In rare acts of bipartisanship, the House and Senate passed two securities bills this week. One is the JOBS act which has little to do with creating jobs and lots to do with simplifying the regulatory requirements for certain companies post-IPO while creating a new “crowdfunding” exception to the registration provisions. The other is the STOCK Act which bars insider trading by members of Congress, although Enforcement Director Robert Khuzami has repeatedly testified that members are subject to current law.

The Supreme Court rejected the Ninth Circuit’s position on how the two year statute of limitations for Exchange Act Section 16(b) is tolled as well as that of the Second Circuit. The High Court was unable to conclude if that period could in fact be tolled although the fact that eight Justices split with the Chief Justice not participating had the effect of affirming the Ninth Circuit’s ruling that the period could in fact be tolled. That decision however has no precedential value

The SEC prevailed in two court proceedings this week in involving investment fund cases. In one the Commission secured a preliminary injunction and other relief following a hearing. In the other, the SEC prevailed on summary judgment.

Finally, in the African Sting case the DOJ moved to dismiss the three guilty pleas obtained early in the case. The DOJ and the SEC also resolved another medical device FCPA case.

The Commission

Cooperation agreements: The Commission announced that it has entered into two new supervisory cooperation agreements as part of a long-term strategy to improve oversight of cross-boarder regulated entities. One agreement is with the Cayman Islands Monetary Authority. The other is with the European Securities and Markets Authority.


JOBS ACT: The Jumpstart Our Business Startups Act or the JOBS Act, H.R. 3606 as amended, has passed both the House and Senate and was sent to the President for signature. The Act is designed to provide an IPO ramp for small companies by easing their filing requires for a period of time. It also modifies rules regarding the sale of private placement securities under Regulation D, certain prohibitions separating analysts and the investment banking side of a firm and contains crowdfunding provisions.

STOCK ACT: The Stock Act, S. 2038, which would bar members of Congress from insider trading, has been passed by both the House and the Senate. The bill has been sent to the President for signature.

Supreme Court

Section 16(b) statute of limitations: Credit Suisse Securities (USA) LLC v. Simmons, No. 10-1261 (March 26, 2012). The Court rejected the conclusion of the Ninth Circuit Court of Appeals that the two year statute of limitations for an Exchange Act Section 16(b) short swing claim did not begin to run until the covered person filed a Section 16(a) report. It also rejected the tolling rule of the Second Circuit which held that the time period was tolled until the plaintiff had actual knowledge of the violation. The Court, however, failed to determine if in fact the two year period could be tolled at all, splitting four to four with the Chief Justice not participating. This affirmed the ruling of the Ninth Circuit on this point. This conclusion is not precedential. The case was remanded to the Circuit Court for further proceedings.

SEC Enforcement: Court rulings

Investment fund fraud: SEC v. Callahan, Civil Action No. 12-CV-1065 (E.D.N.Y. Filed March 5, 2012) is an action against Brian Callahan and his investment advisory firms Horizon Global Advisors Ltd. and Horizon Global Advisors, LLC. The complaint alleges that Mr. Callahan raised more than $74 million from at least two dozen investors. The funds were suppose to be invested in liquid assets but in fact were diverted to his brother-in-law’s real estate project which was facing foreclosure. Following a hearing, the court granted the Commission’s request for a preliminary injunction precluding violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The order also continues an asset freeze and requires the repatriation of assets that may be outside the U.S. A receiver was also appointed.

Investment fund fraud: SEC v. Gagnon, Civil Action No. 10-cv-11891 (E.D. Mich. Filed May 11, 2010) is an action against Matthew Gagnon in which the Commission prevailed on a motion for summary judgment and obtained a final judgment against the defendant. The complaint alleged three fraudulent schemes. In one Mr. Gagnon operated a website which he advertised as “the world’s first and largest opportunity review website.” From January 2006 through August 2007 he helped orchestrate a massive Ponzi scheme operated by Gregory McKnight and his company Legisi Holdings LLC. Mr. Gagnon told investors he had completely researched the operation and concluded it was a safe investment. The claim was false and failed to disclose he was being paid 50% of the profits. In the second from August 2007 he sold securities he falsely claimed would pay a 200% return in 14 months and that they were “SEC compliant.” In fact he diverted the money to a twice convicted felon which totaled at least $361,865 raised from 21 investors. In the third, beginning in April 2009 Mr. Gagnon promoted a fraudulent offering of interests in a purported Forex trading venture. Investors were guaranteed returns of 2% per month or 30% per year. The claims were false. In grating the Commission’s motion the court entered a permanent injunction prohibiting future violations of Securities Act Sections 5, 17(a) and 17(b) and Exchange Act Sections 10(b) and 15(a)(1). Mr. Gagnon was also ordered to pay disgorgement of $3,613,259, prejudgment interest and a $100,000 penalty.

SEC Enforcement: Filings and settlements

The Commission filed 3 civil injunctive actions and no administrative proceedings (excluding follow-on actions and 12(j) proceedings) this week including:

Financial fraud: SEC v. Cinderey, Civil Case No. CV 12-1519 (N.D. Cal. Filed March 27, 2012) is an action against John Cinderey, formerly an executive vice president of United Commercial Bank, a wholly owned subsidiary of publically traded UCBH Holdings, Inc.

