This Week In Securities Litigation (Week ending March 22, 2013)

The SEC settled two insider trading cases this week in which S.A.C. Capital was named as a relief defendant. In one it obtained the largest payment to date in an insider trading case, about $600 million. Reportedly S.A.C. Capital will fund the settlement. The second was one of the Dell insider trading cases. Insider trading charges were also brought against the brother of convicted hedge fund mogul Raj Rajaratnam in conjunction with the U.S. Attorney’s Office for the Southern District of New York. In addition, the agency resolved a long running options backdating case and settled with another foreign bank selling securities to its U.S. customers without registering as a broker dealer.

The D.C. Circuit resolved a case which is reminiscent of the 1980s. During that period the SEC and the CFTC sparred over turf. This time it was the CFTC and FERC. The CFTC prevailed in view of the “exclusive” jurisdiction provision in its statute, trumping FERC’s claim that since the manipulative effects impacted both the futures and physicals markets that both agencies had authority to investigate.


Remarks: Commissioner Luis Aguilar delivered remarks titled: Inclusion is a Strength: Corporate America and the SEC Should Reflect America (Washington, D.C. March 21, 2013)(here). His remarks focused on the lack of diversity at the SEC and in corporate America and the Commission’s related disclosure rules.

Remarks: Norm Champ, Director, Division of Investment Management, addressed the 2013 Mutual Funds and Investment Management Conference, Palm Desert, California (March 18, 2013)(here). His remarks focused on recent changes at the Division, including the new REG group, expanded expertise and requests for impute.


Remarks: Commissioner Scott O’Maria addressed the SIFMA Compliance and Legal Society annual Seminar (March 19, 2013). The Commissioner addressed four topics: 1) a review of recent enforcement efforts; 2) concerns regarding data standards; 3) the “futurization” of certain swaps; and 4) the harmonization of cross-boarder and margin standards with the SEC (here).

Remarks: Commissioner Bart Chilton addressed the National Grain and Feed Association’s 117th Annual Convention, San Francisco, California (March 18, 2013). His remarks were titled “The New Prospectors.” He discussed the need for position limits, high speed trading and manipulative trading (here).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 5 civil injunctive actions and 2 administrative proceedings (excluding tag-along-actions and 12(j) proceedings).

Insider trading: SEC v. Rajaratnam, Civil Action No. 13 CV 1894 (S.D.N.Y. Filed March 21, 2013) is an action against Rengan Rajaratnam, the brother of the Galleon Management LLC Fund founder, Raj. It alleges that Rengan traded on inside information beginning in January 2006 through August 2008. Five different stocks were involved. In each instance the tip came from his brother Raj. The first two tips were received while Rengan was a portfolio manager at now defunct Sedna Capital Management, LLC, a hedge fund advisory firm. They involved Polycom, Inc. and Hilton’s takeover by The Blackstone Group. In each instance he traded in his personal account. In addition, he passed the Polycom information to a friend. In March 2008 Rengan closed Sedna and joined Galleon. Subsequently, he received illegal tips from his brother regarding Clearwire’s anticipated joint venture, a negative earnings announcement for Akamai Technologies Inc., and about potential investors in Advanced Mirco Devices Inc. He traded on behalf of the Galleon funds on the first two and in his personal account on the Clearwire tip. His brother bought the shares of AMD. The Commission’s complaint alleges violations of Exchange Act Section 10(b). The case is pending. A parallel criminal case was also filed (see below).

Insider trading: SEC v. Whitman, Civil Action No. 12-CV-1055 (S.D.N.Y.) is a previously filed action against Douglas Whitman and his firm, Whitman Capital, LLC. The complaint alleged that the defendants traded on inside information obtained from Roomy Khan, a key witness in the Raj Rajaratnam case, regarding the earnings of Polycom Inc. and Google Inc. Previously, Mr. Whitman was convicted on criminal charges based on essentially the same facts. This week a final judgment was entered in the case enjoining each defendant from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also requires the two defendants to jointly and severally disgorge $935,306 and Mr. Whitman to pay a civil penalty in the same amount. Mr. Whitman’s disgorgement obligation will be offset by his forfeiture obligation in the criminal case but the civil penalty is in addition to the criminal fine. Separately, Mr. Whitman agreed to be barred from the securities business. See also Lit. Rel. No. 22653 (March 20, 2013).

