This week SEC Chairman Mary Schapiro announced her resignation, effective December 14, 2012. Commissioner Walter was designated as Chairman, effective after Ms. Schapiro’s departure. Ms. Walter has indicated she will only remain as a member of the Commission for a brief period.

Beginning the week of Thanksgiving, the Commission prevailed in two court actions while dismissing one of its market crisis cases. It also filed four new insider trading actions and two market crisis cases.

The Manhattan U.S. Attorney’s Office continued to bring high profile insider trading cases, this time against another former employee of SAC Capital. The Commission filed a parallel action. Following the filing of the action speculation focused on possible charges against SAC Capital which later announced that it has received a Wells Notice from the Commission.

The SEC

The Chairman: Mary L. Schapiro, one of the longest serving SEC Chairman, announced her resignation, effective December 14, 2012. Ms. Schapiro has served through one of the most difficult periods in the Commission’s history. Taking office in January 2009 she was immediately faced with an agency in disarray following a series of scandals. The regulator was also faced with the aftermath of the worst market crisis in history. Rising to the task under Ms. Schapiro’s leadership, the Commission initiated the largest reorganization of the enforcement program in the history of the agency. Following the passage of the ground breaking Dodd-Frank legislation, she led the Commission through an unprecedented period of rule writing to implement the legislation.

SEC Enforcement: Litigated cases

Advisory fraud: SEC v. EagleEye Asset Management, LLC, Civil Action No. 11-CV-11576 (D. Mass.) is an action in which a jury returned a verdict in favor of the Commission and against registered investment adviser EagleEye Management and its sole principal Jeffrey Liskov based on a fraud on advisory clients. The complaint centered around a forex trading scheme. Between April 2008 and August 2010 Mr. Liskov made material misrepresentations to a dozen clients, according to the Commission. The representations were made to induce the clients to liquidate their securities holdings so the cash could be used to engage in high risk forex trading. The trades resulted in about $4 million in losses for the clients but generated over $300,000 in performance fees. In some instances Mr. Liskov used a strategy which resulted in short term profits to generate the fees. Later, however, the positions would decline sharply in value. In the case of two clients Mr. Liskov liquidated their brokerage accounts without permission. He then transferred the proceeds to forex trading accounts where virtually all of their money was lost. The transfers were facilitated through the use of doctored documents. The complaint alleged violations of Exchange Act Section 109b) and Advisers Act Sections 206(1), 206(2) and 204. See also Lit. Rel. No. 22546 (Nov. 27, 2012).

Aiding & abetting: SEC v. Greenstone Holdings, Inc., Civil Action No. 10-cv-1301 (S.D.N.Y.) the court granted in part the Commission’s motion for summary judgment, fining attorney Virginia Sourlis liable for aiding and abetting a fraud by issuing a false legal opinion. In its papers the Commission claimed that attorney Sourlis authored a false legal opinion that was used by the firm to issue over six million shares of unregistered stock. The opinion described notes, note holders and communications with those note holders for which there was no basis in fact. The Court concluded that Ms. Sourlis aided and abetted violations of Exchange Act Section 10(b). The Court reserved ruling on the Securities Act Section 5 claim against the attorney while rejecting the SEC’s claim of primary liability against Ms. Sourlis. The Commission plans to file a motion seeking appropriate remedies. See also Lit. Rel. 22542 (Nov.. 26, 2012).

Market crisis: SEC v. Steffelin, Civil Action No. 11- 04206 (S.D.N.Y. Filed June 21, 2011) is the Commission’s actions against Edward Steffelin, a Managing Director at GSCP (NJ) L.P. That case was filed in conjunction with another market crisis action against J.P. Morgan Securities, SEC v. J.P. Morgan Securities LLC, Civil Action No. 11-04204 (S.D.N.Y. filed June 21, 2012). Both actions centered on the sale of interests in a largely synthetic collateralized debt obligation known as Squared CDO 2007-1. The Commission’s complaint alleged misstatements in connection with the marketing of interests in the entity tied to the role of hedge fund Magnetar Capital LLC. Mr. Steffelin’s firm served as the portfolio managed on the deal. Although the factual allegations in the complaint appeared to detail an intentional fraud, the charges alleged negligence based fraud under Securities Act Sections 17(a)(2) & (3). J.P. Morgan settled. Mr. Steffelin did not. The Commission dismissed the proceeding with prejudice.

