THIS WEEK IN SECURITIES LITIGATION (Week ending May 11, 2012)
International was a key theme this week. The Commission brought another action against the Shanghai affiliate of an international accounting firm based on its failure to produce work papers from an audit of a Chinese issuer and a proceeding against two investment advisers based in Scotland.
Insider trading continued to be a focus, with actins being filed against a daughter and father trading team and a Hollywood film producer and his relatives and friends. Charges were also brought against the former mayor of Detroit and others alleging that they received kickbacks in connection with an investment in a city pension fund. Finally, the former CEO of a brokerage firm and his office manager were sentenced to prison in connection with a stock manipulation scheme.
Speech: SEC Commissioner Luis Aguilar addressed the NASAA/SEC 19(d) Conference, Washington, D.C. (May 7, 2012). His address is titled: Advocating for Greater Federal and State Securities Regulatory Cooperation and Collaboration (here). In his remarks the Commissioner cited opportunities for the SEC and NASAA to partner in the future including on the transition of advisers to the states and crowdfunding under the JOBS Act as well as on the financial exploitation of the elderly and the advisory committee.
SEC Enforcement: Filings and settlements
Statistics: This week the SEC filed seven civil injunctive actions and two administrative proceedings (excluding follow-on and 12(j) actions).
Breach of fiduciary duty: In the Matter of Martin Currie, Inc., Adm. Proc. File No. 3-14873 (May 10, 2012) is a proceeding which names as Respondents: Martin Currie Inc., a registered investment adviser based in Scotland and Martin Currie Investment Management Ltd., a registered investment adviser based in Scotland that advises Martin Currie China Hedge Fund L.P. The Order alleges violations of Advisers Act Sections 206(1) and (2) and 206(4) and Investment Company Sections 17(d) and 34(b). During the financial crisis in early 2009 Martin Currie Investment used the assets of client The China Hedge Fund, Inc., a registered investment company listed on the NYSE, to rescue The Martin Currie China Hedge Fund, according to the Order. That fund required liquidity because a significant investment was illiquid. The difficulty arose from a miscalculation by the advisers which resulted in the fund purchasing more unregistered securities than permitted and which turned out to be illiquid. That investment was improperly classified to conceal the error. Martin Currie Investment alleviated this situation by causing The China Hedge Fund to enter into a $10 million bond redemption transaction which created liquidity for the illiquid Martin Currie China Hedge Fund. The investment was a poor one for The China Hedge Fund however since the bonds were later sold at 50% of their face value.
To resolve the proceeding Martin Currie Inc. consented to the entry of a censure and a cease and desist order based on the Sections cited in the Order. Martin Currie Investment also consented to the entry of a censure and a cease and desist order based on Advisers Act Section 206(4) and Investment Company Act Section 17(d). The Respondents are jointly and severally liable for the payment of a penalty of $8.3 million. The penalty was limited to that amount based on the cooperation of the Respondents. Overall Martin Currie paid $14 million to resolve matters with the SEC and the FSA.
SOX Violation: In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Adm. Proc. File No. 3-14872 (May 9, 2012) is a proceeding which names as a Respondent PRC based Deloitte Touche Tohmatsu Certified Public Accountants or D&T Shanghai. This action is based on Rule 102(e)(1)(iii) which concerns willful violations of the federal securities laws. The Order alleges violations of SOX Section 106(b) which requires that foreign public accounting firms produce work papers on the request of the PCAOB or the SEC in connection with any investigation of one of its audit reports. Since April 2010 the staff has made extensive efforts to obtain the work papers related to â€œClient A,â€ according to the Order. The firm has declined, through its international parent, to produce the requested work papers based on its understanding that PRC law precludes their production. The Order alleges that the failure to produce the requested work papers constitutes a violation of SOX Section 106(b). A hearing will be convened.
