As the summer draws to a close and fall approaches the SEC announced it would not appeal the recent ruling striking down its proxy access rule. The agency also solicited comments regarding its review of various regulations.
SEC Enforcement brought cases involving market professionals and unauthorized and fraudulent trading, investment fund fraud and insider trading. Actions were also brought relating to the market crisis, the duties of a transfer agent, SOX Section 304 and to enforce a subpoena against the auditor of a Shanghai based issuer.
FINRA imposed sanctions on four brokers relating to undisclosed charges. The FSA brought two proceedings, one involving market manipulation in the securities markets and a second centered on disorderly trading on the LME.
Proxy access: Chairman Mary Schapiro announced that the Commission had determined not to appeal the decision of the D.C. Circuit striking down the SEC’s recent proxy access rule (here). The decision is discussed here.
Review of regulations: The Commission is seeking public comment on the process it should use to conduct retrospective reviews of its regulations (here).
SEC enforcement – filings and settlements
Investment adviser fraud: SEC v. EagleEye Asset Management, LLC, Civil Action No. 11-CV-11576 (D. Mass. Filed Sept. 8, 2011) is an action against investment adviser EagleEye Asset Management and its sole principal, Jeffrey Liskov. According to the complaint, between April 2008 and August 2010 Mr. Liskov made material misrepresentations to a dozen clients to induce them to liquidate their securities holdings and 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 but later the positions would decline sharply in value. In the case of two clients Mr. Liskov liquidated their brokerage accounts without permission and transferred the proceeds to forex trading accounts where he lost virtually all of the money. The transfers were done by doctoring the documents. The complaint alleges violations of Exchange Act Section 109b) and Advisers Act Sections 206(1), 206(2) and 204. The case is in litigation.
Broker fraud: SEC v. Finger, Civil Action No. 2;11-cv-01479 (W.D. Wash. Filed Sept. 8, 2011) is an action against Richard Finger and his brokerage firm, Black Diamond Securities LLC. According to the complaint, Mr. Finger opened the firm in February and began managing about $5 million, largely from friends and family. In the following months he lost almost $2 million in risky option and high frequency trading and took another $2 million in commissions. Portions of the funds were diverted to Mr. Finger’s personal use. The complaint alleges violations of Exchange Act Section 10(b) and 15(c)(1)(A). The case is in litigation.
Subpoena enforcement: SEC v. Deloitte Touche Tohmatsu CPA, Ltd., File No. 1:11-MC-00512 (D.D.C. Filed Sept. 8, 2011) is an action against the outside auditors of Longtop Financial Technologies Ltd., a Cayman Island company based in Shanghai whose ADRs were traded in New York from the date of its IPO in October 2007 until May 17, 2011 when the Exchange halted trading prior to delisting the shares. The defendant in the action is a PCAOB registered firm which served as the outside auditors for Longtop. The firm resigned as the outside auditors under a letter dated May 23, 2011 after discovering numerous improprieties during a year end audit. The SEC in investigating and issued a subpoena for documents to the audit firm. To date no documents have been produced. The Commission is requesting that the court order the documents produced.
Adviser fraud: In the Matter of Montford and Company Inc., Adm. Proc. File No. 3-14536 (Sept. 7, 2011) is an action against registered investment adviser Montford Associates and Ernest Montford, Sr., its president, CEO, CCO and 100% shareholder. The Order alleges violations of Sections 206(1), 206(2), 207 and 204 of the Advisers Act. Montford Associates represented in its Form ADV and promotional materials that it was a source of independent investment advice for institutional investors. In fact it had an arrangement with SJK Investment Management LLC and its principal Stanley J. Kowaleski, both the subject of an emergency fraud action recently filed by the Commission, to steer them business in return for fees. In return for the payment of about $210,000 in 2010 Montford referred clients to Kowaleski who invested about $80 million. That represented about 90% of the assets of Kowaleski Investment Management. The Order alleges that Montford Associates breached the sections cited by failing to update its Form ADV and not disclosing the relation. Mr. Montford is alleged to have aided and abetted and caused those violations. The case is in litigation.