SEC Enforcement: Filings and settlements

Weekly statistics: Over the last two weeks the Commission filed 9 civil injunctive actions and 8 administrative proceedings (excluding tag-along-actions and 12(j) actions).

Insider trading: SEC v. Conradt, Civil Action No. 12-cv-8676 (S.D.N.Y. Filed Nov. 29, 2012) is an action against attorney Thomas Conradt, formerly a registered representative at a New York City brokerage firm, and David Weishaus, a law school graduate who was also formerly an employee at a broker-dealer. The case centers on the acquisition of SPSS Inc., by International Business Machine Corporation, announced on July 28, 2009. Mr. Conradt obtained inside information on the deal from his roommate who, in turn, obtained it from an associate at a law firm working on the deal. The associate discussed the information in confidence. Instant messages between the two defendants reflect the fact that they knew they had inside information. The defendants, and other downstream tippees, purchased shares and options in advance of the deal announcement. Following the announcement the two defendants, along with three other registered representatives tipped but not charged here, had trading profits of over $1 million. The U.S. Attorney’s Office for the Southern District of New York announced parallel criminal charges. The cases are pending. See also Lit. Rel. No. 22549 (Nov. 29, 2012).

Insider trading: SEC v. Pamplin, Civil Action No. 1:12-cv-04136 (N.D. Ga. Filed Nov. 29, 2012) is an action centered on the acquisition of TurboChef Technologies, Inc. by Middleby Corporation, announced on August 12, 2012. Defendant John Pamplin, Jr. was employed at TurboChef as its Chief Information Officer until March 2008 when he was terminated. Subsequently, he remained in contact with a number of employees of the company. The complaint claims he pressed those employees for information about the company and a possible deal. Through those contacts it is alleged that he in fact obtained inside information. He is also alleged to have engaged in suspicious trading which included liquidating company share holdings and the purchasing out of the money options. Following the announcement of the deal Mr. Pamplin had $68,000 in trading profits. The complaint, which is in litigation, alleges violations of Exchange Act Section 10(b). See also Lit. Rel. no. 22550 (Nov. 29, 2012).

Investment fund fraud: SEC v. Resources Planning Group, Inc., Civil Action No. 12-cv-9509 (N.D. Ill. Filed Nov. 29, 2012) is an action against the registered investment adviser and its co-owner and co-principal, Joseph Hennessy. From early 2007 through the spring of 2012 the defendants raised more than $1.3 million by telling investors that the Midwest Opportunity Fund could offer high returns when in fact it was in poor financial condition. Investors were not told that the money was actually to repay notes of the Fund personally guaranteed by Mr. Hennessy that had been issued to acquire the Fund’s largest portfolio companies but which it could not repay. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). The case is in litigation. See also Lit. Rel. No. 22548 (Nov. 29, 2012).

Asset valuation: In the Matter of KCAP Financial, Inc, Adm. Proc. File No. 3-15109 (Nov. 28, 2012) is a proceeding which names as Respondents, KCAP Financial, Inc., f/k/a/ Kohlberg Capital Corporation, a closed end investment company that is regulated as a BDC, and three of its officers, Dayl Pearson, Michael Wirth and R. Jonathan Corless the CIO. From late 2008 through the middle of 2009 KCAP held two primary classes of assets. One was corporate debt while the other was investments in CLOs. During the financial crisis the firm did not account for certain market based activity in determining the fair value of its debt securities. Likewise, it failed to account for certain market based activity for its two largest CLO investments by properly fair valuing them. At the time KCAPs filings stated that those CLOs were valued using a discounted cash flow method that incorporated market data. In fact the CLOs were valued at KCAP’s cost. In May 2010 the firm disclosed that it had to restate the fair values for certain securities and the CLOs. It had overstated NAV by about 27% as of the end of 2008. Its internal controls also were not designed to properly value illiquid securities. As a result, the Order alleges that the firm violated Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and the related rules. The individual defendants are each alleged to have caused the violations.

To resolve the action each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Messrs. Pearson and Wirth each agreed to pay a penalty of $50,000 while Mr. Corless will pay a $25,000 civil penalty.

