January 7, 2010
New York Fed Told AIG Not to Disclose Details about Payments to Banks
Numerous media sources report that emails between the New York Federal Reserve Bank and AIG show that AIG planned to disclose details about the controversial payments it made to counterparties to cancel financial deals -- including Goldman Sachs and Deutsche Bank -- in SEC filings, but attorneys for NYFed, in pre-filing review, told AIG not to disclose so much information. NY-Fed and Treasury spokespersons downplayed the emails.
Alleged Embezzlement at Koss Corp. Fuels Debate on Sarbox 404 Exemption
CFO.com reports on the alleged $31 million embezzlement by the former vice president--finance of Koss Corp., a small public corporation that has been exempt from the Sarbanes-Oxley 404(b) requirement that its auditor evaluate its internal controls. Small business advocates have argued that 404 is too costly for small businesses, and the regulatory reform bill that passed the House in December would make the exemption permanent. Would better internal controls have prevented the alleged embezzlement? CFO.com, Fraud Case Feeds Sarbox-Exemption Critics.
Former McKinsey Partner Says He Passed Information to RajaratnamAnil Kumar, a former senior partner at McKinsey & Co., pleaded guilty in Manhattan federal court to conspiracy and securities fraud charges, saying that he was paid more than $1 million to give confidential information on McKinsey clients to Raj Rajaratnam, the hedge fund manager. As part of the plea bargain, he will forfeit $2.6 million. Sentencing will take place later. WSJ, Kumar Pleads Guilty in Galleon Case.
SEC Inspector General Investigated Allegations of Misconduct at Boston Regional OfficeUnder the heading "frequently-requested" FOIA documents," the SEC website posted a heavily redacted report from the SEC's Inspector General concluding a preliminary inquiry into charges brought by a former Putnam employee that the SEC's Boston office engaged in misconduct and essentially ignored his whistle-blowing about market-timing in 2003. The report finds that the staff did not conduct a market-timing investigation after the former employee made his allegations in April, but instead opened an investigation in Sept. after New York AG Spitzer filed his first market-timing case. The Inspector General did not find evidence of SEC staff misconduct.
January 6, 2010
Former Engineered Support CEO Settles Backdating Charges
On Jan. 5, 2010, the United States District Court for the Eastern District of Missouri entered a final judgment by consent against Michael F. Shanahan, Sr., the former Chairman and CEO of Engineered Support Systems, Inc. (Engineered Support or the Company), resolving the Securities and Exchange Commission's charges against Shanahan Sr. for options backdating filed in July 2007. According to the Complaint, from 1997 through 2002, Shanahan Sr. participated in a fraudulent scheme to grant undisclosed, in-the-money stock options to himself and other Engineered Support employees by backdating Company stock option grants to coincide with historically low closing prices of Engineered Support's common stock. In addition, the Complaint alleged that Shanahan Sr. cancelled previously issued Engineered Support stock options that had fallen out-of-the-money and reissued the options with a new backdated grant date and exercise price, bringing those options back in-the-money. The Complaint also alleged that Shanahan Sr. improperly issued additional Engineered Support stock options to nonemployee directors beyond what they were authorized to receive under the Company's shareholder-approved stock option plans. The Complaint further alleged that Shanahan Sr. and others caused Engineered Support to make material misrepresentations and to omit statements of material fact regarding Engineered Support's stock option grants in its filings with the Commission.
According to the Complaint, Engineered Support employees received approximately $20 million of improper in-the-money benefit from the backdating, $15 million of which went to top executives and directors.
Without admitting or denying the Commission's allegations, Shanahan Sr. has consented to a permanent injunction from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, 13b2-1, and 14a-9 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Shanahan Sr. has also consented to pay a $750,000 civil penalty, and to be permanently barred from serving as an officer or director of a public company.
In a separate criminal matter brought by the United States Attorney's Office in the Eastern District of Missouri, which arose out of similar factual allegations, in July 2008 Shanahan Sr. pled guilty to knowingly and willfully falsifying company records in violation of Sections 13(b)(2) and (5) of the Exchange Act. The District Court sentenced Shanahan Sr. to three years probation, and ordered him to pay restitution of $7,871,662.50 and a $40,000 criminal fine.
