The Commission provided congressional testimony on international matters this week, while also issuing an alert regarding the municipal securities market and an Investor Bulletin. Enforcement announced that it has declined prosecution to an individual under its 2010 cooperation initiative. The announcement provides guidance regarding the parameters of the initiative.

The SEC brought two insider trading actions this week. Once is paralleled by a criminal action. The former President of Carter’s, Inc. was named as a defendant in a 37 count superseding indictment. Carter’s, Inc. was the first company to execute a non-prosecution agreement with the Commission.

The Commission

Testimony: Commissioner Elisse Walter testified on March 22, 2012 before the Senate Committee on Banking, Housing, and Urban Affairs regarding “International Harmonization of Wall Street Reform: Orderly Liquidation, Derivatives, and the Volker Rule.” The testimony covers a number of areas including the Commission’s international coordination efforts, derivatives, the Volker Rule and international enforcement and the work of the cross-boarder group (here).

Testimony: Ethiopis Tafara, Director, Office of international Affairs, testified on March 21, 2012 before the House Subcommittee on Capital Markets and Government Sponsored Enterprises. The testimony discussed repositories for sways and derivatives and indemnification requirements under Section 763(i) of Dodd-Frank (here).

Alert: The Commission issued a Risk Alert on Strengthening Procedures for Underwriting of Municipal Securities and an Investor Bulletin on Municipal Securities (here).

Speech: Chairman Mary Schapiro delivered Remarks at the SIFMA C&L Conference, Miami, Florida (March 20, 2012). The Chairman’s remarks focused on the use of technology at the agency to improve efficiency and investor protection.

Speech: Commissioner Elisse B. Walter delivered Remarks at the 2012 Mutual Funds and Investment Management Conference, Phoenix, AZ (March 19, 2012). The Commissioner discussed issues concerning money market funds.


The Commission announced that it declined to prosecute a former AXA Rosenberg executive based on his assistance under the program initiated in January 2010 regarding cooperation. AXA Rosenberg is an investment advisor which specialized in quantitative investment strategies tied to complex computer models. Because of a computer coding error over 600 clients lost about $217 million. Although the firm at first concealed the error once it was discovered the Commission investigated and brought two enforcement actions which recovered all of the investor losses.

The SEC credited a senior executive at the firm with facilitating its investigation as envisioned by the proposal. Key elements of the cooperation included: 1) The executive was the first to offer assistance under the cooperation initiative; 2) He participated in the absence of any promise regarding the impact on him; 3) The staff was provided with candid and accurate information which facilitated the investigation; 4) The position of the executive, coupled with his relationship with the parties involved and detailed knowledge of the model, allowed him to provide credible, important information to the staff; and 5) The investigation was in a priority area for the Division and a favorable result was achieved for investors. In addition, the Commission noted that the executive had a limited role in the wrongful conduct and he is no longer in the securities business since he retired with no disciplinary history.

SEC Enforcement: Filings and settlements

This week the Commission filed (or announced the filing of) 3 civil injunctive actions and no administrative proceedings (excluding follow- on and 12(j) actions) including the following:

Misappropriation: SEC v. Franz, Civil Action No. 5:12-cv-00642 (N.D. Ohio Filed March 15, 2012)(announced March 22, 2012, Lit. Rel. 22303) is an action against Andrew Franz who was formerly associated with registered investment adviser Ruby Corporation. While associated with Ruby, Mr. Franz is alleged to have misappropriated about $865,969 from clients of the firm. Most of that sum was from family members. He also misappropriated about $172,000 in client fees from the Adviser. Subsequently, he returned about $684,000 disguised as client fees thus keeping a net of about $354,000, according to the Commission. In November 2011 Mer. Franz is also alleged to have obtained a distribution from the firm by falsely claiming in telephone calls that he was the chairman of the corporate client. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The Court granted a request for a temporary freeze order. The case is in litigation.

