This week much of the news was dominated by two events. One was the difficulties and issues surrounding the IPO for Facebook. The other was the insider trading trial of Rajat Gupta, formerly a Goldman Sachs director.

Congress heard testimony from SEC Chairman Mary Schapiro regarding the implementation of derivates reform. Commissioner Pardes addressed the AICPA Spring meetings in Washington, D.C. regarding the regulatory agenda while Commissioner Walter discussed cross-boarder enforcement in her remarks at the IOSC Conference in Beijing, China.

Lawyers were at the center of two criminal cases and two SEC actions this week. In addition, SEC enforcement brought actions which include two investment fund fraud cases and two insider trading actions. FINRA filed a settled action relating to the RBS market against Citigroup. The FSA in London resolved an action against two traders for unauthorized trading.

The Commission

Testimony: SEC Chairman Mary L. Schapiro testified before the Senate Committee on Banking, Housing, and Urban Affairs regarding “Implementing Derivatives Reform: Reducing Systemic Risk and Improving Market Oversight” (May 22, 2012). In her testimony the Chairman reviewed the Title VII of Dodd Frank, coordination with the CFTC and other regulators, rules adopted to date and future steps (here).

Speech: SEC Commissioner Tory Pardes addressed the AICPA Council Spring Meeting, Washington, D.C. (May 21, 2012). His remarks included comments on the pending regulatory agenda of the Commission, the JOBS Act and assessing the consequences in rule making (here).

Speech: SEC Commissioner Elisse B. Walter, addressed The 37th International Organization of Securities Commissioners Annual Conference, Beijing, China (May 16, 2012). Her remarks focused on cross-boarder enforcement (here).

SEC Enforcement: Filings and settlements

Statistics: This week the Commission filed 6 civil injunctive actions and 2 administrative proceedings (excluding tag-a-long and 12j actions).

Ethics violation: In the Matter of Spencer C. Barasch, Adm. Proc. File No. 3-14891 (Filed May 24, 2012) is a proceeding against attorney Spencer Barasch based on Rule 102(e) of the Commission’s Rules of Practice. Mr. Barasch previously served as the Associate District Director for Enforcement in the Commission’s Forth Worth District Office. While in that role he “personally and substantially” was involved in several decisions relating to the SEC’s response to allegations that various entities associated with Robert Allen Stanford were violating the federal securities laws. After resigning from the staff Mr. Barasch asked the SEC ethics office if he could represent an entity associated with Stanford. He was told he was permanently barred from accepting the representation. The next year Stanford Group Company retained him regarding an SEC inquiry. After the formal order of investigation was entered Mr. Barasch attempted to discuss the matter with the staff. Again the SEC ethics office told him he was barred from accepting the representation. He billed Stanford for 12 hours of legal work. This conduct, the Order concludes, violated the federal conflict of ethics statute, 18 U.S.C. § 207(a)(1). To resolve the matter Mr. Barasch consented to the entry of an order barring him from practicing before the Commission as an attorney for one year with a right to reapply based on certain conditions. Previously, Mr. Barasch settled similar charges with the DOJ by paying a $50,000 civil fine.

Insider trading: SEC v. Guth, Civil Action No. 1:12-cv-00842 (D.D.C. Filed May 24, 2012) is an action against Stephen Guth. The case centers on the acquisition by Johnson & Johnson of Omrix Biopharmaceuticals, Inc. which was announced on November 23, 2008. Prior to that date Mr. Guth, who was formerly employed at Omrix, was consulted on several occasions by company officials as they conducted due diligence. Mr. Guth learned that the acquisition of his former employer was likely. He then purchased 7,000 shares of company stock. After the tender offer was announced he tendered his shares, realizing profits of over $60,000. This violated Exchange Act Section 14(e) and Rule 14(e)-3, according to the complaint. Mr. Guth resolved the case by consenting to the entry of a permanent injunction based on the Section and Rule cited in the complaint. He also agreed to pay disgorgement of $63,517 with prejudgment interest and a civil penalty of $31,758.

