The Commission announced that its enforcement program remains vibrant, having filed just one less action last year that its record setting 735 actions in the prior fiscal year. The enforcement program is being bolstered by over 3,000 whistleblower complaints that were filed last year from all 50 fifty states and a number of foreign countries. And, the long awaited guidance on the FCPA was published by the agency and the DOJ.
In court the Commission lost another significant market crisis case centered on the first mutual fund to “break the buck.” The jury did find in the Commission’s favor on the negligence based charges but it rejected each intentional fraud claim. At the same time the Commission settled with BP over its faulty disclosures regarding the Deep Water Horizon oil spill, collecting the third largest penalty in its history.
Report: The House Sub-Committee on Oversight and Investigations, Committee on Financial Services, issued a report on MF Global (Nov. 15, 2012). The Report is critical of the lack of coordination between the CFTC and the SEC and raises the prospect of a merger of the two agencies.
Statistics: The Commission released statistics regarding its enforcement program for the last fiscal year showing that a total of 734 enforcement cases were brought, one less than the record setting 735 in the prior year. Those cases included 58 insider trading actions, one more than the year earlier; 147 actions involving investment advisers, also one more than the prior year; and 134 against broker-dealers, a 19% increase over the year before. They also included “firsts” such as the proceeding against the New York Stock Exchange and dark pool operator Pipeline Trading Systems.
Whistleblowers: A report on the whistleblower program states that the agency received over 3,000 tips during the past year. Those came from all 50 states and 49 countries. During the last fiscal year there were 143 enforcement judgments and orders that potentially qualify for awards. The most common complaint related to corporate disclosure.
Report on NRSROs: The agency issued a Staff Summary Report of Examinations of Nationally Recognized Statistical Rating Organizations. The findings state that the methodology applied to rating certain securities appears to have changed; certain securities were not downgraded in a timely fashion; methodologies were published and disclosed inconsistently; and directors were not actively exercising their oversight duties (here).
SEC Enforcement: Litigated cases
Market crisis: SEC v. Reserve Management Company, Inc., Case No. 1:09 CV 4346 (S.D.N.Y. Filed May 5, 2009) is the Commission’s market crisis case centered on events which led to the first money fund to “brake the buck.” The jury returned verdicts against the Commission on each intentional fraud count but did find in its favor on negligence based counts. The case named as defendants Reserve Management Company or RMC, a registered investment advisor owned by defendant Bruce Bent Sr. and his family; Resrv Partners, a registered broker dealer which is the distributor for the funds managed by RMC and which is also controlled by the Bent defendants; Bruce Bent Sr., the Chairman of RMC and president, treasurer and trustee of the Fund; and Bruce Bent II, also an owner of RMC and a vice chairman and the vice president and assistant treasurer of the Fund.
The Fund, one of the oldest and most respected in the country, held $785 million of Lehman Brothers bonds on September 15, 2008 when the investment banking firm collapsed into bankruptcy. By mid-morning on September 15 the Fund was overwhelmed with redemption demands. The Fund’s custodian bank halted redemptions. In an effort to reassure investors and others the defendants made a series of misrepresentations regarding the financial resources available and used a flawed methodology to calculate NAV, according to the complaint. The complaint charged violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Section 206(1) and 206(2).
Privilege: SEC v. Welliver, Civil No. 11-CV-3076 (D. Minn. Ruling Oct 26, 2012) is an action in which the court addressed the question of inadvertent privilege waivers. During the course of an investigation which centered on a lending arrangement involving an investment company and another related entity, privileged documents were produced. Later in the enforcement action some of the same and other privileged materials were produced, some of which were then used by the defense in a deposition. At the time defenses had been asserted which included advice of counsel. Subsequently, the defendants amended the defenses to delete reliance on counsel and sought to claw back the privileged documents. The court rejected the claim based on Rule 502, Federal Rules of Evidence. Under that Rule the Court concluded that there was a waiver of privilege as to the materials produced at the Jones deposition but not by subject matter. The disclosure was clearly intentional the court found. The record, however, did not support a claim that there should be a subject-matter waiver since neither party described the context in which the materials were used which might suggest a basis for such a ruling under the Rule. The Court also concluded that there had been a waiver as to the materials produced in response to the SEC investigative subpoena and in discovery. Under the Rule the critical point is the reasonableness of the precautions taken, the time taken to rectify the error and the overriding fairness, the same approach utilized in pre-Rule case law in the district. Here there was no showing regarding the procedures used to safeguard privilege including any evidence that the defendants sought extensions of time from the SEC.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 3 civil injunctive actions and 1 administrative proceeding (excluding tag-along-actions and 12(j) actions).
