This Week In Securities Litigation (Week ending September 18, 2015)

The Yates Memo, refocusing DOJ criminal and civil corporate investigations, continues to be the critical topic of discussion this week. The Memo, discussed here, directs that individuals be the focus of the inquiry from the beginning. Perhaps more importantly, the Memo stresses the point that cooperation credit will not be given unless the company identifies those responsible for the malfeasance and furnishes the supporting evidence.

In litigation, the SEC staff suffered a rare defeat in an administrative proceeding with the ALJ dismissed an insider trading case when the Division failed to establish a Dirks-Newman personal benefit. The Commission also filed a group of actions centered on fraudulently induced loans and improper lending practices by a broker and a settled proceeding involving an investment adviser who failed to disclose that his expenses were paid out of an offering he recommend to clients. The agency also brought an action centered on a market manipulation and another based on an offering fraud.


Testimony: Andrew Ceresney, Director, Division of Enforcement, testified on the Electronic Communications Privacy Act before the Senate Committee on the Judiciary (Sept. 16, 2015). His remarks focused on the SEC’s concerns regarding the Act (here).


Remarks: Commissioner Sharon Y. Bowen delivered the keynote address at the ISDA North American Conference (Sept. 17, 2015). Her remarks focused on high frequency trading and algorithmic trading (here).

Remarks: Commissioner J. Christopher Giancaro delivered remarks titled “Good Intentions Do Not Always Lead to Good Regulations” to the 7th Annual Capital Link Global Commodities, Energy & Shipping Forum, New York City (Sept. 16, 2015). His remarks focused on position limits (here).

SEC Enforcement – Litigated Actions

Insider trading: In the Matter of Gregory T. Bolan, Jr., Adm. Proc. File No. 3-16178 (Initial Decision Sept. 14, 2015). Respondents are two former Wells Fargo Securities LLC employees. Mr. Bolan was a research analyst in Nashville, Tennessee. His research focused on three sub-sectors of the health care industry. Respondent Joseph Ruggieri was a senior trader of health care stocks in Wells Fargo’s trading department in New York City. In that role he placed customer orders and principal trades for the firm. The Order alleges that over a two year period beginning in 2010 Mr. Ruggieri traded ahead of six recommendations made by Mr. Bolan. This generated over $117,000 in profits in Mr. Ruggieri’s account. Trader A, who passed away in 2013, was a friend of Mr. Bolan’s who also is alleged to have traded ahead of recommendations. The Order alleged violations of Exchange Act Section 10(b) and Securities Act Section 17(a). Mr. Bolan settled, consenting to the entry of a cease and desist order based on Securities Act Section 17(a)(3). He also agreed to pay a penalty of $75,000. No industry bar was imposed.

Mr. Ruggieri proceeding to hearing. At the conclusion of the hearing ALJ Jason S. Patil dismissed the action based on Dirks and Newman. The initial question was if Mr. Ruggieris was tipped. After a careful analysis of the circumstantial evidence ALJ Patil concluded that Mr. Ruggieri had traded ahead of four of the six reports alleged in the Order. Furnishing the information alone is, however, not sufficient to sustain an insider trading charge. Citing Dirks and Newman the ALJ held that the Division had to prove a Dirks-Newman personal benefit. Both cases defined personal benefit in terms of objective criteria. Under those decisions the insider must receive “a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. There are objective facts and circumstances that often justify such an inference. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient . . . [or the] insider makes a gift of confidential information . . . The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient,’” the Initial Decision states, quoting Dirks.

Here the Division’s proof was insufficient to establish a Dirks-Newman personal benefit. The Division could have had Mr. Bolan, who was under subpoena, testify on this critical point. It chose not to call him. Furthermore, the “friendship” between Messrs. Bolan and Ruggieri “was not a meaningful, close or personal one.” Likewise, the Division’s claims of “career mentorship” and giving “positive feedback” to Mr. Bolan’s superiors are nothing more than standard practice – neither was sufficient to establish a Dirks type personal benefit. While in “an abstract sense, feedback from the trading desk, including Ruggieri, could be viewed as having some potential pecuniary value . . .” here the question was not if it helped Mr. Bolan’s career but rather if Mr. Bolan would have tipped for it. The Division did not establish that point.

Likewise, the claimed friendship — working relationship between the two men was not adequate to establish the necessary benefit. That conclusion is reinforced by Mr. Bolan’s motive which seemed to be more about his disregard for the rules. Accordingly, the Division failed to establish the requisite personal benefit.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 3 civil injunctive cases and 5 administrative actions, excluding 12j and tag-along proceedings.

