This Week In Securities Litigation (Week ending March 4, 2016)
The SEC had a significant courtroom victory this week, prevailing in the Payton insider trading trial. A jury returned a verdict in favor of the agency. The defendants had previously pleaded guilty in a parallel criminal case. Those pleas were vacated after Newman. The court refused to dismiss the SEC’s civil action which was based largely on the same facts.
This week the SEC brought three FCPA cases. In addition, the Commission filed actions based on overcharging advisory fees, insider trading, the improper use of confidential client information by a registered representative and false statements made by two penny stock companies.
Remarks: Commissioner Michael S. Piwowar delivered remarks at the ABS Vegas 2016 meeting, Las Vegas, Nevada (March 1, 2016). In his remarks the Commissioner reviewed the securitization market and recent rules issued in that area which the agency is assessing. He also reviewed European securitizations (here).
SEC Enforcement – Litigated Actions
Insider trading: SEC v. Payton, Civil Action No. 14 civ 4644 (S.D.N.Y.). A jury returned a verdict in favor of the SEC and against defendants Daryl Payton and Benjamin Durant, both registered representatives. The inside information on the IBM – SPSS deal traced to attorney Michael Dallas, an associate at New York law firm Cravath Swaine & Moore LLP, who had been assigned to work on the deal. Mr. Dallas was close friends with broker Trent Martin. The two men had a history of sharing confidential information. Beginning in the spring of 2009 Mr. Dallas told his friend about the SPSS deal. Over time he provided updates. Both men understood that the information they shared regarding their work was non-public and confidential. Both expected that confidentiality would be maintained, according to the SEC complaint.
Mr. Martin was roommates with Thomas Conradt, an attorney employed at another New York brokerage firm. They had a close, mutually dependent financial relationship with a history of personal favors. Mr. Martin told his roommate about the SSPS deal. Mr. Conradt purchased shares of SPSS prior to the deal announcement on July 28, 2009. Defendants Payton and Durant were co-works of Mr. Conradt. The three men had discussions about Mr. Conradt’s roommate – Trent Martin. Each knew that Mr. Martin worked at a brokerage firm. Mr. Conradt told his co-workers that he learned about the SPSS acquisition from his roommate. Messrs. Payton and Durant did not ask more about the roommate. They did purchase shares of SPSS just prior to the public announcement of the deal. The SEC charged Messrs. Payton and Durant with insider trading.
At trial a critical issue at trial was whether there was a Newman type benefit. That same issue was the focal point of a Motion to Dismiss brought at the outset of the SEC’s action. In an opinion written by Jude Rakoff, that motion was denied. In a parallel criminal case guilty pleas by the two defendants were previously vacated. U.S. v. Conradt, 12 cr. 887 (S.D.N.Y. Order Dated January 22, 2005).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive case and 4 administrative proceeding, excluding 12j and tag-along proceedings.
Advisory fees: In the Matter of Marco Investment Management, LLC, Adm. Proc. File No. 3-17150 is a proceeding in which the Respondents are the firm, a registered investment adviser, and its CEO and CCO, Steven Marco. The Order alleges that from 2005 through 2014 the adviser charged clients excessive fees. That also resulted in errors in the books and records stemming from the manner in which the fees were calculated. In addition, the firm had inadequate supervisory procedures. The Order alleged violations of Advisers Act Sections 204(a), 206(4) and 207. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. The firm will pay disgorgement of $124,750.44 along with prejudgment interest and a penalty of $100,000. Mr. Marco will pay a penalty in the amount of $50,000.
Insider trading: In the Matter of Patricia Zajick, Adm. Proc. File No. 3-17141 (March 1, 2016) is a proceeding which names as Respondents Ms. Zajick, Daniel Mitzler and Donald Zajick. The proceeding centers on the takeover of GSI Commerce, Inc. by eBay Inc., announced on March 28, 2011. Prior to the deal announcement Ms. Zajick misappropriated information from her friend, Individual A, who was married to a GSI employee. She then tipped each of the other Respondents – her husband Daniel and her father, Donald Zajick. The Order alleged violations of Exchange Act Section 10(b). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, the Respondents will pay, jointly and severally, disgorgement of $53,037, prejudgment interest and a penalty of $107,224. See also In the Matter of Craig N. Salamone, Adm. Proc. File No. 3-17143 (March 1, 2016)(Respondent was tipped by Daniel Zajick regarding the GSI transaction and traded; resolved with a cease and desist order based on Section 10(b) and the payment of disgorgement in the amount of $9,491, prejudgment interest and a penalty of $4,745; Respondent cooperated with the staff); In the Matter of Lawrence M. Gincel, Adm. Proc. File No. 3-17142 (March 1, 2016)(Respondent tipped by good friend Patricia Metzler and traded; consented to the entry of a cease and desist order based on Section 10(b) and paid $1,083 in disgorgement, prejudgment interest and a penalty equal to the amount of the disgorgement).