Insider trading: SEC v. Griggs, Case No. CV 12-2203 (C.D.Ca. Filed March 15, 2012) is an action against Noah J. Griggs, Jr., an EVP at CKE Restaurants, Inc., the operator of the Hardee’s fast food chain. Through his work he learned that CKE would be acquired by private equity fund Thomas H. Lee Partners or THP. Prior to the announcement on February 26, 2010 he purchased a total of 50,000 shares of the company. After the deal announcement the share price increased significantly. Mr. Griggs resolved the action by consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) without admitting or denying the allegations in the complaint. In addition, he agreed to pay disgorgement of $145,430, prejudgment interest and a penalty of $11,730. The order also bars him from serving as an officer or director of a public company for ten years.

Stock lending scheme: SEC v. SW Argyll Investments, LLC, 12-cv-0646 (S.D. Cal. Filed March 15, 2012) is an action against the company and two of its senior executives, James Miceli and Douglas McClain. Since 2009 the defendants are alleged to have induced nine corporate officers and directors to transfer millions of shares of stock to Argyll as collateral for purported loans. Investors were told that their shares would not be sold and that they would be returned when the loans were paid. In fact the stock was sold without their knowledge. In many instances the proceeds were used to fund loans. Argyll is alleged to have reaped over $8 million from the scheme. Many of the shares were not registered. The complaint alleges violations of Securities Act Section 5 and Exchange Act Sections 10(b) and 15(a). The case is in litigation.

Criminal cases

Financial fraud: U.S. v. Ellis (N.D.Ga.). A superseding indictment was handed down naming as a defendant Joseph Pacifico, President of Carter’s,Inc. from 2004 through the end of 2009. Mr. Pacifico was named in 37 counts, including securities and wire fraud, in connection with a financial fraud orchestrated by Joseph Elles, formerly an executive of the company. According to the superseding indictment, Mr. Pacifico knew about, and helped cover-up, the fact that Mr. Elles was manipulating the company rebate policy to fraudulently boost the income of the firm. Eventually the company was forced to restate its financial statements. Carter’s, Inc. entered into the Commission’s first non-prosecution agreement as a result of self-reporting and its cooperation. Mr. Elles was previously named as a defendant in a Commission enforcement action.

Market crisis: U.S. v de Armas (E.D.Va.) is the action against Delton de Armas, former CEO of collapsed mortgage company Taylor, Bean & Whitaker. Mr. de Armas pleaded guilty to making false statements and conspiring to commit bank and wire fraud in connection with the $2.9 billion fraud. Previously, CEO Lee Farkas, to whom Mr. de Armas at one time reported, was found guilty by a jury in connection with the massive fraud which lead to the collapse of the firm.

Insider trading: U.S. v. Allen, 11 Crim 7997 (S.D.N.Y. Nov. 2011); SEC v. Allen, 11 Civ. 6443(S.D.N.Y. Sept. 15, 2011). Defendant Scott Allen was a principal in a human resources firm. His long time friend John Bennett worked in the film industry but previously was in the securities business. From his work at his firm Mr. Allen learned about two upcoming tender offers. The first was by Takeda Pharmaceuticals, Inc. for Millennium Pharmaceuticals, Inc. The deal was announced on April 10, 2008. The second was by Dainippon Sumitomo Pharma Co. Ltd. for Sepracor. That transaction was announced on September 3, 2009. Each was a cash tender offer. After learning about the deals Mr. Allen furnished the information to John Bennett. In return he received over $100,000 in cash payments. Mr. Allen did not purchase securities in either deal. Mr. Bennett traded options, netting $619,000 in profits on the Millennium deal and another $682,000 on the Speracor transaction. When approached by investigators Mr. Allen tried to conceal his relationship with Mr. Bennett. Shortly prior to trial Mr. Allen pleaded guilty to seven counts of securities fraud and one count of conspiracy to commit securities fraud. Sentencing is set for August 20, 2012. The Commission’s case is pending.


Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., was fined $600,000 by FINRA and ordered to pay over $648,000 in restitution and interest to more than 3,600 bond customers for charging excessive markups and markdowns on corporate and agency bond transactions and in connection with supervisory failures. From July 2007 through September 2010 Citi International charged excessive corporate and agency bond markups and markdowns. The firm also failed to use reasonable diligence to buy or sell corporate bonds so that the resulting price to its customers was as favorable as possible under prevailing market conditions.

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