Insider trading: SEC v. Feinblatt, Civil Action No. 11-CV-0170 (S.D.N.Y.) is an action against Robert Feinblatt, a co-founder and former principal of hedge fund Trivium Capital Management LLC, and Jeffrey Yokuty, formerly an analyst who reported to him. The complaint alleges trading on in inside information in the shares of Polycom, Hilton, Google and Kronos obtained from Roomy Khan. Ultimately the information traced to Polycom senior executive Sunil Bhalla and Shammara Hussain, an employee at investor relations consulting firm Market Street Partners that did work for Google. Mr. Feinblatt settled with the SEC by consenting to the entry of a permanent injunction enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Feinblatt also agreed to pay disgorgement of $829,765 along with prejudgment interest and a civil penalty of $1,659,530. In a separate administrative proceeding Mr. Feinblatt consented to be barred from the securities business with a right to reapply after five year. Mr. Yokuty previously settled with the SEC on similar terms while agreeing to pay disgorgement of $127,595.10 along with prejudgment interest and a civil penalty in an amount equal to the disgorgement. He also resolved a related administrative proceeding on similar terms but with a right to apply for reentry after three years.
Clawback: SEC v. O’Leary, Case No. 1:11-cv-2901 (N.D. Ga.) is an action against James O’Leary, the former Chief Financial Officer of Beazer homes USA, Inc. In 2006 the then Chief Accounting Officer of the company orchestrated an accounting fraud at Beazer to meet earnings expectations. In May 2006 the company was required to restate its financial statements as a result of that fraud. Although Mr. O’Leary is not alleged to have been involved in the wrongful conduct, the Commission’s complaint demands the repayment of over $1.4 million he received after Beazer filed materially false financial statements during fiscal year 2006 under Section 304 of Sarbanes Oxley. To settle the case Mr. O’Leary agreed to reimburse Beazer $1,431,022 within 30 days of entry of the Court’s order approving the settlement. That amount represents the entire incentive bonus paid to Mr. O’Leary in fiscal 2006. It includes $1,024,764 in incentive compensation and $133,733 previously obtained from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. It also includes $274,525 in stock sale profits.
Investment fund fraud: SEC v. Stanley, Inc., Case No. CV 11-07147 (C.D. Cal. Sept. 2, 2011) is an action against Daniel Powell and his company, Christian Stanley Inc. Mr. Stanley raised about $4.5 million from 50 investors in a nationwide offering of unregistered notes. Investors were told that they would be paid returns ranging from 5 to 15.5% annually for five years. The money was to be invested in life settlements and backed by assets such as a gold mine and coal deposits. In fact the operation was a Ponzi scheme in which Mr. Powell diverted much of the money to himself, according to the Commission. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The Commission obtained a temporary freeze order. The case is in litigation.
Transfer agents: SEC v National Stock Transfer, Inc., Case No. 2:11-CV-00798 (D. Utah Filed Sept. 2, 2011) is an action against National Stock Transfer, Inc., its president Kay Berenson-Galster and its owner, Roger Greer. The complaint alleges that for the last five years the transfer agent has violated its obligations by failing to report lost or stolen securities in a timely fashion, failing to maintain certain records, failing to maintain control books for all of its issuers and not filing it annual report with the Commission. The complaint alleges violations of Exchange Act Sections 17(a)(3) and 17A(d). The case is in litigation.
Insider trading: SEC v. Clay Capital Management, LLC, Civil Action No. 2:11-cv-05020 (D. N.J. Filed Aug. 31, 2011) is an action against James Turner and his fund, Clay Capital Management, LLC, along with Scott Vollmar, Mr. Turner’s brother-in-law, Scott Robarge, his friend, and Mark Durbin, and a neighbor of Mr. Vollmar. The trading involved the shares of Moldflow Corporation, Autodesk, Inc. and Salesforce.com, Inc. The first scheme centered on the tender offer by Autodesk for Moldflow, announced on May 1, 2008. Prior to the deal announcement Mr. Vollmar, illegally tipped James Turner and Mark Durbin about the deal. At the time Mr. Vollmar was the director of business development for Autodesk and had been heavily involved in the acquisition discussions. Each traded. Mr. Turner also tipped his brother-in-law, Scott Robarge who in turn recommended the stock to others. Collectively the traders netted $2.3 million in illicit trading profits according to the complaint. The second scheme centered on trading prior to the fourth quarter 2008 earnings announcement for Autodesk on February 26, 2008 Mr. Vollmar again tipped Messrs. Turner and Robarge. Each traded. Mr. Robarage also recommended the shares to others. Collectively, the trading in Autodesk shares yielded about $1.1 million in illicit trading profits. Finally, Mr. Robage, a recruiting technology manager for Salesforce, is alleged to have tipped Mr. Turner about the pending earnings announcement for his company. Mr. Turner traded and told Mr. Vollmer who also purchase shares and options in Salesforce. Mr. Robarage also traded on the information prior to the announcement and recommended the stock to other friends. Collectively, the trading in the shares of Salesforce yielded about $500,000 in illicit trading profits according to the complaint. The Commission’s complaint alleges violations of Securities Act section 17(a) and Exchange Act Sections 10(b) and 14(e).