Investment fund fraud: SEC v. 3 Eagles Research & Development LLC, Civil Action No. 3:12-cv-01289 (D. Oregon, Filed July 17, 2013) is a previously filed action against 3 Eagles, Harry Proudfoot, Matthew Proudfoot, Laurie Vrvilo and Dennis Bukantis alleging that they raised about $2.7 million from 140 investors in 23 states selling interests in a claimed gold mine. In fact the investor funds were misappropriated. This week Matthew Proudfoot and Laurie Vrvilo settled with the SEC. Each consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The two defendants also agreed to be jointly and severally liable for the payment of disgorgement in the amount of $2.72 million plus prejudgment interest. Based on their financial condition, a penalty was not imposed. The action is pending as to the other defendants. See also Lit. Rel. No. 22654 (March 20, 2013).

Investment fund fraud: In the Matter of Craig Berkman, Adm. Proc. File No. 3-15249 (March 19, 2013) is an action against Craig Berkman, a former Oregon political figure and repeat securities law violator, John Kern, an attorney who facilitated the schemes, and twelve entities. The Order for Proceedings alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The claims center on schemes to sell interest in pre-IOP shares. Specifically, beginning in late 2010 Mr. Berman told investors that Ventures Trust II, LLC, an entity he controlled, owned shares of Facebook. At the time Facebook had yet to conduct its IPO. In fact the firm never owned an interest in Facebook securities with the sole exception of a small indirect interest. Following Facebook’s IPO, investors attempted to redeem their shares in the Trust. A lawyer acting on behalf of Ventures Trust wrote to the investors, insisting that it owned the shares. The representation was false. Mr. Berkman, and others assisting him, raised over $5.5 million from over 50 investors through this scheme. A second scheme centered on selling interests in Face Off Acquisitions LLC. Potential investors were told that Face Off was about to acquire an entity which owned more than 1 million Facebook shares in a deal that would cost between $40 and $50 million. The representations were false. Mr. Berkman raised about $2.5 million from 14 investors through this scheme. He misappropriated much of the money raised in each scheme. The proceeding will be set for hearing. Parallel criminal charges were brought by the U.S. Attorney’s Office for the Southern District of New York.

Offering fraud: SEC v., Inc., Civil Action No. 0:13-cv-60637 (S.D. Fla. Filed March 19, 2013 is an action against the company, its president, Estuardo Benavides and one of its directors and an attorney, Robert Cook. In 2010 and 2011 the defendants are alleged to have sold shares of the company based on claims that it owned $5 billion worth of Mexican bonds and that the stock price would increase. While the company owned the bonds they were virtually worthless, according to the complaint which charges violations of Securities Act Sections 17(a)(1) and (3). The case is pending. See also Lit. Rel. No. 22651 (March 19, 2013).

Misappropriation SEC v. Caplitz, 1:13-cv-10612 (D. Mass. Filed March 18, 2013) is an action against Gregg Caplitz, a long time business and investment adviser, and Insight Onsite Strategic Management, LLC, a registered investment adviser. There are five relief defendants. After years of furnishing business and financial advice to clients, Mr. Caplitz began soliciting investments in Insight Onsite Fund and/or Insight Onsite Partners, an entity that he represented would own and manage the Insight Onsight Fund. He claimed the fund had more than $100 million in assets under management. About twelve persons invested. Contrary to the representations made to them, much of the money was funneled to the relief defendants. In a second facet of the scheme, in June 2011 Mr. Caplitz is alleged to have obtained $135,000 from a public non-traded Real Estate Investment Trust or REIT, claiming that it was needed for due diligence so a $5 million investment could be made. Following receipt of the funds no due diligence was conducted. Rather, the money was diverted to the personal use of Mr. Caplitz and the Hermans. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is in litigation. Mr. Caplitz and a relief defendant were previously indicted on criminal tax charges in, respectively, Massachusetts and Nevada. See also Lit. Rel. No. 22648 (March 19, 2013).

Unregistered broker/adviser: In the Matter of Banco Comercial Portugues, S.A., Adm. Proc. File No. 3-15248 (March 18, 2013) is a proceeding which names as a Respondent a bank headquartered in Portugal with over 1,700 branches throughout the world. Its shares are traded on the NYSE. From at least 2006 the bank has maintained accounts for U.S. resident customers. During that period the bank also bought and sold securities and gave investment advice to its U.S. customers, although it has never been registered with the Commission as a broker dealer or investment adviser. There were no registration statements filed or in effect for the securities the bank bought and sold for its U.S. resident customers. Accordingly, the Order alleges that the bank willfully violated Securities Act Sections 5(a) and (c), Exchange Act Section 15(a) and Advisers Act Section 203(a). To resolve the proceeding the bank will implement a series of undertakings, consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay disgorgement of $1,352,220, prejudgment interest and a civil penalty of $250,000.