Former Merrill Lynch Banker Settles SEC Charges Relating to Enron's Nigerian Barge Transactions
On Dec. 31, 2009, the U.S. District Court in Houston entered a final judgment in the Commission's civil action against Daniel H. Bayly (Bayly), former global head of investment banking at Merrill Lynch & Co., Inc. (Merrill Lynch). The SEC had in 2003 charged Bayly and three other former executives of Merrill Lynch with aiding and abetting Enron Corp.'s earnings manipulation. That action remains stayed against Bayly's co-defendants pending resolution of a parallel criminal prosecution. Without admitting or denying the allegations in the Commission's complaint, Bayly has now been permanently enjoined from violating the antifraud provisions, as well as from aiding and abetting violations of the periodic reporting, books-and-records, and internal controls provisions; barred from serving as an officer or director of a public company for five years; and ordered to pay $300,001 in disgorgement and civil money penalties for deposit into the Commission's Enron Fair Fund.
As alleged in the Commission's complaint, Bayly substantially assisted Enron's sham sale of an interest in certain Nigerian barges during late 1999. Although the interest in these barges purportedly passed to a special purpose entity in which Merrill Lynch invested equity capital, Bayly had received an oral commitment from Enron's then-Chief Financial Officer, Andrew Fastow, that Merrill Lynch would be repaid within six months at a specified rate of return. In substance, this side agreement transformed what was supposed to be an equity investment into a bridge loan with a fixed interest rate. The complaint alleged that Bayly helped enable this sham "sale" on Enron's interest in the Nigerian barges so as to maintain favorable relations with Enron. By participating in the arrangement - which allowed Enron fraudulently to record $28 million in revenue and $12 million in pre-tax income - Bayly aided and abetted Enron's violations of the federal securities laws.
Former CFO of Investment Adviser Settles SEC Charges She Aided CEO's Misappropriation of Funds
The SEC settled administrative charges against Mary Beth Stevens, the former chief financial officer and chief compliance officer of investment adviser AA Capital Partners Inc. (AA Capital), finding that Stevens aided and abetted the misappropriation of more than $23 million by AA Capital and its former president, John Orecchio (Orecchio). According to the SEC Order, between May 2004 and September 2006, Stevens facilitated Orecchio's and AA Capital's misappropriation of more than $23 million belonging to AA Capital's clients by improperly withdrawing funds from AA Capital's client trust accounts and transferring those funds for Orecchio's personal benefit and to pay the firm's operating expenses. The Order further finds that Stevens falsely characterized the withdrawals in the monthly account statements she prepared and sent to AA Capital's clients as "capital calls" for legitimate investments.
The Order also finds that Stevens did not fulfill her responsibility as AA Capital's chief financial officer to properly maintain the firm's books and records and that Stevens' failure to keep up-to-date books and records helped conceal Orecchio's and AA Capital's misappropriations from clients.
The Order requires Stevens to pay disgorgement of $79,583.50, prejudgment interest of $22,472.24, and a civil penalty of $50,000. Stevens consented to the issuance of the Order without admitting or denying any of the findings.
SEC Announces Agenda for Jan. 13 Meeting
The SEC announced an Open Meeting for January 13, 2010. The subject matter of the Open Meeting will be:
The Commission will consider whether to publish a concept release on equity market structure. The concept release would invite public comment on a wide range of issues, including the performance of equity market structure in recent years, high frequency trading, and undisplayed, or "dark," liquidity.
The Commission will consider whether to propose a new rule regarding risk management controls and supervisory procedures to manage financial, regulatory and other risks for brokers or dealers that provide market access.
Feds Charge Rajaratnam with Paying for Inside InformationFederal prosecutors added another count to its criminal complaint against hedge fund manager Raj Rajaratnam, alleging that in 2006 he paid an unnamed source for advance information about the acquisition of ATI Technologies by Advanced Micro Devices and subsequently made a $19 million profit on trades. Mr. Rajaratnam was indicted on Dec. 15 and pleaded not guilty. WSJ, Galleon's Rajaratnam Paid Tipster, Filing Says.
January 5, 2010
Last of Fourteen Defendants Settles Charges in Wall Street Insider Trading Case
On December 17, 2009, the United States District Court for the Southern District of New York entered a final judgment against Ken Okada, the last remaining defendant in SEC v. Guttenberg, et al., C.A. No. 07 CV 1774 (S.D.N.Y.), an insider trading case the Commission filed against fourteen defendants on March 1, 2007. The Commission’s complaint alleged two related insider trading schemes in which Wall Street professionals serially traded on material, nonpublic information tipped, in exchange for kickbacks, by insiders at UBS Securities LLC and Morgan Stanley & Co., Inc. The complaint alleged that in the first scheme, from 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, illegally tipped material, nonpublic information concerning upcoming UBS analyst upgrades and downgrades. The complaint alleged that in the second scheme, in 2005 and 2006, Randi Collotta, an attorney who worked in the global compliance department of Morgan Stanley, illegally tipped material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley’s investment banking clients. As alleged in the complaint, Okada was a downstream tippee in both schemes.
