Dodd-Frank, insider trading and the FCPA continue were key to securities regulation and enforcement this week. The Commission proposed more rules to implement the Reform Act. In this instance the rules concern security-based swap execution facilities.
Insider trading continues to be a key focus as the Galleon criminal trial tracks toward trial later this month. The SEC filed an action evolving out of the expert network investigation it has been conducting with the Manhattan U.S. Attorneys Office. The Commission’s action overlaps the previously filed criminal case but adds additional defendants. The SEC also settled with two more defendants in its Galleon insider trading case. Both previously pleaded guilty to criminal charges and were sentenced to time in prison.
Finally, the Commission and DOJ resolved FCPA cases with Maxwell Technologies. UK authorities however delayed for the third time the implementation of the much discussed Bribery Act.
The Commission continues to propose rules to implement Dodd-Frank despite budget constraints. This week the proposed rules concerned security-based swap execution facilities. The rules define a security-based swap execution facility, establish their registration requirements and their duties and core principles. They also exempt security-based swap execution facilities from the definition of “exchange” and from most regulation as a broker.
Insider trading: SEC v. Longoria, Civil Action No. 11-CV-0753 (S.D.N.Y. Filed Feb. 3, 2011) is an action based on insider trading by hedge funds who obtained the information through an expert network. Four defendants were paid consultants of expert witness network Primary Global Research Inc.: Anthony Longoria, formerly a Supply Chain Manager at Advanced Micro Devices, Inc. or ADM; Daniel DeVore, formerly a Global Supply Manager at Dell, Inc.; Winifred Jiau, who has held positions at various technology companies; and Walter Shimoon, formerly a vice president of business development for components in the Americas at Flextronics. Two defendants were employees of Primary Global: James Fleishman, a vice president of sales; and Bob Nguyen, a technology analyst and semiconductor vertical manager. According to the complaint, Mr. Longoria furnished multiple Primary Global clients financial information on AMD who traded in the securities of the company. Mr. DeVore had access to Dell sales forecasts and price and volume information about purchases from suppliers. He regularly furnished this information to network clients. Mr. Shimoon had access to confidential information about Flextronis and its customers including Apple, Omnivision and Research in Motion. He furnished this information to network clients. Ms. Miau had contacts at Marvell and other technology companies from whom she obtained information which was furnished to network clients. Overall the complaint claims traders who used the tips from the network had profits or avoided losses totaling at least $5.9 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. Previously a related criminal case was filed (here).
Failure to disclose: In the Mater of AXA Roenberg Group, Adm. Proc. File No. 3-14224 (Feb. 3, 2011) is a proceeding naming as Respondents AXA Rosenberg Group LLC, a holding company, AXA Rosenberg Investment Management LLC, an institutional money manager and registered investment adviser, and Bar Rosenberg Research Center LLC, an investment adviser that developed and maintained the computer model at issue here. According to the Order, in June 2009 senior management at the holding company and the money manager discovered that there was an error in a computer model used in the management of the portfolios. The error was fixed for U.S. managed portfolios in September 2009 and for others in late October and early November. However, it adversely impacted 608 of 1421 client portfolios managed by AXA Rosenberg Investment and caused $216,806,864 million in losses. In November 2009 an employee informed the CEO of the money manager and an investigation was conducted. It was disclosed to the Commission in late March 2010 and to investors, who had been complaining about performance, on April 15, 2010. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4). To resolve the proceeding Respondent AXA Rosenberg consented to the entry of a cease and desist order based on the Securities Act Sections cited in the Order; Respondent AXA Rosenberg Investment Management also consented to the entry of a cease and desist order but based on Advisers At Section 206(2); and Respondent Barr Rosenberg consented to the entry of a cease and desist order based on Advisers Act Sections 206(2) and 206(4). Respondents also agreed to pay a penalty of $25 million and to implement certain undertakings. In accord with their undertakings Respondents will compensate clients for the harm caused by the conduct set forth in the order in the total amount of $216,806,864. This amount was calculated by an expert retained by AXA Rosenberg Group.
Failure to supervise: In the Matter of TD Ameritrade, Inc., Adm. Proc. File No. 3-14225 (Feb. 3, 2011) is a settled proceeding naming as a Respondent the registered broker dealer. The Order alleges that for approximately eighteen months beginning in January 2007 the Respondent failed to reasonably supervise its registered representatives in connection with the offer and sale of shares in the Reserve Yield Plus Fund, a mutual fund managed by The Reserve. There was a training program for registered representatives. However, at times the fund was mischaracterized as a money market fund or as safe as cash when in fact it was not. The Order alleges violations of Securities Act Section 17(a)(2). The proceeding was resolved with Respondent agreeing to implement certain undertakings, to compensate certain customers which is expected to total up to $10 million and to the entry of a censure. No penalty was imposed at this time. If the undertakings are not fully implemented the Division of Enforcement reserved the right to reopen the matter for consideration of other relief.
