Michael Steinberg, formerly of SAC Capital, was found guilty of insider trading by a jury. The verdict preserved the unblemished record of the US Attorney’s Office in Manhattan which has prevailed in each of the insider trading case taken to trial arising out of its years long investigation into the hedge fund industry.
The number of cases brought by the SEC declined during the last fiscal year, according to statistics published by the agency. The dollar amount of penalties ordered in its cases, however, reached the highest point since 2005.
SEC enforcement lost another case at trial. This week Enforcement filed a series of new cases focused on insider trading, excessive brokerage fees, manipulation, acting as an unregistered broker, prime bank fraud and offering fraud.
Proposed rules: The Commission issued proposed rules under the JOBS Act which are intended to facilitate access to the capital markets for small companies. The proposal builds on Regulation A and would permit an issuer to offer up to $50 million in securities within a twelve month period (here).
Statistics: In the last fiscal year the number of SEC enforcement actions filed declined to 686. This is the lowest total since 2010 when 681 were brought. When delinquent filing cases are excluded, in the last fiscal year the SEC only filed 554 enforcement actions. That is the lowest number since 2006 when 483 actions were filed if delinquent filing cases are excluded. Overall the statistics show a decline in the number of FCPA, financial fraud, insider trading and investment adviser and investment company cases but increases in the number of market manipulation and offering fraud actions. The total amount of penalties ordered in Commission cases last year was $1.16 billion, the largest dollar figure since fiscal 2005.
SEC Enforcement – litigated cases
Financial fraud: SEC v. Jensen, Civil Action No. CV 11-05316 (C.D. Cal.) is an action against Peter Jensen and Thomas Tekulove, respectively, the founder and former CEO and former CFO of Basin Water, Inc. Basin conducted an IPO in May 2006. The company designed, manufactured and serviced groundwater treatment systems. On February 10, 2009 Basin restated its financial results for 2006 and 2007. The restatement focused on transactions involving two special purpose entities and the application of FIN 46(R) which changed the conceptual framework regarding consolidation. The company explained the errors to the staff in response to an inquiry. Prior to the restatement Basin’s audit committee retained outside counsel to conduct an internal investigation of certain accounting transactions involving the two special purpose entities as well as each of the points later raised by the SEC in its complaint. Following the inquiry the audit committee concluded that there was no fraud.
In June 2011, the SEC filed an accounting fraud action against the two former company officers. The complaint centered on claims that Basin had prematurely recognized revenue in six transactions thereby improperly inflating its financial results in 2006 and 2007. Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(5) and SOX Section 304 were violated, according to the Commission. Following a bench trial the Court prepared detailed findings of fact and conclusions of law, analyzing the evidence and reviewing each of the six accounting issues raised by the Commission. The Court concluded that while there were accounting errors, there was no fraud or statutory violation. To the contrary the Commission’s claims were based largely on hindsight.
SEC Enforcement – filed and settled actions
Weekly statistics: This week the Commission filed, or announced the filing of, 5 civil injunctive district court actions, DPA or NPA and 4 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Insider trading: SEC v. Jorgenson, Case No. 2:13-cv-02275 (W.D. Wash. Filed Dec. 19, 2013) is an action against Brian Jorgenson and Sean Stokker, respectively a senior manager in Microsoft Corporation’s Treasury Group, and a business analyst who has known Mr. Jorgenson since 2009 when the two men became friends. The complaint alleges that Mr. Jorgenson provided his friend with confidential, non-public, material information about his employer on three occasions. Mr. Stokker then traded while in possession of the information and spit the profits with his friend. The first was in advance of an April 2012 announcement that Microsoft would invest in Barnes & Noble, Inc.’s e-reader. Mr. Stokker purchased call options in Barnes & Noble and made profits of $185,000. The second involved the announcement of Microsoft’s earnings in July 2013. The announcement stated that the firm would miss consensus estimates. Mr. Stokker sold short, realizing profits of over $195,000. The third was prior to Microsoft’s first quarter earnings announcement in October 2013. The release stated that the firm would exceed consensus estimates. Mr. Stokker purchased options of Technology Select Sector SPDR Fund which held Microsoft shares. Following the announcement there were profits of $13,000. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney for the Western District of Washington filed a parallel criminal case. Both actions are pending.