Okada consented to the entry of a final judgment which (i) permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders disgorgement of $327,191, but waives payment of all except $45,000 based on his demonstrated inability to pay. In a related administrative proceeding, Okada consented to the entry of a Commission order barring him from future association with any broker, dealer, or investment adviser. In a parallel criminal case, Okada previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud and was sentenced to three years probation, a $300,000 fine, and forfeiture of $7,375.
Final judgments ordering injunctive relief, disgorgement, and/or civil penalties have now been entered against all fourteen defendants originally charged in this case. In related administrative proceedings, all ten individual defendants who worked in the securities industry (as well as two additional securities industry professionals who engaged in related misconduct) have been barred from future association with any broker, dealer and/or investment adviser. Additionally, in related criminal cases prosecuted by the U.S. Attorney’s Office for the Southern District of New York, all nine individual defendants (and two other individuals) have been convicted of felony charges and received sentences that have included forfeiture, fines, and/or prison terms.
Former Perot Systems Employee Settles Insider Trading Charges in Connection with Dell Merger
The SEC today announced that Reza Saleh, a former Perot family companies employee, agreed to return all of his profits — a total of more than $8.6 million -- from alleged insider trading. Just two days after Dell Inc. announced plans to acquire Perot Systems, the SEC charged Saleh with insider trading, alleging that he illegally traded in Perot Systems call options after learning about the merger before it was announced. The SEC obtained a court order at that time freezing all of Saleh's trading profits.
Under the terms of the settlement filed today in federal court in Dallas, the SEC plans to ask the court to appoint a third party to recommend a distribution plan for Saleh's illegal profits. The SEC also will ask the court to impose a financial penalty against Saleh. The settlement is subject to court approval.
January 4, 2010
WSJ Reports on Brokers' Flight from Brokerage FirmsIn case you missed it -- the Wall St. Journal today has a front-page story on the exodus of brokers from major brokerage firms and their transformation into investment advisers. The statistics show a decline in the number of registered representatives and a corresponding growth in registered investment advisers. Those making the move cite the fallout from the collapse of major firms like Bear Stearns and Lehman and the merger of Merrill. WSJ, More Brokers Flee Big Firms, Taking Investors With Them.
FINRA Arbitration Panel Awards Punitive Damages Based on Elder AbuseArbitration awards against online discount brokerage firms are rare, as are punitive damages in general and punitive damages based on elder abuse. Yet Investment News reports that a FINRA arbitration panel in California awarded $320,000 in compensatory damages and $960,000 in punitive damages, citing elder abuse. The claimant was a 95-year old investor who alleged that brokers coerced him into unsuitable trades. InvNews, Discount broker slapped with triple damages in rare elder abuse award.
SEC Publishes Corrected Effective Date for Final Temporary Rule on Principal Trades
Today the SEC published a correction to its December 30, 2009 release adopting as final Rule 206(3)-3T under the Investment Advisers Act of 1940, the interim final temporary rule that establishes an alternative means for investment advisers who are registered with the Commission as broker-dealers to meet the requirements of Section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. As adopted, the only change to the rule was the expiration date. Rule 206(3)-3T will sunset on December 31, 2010. As corrected, the release now reads:
DATES: Effective December 31, 2009. The DATES section for FR Doc. 2009-30877, published on December 30, 2009 (74 FR 69009) is corrected to read “DATES: The amendments in this document are effective December 30, 2009 and the expiration date for 17 CFR 275.206(3)-3T is extended to December 31, 2010”.
SEC Names PwC Partner as Director of OCIE
The SEC today announced that Carlo V. di Florio has been named Director of the agency’s Office of Compliance Inspections and Examinations (OCIE). OCIE is the division that received so much bad press for its failure to uncover the Madoff ponzi scheme over the years. Mr. di Florio comes to the SEC from PricewaterhouseCoopers (PwC), where he was a partner in the Financial Services Regulatory Practice. According to the press release, he is one of PwC's national leaders in corporate governance, enterprise risk management and regulatory compliance and ethics.