The SEC Enforcement program got a big win on Thursday in the Tourre case when a jury returned a verdict in favor of the agency. The case is an offshoot of the settled market crisis action against Goldman Sachs. Winning the case was a must for the agency after it stumbled in the trial of earlier market crisis cases. The jury’s verdict can be expected to bolster the agency’s new “get tough” approach under its Chair Mary Jo White. Recently the SEC modified its long standing enforcement settlement policy, rejected the proposed settlement of a high profile hedge fund case and announced a new financial statement fraud task force, a possible indication of the direction the Enforcement Division will now chart.
In other actions the Commission continued to focus on insider trading. The agency filed an insider trading case against two citizens and residents of Spain which may present issues about the reach of the antifraud provisions under Morrison and Dodd-Frank. Another insider trading action was brought against the CEO of an investor relations firm who wrote the insider trading rules for the company. In addition, the SEC brought two more actions tied to the municipal bond market and cases charging failure to supervise, offering fraud and the sale of unregistered securities.
Rules: The Commission adopted Rules to increase Protections for Investors with assets being held by broker-dealers (here).
Rules: The Commission adopted Amendments to the Financial Responsibility Rules for Broker-Dealers (here). Comments on the new rules by Commissioner Luis Aguilar are here and those by Commissioners Gallagher and Paredes are here.
Testimony: SEC Chair Mary Jo White testified before the Senate Committee n Banking, Housing and Urban Affiairs on “Mitigating Systemic Risk in the Financial Markets through Wall Street” (July 30, 2013). Her testimony focused on Dodd-Frank provisions that reduce risk in the system (here).
Testimony: Chairman Gary Gensler testified before the Senate Committee on Banking, Housing and Urban Affairs (July 30, 2013). His testimony focused on the implementation of Dodd-Frank, on-going projects of the staff and resources (here).
Securities Class Actions
Filings: A mid-year report prepared by Cornerstone Research found that the number of securities class actions filed in the first half of the year was down compared to last year (here). Specifically, the report states that in the first six months of this year there were 74 filings compared to 88 in the first half of 2012 and 64 in the second half of last year. If the current trend continues the number of filings in 2013 will be the second lowest since 1997.
SEC Enforcement: Filings and settlements
Filings this week: This week the Commission filed 4 civil injunctive actions and 6 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Unregistered broker: In the Matter of ABN AMRO Bank, N.V., Adm. Proc. File No. 3-15401 (July 31, 2013) is a proceeding against the bank which is organized under Dutch law. Since at least 2004 it has been regularly soliciting and effecting transactions in securities in the U.S. in violation of Exchange Act Section 15(a). Respondent has also violated Securities Act Sections 5(a) and (c) by engaging in transactions that were not registered in the U.S. Although the bank became aware of these issues in 2004 if failed to address them adequately and did not voluntarily report until 2008. To resolve the matter the bank agreed to implement a series of undertakings and consented to the entry of a cease and desist order based on Securities Act Sections 5(a) and (c), Exchange Act Section 15(a) and Advisers Act Section 203(a) as well as a censure. The bank also agreed to pay a penalty of $2 million.
Best execution: In the Matter of A.R. Schneidler & Co., Inc., Adm. Proc. File No. 3-15399 (July 31, 2013) is a proceeding against the registered investment adviser alleging it violated Advisers Act Section 206(2) by failing to obtain best execution for clients beginning in 2007. It also violated Advisers Act Sections 206(4) and Rule 206(4)-7 by failing to have procedures reasonably designed to prevent best execution violations. To resolve the proceeding the Respondent agreed to implement a series of undertakings, consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. It will also pay disgorgement of $757,876.88 along with prejudgment interest and a civil penalty of $175,000.
Misrepresentations: In the Matter of Goelzer Investment Management, Inc., Adm. Proc. File No. 3-15400 (July 31, 2013) is a proceeding against the registered investment adviser and its CEO, Gregory Goelzer. Since 2000 the firm has inappropriately directed advisory client trades through itself, also a broker-dealer, without considering alternative options for the trades. The firm had inadequate compliance procedures to ensure best execution of the trades. In addition, the firm misrepresented in its Form ADV that it considered a series of factors in selecting itself as a broker and that clients benefited. Mr. Goelzer as CEO and CCO was responsible for the Form ADV. To resolve the proceeding the firm agreed to implement a series of undertakings. In addition, Respondents consented to the entry of a cease and desist order based on Advisers Act Sections 206(2), 206(4) and 207 and to a censure. The firm will also pay disgorgement of $309,994, along with prejudgment interest,and a civil penalty of $100,000. Mr. Goelzer will pay a penalty of $35,000.