Investment fund fraud: SEC v. GLR Capital Management, LLC, Civil Action No. 12-02663 (N.D. Cal. Filed May 24, 2012) is an action against the company, GLR Advisors, LLC, Geringer, Luck & Rode LLC and John Geringer who managed GLR Growth Fund. Since 2005 Mr. Geringer raised over $60 million, telling investors that he had a successful track record investing in stock indexes. Despite his claim of returns running from 17 to 25%, he lost much of the money he invested and, after a time, stopped trading. He continued to run the fund essentially like a Ponzi scheme. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) & (4). The case is in litigation.

Investment fund fraud: SEC v. Levin, Case No. 1:12-cv-21917 (S.D. Fla. Filed May 22, 2012) names as defendants George Levin and Frank Preve. The complaint alleges that the defendants sold promissory notes in an entity which acquired lawsuit settlements. The interests in the lawsuits were secured from attorney Scott Rothstein, a principal in the firm of Rothstein, Rosenfeld and Adler, PA. Mr. Rothstein was operating a massive Ponzi scheme and is currently serving 50 years in federal prison. Messrs. Levin and Preve solicited investors to purchase promissory notes issued by a company controlled by defendant Levin named Banyon 1030-32, LLC. It was the general partner of investment fund Banyon Income Fund, L.P. Investors were told that the fund was acquiring settlements from Mr. Rothstein. They were assured that the two men carefully reviewed the pertinent papers prior to purchasing any settlement. They were also told in the private placement memorandum that the fund was the successor of an entity which had profitably purchased more than $1 billion in settlements from Mr. Rothstein over the prior two and one half years. Investors were not told that many times interests in the settlements were purchased without obtaining any documentation and that by May 2009 Mr. Rothstein had ceased making payments on a majority of the settlements Mr. Levin and his entities had purchased. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is in litigation.

Insider trading: SEC v. Shah, Civil Action No. 12-cv-4030(S.D.N.Y. Filed May 21, 2012), U.S. v. Shah, 12-cr-404(S.D.N.Y. Filed May 21, 2012) and U.S. v.Kwok, 12-cr-405 (S.D.N.Y. Filed May 21, 2012)are actions against Reema Shah, a portfolio manager at RiverSource Investments, LLC, a registered investment advisor which is a subsidiary of Ameriprise Financial, Inc. and Robert Kwok, formerly a Senior Director of Business Management at Yahoo! Inc. The two defendants met at a conference in 2008 and became friends. Ms. Shah provided Mr. Kwok with information from her work as a portfolio manager which aided him in his personal investments while he furnished her with information about his company. In early 2008 Ms. Shaw told Mr. Kwok that Autodesk Inc. intended to acquire Moldflow Corporation, information she obtained from a company insider. Mr. Kwok purchased 1,500 shares of Moldflow stock in April 2008 which later netted him trading profits of $4,754. In July 2009 he returned the favor, confirming that a long rumored deal between Yahoo and Microsoft was about to be announced. Ms. Kwok caused the funds she helped manage to buy 700,300 shares of Yahoo on July 16, 2009. The shares were sold by the end of the month at a profit of $389,000. In the criminal cases Ms. Shah pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud. Mr. Kwok pleaded guilty to one count of conspiracy. Both are awaiting sentencing. In the SEC’s action, which alleges violations of Exchange Act Section 10(b), each consented to the entry of a permanent injunction after acknowledging the facts they admitted in the criminal case. Ms. Shaw agreed to be barred from the securities industry. Mr. Kwok agreed to be barred from serving as an officer or director of a public company. Financial remedies will be considered at a later date.


Speech: Richard Ketchum, Chairman and CEO, addressed the FINRA Annual Conference (May 21, 2012). His remarks covered the exam program and market surveillance (here).

Inaccurate pricing data: Citigroup Global Markets was fined $3.5 million for posting inaccurate mortgage performance information on its website from January 2006 through October 2007 and for supervisory failures and other violations in connection with subprime securitizations. Firms are required to post historical performance data for RMBS. Despite repeated warning the firm did not remove the inaccurate data until May 20120.

Criminal cases

Investment fund fraud: U.S. V. Watson, No. 1:11-cr-00441 (E.D. Va.) is an action against Allan Watson who pleaded guilty to one count of wire fraud. According to the court papers, Mr. Waston began an investment club in 2004. From 2006 through 2009 he raised almost $40 million from investors. The funds were supposed to be invested through an equity trading system. In reality little of the money was invested as promised while most was put into high risk ventures. Over 900 investors suffered losses. This week Mr. Watson was sentenced to 12 years in prison.

