As the end of the government fiscal year approaches, the Commission filed several significant actions. Two involved Goldman Sachs and a former employee in a pay-to-play scheme centered on political contributions and business in the municipal markets. A significant market crisis case was brought against two former senior bank officials for falsifying the financial records of their now bankrupt institution. An insider trading case focused on an investment banker and his college friend. And, a settled FCPA action was filed involving payments in several different countries made before and after the entry of a Commission fraud injunction against the company.
Speech: Commissioner Daniel M. Gallagher addressed the Conference on Financial Markets Quality, Georgetown University (Sept. 19, 2012). His remarks centered on the need for additional Commission attention to the bond markets (here).
Staff report: A report entitled Staff Summary Report of Examinations of Information Barriers: Broker-Dealer Practices Under Section 15(g) of the Securities Exchange Act of 1934 was issued. It discusses issues related to material non-public information at broker-dealers and practices to control it (here).
Testimony: Chairman Gary Gensler testified before the European Parliament, Economic and Monetary Affairs Committee, Brussels Belgium (Sept. 24, 2012). The Chairman’s remarks, summarized here, focused on the use of Libor and establishing a healthy benchmark tied to market data.
PWC released its Annual Corporate Directors Survey which provides insights into the board room. Key findings from the survey include: 1) A majority of directors (56%) have increased the time they spend on board work during the last year. A majority (67%) indicated that the increase was over 10% while one out of five said it was by 20%. 2) Virtually all (99%) say they discuss the viability of the strategy for the company at least one each year with about one third (36%) noting that they review it twice per year. Nevertheless, most (75%) say they would like to devote more time to it in the next year. 3) Nearly all directors (97%) state that they are at least moderately comfortable with their board’s understanding of the risk appetite of the company. Most (91%) note that they are “moderately” comfortable with their understanding of emerging risks. 4)Less than half of the directors surveyed (45.5%) indicated that the board held discussions regarding tone at the top. 5) About two thirds (66%) note that they have placed greater emphasis on employee awareness of ethics and compliance procedures. A significant minority (42%) indicate that their company has increased reporting of compliance related issues to the board. The survey, titled Insights from the Boardroom 2012: Board evolution: Progress made, yet challenges persist is available here.
Statute of limitations: Gabelli v. SEC, No. 11-1274 (Cert. granted Sept. 25, 2012). The Supreme Court agreed to here this case which centers on the question of when the statute of limitations begins under Section 2442 of Title 28, the five year statute of limitations for penalties. The Commission’s case centered on claimed false statements by Marc Gambelli, the portfolio manager of Gabelli Global Growth Fund, and Bruce Alpert, the COO of the Fund’s adviser, Gabelli Funds, LLC. From 1999 until 2002 the defendants permitted trader Headstart to engage in “time zone arbitrage” according to the SEC, a form of market timing, and deceived the board and investors about the practice. The Commission filed its complaint in April 2008, although the enforcement investigation began in 2003. It alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).
The district court ruled in favor of the defendants on the statute of limitations question. The Second Circuit reversed. That Court concluded that the claim did not accrue until September 2003 when the complaint alleges the Commission discovered it because this is a fraud case.
In requesting that the High Court hear the case, Petitioners argued that four circuit courts have concluded that under Section 2462 the claim accrues when it occurs, not when it is discovered. In opposing review by the Court, the SEC claimed that it has long been established in fraud cases that the statute does not begin to run until the claim is discovered or reasonably could have been discovered. The case will be heard by the Supreme Court later this term.
SEC Enforcement: Filings and settlements
This week the Commission filed 9 civil injunctive actions and 5 administrative proceedings (excluding follow-on and 12j actions).