Insider trading: SEC v. Canas, Civil Action No. 13 CIV 52299 (S.D.N.Y. Filed July 30, 2013) names as defendants two citizens and residents of Spain, Cedric Canas Maillard and Julio Martin Ugedo. Mr. Canas served from May 1, 2008 through January 2011 as the Technical Cabinet Adviser to the CEO of Banco Santander, S.A. Mr. Martin is a long time friend. The action centers on the failed takeover bid by Australian multinational BHP Billiton for Canadian giant Potash Corp. On August 17, 2010 Potash publicly announced that its board had received and rejected an unsolicited offer to purchase its common stock for $38.6 billion or $130 per share in cash from BHP. The price represented a 16% premium to the most recent closing price. A hostile takeover bid failed.
In early August 2010 BHP approached Santander, inquiring if the bank could support a $10.5 billion portion of the underwriting in connection with the proposed bid. The next day a memorandum about the proposal was forwarded to Mr. Canas who discussed it with the Head of European Loans. On August 9, 2010 Santandar approved the proposed underwriting for the deal. Between August 9 and 13, 2010 Mr. Canas purchased highly-leveraged securities know as Contracts-for-Difference or CFDs through the Luxembourg affiliate of TD Ameritrade. CFDs are not available in the U.S. The securities mirror the movement and pricing of the underlying stock on a dollar-for-dollar basis. The purchase and sales prices are identical to those quoted for shares on the listing exchange. In executing the transactions the brokerage firm purchased the equivalent number of Potash shares through U.S. exchanges to set the price and as a hedge. Mr. Canas also tipped his long time friend Mr. Martin, according to the complaint. Between August 10 and 11, 2010 Mr. Martin purchased 1,238 shares of Potash stock on the New York Stock Exchange, although he had little investment experience. At some point Mr. Martin admitted he discussed investing in Potash with Mr. Canas, according to the complaint. Following the announcement of the proposed deal, Mr. Martin had trading profits of $37,153.27 while Mr. Canas had profits of $917,239.44. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.
Insider trading: SEC v. Lee, Civil Action No. 13-cv-5185 (S.D.N.Y. amended complaint Filed July 30, 2013) is a previously filed action in which the Commission amended its complaint to add as a defendant Sandeep Aggarwal, an analyst who covered Microsoft and Yahoo! for his firm. Mr. Lee is the former SAC Capital portfolio manager who pleaded guilty shortly before criminal charges were filed against his former firm (here). Mr Aggarwal furnished the inside information about the proposed Microsoft – Yahoo! deal to Mr. Lee. A parallel criminal case was also brought against Mr. Aggarwal, U.S. v. Aggarwal (S.D.N.Y.)
Unregistered offering: SEC v. Sensenig, Civil Action No 13-cv-4378 (E.D. Pa. File July 30, 2013) is an action against John Sensenig alleging that from 1997 through 2009 he sold promissory notes to fellow members of the Amish and Mennonite communities, raising millions of dollars. The notes were used to finance a collection of start-up companies he founded and controlled, the largest of which was Conestoga Log Cabin Leasing, Inc. In selling the promissory notes, which were unregistered, Mr. Sensenig made misrepresentations concerning the use of the proceeds, the risks involve and the sanctions imposed on him by state securities authorities. About half of the proceeds have been returned to the community. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and (3). Mr. Sensenig settled, consenting to the entry of a permanent injunction based on the sections cited in the complaint and permanently enjoining him from directly or indirectly participating in any unregistered offering. The order also requires him to pay a penalty of $131,500 and surrender for cancellation all shares of stock he owns in two privately held companies formerly affiliated with Conestoga Long Cabin Leasing, Inc. A higher penalty was not sought in view of the defendant’s financial condition. See also Lit. Rel. No. 22764 (July 30, 2013).
