This Week In Securities Litigation (Week ending May 3, 2013)

The FCPA continued to be a focus this week. Another Alstrom executive was added to a pending criminal prosecution in a superseding indictment charging FCPA violations and money laundering.

In court the Commission prevailed in the D.C. Circuit as well as the district court. In the Circuit Court the Commission secured the dismissal on jurisdictional grounds of a suit challenging Exchange Act Section 13(q) and the related rules. Those provisions require the disclosure of certain payments made to foreign governments relating to the commercial development of oil, natural gas, or minerals. In the district court the agency prevailed on a summary judgment motion in an investment fund fraud action. The agency also filed a settled administrative proceeding stemming from its inspection program against the gatekeepers of two mutual fund trusts based on inaccurate disclosures.


Rules: The Commission proposed Rules for Cross-Boarder Security-Based Swap Activities. The proposed rules detail the regulatory requirements for transactions that occur partially in the U.S. and define when a security-based swap dealer, major participants and other entities must register with the SEC (here).

Report: The Commission filed its Report on Administrative Proceedings for the Period October 1, 2012 through March 31, 2013 tabulating the number of matters before ALJs and the Commission (here).


Remarks: Commissioner Bart Chilton delivered remarks titled “TTF” as the Keynote address to the Energy Bar Association, Washington, D.C. (May 1, 2013). Topics discussed included position limits, high speed trading and a proposed targeted transaction fee or TTF which would be paid by speculators and high speed traders and used to fund the agency (here).

Remarks: Commissioner Bart Chilton delivered remarks titled “The Energizers” which was the keynote address at the National Energy Marketers Association meeting, Washington, D.C. (April 30, 2013). Topics discussed included position limits and high speed trading (here).

Remarks: Commissioner Scott O’Malia delivered remarks at the Federal Reserve Bank of New York City (April 26, 2013). The topics discussed included the development of the swap data reporting rules, the Commission’s technology program and its external business conduct rules (here).

SEC Enforcement: Litigated cases

Investment fund fraud: SEC v. Constantin, Civil Action No. 11-CV-4642 (S.D.N.Y. Filed July 6, 2011). The Commission prevailed on its summary judgment motion in this case. The complaint named as defendants Windham Securities, its owner and principal Joshua Constantin, and former firm managing director Brian Solomon. The claims center on an alleged fraud in connection with a private placement of securities through which the defendants raised more than $1.1 million for Leeward Group, Inc, a company that was supposed to be going public. Rather than invest the money as represented to investors, it was funneled in part to other entities and diverted to personal use. In granting the Commission’s summary judgment motion, the Court concluded that the defendants made a series of misrepresentations in connection with the sale of the shares. It also found that Mr. Constantin diverted investor funds to his own purpose and that as part of an effort to conceal the wrongful conduct, Messrs. Constantin and Solomon furnished misleading documents to the investors. The Court entered judgments of permanent injunction against each defendant, prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the Court directed Mr. Constantin and Windham Securities pay, on a joint and several basis, $2.49 million in disgorgement, prejudgment interest and penalties. Mr. Solomon was directed to pay $249,000 in disgorgement, prejudgment interest and penalties. A supplemental order requires the defendants, along with two relief defendants, to pay $2.74 million in disgorgement, prejudgment interest and civil penalties on a joint and several basis. See also Lit. Rel. No. 22656 (April 24, 2013).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 1 civil injunctive actions and 2 administrative proceedings (excluding tag-along-actions and 12(j) proceedings).

Inaccurate disclosures/procedures: In the Matter of Northern Lights Compliance Services, LLC, Adm. Proc. File No. 3-15333 (May 2, 2013) is a proceeding which centers on the duties of trusts which create turnkey mutual fund operations that ultimately are managed by different unaffiliated advisers and overseen by a single board of trustees. Named as Respondents are: Northern Lights, which provides CCO services to investment companies; Gemini Fund Services LLC, a full service fund administrator; and five Trustees, Michael Miola, Lester Bryan, Anthony Hertl, Gary Lanzen and Mark Taylor. The Order centers on three issues. First, Section 15(c) of the ICA imposes a duty on directors of a registered investment company to request and evaluate information reasonably necessary to evaluate an advisory contact. The material evaluated is detailed in the fund’s next shareholder report. Boiler plate is not permitted. Here, however, on occasion the disclosures contained boiler plate that was materially untrue or misleading in violation of Section 34(b) of the ICA, according to the Order. Gemini Fund Services made these disclosures based on board minutes reviewed by the Trusts’ outside counsel and reviewed by the Trustees. The Trustees therefore were a cause of these violations. Second, Gemini Fund Services failed to ensure that certain shareholder reports contained the required disclosures and that the requisite files were maintained. Third, Northern Lights and the Trustees failed to implement series’ policies to give the Trustees the compliance manuals for their review or, alternatively, a summary which could be relied on, thereby causing a violation of Rule 38a-1(a)(1). To resolve the matter Northern Lights consented to the entry of a cease and desist order based on Rule 38a-1 if the ICA; Gemini Fund Services agreed to a similar order based on Sections 30(e) and 31(a) of the ICA and the related rules; and the Trustees agreed to a similar order based on Rule 38a-1(a)(1) of the ICA. In addition, Northern Lights and Gemini Fund agreed to each pay a civil money penalty of $50,000. This proceeding arose from an examination. A related press release also notes that the Enforcement Division has been taking “a widespread look into the investment advisory contract renewal process and fee arrangements in the fund industry.”