As the market crisis unfolded in 2008 the real estate market declined resulting in increasing loan delinquencies and decreasing collateral values for the bank’s portfolio of commercial and construction loans. In the second half of the year overdue loans and defaults increased. The bank sought and received funds from TARP. Nevertheless, by November 6, 2009 the bank was closed and an FDIC receiver was appointed. Prior to the failure of the bank, its former CEO, COO and former EVP deliberately delayed the proper recording of loan losses as the company prepared its 2008 financial statements. Mr. Cinderey assisted that process by furnishing false and misleading materials to the auditors. In taking these and other actions Mr. Cinderey circumvented the internal controls of the bank, according to the complaint. The complaint alleges that the defendant aided and abetted violations of Exchange Act Section 13(b)(2)(A) and violated Exchange Act Section 13(b)(5) and the related Rules. Mr. Cinderey resolved the charges, consenting to the entry of an injunction based on the Sections and Rules cited in the complaint, without admitting or denying its allegations. He did not pay a civil penalty in part based on a $40,000 civil penalty paid in an FDIC administrative proceeding. The terms of the settlement reflect his cooperation and the fact that he entered into a cooperation agreement, according to the Commission’s Litigation Release. See also SEC v. Wu, Civil Case No. CV-11-4988 (Oct. 11, 2011)(action against senior officers of the bank).

Offering fraud: SEC v. Marion, Civil Action No. 12-cv-00749 (D. Minn. Filed March 26, 2012) is an action against David Marion and his company, International Rarities Holdings, Inc. or IRI. From 2008 through July 2009 he raised about $1 million from 26 investors by selling them IRI shares. In connection with those sales Mr. Marion falsely represented that IRI owned International Rarities Corporation or IR Corp., a gold coin and bullion sales firm he operated and that the money would be used to expand the business and take it public. In fact IRI was a shell and the money was diverted to Mr. Marion’s personal use. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation.

Criminal cases

U.S. v. Maloy (E.D. Va.) is an action in which defendant David Maloy previously pleaded guilty to operating an investment fraud scheme. Beginning in 2003 he defrauded over 700 businesses and 600 individuals out of over $7 million through the operation of Cash Rewards, Inc. That company marketed an advertising tool to retail businesses that could be used to attract prospective clients. It sold a time-deferred mail in cash rewards certificate. In marketing the product Mr. Maloy made numerous recommendations. Even when the company was forced into bankruptcy in 2009 he continued to market the program. Much of the money was diverted to his personal use. This week Mr. Maloy was sentenced to serve 120 months in prison and ordered to pay $7,246,709 in restitution.


Africa Sting: U.S. v. Goncalves, Cr. No. 09-335 (D.D.C.) is an FCPA action initially brought against 22 individuals. It was based on the largest FCPA sting operation in the history of the Act. Following two trials in which the jury either failed to reach a verdict or acquitted defendants and adverse rulings by the Court, the DOJ dismissed the remaining indictments. This week the Department moved to dismiss with prejudice the charges against three defendants who pleaded guilty to conspiracy charges prior to the first of the trials. The DOJ conclude that an earlier adverse ruling on a conspiracy charge in the case would apply to the three defendants and thus moved for dismissal despite that fact that it disagreed with the ruling.

Medical device industry investigation: Biomet Inc., a global medical device company, settled FCPA charges with the DOJ and the SEC. SEC v. Biomet, Inc., Civil Action No. 1:12-CV-00454 (D.D.C. March 26, 2012). The company, along with its subsidiaries, made more than $1.5 million in payments in violation of the FCPA from 2000 to 2008 to publicly-employed health care providers in Argentina, Brazil and China. The illegal payments were made to publically-employed doctors, in some instances directly, and in others through intermediaries. The payments were falsely recorded in the books and records of the company. Biomet resolved charges with the DOJ by entering into a deferred prosecution agreement. The company will pay a criminal fine of $17.28 million, implement rigorous internal controls, cooperate with the Department and retain a compliance monitor for 18 months. The DOJ acknowledged the extensive cooperation of the company. The company also settled with the SEC, consenting to the entry of a permanent injunction which prohibits future violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). It also agreed to pay disgorgement of $4,432,998 along with prejudgment interest.


Market crisis: The regulator imposed fines on three individuals and banned them in connection with falsifying the financial condition of Cattles plc and its subsidiary Welcome Financial Services Limited. Both firms were censured. Cattles was a sub-prime lender listed on the London Stock Exchange and, in 2008 was a member of the FTSE 250 before being delisted. Cattle’s 2007 annual report falsely represented that only £0.9 billion of Welcome’s approximately ₤3 billion loan book was in arrears. In fact about £1.5 billion was in arrears if proper accounting standards were employed. The company also announced a pre-tax profit of ₤165.2 million for 2007 when in fact it suffered a pre-tax loss of £96.5 million. The FSA fined James Corr, Cattles’ finance director ₤400,000, Peter Miler, Welcome’s finance director £200,000 and banned both men from performing any functions in relation to any FSA regulated activities. It also banned John Blake, Welcome’s managing director and fined him ₤100,000. Both firms were censured. The penalties would have been higher but for the financial condition of the individuals and the entities.

Corruption: The regulator published the finings of its thematic review of anti-bribery and corruption systems and controls in investment banks. Generally it concluded that the 15 firms surveyed had inadequate controls. Specifically, most of the firms had not adequately considered the rules prior to or after the new Bribery Act, nearly half had inadequate risk assessment and while many had recently tightened rules on gifts, hospitality and expenses few had processes to ensure that gives and expenses in relation to particular clients and projects were reasonable on a cumulative basis. The FSA is no considering if further regulatory action should be taken.

Tagged with: , , , , ,