Municipal securities: In the Matter of West Clark Community Schools, Adm. Proc. File No. 3-15391 (July 29, 2013); In the Matter of City Securities Corporation, Adm. Proc. File No. 3-15390 (July 29, 2013). These proceedings were brought against, respectively, the school district, its underwriter, City Securities, and an employee of the broker, Randy Ruhl. The proceedings center on two municipal bond offerings by the school district, one in March 2005 and the second in 2007. In the first the District undertook to provide an annual report containing certain financial information and operating data to the appropriate national and state repositories. The District was also required to provide timely notices of certain specific events regarding the bond issue. One of those obligations was to provide notice if it could not furnish the required information. In the second, the district represented that it had complied with all of its disclosure obligations from the first. City Securities was the sole underwriter for both offerings. Mr. Ruhl supervised the second. Contrary to its representations, the District failed to comply with its disclosure obligations — the representations made in connection with the 2007 offering were false. City failed to conduct adequate due diligence regarding the representations of the district or to have procedures in place to obtain notice of compliance with the disclosure obligations. The Order as to the District alleges violations of Securities Act Section 17(a)(2) and Exchange Act Section 10(b). The Order as to City Securities and Mr. Ruhl alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 15(c)(2) and 15B(c)(1). Mr. Ruhl aided and abetted the violations of the firm, according to the Order.
Each Respondent settled with the Commission. The District agreed to implement a series of undertakings that will ensure it has proper policies and procedures. In addition, the District consented to the entry of a cease and desist order based on Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. City Securities agreed to implement a series of undertakings and consented to the entry of a cease and desist order based on Section 17(a) of the Securities Act, and Sections 10(b), 15(c)(2) and 15B(c)(1) of the Exchange Act . . . “ The firm also agreed to pay disgorgement of $238,000, prejudgment interest and a civil money penalty of $300,000. Mr. Ruhl consented to the entry of a similar cease and desist order and agreed to pay $18,155 as disgorgement, prejudgment interest and a civil money penalty equal to the amount of the disgorgement. 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 one year. In addition, Mr. Ruhl agreed to the entry of a bar from serving in a supervisory capacity in the securities business.
Failure to supervise: In the Matter of Comprehensive Capital Management, Inc., File No. 3-15393 (July 29, 2013) and In the Matter of Ronald S. Rollins, File No. 3-15393 (July 29, 2013) are proceedings arising out of the wrongful acts of Timothy Roth who was an associated person at Comprehensive, a registered investment adviser, from June 2003 through February 2011. During that period Mr. Roth transferred mutual fund shares and cash from client accounts at a custodial broker to his nominee accounts without authorization by falsifying transfer authorization forms and abusing standing authority from clients. The firm failed to reasonably supervise him, according to the Order. Mr. Rollins was the CCO of the firm. He also failed to reasonably supervise Mr. Roth by failing to reasonably implement the firm policies governing custody review of transactions, books and records, e-mail and annual office audits. Through his failures he aided and abetted and caused the firm’s violations of the Custody Rule of the Advisers Act as well as the books and records provisions. To resolve the proceeding the firm agreed to implement certain undertakings, consented to the entry of a cease and desist order based on Advisers Act Sections 204 and 206(4) and to paying a penalty of $120,000. Mr. Rollins settled, consenting to the entry of a cease and desist order based on the same sections. Based on financial condition, a penalty was not imposed. Mr. Rollins was also suspended from the securities business for one year and barred from serving in a supervisory capacity with a right to reapply after three years.
Insider trading: SEC v. Gray, Civil Action No. 4:13-cv-2186 (S.D. Tx. Filed July 26, 2013) is an action against Stephen Gray, former CEO, Managing Partner and a member of a Huston based investor relations firm. He is also the former CEO of a public company. At the IR firm he wrote the securities trading policy which precluded not just insider trading but any trading in the shares of firm clients. Nevertheless, beginning in 2010, and continuing through the September 2011, Mr. Gray traded primarily in the securities of firm clients through his personal brokerage account. Over time he began trading in options. On at least nine occasions he traded in the securities of a firm client while in possession of material non-public information obtained from the client engagement. Overall Mr. Gray had profits of $278,000 and avoided losses of at least $35,000 from trading in the securities of clients. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). See also Lit. Rel. No. 22762 (July 26, 2013).