Kickbacks: SEC v. Kilpatrick, Case No. 12-cv-12109 (E.D. Mich. Filed May 9, 2012) is an action against Kwame M. Kilpatrick, former mayor of Detroit, Jeffrey W. Beasley, former city treasurer, Chauncey Mayfield, the CEO of MayfieldGentry Realty Advisors, LLC, an investment adviser, and MayfieldGentry. The complaint alleges that the defendants obtained lavish perks in the form of expensive travel from MayfieldGentry whose CEO was recommending to the trustees that the pension funds invest about $117 million in a REIT controlled by the firm. The demand for the perks/kickbacks began while Mr. Kilpatrick was still mayor at a time when the CEO of MayfieldGentry supported the opposing candidate and hired his daughter. Subsequently, the demands continued until thousands of dollars in travel and entertainment were given. The complaint alleges violations of Securities Act Sections 17(a)(1), (2) and (3) and Advisers Act Sections 206(1) and (2).
Manipulation: SEC v. Blech, Civil Action No. 12 CV 3703 (S.D.N.Y. Filed May 9, 2012) is an action against David Blech, who has previously pleaded guilty to securities fraud and has been barred from the industry in a Commission action, and his wife, Margaret Chassman. The complaint details a complex market manipulation scheme in which the defendants used over fifth brokerage accounts to conduct matched sales of large blocks of thinly traded pharmaceutical stocks to manipulate the share price. The two defendants also sold unregistered securities. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 15(b)(6)(B), 13(d) and 16(a). The U.S. attorney announced a parallel criminal action. Both cases are pending.
Prime bank fraud: SEC v. Kegley, Case No. 1:12-CV-1605 (N.D. Ga. Filed May 8, 2012) is an action against Gerald Kegley and his company, Prism Financial Services LLC. It alleges that from April through August 2010 he introduced six individuals who invested $1.95 million into a fraudulent scheme. Investors supposedly could draw on bank issued guarantees worth millions of dollars without having to repay the withdrawn funds. The investor funds were supposed to be held in escrow until the bank guarantees were issued. In fact the representations made to the investors were false. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a).
Market timing: SEC v. Tambone, Case No. 06-cv-10885 (D. Mass. Filed May 19, 2006) is an action against James Tambone and Robert Hussey who were previously senior executives as Columbia Funds Distributor, Inc., the underwriter of the Columbia complex of mutual funds. It claimed that the two defendants permitted market timing by certain traders in violation of the terms of the prospectuses. In this long running action which is the subject of a court of appeals opinion on primary liability (here), the defendants settled and consented to the entry of a final judgment which requires Mr. Hussey to pay disgorgement in the amount of $37,500 along with prejudgment interest and a civil penalty of $75,000. Mr. Tambone agreed to pay disgorgement of $26,344 along with prejudgment interest and a civil penalty of $75,000. The parties agreed that claims regarding aiding and abetting violations of Exchange Act Section 10(b) would be dismissed. The claim in the complaint alleging direct violations of that Section was dismissed earlier in the litigation.
Insider trading: SEC v. Longoria, Civil Action No. 11-CV-0753 (S.D.N.Y.) is an action centered on the expert networking firm Primary Global Research LLC and its consultants, employees and clients. In essence the complaint alleges that the firm funneled inside information to clients from company insiders. This weeks James Fleishman, one of the primary figures in the action, settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The Order also requires him to pay disgorgement of $49,150 which will be deemed satisfied by the order of forfeiture entered against him in the parallel criminal case. In that action he was sentenced to a term of 30 months in prison. Mr. Fleishman also consented to the entry of an order barring him from the securities business and from participating in any penny stock offering in a separate administrative proceeding.
Insider trading: SEC v. Amin, CV12 â€“ 3960 (C. D. Cal. Filed May 7, 2012) is an action against Mohammed Mark Amin, a Hollywood movie producer, his brother Robert Reza Amin, his cousin, Michael Mahmood Amin, his business manager, Sam Saeed Pimazar, Mary Teresa Coley, a long time friend of Mark and his brother, and Ali Tashakori, a contractor who did construction work for Mark and his brother. The action centers on DuPont Fabros Technologies, Inc. or DFT, and certain leases and loans it was arranging that were announced in an earnings release on February 11, 2009. Mark had been a DFT board member since the company went public in October 2007. He is related by marriage to the CEO. After learning about the leases and loans at a board meeting on December 22, 2009, Mark spoke with the CEO about them on the phone in early January 2009. Shortly after the telephone call Mark told his cousin and, in addition, his business manager Mr. Pirnazar about the pending transactions at DFT. Both traded. At the February 4, 2009 board meeting Mark received additional information about the pending transactions. The next morning he told his brother about the matters who also traded and told his close friends, Mary Teresa Coley and Ali Tashakori. Both traded. Following the close of the market on February 11, 2009 the company issued an earnings release and the share price rose 36% giving the traders profits of over $614,000. Each of the defendants settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Mark also agreed to the entry of an officer director bar for ten years. In addition, the defendants collectively agreed to pay disgorgement of $618,497 along with prejudgment interest and a penalty of over $540,000.
