Market reform, insider trading and the FCPA continue to dominate securities regulation and enforcement, along with the budget short falls at the SEC. The inability of law makers on to agree on a budget and furnish the SEC with the necessary funding is impacting operations and the ability of the enforcement division to carry out its mission. All sides of the political spectrum claim to support law enforcement. Yet the stale mate on Capital Hill continues.

Nevertheless, the SEC and DOJ continued to bring significant actions this week. The so-called expert network investigation continues to expand. DOJ and the SEC brought additional charges against four more individuals. The charges go beyond the expert network. Prosecutors made it clear that the inquiry will continue for a considerable period of time. While brining these cases the SEC prevailed in another insider trading trial The CFTC also won a verdict in a commodity pool case.

Finally, the FCPA continues to be a key focus for government prosecutors and the SEC. DOJ and the Commission filed more settled FCPA cases this week.

Market reform and the SEC

Dodd-Frank Section 939A: The SEC continued to implement Dodd-Frank this week, proposing rules which would remove credit ratings as one of the conditions for companies seeking to use short form registration when registering securities for public sale. Section 939A of the Act requires federal agencies to examine how regulations rely on rating agencies and, if appropriate, remove that requirement. The proposal this week is the first of a series planned by the Commission.

Significant speeches at SEC Speaks:

  • SEC Chairman Schapiro addressed topics which include the restructuring of OCIE, improving market structure and the impact of the budget shortfall (here).
  • SEC Commissioner Aguilar noted in part that the enforcement division must bring cases with obvious deterrent effect in which remedies are calibrated to be meaningful and not routine. He also discussed the impact of the underfunding of the agency (here).
  • SEC Commissioner Kathleen Casey discussed the question of the retroactivity of certain provisions of Dodd-Frank (here).

SEC Enforcement

Insider trading: SEC v. Gowrish, 09-CV-5883 (N.D. Cal. Filed Dec. 16, 2009) is an action against Vinayak Gowrish, formerly an associate in the San Francisco office of TPG Capital, L.P, a global private investment firm. A jury found him liable for insider trading. The SEC’s complaint named as defendants Mr. Gowrish and Adnan S. Zaman, an associate with the investment banking firm of Lazard Ferres & Co. LLC, along with their two friends Pascal Vaghar and Semeer Khoury. The complaint alleged that Messrs. Gowrish and Zaman tipped their friends, Messrs. Vaghar and Khoury, on five occasions, furnishing them with inside information misappropriated from their respective employers. Messrs. Vaghar and Zaman were alleged to have made almost $500,000 in illegal trading profits. In exchange Mr. Gowrish was given cash kickbacks from defendant Vaghar. Mr. Zaman received kickbacks in the form of cash, free rent and other items of value from both traders totaling about $70,000. Each defendant, except Mr. Gowrish, settled at the time the complaint was filed as discussed here. In reaching its verdict, the jury found Mr. Gowrish liable for having furnished material non-public information about the negotiations to acquire Sabre, TXU and ADS to his two friends in violation of Exchange Act Section 10(b). The court will consider the question of remedies at a later date. Lit. Rel. No. 21838 (Feb. 4, 2011).

In the Matter of Alpine Woods Capital Investors, LLC, Adm. Proc. File No. 3-14233 (Feb. 7, 2011) is a proceeding naming as Respondents Alpine Woods Capital, a registered investment adviser, and Samuel Lieber, its CEO. Beginning in 2003 and continuing for the next four years Alpine launched a number of new funds and experienced significant growth. As a result it had significant opportunities to obtain IPO allocations. Its compliance procedures required that they be distributed “fairly and equitably,” a statement repeated in its Form ADV. In practice this was not followed. The order states that from 2006 through 2008 two small funds obtained a disproportionate share of IPO allocations which had a significant, positive impact on their earnings. This was not disclosed to the Board of Trustees or fund investors. There was also a failure to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. The Order alleges violations of Securities Act Section 17(a)(3), Advisers Act Sections 206(2) and (4) and Investment Company Act Section 34(b). During the investigation Alpine hired a COO and CFO, voluntarily replaced its Chief Compliance officer and retained an independent consultant to review certain procedures. In resolving the matter Alpine offered to implement certain procedures and consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to pay a civil penalty of $650,000. Mr. Lieber consented to the entry of a similar order based on Section 206(4) of the Advisers Act and to pay a $65,000 civil penalty. .