Messrs. Robarge and Durbin settled with the SEC. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). In addition, Mr. Robarge agreed to pay disgorgement of $232,591 along with prejudgment interest and a penalty equal to the amount of the disgorgement. Mr. Durbin also agreed to pay disgorgement in the amount of $8,391.26 along with prejudgment interest and a penalty equal to the amount of the disgorgement. The other defendants did not settled with the SEC.
Insider trading: SEC v. Scolaro, Civil Action No. 11-CV-6112 (S.D.N.Y.) is an action against Anthony Scolaro, a former portfolio manager at hedge fund investment adviser Diamondback Capital Management, LLC. The allegations relate to the Arthur Cutillo and Brien Santarias side of the Galleon investigation. Messrs. Cutillo and Santarias were formerly associates at the law firm of Ropes & Gray LLP. They misappropriated material, non-public information concerning the acquisition of Axcan from their firm. The information was furnished through another attorney to Zvi Goffer, a proprietary trader at broker dealer Schottenfeld Group LLC, who traded on it. Mr. Goffer then furnished the information to Franz Tudor, another trader at his firm who in turn provided it to his friend Mr. Scolaro who traded on behalf of hedge fund Diamondback yielding about $1.1 million in illegal profits.
Mr. Scolaro resolved the case with the SEC by consenting to the entry of a final judgment that permanently enjoins him from future violations of Exchange Act Section 10(b). The order also requires him to pay disgorgement of $125,980 along with prejudgment interest and a civil penalty of $62,945. Diamondback, named as a relief defendant, consented to the entry of an order requiring the payment of $962,486 in disgorgement along with prejudgment interest. In addition, Mr. Scolaro consented to the entry of an order in an administrative proceeding barring him from the securities business. Previously, he pleaded guilty to charges of conspiracy to commit securities fraud and securities fraud in a related criminal case. U.S. v. Scolaro, 11-CR-429 (S.D.N.Y.). He is awaiting sentencing.
Financial fraud: SEC v. Li, Civil Action No. CV-11-1712 (D. Ariz. Filed Aug. 30, 2011) is an action against James Li, a director, president and COO of Syntax-Brillian Corporation, a developer and distributor of H-D LCD TVs and Thomas Chow, a director and chief procurement officer of the company. Also named as defendants are Wayne Pratt, the CFO of the company and Christopher Liu and Roger Kao of Taiwan Kolin, Co. Ltd. The complaint centers on a financial fraud scheme orchestrated by defendants Li and Chow. According to the SEC, from at least mid-2006 through early 2008 the defendants Li and Chow executed a complex scheme to record revenue from the sale of TV sets in China when in fact the sales never occurred. As the scheme progressed a circular cash flow was developed involving Syntax’s primary manufacturer, Taiwan Kolin, Co. Ltd involving its chairman Christopher Liu and a board member, Roger Kao. Wayne Pratt, the CFO of Syntax, ignored red flags of improper revenue recognition and participated in preparing backdated documentation that were provided to the outside auditors to support fictitious sales. The complaint alleges violations of Securities act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5).
Each defendant settled with the Commission with the exception of Mr. Chow. Mr. Li consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of the other sections cited in the complaint. He also consented to the entry of an officer and director bar. The court will determine disgorgement and a civil penalty. Mr. Kao consented to the entry of an injunction based on Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). He also agreed to pay a civil penalty of $100,000. Mr. Liu consented to an injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b) and 13(a) and to an order imposing an officer and director bar. Finally, Mr. Pratt consented to the entry of an injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 3(b)(5). He also agreed to pay disgorgement in the amount of $88,000 along with prejudgment interest and a civil penalty of $90,000 and to a five year officer and director bar. In a related administrative proceeding he also agreed to the entry of an order suspending him from appearing or practicing before the Commission as an accountant for a period of five years.
Investment fund fraud: SEC v. Davis, Civil Acton No. 6:11-cv-1440 (M.D. Fla. Filed Aug. 29, 2011) is an action against James Risher, a convicted felon, and Daniel Sebastian, a former insurance broker. The SEC claims that from January 2007 through July 2010 the defendants operated a Ponzi scheme, raising about $22 million from more than 100 investors who were promised returns ranging from 14 to 124%. The funds were suppose to be invested in public equity through a FINRA broker. In reality little of the money was invested as promised. Nevertheless, investors were furnished with account statements falsely showing their profits. The complaint alleges violations of Securities Act Sections 5 and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation.