Pay-to-Play: In the Matter of Goldman Sachs & Co., Adm. Proc. File No. 3-145048 (Sept. 27, 2012) and In the Matter of Neil M.M. Morrison, Adm. Proc. File No. 3-15049 (Sept. 27, 2012) are proceedings against, respectively, the firm and a former vice president in the investment banking division of the firm. The charges center on undisclosed campaign contributions to the then Massachusetts state treasurer Timothy Cahill while he was a candidate for governor. Mr. Morrison is alleged to have done extensive work for the candidate while employed by, and using the facilities of, Goldman Sachs from November 2008 through October 2010. Mr. Morrison also made secret cash campaign contributions. Within two years of the campaign contributions Goldman Sachs engaged in municipal securities business with issuers associated with Mr. Cahill as Treasurer of the sate and candidate for governor. Goldman Sachs is also alleged to have failed to supervise the conduct of its municipal securities business and the activities of its associated persons. The Order alleges this violates Exchange Act Section 15B(c)(1) and MSRB Rule G-37 and other rules. Mr. Morrison also is alleged to have caused the firm to violate Rule G-37(b) and other related rules. Goldman Sachs resolved the case, consenting to the entry of a cease and desist order based on Exchange Act Section 15B(c)(10 and MSRB rule G-8, MSRB Rule G-9, MSRB Rule G-17, MSRB Rule G-27, MSRB Rule G-37(b) and MSRB Rule G-37. The firm also agreed to pay disgorgement of $7,558,942, prejudgment interest and a civil penalty of $3,750,000. Portions of the disgorgement will be paid to the Commonwealth of Massachusetts and the Massachusetts Water Pollution Abatement Trust. The proceeding as to Mr. Morrison will be set for hearing.
Insider trading; SEC v. Lee, Civil Action No. C12-5031 (N.D. Cal. Filed Sept. 27, 2012) is an insider trading action against Jauyo Lee and Victor Chen. Mr. Lee is employed at an investment bank and is a college friend of Mr. Chen. The complaint claims that Mr. Lee, who is alleged to have had inside information, tipped his friend about two upcoming corporate transactions on which his firm was engaged. One was in 2009 and involved the merger of Candela Corporation and Syneron Medical Ltd. The other was in 2010 and involved the merger of Covidien plc with Somanetics Corporation. In each instance Mr. Chen, who had never traded in the securities of Candela or Covidien, made larges securities purchases shortly before the announcement. During the period the two men exchanged repeated text messages and phone calls. Bank records established a pattern of withdrawals by Mr. Lee followed with deposits by Mr. Chen. Overall Mr. Chen had $600,000 in trading profits from transactions in seven accounts at four brokerage firms. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See also Lit. Rel. No. 22497 (Sept. 27, 2012).
Investment fund fraud: SEC v. Holcom, Civil Action No. 3;12-cv-01623 (S.D. Cal. Filed June 29, 2012) and SEC v. Pinedo, Civil Action No. 3:12-cv-01620 (S.D. Cal. Filed June 29, 2012) are actions against, respectively, Bradley Holcom and Jose Pinedo. According to the court papers, Mr. Holcom raised about $42 million from 150 investors, many senior citizens. Investors were told that their money would be safely invested and they would receive guaranteed monthly interest payments. The funds were to develop specific pieces of real estate that supposedly collateralized the deal. In fact the operation was a Ponzi scheme. Mr. Pinedo was the book keeper and was involved with several of Mr. Holcom’s entities. The complaint against Mr. Holcom alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. Mr. Pinedo settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c), 17(a)(2) and 17(a)(3). See also, Lit. Rel. No. 22496 (Sept. 27, 2012).
Manipulation: SEC v. 8000, Inc., Civil Action No. 12-CV-7261 (S.D.N.Y. Filed Sept. 27, 2012) is an action against the company, Jonathan Bryant,, Thomas Kelly and attorney Carl Duncan. The defendants, according to the complaint, drove up the price of the OTC quoted stock of 8000 using false financial information and then sold millions of allegedly restricted shares into the market. Those sales were facilitated by Attorney Duncan who prepared false documents delivered to OTC Markets to ensure that the shares would continue to be quoted. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Section 10(b). Mr. Duncan settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a)(2). The injunction also prohibits him from preparing or issuing any opinion letter in connection with the offer or sale of securities pursuant to, or claiming an exemption under Section 4(1) and Rules 144 and 802 of the Securities Act. In addition, Mr. Duncan agreed to be barred from participating in any penny stock offering and will disgorge $15,570 in legal fees and prejudgment interest and pay a $25,000 civil penalty. In a related administrative proceeding he has agreed to be permanently suspended from appearing or practicing before the Commission as an attorney. See also Lit. Rel. No. 22495 (Sept. 27, 2012).