Insider trading: SEC v. Zwerko, Civil Action No. 14-cv-8181 (S.D.N.Y.) is a previously filed action which named as defendants Zachary Zwerko and David Post. The complaint alleged that the two men orchestrated an insider trading scheme that generated about $683,000 by purchasing securities based on information Mr. Zwerko obtained about his employer’s pharmaceutical acquisition targets. The court entered final judgments by consent as to each defendant permanently enjoining them from future violations of Exchange Act Section 10(b). The court also directed the payment of $57,000 in disgorgement as to Mr. Zwerko to be offset by the criminal forfeiture judgment imposed on him. As to Mr. Post, the court ordered the payment of disgorgement in the amount of $683, 967, also to be offset by the criminal forfeiture judgment entered against him. Previously, both men pleaded guilty in the parallel criminal action. Mr. Zwerko was sentenced to 37 months in prison while Mr. Post will serve six months. See Lit. Rel. No. 23477 (March 1, 2016).
Confidential information: In the Matter of Maximillian Santos, Adm. Proc. File No. 3-17139 (February 29, 2016) is a proceeding which names as Respondent Mr. Santos, a registered representative at a registered broke. The Order alleges that he shared confidential client information from client files with a former firm broker from whom he inherited many of his clients. He also used his personal email for business transactions. The Order allege violations of Exchange Act Section 17(a)(1) and Rules 7(a)(1) and 10(a)(1) of Regulation S-P. Mr. Santos resolved the action, consenting to the entry of a cease and desist order based on the Section and Rules cited in the Order. He was also suspended from the securities business for a period of six months, from participating in any penny stock offering and prohibited from serving as an officer or director of an investment adviser or a depositor of, or principal underwriter for, a registered investment company for a period of six months. In addition, he will pay a penalty of $75,000.
Financial fraud: SEC v. Davis (S.D.N.Y.) is a previously filed action in which the Court entered a final judgment by consent against Francis Canellas, the former finance director of firm. The court entered a permanent judgment prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The judgment also provides for the payment of disgorgement, prejudgment interest and a financial penalty in amounts to be determined later. The initial action was brought against five executives and finance professionals formerly with the collapsed law firm. In addition to Mr. Canellas, the defendants are: Attorney Steven Davis, chairman of the firm; attorney Stephen DiCarmine, executive director; Joel Sanders, CFO; and Thomas Mullikin who held several accounting positions. The complaint alleges that in connection with a $150 million private bond offering in 2010 the firm and the defendants engaged in financial fraud, furnishing purchasers a PPM with false financial information. In fact, the financial fraud traced back to 2008 when the firm began falsifying its books. Bond purchasers were also furnished with quarterly financial information which was false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 23475 (February 26, 2016).
Insider trading: SEC v. Huang, Civil Action No. 15-cv-269 (E.D. Pa.) is a previously filed action in which the court issued a memorandum opinion and final judgment against Nan Huang who was found liable for insider trading following a jury trial. The court entered a permanent inunction and directed the payment of $4,403,545 in disgorgement, prejudgment interest and a penalty of $8,807,090. The complaint alleged insider trading based on the misappropriation theory against two former employees of Capital One, Bonan Huang and Nan Huang. From November 2013 through January 2015 the two defendants were alleged to have misappropriated material inside information from their employer and used it to trade in the shares of retail establishments reflected in the credit card statements of firm card holders. Specifically, the defendants, employed as data analysts, were tasked with analyzing transactions for possible fraudulent credit card activity. As such the two men had access to customer data held by the Capital One. That included details on numerous consumer purchase transactions. The two men used their access to gather information regarding purchases and analyze potential sales trends at various retail establishments. The results of the analysis were then used to trade in shares of the firms prior to earnings announcements. The scheme generated over $2.8 million in trading profits. See Lit. Rel. No. 23476 (February 26, 2016). Defendant Bonan Huang settled with the Commission shortly before trial, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b), and agreeing to pay disgorgement, prejudgment interest and penalties totaling over $4.7 million. See Lit. Rel. No. 23438 ( December 23, 2015).
False statements: SEC v. Fortitude Group, Inc., Civil Action No. 1:16-cv-00050 (W.D. Pa. Filed Feb 29, 2016); SEC v. Strategic Global Investments, Inc., Civil Action No. 3:16-cv-005014 (S.D. Cal. Filed Feb. 29, 2016). Fortitude Group names as defendants, the company, which claims in part to have made efforts to enter into the rapidly growing legal marijuana business, and its CEO, Thomas Parilla. Strategic Global names as defendants the company, which claims to have a marijuana cultivation facility, and its CEO, Andrew Fellner. Both firms are penny stock stocks. Each complaint alleges that the defendants circulated false statements regarding their marijuana related interests. Each complaint alleges violations of Exchange Act Section 10(b). Fortitude also alleges a violation of Exchange Act Section 20(e) while Strategic Global alleges violations of Securities Act Section 17(a)(2). Both cases are pending. See Lit. Rel. No. 23479 (March 3, 2016).