Insider trading: SEC v. Well Advantage Ltd., Civil Action No. 12-cv-5788 (S.D.N.Y.) is a previously filed insider trading case against, among others, several unidentified traders. The action centers on the acquisition of Nexen Inc. by CNOOC Ltd. This week the Commission identified and settled with Choo Eng Hong of Singapore who purchased shares shortly before the announcement. She consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and agreed to pay disgorgement of $466,477.62 and a penalty of $100,000. See also Lit. Rel. No. 11693 (May 1, 2013).

Insider trading: SEC v. Adondakis, Civil Action No. 12 Civ. 0409 (S.D.N.Y.) is a previously filed action against Spyridon Adondakis, Level Global Investors LP and others. It alleged insider trading in the securities of Dell, Inc. and NVIDIA. Specifically, the complaint claimed that beginning in 2008, and continuing into 2009, Mr. Adokakis repeatedly passed inside information to firm founder Anthony Chiasson who used it to execute trades on behalf of funds managed by the firm. The information concerned the quarterly financial results of the two companies. This week the firm settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act section 17(a) and Exchange Act Section 10(b). The firm also agreed to pay disgorgement of $10,082,725, prejudgment interest and a penalty equal to the amount of the disgorgement. Level Global, which one time had about $4 billion under management, is currently winding up its business. See also Lit. Rel. No. 22691 (April 30, 2013).

Financial fraud: SEC v. City of Victorville, Case No. EDCV 13-776 (C.D. Cal. Filed April 29, 2013) is an action against the City, Assistant City Manager Keith Metzler, deal underwriter and broker Newcomb & Dedios or KND and its principle Jeffrey Kinsell. An affiliate of KND and two other employees of the underwriter were also named as defendants. The complaint centers on a two year period beginning in 2006 in which the Airport Authority, created to redevelop a 132 acre tract of land around a former Air Force base, offered and sold at least four tax increment financings. KND was the underwriter for each offering. The bond offerings were used to finance the construction of a power plant and four new hangers on the Air Force base along with what the complaint describes as “a number of ill-conceived redevelopment projects.” In the spring of 2008 the Airport Authority raised an additional $13.3 million in an offering of tax increment bonds. The proceeds were intended to repay, in part, an earlier short term loan. The offering was collateralized by the hangers, valued at $65 million. At the time City Development Director Metzler, KND owner Jeffrey Kinsell and one of the firm’s employees knew that the value for the hangers was inflated, according to the SEC. That fact was not disclosed to investors. Mr. Kinsell and KND also defrauded the city with respect to the fees charged, according to the complaint. While those should have been on a cost plus basis, they took $450,000 that was not owed. They also charged $2.3 million in so-called “fictitious” property management fees, thus effectively misappropriating about $2.7 million. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15B(c)(1). The case is in litigation. See also Lit. Rel. No. 22690 (April 29, 2013).

Criminal cases

Insider trading: U.S. v. Newman, Case No. 1:12-cr-00121 (S.D.N.Y.) is an action against Todd Newman, who is alleged to have been part of a group of portfolio managers that shared inside information. In this case he was charged with having furnished inside information regarding the earnings of Dell, Inc. and NVIDIA to his firm, Diamondback Capital. On multiple occasions the firm traded on the information and profited. Mr. Newman was convicted at trial on one count of conspiracy and four counts of securities fraud. This week he was sentenced to serve 54 months in prison followed by one year of supervised release. He was also ordered to forfeit $737,724 and pay a $1 million fine.

Investment fund fraud: U.S. v. Waters, No. 12-ce-10336 (D. Mass.) is an action in which Arnett Waters previously pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering and obstruction of justice. The case centered on a Ponzi scheme and an array of related fraudulent schemes. This week Mr. Waters was sentenced to seventeen years in prison. The criminal prosecution stems from the Commission’s action, SEC v. Waters Capital, LLC., Civil Action No. 12-cv-10783 (D. Mass.).


