital Corporation, Civil Action No. 2:11-civ-00116 (S.D. Fla.) is an action against the firm and its owner, president and CEO, Robert A. DiGiorgio. Following a ten day trial a jury returned a verdict against Mr. DiGiorgio on each of the Commission’s claims which were based on each subsection of Securities Act Section 17(a) and each subsection of Exchange Act Section 10(b).

The claims centered on events that took place from late 2005 through the fall of 2006. During that period Radius sold at least fifteen mortgaged-backed securities with a total principal amount of over $23 million based on misrepresentations. Specifically, Ginnie May was told that the securities would be insured by the FHA when in fact most were not and many fell below the required guidelines to be insured. In addition, many loans quickly became delinquent and defaulted because underwriting guidelines were ignored. Overall Ginnie May, which had to assume the obligations of Radius, lost more than $5 million. The Court will consider the question of remedies at a later date. See Lit. Rel. No. 22947 (March 19, 2014).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed, or announced the filing of, 3 civil injunctive, DPAs, NPAs or reports and 1 administrative proceeding (excluding follow-on and Section 12(j) proceedings).

Kickbacks: SEC v. Mazzola, Civil Action No. 12-cv-1258 (N.D. Cal.) is a previously filed action against Frank Mazzola, brokerage firm Felix Investments, LLC and fund adviser Facie Libre Management Associates. The complaint alleged that the defendants arranged to be paid secret commissions in connection with their funds’ acquisition of Facebook stock and on the sale of fund interests to new investors. To resolve the action the defendants consented to the entry of permanent injunctions prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Orders as to Mr. Mazzola and Facie Libre are also based on Advisers Act Section 206(4). Mr. Mazzola and Felix Investments, which agreed to a censure, will pay a total of $500,000 in disgorgement, prejudgment interest and civil monetary penalties. Mr. Mazola will be barred from the securities business with a right to reapply after three years. He will, however, be permitted to be associated with Felix Investments and Felix Advisors until August 2014 to facilitate an orderly distribution of existing fund assets that will be overseen by an independent consultant. See Lit. Rel. No. 22949 (March 20, 2014).

Insider trading: SEC v. Cancian, Civil Action No. 1:14-cv-11007 (D. Mass. Filed March 19, 2014) is an action against David Cancian which centers on the announcement of negative news by American Superconductor Corporation on April 5, 2011. On April 1, 2011 Mr. Cancian met a Friend, a senior manager at American Superconductor, for drinks. During the conversation the Friend expressed concern about his financial future because of problems at the company. During the conversation the Friend also expressed concern about impact of those problems on Mr. Cancian, whom he knew to be a shareholder, from a decrease in the stock price of the company. Mr. Cancian breached his duty to the company and benefited by making a gift of the information about his firm to his friend, according to the complaint. The next trading day after the conversation Mr. Cancian sold the majority of his shares and also covered calls. Following the announcement of negative news the next day the stock price dropped 42%. Mr. Cancian made profits and avoided losses of $46,930. The complaint alleged violations of Exchange Act Section 10(b). To resolve the case Mr. Canican consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits and pay prejudgment interest along with a civil penalty equal to the amount of his disgorgement. See Lit. Rel. No. 22946 (March 19, 2014).

Insider trading: SEC v. Eydelman, Civil Action No. 3:14-cv-01742 (D.N.J. Filed March 19, 2014) is an action against Steven Metro and Vladimir Eydelman. Mr. Metro was a clerk at Simpson Thacher & Bartlett LLP. Mr. Eydelman is a registered representative initially employed at Oppenheimer & Co. Inc. and currently at Morgan Stanley & Co. A third person, called “The Middleman” by the SEC (or CW for Cooperating Witness by the USAO) has not been charged and is cooperating with authorities. He is a longtime friend of Mr. Metro, whom he met in law school, and a client of Mr. Eydelman. The scheme, which begin in early 2009, and continued to the present, traces to a conversation in February of that year between Mr. Metro and CW at a New York City bar. During one portion of the conversation the two men discussed stocks. CW expressed concern over his investment in Sirius XM Radio in view of its financial condition. Mr. Metro assured his friend that the investment was safe based on documents he had seen at the law firm stating that Liberty Media Corp. planned to invest over $500 million in the radio company. CW later called Mr. Eydelman and instructed him to purchase shares of Sirius, assuring him that the then financially shaky firm would be fine in view of the reliable information he received from a law firm. Following the deal announcement CW assured Mr. Metro that he had set aside a portion of the trading profits, which totaled $212,814, as a thank you. Mr. Metro directed his friend to hold the funds for investment in future deals.