Failure to supervise: In the Matter of Torrey Pines Securities, Inc., Adm. Proc. File No. 3-14230 (Feb. 3, 2011); In the Matter of Jack C. Smith, Jr., Adm. Proc. File No. 3-14229 (Feb. 3, 2011). Respondent Torrey Pines is a registered broker dealer based in Del Mar, California. Respondent Smith had an ownership interest in the firm and, during the time period, was the president CEO and had supervisory responsibility at the firm. The matters center on a failure to supervise registered representative Dennis Keating. From August 2006 through April 2007 Mr. Keating raised over $17 million from friends, family and Torrey Pines customers through private unregistered offerings During the period he acted as an unregistered broker and made misrepresentations to investors. He was enjoined in an earlier Commission proceeding. In these to proceedings Respondents are alleged to have failed to reasonably supervise Mr. Keating and, as to the firm, that it had inadequate procedures. Accordingly, Respondents violated Exchange Act Section 15(b)(4)(E) and Advisers At Section 203(e) according to the Order. Mr. Smith resolved the proceeding by consenting to the entry of an order which suspends him from supervision for any broker or dealer or investment adviser for a period of nine months. He also agreed to pay a civil money penalty of $25,000. The action as to the firm is in litigation.
Books, records and internal control violations: In the Matter of Deerfield Capital Corp. and Danielle Valkner, CPA, Admin. Proc. File No. 3-14216 (Feb. 2, 2011) is an proceeding naming as Respondents, Deerfield Capital, a publically traded specialty finance company and Danielle Valkner, its former CFO. The Order is based on three transactions one of which occurred in December 2005 while the other two were in March 2006. Each transaction involved securities issued by a Real Estate Mortgage Investment Conduit. That entity is an investment vehicle used for the pooling of mortgage loans and the issuance of mortgage backed securities. In each instance the firm improperly recognized gain from the purported sale of the vehicle when in fact it simultaneously purchased virtually the identical one. The firm recognized a total of $7.5 million in revenue from the three deals. According to the Order, the firm violated the books and records and internal control provisions of the Exchange Act. The proceeding was resolved with each Respondent consenting to the entry of a cease and desist order as to the provisions cited in the Order. In addition the firm agreed to pay disgorgement of $977,000 along with prejudgment interest.
In the Matter of Don S. Hershman, Adm. Pro. File No. 3-14218 (Feb. 2, 2011) is a proceeding naming as a Respondent attorney Don Hershman. The Respondent was counsel to Wextrust Capital LLC. That entity raised about $270 million from 1,400 investors in 70 private placement offerings. The Commission alleged in an enforcement action that those offerings are fraudulent. During the course of his representation Respondent became aware of facts that he knew or should have known were material and not disclosed. Those included the fact that Wextrust: engaged in the over-raising of funds and took actions inconsistent with the disclosure documents; that one of its principal executives pleaded guilty to conspiracy to commit bank fraud and had lied about it; and that the CFO was having trouble accessing the bank accounts which were controlled by the principal who had pleaded guilty. He also worked on an offering which he knew had the effect of diluting the cash flow of investors from a prior offering and, although he told the client he did not like the structure, Respondent continued to represent the client and did not insist on disclosure. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the matter Respondent consented to the entry of a cease and desist order and agreed to pay disgorgement of $25,291 along with prejudgment interest to the receiver appointed in the enforcement action against Wextrust.
Financial fraud: SEC v. Rivelli, Civ. No. 05-CV-1039 (D. Colo. June 7, 2005) is a financial fraud case in which the Commission settled with the remaining two defendants, Rodney Johnson, the former CFO of Fischer Imaging Corporation, and Robert Hoffman, a salesman at the company. The complaint, brought against six executives of the company including the two that settled this week, alleges that the defendants participated in a scheme to fraudulently boost income by recognizing revenue on sales which were not sales – company product was shipped to a controlled warehouse where it was stored. The two settling defendants and another also participated in the implementation of a policy under which revenue was recognized on transactions with side agreements before the contingency was removed, contrary to GAAP. Defendant Johnson and others were also involved in the misstatement of the inventory account and other improper accounting. Each defendant was alleged to have furnished false or misleading documents or information to the outside auditors. Based on these factual claims the complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(5).
To resolve the case, Mr. Johnson consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B. He also agreed to pay disgorgement of $36,761 along with prejudgment interest. A penalty was not imposed based on his financial condition. He was however barred from serving as an officer or director for five years. Mr. Hoffman settled by consenting to the entry of a permanent injunction prohibiting him from aiding and abetting violations of Exchange Act Section 13(a). The other individual defendants previously settled with the Commission. Before the filing of this case the company also settled with the SEC.
Falsification of documents: In the Matter of David M. Tamman, Esq., Adm. Proc. File No. 3-014207 (Jan. 27, 2011) is a Rule 102(e) action against attorney David Tamman, identified as a partner in a major law firm with offices in Los Angeles. Mr. Tamman was counsel to NewPoint Financial Services, Inc. in connection with several offerings of debentures. According to the Order, Mr. Tamman altered the memoranda used in those placements by inserting provisions noting that the principal of NewPoint was using investor funds for his own purposes and then produced the documents to the inspection and enforcement staff without disclosing that he had altered them. He also deleted metadata from documents being produced to the staff during the investigation. The case is in litigation.