Fraudulently obtained loans: SEC v. Hall, Civil Action No. 1:15-cv-23489 (S.D. Fla. Filed Sept. 17, 2015) is an action which names as a defendant Christopher Hall, the COB of Call Now, Inc., a public company that owned and operated a race track. Mr. Hall and his firm had millions of dollars in margin loans from broker and clearing firm Penson Financial Services, Inc. prior to the market crisis. By 2009 when the collateral had significantly diminished in value, he had to post additional collateral. Mr. Hall pledged Call Now stock after obtaining loans from the firm for $5.5 million based on his false claim that the money was needed to clear other loans off the stock – only about $850,000 went to that purpose. He also pledged his interest in a real estate limited partnership without telling the firm its interest would be subordinated to his prior lien. Subsequently, Mr. Hall sold his interest for about $1.3 million without Penson’s written consent and diverted most of the money to his personal account. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23352 (Sept. 17, 2015).

Failed margin loans: In the Matter of Philip A. Pendergraft, Adm. Proc. File No. 3-16819 (Sept. 17, 2015) is a proceeding which names as Respondents, Mr. Pendergraft, a co-founder and director of broker and clearing firm Penson Financial Services, Inc., Kevin McAleer, CPA, the firms CFO, Thomas Johnson, a director of the firm and at one point the President/CEO of Call Now, Inc., and Charles Yancey, the president and CEO of the broker. The action centers on about $100 million in failed margin loans made by Penson to its customers, primarily Cristopher Hall and his affiliates (see above). Following the financial crisis Penson had significant losses on the loans. Rather than recognizing the losses in 2009 as required by the accounting standards, the firm delayed. In 2011 it recorded $60 million. Those losses contributed to the eventual bankruptcy of the firm in 2013. Respondents were responsible for the improper accounting treatment which resulted in false filings being made with the Commission. The Order alleges violations of Securities Act Section 17(a)(2) and 17(a)(3) and Exchange Act Section 7(c), 13(a), 13(b)(2(A), 13(b)(2)(B), 13(b)(2), 13(b)(2)(A), 13(b)(5), 14(a), 17(a) and 17(e). Each Respondent settled with the Commission. Each (except Mr. Yancey) consented to the entry of a cease and desist order based on: as to Mr. Pendergraft, Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 7(c), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a), 17(a) and 17(e); he was also barred from the securities business and directed to pay a penalty of $100,000; as to Messrs. McAleer and McAleer, Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5); both were denied the privilege of appearing and practicing before the SEC with a right to apply for reinstatement after one year and directed to pay a penalty of $25,000; and as to Mr. Johnson, Exchange Act Sections 13(a), 13(b)(2)(A) and 14(a) and, in addition, he will pay a penalty of $25,000. Mr. Yancey was suspended in the securities business from association in a supervisory capacity for six months and directed to pay a penalty of $25,000.

Close out: In the Matter of Brian David Hall, Adm. Proc. File No. 3-16817 (Sept. 17, 2015); In the Matter of Rudolfo Delasierra, Adm. Proc. File No. 3-16816 (Sept. 17, 2015). Mr. Hall was a vice president at Penson Financial Services, Inc., a registered broker dealer which was one of the largest clearing firms in the U.S. Mr. Delasierra was also a vice present of the firm. The proceedings are based on the securities lending practices at Penson. Specifically, over a period of three years beginning in late 2008 procedures were implemented in the Securities Lending Department that did not comply with Rule 204, Regulation SHO which requires participants of a registered clearing agency to deliver equity securities to a registered clearing agency when delivery is due – typically settlement or close out fails to deliver. Each man resolve the proceeding, consenting to the entry of a cease and desist order based on Rule 204(a), Regulation SHO and to a censure. No penalty was imposed based on cooperation.

Audit failures: In the Matter of Terry L. Johnson, CPA, Adm. Proc. File No. 3-16820 (Sept. 17, 2015) is a proceeding based on the audits and quarterly reviews of the financial statements undertaken by Respondent for eight issuer clients and the resulting audit reports issued. The audits had numerous deficiencies including the failure to obtain engagement quality reviews, to properly plan the engagement, to obtain sufficient audit evidence and to maintain audit documentation. In some instances Mr. Johnson is alleged to have created, or caused to be created, back-dated, artificial audit documentation which he produced to the staff during its investigation. The Order alleges violations of Exchange Act Sections 10(b) and 13(a) and Securities Act Section 17(a). Mr. Johnson resolved the matter, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he is denied the privilege of appearing and practicing before the Commission as an accountant and was directed to pay disgorgement of $96,000, prejudgment interest and a penalty of $50,000.

Pyramid scheme: SEC v. Tropikgadget FZE, Civil Action No. 1:15 cv 10543 (D. Mass.) is a previously filed action naming as defendants Julio Cruze, two Portuguese companies and three of its officers and twelve promoters. The complaint alleged a pyramid scheme. Mr. Cruse settled, admitting he was a promoter of the firm and that he solicited investors for the scheme. The Court entered by consent a permanent judgment precluding violations of Securities Act Sections 5(a) and 5(c), the participation in any sales or marketing program similar to the one here and directing the payment of $3,232.32 as disgorgement, prejudgment interest and a penalty. See Lit. Rel. No. 23351 (Sept. 17, 2015).

