Securities Law Prof Blog

Brokerage Firms Can Profit From Sending Confirmations: 7th Circuit

Customers' complaints that their brokerage firms overcharge for their services rarely fare well in the courts, and the Seventh Circuit's recent opinion in Appert v. Morgan Stanley (Mar. 8, 2012) is no exception.  Plaintiffs brought a class action complaining that Morgan Stanley's fee for sending confirmations (a "handling, postage and insurance" or HPI fee) bore no relationship to actual costs and was excessive.  In 2002, the HPI fee was $2.35 per transaction, later raised to $5.00 and then $5.25.  In 2002, postage and handling charges were about 43 cents.

So what, said the court in affirming the district court's dismissal.  The customer's agreement with the firm did not suggest that the HPI fee represented actual costs, and Morgan Stanley had no implied duty under applicable state law to charge a fee that was reasonably proportionate to actual costs where it notified customers in advance of the charges and they were free to decide whether to continue business with the firm.

Harvey Goldschmid on "Survival of Investor Protection"

The SEC Historical Society will have a live broadcast tomorrow of a lecture by Harvey J. Goldschmid, a professor at Columbia Law School and former SEC Commissioner and General Counsel.  The title of the lecture is "Survival of Investor Protection."  The emphasis is mine and the choice of words, I think, is telling -- not "Enhancement," not "Improvement," but "Survival" of Investor Protection.  The lecture is at 4 p.m.; for further information, go to the Society's website: www.sechistorical.org

 

Fifth Circuit Finds SLUSA Does Not Preclude Stanford Investors' State Claims

The Fifth Circuit recently held that SLUSA did not preclude state law class actions seeking to recover damages for losses resulting from the Stanford ponzi scheme, because the purchase or sale of securities (or representations about the purchase or sale of securities) was "only tangentially related" to the ponzi scheme.  Roland v. Green (5th Cir. Mar. 19, 2012). (Download Roland.031912[1])

In that case Louisiana investors sued the SEI Investments Company (SEI), the Stanford Trust Company, the Trust's employees and the Trust's investment advisers alleging violations of Louisiana law.  According to the plaintiffs, the Antigua-based Stanford International Bank (SIB) sold CDs to the Trust, which served as the custodian for individual IRA purchases of the CDs.  The Trust, in turn, contracted with SEI to administer the Trust, making SEI responsible for reporting the value of the CDs.  Plaintiffs allege that misrepresentations by SEI induced them to use their IRA funds to purchase the CDs, including that the CDs were a safe investment because SIB was "competent and efficient," that independent auditors "verified" the value of SIB's assets, and that SIB's assets were invested in a "well-diversified portfolio of highly marketable securities."  The defendants sought removal to district court on the basis of SLUSA preclusion.  (Roland was consolidated with two similar class actions.)

The district court, in holding that SLUSA precluded the class actions, acknowledged that the SIB CDs were not themselves "covered securities" under the statute, but determined that this did not end the inquiry.  It found that the requisite connection existed because (1) the plaintiffs' purchases of the CDs were allegedly induced by the representation that SIB invested in a portfolio of "covered securities" and (2) at least one plaintiff's purchases of the CDs were allegedly funded by sales of covered securities.

Though the question of the scope of the "in connection with" requirement under SLUSA was one of first impression in the Fifth Circuit, the appeals court noted that six circuits have addressed the issue.  The Fifth Circuit initially found the decisions from the Second, Ninth and Eleventh Circuits most useful, because they attempted to give dimension to what is sufficiently connected/coincidental to a transaction in covered securities to trigger SLUSA preclusion.  However, because each of these Circuits stated the requisite connection in a slightly different formulation, the Fifth Circuit looked to cases where the facts were closer to the allegations in this case, i.e., where the alleged fraud was centered around the purchase or sale of an uncovered security like the CDs in this case.  Accordingly, the court turned its attention to the "feeder fund" cases arising from the Madoff ponzi scheme and described three different approaches used by the courts: (1) whether the financial product purchased was a covered security (the product approach), (2) what was the separation between the investment in the financial product and the subsequent transactions in covered securities (the separation approach), (3) what were the purposes of the investment (the purposes approach).