U.S. v. Pierucci (D. Conn.). is an action against Alstrom executive Frederic Pierucci, a French citizen, alleging FCPA violations. This week a superseding indictment was brought in that case, adding William Pomponi as a defendant. Mr. Pomponi is a former Alstrom executive who was the vice president of sales for the U.S. subsidiary. He was charged under the FCPA and for money laundering. The charges center on a scheme to bribe a member of the Indonesian Parliament and officials at Perusahaan Listrik Negara, the state owned electric company. Another Alstrom executive, David Rothschiled, previously pleaded guilty in connection with the scheme.

Court of appeals

American Petroleum Institute v. SEC, No. 12-1398 (D.C. Cir. Decided April 26, 2013) is an action brought by the American Petroleum Institute, the Chamber of Commerce, the Independent Petroleum Association and the National Foreign Trade Council challenging Exchange Act Section 13(q) and the Commission’s rules thereunder. The Section, added by Dodd-Frank, requires the disclosure of certain payments made to foreign governments relating to the commercial development of oil, natural gas, or minerals. The question before the Court was whether the suit was properly initiated in the Circuit Court or in the District Court – the action was filed in each court. The Circuit Court held that the action must first be brought in the district court.

Generally, suit can only be brought in the Circuit Court in the first instance if it is specifically authorized by statute. Here Exchange Act Section 25 is key. It provides that suit may be filed in the Court of Appeals to challenge an agency order or a rule if that rule was enacted under certain specified provisions. Otherwise the Administrative Procedure Act requires that the case be initiated in the district court. In this instance, neither an agency order nor a rule enacted under one of the specified provisions is at issue. Therefore the case had to be initiated in the district court.

No knowledge defense: U.S. v. Behrens, No. 11-3482 (8th Cir. Filed April 25, 2013) is an action against Bryan Behrens who raised the “no knowledge” defense at sentencing after pleading guilty to one count of securities fraud. In the underlying case he had been charged in a twenty-one count indictment centered on a Ponzi scheme. At sentencing the District Court rejected his defense which argued he could not be imprisoned because he did not know the instruments he sold were securities. A sentence of five years in prison, three years of supervised release and restitution of about $6.8 million was ordered. The Court of Appeals affirmed.

The defendant’s claim was predicated on Section 32(a) provides, in pertinent part, that “no person shall be subject to imprisonment under this Section [regarding penalties] for the violation of any rule or regulation if he proves that he had no knowledge of such a rule or regulation.” This Section is one of two “sturdy safeguards” Congress provided regarding scienter according to U.S. v. O’Hagan, 521 U.S. 642 (1997). The provisions was designed, the Court concluded, to “allow individuals to avoid a sentence of imprisonment if they can establish that they did not know the substance of the SEC rule or regulation they allegedly violated, regardless of whether they understood its particular application to their conduct.” A defendant meets the required burden of proof by demonstrating that he or she was unfamiliar with the import of the rule, that is, its substance. It is not met by establishing that the person did not understand that their specific conduct fell within its prohibitions. Here the defendant failed to meet his burden since his claim focused on not knowing that the notes he sold were securities.


Investment fund fraud: The UK regulator charged Alex Hope and Raj Von Badio with ten offenses centered on operating a unauthorized investment scheme. Investors were told that their funds would be put in a FOREX trading investment. The two men are believed to have taken over ₤5 million from investors.


Fraud: The Australian regulator announced that Lawson Stuart Donald, formerly a client adviser at a brokerage, pleaded guilty to one charge of dishonestly using his position. He was sentenced to serve two and one half years in prison, suspended upon entering a two year good behavior bond. The charges stem from a “rebooking scheme” in which Mr. Donald rebooked profitable trades from accounts of his clients to accounts that belonged to his wife and him. He also rebooked unprofitable trades belonging to his wife’s account or his and transferred them to clients.


Insider trading/market manipulation: In a landmark ruling the court of appeals dismissed the appeal of Tiger Asia which challenged the jurisdiction of the Securities and Futures Commission to bring an insider trading action. The appeal had been based on the theory that a criminal conviction had to be obtained prior to the Commission instituting an action. Tiger Asia is a New York based asset management company that specializes in equity investments in China, Japan and Korea. In the underlying case the agency alleged that the firm engaged in insider trading and market manipulation with regard to the shares of Bank of China Limited and China Construction Bank Corporation Limited in 2008 and 2009. In each case a placement agent contacted the firm and asked if it wanted to participate in a placement of shares. The information was furnished to the firm on the representation that it was confidential and price sensitive. In each instance Tiger Asia is alleged to have shorted the shares of the company involved. That case will now move forward.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live program in Washington). Webcast Nationally by the ABA. Further information here.

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