Unregistered sales: SEC v. Bravo, Civil Action No. 13-cv-5116 (S.D.N.Y. Filed July 23, 2013) is an action against Jorge Bravo, Jr. The complaint alleges that from April 2009 through May 2010 Mr. Bravo sold about 93 million shares of stock in AVVAA World Health Care Products, Inc. for about $530,000. He obtained the shares in so-called “wrap around agreements” under which he secured the shares from officers of the company in exchange for assuming certain debts. After obtaining the shares he began selling them to the public, although there were not registered. Mr. Bravo had been involved in a similar scheme in his capacity as president of another company. Those agreements were subject to a Commission enforcement action. Mr. Bravo resolved the action, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a) and 5(c). He also agreed to pay disgorgement of $392,000 along with prejudgment interest and a civil penalty of $150,000. See also Lit. Rel. No. 22756 (July 25, 2013).
Insider trading: U.S. v. Lee (N.D. Cal.) is an action against Jauyo Lee and Victor Chen. Mr. Lee was previously employed at an investment banking firm in San Francisco. He tipped his friend Mr. Chen about two deals. The first was the merger of his firm’s client, Syneron Medical Ltd. with Candela Corporation in 2009. Mr. Chen traded and reaped profits of about $62,589. The second was the merger of Somanetics Corporation with a subsidiary of Covidien plc. Mr. Lee’s firm was the lead banker on the deal. Mr. Chen, his long-time friend, traded and had profits of $547,510. Both pleaded guilty to one count of conspiracy to commit securities fraud. Both were sentenced to serve 16 months in prison.
Investment fund fraud: U.S. v. Barriger (S.D.N.Y.) is an action in which the former president and principal shareholder of Gaffken & Barriger Fund LLC pleaded guilty to a four count superseding indictment charging securities fraud, conspiracy to commit securities fraud, mail fraud and conspiracy to commit mail fraud based on an alleged $12.6 million investment fraud scheme. The indictment claims that from July 2006 through March 2008 Mr. Barriger solicited about $12.6 million from over 70 investors by deceiving them about the Fund’s performance. Mr. Barriger described the fund as safe and liquid with a minimum guaranteed return of 8% per year. According to the court papers, the defendant concealed material information from investors about its losses and income. Sentencing is scheduled for November 15, 2013.
Insider dealing: The Financial Conduct Authority arrested four individuals in connection with insider dealing and market abuse charges. The regulator declined to release additional information about the charges.
Short selling: Based on recent investigations the Securities and Futures Commission issued a warning regarding the illegal short selling in advance of a placement (here).
Breach of duty: The SFC is seeking disqualification orders against Wang Jian Hua, former advisor to the board of China Best, Ma Jun Li, former chairman and executive director of that company and Zhang Da Qing, former CEO of that company. The proceeding is based on the proposed acquisition of 60% of Chang Hou Energy Resources Ltd. by a China Best’s subsidiary. According to the Commission, the three individuals breached their duty as directors of China Best in handling the proposed acquisition which resulted in a loss to the company. The seller in the proposed acquisition, and the ultimate beneficial shareholder, were nominees for Mr. Wang and not independent third parties. The $155 million paid by China Best for the acquisition was actually used to discharge Mr. Wang’s personal loans or pay his personal company. Mr. Wang thus profited from the deal but failed to disclose this to the board. China Rich also falsely represented that the deal was with an independent third party. When China Rich terminated the deal following an inquiry by the exchange the deposit of $305 million was not returned.
Inadequate procedures: The SFC fined A One Investment Company Ltd $1.2 million and suspended approval for Alysia Ann Lee to act as a responsible officer of the firm for eight months in connection with certain control failures relating to the unauthorized sales of client securities and unauthorized transfers of $7 million in client funs. From July 4, 2012 through August 10, 2013 a block of 538,000 shares of securities was liquidated from a client account and, in a series of transfers, the funds were remitted to accounts in other countries. Supposedly this was done based on a client e-mail. The client denied sending the e-mail, claiming the account was compromised. The SFC found that the firm had inadequate internal controls relating to the sale and the transfers of cash and failed to follow its own procedures in that regard.