Excessive fees: In the Matter of G-Trade Services LLC, Admin. Proc. File No. 3-15654 (Dec. 18, 2013); In the Matter of Thomas Lekargeren, Adm. Proc. File No. 3-15653 (Dec. 18, 2013); In the Matter of Jonathan Samuel Daspin, Adm. Proc. File No. 3-15652 (Dec. 18, 2013). The proceeding against G-Trade names as Respondents, the firm, a registered broker dealer with a division known as the CGM Division; ConvergEx Global Markets Limited or CGM, a Bermuda broker dealer; and ConvergEx Execution Solutions or CES, a New York registered broker dealer. Mr. Lekargeren was a registered representative with G-Trade. Mr. Daspin, based in New Jersey, was the global head of trading of CGM. Each entity is a subsidiary of ConvergEx Group, LLC.
From 2006 through 2011 Respondents executed equity orders for institutional customers. The CGM Division of G-Trade handled large non-electronic orders around the world for firm customers. GTM handled global transition management services involving large orders of stock for customers who were changing fund managers or investment strategies. GTM and the CGM Division acted as agents on behalf of customers. They charged disclosed commissions for their services. When GTM or the CGM Division received an order it was routed to CGM in Bermuda. That firm then acted in a riskless principal capacity and executed the order for its account through a local broker deal in the relevant market. If the CGM employee believed a mark-up could be added without the knowledge of the customer, it was included in the price. This created additional trading profit for the firm which was not disclosed. A series of steps were taken to conceal the added profit. The Orders allege violations of Exchange Act Sections 10(b) and 15(c)(1).
To resolve the proceedings G-Trade and CES agreed to a series of undertakings. In addition, the Respondents in each proceeding admitted to the facts alleged in the Order in which they were named as a Respondent and to violating the federal securities laws. Each Respondent also consented to the entry of a cease and desist order based on the Sections cited in the Orders. The entity defendants agreed to a censure.
In the G-Trade proceeding, the Respondents will pay disgorgement of $79,802,448, prejudgment interest and a penalty of $20 million, jointly and severally. Messrs. Daspin and Lekargeren agreed to the entry of orders barring them from the securities business or from participating in any penny stock offering with any reapplication being subject to certain condition. In addition, Mr. Daspin agreed to pay disgorgement of $1 million, prejudgment interest and a penalty of $111,550. Mr. Lekargeren agreed to pay disgorgement of $110,089 and prejudgment interest.
Parallel criminal charges were also resolved. Messrs. Daspin and Lekargeren pleaded guilty to conspiracy to commit securities and wire fraud. CGM agreed to plead guilty. ConvergEx Group entered into a deferred prosecution agreement where the underlying information charges one count of conspiracy to commit securities fraud and wire fraud and one count of wire fraud. To resolve the charges ConvergEx Group and CGM agreed to pay a criminal penalty of $18 million and to forfeit about $12.8 million. They also agreed to pay restitution of about $12.8 million. Both the Commission and the DOJ acknowledged the extensive cooperation of ConvergEx after the investigation commenced and the remedial efforts of the company. The individuals also cooperated.
Manipulation: SEC v. Hamdan¸ Civil Action No. 2:13-cv-15006 (E.D. Mic. Filed December 10, 2013) is an action against Randy Hamdan and his company, Oracle Consultants, LLC. The complaint alleges that the defendants conducted a pump-and-dump manipulation scheme involving the shares of CompSonics. The scheme was implemented using false press releases claiming that the firm had reached a settlement in certain patent litigation and was considering options to improve shareholder value. 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. 22892 (Dec. 18, 2013).