Financial fraud: SEC v. Lundstrom, Civil Action No. 8:12-cv-00343 (D. Neb. Filed Sept. 25, 2012) names as defendants Gilbert Lundstrom, Chairman and CEO of TierOne Corporation, James Laphen, president and CEO of the company and Trevor Lundstrom, son of Gilbert Lundstrom. TierOne Bank, owned by the holding company defendant, was a federally chartered savings bank. As the market crisis unfolded in 2008 many of TierOne’s loans deteriorated. The Office of Thrift Supervision or OTS increased the bank’s regulatory capital requirements in mid-2008. To make it appear that the bank was in compliance, Messrs. Lundstrom and Lapen materially understated the bank’s loan losses and the losses on real estate it repossessed. In 2009 the bank was finally required to disclose the full extent of its loses — $130 million. Its stock price dropped 70% and eventually the bank filed for bankruptcy and was closed. In a separate count the Commission alleged that Mr. Lundstrom tipped his son Treaver regarding an anticipated asset sale between the bank and Great Western Bank was announced September 4, 2009. Treaver Lundstrom traded, reaping illicit profits of $225,921. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5).
Mr. Lundstrom and his son settled. Mr. Lunstrom consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, he is barred from serving as an officer or director of a public company and will pay a civil penalty of $500,921. His son consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to disgorge his trading profits and pay prejudgment interest and a civil penalty equal to his trading profits. Mr. Laphen is litigating the case. See also, Lit. Rel. No. 22493 (Sept. 25, 2012).
Manipulative trading: In the Matter of Hold Brothers On-Line Investment Services, LLC, Adm. Proc. File No. 3-15046 (Sept. 25, 2012) is a proceeding which names as Respondents: Hold Brothers, a registered broker dealer whose primary business is to allow overseas investors trade through its access; Demonstrate, LLC, an foreign entity owned by Steve Hold of Hold Brothers; Trade Corporate, Ltd., an off shore entity owned by Steve Hold; Steve Hold, president and co-founder of Hold Brothers; William Tobias, an associated person of Hold Brothers; and Robert Vallone, the former CCO and CFO of Hold Brothers. The Order alleges that over a period of eighteen months beginning in January 2009 overseas traders who accessed the U.S. markets through Hold Brothers engaged in “spoofing” or “layering,” manipulative techniques which involve placing orders on both sides of the market and canceling them to drive up the price. Some of the orders were placed through Hold Brothers customer accounts, Demonstrate and Trade Alpha who provided capital for them. Throughout the period Messrs. Hold, Vallone and Tobias ignored red flags including e-mails suggesting that the overseas traders were engaged in manipulative trading. In addition, Hold Brothers failed to keep the required records. The Order alleges violations of Exchange Act Sections 9(a)(2) and 17(a) and failure to supervise. To resolve the proceeding each of the individual Respondents and Demonstrate and Trade Alpha consented to the entry of cease and desist orders based on Exchange Act Section 9(a)(2). Hold Brothers consented to a similar entry which added Section 17(a). In addition, each of the individual Respondents agreed to be barred from the securities business and from participating in a penny stock offering. Messrs. Valione and Tobias have a right to reapply after three years. Mr. Hold has a right to reapply after two years. Demonstrate also agreed to pay disgorgement of $1,258,333 and prejudgment interest; Hold Brothers will pay disgorgement of $629,167 along with prejudgment interest and a civil penalty of $1,887,500; and each of the individual Respondents will pay a penalty of $75,000. FINRA, joined by NYSE Arca, the NASDAQ Stock Market, NASDQ OMX BX and BATS Exchange announced that they had imposed a $3.4 million fine on Hold Brother as a result of the manipulative trading.
