This Week In Securities Litigation (Week ending March 3, 2017)

The Commission prevailed in another trial. The action centered on fraud in connection with a securities lending transaction. The agency also brought another suspicious trading case this week. The action centered on the acquisition by Softbank of Fortress Investments in which there two trader groups appear to have made profits totaling about $3.6 million.

In one of the first Circuit Court insider trading decisions involving tipping since the Supreme Court’s decision in Salman, the First Circuit upheld the conviction of a man tipped by his golfing buddy on a cocktail napkin to the takeover of a small community bank. The Court rejected claims that the relationship between the two men was not sufficiently to support a charge based on gifting the information.


Foreign private issuers: The Commission announced that foreign private issuers can begin submitting their financial statements in XBRL (March 1, 2017)(here).

Rules: The Commission proposed rule amendments to improve municipal securities disclosures (March 1, 2017)(here).

Remarks: Acting Chairman Michael Piwowar delivered remarks titled “Remembering the Forgotten Investors” at the PLI SEC Speaks Conference, Washington, D.C. (Feb. 24, 2017). His remarks included a discussion of disclosure initiatives, the threshold regarding accredited investors, a brief review of issues regarding corporate penalties and a reference to four new disclosure recommendations from the staff (here).

Remarks: Commissioner Kara Stein delivered remarks titled “The Market in 2017: What’s at Stake?” at the PLI SEC Speaks Conference, Washington, D.C. Feb 24, 2017). Her remarks focused on changes in the markets, the opportunities they present and the need for change (here)

SEC Enforcement – Litigated Actions

Securities lending: SEC v. Hall, Civil Action No. 1:15-cv-23489 (S.D. Fla. Filed Sept. 17, 2015). The complaint named as a defendant Christopher Hall, the COB of Call Now, Inc., a public company that owned and operated a race track. Mr. Hall and his firm had millions of dollars in margin loans from broker and clearing firm Penson Financial Services, Inc. prior to the market crisis. By 2009 the collateral had significantly diminished in value. The Defendants were requested to post additional collateral. Mr. Hall offered shares of Call Now stock which the broker valued internally at $10 per share. He represented to the firm, however, that liens had to be cleared from the shares before they could be deposited as collateral. Pension then arranged to extend Mr. Hall $5.5 million in loans. In fact the claim was false, according to the complaint. Mr. Hall had the loan proceeds wired to an account in Florida he controlled and only used about $850,000 to pay for liens.

Mr. Hall also agreed to pledge his interest in a real estate limited partnership as additional collateral for his margin loans. As part of the arrangement Mr. Hall agreed to obtain the broker’s written consent if he decided to sell the interest. Since the interest had a pre-existing lien, according to Mr. Hall, Penson agreed to subordinate its interest to that of a prior lender. The broker did not know that the prior lender was Mr. Hall and that the lien had been created to shroud his assets from creditors.

Subsequently, defendant Hall sold his interest in the real estate limited partnership without informing the broker. He took the $1.3 million in proceeds and delivered $1 million to his firm and the remainder to his personal bank account. The complaint alleged violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23352 (Sept. 17, 2015).

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 1 civil injunctive cases and 4 administrative proceedings, excluding 12j and tag-along proceedings.

Suspicious trading: SEC v. One or More Unknown Traders, Civil Action No. 2:17-cv-01287 (D. N.J. Filed Feb. 28, 2017) is a suspicious trading action centered on the acquisition of Fortress Investment Group, LLC by Softbank Group Corp, announced on February 14, 2017. The day before the deal announcement customers at a Singapore based broker dealer purchased 950,000 shares of Fortress which they sold the next morning, reaping profits of about $1.7 million. Customers of a U.K. based broker-dealer purchased contracts for difference between February 10 and 14, 2017 representing about 1,055,500 shares of Fortress. Most were closed on February 15 for a profit of about $1.9 million. The complaint alleges violations of Exchange Act Section 10(b). The SEC obtained an emergency freeze order. The case is pending. See Lit. Rel. No. 23760 (Feb. 28, 2017).

Stop order proceeding: In the Matter of the Registration Statement of Nova Smart Solutions Inc., Adm. Proc. 3-17863 (Feb. 27, 2017); In the Matter of the Registration Statement of Arc LifeStyle Group Inc., Adm. Proc. File No. 3-17862 (Feb. 27, 2017); In the Matter of the Registration Statement of Go EZ Corporation, Adm. Proc. File No. 3-17861 (Feb. 27, 2017) Each Order alleges that the registration contains false and misleading information. Each action will be set for hearing.

Independence: In the Mater of Edward Richardson Jr., Adm. Proc. File No. 3-17857 (Feb. 24, 2017) is a proceeding which names as Respondents Mr. Richardson and the PCAOB registered firm he owns, Edward Richardson Jr. The Order alleges that for over 80 broker-dealer audit clients during the period of 2010 through 2012 the firm violated the independence standards by conducting an audit when it had prepared the financial statements. For another client Respondents failed to obtain engagement quality reviews as required by PCAOB standards during 2013. Finally, in conducting the audits for another firm during 2013 Respondents failed in a number of instances to comply with PCAOB standards. The Order alleges violations of Exchange Act Sections 13(a), 15(d), 17(a) and the related rules. The proceeding will be set for hearing.