Unregistered broker: In the Matter of Ambit Capital Pvt. Ltd., Adm. Proc. File No. 3-15105 (Nov. 27, 2012); In the Matter of Motilal Oswal Securities Ltd., Adm. Proc. File No. 3-15106 (Nov. 27, 2012); In the Matter of JM Financial Institutional Securities Private Ltd., Adm. Proc. File No. 3-15107 (Nov. 27, 2012); In the Matter of Edelweiss Financial Services Ltd., Adm. Proc. File No. 3-15108 (Nov. 27, 2012) are proceedings against brokers registered in India that solicited business in the United States without registering with the Commission. Each firm resolved the proceeding by agreeing to the entry of a censure. In addition, Ambit agreed to pay disgorgement and prejudgment interest of $30,910 while Edelweiss agreed to pay $568,347, JM Financial will pay $443,545 and Motilal will pay $821,584.

Insider trading: SEC v. Lazorchak, Case No. 2:12-cv-07164 (D.N.J. Filed Nov. 19, 2012). The SEC and the U.S. Attorney’s Office, New Jersey, brought civil and criminal insider trading charges against, respectively, six and seven individuals based on a five year insider trading ring that garnered over $1.4 million in illegal profits. The Commission’s complaint named as defendants: John Lazorchak, Director of Financial Reporting at pharmaceutical company Celgene Corporation; Mark Cupo, Director of Accounting at Sanofi-Aventis Corporation, another pharmaceutical company and a former co-worker of Mr. Lazorchak; Mark Foldy, employed in the marketing department at a third pharmaceutical company, Styker Corporation; Michael Castelli, a friend of defendant Cupo; Lawrence Grum, who holds a brokers license and attended high school with defendant Castelli; Michael Pendolino; and James Deprado who is not named as a defendant in the criminal case. Defendants Larzorchak, Pendolino, Foldy and Deprado attended the same high school.

The ring is alleged to have traded on inside information in advance of four corporate take-over announcements. The basic scheme involved an arrangement devised by Messrs. Castelli and Grum. It called for Mr. Lazorchak, through defendant Cupo, to furnish them inside information obtained from his position at Celgene. Mr. Cupo served only as a middleman. Defendants Castelli and Grum placed the trades, often in options. Over time the scheme expanded. Mr. Lazorchak illegally tipped Messrs. Pendolino and Foldy and was, in turn, compensated by them. Messrs. Pendolino also tipped others. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e) and Securities Act Section 17(a). Each defendant in the criminal case is charged with multiple counts including conspiracy and securities fraud. The defendants voluntarily surrendered in the criminal action. Both cases are pending.

Improper registration: In the Matter of Evens Barthelem, Adm. Proc. File No. 3-15102 (Filed Nov. 20, 2012) is a proceeding against registered investment adviser Barthelemy Group LLC and its founder and sole owner Evens Barthelemy. The Order centers on the improper registration of Barthelemy Group with the Commission beginning in 2009. The improper registration was discovered during an examination by the staff. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on Advisers Act Sections 203A, 204, 206(4) and 207. Mr. Barthelemy will also be barred from the securities business with a right to reapply after two years and the firm is censured. A financial penalty was not imposed based on the financial condition of each Respondent.

In the Matter of EM Capital Management, LLC, Adm. Proc. File No. 3-15101 (Nov. 20 2012) is a proceeding against the registered investment adviser and its CEO and majority interest holder, Seth Freeman. The Order alleges that the Respondents failed to furnish required books and records including financial statements, e-mails and other documents to the inspection staff. Despite repeated requests, the materials were not made available until months after the staff notified Respondents that they were considering recommending an enforcement action. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on Advisers Act Section 204. Each was also censured and agreed to pay, jointly and severally, a civil money penalty of $20,000.

Investment fund fraud: SEC v. Colangelo, Jr., Civil Action No. 12 CIV 8439 (S.D.N.Y. Filed Nov. 19, 2012) is an action against Mr. Colangelo centered on three claims: First, he raised about $760,000 from investors for the Brickel Fund LLC in 2009 based on a series of misrepresentations regarding its historical rates of return, investment strategy and without disclosing he had previously been charged with fraud-based felonies. Second, from the Spring of 2009 through Winter 2001 he raised another $1.2 million from three investors he solicited as advisory clients using similar misrepresentations. Third, from mid-2009 through late 2011 he raised an additional $2.2 million for three claimed start up companies he controls again based on material misrepresentations that were similar to those in the other schemes. In each instance portions of the money was misappropriated. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). The case is in litigation. See also Lit. Rel. No. 22534 (Nov. 19, 2012). A parallel criminal action was filed by the U.S. Attorney’s Office.