Unregistered broker: In the Matter of Alex Halimi, Adm. Proc. File No. 3-15646 (Dec. 17, 2013) is a proceeding naming as Respondent Alex Halimi who was a registered representative at several registered brokers from 1991 through 1996. From November 2008 through August 2012 Mr. Halimi, through Cannes Capital Advisors, LLC, solicited investors and regularly placed orders for securities on behalf of others in exchange for transaction-based compensation. In this regard he acted for at least 54 customers and was paid over $500,000. Neither Respondent nor his firm were registered broker dealers with the Commission. The Order alleges a violation of Exchange Act Section 15(a). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. He also agreed to the entry of an order barring him from the securities business and from participating in any penny stock offering with a right to apply for reentry after five years. In addition, Mr. Halimi agreed to pay disgorgement of $522,785, prejudgment interest and a civil penalty of $125,000.
Prime bank fraud: SEC v. Malom Group AG., Civil Action No. 2:13-cv-2280 (D. Nev. Dec. 16, 2013) and U.S. v. Brandel, No. 2:13-cr-439 (D. Nev. Unsealed Dec. 16, 2013) are cases centered on two prime bank fraud schemes. The schemes centered on Swiss based Malom Group AG – Malom being an acronym for Make A Lot of Money. The schemes were perpetrated by a group of individuals which include: Malom principals Martin Schlapfer and Hans-Jung Lips, both of Switzerland; Malom’s U.S. based officers, James Warras and Joseph Micili; Anthony Brandel through is company M.Y Consultants, Inc.; and Sean Finn through M. Dwyer LLC.
Overall 30 investors put $11 million in the schemes. In the first scheme investors were solicited to participate in joint ventures that were to place funds in European equity and debt offerings represented to have very high rates of return. Under the plan investors would use the resources of the Malom Group in exchange for an up-front fee. Investors would propose a trading program that had to be approved under the terms of the joint venture agreements. None of the proposed programs were approved. Under the second proposal, Malom would invest in structured notes that would be listed on Western European exchanges. As in the first scheme, investors were required to pay an up-front fee. Once the fees were paid, the defendants simply pocketed the investor funds. Eventually the investors requested a return of their funds. Those requests were not honored.
The criminal indictment charges conspiracy, wire fraud and securities fraud. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The cases are pending.
Offering fraud: SEC v. Arcturus Corporation, Civil Action No. 3:13-cv-04861 (N.D. Tex. Filed Dec. 12, 2013) is an action against Leon Ali Parvizian and his entities, Arcturus Corporation and Aschere Energy LLC. Also named as defendants are promoters Alfredo Gonzalex, AMG Energy, LLC, Robert Balunas and R. Thomas & Co. LLC. Over a period of about four years beginning in 2007 Parvizian, through Arcturus and Aschere, raised about $22 million from 380 investors. The funds were for interests in oil and gas joint ventures. The defendants failed to disclose the fact that the companies were engaged in material litigation. Nevertheless, much of the money raised was used to fund that litigation. Indeed, Parvizian prematurely called for completion funds on two projects when funding for the litigation was depleted. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See Lit. Rel. No. 22891 (Dec. 16, 2013).
Prime bank fraud: SEC v. Coddington, Civil Action No. 1:13-cv-3363 (D. Colo. Filed Dec. 12, 2013) is an action against Daniel Coddington, his company Golden Summitt Investors Group, Inc., Jesse Erwin, Merlyn Geisler, Marshall Gunn, Jr., Lewis Malouf, Golden Summit, Extreme Capital Ltd, Fidelity Asset Service Corp., Geisco FNF, LLC and SouthCom Management, LLC, Seth Leyton, Michael Columbia and Stonerock Capital Group LLC centered on a prime bank fraud scheme. Investors were promised annual returns of over 250% by obtaining loans against what was called a collateralized mortgage obligation or CMO. The loan proceeds were to be invested in what was claimed to be a CMO trading program. No loans were obtained according to the complaint. Rather, the funds were misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See Lit. Rel. No. 22889 (Dec. 13, 2013).
Records/reserves: The regulator fined Deutsche Bank Securities, Inc. $6.5 million for financial and operational deficiencies. Specifically, in March 2010 the firm incorrectly computed its customer reserve formula which was deficient by $700 million. In connection with its enhanced lending program, which extended loans largely to hedge funds through a London affiliate, the firm had a number of serious flaws in its books and records. This meant, for example, that FINRA examiners could not readily determine which portions of the debt were attributable to the customers’ enhanced lending and which were from the firm’s proprietary trading. Accordingly, the firm was unable to readily monitor the accounts originating out of the lending business.