Next, the Fifth Circuit returned to the "policy consideration" that the U.S. Supreme Court relied on in Dabit in determining the scope of the in connection with requirement and found persuasive Congress's explicit concern about the distinction between national, covered securities and other, uncovered securities.  "That SLUSA would be applied only to transactions involving national securitiess appears to be Congress's intent."  It also recognizes that "state common law breach of fiduciary duty actions provide an important remedy not available under federal law."  The court also acknowledged the concern expressed by some members of Congress who filed an amicus brief: "The interpretation of SLUSA and the 'in connection with' requirement adopted by the District Court ... could potentially subsume any consumer claims involving the exchange of money or alleging fraud against a bank, without regard to the product that was being peddled."

Ultimately, the Fifth Circuit concluded that the standards articulated by the Second and Eleventh Circuits were too stringent and adopted the Ninth Circuit test -- a misrepresentation is "in connection with" the purchase or sale of securities if there is a relationship in which the fraud and the stock sale coincide or are more than tangentially related.

In applying the test, the Fifth Circuit agreed with the district court that the fact that the CDs were uncovered securities did not end the inquiry and that it must closely examine the schemes and purposes of the frauds alleged by the plaintiffs.  It disagreed with the district court, however, about the importance of the representation that SIB's assets were invested in marketable securities because that was only one of many representations made to induce plaintiffs to purchase the CDs.  Rather, the "heart, crux and gravamen" of the fraudulent scheme was the representation that the CDs were a "safe and secure" investment.  It also dismissed the significance placed by the district court on the fact that at least one plaintiff sold covered securities to finance the purchase of CDs, because the fraud did not depend upon the defendant convincing the victims to sell their covered securities.  Accordingly, in both instances, the representations were no more than "tangentially related" to the purchase or sale of covered securities.

 

Second Circuit Appoints Attorney to Argue in Support of Judge Rakoff's Position in SEC v. Citigroup

The Second Circuit appointed John R. Wing, Esq., of Lankler Siffert & Wohl, as counsel "to argue in support of the district court's position" in the appeal of SEC v. Citigroup.  Mr. Wing was recommended by Jed Rakoff.  (Although deciding only procedural issues, the Second Circuit last week expressed no support for Judge Rakoff's view of the scope of judicial review of an SEC settlement.)

According to his firm's website, Mr. Wing, for more than 25 years, has been actively involved in criminal trial, pretrial and appellate work, representing clients charged with, or under investigation for, violations involving securities, tax, antitrust, labor, environmental, fraud, bribery, money laundering and RICO laws.  Mr. Wing is a Fellow of the American College of Trial Lawyers and past President and Director of the New York Council of Defense Lawyers.  Mr. Wing has published and lectured extensively on jury trial work and criminal law topics and has taught trial advocacy courses at a number of law schools.

Mets Owners and Madoff Trustee Settle Charges

Mets owners Fred Wilpon and Saul Katz settled charges brought by the Madoff Trustee, Irving Picard, that they were willfully blind to Madoff's fraud and thus avoided a jury trial.  They agreed to pay up to $162 million; the Trustee was seeking about $300 million.  In addition, they won't have to pay for three years, and the amount can be reduced by recoveries the Mets owners would have been entitled to receive in the bankruptcy proceeding..  WSJ, Mets Owners to Pay $162 Million to Madoff Trustee

SEC Charges Former CKE Restaurants Exec with Insider Trading

On March 15, 2012, the SEC charged Noah J. Griggs, Jr., a former executive at the parent company of Carl’s Jr. and Hardee’s fast food restaurants, with insider trading in the company’s securities based on confidential information he learned on the job.