Insider trading: SEC v. Galleon Management, LP, Civil Action No. 09-CV-8811 (S.D.N.Y.) is the Commission’s enforcement action involving the now defunct hedge fund, its founder Raj Rajaratnam and others discussed here. This week the Commission settled with defendant Ali Hariri. The SEC claimed that defendant Hariri tipped co-defendant Ali Far about an earnings announcement at his company, Atheros Communications, Inc. In return Mr. Far tipped Mr. Hariri with inside information about another company. To settle with the Commission defendant Hariri consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). He also agreed to pay disgorgement and prejudgment interest of $2,665.68 and to the issuance of an officer and director bar. Mr. Hariri previously pleaded guilty in the parallel criminal case and was sentenced to 18 months in prison followed by two years of supervised release and to pay a criminal fine of $50,000. U.S. v. Hariri, 10 CR 00173 (S.D.N.Y.). The SEC previously obtained full disgorgement of Mr. Hariri’s downstream tippees Messrs. Far and Lee. See also Lit. Rel. No. 21839 (Feb. 4, 2011).

Investment fund fraud: SEC v. Farah, Case No. 1:10-CV-00135 (D.N.H. Filed April 9, 2010) is an action against Scott Farah, Donald Dodge and their related entities. The Commission’s complaint alleged that the defendants ran a Ponzi scheme which defrauded investors of at least $33 million. Each defendant settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of the antifraud provisions of the federal securities laws. The injunctions as to defendants Farah, Dodge and Financial Resources Mortgage were also based on Securities Act Section 5. In a related criminal proceeding Mr. Farah was sentenced to 15 years in prison. Mr. Dodge received a 6 year sentence. Mr. Farah pleaded guilty to one count of wire fraud and one count of mail fraud. Mr.Dodge pleaded guilty to one count of wire fraud. The court has not made a determination on the question of restitution pending a report from the trustee in a related bankruptcy proceeding.

Unregistered stock sales: SEC v. Olins, Civil Action No. 07-6423 (N.D. Cal.) is an action against Robert Olins, the former CEO of SpatiaLight, Inc. and his company Argyle Capital Management. Previously, the Commission obtained summary judgment on a Securities Act Section 5 claim as to the sale of SpatiaLight shares. On this part of the case the court entered a permanent injunction based on the registration provisions as to both defendants and directed that $2.4 million in disgorgement be paid along with prejudgment interest and a $5,000 civil penalty. Other portions of the complaint alleged misrepresentations in connection with the sales and false filings. The Commission settled those claims. See Lit. Rel. No. 21845 (Feb. 9, 2011).


Investment fund fraud: CFTC v. Bromfield is a fraud action against commodity pool operators Damien Bromfield and Donovan Davis, Jr. Following a two week trial in Orlando, Florida the agency prevailed. According to the CFTC, the defendants secured $17 million in investments for their pool from over 100 customers in 2007 and 2008. Substantial portions of the invested funds were misappropriated by the defendants. The court has not set a hearing date for determining remedies.

Criminal cases

Insider trading: Four additional individuals were charged in the on-going expert network insider trading investigation. Samir Baral, the founder of Barai Capital Master Fund, and Donald Longueuil, a portfolio manager at an unregistered investment adviser, were each charged with conspiracy to commit securities fraud and wire fraud and obstruction of justice. Mr. Baral was also charged with three counts of securities fraud. In addition, Jason Pflaum, who worked as an analyst at Barai Capital and Noah Freeman pleaded guilty to conspiracy to commit securities fraud and securities fraud. According to the court papers, the four defendants engaged in a conspiracy to insider trade from 2006 through 2008. The group is alleged to have obtained material non-public information about six different entities some of which was furnished by Winifred Jianu who was previously charged in connection with this investigation. Messrs. Barai, Longueuil and Freeman also regularly shared inside information according to the papers. All four defendants took steps to conceal their activities. Messrs. Barai and Longueuil also evaluated what proof the government might have against them and destroyed evidence following the public disclosure of the investigation, according to the charging papers. The SEC amended its complaint, adding each defendant from the new criminal cases. SEC v. Longoria, Civil Action No. 11-CV-0753 (S.D.N.Y.).