Insider trading: SEC v. Milliard, Case No. CV 12-73 (D. Mon. Filed May 7, 2012) is an action against Angela Milliard, a paralegal at Semitool, Inc. and her father, Kenneth Milliard, a retired business executive. The case focuses on the announcement of a tender offer for the shares of Semitool by Applied Materials, Inc. on November 17, 2009. In October 2009 Ms. Milliard became a key member of the deal team. As she worked on the deal she telephoned her father. At times the two traded through online brokers during the calls. At other times trades were placed shortly after the calls. Mr. Milliard also tipped his sons. When the deal was announced on November 17 the market closed up 30% and the family members sold their shares for a collective profit of $47,805.11. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Daughter and father settled with the SEC. Each consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. Ms. Milliard also agreed to pay disgorgement of $20,355 along with prejudgment interest and a civil penalty of $54,022.11. Mr. Milliard agreed to disgorge his trading profits and those of his sons, totaling $47,805, along with prejudgment interest, and to pay a penalty equal to the amount of the disgorgement.
Investment fund fraud: SEC v. A.L. Water Capital, LLC, Civil Action No. 12-cv-10783 (D. Mass. Filed May 4, 2012) is an action against Arnett Waters and two entities he controls, broker dealer A. L. Water Capital and investment adviser Moneta Management, LLC. Beginning in 2009 and continuing to the present, the defendants are alleged to have fraudulently induced at least eight investors to put $780,000 in their fund. One investor was a church that invested $500,000. The funds were supposed to be invested in a portfolio of securities. Instead, much of the money was misappropriated. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Section 206. The defendants settled, agreeing to the entry of a preliminary injunction which precludes the defendants from soliciting additional funds and provides for other relief.
Market manipulation: U.S. v. Mandell, 09-cr-00662 (S.D.N.Y.) is an action in which Ross Mandell and Adam Harrington are defendants. Mr. Mandell was the CEO of brokerage firm Sky Capital, LLC, and its related companies. He also controlled The Thornwater Company, L.P. Mr. Harrington managed the Sky New York office for a time. From 1998 through 2006 Mr. Mandell and others participated in a scheme to induce investors to purchase Thornwater and Sky Capital related private placement interests. To induce purchases, investors were told that they were acquiring the shares at a discount to market. They wee not told that the market price was being manipulated by Mr. Mandell and others who were paid huge commissions. The scheme is alleged to have defrauded investors out of about $140 million. Following a five week trial in July 2011 Messrs. Mandell and Harrington were found guilty by a jury of conspiracy, securities fraud, wire fraud and mail fraud. Both were sentenced last week. Mr. Mandell received a twelve year prison term and was ordered to forfeit $50 million. Mr. Harrington was sentenced to serve five years in prison.
The regulator imposed a fine of £3,345,000 on Mitsui Sumitomo. The FSA also imposed a ban an a fine of £119,303 on the former executive chairman of the firm, Yohichi Kumagai. MSEI is the London based subsidiary of Mitsui Sumitomo Insurance Company Ltd. of Japan, one of the worldâ€™s largest non-life insurance groups. Traditionally the firm supplied wholesale insurance coverage to Japanese firms in Europe and the Middle East. Beginning in 2007 it expanded its business. In early 2009 Mr. Kumagai was seconded from the parent to become executive chairman of the subsidiary. Shortly after assuming that post the FSA warned the firm that with its expansion into European markets it would need focused oversight from an appropriately skilled and experienced board. The firm failed to take this step. The management structure and composition of the board was ineffective. The chairman failed to take appropriate steps. As a result the firm had significant failings in corporate governance and control arrangements which resulted in it being poorly organized and managed. This is contrary to the proposition that senior management must take responsibility for the firms they run.