After the Sirius transaction Mr. Metro supplied inside information on twelve additional deals in which Simpson was involved to CW. In doing so, the three men were careful to leave little in the way of evidence. Mr. Metro furnished the basic information to CW without writing it down, except a ticker symbol displayed on a cell phone. CW transmitted it to Mr. Eydelman on a scrap of paper he then chewed up. Some of the meetings were taped. In addition, Mr. Eydelman, who placed the trades for the group, his accounts, and clients, created a false research trail by e-mailing materials on the target to CW. Overall the scheme yielded $5.6 million in illegal trading profits. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). A parallel criminal complaint contains one count of conspiracy to commit securities and tender offer fraud and multiple counts of securities fraud. Both cases are pending. See Lit. Rel. No. 22948 (March 20, 2014).

Insider trading: In the Matter of Wilfred J. Halpern, CPA, Adm. Proc. File No. 3-15804 (March 19, 2014) is a proceeding against Mr. Halpern, a personal tax accountant. Mr. Halpern learned that SFN Group, Inc. was about to be acquired from a client who was a corporate insider and was seeking advice. During the call the insider told Mr. Halpern that the information was confidential and nonpublic. After learning about the transaction Mr. Halpern misappropriated the information and purchased 9,500 shares of the company which, after the deal announcement, yielded him profits of $41,023. The Order alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the proceeding, Mr. Halpern consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to pay disgorgement of $41,023, prejudgment interest and a penalty equal to the amount of the disgorgement.

Offering fraud: SEC v. A Chicago Convention Center, LLC, Civil Action No. 13-cv-982 (N.D. Ill.) is a previously filed case against the firm, Anshoo Sethi and Intercontinental Regional Center Trust of Chicago, LLC. The case centered on a claim that the defendants raised $158 million from about 3000 investors through an offering fraud targeting foreign nationals who sought to invest in the U.S. economy and gain a legal pathway to citizenship through the EB-5 Immigrant Investor Program. The defendants settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants also agreed to the entry of an order enjoining and restraining them for twenty years from offering or selling securities issued by any of the defendants or any entity owned or controlled by Mr. Sethi. In addition, Mr. Sethi will pay a penalty of $1 million while each entity will pay “civil penalties of up to $1.45 each . . .” The defendants will satisfy their payment obligations in part by paying over certain funds in frozen accounts. Previously the Court had granted the Commission’s motion to return $147 million to investors that had been frozen. The settlement resolves the disposition of about $11 million in administrative fees that had been frozen. See Lit. Rel. No. 22945 (March 19, 2014).

False takeover: SEC v. Mascioli, Civil Action No. 314-cv-00325 (D. Conn. Filed March 13, 2014) is an action centered on the efforts of Alexander Mascioli and his firm, North Street Capital L.P., to acquire without any assets, all of the outstanding shares of Winnebago Industries, Inc., a New York Stock Exchange listed company. On April 10, 2012 Mr. Mascioli telephoned the General Counsel of Winnebago and offered to acquire all of the outstanding shares of the firm. The call was followed by an offer letter. The General Counsel responded to the offer letter with a series of questions regarding the ability of Northside to complete the transaction. Mr. Mascioli did attempt to secure financing. He contacted a major bank. An effort was also made to enlist the interest of a major competitor of the firm. Both efforts failed. Nevertheless, Northside told the General Counsel of its experience, expertise and that the firm was ready to proceed with the deal. Despite being rejected, Northside sent a second offer letter with improved terms. The letter represented that the offer was not conditioned on financing and stated that Northside was prepared to move forward. Subsequently, Mr. Mascioli and Northside sent a copy of the second offer letter to Bloomberg which posted the offer on its website. Despite an early morning trading halt, volume soared and the price increased. A hedge fund with a short position liquidated it at a loss. The Commission’s complaint alleged violations of Exchange Act Section 10(b). To resolve the case Mr. Mascioli and Northside consented to the entry of permanent injunctions based on Exchange Act Section 10(b). The two defendants also agreed, on a joint and several basis, to pay a civil penalty of $100,000. In addition, Mr. Mascioli agreed to the entry of an order barring him from serving as an officer or director of a public company. See Lit. Rel. No. 22941 (March 13, 2014).

Criminal Cases

Investment fund fraud: U.S. v. Burks, No. 3:13-cr-00144 (E.D.Va.) is an action against Stephen M. Burks who previously pleaded guilty to wire fraud charges. This week he was sentenced to serve 115 months in prison followed by three years of supervised release and to pay $1,338,971.52 in restitution to his victims as well as forfeiture. Mr. Burks was the CEO of Chelsea Financial Group, LLC which operated in Maryland and Virginia. Beginning in January 2008, and continuing for the next five years, Mr. Burks solicited investors for several investment schemes. In making these solicitations, Mr. Burks misrepresented his background, falsely claiming to be an investment profession while failing to disclose the fact that he was a convicted felon. He also did not disclose that he retained 25% of the funds for his personal and other use.

