This Week in Securities Litigation (Week ending October 11, 2013)

SEC Chair continued to define her vision for SEC enforcement this week, declaring that the agency will be the cop that is everywhere, filing large and small cases. This week the Commission resolved two insider trading cases, a cherry picking action and an offering fraud case.

Transparency International issued its report on enforcement of the OECD Convention. The statistics in the report demonstrate that enforcement by member nations is at best uneven with the U.S., Germany, the U.K. and Switzerland leading the way. While the number of corruption cases brought by U.S. officials last year declined, the Report cautions that this only reflects the long term nature of the actions and not any decline in prosecution efforts.


Remarks: Chair Mary Jo White addressed the Securities Enforcement Forum, Washington, D.C. (Oct. 9, 2013). In her remarks she noted that the enforcement program will be the kind of cop that is everywhere, bringing large and small cases (here).

Website: The Commission launched its new market structure data and analysis website which collects data from MIDAS this week.

SEC Enforcement

Weekly statistics: This week the Commission did not file or announced the filing of any civil injunctive actions or administrative proceeding (excluding follow-on actions and 12(j) proceedings).

Insider trading: SEC v. Terpins, Civil Action No. 12-Civ-1080 (S.D.N.Y.) is the previously filed insider trading action centered on the acquisition of H.J. Heinz Company. Initially the action was filed against unknown traders. The amended complaint named as defendants two brothers, Michel Terpins and Rodrigo Terpins. The complaint alleges that Michel Terpins learned about the deal for Berkshire Hathaway and 3G Capital to acquire Heinz. The amended complaint does not specify how he learned this information. He then told his brother who placed the trades the day before the announcement through Alpine Swift, an off-shore investment vehicle with accounts in Switzerland. Rodrigo Terpins periodically attended performance meetings regarding Alpine Swift’s assets but he did not have permission to place the trades. The U.S. brokers for the vehicle had authorizations to make certain disclosures to federal regulators. The complaint alleges violations of Exchange Act Section 10(b). The defendants resolved the action, consenting to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. They also agreed to pay disgorgement of $1,809,857, prejudgment interest and a $3 million penalty. See Lit. Rel. No. 22841 (Oct. 10, 2012).

Cherry picking: SEC v. Dushek, Civil Action No. 13-cv-3669 (N.D. Ill. ) is a previously filed action against Charles J. Dushek, Charles S. Dushek and Capital Management Associates, Inc. The complaint alleges that the defendants engaged in a cherr picking scheme that made them about $2 million in illicit profits. This week the Court entered a final judgment as to each defendant which permanently enjoins them from future violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The judgment also directs that each defendant pay disgorgement, prejudgment interest and civil penalties in an amount that will be determined later by the Court. See Lit. Rel. No. 22840 (Oct. 10, 2013).

Offering fraud: SEC v. Laborio, Civil Action No. 1:12-cv-11489 (D.Mass.) is a previously filed action against, among others, Jonathan Fraiman. Last year the Commission filed an action charging Mr. Fraiman, two other individuals and seven entities, with raising about $5.7 million from more than 150 investors through a fraudulent unregistered offering of securities. Mr. Fraiman and the Commission resolved the matter and this week the Court entered a final judgment prohibiting him from violating Securities Act Section 17(a)(2), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4)-8. The order also bars him from participating in any offering of a penny stock and requires him to pay disgorgement of $180,961.42 along with prejudgment interest. Payment was waived, and a penalty not imposed, based on financial condition. In a related administrative proceeding Mr. Fraiman consented to the entry of a bar from the securities industry with a right to apply reapply after ten years. See Lit. Rel. No. 22836 (Oct. 8, 2013).

Insider trading: SEC v. Nguyen, Civil Action No. 12 Civ. 5009 (S.D.N.Y.) is a previously filed action against Tai Nguyen and his sister, ThanhHa Bao. The complaint alleged that from 2006 through 2009 Mr. Nguyen frequently traded on inside information about Abaxis, Inc., which he obtained from his sister who was employed at the company. This week the Court entered a final judgment by consent against Mr. Nguyen which prohibits future violations of Securities Act Section 13(a) and Exchange Act Section 10(b). The judgment also requires him to pay disgorgement of $144,910, prejudgment interest and a penalty equal to the amount of disgorgement. Those amounts will be credited against the sums Mr. Nguyen is required to pay in a parallel criminal action. In that case he was sentenced to serve one year in prison. Ms. Bao also settled with the Commission. The final judgment against her imposes a permanent injunction on the same terms as the one against her brother. In addition, the order bars her from serving as an officer or director of a public company for five years and requires the payment of a penalty of $144,900. See Lit. Rel. No. 22834 (Oct. 7, 2013).