Prime bank fraud: SEC v. McClintock, Civil Action No. 1:12-CV-4028 (N.D. Ga. Filed Nov. 19, 2012) is an action against Billy McClintock and Dianne Alexander who are alleged to have conducted a prime bank fraud scheme since at least 2004. Over 220 investors in 20 states who paid over $15 million were promised access to a Trust supposedly created after World War II by a group of very wealthy families. Investors were told the Trust had the ability to create money through fractional banking and the sale of debentures. Access was carefully restricted according to the pitch. Investors were to receive returns of 38% annually. In reality the Trust did not exist and the defendants misappropriated the funds, according to the Commission’s complaint. That complaint alleges violations of Securities Act Sections 5(a), 5(c), each subsection of 17(a) and each subsection of Exchange Act Section 10(b) and Section 15(a). The case is in litigation.

Market crisis: SEC v. J.P. Morgan Securities LLC (D.D.C. Filed Nov. 16, 2012) is an action against the firm and affiliates Bear Stearns Asset Backed Securities I, LLC, Structure Asset Mortgage Investments II, Inc., SACO I, Inc. and J.P. Morgan Acceptance Corporation I, arising out of the residential mortgage market. The case centers on two key claims. The first focuses on Bear Stearns and a practice known as “bulk settlements” which involved 156 RMBS transactions from 2005 –2007. Loan originators were typically required to buy back loans that had early payment defaults or certain other defects. Bear frequently negotiated discounted cash deals with the originator rather than execute the buy-back and then kept most of the proceeds without making the appropriate disclosures to the loan originators. The second part of the action centers on J.P. Morgan and its failure to properly disclose its delinquency rate for RMBS. The firm claimed in the prospectus supplement for a $1.8 billion RMBS offering in 2006 that only four loans were delinquent by 30 to 59 days when in fact about 620 were 30 to 59 days delinquent and the four disclosed were in fact 60 to 89 days delinquent. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3). The defendants settled the action, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, defendants will pay $162,065,536 in disgorgement, prejudgment interest and a $60.35 million penalty. The SEC intends to seek distribute the money through a fair fund.

Market crisis: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-15098 (Nov. 16, 2012) is a proceeding against Credit Suisse Securities and a series of affiliated entities. The allegations are essentially the same as in the action brought against J.P. Morgan listed above. To resolve the proceeding the Respondents consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 15(d). They also agreed to pay disgorgement of $68,747,769 along with prejudgment interest and a $33 million penalty which the SEC will seek to distribute through a Fair Fund.

Offering fraud: SEC v. Wilson, Civil Action No. 12-cv-15062 (E.D. Mich. Filed Nov. 15, 2012) is an action against Joel Wilson and his controlled entities, Diversified Group Partnership Management LLC and American Realty Funds Corporation. Beginning in 2009 and continuing through 2012 Mr. Wilson raised about $6.7 million from 120 investors selling unregistered shares in his company, Diversified Group Partnership Management, LLC through his brokerage firm, W.R. Rice Financial Services, Inc. Investors were told their funds would be put in real estate, yielding returns of 9.9%. They were not told that the real estate business did not generate sufficient revenue to make the promised payments or that portions of the money would be diverted to Mr. Wilson’s personal use. Defendant Wilson raised additional funds for his real estate business through American Realty Funds Corporation, an OTC Bulletin Board company he controlled. The materials contained omissions, including the fact that it was delinquent on its loan payments and about its business relationships with Mr. Wilson. Since the company was delinquent on its filing, the Commission suspended trading in its shares. The complaint alleges violations of Securities Act Sections 5(a), 5(c), each subsection of 17(a), Exchange Act Sections 10(b), 13(a) and 20(e), control person liability under Section 20(a) and Advisers Act Section 206(4). The case is in litigation. See also Lit. Rel. No. 22537 (Nov. 20, 2012).