Kickbacks:U.S. v. Weisberg (E.D.N.Y. Filed May 21, 2012) names as a defendant Attorney Martin Weisberg, formerly a partner in the New York office of an international law firm. One scheme involved two of Mr. Weisberg’s clients, Xybernaut Corporation and Ramp Corporation. While serving as outside counsel and a member of the board of directors, co-conspirators of Mr. Weisberg secretly caused the companies to issue shares to themselves at a discount which were later resold overseas. Mr. Weisberg was paid kickbacks from the proceeds of the sales to include false statements regarding the conspirators’ ownership and control of the securities in filings made with the SEC. In another scheme Mr. Weisberg took about $1.3 million of interest earned on a $30 million deposit he held that belonged to another corporate client. This week Mr. Weisberg pleaded guilty to one count of money laundering and one count of conspiracy to commit securities fraud. He is awaiting sentencing.


Two former UBS brokers, Sachin Karpe and Laila Karan, were ordered by the Upper Tribunal to be banned from the industry by the FSA. A fine was imposed on Mr. Karpe of ₤1.25 million and on Ms. Karan of £75,000. The charges focused on substantial unauthorized trading primarily in FX instruments with a total value of billion of pounds in 39 customer accounts. Ms. Karpe sought to conceal the actions with the help of others including Karan. Losses of about $42 million were suffered by 21 investors. Mr. Karpe also deliberately misled UBS compliance so he could facilitate a transaction for an Indian resident which breached Indian law.


The Australian Securities and Investment Commission secured an injunction against Melinda Scott and two companies of which she is a director, Roach Graham Scott Pty ltd. and Roach Scott Pty Ltd. The order precludes Ms. Scott and her companies from working in the financial services industry. It also freezes all of their property. The action is based on a suspected fraud.

Hong Kong

The Final Court of Appeals, Hong Kong, reversed the convictions of Patrick Fu For Kuen and Francis Lee Shu Yuen. The two had been convicted on 20 counts of creating a false and misleading appearance of active trading in derivative warrants. The Court of Appeals concluded that although their conduct gave rise to a false and misleading appearance of trading, there was evidence that their purpose was not or did not include that purpose. Accordingly the findings of two lower courts were reversed.

The Securities and Futures Commission of Hong Kong entered an order censuring Capital VC Limited and Mr. Yau Chung Hong for breaching the Takeovers and Mergers Code. The order also bans them from participating in the capital markets for eighteen months.

The action is based on Rule 26.1 of the Code which requires any person or group which increases their shareholding to 30% or more of an issuer’s shares to make a general offer. Capital VC is an investment company which invests in the shares of listed and unlisted Hong Kong and People’s Republic of China or PRC companies. Mr. Hong managed an account for the firm and himself. Those accounts acquired 30.19% of the shares of Longlife Group Holdings, Ltd. whose shares are listed on the Growth Enterprise Market.

Mr. Hong claimed that the rule breach was inadvertent. However, there were no procedures in place to effectively monitor the share concentration. Accordingly, the regulator concluded that the breach was serious and imposed the sanctions.

ABA Program: The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate? Tuesday June 5, 2012, 12:00 PM to 1:30 PM EST, Live in Washington, DC and webcast.

Moderators: Thomas O. Gorman, Partner, Dorsey & Whitney LLP, Washington, D.C. and Frank C. Razzano, Partner, Pepper Hamilton, LLP, Washington, D.C.

Panel: John D. Buretta, Deputy Asst. AG, Criminal Division, DOJ, Washington, D.C.; Charles E. Cain, Deputy Chief FCPA Unit, SEC, Washington, D.C.; France Chain, Senior Legal Analyst, Anti-Corruption Division, OECD, Paris, France; Prof. Mike Koehler, Butler University, Indianapolis, Ind.; Hon. Stanley Sporkin, Washington, D.C.; Greg D. Andres, Partner, Davis Polk, New York, New York; Eric Bruce, Partner, Kobre & Kim, New York, New York. Live Presentation from Washington, DC.

Co-hosted by Dorsey & Whitney LLP and Pepper Hamilton, LP at Penthouse at Hamilton Square, 600 Fourteenth St., N.W. Washington, D.C. Click here for more information (here)

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