DOJ announced “Operation Broken Trust” this week, a sweep focused on investment fund fraud. It is being conducted by the Justice Department along with the SEC, CFTC, IRS and others. A new report shows that the number of SEC settlements in FY 10 increased to the highest level since 2007. Settlements with individuals were up significantly, while those with corporations declined.
This week, SEC enforcement was dominated by insider trading cases. The actions were not the much-discussed headline grabbing probes into the hedge fund industry however. Rather the actions were dominated by family related insider trading rings.
SEC Settlement Trends
The SEC settled with 694 defendants in FY10, the highest level since 2007 according to a new NERA Economic Consulting Report available at http://www.securitieslitigationtrends.com/. The overall increase came from a 25% jump in settlements with individuals. Settlements with companies, however, declined during the same period by 12%. The 168 company settlements were the second lowest since the passage of SOX. The largest corporate settlement was with Goldman, Sachs & Co. at $550 million. Four of the top ten largest corporate settlements were FCPA cases.
Operation Broken Trust
Members of the Financial Fraud Task Force, including DOJ, the SEC, the FBI, the IRS, the Postal Inspectors and the CFTC, in coordination with the FTC, the U.S. Secret Service and the National Association of Attorneys General, conducted the largest targeted sweep in history focused on financial investment fraud. The task force, announced this week by Attorney General Eric Holder, began on August 16th. Since then, enforcement actions have been brought against 343 criminal defendants and 189 civil defendants. The actions involved over 120,000,000 victims. The task force is designed to send two messages. One is to alert the public to invest scams. The other is to warn those conducting these fraudulent enterprises that law enforcement is using every tool to pursue them.
Insider trading: SEC v. One of More Unknown Purchasers of Securities of Wimm-Bill-Dann Foods OJSC, 10 Civ. 9159 (S.D.N.Y. Filed Dec. 8, 2010) is an insider trading action centered on the acquisition of 66% of Wimm-Bill-Dann Foods OJSC, a Russian manufacturer and seller of dairy and fruit juice products, by PepsiCo, Inc. The deal was announced on December 2, 2010. In the days prior to the announcement an account at SG Private Banking SA in Geneva, Switzerland made large purchases of Wimm-Bill-Dann ADRs. For example, on November 29 the account purchased 23% of the total trading volume; on November 30th 13% of the trading volume; and on December 1st 21%. After the acquisition date the price of the ADRs rose 28%. The positions in the account would yield $2.7 million if sold. The Commission obtained a temporary freeze order. See also Litig. Rel. 21766 (Dec. 8, 2010).
Insider trading: SEC v. Cohen, Case No. 10 CV 2514L (S.D. Cal. Filed Dec. 8, 2010); U.S. v. Myers, Case No. 10 CR 4832 (S.D. Cal. Filed Dec. 8, 2010) (here). These cases are, respectively, a civil and criminal, insider trading case against Bret Cohen and his Uncle David Myers. According to the SEC complaint, which alleges violations of Exchange Act Section 10(b) and the one count information alleging a conspiracy to violate the securities laws, the defendants were furnished inside information on two occasions about Sequenom, Inc. The information came from two brothers, tippers A and B. Tipper A was the patent agent for the company. Tipper B is the fraternity brother of Mr. Cohen. In one instance, tipper A furnished tipper B advance information about a pending acquisition of Exact Sciences Corporation after working on the due diligence. Tipper B then furnished the information to Mr. Cohen, who traded prior to the January 9, 2009 deal announcement. The share price increased significantly before Exact Sciences rejected the bid on January 12. Beginning on January 13, and continuing for several weeks, Mr. Cohen sold his shares. He made a profit of over $34,000. Tippers A and B received a payment from Mr. Cohen.
The second transaction involved the April 29, 2009 announcement that previously disclosed test data for a Sequenom product could not be relied on. Again, tipper A was involved in the matter for the company. Again he furnished the information to tipper B, who tipped Mr. Cohen. A few minutes before the market close on April 29, Mr. Cohen began buying Sequenom put options which were sold the next day at a profit of over $572,000. Tipper B was later paid a fee of $10,000. The cases are in litigation.