False statements: SEC v. BP p.l.c., Civil Action No. 2:12-cv-02774 (E.D.La. Filed Nov. 15, 2012) is an action against the London based oil company stemming from the Deepwater Horizon spill in the Gulf of Mexico. It began with an explosion on April 20, 2010. Following the explosion, which killed eleven crew members, the rig sank. BP stated that the flow rate of oil into the Gulf was estimated to be 5,000 barrels of oil per day in three separate Forms 6-K filed with the Commission. Additional similar statements were made by BP officials. Over time other contradicted those claims but BP maintained its position despite the fact that eventually it had several other studies which showed that the flow rate was significantly more. Eventually the Flow Rate Technical Group, composed of government and academic experts, determined that the rate was 52,770 to 62,700 barrels of oil per day. The company never corrected its statements. The complaint alleged violations of Exchange Act Sections 10(b) and 13(a). To resolve the case the company consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. It also agreed to pay the third larges civil fine ever obtained by the SEC, $525 million which will be put into a fair fund.
Disclosure: In the Matter of Massachusetts Mutual Life Ins. Co., Adm. Poc. File No. 3-15095 (Nov. 15, 2012) is a proceeding against the firm stemming from the sale of certain variable annuity products. Specifically, the Order alleges that from 2007 through 2009 the firm offered as an option a feature on certain variable annuity products which was a rider known as Guaranteed Minimum Income Benefit or GMIB value. It increased by a compound annual interest rate of either 5 or 6% and permitted investors to make withdrawals any time during the annuity’s accumulation phase. The product was advertised as providing “Income Now” or “Income Later.” What was not clear in the disclosures, and apparently unknown to certain company salesmen, was the effect of the withdrawals. After a number of withdrawals both the contract and GMIB value, depending on market conditions, could decline and adversely impact the amount a customer could apply to an annuity and the future income stream. As part of its remedial efforts the company eliminated the cap on GMIB riders. To resolve the proceeding the company consented to the entry of a cease and desist order based on the Section cited in the Order. It also agreed to pay a penalty of $1,625,000.
Investment fund fraud: SEC v. Sekaran, Civil Action No. 12 CIV 8199 (S.D.N.Y. Filed Nov. 9, 2012) is an action against Anand Sekaran and his controlled entity, Wasson Capital Advisors Ltd. Mr. Sekaran was the sole director and president of Wasson and also advised separately managed accounts for others. For over a decade the operation was successful. As the market crisis unfolded in 2008, however, defendants began incurring significant losses from their investment strategy. Rather than inform investors they created fictitious account statements on a monthly basis for three years. As the losses continued Mr. Sekaran also misappropriated client funds to cover a variety of personal expenses. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is in litigation. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges. In that proceeding Mr. Sekaran surrendered and pleaded guilty to one count of securities fraud and one count of mail fraud. His sentencing has been scheduled for February 19, 2013.
Investment fund fraud: SEC v. Ellis, Civil Action No 0:12-cv-62211 (S.D. Fla. Filed Nov. 9, 2012) is an action against James Ellis for soliciting 14 investors over a seven year period beginning in 2004 for a Ponzi scheme operated by George Ella. That Ponzi scheme is the subject of an earlier Commission action. Lit. Rel. No. 22319 (April 6, 2012). Most of the investors solicited by Mr. Ellis were his social connections in the gay community centered in Wilton Manors, Florida. The complaint alleges violations of each subsection of Securities Act Section 17(a), Sections 5(a) and (c) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22528 (Nov. 9, 2012).
Remarks: Commissioner Bart Chilton addressed SEFCON, New York City (November 13, 2012) in remarks titled “Bedrock, Country and My Dog.” His remarks focused on the need for better coordination for situations such as hurricane Sandy, cautioned against bills in Congress to alter the Administrative Procedure Act and discussed the need for position limits (here).
Remarks, Commissioner Bart Chilton addressed The Globalization and Energy Markets: Investment and Commodity Price Cycles Conference (Huston, Tx. Nov. 9, 2012) in Remarks, “Sin-Orgy and Energy,” which in part focused on the need for position limits, an appeal being taken by the agency of an adverse court ruling regarding its recent position limit rule and efforts to write a new rule (here).
Guidance: The SEC and the Department of Justice released their long awaited guidance on the FCPA titled: A Resource Guide to the U.S. Foreign Corrupt Practices Act (here).
The Securities and Futures Commission brought an action against three current and former directors of First China Financial Network Holdings Ltd, a Hong Kong exchange traded company that is a brokerage and corporate finance company. Richard Yin Yingneng, former Chairman, Wang Wen Ming and Lee Yiu Sun, current chairman and CEO of the company, were accused of a breach of fiduciary duty in connection with a distribution of $18,692,000 dividend to Fame Treasure Ltd, the seller in the 2007 acquisition by First China of GoH Holdings Ltd (GoHi). Mr. Wang, the current Chairman of First China, was a majority shareholder of GoHi at the time through his holdings in Fame Treasure Ltd. The defendants claimed the distribution was part of an agreement between the parties in the acquisition. The SFC claims the agreement does not exist.