This Week In Securities Litigation (Week of November 2, 2020)
With the election on Tuesday, a key question is the aftermath. Even if the current administration prevails there will be changes. Rumors have swirled that the Commission’s Chairman will return to New York. Others have resigned – a co-director of enforcement, the director of corporation finance and the head of international. If a new administration prevails the changes will undoubtedly be significant. Then again it could be some time before the winner prevails. In this regard a good read is William Rehnquist’s Centennial Crisis, a detailed account of the disputed election of 1876.
In the past week SEC Enforcement prevailed in a bench trial in one of the last of a series of cases centered on pay-to-play allegations involving the New York pension fund. The agency also filed actions centered on unregistered broker charges tied to a boiler room and the failure to register security-based swaps.
Be safe and healthy this week — and please VOTE!!
Whistleblowers: The Commission continued to make large awards, this week. The agency awarded over $10 million to a person who furnished information that prompted the opening of an investigation and then assisted as it evolved, according to a release issued on October 29, 2020.
Rules: The Commission adopted a new framework for the use by Funds of derivatives on October 28, 2020. The proposal alters the rule-based approach traditionally used to one which is principle based (here). The initial proposed rules were issued for comment based on the unanimous vote of the Commission. The final rules were adopted by a 3-2 vote with Commissioners Allison Herren Lee (here) and Caroline A. Crensaw (here) dissenting, noting that the promise of the initial proposals was lost in enactment.
SEC Enforcement – Litigated Actions
Pay-to-play: SEC v. Paulsen, Civil Action No. 18-cv-6718 (S.D.N.Y.). The facts presented centered on a pay-to-play scheme involving a New York broker-dealer where John Paulsen and Deborah Kelley were employed and the New York State Common Retirement Fund. Navnoor Kang was the Director of Fixed Income and Head of Portfolio Strategy of the Pension Fund. In that capacity Mr. Kang was responsible for investing over $53 billion in fixed-income securities on behalf of the Fund. Policies of the Pension Fund precluded him from receiving gifts, benefits or consideration of any kind.
Ms. Kelly met Mr. Kang prior to his employment at the Pension Fund. Following his employment at the Pension Fund she invited him, for example, on a ski trip. In return for that and other gifts Mr. Kang used his position to direct the fixed income business to the brokerage firm employing Ms. Kelly and Mr. Paulsen. The broker-dealer’s Pension Fund business increased dramatically from $0 in the fiscal year ended March 1, 2014 to about $156 million in the next fiscal year. The subsequent year it increased to $179 million.
In late 2015 the SEC opened an investigation into the benefits provided to those involved. Prior to testimony Ms. Kelly and Mr. Kang agreed to align their stories and testify falsely to conceal the pay-to-play scheme. In late 2015 and early 2016 Ms. Kelley and Mr. Kang each falsely testified under oath before the SEC about the expenses that had been paid for by Ms. Kelly. From about 2014 through 2016 Mr. Kang, Ms. Kelly, and Mr. Paulsen are alleged to have defrauded the Pension Fund, denying the Fund its right to honest services.
During the period bribes were paid in the form of entertainment, travel, meals and other items to secure fixed-income business from the Pension Fund, according to the charges. Ms. Kelley and Mr. Paulsen sought to conceal the scheme from their employer and its internal auditors. The records of the firm contained false entries regarding the payments made to Mr. Kang. The two brokers also lied to the internal auditors. Ms. Kelley eventually pleaded guilty in the criminal case as did Mr. Kang, and settled with the Commission. U.S. v. Kang, No. 1:16-cr-00837 (S.D.N.Y.); SEC v. Kang, Civil Action No. 16-cv-9029 (S.D.N.Y.). Mr. Paulsen was charged by the Commission with violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Following trial, the Court found him liable under each Section. Remedies will be considered in the future.
SEC Enforcement – Filed and Settled Actions
The Commission filed 1 civil injunctive action and 1 administrative proceeding last week, excluding 12j and tag-along-proceedings.
Unregistered brokers: SEC v. Forester, Civil Action No. 249562 (C.D. Cal. File Oct 26, 2020) is an action which names as defendants Alex Forester, Michael Micks, Yarden Krampf, Christopher Lee, Sean O’Neal, Michael Raynor and Lee Sobel. The complaint alleges that over a four-year period, beginning in 2015, Defendants worked for a boiler room, soliciting people to purchase securities using cold calls. Those solicited were convinced to purchase securities in amounts and at prices that those behind the scheme arranged. Over $2.8 million in commissions were paid. The complaint alleges violations of Exchange Act Section 15(a)(1). Defendants Forester, Hicks and Krampf settled, consenting to the entry of permanent injunctions. The question of penalties was reserved for later consideration. See Lit. Rel. No. 24952 (Oct. 27, 2020).
Manipulation: SEC v. Taub, Civil Action No. 24951 (D.N.J.) is a previously filed action which names as defendants Joseph Taub and Elazar Shamalo. Defendants resolved this action and a final judgment was entered by consent against each Defendant enjoining them from future violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). Conduct based injunctions were also imposed with a 10 year duration. Defendants were, in addition, directed to pay disgorgement in the amount of $395,207 and prejudgment interest of $20,007, offset in part by a forfeiture order entered in a related civil forfeiture action. The underlying conduct, which took place over a two-year period, began in 2014. During the period Defendants placed at least 30,000 manipulative coordinated trades. See Lit. Rel. No. 24951 (Oct. 23, 2020).
Security-based swaps: In the Matter of Tradent Capital Markets Ltd, d/b/a Tradenet, Adm. Proc. File No. 90261 (October 23, 2020). Respondent is a private company based in Israel. Many of its customers are also U.S. citizens and/or based here. Since January 2016 Tradent has operated a website – Tradenet.com – that offers educational programs to customers which can teach them to trade U.S. and other securities. Buyers can purchase a Day Trading Educational Package designed to teach them the basics. The contract the purchaser executes describes the purchase and sale of securities, options and contracts for differences although no securities are actually purchased. The firm offered four other packages priced at different levels that gave the customer the opportunity to fund an account from which they could obtain a 70% interest in the net profits or no more than a specified amount of the losses which were limited by a mechanism that halted trading after a certain dollar level. Over a three-year period, beginning in November 2017, over 5,000 customers in the U.S. purchased and operated Tradent accounts. Those customers received about $1.7 million in payouts. The funds were transferred to U.S. accounts. No registration was in effect. The Order alleges that the contracts offered and sold by Tradent were security-based swaps and alleges violations of Securities Act Sections 5(e) and 6(1). In resolving the matter, Respondent took certain remedial actions and cooperated with the staff. The company consented to the entry of a cease and desist order based on the sections cited in the Order. The firm also agreed to pay a penalty of $130,000 which will be transferred to the U.S. Treasury.
Cooperation: The Division of Enforcement issued new guidance regarding self-reporting and cooperation. The guidelines will be added to the Enforcement Manual. According to the release the “guidance describes potential scenarios where the staff may recommend the recognition of respondent’s self-reporting, cooperation or remediation . . .” which may result in a smaller penalty (here).
Report: The regulator published a report forecasting Singapore GDP using SPF Data. The report was originally published in the Microeconomic Review (here).