The SEC alleges that  Griggs, who was executive vice president of training and leadership development at CKE Restaurants Inc., made two purchases totaling 50,000 shares of CKE stock after attending an executive meeting during which he learned that the company was in discussions with private equity investors about a possible acquisition. Griggs made a potential profit of $145,430 after the stock price soared when the merger was announced publicly. Griggs has agreed to pay $268,000 to settle the SEC’s charges without admitting or denying the allegations.

SEC Releases Analysis of Data on Credit Default Swaps

On March 15 the SEC staff made available publicly an analysis of market data related to credit default swap transactions. The analysis, which was conducted by the staff of the SEC’s Division of Risk, Strategy, and Financial Innovation, is available for review and comment as part of the comment file for rules the SEC proposed, jointly with the Commodity Futures Trading Commission, to further define the terms “swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant," and "eligible contract participant." The SEC and CFTC jointly proposed those rules in December 2010 as one part of the implementation of Title VII of the Dodd-Frank Act.

According to the press release, the SEC staff believes that the analysis of market data has the potential to be informative for evaluating certain final rules under Title VII, including rules that further define “major security-based swap participant” and “security-based swap dealer,” and rules implementing the statutory de minimis exception to the latter definition. Analyses of this type particularly may supplement other information considered in connection with those final rules, and the SEC staff is making this analysis available to allow the public to consider this supplemental information. The SEC staff expects that the Commission will consider the adoption of rules defining these terms in the next several weeks.

SEC Alleges Phony Stock Lending Scheme Defrauded Execs

The SEC charged two senior executives and their California-based firm with defrauding officers and directors at publicly-traded companies in an elaborate $8 million stock lending scheme.  According to the SEC, Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it.

Also charged in the SEC’s complaint filed in U.S. District Court for the Southern District of California is a broker through which Argyll attracted potential borrowers. The SEC alleges that AmeriFund Capital Finance LLC and its owner Jeffrey Spanier violated the federal securities laws by brokering numerous transactions for Argyll while not registered with the SEC.

SEC Charges Adviser with Providing Fund Investors with Bogus Audit Report

The SEC recently charged James Michael Murray, a San Francisco-area investment adviser, with defrauding investors by giving them a bogus audit report that embellished the financial performance of the fund in which they were investing.  According to the SEC, Murray raised more than $4.5 million from investors in his various funds including Market Neutral Trading LLC (MNT), a purported hedge fund that claimed to invest primarily in domestic equities. Murray provided MNT investors with a report purportedly prepared by independent auditor Jones, Moore & Associates (JMA). However, JMA is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled. The phony audit report misstated the financial condition and performance of MNT to investors.

The U.S. Attorney’s Office for the Northern District of California also has filed criminal charges against Murray.

The SEC alleges that the bogus audit report provided to investors understated the costs of MNT’s investments and thus overstated the fund’s investment gains by approximately 90 percent. The JMA audit report also overstated MNT’s income by approximately 35 percent, its member capital by approximately 18 percent, and its total assets by approximately 10 percent.

SEC Settles Insider Trading Charges Against Management Consultant

The SEC recently charged Sherif Mityas, a Chicago-based management consultant, with insider trading based on confidential information about his client’s impending takeover of a Long Island-based vitamin company.  According to the SEC, Mityas was retained by Washington, D.C.-based private equity firm The Carlyle Group to provide strategic advice related to the acquisition of NBTY Inc. That same month, Mityas purchased NBTY stock and subsequently tipped a relative who also bought NBTY shares. After Carlyle publicly announced its acquisition of NBTY, Mityas and his relative sold their NBTY stock for a combined profit of nearly $38,000.

Mityas agreed to pay more than $78,000 to settle the SEC’s charges. In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced the unsealing of criminal charges against Mityas.

 

SEC Issues Alert on Stengthening Compliance Practices for Underwriting Muni Bonds

The SEC issued a Risk Alert on compliance measures to help broker-dealers fulfill their due-diligence duties when underwriting offerings of municipal securities and issued an Investor Bulletin to help educate investors about municipal bonds.

The alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) notes that in recent years there has been significant attention focused on the financial condition of some state and local governments and cites concerns about the extent of written documentation by broker-dealers of due diligence efforts and supervision of municipal securities offerings.

The alert includes examples of practices used by broker-dealers that may help to demonstrate due diligence and supervisory reviews. The Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy (OIEA) describes the attributes of municipal bonds, including investment risks, and provides information on where investors may obtain additional data on particular bonds.

 

Insurance Agent Convicted of Selling Annuity to Woman Suffering from Dementia

An independent insurance agent in California has been sentenced to 90 days in jail for selling an indexed annuity to a 83 year old woman who was showing signs of dementia according to the prosecutor.  Glenn Neasham was convicted under a state law protecting the elderly.  His attorney plans to appeal.  WSJ, Annuity Case Chills Insurance Agents

Citi Fines Citigroup Sub for Excessive Markups and Markdowns on Bond Transactions

FINRA announced today that it fined Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., $600,000 and ordered more than $648,000 in restitution and interest to more than 3,600 customers for charging excessive markups and markdowns on corporate and agency bond transactions, and for related supervisory violations.

FINRA found that from July 2007 through September 2010, Citi International charged excessive corporate and agency bond markups and markdowns. The markups and markdowns ranged from 2.73 percent to over 10 percent, and were excessive given market conditions, the cost of executing the transactions and the value of the services rendered to the customers, among other factors. In addition, from April 2009 through June 2009, Citi International failed to use reasonable diligence to buy or sell corporate bonds so that the resulting price to its customers was as favorable as possible under prevailing market conditions. 

During the relevant period, Citi International's supervisory system regarding fixed income transactions contained significant deficiencies regarding, among other things, the review of markups and markdowns below 5 percent and utilization of a pricing grid for markups and markdowns that was based on the par value of the bonds, instead of the actual value of the bonds. Citi International was also ordered to revise its written supervisory procedures regarding supervisory review of markups and markdowns, and best execution in fixed income transactions with its customers.

In concluding this settlement, Citi International neither admitted nor denied the charges.

Second Circuit Grants Stay in SEC v. Citigroup

The Second Circuit issued a per curiam opinion today in SEC v. Citigroup Global Markets.  Technically the court granted the SEC's and Citigroup's request for a stay of the district court proceedings, refused to expedite the appeal and directed appointment of counsel to represent the "other side" of this appeal (since both parties want to reverse the district court's order).  Untechnically, the SEC and Citigroup won, and Judge Rakoff lost.

The court's views on the merits are made clear in its discussion of why the parties have a strong likelihood of success on the merits.  The court noted a number of problems with Judge Rakoff's determination that a consent judgment without Citigroup's admission of liability is bad policy, including:

The district court prejudges that Citigroup had misled investors and assumes the SEC would prevail at trial;

In addition, (and most important) the district court did not appear to give deference to the SEC's judgment on wholly discretionary matters of policy.  The scope of the district court's authority to second-guess an agency's discretionary and policy-based decision to settle is "at best minimal."

The Second Circuit did take care to emphasize that its discussion of the merits was solely for the purpose of establishing that the parties have a "strong likelihood" of success on the merits and that the "other side" was not represented. 

We recognize that, because both parties to the litigation are united in seeking the stay and opposing the district court’s order, this panel has not had the benefit of adversarial briefing. In order to ensure that the panel which determines the merits receives briefing on both sides, counsel will be appointed to argue in support of the district court’s position.
The merits panel is, of course, free to resolve all issues without preclusive effect from this ruling. In addition to the fact that our ruling is made without benefit of briefing in support of the district court’s position, our ruling, to the extent it addresses the merits, finds only that the movant has shown a likelihood of success and does not address the ultimate question to be resolved by the merits panel – whether the district court’s order should in fact be overturned.