In the Matter of Nordion (Canada) Inc., Adm. Proc. File No. 3-17153 (March 3, 2016); In the Matter of Mikhail Gourevitch, Adm. Proc. File No. 3-17152 (March 3, 2016). The firm is a global health science company based in Canada. At one time Nordion was listed on the TSX and the NYSE. Mr. Gourevitch was a Canadian and Israeli citizen employed by the firm as an engineer. The Order alleges that beginning in 2004, and continuing through 2011, the firm made payments to a third party agent obtaining Russian government approval for the distribution of a liver cancer treatment in that country. Those payments were not properly recorded in the books and records of the firm. Mr. Gourevitch is alleged to have authorized offering or making the payments. The Order as to the company alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The Order as to Mr. Gourevitch alleges violations of the same Sections as the Order regarding the company but adds Exchange Act Section 30A. Each proceeding was resolved with the Respondent consenting to the entry of a cease and desist order based on the Sections cited in the respective Order. In addition, the company will pay a penalty of $375,000. The Commission considered the fact that the firm self-reported, took remedial acts and cooperated. Mr. Gourevitch will pay disgorgement of $100,000, prejudgment interest and a penalty of $66,000.
U.S. v. Olympus Latin America, Inc. is an FCPA action involving Olympus Corporation of the Americas, a wholly owned subsidiary of Olympus Corporation, Tokyo, Japan, and Olympus Latin America, Inc. The action centers on the period 2006 through 2011 in Brazil Bolivia, Chile, Columbia, Argentina, Mexico and Costa Rica. During that period payments were made by Olympus to medical officials, implementing a plan to increase medical equipment sales in Central and South America. The payments were delivered through what were called training centers. Nearly $3 million in payments were made. Those payments yielded over $7.5 million in profits. The FCPA action was resolved with Olympus Latin America, Inc. entering into a deferred prosecution agreement. Under the terms of the Agreement the firm will pay a criminal fine of $22 million. The company will also retain a corporate compliance monitor for three years. The fine is below the bottom of $28.5 million range calculated under the sentencing guidelines. While the company cooperated with the DOJ, it did not “timely” report. The firm did, however, terminate its involvement with a number of responsible parties. Those included employees and third party distributors in Latin America. It also enhanced its due diligence as to third parties. In addition, the company entered into a corporate integrity agreement with HHS and resolved parallel criminal and civil investigations under the Anti-Kickback Statute and False Claims Act. The firm paid a fine of $612 million.
In the Matter of Qualcomm Inc., Adm. Proc. File No. 3-17145 (March 1, 2016). Qualcomm designs and sells wireless telecommunication products. The firm develops and patents wireless communications technologies including those incorporated into CDMA, WCDMA and LTE, all used by wireless carriers. As the wireless technology evolved, Qualcomm began warning investors regarding the future of its products and 4G technology.
By 2012 about 42% of its revenue came from Chinese handset manufacturers and other customers in China. In May 2008 China announced the restructuring of its telecommunications industry. Three SOEs were created. Each had a different technology. One license was issued to SOE 2 the next year which launched a version of Qualcomm’s CDMA technology. SOE 1 was awarded a license for WCDMA and deployed a network using that technology.
Beginning in 2002 Qualcomm provided various things of value to officials from a Chinese government agency to help expand the use of the firm’s technology and ensure that executives at SOE 1 and 2 adopted Qualcomm technology. The company also provided or offered full-time employment and paid internships to family members and other referrals of foreign officials at SOE 1 and 2 was well as at the Agency. FCPA compliance was not considered. In addition, Qualcomm offered foreign officials hospitality packages to world-class sporting events. The employees involved in planning the events for foreign officials did not have FCPA training. The firm did have FCPA compliance policies but there was no head of compliance for the firm or in China.
Qualcomm failed to maintain an adequate system of internal accounting controls. Meal, gift and entertainment entries, for example, were repeatedly missing from logs. Neither the local management in China, nor the executive management team, adequately identified the FCPA risks in offering lavish hospitality packages to foreign officials. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B).
To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to pay a penalty in the amount of $7.5 million and to report to the staff for a two year period on its progress regarding remediation and the implementation of compliance procedures.
Testimony: Richard G. Katchum, Chairman and CEO, testified before the Senate subcommittee on securities, insurance and investment. His testimony focused on market structure, reviewing its evolution, fairness, transparency, liquidity and volatility as well as the work of the SEC’s market structure committee (here).
Markups: The Securities and Futures Commission reprimanded and fined Yuanta Securities (Hong Kong) Company Limited $4 million. The regulator found that the securities firm failed to properly disclose markups on hundreds of bond transactions from the beginning of July to the end of December 2012.