This Week in Securities Litigation (Week ending October 18, 2013)
The SEC lost another major case this week when a jury found against the agency and in favor of Mark Cuban on insider trading claims after deliberating only a few hours. The Commission also filed two settled cases this week, one against Knight Capital arising out of its recent computer issues which caused a frenzy of trading for a brief period and a second against a Ponzi scheme operator.
The CFTC settled charges with JPMorgan arising out of the London Whale debacle. The settlement includes admissions of fact, remedial undertakings, a cease and desist order and the payment of a $100 million fine. The settlement is the first time the agency has invoked its new antifraud authority granted under Dodd-Frank. It is also the first time the agency has obtained admissions in connection with a settlement.
Remarks Mary Jo White, SEC Chair, delivered remarks tilted “The Path Forward on Disclosure Policy” to the National Association of Corporate Directors (October 15, 2013). The remarks focused on the purpose of disclosure and possible revisions to policy (here).
Remarks: Chair Mary Jo White’s addressed the Securities Enforcement Forum, Washington, D.C. (Oct. 9, 2013)(here). Her remarks focused on enforcement policy.
Remarks: Stephen Cohen, Associate Director, SEC Division of Enforcement, delivered remarks to the SCCE Annual Conference, Washington, D.C. (Oct. 7, 2013) which focused on compliance issues (here).
Remarks: Commissioner Scot D. O’Malia addressed the Edison Electric Institute CFTC Compliance Forum, Washington, D.C. (Oct. 17, 2013). His remarks included comments on the rule making process of the agency, futurization, and the readiness of the Commission to oversee the implementation of Dodd-Frank (here).
SEC Enforcement – litigated cases
Insider trading: SEC v. Cuban, Civil Action No. 3-08-CV-2050 (N.D. Tx.) is the insider trading case against Mark Cuban, the owner of the Dallas Mavericks. The jury returned a verdict yesterday against the SEC and in favor of Mr. Cuban. The SEC’s complaint claimed that Mr. Cuban engaged in fraudulent, insider trading when he sold a large stake in Mamma.com and avoided what later would have been a loss of over $700,000. The sale followed phone calls with Mamma officials in which Mr. Cuban, as the firm’s largest shareholder, was told about a coming PIPE offering. Those officials claimed that Mr. Cuban was told the information was confidential. There were remarks by Mr. Cuban, according to the complaint, which suggested he understood he could not trade. The district court dismissed the complaint and the SEC declined to amend. The Fifth Circuit Court of appeals reversed. The jury, however, found for Mr. Cuban.
Weekly statistics: This week the Commission filed or announced the filing of 2 civil injunctive actions and 1 administrative proceeding (excluding follow-on actions and 12(j) proceedings).
Investment fund fraud: SEC v. CKB Holdings Ltd., Civil Action No. 13-5584 (E.D.N.Y. Filed under seal October 9, 2013) is an action against sixteen defendants including Rayla Melchor Santos, Hung Wai Shern, Rui Ling Leung and a group of entities called the CKB entities. The complaint alleges that since mid-2011 defendants have raised over $20 million from U.S. investors and millions more from those in Canada, Taiwan, Hong Kong and other countries. Investors were solicited to invest in the CKB entities which supposedly marketed children’s educational courses. Riskless profits were to come from Profit Reward Points granted to investors which increased in value or paid dividends. Additional profits were to come from an IPO and listing on the Hong Kong stock exchange. In fact the representations were false. The companies engaged in little business and no steps were taken toward an IPO. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(a)(1). A freeze order was entered by the Court. See Lit. Rel. No. 22846 (Oct. 17, 2013).
Financial statement fraud: SEC v. JBI, Inc., Civil Action No. 1:12-cv-10012 (D.Mass.) is a previously filed action against the company, John Bordynuik and Ronald Baldwin, Jr. The complaint alleged that during two reporting periods in 2009 that the company overstated the value of certain assets by almost 1,000%. The company and Mr. Bordynuik, the CEO, previously settled. This week the Court entered a final judgment by consent against Mr. Baldwin, the former CFO. That judgment permanently enjoins him from engaging in future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). He was also barred from serving as an officer or director of a public company for five years and directed to pay a fine of $25,000. See Lit. Rel. No. 22847 (Oct. 17, 2013).