Criminal cases

Insider trading: U.S. v. Martoma, 12 mag 2985 (S.D.N.Y. Unsealed Nov. 20, 2012) and SEC v. CR Intrinsic Investors, LLC, Civil Action No. 12 cv 8466 (S.D.N.Y. Filed Nov. 20, 2012) are actions against Mathew Martoma, a former portfolio manager at CR Intrinsic Investors. The SEC action also names as defendants the entity and Dr. Signey Gilman, a professor at the University of Michigan medical school. The court papers claim the defendants participated in a highly lucrative insider trading scheme which made profits and avoided losses totaling about $276 million. Mr. Martoma met the doctor through an expert network, according to the court papers. He consulted on certain clinical trials being conducted by pharmaceutical companies Elan and Wyeth from 2006 through 2008. The Doctor is alleged to have furnished Mr. Martoma with inside information on the trials in advance of the announcement of the data. This permitted the fund managed by Mr. Martoma, and other affiliated funds, to liquidate a long position of over $700 million in Elan and Wyth stock and short those securities prior to the announcement which caused the share prices to plummet. Following the announcement of disappointing results, the funds had profits of about $82 million on the short positions. By liquidating their massive long positions the funds avoided losses of about $194 million.

In the criminal case Mr. Martoma has been charged with one count of conspiracy to commit securities fraud and two counts of securities fraud. Dr. Gilman entered into a non-prosecution agreement. The case against Mr. Martoma is pending. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Dr. Gilman settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay $234,000 in disgorgement and prejudgment interest. The court will determine at a later date if any additional financial penalty is appropriate. The action is pending as to the other two defendants.

Financial fraud: U.S. v. Collins (S.D.N.Y.) is the long-running criminal case against former Mayer Brown partner Joseph Collins. On November 16, 2012 a jury again convicted Mr. Collins of conspiracy, securities fraud and making false statements to the SEC in connection with his role as lead partner for Refco. The underlying scheme involved the concealment of millions of dollars in loses. Mr. Collin’s initial conviction had been reversed by the court of appeals.

CFTC

Remarks: Commissioner Bart Chilton delivered remarks titled “Whose Markets Are These Anyway? Can Ya Dig It?” as the Keynote Address Before the Consumer Federation of America 2012 Financial Services Conference (Washington, D.C., Nov. 29, 2012). The Commissioner’s remarks covered topics which included market integrity of the system, high speed trading and the need to update the penalty system for the agency.

FINRA

MOU:

The regulator announced that it had entered into an agreement with the Japan Securities Dealers Association. The Memorandum of Understanding will support more robust cooperation between the two regulators.

FSA

Inadequate controls:

The regulator fined UBS AG £29.7 (discounted from £42.4 million for early settlement) for systems and controls failings that permitted an employee to engage in unauthorized trading which resulted in losses of US $2.3 billion. The losses were incurred primarily on exchange traded index future positions. During the relevant period the regulator concluded that there was insufficient focus on key risks associated with unauthorized trading at the London Branch. Significant control breakdowns remained undetected for a substantial period. Some systems were simply not effective in controlling unauthorized trading while others had deficiencies.

SFC

Insider dealing: Former CITIC Pacific Ltd. director of Finance Simon Chui Wing Nin was sentenced to serve 15 months in prison and pay a fine of $1.36 million (the amount of the loss avoided) for insider dealing. He was also ordered to pay the cost of the investigation and will be disqualified from being a director for three years. Mr. Nin was involved in calculating the impact of the drop in value of the Australian dollar on the company. He understood the company faced a substantial mark to market loss and traded while in possession of this information prior to it becoming public.

Failure to supervise: The SFC banned Wong Tang Chung, a former executive director of Mega Capital (Asia) Company Limited, from re-entering the industry for three years. The action was based on his failure to properly supervise and take responsibility for the listing application of Hortex International Holdings Company Ltd on the Hong Kong Stock Exchange. Mr. Wong was one of two responsible officers and sponsor principals in charge of the supervision of Mega Capital’s transaction team.

ASIC

Liquidation: The Australian Securities and Investment Commission announced that it obtained an ex parte court order appointing KPMG as a liquidator of four companies based in Arizona. The order restrains Royale and Active Pty Ltd and ActiveSuper Pty Ltd. who raised over $4.75 million from over 300 investors. The last known director of the four Arizona based entities lost control and there was risk that the assets, which were invested in 14 Arizona properties purchased with funds from Australian clients of Royale and Active, were at risk.