Conflicts: In the matter of Matthew Crisp, Adm. Proc. File No. 3-14520 (Aug. 29, 2011) is an action against Matthew Crisp, a partner in Adams Street Partners, LLC, a registered investment adviser. In 2006 Mr. Crisp is alleged to have secretly formed a private investment vehicle and steered a corporate opportunity that should have gone to Adams Street to it. During a subsequent buy out of that company he enriched himself by taking $150,000 which also should have gone to Adams Street. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation.
Investment fund fraud: SEC v. Faruki, Civil Action No. 11-cv-05406 (N.D. Ill. Filed Aug. 10, 2010, under seal until Aug. 29) is an action against Belal Faruki and his advisory firm, Neural Markets, LLC. According to the complaint, the defendants marketed themselves to sophisticated investors as a successful hedge fund, seeking investments in “Evolution quantitative IX Fund,” The fund supposedly had significant investors and a good track record. At least one investor put $1 million in the fund. The representations were false. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Section 206(4). The court previously granted a freeze order. The terms of that order were continued in a preliminary injunction entered by consent.
Suitability: In the Matter of David G. Brouwer, Adm. Proc. File No. 3-14516 (Aug. 26, 2011) is an action against David Brouwer, formerly of Great American Advisors, Inc., a broker dealer. During 2007 and 2008 Mr. Brouwer recommended equity linked notes to many of his customers. He falsely represented that the notes in which there is a derivative exposure were safe, among other things, when in fact the investment could be lost. He also recommended the notes to at least two customers for whom they were not suitable. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the proceeding the Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and agreed to be barred from the securities business and from participating in any penny stock offering. Mr. Brouwer also agreed to pay disgorgement of $33,000 along with prejudgment interest and a penalty in an amount equal to the disgorgement.
Market crisis: In the Matter of GSCP (NJ), L.P., Adm. Proc. File No. 3-15514 (Aug. 25, 2011) is an action against GSC, a registered investment adviser which served as the portfolio manager for Squared CDO 2007-1, a largely synthetic collateralized debt obligation built primarily out of credit default swaps and tied to the subprime housing market. Interests in Squared were marketed by J.P. Morgan Securities LLC. Essentially the marketing materials told investors that the securities were selected by GSCP without disclosing the participation of a hedge fund with a significant short position. A detailed description of the action which J.P. Morgan securities and the managing director of GSCP previously settled is available here. GSC resolved this proceeding by consenting to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) & (3) and Advisers Act Section 206(2). The SEC considered the cooperation of the Respondent.
The agency sanctioned five broker dealers for mischaracterizing the amount of total commissions charged to customers in trade confirmation and on fee schedules. Specifically, the firms mischaracterized the handling fees charged. The firms sanctioned are: Pointe Capital, Inc., $300,000; John Thomas financial, $275,000; First Midwest Securities, Inc., $150,000; A&F Financial Securities, Inc, $125,000; and Salomon Whitney LLC, $60,000. The actions resulted from a targeted examination of the fee question.
Market squeeze: The Upper Tribunal issued a decision involving Jason Geddis, a trader at Dresdner Kleinwort Ltd., who traded on the London Metals Exchange, censuring him. Mr. Geddis manipulated the price of lead contracts on the LME by rapidly building a position in the morning and then liquidating it in the afternoon. The tribunal found this conduct contributed to a disorderly market and censured Mr. Geddis. The FSA has sought a more severe sanction.
Market abuse/manipulation: The agency obtained a freeze order against seven companies based on claims that they manipulated the market by “layering.” In this scheme the companies created the misleading impression regarding the supply of shares by trading across a number of UK trading platforms and placing large orders for shares which they had no genuine intention of allowing to trade. This drove up the price, netting the companies about £1 million. The companies involved were; Da Vinci Invest ltd, a UK registered but Swiss based fund manager; Da Vinci Invest PTE Ltd, a Singapore based company; Mirworld Ltd, registered in the Seychells; and Szaboics Banya, Tamas Pornye and Gyorgi Brad all of Switzerland.
Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019. Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP. Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc. For furhter information please click on the following link: file:///C:/Users/tom/AppData/Local/Temp/CET1DSW-DS1.html