Insider trading: SEC v. CR Intrinsic Investors, LLC, Civil Action No. 12 Civ. 8466 (S.D.N.Y. Amended complaint filed March 15, 2013) is a previously filed action against the CR Intrinsic, Matthew Martoma and Dr. Sidney Gilman. The amended complaint adds as relief defendants four entities who are alleged to have benefited from the illegal trades: S.A.C. Capital, S.A. C. LLC, Capital Associates, LLC, S.A.C. International Equities, LLC and S.A.C. Select Fund, LLC. The claims in the amended complaint are essentially the same as in the initial action. Mr. Martoma, who served as portfolio manager until 2010, met Dr. Gilman through a New York expert network firm. At the time the doctor, a professor of neurology at the University of Michigan Medical School, had a consulting contract with Elan Corporation, plc. He consulted on certain clinical trials being conducted by Elan and Wyeth on for the Alzheimer’s drug, bapineuzumab.

Dr. Gilman is alleged to have furnished Mr. Martoma with inside information on the Phase II trial for the drug as early as 2007 and in advance of a conference on July 29, 2008 where details about the trials would be disclosed. At the time funds managed by Mr. Martoma and related funds at an affiliated entity held a combined long position of over $700 million in Elan and Wyth securities. As a result of the inside information the long positions were liquidated. The funds immediately built a substantial short position in each security. Following the announcement of disappointing results, the funds had profits of about $82 million on the short positions. By liquidating their massive long positions the funds avoided losses of about $194 million. Overall the trading profits and losses avoided totaled over $276 million. To settle the case CR Intrinsic consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The firm also agreed to pay disgorgement of $274,972,541, prejudgment interest and a penalty equal to the trading profits. S.A.C. Capital will fund the entire settlement which totals about $600 million, according to Bloomberg (March 15, 2013).

Insider trading: SEC v. Sigma Capital Management, LLC, 13-civ.-1740 (S.D.N.Y. Filed March 15, 2013) is an action against the unregistered investment adviser and two hedge funds alleged to have benefitted from the trades as relief defendants: Sigma Capital Fund and S.A.C. Select Fund which was affiliated with S.A. C. Capital Advisors, LLC. This action centers on trading in advance of earnings announcements in the shares of Dell, Inc. and Nvidia Corporation. In each instance Sigma Capital obtained the inside information from Jon Horvath who belonged to a group which periodically exchanged inside information. In one part of the scheme Sandeep Goyal, an analyst at an investment adviser, obtained inside information about Dell’s May 2008 and later August 2008 earnings announcements. The information was eventually transmitted to Sigma Capital which traded in May, generating about $2.6 million in profits and losses avoided and in August 2008, avoiding losses of about $2 million. S.A.C. Select fund also benefited from the Dell inside information, avoiding losses of about $1 million. See also Lit. Rel. No. 22650 (March 19, 2013).

A second facet of the scheme involved Danny Kuo, a fund manger at another adviser who was also a member of the group which exchanged inside information. Mr. Kuo obtained inside information about Nvidia’s pending earnings releases from Hyung Lim who secured it from a friend. In May 2009 Mr. Horvath obtained inside information from Mr. Kuo that was used by Sigma Capital to trade and avoid a loss of over $500,000. Sigma Capital agreed to settle with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Ac Section 10(b). The firm also agreed to pay disgorgement of $6.425 million plus prejudgment interest and a penalty equal to the trading profits.

Option backdating: SEC v. Mercury Interactive, LLC, Civil Action No. 07-2822 (N.D. Cal., Filed May 31, 2007) is the Commission’s long running option backdating case against the company and four of its officers. This week the Commission settled with Susan Skaer, the former general counsel of the company, and the sole remaining defendant. Generally, the complaint alleged that over a seven year period beginning in 1997 the defendants backdated millions of dollars in options without recording the related expense. Ms. Skaer resolved the claims, consenting to the entry of a permanent injunction prohibiting her from violating and/or aiding and abetting violations of Securities Act Sections 17(a)(2) and (3) and the financial reporting, record keeping, internal controls, false statements to auditors and proxy provisions of the federal securities laws. She also agreed to pay disgorgement of $628,037 which was the in-the-money benefit of the options she exercised, prejudgment interest and a $225,000 civil penalty. She also agreed to be suspended from practicing or appearing before the Commission as an attorney. See also Lit. rel. No. 22646 (March 15, 2013).

