The FCPA and insider trading were the primary issues in securities enforcement litigation this week. The largest FCPA sting case in history was dismissed by the DOJ following two ill-fated trials. The set back for the DOJ in their enforcement efforts comes at an interesting time since the Department is writing guidance on the application of the Act which should be issued later this year.
The filing this week of a pair of expert network insider trading cases by the DOJ and the SEC put that investigation back in the headlines. Criminal and civil charges were brought against a network operation. In addition, one of that person’s reputed sources of inside information pleaded guilty.
SEC Enforcement: Court decisions
Investment fund fraud: SEC v. Bard, Civil Action No. 1:09-cv-1473 (M.D. Pa.) is an action brought against Robert Bard and his company, Vision Specialist Group, LLC alleging violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The complaint alleged that Mr. Bard made false statements to his investment advisory clients, assuring them that their funds would be invested in safe instruments such as bonds and money market funds. In reality he lost much of the investor money in risky investments. In an earlier ruling, the court concluded that the defendants made false statements to 33 of their advisory clients on 146 separate occasions about their investments. This week the court imposed a $2.5 million civil penalty against the defendants on a joint and several basis.
SEC Enforcement: Filings and settlements
Investment fund fraud: SEC v. Verde Retirement LLC, Case No. 3:12-cv-00445 (S.D. Cal. Filed Feb. 21, 2012) is an action against Steven Hamilton, Verde Retirement LLC, Verde FX Nevada, LLC and Covenant Capital Partners. The complaint alleges that from 2007 through 2011 Mr. Hamilton raised about $1.6 million from investors based on various misrepresentations regarding how their money would be invested, including that it would be put in real estate loans secured by deeds of trusts or other instruments. All the representations were false, according to the complaint. In fact Mr. Hamilton diverted the funds to his personal use and to repay certain investors, according to the court paper. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The case is pending.
Misappropriation: SEC v. Ming Zhao, Case No. 12 CV 1316 (S.D.N.Y. Filed Feb. 22, 2012) is an action against the former chairman and CEO of Puda Coal, Inc., Ming Zhao, and his successor, Liping Zhu. Puda Coal, Inc. is a Delaware corporation with its principal office in the Peoples Republic of China or the PRC. Its shares were traded on the NYSE from September 2009 through August 2011. The primary asset of the company was Shaux Coal, a coal mining company that was an indirect 90% owned subsidiary. Shortly before an announcement on September 28, 2009 that Shanxi Coal would receive a lucrative contract from a provincial government, defendant Zhao transferred all of the company’s interest in Shanxi Coal to himself. The next year he transferred 49% of the coal company to CITIC Trust Co., a Chinese private equity fund controlled by a large state owned entity. Mr. Zhao also arranged to have Shanxi Coal pledge 51% of its assets to CITI Trust as collateral for a loan of about $370 million. The Chinese entity which held the shares of the coal company then sold interests in the holding vehicle to investors in the PRC while Puda conducted two public offerings in the U.S., selling shares in what was then an empty shell to the public. When the fraud was uncovered the share price of Puda dropped from $17 to a few cents. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 12(b)(2)(B), 13(b)-5 and 14(a). The action is pending.
Insider trading: U.S. v. Kinnucan, 12-mj-00424 (S.D.N.Y. Unsealed Feb. 17, 2012) and SEC v. Kinnucan, Civil Action 12-cv-01230 (S.D.N.Y. Filed Feb. 17, 2012) are actions against John Kinnucan, president of Broadband Research Corporation, an expert network company. Both cases focus on June and July 2010 when Mr. Kinnucan is alleged to have obtained information from an employee of F5 Networks, Inc. that the quarterly revenue for the company would exceed street expectations. Mr. Kinnucan is alleged to have immediately furnished this information to several clients at least three of whom traded making profits or avoiding losses of about $1.58 million. In the criminal case Mr. Kinnucan has been charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud and two counts of securities fraud. In the civil case Mr. Kinnucan and the firm have been charged with violating Exchange Act Section 10(b). Mr. Kinnucan has been arrested. Both cases are pending.
Insider trading: Donald Barneston, a former SanDisk Corporation executive, pleaded guilty to one count of conspiracy to commit securities and wire fraud in connection with the charges against John Kinnucan. Mr. Barnetson is alleged to have furnished inside information to Mr. Kinnucan in July 2010 about the future earnings of his company and again in September 2010 about confidential negotiations regarding a dispute between SanDisk and Apple Inc.
U.S. v Goncalves, No. 09-cr-335 (D.D.C.) is the African sting FCPA cases. The action was brought against 22 individuals based on the largest FCPA sting operation in history. To facilitate trial the defendants were divided into groups. The first trial ended in a hung jury and the second is a split decision with two defendants being acquitted and a hung jury as to the others. The DOJ this week decided to dismiss all of the remaining charges as to all defendants.
Guidance: Senators Amy Klobuchar and Chris Coons sent a letter dated February 15, 2012 to Attorney General Eric Holder regarding the forthcoming guidance on the FCPA. The letter urges the attorney general to give clear guidance on the application of the Act including: on the definition of foreign official; the benefits from self-reporting and cooperation; the scope of internal investigations required to cooperate; the requirements for adequate compliance programs; the methodology used to calculate fines and disgorgements; the extent to which companies may be held liable for the actions of subsidiaries and predecessor entities; the level of intent required for liability; the methodology used to determine if a payment is a reasonable and bona file expenditure directly related to the promotion of products; and the applicability of the FCPA to transactions of de minimis value.
A £1.5 million fine was imposed on Santander for failing to properly identify in its customer literature the extent to which certain structured products were covered by the Financial Services Compensation Scheme. From late 2008 through January 2010 Santander sold £2.7 billion of the products, including £1.2 billion after June 2009 when it concluded the coverage would be limited. Santander acknowledged that it could have changed its product literature and training materials more quickly to reflect the FSCS position accurately. The customers here did not suffer any loss.