This Week In Securities Litigation (Week ending October 12, 2012)
Events surrounding the collapse of the first money fund to “break the buck” are being played out in a New York City courtroom on SEC charges that the principles of the fund misrepresented its financial condition in the wake of massive redemption demands. Investors lost confidence in the Reserve Primary Fund once its huge holdings in Lehman Brothers bonds became worthless with the collapse of the investment bank. The case is one of the few market crisis actions to go to trial. Its significant goes beyond the case however since it touched off a debate about money fund regulation which remains unresolved to this day.
The Commission brought another action in conjunction with the U.S. Attorney’s Office in Manhattan. This one centered on fraudulent mark ups. The CFTC published statistics showing that its enforcement division had another record year, filing more cases that the prior fiscal year which had also set a record.
Finally, the SFO issued additional guidance on certain key issues under the Bribery Act. Unfortunately, it offers few insights into the charging process beyond those contained in earlier guidance.
Remarks: Chairman Mary Schapiro addressed the New England Securities Conference on October 11, 2012. Her remarks focused on enforcement strategy, discussing significant cases, the restructuring of the Division and its collaboration with other agencies (here).
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 1 civil injunctive action and no administrative proceedings (excluding tag-a-long and 12j proceedings).
Fraudulent mark ups: SEC v. Leszczynski (S.D.N.Y. Filed Oct. 5, 2012); U.S. v. Condon (S.D.N.Y. Unsealed Oct. 5, 2012). The SEC and the U.S. Attorney’s Office in Manhattan brought charges against brokerage firm employees centered on illegal mark ups. Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann and Henry Condon were employed in the New York office of a London based broker. The firm charged clients fixed fees on a per share basis. Messrs. Reyftmann, Chouchane and Leszczynski were sales brokers while Mr. Condon and another executed the trades. The scheme focused primarily on manipulating the mark ups. This was done by altering the execution price of the stock and taking the difference for the firm in addition to charging the standard per share commission. A second facet of the scheme involved misappropriating portions of trades. The scheme resulted in customer overcharges of about $18.7 million. At the same time it earned the defendants millions of dollars in bonuses.
In the criminal case Messrs. Leszczynski and Chouchane have each been charged with one count of securities fraud and one count of conspiracy to commit securities and wire fraud. Mr. Condron pleaded guilty to one count of securities fraud and two counts of conspiracy to commit securities fraud. He also agreed to forfeit all proceeds traceable to the commission of the felonies. Mr. Reyftmann was not charged in the criminal case. The SEC’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is pending.
Remarks: Chairman Gary Gensler addressed the George Washington University Center for Law, Economics and Finance Conference (October 10, 2012) in remarks titled: The New Era of Swaps Market Reform. His remarks reviewed the history of swaps regulation and projected a time table for future rules. He also discussed benchmark interest rates (here).
Enforcement statistics: The Enforcement Division for the CFTC reported record filings for the second fiscal year. For the last fiscal year it filed a record 102 enforcement actions. That number eclipses the 99 filings made in the prior fiscal year. The Enforcement Division also opened 350 new investigations, among the highest in the history of the program.
The regulator fined Guggenheim Securities LLC $800,000 for failing to supervise Alexander Rekeda, the former head of its CDO Desk, and Timothy Day, a trader on that desk. The charges alleged that in October 2008 the Guggenheim CDO Desk acquired a €5,000,000 junk rated tranche of a CLO. After failing to market the position, Messrs. Rekeda and Day lied to a customer to induce the sale at a price that was more than it had previously agreed to pay by falsely offering it as part of a package of securities a third party offered for sale. As part of the arrangement the customer was to be provided with pricing adjustments on other deals and other consideration. The arrangements were not detailed in the records. Mr. Rekeda was suspended for one year and fined $50,000. Mr. Day was suspended for four months and fined $20,000.
The Serious Frauds Office issued further guidance on facilitation payments, business expenditures and the self-reporting corruption. Essentially the guidance reiterates prior statements, offering little new on the prosecution standards in these areas that will be used under the Bribery Act.
The Securities and Futures Commission banned Ms. Chu Lai Sze, formerly employed at Dah Sing bank Limited, from re-entering the securities industry for three years. She had been employed at the bank to deal in securities. The action is based on her conviction for forging a customer’s signature on documents relating to the purchase of a Minibond product in April 2008 while working at the bank. The bank compensated the customer.