AML: The regulator imposed a $1 million fine on COR Clearing LLC for repeated failures to comply with ant-money laundering requirements. The firm provides clearing services for about 86 correspondent firms. Those services include settlement and recordkeeping functions for introducing broker-dealers as well as order processing and other services. Over repeated inspections the regulator found the firm’s AML procedures to be inadequate. A number of book keeping and net capital computation errors were also found. In addition to the fine, COR is required to: retain an independent consultant to conduct a comprehensive review of the relevant policies and systems; to submit proposed new clearing agreements to FINRA for approval; and to submit for one year certifications from the CEO and CFO stating that each has reviewed the firm’s customer reserves and net capital computations for accuracy prior to submission.
Investment fund fraud: U.S. v. Liskov, Case No. 13-CR-10206 (D. Mass.) is case against Jeffrey Liskov who pleaded guilty to a one count criminal information alleging a violation of Advisers Act Section 206. The information claimed that Mr. Liskov and his former advisory firm, EagleEye Asset Management, LLC, defraud clients by inducing them to liquidate their holdings and then invest in his forex trading scheme. Investors were inducted to take this action through a series of misrepresentations. In two instances the defendant transferred client funds to the scheme without permission. The forex investments lost nearly $4 million while Mr. Liskov and his firm made $300,000 in performance fees. The strategy was to generate temporary profits on client forex investments to collect the fees after which the value of the holdings declined. Mr. Liskov was sentenced to serve 3 years in prison and pay $3,003,147 in restitution. Previously, a jury found Mr. Liskov and his firm liable in an action brought by the Commission. The Court entered a final judgment, injunctive relief and directed the payment of disgorgement, prejudgment interest and civil penalties. SEC v. EagleEye Asset Management, LLC., Civil Action No. 11-CV-11576 (D. Mass.).See Lit. Rel. No. 22888 (Dec. 13, 2013).
Inaccurate information: The Securities and Futures Commission reprimanded HSBC Securities Brokers (Asia) Ltd, a subsidiary of The Hongkong and Shanghai Banking Corporation Ltd., $5 million for furnishing the regulator inaccurate information. In an application for a new customer program, the firm represented to the regulator that it would permit customers to opt-in. The program was approved. In fact the company had made a tentative decision to have customers opt in but later before the launch changed it to opt-out without informing the regulator. The fine took into consideration the cooperation of the firm.
Alert: The Financial Conduct Authority announced a warning to consumers regarding the possible risks from buying, trading or holding virtual currencies such as Bitcoins.
Manipulation: The FCA announced that the Court of Appeals affirmed its position in a case against Swift Trade Inc. and Peter Beck. There the FCA had taken the position that layering constituted market abuse. In this case the firm carefully placed large positions on one side of the market which caused a shift in price. It would then place small positions on the other side to take advantage of the price movement and then cancel the large orders. This process was repeated.
Suitability: The FCA banned Michael Conway, Andrew Powell and Martin Gwynn from the financial services industry and banned Daniel Conway from serving in any supervisory capacity. The actions were based on the roles of the four men in advising pensions to invest in potentially unsuitable high-risk assets that may result in lower pensions. Mr. Conway failed to disclose that he stood to gain financially from the advice he gave. Mr. Powell, while raising concerns about the suitability of the investments, recommended them. Mr. Gwynn failed to properly monitor the advice of Mr. Powell or obtain the necessary authorization when he was appointed a director in the firm. Mr. Conway was appointed with no prior experience and failed to take the steps necessary to understand the requirements of his role or the suitability of his advice. The advice generated over £4 million in commissions.
False statements: The FCA announced that the Upper Tribunal ordered derivatives trader David Hobbs banned from the financial services industry. The order was based on the fact that while under investigation for possible market abuse, and during a proceeding in which he was ultimately found not liable, he lied to investigators, put forth a false defense and therefore was not fit for the industry.