Unregistered offering: In the Matter of Prescient Capital Partners, Ltd, Adm. Proc. File No. 3-15042 (Sept. 24, 2012) is a proceeding against the firm and its principal, Steven Young. Beginning in 2010 Respondents raised over $7 million from 23 investors who purchased loan participations issued by Prescient Capital. While Respondents clamed the interests were sold based on an exemption from registration they failed to comply with the regulatory requirements. The firm and Mr. Young made multiple general solicitations using the mail, e-mail, social media, internet websites and videos. The Order alleges violations of Securities Act Sections 5(a) and (c). To resolve the proceeding the Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. They also agreed to pay, jointly and severally, disgorgement of $28,987 and prejudgment interest. A penalty was not imposed based on the cooperation of the Respondents.
Rule 105: In the Matter of JCSD Capital, LLC., Adm. Proc. File No. 3-15044 (Sept. 24, 2012) is a proceeding which names as a Respondent, JCSD, an investment adviser to a single fund. In March 2010 the firm violated Rule 105 of Regulation M in connection with certain short sales made during the restrictive period prior to its participation in a public offering by Bank of Commerce Holdings. As a result, it had profits of $59,522. The proceeding was resolved with the Respondent consenting to the entry of a cease and desist order based on the cited Rule. The firm also agreed to pay disgorgement in the amount of its trading profits along with prejudgment interest and a penalty of $29,761.
Investment fund fraud: SEC v. Pameijer, Case No. 1;12-CV-01364 (S.D. In. Filed Sept. 24, 2012) is an action against Rudolf Pameijer, Lindsay Sayer and Ryan Koester and his controlled entity Rykoworks Capital Group LLC. Beginning in 2010 Mr. Pameijer and his daughter, Ms. Sayer, solicited clients to invest in Rykoworks by purchasing promissory notes. The notes were supposed to guarantee investor principal while offering risk free returns from forex trading. Mr. Koester represented that he was an expert foreign currency trader and that his plan had guaranteed results. In fact the defendants misappropriated about $1.7 million from investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Defendants Pameijer and Sayer settled by agreeing to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint and to the entry of orders barring them from the securities business and from participating in a penny stock offering. Issues of monetary relief will be determined by the court. The other defendants did not settle. See also Lit. Rel. No. 22492 (Sept. 24, 2012).
Unregistered broker: SEC v. Tackaberry, Case No. 6:12-Civ-06512 (W.D.N.Y. Filed Sept. 21, 2012) is an action against Edward Tackaberry. The complaint alleges that for a two year period beginning in 2007 Mr. Tackaberry acted as an unregistered broker-dealer and/or associated with an individual acting as an unregistered broker-dealer. During that period he discussed investment transactions with prospective investors, negotiated the terms of those investments and documented transactions. Previously he had been enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The complaint alleges violations of Exchange Act Sections 15(a) and 15(b)(6)(B(i). Mr. Tackaberry resolved the proceeding, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. See also Lit. Rel. No. 22488 (Sept. 21, 2012).
Misrepresentations: In the Matter of Stock Markets Institute, Inc., Adm. Proc. File No. 3-15038 (Sept. 21, 2012) is a proceeding which names as Respondents SMI, a registered investment adviser and Sergey Perminov, its founder. The Order alleges that in 2008 and 2009 the Respondents furnished investors misleading information about their programs by disclosing facts regarding its success while omitting data concerning its failures. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondents resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order, and to a censure. In addition, Mr. Perminov agreed to pay a civil penalty of $40,000 while SMI will pay a penalty of $75,000.
False press releases: SEC v. Revolutions Medical Corp., Civil Action No. 1:12cv-03298 (N.D. Ga. Filed Sept. 20, 2012) is an action against the company and its CEO, Ronald Wheet. Beginning in August 2010, and over the next year, the defendants issued a series of press releases to hype the shares of the penny stock company, claiming it developed a safe and effective syringe that was about to go into mass production. The claims were false according to the complaint which alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22489 (Sept. 21, 2012).
Misrepresentations: SEC v. Gengler, Civil Action No. 1:08-cv-235 (E.D. Va.) is an action filed in March 2008 against David Gengler and his company Lashaico, Inc. The defendants made presentations on stock trading based on a system called Teach Me To Trade. According to the complaint, Mr. Gengler told prospective purchasers that he created the system and it was very successful. To resolve the action each defendant consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, each defendant is permanently enjoined from receiving compensation from giving classes or workshops on securities trading. Mr. Gengler also agreed to pay a penalty of $200,000.
