In recent enforcement cases the SEC obtained split results in an insider trading case, losing against one defendant but prevailing as to another. The court however then refused to impose an injunction against the defendant found liable but did order disgorgement and a penalty. The Commission also filed a settled insider trading case during the past week, another Reg FD action and two new investment fund fraud actions.

FINRA filed a settled action involving misleading marketing regarding a non-traded REIT. The PCAOB announced another MOU. In London the FSA settled an action involving the failure of a compliance officer to take proper steps to protect a hedge fund and its investors.

SEC Enforcement: Litigated cases

Insider trading: SEC v. Alberto Perez, Case No. 09-CV-21977 (S.D. Fla.) is an action in which the jury found defendant Alberto Perez liable for insider trading. The case centers on the acquisition of Neff Corporation by Odyssey Investment Partners, LLC in a deal announced on Aril 7, 2005. During due diligence Juan Carlos Mas, CEO of Neff, made office space available to his long time acquaintance, Alberto Perez, who he also employed to manage real estate projects. While the due diligence was in progress a securities account jointly owned by Mr. Perez and his brother made thirty-nine purchases of Neff stock totaling 17,000 shares. Following the deal announcement the SEC brought insider trading charges against six individuals. Three settled. A fourth prevailed on a motion for summary judgment. Defendants Sebastian de la Maz and Perez proceed to trial.

The jury concluded that Defendant de la Maz was not liable. The court rejected the SEC’s request for an injunction. To warrant injunctive relief the SEC must establish that there is a reasonable likelihood that the defendant will engage in future violations of the securities laws absent the requested relief, the court found. This requires more than a showing of past violations. The court carefully analyzed six factors. Central to the court’s decision was the isolated nature of the incident, the fact that the defendant will likely not be in a position to violate the insider trading laws again and an affidavit from Mr. Perez. In that affidavit he assured the court that he had learned from the ordeal, respected the securities laws and would avoid being involved with a public company in the future, although he did not acknowledge responsibility for the trades. The court did order the payment of disgorgement of $399,395 along with prejudgment interest and a civil penalty of $50,000. It rejected the SEC’s request for a penalty equal to three times the amount of the disgorgement.

SEC Enforcement: Filings and settlements

Sale of unregistered securities: SEC v. Weiner, Civil Action No. 11-CV-5731 (E.D.N.Y. Filed Nov. 23, 2011) is an action against Myron Weiner charging violations of Section 5 of the Securities Act. Mr. Weiner is alleged to have purchased shares of Spongetech Delivery Systems, Inc. in 2009 for five cents per share from an affiliate of the company. Less than three months later he resold them into the public market at twenty cents per share. The shares were not registered with the Commission and no exemption from registration applied. This action is in litigation. The U.S. Attorney’s Office for the Eastern District of New York filed a parallel forfeiture action.

Reg FD: In the Matter of Fifth Third Bancorp, Adm. Proc. File No. 3-14639 (Nov. 22, 2011) is an action against the bank alleging a violation of Exchange Act Section 13(a) and Reg FD. Specifically, in May 2011 the financial institution selectively disclosed to certain investors that it planned to redeem a class of its trust preferred securities for about $25 per share. At the time the securities were trading for about $26.50 per share. Fifth Third did not issue a Form 8-K or other public notice until after it learned that investors who apparently learned about the plan were selling the shares to others who had not learned about the proposed plan. To resolve the action the bank consented to the entry of a cease and desist order based on the sections cited in the Order. No penalty was imposed in recognition of the cooperation of the bank and its remedial efforts which included compensation to the investors who were harmed.

Investment fund fraud: SEC v. Rooney, Case No. 11-cv-8264 (N.D. Ill. Filed Nov. 18, 2011). The defendants in this case are Patrick Rooney and Solaris Management, LLC. Mr. Rooney is the founder and managing partner of Solaris Management. The firm serves as the general partner and investment adviser of hedge funds Solaris Opportunity Fund, LP (“the Fund”) and the Solaris Offshore Fund. The two entities were managed together.

The Fund claims to follow a non-directional strategy to trade equity, options and futures. While that was true initially, beginning in 2005 the Fund invested millions of dollars in a company which had suffered a series of losses. Mr. Rooney was the Chairman of that company and drew a salary from it. He obtained that position in connection with an investment in the entity by a company affiliated with his father. Eventually the Fund held about 60% of the entity without any disclosure to the investors that the investment policies had been radically altered. When disclosure was made Mr. Rooney falsely claimed he became chairman of the company to protect the Fund investment rather than for his own benefit. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(d)(1) and Advisers Act Sections 206(1), (2) and (4). The case is in litigation.

Investment fund fraud: SEC v. Kugel (S.D.N.Y. Filed Nov. 21, 2011) is an action against former Bernard Madoff employee David Kugel. The defendant began working at the Madoff brokerage operation in 1970. Subsequently, he began furnishing the advisory business with historic or backdated trading data used on customer account statements as well as his own. From 2001 through 2008 he withdrew almost $10 million from his accounts at the brokerage firm and the advisory business although he knew that the so-called profits were not from actual trading activity. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 15(c), Securities Act Section 17(a) and Advisers Act Sections 206(1), (2) and 204. Mr. Kugel has pleaded guilty to criminal charges. He has also agreed to settle the SEC’s action, consenting to the entry of a permanent injunction and to the forfeiture of his ill-gotten monetary gains upon entry of a criminal forfeiture order in the criminal case.