Market access: In the Matter of Knight Capital Americas LLC, Adm. Proc. File No. 3-15570 (October 16, 2013) is a settled administrative proceeding against registered broker dealer Knight Capital. The Order centers on the events of August 1, 2012 when a computer error that occurred in connection with the execution of 212 small retail orders resulted in 4 million executions in 154 stocks for more than 397 million shares in 45 minutes. Overall Knight purchased $3.5 billion long positions in 80 stocks and $3.15 billion short positions in 74 stocks. The Order finds that Knight violated the market access Rule adopted in 2010 by failing to reasonably maintain effective systems. Overall the firm suffered $460 million in losses. This is the first proceeding based on that Rule. To resolve the proceeding Knight agreed to adopt a series of remedial undertakings which included retaining one or more independent consultants who will prepare a report that will be submitted to the staff regarding the pertinent procedures with recommendations that will be adopted. The firm also consented to the entry of a cease and desist order based on Exchange Act Section 15(c)(3), Rule 15c3-5 and Rules 200(g) and 203(H) of Regulation SHO and a censure. The firm will pay a $12 million penalty.
False reports: SEC v. Madoff, Civil Action No. 12-cv-5100 (S.D.N.Y.) is a previously filed action against Peter Madoff, brother of the Ponzi king, alleging that he made “stacks” of false documents in support of his brother’s fraud, including account reports and filings. The Court entered a default judgment against Mr. Madoff and a permanent injunction prohibiting future violations of Exchange Act Sections 10(b), 15(b)(1), 15(c) and 17(a) and Advisers Act Sections 204, 206(1), 206(2), 206(4) and 207. No monetary relief was entered in view of Mr. Madoff’s criminal conviction and the $143 billion restitution order entered in that case. See also Lit. Rel. No. 22845 (Oct. 15, 2013).
Investment fund fraud: SEC v. Enea, Civil Action No. 2:13-cv-01151 (E.D. Wisc. Filed October 10, 2013) is an action against Michael Enea alleging that he operated a Ponzi scheme from about July 2006 to May 2013 which raised about $2.1 million from 18 investors. Those investors were falsely told that their money would be invested in a “credit card portfolio,” supposedly proceeds from a group of retail merchants who pay fees to a third party processor when there is a charge. Investors were to receive a stream of monthly payments. In fact most of the money was used to repay other investors while portions were taken by Mr. Enea for personal use. To resolve the matter Mr. Enea consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). He is also required to pay disgorgement of $763,803 and prejudgment interest. See Lit. Rel. No. 22842 (October 11, 2013).
Trading: In the Matter of JPMorgan Chase Bank, N.A, (Filed October 16, 2013) is an administrative proceeding naming the bank as a Respondent. It centers on the “London Whale” trading episode. Over a four year period beginning in 2007 the Chief Investment Office of JPMorgan built a large portfolio of CDX, a particular type of credit default swap, through its London desk. While the portfolio was typically profitable, in early January 2012 when it held billions of dollars in positions the market was moving against it. On February 29 the traders “recklessly employed an aggressive trading strategy in one particular CDX. The CIO sold net more than $7 billion of the CDX, with about $4.6 billion of the sales taking place in the last three hours of the market day. In the prior two days the unit had sold over $3 billion of the index. Overall, the transactions by the CIO in the three days amounted to about one-third of the volume traded in the month of February. As the sales took place the market price declined which benefited the portfolio. The controls over the CIO did not prevent it from accumulating these huge positions or taking steps to conceal the losses. The ultimate loss from the trading was over $6 billion. The Order alleges violations of Section 6(c)(1) of the CEA which was added under Dodd-Frank. Based on Exchange Act Section 10(b), it prohibits in connection with any swap . . . “intentionally or recklessly” employing any device or scheme or artifice to defraud. JPMorgan resolved the proceeding by: 1) entering into a series of undertakings; 2) admitting to the fact sections cited in the Order but not the conclusions of violation; 3) consenting to the entry of a cease and desist order based on Section 6(c)(1) and the pertinent rules; and 4) paying a fine of $100 million. In a footnote the agency stated it does not have the resources to prosecute the individuals involved. This is the first enforcement action in which the trading Commission obtained admissions.
MOU: The Securities and Futures Commission entered into a Memorandum of Understanding with the Financial Regulatory Commission of Mongolia. The MOU pertains to cross boarder matters and enforcement.