U.S. v. Tyson Foods, Inc. (D.D.C. Filed Feb. 10, 2011); SEC v. Tyson Foods, Inc., Civil No. 1:11-CV-00350 (D.D.C. Filed Feb. 10, 2011). Tyson Foods settled FCPA charges with DOJ and the SEC. According to the court papers, over a two year period beginning in fiscal 2004 the Mexican subsidiary of the company paid over $100,000 to two individuals who served as official Mexican government veterinarians at Tyson de Mexico’s facilities. The veterinarians were responsible for certifying that chickens being processed for export complied with the applicable health regulations. To conceal the payments initially the wives of the two veterinarians were placed on the payroll. When this arrangement was discovered by a plant manager the payments to the wives were replaced with invoices to one of the veterinarians. This approach was approved by an executive of Tyson International. It was not until two years after the discovery of the payments that the company ordered them halted.

To settle with DOJ Tyson entered into a deferred prosecution agreement. The underlying information charges the company with conspiring to violate the FCPA and violating the Act. The company agreed to pay a criminal fine of $4 million. To resolve the SEC investigation, the company consented to the entry of a permanent injunction prohibiting violations of the anti-bribery and books and records provisions of the FCPA. The company also agreed to pay disgorgement and prejudgment interest of over $1.2 million. Both DOJ and the SEC acknowledged the cooperation of the company. See also Lit. Re. No. 21851 (Feb. 10, 2011).

Survey results: Deloitte, in a press release dated February 7, 2011, discussed the publication of its “Look Before You Leap” survey of corporate executives, investment bankers, private equity executives and hedge fund managers. In the survey 63% of the respondents reported that over the last three years FCPA and anti-corruption issues have caused their companies to renegotiate or pull out of planned business relationships, mergers or acquisitions. The survey data revealed that 21% of those who responded identified a lack of transparency or unusual payment structures in contracts as the reason for renegotiating or terminating deal. At the same time 18% stated that their company renegotiated or pulled out of the deal because of the use of agents, consultants, distributors or third parties to obtain or facilitate business.

Court of appeals

Full Value Advisors, LLC v. SEC, No. 10-1053 (D.C. Cir. Feb. 4, 2011) is an action by an institutional investment manager challenging the constitutionality of Exchange Act Section 13(f). That Section, which applies to institutional investment managers holding at least $100 million in securities, requires the filing of quarterly reports on Form 13F essentially disclosing its holdings. That information is made public unless the Commission determines otherwise in the public interest or delays the disclosure. Managers can seek an exemption but must disclose sufficient information on Form 13F for a judgment to be made on the request. Here an application was made but the required Form 13F information was omitted. Subsequently, Full Value requested confidential treatment as to all the securities it would otherwise be required to disclose. The SEC denied the request for an exemption and for confidential treatment. The Commission noting that the fund failed to furnish sufficient facts. In any event, absent extraordinary circumstances, the fund could not seek an exemption from disclosing its positions unless it first sought in good faith confidential treatment. Here Full Value did not meet the requirements for such treatment.

Petitioner argued that the disclosure requirements compelled speech in violation of the First Amendment and represented an uncompensated taking in violation of the Fifth Amendment. The court rejected both arguments. Neither the First nor the Fifth Amendment claims are ripe for review the court held. The court also held that the disclosure requirements here are only part of a regulatory process designed to inspire confidence in the markets and protect proprietary information in the process. The requirements of Section 13(f) are thus indistinguishable from other similar provisions which do not violate the constitution.


The FSA was directed by The Upper Tribunal in a recent decision to fine David Massey ₤150,000 and ban him from performing any role in regulated financial services for engaging in market abuse. The case centers on transactions from November 2007 when Mr. Massey was a Corporate Finance Executive at Zimmerman Adams International. He had acted as a financial PR consultant for Eicom, the then an AIM-listed digital broadcaster. On November 1, 2007 Mr. Massey shorted Eicom shares at 8p per share. At the time he executed that trade he knew that Eicom was in need of further funds for a possible acquisition. He also knew that the company was prepared to issue up to 3 million shares to him at a substantial discount. Immediately after executing the short trade, Mr. Massey accepted an offer to in fact purchase 2.6 million Eicom shares at 3.5p. This made him a profit of over ₤100,000.