Insider trading: U.S. v. Rajaratnam, Case No. 1:09-mj-02306 (S.D.N.Y.). Rajiv Goel, who previously pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud pursuant to a cooperation agreement, was sentenced to serve two years probation. Mr. Goel testified at the trial of Galleon principal Raja Rajaratnam stating that he furnishing inside information on the earnings of Intel Corporation and that firm’s investment in Clearwire Corporation to the hedge fund operator. In each instance Mr. Rajaratnam traded and made substantial profits.
Investment fund fraud: U.S. v. Catledge, Case No. 3:12-cr-00678 (N.D. Cal. Filed Sept. 18, 2012) is case which names as defendants James Catledge and Derek Elliot. It charges one count of conspiracy to commit mail fraud and three counts of mail fraud. The defendants are alleged to have sold interests in an old hotel they purchased in the Dominican Republic which they named Juan Dolio Resort. The $90 million they raised was supposed to be used to rehab the property. In fact it never opened. Investors were not told that the defendants were charging 44% commissions, that the renovations were underfunded, that investor funds were used for other projects and that the projected returns were not supportable. While about $13.4 million of the investor funds were used on renovations, over $68 million went to pay commissions and for other projects. The arrangement for Mr. Catledge is scheduled for October 5, 2012.
U.S. v. Tyco Valves & Controls Middle East Inc., Case No. 1:12-cr-00418 (E.D. Va. Filed Sept. 24, 2012); SEC v. Tyco International Ltd., Case No. 1:12-cv-01583(D.C. Filed Sept. 24, 2012). Tyco International Ltd., and is subsidiary Tyco Valves & Controls Middle East Inc., settled FCPA charges with the DOJ and the SEC. Tyco entered into a non-prosecution agreement with the DOJ while its subsidiary pleaded guilty to one count of conspiracy to violate the FCPA bribery provisions. The two companies agreed to pay a criminal fine of $13.68 million. Tyco also settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A(a), 13(b)(2)(A) and 13(b)(2)(B). The company also agreed to pay disgorgement of $10,564,992 and prejudgment interest. The DOJ and the SEC acknowledged the voluntary disclosure of this matter and the extensive cooperation of the company.
The underlying conduct traces to at least 2004. Tyco, through various subsidiaries, engaged in a scheme which continued for years in several countries including Turkey, China, Germany, France, Thailand, Malaysia, Egypt, Saudi Arabia and Poland, according to the court papers. Typically payments were made by a subsidiary or through an agent without the knowledge of the parent. They were to secure business or for entertainment and were not properly recorded in the books and records of the company or lacked adequate documentation. For example, in Turkey made payments which were improperly booked through its subsidiary TE M/A-Com, Inc., in connection with a September 2006 sale of microwave equipment to an instrumentality of the government. In China two subsidiaries entered in a contract with the Chinese Ministry of Public security for $770,000 which was obtained through the payment of $3,700 to a “site project team” of a state owned corporation. The amount was improperly recorded as a commission when in fact it was passed to the end user. Similar conduct occurred in the other countries.
Reports: The regulator fined Merrill Lynch, Pierce, Fenner & Smith Inc. $500,000 in connection with supervisory failures that allowed widespread deficiencies in the filing of required reports which were required to include customer complaints, arbitration claims and related U4 and U5 filings. The failures included not filing over 640 reports from 2007 to 2011; failing to report or timely report customer complaints and related Forms U4 and U5 between 23% and 63% of the time from 2005 through 2011; and failing to file or timely file 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it received repeatedly.
The regulator charged Benjamin Wilson with operating an illegal investment scheme, making false statements, forgery and fraud. The charges are based on an investment scheme known as SureInvestment which purported to trade in the futures market for its investors.
The regulator announced a court decision under which Li Wo Hing, the former CEO of Medical China Ltd (now known as China Asean Resources Ltd) will pay $10.7 million in compensation to the company resulting from his misconduct. He is also disqualified from taking part in the management or serving as a director of any corporation for seven years without leave of court. The order is based on a finding of the SFC that Mr. Hing and James Li misappropriated $10.7 million from the company through a fraudulent transaction.