Criminal Cases

Overbilling: U.S. v. Broidy, (E.D.N.Y.) is an action which named investment adviser Broidy, the principle of Wealth Advisors, LLC, as a defendant. Over a five year period beginning in early 2011 Mr. Broidy overbilled advisory clients by about $640,000. Mr. Broidy covered up the overbilling scheme by altering certain documents. In addition, over a period of about one year, beginning in April 2015, Mr. Broidy misappropriated about $865,000 from trusts for which he served as trustee. Finally, Mr. Brody failed to advise clients that he was a board member of certain private companies for which he solicited investments from firm clients. This week Mr. Broidy pleaded guilty to investment adviser fraud. As part of the plea agreement he will make restitution to the fraud victims. See also SEC v. Broidy, Civil Action No. 1:16-cv-05960 (E.D.N.Y. Filed Oct. 27, 2016) See Lit. Rel. No. 23679 (Oct. 27, 2016).

Court of Appeals

Insider trading: In U.S. v. Bray, No. 16-1579 (1st Cir. Decided Feb. 24, 2017) the Circuit Court considered two key questions in the wake of Salman v. U.S., 136 S.C. 899 (2016): 1) The sufficiency of the evidence on the question of a personal benefit when the inside information was a gift; and 2) the adequacy of an instruction that the defendant “knew or should have known” that the tipper obtained a personal benefit. The action centered on the June 29, 2010 announcement that Eastern Bank had agreed to acquire Wainwright Bank & Trust Co. for $19 per share. Prior to the announcement defendant Robert Bray had known John O’Neill for years. Mr. Bray was a contractor and real estate developer. Mr. O’Neill was an executive at Eastern Bank.

The two men met at a country club where they both played golf, although their contacts focused largely on socializing in the pub and at dinner. Over time the two men became friends. In some instances the they discussed their respective professions. Mr. O’Neill, for example, had some of his friend’s associates refurbish the basement and roof of his home. Mr. Bray often asked his friend for stock market and investment advice and, in particular, about small bank stocks. The information was always public. On June 13, 2010 Messrs. Bray and O’Neill had a conversation about investing in which Mr. Bray for the first time said he need to make a “big score” to help fund one of his real estate ventures – did Mr. O’Neill have any bank stock tips. After furnishing his friend with the names of several banks, Mr. O”Neill wrote the word “Wainwright” on a napkin and gave it to Mr. Bray. At the time Mr. O’Neill knew that local bank Wainwright Bank & Trust Co. was up for sale from his work — he had signed a confidentiality agreement. Mr. Bray later bought 31,000 shares of the thinly traded stock, constituting about 56% of the trading volume between June 14th and the end of the month. He liquidated a large portion of his other holdings. Following the deal announcement he had profits of about $300,000.

Mr. Bray was charged with insider trading by the SEC and the U.S. Attorney’s Office. At the criminal trial Mr. O’Neill testified that he furnished the information to “enhance our relationship, he would think more highly of me . . . [we were] friends and that’s what friends do . . . I didn’t expect anything at that exact time, but down the road he did offer me an interest in the Watertown project.” The jury returned a verdict of guilty on a charge of insider trading. Mr. Bray was sentenced to serve two years in prison.

The Circuit Court affirmed. The government tried the case based on the misappropriation theory of insider trading. In such instances liability hinges on whether the tipper breached a duty of trust and confidence by disclosing the inside information, which in turn depends on whether the tipper personally will benefit . . .” according to the Court. Here Mr. Bray admitted he traded on inside information but claimed that there was insufficient evidence that Mr. O’Neill expected a personal benefit in exchange for the tip. He also claimed that the relationship between the two men was “causal, as opposed to close” and thus did not meet the standard of U.S. v. Newman, 773 F. 3d 438 (2nd Cir. 2014) which required a “meaningfully close relationship” – a point not discussed in Salman, although the Supreme Court did reject a portion of the Newman standard.

The Court found the evidence more than sufficient to uphold the verdict. First, Mr. O’Neil’s testimony was sufficient on the point. Second, that point is bolstered by the fifteen year relationship of the two men who frequently socialized and took each other’s counsel. In reaching this conclusion the Court noted that it was not deciding how close the relationship had to be but only that the evidence here was sufficient. Finally, the Court rejected the defendant’s claim regarding the jury instruction. While Mr. Bray was correct that the “knew or should have known” standard is incorrect, he failed to object at trial. In view of the sufficiency of the evidence here his claim failed to meet the test of plain error.


Report: The Australian Securities and Investment Commission published another report on corporate finance regulation, focused on the period July to December 2016. The Report furnishes insights in to the regulator’s approach.

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