The SEC is heading for a record year in terms of the number of settled enforcement actions according to a new report by NERA. The Commission also lost its bid to compel SIPIC to provide coverage for those who purchased CDs from the off-shore bank operated by convicted fraudster Robert Allen Stanford.
SEC enforcement filed another high profile action in conjunction with the Manhattan U.S. Attorney’s Office. This case was against Peter Madoff, broker of he Ponzi scheme king. Mr. Madoff pleaded guilty to parallel criminal charges while maintaining that he was surprised to learn about the Ponzi scheme. The Commission also brought a financial fraud action and an investment fund fraud case in this holiday shortened week.
Enforcement trends: The SEC is on pace to settle a record number of enforcement actions, according to a new report released by NERA Economic Consulting. This trend is being driven by a marked rise in the number of actions against individuals, primarily in insider trading and Ponzi scheme cases. NERA is projecting that at the current pace the SEC will settle 758 cases by year end. Presently, the Commission has concluded 379 settlements. That total represents 93 resolved cases with corporations and 286 with individuals. If the current pace continues the total settlements will be the most since 2005 when the Commission resolved 824 cases, according to the Report.
The largest increase in settlement activity is in insider trading cases. In 2011 the Commission settled 63 insider trading cases. Based on current trends, NERA projects that the agency will settle 120 cases in fiscal 2012. Settlements in Ponzi scheme cases had the next largest increase with a projected 76 settlement compared to 55 in 2011.
SIPIC coverage: SEC v. SIPC, Civil Action No. 11-mc-678 (D.D.C.) is an action in which the SEC sought to compel SIPIC to provide coverage for those who purchased certificates of deposit issued by Stanford International Bank, Ltd., an off-shore bank, that marketed CDs through now defunct Stanford Group Company, a broker dealer registered with the SEC and a member of SIPIC. The court rejected the SEC’s position, concluding that those who purchased the CDs were not customers within the meaning of the SIPIC statute. In reaching this conclusion the court declined to give deference to the views of the Commission since the agency altered its long held view regarding the meaning of the term customer in taking its position here. The court also noted that the SEC interpretation would broaden the scope of SIPIC liability well beyond the plain meaning of the statutory term “deposited.”
SEC Enforcement: Filings and settlements
Statistics: This week the SEC filed 3 civil injunctive actions and 1 administrative proceeding (excluding tag-along and 12(j) actions).
False reports: SEC v. Gold Standard Mining Corporation, Case No. CV 12-5662 (C.D. Cal. Filed June 29, 2012) is an action against the company, Panteleimon Zachos, a Greek resident who is CEO and CFO, Kenneth Eads, its general counsel, Gruber & Company LLC, an audit firm and Edward Gruber, managing member of the audit firm. From May 2009 through April 2011 Gold Standard and its CEO filed false and misleading periodic reports with the Commission concerning the operations of the company, its assts and financial statements. Those reports misrepresented the facts concerning the Russian gold mine the company claimed to own as well as well as its financial condition.
The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). Defendants Gold Standard and Zachos settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. Mr. Zachos will also be barred from serving as an officer or director of a public company. The other defendants have not settled.
Fraudulent reports: SEC v. Madoff (S.D.N.Y. Filed June 29, 2012) and U.S. v. Madoff (S.D.N.Y. June 29, 2012) are actions against Peter Madoff, the younger brother of Bernie Madoff. Peter Madoff pleaded guilty to a two count criminal information and agreed to forfeit $143.1 million and not request a prison term under the statutory maximum of ten years. Under a separate agreement the assets of his wife and daughter will also be forfeit with the exception of a stipend left for his wife. Mr. Madoff was the Senior Managing Director and Chief Compliance Officer of Bernard L. Madoff Investment Securities LLC from 1969 through the December 2008. In that capacity he was responsible for BMIS’s market-making and proprietary trading operations. According to the information and the SEC complaint, he filed numerous false documents including compliance reviews of the trading in the BMIS IA business, statements to regulators, auditors and IA clients, and reports with the SEC on an annual basis on Form ADV which misrepresented the number of adviser clients and the assets under management. Mr. Madoff is also alleged to have engaged in a tax fraud which involved the transfer of family assets in a manner to avoid paying millions of dollars in required taxes. These schemes also permitted his brother to avoid paying millions of dollars in taxes. Sentencing is set for October 4, 2012. The SEC complaint alleges violations of Exchange Act Sections 10(b), 15(b)(1), 15(c) and 17(a) and Advisers Act Sections 204, 206(1), (2), (4) and 207. The action is pending.
Investment fund fraud: SEC v. Price, Case No. 1:12-CV-2296 (N.D. Ga. Filed July 2, 2012) is an action against Aubrey Price and his controlled entities, PFG, LLC, an unregistered investment fund, Montgomery Asset Management, LLC (Florida), and Montgomery Asset Management, LLC (Georgia). Beginning in 2008 the defendants sold shares to more than 100 investors in PFG based on representations that the money would be invested in marketable securities in addition to illiquid investments in South America real estate and a troubled South Georgia bank. About $36.9 million, which represented a significant portion of the assets, was deposited with a broker dealer. The account suffered significant trading losses. Investors, however, were initially given fictitious statements. Later Mr. Price sent them a 22 page letter confessing his fraud. Mr. Price has disappeared. The complaint alleges violations of Exchange Act Section 10(b). A freeze order has been entered.
Manipulation: In the Matter of Eric Wanger, Adm. Proc. File No. 3-14676 (July 2, 2012) is an action against Mr. Wanger and his controlled entity, Wanger Investment Management, Inc. which at one time registered with the Commission as an investment adviser and later withdrew that registration. In April 2008 Respondents started a fund with about $3.5 million. Between the end of January 2008 and the end of September 2010 Mr. Wanger marked the close at least fourteen times on separate days at the end of a month or quarter in thinly traded securities. This improperly inflated the Fund’s monthly statements by amounts ranging from 3.6% to 5,908.71%. It also improperly inflated NAV by amounts ranging from about 0.24% to 2.56% as well as the fees paid to Mr. Wanger and Wanger Investment. In 2008 and 2009 Mr. Wanger, through Wanger Investment, directed the transfer of funds from the Fund’s brokerage account to Wanger Investment to pay adviser operating expenses and payroll. The transfers were not specifically authorized by the Fund. From 2007 through 2009 Mr. Wanger also served on the board of one of the companies whose securities he manipulated at a time when the Fund was a 10% shareholder. During the period Mr. Wanger failed to timely file the required Form 4 with the Commission. The Order alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 16(a) and Advisers Act Sections 206(1), (2), (3) and (4). The Respondents resolved the matter, consenting to the entry of cease and desist orders based on the Sections cited in the Order. In addition, Mr. Wanger will be barred from the securities business with a right to apply for re-entry after one year and will pay a penalty of $75,000.
Takeovers: The Securities and Futures Commission brought a criminal proceeding against PME Group Ltd., a Hong Kong listed company, and its director Ms. Ivy Chan Shui Sheung, based on furnishing false and misleading information in stock announcements. From February 11, 2008 to February 28, 2008, the closing price of PME’s shares rose 136%. Following inquiries by the exchange, PME made three announcements stating that it did not know of any negotiations or disclosable agreements and that its directors were not aware of any price sensitive matter. In fact the company was taking steps to acquire control of another company that owned 50% of a listed company. The case is pending.