SEC v. Daifotis, Civil Action No. CV-11-0137 (N.D. Cal. Filed Jan. 11, 2011) is an action against, among others, Randall Merk who was an Executive Vice President at Charles Schwab & Co., Inc., President of Charles Schwab Investment Management and a Trustee of Schwab YieldPlus Fund and other funds. The Commissions complaint claimed that Mr. Merk mislead investors or failed to adequately inform them regarding the risks of investing in YieldPlus. He also approved other Schwab funds’ redemptions of their investments in YieldPlus at a time when the portfolio manager had received inside information about the YieldPlus without authorization of the Fund’s board of trustees. Mr. Merk agreed to settle with the Commission, consenting to the entry of a permanent injunction prohibiting him from aiding and abetting violations of Sections 206(2) and 206(4) of the Advisers Act and Section 34(b) of the Investment Company Act. He also agreed to pay a civil penalty of $150,000. In addition, Mr. Merk agreed to be suspended for a period of twelve months from the securities business and from participating in any penny stock offering.

Insider trading: SEC v. Konyndyk, Civil Action No. 11-CV-02055 (D.D.C. Filed Nov. 18, 2011) is an action against Mark Konyndyk, a former manager in the Transaction Advisory Services Group of Ernst & Yound. Mr. Konyndyk learned through his work that Activision, Inc. was the target of highly confidential acquisition talks in which Vivendi S.A. was the potential acquirer. The deal was announced on December 2, 2007. Shortly before that date Mr. Konyndyk purchased out of the money call options with near term expirations. Those options were sold for a profit of $9,725 after the deal was announced. Mr. Konyndyk resolved the case, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 14(e). He also agreed to pay disgorgement equal to his trading profits, prejudgment interest and a civil penalty equal to the amount of the disgorgement. In a related administrative proceeding he consented to the entry of an order which prohibits him from appearing or practicing before the Commission as an accountant with a right to seek reinstatement after two years.

Investment fund fraud: SEC v. Garfield Taylor, Inc., Case No. 1;11cv02054 (D.C.C. Filed Nov. 18, 2011) is an action against the company and Gibralter Asset Management Group LLC, both controlled by Garfield Taylor, his brother Maurice, nephew, Randolph, childhood friend Benjamin Dalley and Jeffrey King and William Mitchell. The complaint alleges that over a five year period beginning in 2005 the defendants defrauded about 130 investors out of more than $27 million. Investors were falsely told that their funds would be invested in a low risk option trading scheme where the funds would be protected by a “reserve account” and that they would receive returns as high as 20% per year. The targeted investors were not sophisticated and in some cases were urged to refinance their homes to secure the money to buy notes. In fact the defendants engaged in a high risk option trading scheme which incurred huge losses. Portions of the investor money were used to make Ponzi type interest payments to other investors. Other portions of the funds were diverted to the personal use of the defendants. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1), (2) and (4)-8. The case is in litigation.

FINRA

Misleading marketing materials: Wells Investment Securities, Inc. was fined $300,000 for using misleading marketing materials in connection with the sale of share in Wells Timberland REIT, Inc. The firm served as dealer manager for the offering of shares in the entity. Those materials told investors that the entity would qualify as a REIT for the tax year ended December 31, 2006. While non-traded REITs such as the one here are generally illiquid for years, they can avoid certain tax consequences if they qualify under specific provisions of the Internal Revenue code. Here the entity did not qualify until December 31, 2009. Most of the sales literature did not make it clear to potential investors that the tax benefits were not available. Previously, FINRA had issued an investor alert regarding non-traded REITs.

MOU: The SRO announced that it has entered into a Memorandum of Understanding with the Ontario Securities Commission. The agreement will facilitate the exchange of information with respect to regulated entities that operate across the U.S. Canadian border.

PCAOB

The Board entered into a cooperative agreement with the Financial Supervisory Commission of Taiwan for oversight of auditors that practice in both of the regulators’ respective jurisdictions. The Board has been doing inspections of Taiwan-based audit firms since 2007. The Board has similar agreements with other regulators in the Asia and Pacific region including Australia, Korea and Singapore. The Board also has been conducting inspections in coordination with regulators in Indonesia, Japan, Malaysia, New Zealand, Philippines and Thailand.

FSA

Failure act as compliance officer: Dr. Sandradee Joseph was fined £14,000 and barred from performing any significant influence function in regulated services for failing to fulfill her role as Compliance Officer at Dynamic Decisions Capital Management or DDCM, a hedge fund management company. The funds managed by DDCM lost 85% of their assets. A senior employee at the adviser entered into a number of contracts on behalf of the funds for the purchase and sale of a bond. Dr. Joseph failed as a compliance officer to investigate with respect to this transaction. The prime broker involved with the deal resigned in protest because of it. Various investors also raised concerns. Rather than investigate these Dr, Joseph simply relied on a collogue and her believe that outside counsel were instructed and would act on concerns as appropriate. This is a violation of FSA Principle 6 under which a compliance officer is required to act with due skill and care.