Expenses: In the Matter of Jeffrey B. Rubin, Adm. Proc. File No. 3-16813 (Sept. 15, 2015) is a proceeding which names as a Respondent the founder of Pro Sports Financial, Inc. Mr. Rubin is also a registered investment adviser. Over a three year period beginning in March 2011 either he or a Project Developer recommended that his clients invest a total of about $40 million in an entertainment complex and casino. Mr. Rubin did not disclose that the complex paid about $600,000 of what he claimed were his expenses out of the offering proceeds. In fact, the money was not expenses but to support his lifestyle. The Order alleges violations of Exchange Act Sections 17(a)(1) and (3). To resolve the matter Mr. Rubin consented to the entry of a cease and desist order based on the Sections cited in the Order. He is also barred from the securities business. Disgorgement and a penalty were not sought based on an affidavit demonstrating his inability to pay.

Offering fraud: SEC v. Mogler, Civil Action No. 15-cv-01814 (D. Ariz. Sept. 11, 2015) names as defendants Jason Mogler, James Hinkeldey, Casimer Polanchek, Brian Buckley and James Stevens and ten related entities. The scheme centered around the supposed development of beachfront property in Mexico, the operation of recycling facilities and the acquisition of foreclosed residential properties that would be resold. Various entities used by the defendants were supposedly involved in one of these lines of business. Investors were solicited over a period of years beginning as early as October 2006 for some investments. Investors were variously told about one or more of the businesses. Overall about 225 investors parted with over $18 million based on representations that their funds would be used to develop one of the lines of business. Investors were also assured that the investment was safe. In fact the representations were false. Virtually all of the investor funds were diverted to the personal use of the defendants. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23347 (Sept. 15, 2015).

Manipulation: SEC v. Babini, Civil Action No. 1:15-cv-13348 (D. Mass. Sept. 14, 2015) names as defendants Marco Babini, Samuel Brown and Edward Withrow. It involves Endeavor Power Corporation. In 2012 Mr. Withrow became chairman of Endeavor following a merger of another company he controlled with one controlled by Marco Babini. The two men held over 40 million shares of the company through a series of foreign accounts. The three defendants planned to manipulate the share price by raising it from about 7 cents per share to 25 cents. The three defendants coordinated with an individual who supposedly had substantial experience in the area but who in fact was a person working with the FBI. A series of steps were taken to tout the stock in an effort to increase the share price. Before the price increased sufficiently to sell the covertly owned shares, the SEC suspended trading, thwarting the scheme. The complaint alleges violations of Exchange Act Sections 9(a)(2), 10(b), 13(d) and 16(a) along with each subsection of Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23346 (Sept. 14, 2015). A parallel criminal action was filed by the U.S. Attorney’s Office for the District of Massachusetts.


Misconduct: The regulator barred the former President of Global Arena Capital Corp., Bargara Desiderio and five former representatives, David Bennett, James Torres, Peter Snetzko, Alex Wildermuth and Michael Tannen based on the use of misleading sales pitches, churning and other violations. In addition, two former principals of the firm, Kevin Hagan and Richard Bohack, are barred as principals. Niaz Elmazi and Andrew Marzec were barred for failing to cooperate. This action resulted from an initiative under which FINRA follows brokers who have a problem past to new firms and conducts inspections.

Criminal Cases

Insider trading: U.S. v. Eydelman (D.N.J.) is an action which names as a defendant former broker Vladimir Eydelman. He was charged for participating in the insider trading ring tied to Stephen Metro, a former clerk at Simpson Thacher & Bartlett LLP. The ring had profits of over $5.6 million (here). This week he pleaded guilty to a superseding indictment charging one count of securities fraud, one count of tender offer fraud and one count of conspiracy to commit securities and tender offer fraud. Sentencing is scheduled for December 21, 2015.


False information: Benjamin Kirkpatrick, formerly the executive chairman of Waratah Resources Ltd. was charged with furnishing false information to the Australian Securities and Investment Commission. He was also charged with aiding and abetting the violation by the company of its continuous disclosure obligation. The charges centered on a company announcement that the firm had established a $100 million trade facility with Bank of China when it had not. The matter was adjourned until early November 2015.

Inappropriate advice: The ASIC banned Alfie Chong, a financial adviser at Meritum Financial Group Pty. Ltd. for five years. The action was based on giving inappropriate client advice, failing to assess the client’s circumstances, engaging in misleading and deceptive conduct, failing to give clients a statement of advice and failing to provide clients with sufficient detail.

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