Reg M: In the Matter of Gartmore Investment Ltd., Adm. File No. 3-14154 (Dec. 8, 2010) is a settled proceeding against London based investment adviser Gartmore Investment Ltd. The Order alleges a violation of Rule 105 of Regulation M, which prohibits short selling of equity securities during a restricted period prior to a public offering and then purchasing the same securities in the public offering. The Respondent is alleged to have violated the Rule in May 2009 in connection with certain short sales it made prior to the public offering by BB&T Corp. The Respondent made profits of $928,117.83. The action was resolved with a consent to the entry of a cease and desist order from committing or causing any violations and any future violations of Rule 105 of Regulation M of the Exchange Act. Respondent also agreed to disgorge its trading profits along with prejudgment interest and pay a penalty of $375,000.
Bid rigging: In the Matter of Banc of America Securities LLC, Adm. Proc. File No. 3-14153 (Dec. 7, 2010) is an action against Banc of America Securities, now Merrill Lynch, for its role in improper bidding practices from 1998 through 2002. Municipalities generally invest the proceeds from the purchase of municipal securities temporarily in reinvestment products. IRS regulations generally require that the investments be at fair market value. That value is typically established through a bidding process. Here, that process was not competitive because of undisclosed consultations, agreements, or payments. These actions jeopardized the tax exempt status of the underlying municipal securities. Respondent settled with the SEC by consenting to the entry of a cease and desist order from committing or causing any violations and any future violations of Exchange Act Section 15(c)(1)(A) and agreeing to pay disgorgement plus prejudgment interest of $36,096,442 directly to the affected entities. No penalty was assessed because of the cooperation of the Respondent. The settlement was part of a global resolution which also included the IRS, the Office of the Comptroller of Currency and 20 State Attorneys General. Overall Respondent paid $137.1 million. DOJ did not charge Banc of America under the terms of its Antitrust Corporate Leniency Program.
Insider trading: SEC v. Temple, Case No. 10-cv-1058 (D. Del. Filed Dec. 7, 2010) names as defendants Jeffery Temple and his brother-in-law Benedict Pastro (here). Mr. Temple was employed at a Wilmington, Delaware law firm from August 12, 2002 through October 11, 2010 as Information Systems and Security Manager which gave him access to electronic and other files containing material non-public information. Defendant Benedict Pastro is Mr. Temple’s brother-in-law. Beginning in June 2009, and continuing until his termination from the firm, Mr. Temple traded in advance of twenty-two prospective mergers and/or acquisition related announcements involving twenty law firm client. In twelve instances, the complaint claims Mr. Temple tipped his brother-in-law. Overall, Mr. Temple is alleged to have made illegal profits of $88,300. Mr. Pastro is alleged to have made $94,000 in illegal profits. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.
U. S. v. Chodan, (S.D. Tex. Dec. 6, 210) is an action in which Joseph Chodan, a former commercial vice president and consultant to the U.K. subsidiary of Kellogg, Brown & Root, Inc. pleaded guilty to conspiring to violate the FCPA (here). The plea is based on FCPA violations by a joint venture formed in 1990 by KBR, Snamprogetti Netherlands B.V., Technip S.A. and another company. The purpose of the venture was to secure contracts from Nigeria LNG, Ltd., a company formed by the Nigerian government which held a 49% interest. From 1995 through 2004, the joint venture was awarded four EPC contracts by Nigeria LNG Ltd. to build facilities on Bonny Island. KBR CEO Albert Stanley and others met with a designated representative of the government and negotiated the agreements and bribes. Mr. Chodan recommended that the joint venture hire two agents to pay the bribes. One was a Gibraltar corporation controlled by Jeffrey Tesler. The other was a Japanese trading company. About $132 million was paid to the Gibraltar company. Another $50 million was paid to the Japanese trading company. At various points during the venture, Messrs. Stanley, Chodan and others met with government officials to secure the appointment of a representative with whom they could deal. Previously, KBR, Snamprogetti, Technip and Mr. Stanley resolved their cases (see e.g., here). The date for sentencing has not been set.
The agency filed an action seeking a temporary cease and desist order against San Antonio based broker Pinnacle Partners Financial Corporation and its president Brian K. Affaro. FINRA alleges that from August 2008 to the present Mr. Affaro and Pinnacle have operated a boiler room. Through this operation more than $10 million has been raised from over 100 investors. The funds were raised through misrepresentations. According to FINRA, the investor funds were misused by Mr. Affaro.