Investment fund fraud: U.S. v. Milter (S.D.N.Y.) is an action against George Milter for operating a fraudulent investment fund. Beginning in about 2005 Mr. Milter represented that he was the CEO of Lempert Capital Management, Ltd., a Cayman Islanded based firm which was a registered broker-dealer. He raised about $1 million from investors by telling them that there funds would be safe because of protective measures built into the program. In fact he misappropriated much of the money while sending investors false account statements to conceal the fraud. Mr. Milter previously pleaded guilty. The Court sentenced him to serve 61 months in prison and pay restitution in the amount of $946,509 and to forfeit the same amount. Cliffe Bodden, the co-defendant in this case, was previously sentenced to serve 74 months in prison.


U.S. v. Marubeni Corporation (D. Conn.) is an action in which the Japanese trading company pleaded guilty to an eight count criminal information charging one count of conspiracy to violate the anti-bribery provisions of the FCPA and seven counts of violating the FCPA. The firm admitted its conduct and agreed to pay a criminal fine of $88 million, subject to the approval of the district court. The case is based on a years long scheme which traces to at least 2002 when Marubeni, in conjunction with a Connecticut company reported to be Alstrom, paid bribes to officials in Indonesia, including to a high ranking member of Parliament and an official at the state owned utility. The purpose was to secure a $118 million contract known as the Tarahan project, to provide power related services for the citizens of Indonesia. To conceal the hundreds of thousands of dollars in bribes, two consultants were retained whose primary purpose was to pay the bribes. Portions of the bribe money were paid through the Maryland bank account of one consultant. The contract was secured. The firm, which is a party to a deferred prosecution agreement stemming from the TSKJ Nigeria joint venture FCPA cases, did not have an effective compliance system, failed to self-report and refused to cooperate. As part of the plea agreement the firm agreed to adopt compliance procedures and cooperate with the Department. Four individuals have either been charged or pleaded guilty to FCPA violations in connection with this matter.

Remarks: Acting Assistant AG Mythill Raman addressed the Global Anti-corruption Compliance Congress, Washington, D.C. (March 20, 2014). Here remarks recounted recent enforcement actions such as the one against Marubeni Corporation which failed to cooperate, those against individuals involved in paying and taking bribes and forfeiture initiatives (here).


Short selling: FINRA and BATS Global Markets, Inc. brought an action against Citigroup Global Markets Inc. for illegal short selling in violation of Rule 105 of Regulation M with respect to five offerings. Citigroup purchased more than 1.5 million shares from late May 2009 through September 2010 after selling 313,890 shares short in the window prior to the offerings. To resolve the violations the firm was ordered to pay disgorgement of $538,000 plus interest and about $559,000 in fines. Citigroup was also ordered to update its written supervisory procedures with respect to Rule 105.


Integrity infringement: Hartleys Limited paid a penalty of $35,000 imposed by the Markets Disciplinary Panel, according to the Australian Securities and Investment Commission, for failing to comply with its obligation to promote confidence in, and the integrity of, the market. On October 25, 2012, on behalf of a client, the firm was working an order to sell 35 million ABM Resources shares. By shortly before the close all but 500,000 shares had been sold. In entering a limit order to sell the remaining shares at prices up to $0.053 the firm inadvertently entered the symbol for the securities of another company whose shares had been trading at $0.795. The order was partially executed. As a result the price of the other firm’s shares dropped to $0.50. After the close the firm could not cancel the order. This action violated the firm’s obligations to act in a manner that promotes the integrity of the market.

Integrity infringement: Instinet Australia Pty paid a penalty of $50,000 imposed by the Markets Disciplinary Panel, according to ASIC, for failing to comply with its obligation to promote confidence in and the integrity of the market. On March 23 the firm entered an order for a client to sell 250,000 shares of Revison Consolidated Mines NL March 2012 convertible notes at a limit price of $0.10. Following a partial execution at the limit price the client directed that the remaining part of the order be removed to the client for purposes of Direct Market Access. The remaining part of the order was deleted. That portion of the order was then inadvertently reentered as a market order which drove the price of the notes down to $0.02 where it was executed. A request to cancel the execution after the time period for such requests was denied. While the action was inadvertent it undermined the integrity of the market in the view of the panel.

Hong Kong

Disqualification: The Securities and Futures Commission initiated a proceeding to disqualify four former directors of Tack Fact Group, International Limited, a garment manufacturer. Prior to entering into a provisional liquidation, investors were not furnished with adequate information about certain loan transactions in which significant assets of the firm were pledged. In addition, the company allocated share options for 40 million shares, converted without payment, for the former chairman who exercised them in June and July 2008 while in possession of inside information, making a profit of $20 million. The directors failed to properly discharge their duties according to the regulators. The SFC is also seeking the repayment of $26 million.


Manipulation: Seasoned bond trader Mark Steveson was fined £662,700 and banded from the securities industry for manipulating a UK government bond on October 10, 2011. During the government’s QE program, Mr. Stevenson intended to sell holdings with £1.2 billion to the Bank of England at artificially high prices. The prices resulted from his trading on the proposed sale date shortly prior to transaction. His purchases accounted for 92% of the bond’s turnover for the day. That trading was undertaken with the intent to, and did, artificially inflate the price of the bonds.