Transparency International issued its ninth annual progress report on OECD Anti-Bribery Convention Enforcement. “Exporting Corruption, Progress Report 2013: Assessing Enforcement of the OECD Convention on Combating Foreign Bribery.” The Report reviews the enforcement efforts by countries who are parties to the anti-bribery convention. While 40 countries are parties to the Convention, the Report makes it clear that global enforcement is quite uneven. For example, only the U.S., Germany, the U.K. and Switzerland were ranked as having active enforcement programs. Those four countries opened 62 investigations in 2012 compared to the 36 initiated by all of the other countries that executed the Convention. Likewise, those same four countries concluded 37 actions in which sanctions were imposed in 2012 while all of the remaining parties to the Convention resolved 3 such actions.

Finally, in a section which analyzes FCPA enforcement, the Report notes that “the U.S. maintains the most developed and active foreign bribery legal and enforcement regime in the OECD (and the world).” Although last year there was a smaller number of actions against companies and individuals than in the prior year that does not represent a “de-emphasis of FCPA enforcement or a change in the legal or enforcement framework but rather the multi-year character of FCPA cases,” according to the Report. It does call for U.S. enforcement officials to provide more robust explanations for the reasons that an action is resolved with either a NPA or DPA.

Circuit courts

Note as a security: SEC v. Thompson, Case No. 11-4182 (10th Cir. Oct. 4, 2013) is

a case which centers on the sale of notes in an alleged Ponzi scheme conducted by defendant Ralph Thompson through his company, Novus Technologies, LLC. The notes stated on their face that they were not securities. Nevertheless, the SEC prevailed on summary judgment. The key question on appeal was whether the notes were securities under Reves v. Ernst & Young, 494 U.S. 56 (1990). While the securities laws define the word security in broad terms which include a “note,” Reves made it clear that not every note is covered. Rather, that term must be viewed in the context of what Congress sought to accomplish under the securities laws. Under the Court’s decision generally notes are presumed to be securities. A four part test is used to compare the instrument to notes which are not securities. Critical to Appellant’s claims here is his contention that a jury must make the ultimate determination on this test. That claim is contrary to established Tenth Circuit and other authority which holds that it is a question of law, not fact, and that submitting it to a jury is error, at least in a civil case, the Court held. And, in any event, in view of the presumption that the note is a security, once a moving party demonstrates that there is no dispute of a material fact, the opposing party has the burden to demonstrate that the note is not a security.

Here Appellant failed to rebut the presumption. The first question under the Reves test is the reasonable motivations of a buyer and seller of the instruments. Here the purpose was to raise money for the enterprise making it likely the instrument it is a security. Second, in the “plan of distribution” for it, the instrument need not be traded on an exchange. Rather, it is sufficient that it is sold to a broad segment of the public as here. Third, while the question of “reasonable perceptions of the investing public” is a closer call according to the Court, it also does not support Appellant despite the disclaimer on the notes in view of the overall analysis on the other factors. Finally, the last factor, which considers whether there is an alternate regulatory scheme, also cuts against Appellant. Here there is no other federal regulatory scheme to protect investors. Accordingly the decision of the district court was affirmed.


Remarks: Richard Ketchum, Chairman and CEO of FINRA, addressed the Council for Economic Education, Baltimore, MD. (October 3, 2013). His remarks included comments on FINRA’s mission, a discussion of the financial literacy program and findings from a recent survey (here).


Brokers: The Board adopted two attestation standards regarding the audits of brokers and dealers (here).


Misleading investors: Last week the Financial Conduct Authority censured Catalyst Investment Group for recklessly misleading investors in connection with the sale of bonds by ARM Asset Backed Securities SA from November 2009 through May 2010. This week the regulator imposed fines of £450,000 and £100,000 on, respectively, Timothy Roberts, the chief executive of the firm, and Andrew Wilkins, a former director of Catalyst Investment Group. Mr. Roberts was banned from the industry while Mr. Wilkins is precluded from holding senior roles in the future.

Hong Kong

The Securities and Futures Commission banned former representative Chan Ka Chung for life. Mr. Chun was found by a court that while he was an associate director at Falcon Private Bank Ltd. in Hong Kong that he conspired with two clients to issue four false letters showing proof of funds and credit facilities on the letterhead of the bank. The proof was not authorized by the bank. The court sentenced Mr. Chan to serve 23 months in prison.