This Week In Securities Litigation (Week ending Oct. 14, 2016)

The Commission announced the filing of a record number of enforcement actions for the last fiscal year. The enforcement statistics highlight areas of concentration such as insider trading, investment advisers and private equity funds.

The agency also brought three enforcement actions this week. One penalized a firm for conducting games that sold interests that are securities based swaps without complying with the registration and prospectus delivery requirements. Two other actions focused on the failure properly implement procedures regarding inside information.


Rules: The Commission adopted rules which update the reporting and disclosure requirements for registered investment companies and enhance the liquidity risk management for open-ended mutual funds and exchange-traded funds (here).

Statistics: The Commission published statistics for its enforcement program over the last fiscal year showing that the program yielded a record number of enforcement actions. Specifically, during the last fiscal year the SEC brought 548 independent or standalone enforcement actions compared to 507 in the prior year and 413 in 2014. The actions brought as part of the program resulted in over $4 billion in disgorgement and penalties being ordered compared to $4.19 billion in fiscal 2015 and $4.16 in 2014. Included in the statistics were singe year records for the number of actions involving investment advisers or investment companies and the FCPA. The SEC also distributed a record amount of money to whistleblowers.

Notable areas of emphasis last year included the traditional area of insider trading where 78 actions were brought and a relatively new focus on private equity were 8 enforcement actions were filed. Two key examples of actions denominated as the “most significant” brought during the last fiscal year are the insider trading cases against Leon Cooperman and William Walters. Both actions are being contested in court.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC did not file any civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along proceedings.

Security based swaps: In the Matter of Forcerank LLC, Adm. Proc. File No. 3-17625 (Oct. 13, 2016) is an action in which the Respondent is a wholly owned subsidiary of Estimize Inc. Forcerank conducted mobile phone games in which players predicted the order in which ten securities would perform relative to each other. Each game ran for a week. Points were awarded for the best predictions. At the end of the week the player with the most points won the game. The firm kept 10% of the entry fees and anticipated over time that it would use the data to create a product that would be marketed to hedge funds. While the Respondent told the public that it was not selling security based swaps, in fact the Order alleges that entries were a security based swap because each participant paid to enter into an agreement with the firm that provided for the payment of points and in certain cases cash. Those payments were contingent on a potential financial, economic or commercial consequence since the outcome hinged on changes in the market prices of individual securities. As securities based swaps they must be on an exchange and offered with a prospectus. The Order alleges violations of Securities Act Section 5(e) and Exchange Act Section 6(1). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $50,000.

Procedures: In the Matter of Artis Capital Management, L.P., Adm. Proc. File No. 3-17624 (October 13, 2016) is a proceeding which names as a Respondent the firm, previously a registered investment adviser that advised several funds, and Michael Harden, who was employed by the firm as an analyst. In 2008 Matthew Teeple, an employee of the firm, obtained inside information about Foundry Networks, Inc. from an employee of that company in two instances. In both cases the information was provided to Artis and timely trades were placed in advance of public announcements by Foundry. Mr. Harden did not question Mr. Teeple about the source of the information or ask the CCO or any other colleague to look into the matter. By failing to respond appropriately to red flags Respondents did not reasonably supervise Mr. Teeple, contrary to Advisers Act Section 204A. To resolve the matter Artis consented to the entry of a censure and agreed to pay disgorgement of $5,165,862 and prejudgment interest. The firm will also pay a penalty of $2,582,991. Mr. Harden is suspended from the securities business for a period of 12 months after which he will furnish the Commission with an affidavit of compliance.

Procedures: In the Matter of Deutsche Bank Securities, Inc., Adm. Proc. File No. 3-17622 (October 12, 2016) is a proceeding which names the registered investment adviser and broker dealer, a subsidiary of Deutsche Bank AG, as a Respondent. The Order alleges that from January 2012 through December 2014 the firm failed to establish appropriate policies regarding the dissemination of material non-public information. This specifically related to policies and procedures tied to its equity research analysts and communications with customers and its sales force. This is contrary to Exchange Act Section 15(g). In addition, the firm published a research report on the stock of Big Lots that was not in accord with the personal opinions of the analyst, contrary to Rule 501 of Regulation Analyst Certification. Finally, Deutsche Bank failed to furnish promptly to the staff certain electronic communications related to its broker dealer operations, contrary to Exchange Act Section 17(a). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the provisions cited above. In addition, the firm will pay a penalty of $9.5 million.

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