The focus was on Dodd-Frank this week as the Commission continued to implement the Act, issuing proposed rules regarding asset backed securities and derivatives. SEC Enforcement filed a financial fraud case and another investment fund fraud action which tracks a criminal case. Similarly, in Michigan, a criminal indictment based on allegations of investment fund fraud was handed down. Finally, the New York AG continued to move forward with his “pay-to-play” investigation, settling with a national law firm.

Market reform

Dodd-Frank Rules: The SEC issued proposed rules this week under three sections of Dodd-Frank.

  • ABS: To implement Section 945, the Commission proposed rules which would require issuers of asset backed securities to disclose the nature of the review performed as well as its findings and conclusions. Required disclosures would include information about how the loans in the pool differ from the disclosed underwriting criteria; facts about loans that did not meet the underwriting standards; and information about the entity that made the determination that loans should be included in the pool despite not having met the underwriting standards.
  • Swaps: Section 766 requires the SEC to adopt an interim final rule requiring the reporting of security-based swap transactions that occurred before the enactment of the legislation, but which had not expired on the date of enactment. This week, the Commission approved interim Rule 13Aa-2T to comply with this requirement.
  • Conflicts/Swaps: Section 765 specifies requirements designed to mitigate conflicts of interest at clearing agencies for security-based swaps. This week the SEC issued for comment Proposed Regulation MC which is designed to deal with the potential conflicts. Previously, the CFTC proposed similar rules for products within its jurisdiction.

IG Report on Goldman: The SEC’s Inspector General filed a report on his investigation into the circumstances surrounding the filing and settlement of the enforcement action against Goldman Sachs (discussed here). In essence, it concludes that there is no evidence suggesting that the filing or settlement was politically timed or that there were press leaks by the SEC. Report of Investigation, Case No. OIG – 534 (Sept. 30, 2010).

SEC Enforcement

Financial fraud: SEC v. LocatePlus Holdings Corporation, Case No. 10-CV-11751 (D. Mass. Oct. 14, 2010) is an action against LocatePlus Holdings, a company which sells on-line access to public record data bases for investigative searches. According to the complaint, the company improperly inflated its revenue from 2005 through 2007 by recognizing $2 million from a fictitious customer called Omni Data. In fact, that company was funded with cash routed from entities secretly controlled by the former CEO and CFO of LocatePlus. The Commission’s complaint alleges violations which include the antifraud provisions of the Securities Act and the Exchange Act. The case is in litigation. See also Litig. Rel. 21692 (Oct. 14, 2010).

Investment fund fraud: SEC v. Prevost, Case No. 0:10-cv-04235 (D. Minn. Filed Oct. 1, 2010) names as defendants Bruce Prévost, David Harrold and their controlled entities, Palm Beach Capital Management LP and Palm Beach Capital Management LLC. According to the complaint, from 1995 through 2008, Tom Petters perpetrated a massive Ponzi scheme through the sale of promissory notes. At the time, Mr. Petters was a prominent Minnesota businessman who controlled what is described as an “empire” of companies including Polaroid Corporation, Fingerhut Direct Marketing and Sun Country Airlines. The note proceeds were to finance the purchase of large amounts of consumer electronics for resale to “Big Box” retailers. In reality, Mr. Petters diverted the funds to his own use. Much of the $3.65 billion invested came from feeder funds, including two controlled by defendants Prévost and Harrold. During the period, these two defendants earned more than $58 million in fees. According to the complaint, Messrs. Prévost and Harrold made false representations to investors regarding the safeguards provided by certain bank accounts. By February 2008, Mr. Petters was unable to repay certain notes held by two funds Messrs. Prévost and Harrold controlled. These two defendants then joined with Mr. Petters to concoct a series of bogus notes used in exchange transactions to conceal the inability to pay. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation. See also Litig. Rel. 21694 (Oct. 14, 2010). Mr. Petters was previously convicted of conspiracy, fraud and money laundering (here).

Insider trading: SEC v. Di Nardo, Civil Action No. 08-cv-6609 (S.D.N.Y. Filed July 25, 2008) is an action originally filed on an emergency basis against unknown purchasers of DRS Technologies, Inc. and American Power Conversion Corporation options. Both companies were being acquired in October 2006 by Schneider Electric S.A. In an amended complaint the SEC named Gianluca Di Nardo, an Italian citizen, and his investment vehicle Corralero Holdings as defendants. The amended complaint alleges that Mr. Di Nardo and his entity were in possession of inside information in late September 2006 when he bought 2,400 APCC call options for about $299,800. Those options were liquidated after the deal announcement, yielding a profit of $1.4 million. Earlier, Mr. Di Nardo had purchased DRS call options while in possession of inside information. After the deal announcement, they were sold at a profit of $669,750. To resolve the action Mr. Di Nardo and his company consented to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b). The two defendants also agreed to pay $2,110,000 in disgorgement along with prejudgment interest and a civil penalty of $700,000. See also Litig. Rel. 21687A (Oct. 7, 2010).

Criminal cases

U.S. v. DeMiro, Case No. 10-cr-20594 (E.D. Mich. Oct. 10, 2010) is an action against investment adviser Dante DeMiro. He is the founder of MuniVest Financial Group and MuniVest Services LLC. From March 2009 through September 2010 the indictment claims that Mr. DeMiro falsely promised clients that he would purchase millions of dollars in certificates of deposit. In reality he diverted the funds to his personal use, defrauding a school district, a municipality and others out of about $10 million. Mr. DeMiro entered a plea of not guilty.

New York

New York AG Andrew Cuomo settled with the law firm Manatt Phelps & Phillips, LLP in his pay-to-play investigation (discussed here). According to the New York AG, Manatt made introductions and secured meetings on behalf of firms seeking investments from public pension funds in New York, California and in other locations. The law firm and the attorneys involved were not licensed placement agents or securities brokers. Manatt was only paid for one transaction. In 2003, the firm, in conjunction with Platinum Advisors, helped place $25 million by CalPERS in Levine Leichtman Capital Partners Fund III. The law firm and Platinum each received $187,500 in fees from 2004 through 2006. To resolve the matter Manatt agreed to pay a $550,000 fine to the State of New York. In addition, the firm will be barred from appearing before any public pension fund in New York for five years. It will also adopt the Attorney General’s Public Pension Fund Reform Code of Conduct and cooperate with the on-going investigation.