Manipulation: SEC v. Carrillo Huettel LLP, Civil Action No. 13 Civ. 1735 (S.D.N.Y. Filed March 15, 2013) is an action against: Four Canadian stock promoters, John Kirk, Benjamin Kirk, Dylan Boyle and James Hinton; two San Diego based lawyers, Luis Carrillo and Wade Huettel; two companies, Pacific Blue Energy Corporation and Tradeshow Marketing Company Ltd. and their presidents, respectively, Luniel de Beer and Joel Franklin; a Bahamian broker dealer, Gaibraltar Global Securities and its president, Warren Davis; and the father of attorney Luis Carillo, Dr. Luis Carrillo. The complaint alleges an international pump and dump manipulation in which the shares of Blue Pacific and Tradeshow were artificially inflated through false and misleading e-mails and websites as well as the use of boiler room tactics. It alleges violations of Securities Act Sections 5(a) and (c), each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Re. No. 22645 (March 15, 2013).

Criminal cases

Insider trading: U.S. v. Rajaratnam, 13-cr-0211 (S.D.N.Y. Filed March 21, 2013) is an action against the brother of convicted hedge fund operator Raj Rajaratnam, Rengan Rajaratnam. The case focuses on tips he received regarding Clearwire and AMD, detailed in the discussion of the SEC Complaint above. In this case Rengan is charged with conspiracy to commit securities fraud and six counts of securities fraud. The case is pending.

Court of appeals

Agency jurisdiction: Hunter v. Federal Energy Regulatory Commission, No. 11-14777 (D.C. Cir. Decided March 15, 2013). The issue in this case centered on claims by the CFTC and FERC that each had jurisdiction to bring an enforcement action against Brian Hunter, an employee of hedge fund Amaranth. Mr. Hunter traded natural gas futures contracts on the New York Mercantile Exchange or NYMEX. In the spring of 2006 he had a portfolio constructed to benefit from a decline in the price of natural gas. Thus in February, March and April he sold a significant number of futures contracts. The volume of his trading reduced the settlement price for natural gas, a benefit for Mr. Hunter.

In July 2007 the CFTC filed an enforcement action against Mr. Hunter, alleging manipulation in violation of Section 13(a)(2) of the Commodity Exchange Act. FERC immediately filed an administrative proceeding against Mr. Hunter alleging manipulation in violation of Section 4A of the Natural Gas Act. Eventually FERC found against Mr. Hunter, imposing a $30 million fine. This appeal followed. The CFTC intervened in support of Mr. Hunter on his claim that FERC lacks jurisdiction.

The Court of Appeals focused on Section 2(a)(1)(A) of the CEA which governs the jurisdiction of the CFTC. It provides that “The Commission shall have exclusive jurisdiction . . . with respect to accounts, agreements . . . and transactions involving contracts of sale of a commodity for future delivery . . .” (emphasis added). While the Natural Gas Act makes it unlawful to manipulate the price of natural gas and vests jurisdiction over such claims with FERC, Section 23 directs that FERC and the CFTC enter into a memorandum of understanding about information sharing. It also provides that the statute has no effect on the CFTC’s exclusive jurisdiction. In this case Mr. Hunter’s alleged scheme focused on trading natural gas futures contracts with an intent to manipulate. Thus the CEA “by its plain terms” vests the CFTC with exclusive jurisdiction over the manipulation of natural gas futures contracts.

The Court rejected arguments from FERC that both agencies could had jurisdiction and that the Energy Policy Act constitutes an implicit repeal of the CEA’s exclusive jurisdiction provision. Either contention would undermine the exclusive jurisdiction of the CFTC while neither was supported by the statutory text.


Advertisements: Pacific Sun Advisors Limited and Andrew Mantel, a director, were acquitted on four counts of issuing advertisements to promote a collective investment scheme without authorization of the Securities and Futures Ordinance. Section 103(3)(k) of the SFO provides that an advertisement need not be authorized by the Securities and Futures Commission for securities, structured products or interests in a collective investment scheme that are intended to be disposed of only to professional investors. Here Pacific Sun is registered with the Securities and Futures Commission and holds licenses to give advice on securities and asset management. The defendants argued that while they did advertise the products the focus was on professional investors. The court accepted this position.

Disclosure: Andy Wong Shu Wing, former chairman and executive director of Sunlink International Holdings, Ltd. and Lee Chak To, former financial controller and company secretary were barred from serving as a director or in other positions with a listed company in Hong Kong, for, respectively, five years and three and one half years, under a court order secured by the SFC. The order was based on the fact that their company, Sunlink, failed to disclose necessary information regarding its financial condition as it deteriorated.

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