Insider trading: SEC v. Galleon Management L.P., Civil Action No. 09-CV-8811 (S.D.N.Y.) is the Commission’s insider trading case (here) which parallels the criminal case against the founder of Galleon, Raj Rajaratnam. This week the Commission settled with defendants Robert Moffat and Mark Kurland. Mr. Moffat is a former Senior Vice President and Group Executive of IBM’s Systems and Technology Group. Mr. Kurland was the Chief Executive Officer of New Castle, a hedge fund. Mr. Moffat is alleged to have furnished inside information to defendant Danielle Chiessi about the quarterly earnings of Sun Microsystems, the quarterly financials of IBM and pending transactions involving ADM. Ms. Chiessi tipped Mr. Kurland who traded. Both men settled with the SEC. Mr. Moffat consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). He also agreed to the entry of an officer and director bar. In the parallel criminal case Mr. Moffet previously pleaded guilty an was sentenced to six months in prison followed by two years of supervised release. Mr. Kurland settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay disgorgement of $4,213,630.18 which is the profits/or loss avoided/ from the trading, along with prejudgment interest. Mr. Kurland had previously pleaded guilty in the parallel criminal case and been sentenced to serve 27 months in prison followed by two years of supervised release. He was also ordered to pay criminal forfeiture of $900,000.
Investment fund fraud: SEC v. Illarramendi, Case No. 3:11-cv-00078 (D. Conn. Filed Jan. 14, 2011) is an action alleging violations of Advisers Act Sections 206(1), 206(2) and 206(4) against unregistered investment adviser Francisco Illarramendi and his controlled entity, Michael Kenwood Capital Management, LLC. According to the complaint, Mr. Illarramendi controls a group of affiliated entities organized under the name of The Michael Kenwood Group. Through the entities he advises hedge funds, one of which has about $540 million in assets. The investors in these funds are off-shore individuals and entities. About 90% of the funds come from a foreign pension fund. Since 2009 Mr. Illarramendi has improperly invested at least $53 million from the funds into personal accounts and entities he controls. For example, during the investigation by the staff Mr. Illarramendi is alleged to have transferred as much as $5 million of investor funds into a west coast company he controls. The Commission obtained a temporary asset freeze. The case is in litigation. See also Lit. Rel. No. 21828 (Jan. 28, 2011).
Insider trading: U.S. v. Sebbag (S.D.N.Y.) is an insider trading case against defendant Yonni Sebbag and his girlfriend who obtained inside information from her position at Disney. After soliciting buyers the couple sold the information to an undercover FBI agent as discussed here. Mr. Sebbag, who previously pleaded guilty, was sentenced to 27 months in prison in connection with his role in the scheme.
SEC v. Landberg, Civ. No. 11-CV-0404 (S.D.N.Y.) is an action against investment adviser William Landberg and his controlled entities, West End Financial Advisors LLC, West End Capital Management LLC and Sentinel Investment Management Corporation. Two officers of the entities were also named as defendants, Kevin Kramer and Steven Gould. The complaint claims that in 2008 and 2009, as the condition of the $66 million advisory business deteriorated, investors were falsely given to believe that the funds were stable and safe investments. In fact defendant Landberg obtained fraudulently obtained bank loans to sustain the illusion that the fund was performing well. Portions of the bank loans were used to make distributions. Mr. Landberg is also alleged to have misappropriated at least $1.5 million for himself and his family. According to the complaint, defendants Gould and Barsuk facilitated the fraud. The complaint, which is in litigation, alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisors Act Sections 206(1), 206(2) and 206(4).
Maxwell Technologies, Inc. settled FCPA charges with DOJ as well as the SEC. U.S. v. Maxwell Technologies Inc; SEC v. Maxwell Technologies Inc., Case No. 1:11-cv-00258 (D.D.C. Filed Jan. 31, 2011). The violations at Maxwell occurred from 2002 through May 2009. During that period the company marketed products through its Swiss subsidiary in China. Sales were made by a Chinese agent to state owned enterprises. The sales invoices had added 20% to cover the cost of the kickbacks. Overall the company paid $2.5 million in bribes and was awarded contracts that generated $15 million in revenue and $5.6 million in profits. In February 2009 a new Maxwell sales director learned about the kickbacks and informed the CEO who in turn notified the audit committee and outside counsel. After inquiry the company disclosed the potential FCPA issues in its Form 10-Q filing for the quarter ended March 31, 2009.
The company resolved the issues with DOJ. A two count criminal information was filed, charging the company with violating the anti-bribery and books and records provisions of the FCPA. Maxwell entered into a deferred prosecution agreement. It also agreed to implement enhanced procedures and pay a criminal fine of $8 million. In the SEC settlement the company consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records and internal control provisions of the FCPA. Maxwell also agreed to pay disgorgement of $5,654,567 and prejudgment interest of $696,314. The company will also be required to comply with certain undertaking regarding its FCPA compliance program. DOJ noted that the company voluntarily disclosed the violations. The SEC stated that the company cooperated.
U.K. Bribery Act
The Ministry of Justice announced that the implementation of the Bribery Act. It had been scheduled to go into effect in April 2011. This is the third delay in implementing the Act.