Neverthless, unless this panel is an outlier, the opinion is a good prediction of the merits determination.

SEC v. Citigroup Global Markets (2d Cir. Mar. 15, 2012)(Download SECvCitigroup.2dCir)

 

This is Financial Reform?

ProPublica's Jesse Eisinger's take on the JOBS Act that recently passed in the House appears in today's New York Times.  The title says it all:  A Jobs Bill That Will Provide Help, but for All the Wrong People

Schapiro Warns JOBS Act could Weaken Investor Protection

The JOBS Act, which passed the House by a wide margin, has been on a bipartisan bandwagon of support, with calls that it will lead to "job creation."  SEC Chair Mary Schapiro today took a more somber view of the proposed legislation and warned that its provisions could seriously weaken investor protection.  WPost, JOBS Act could remove investor protections, SEC chair Mary Schapiro warns

Let's hope there are enough thoughtful voices to slow this train down!

Treasury Announces Plans to Sell Off TARP Investments

Today Treasury announced that as part of its ongoing efforts to explore options for the management and ultimate recovery of its remaining Capital Purchase Program (CPP) investments under the Troubled Asset Relief Program (TARP), it intented to sell several preferred stock CPP investments.  Treasury intends to conduct public auctions to sell its preferred stock positions in the following six banks:
 
•Banner Corporation, Walla Walla, WA (“Banner”)
•First Financial Holdings Inc., Charleston, SC (“First Financial”)
•MainSource Financial Group, Inc., Greensburg, IN (“MainSource”)
•Seacoast Banking Corporation of Florida, Stuart, FL (“Seacoast”)
•Wilshire Bancorp, Inc., Los Angeles, CA (“Wilshire”)
•WSFS Financial Corporation, Wilmington, DE (“WSFS”)

Treasury expects to conduct the auctions, which will be registered public offerings, on or about March 26, 2012.

In addition, on March 8, Treasury announced that it agreed to sell 206,896,552 shares of its American International Group (AIG) common stock at $29.00 per share.  The aggregate proceeds to Treasury from the common stock offering are expected to be approximately $6.0 billion.  As part of Treasury’s common stock offering, AIG agreed to purchase 103,448,276 shares at the offering price of $29.00 per share – representing $3.0 billion of Treasury’s expected proceeds from the sale.

  

 

SEC Brings Charges from Investigation of Secondary Market Trading of Private Company Shares

The SEC charged two managers of private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms with misleading investors and pocketing undisclosed fees and commissions. The SEC alleges that the fund managers collectively raised more than $70 million from investors.

Separately, the SEC charged SharesPost, an online service that matches buyers and sellers of pre-IPO stock, with engaging in securities transactions without registering as a broker-dealer.

The charges stem from the SEC’s yearlong investigation of the fast-growing business of trading pre-IPO shares on the secondary market.

SEC v. Frank Mazzola, Felix Investments LLC, and Facie Libre Management Associates LLC

The SEC alleges that Mazzola and his firms created two funds to buy securities of Facebook and other high profile technology companies. However, Mazzola and his firms engaged in improper self-dealing — earning secret commissions above the 5 percent disclosed in offering materials on the funds’ acquisition of Facebook stock and on re-sales of fund interests to new investors. The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors. They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares.

According to the SEC’s complaint filed in federal court in San Francisco, Mazzola and his firms also made false statements to investors in other funds they created to invest in various pre-IPO companies. For instance, they misled one investor into believing a Felix fund had successfully acquired stock of Zynga. They also made false representations about Twitter’s revenue to attract investors to their Twitter fund.

The SEC’s lawsuit against Mazzola, Felix Investments, and Facie Libre seeks court orders prohibiting them from engaging in securities fraud and requiring them to disgorge their ill-gotten gains and pay financial penalties.

In the Matter of EB Financial Group LLC and Laurence Albukerk

According to the SEC’s administrative proceeding against Laurence Albukerk, he and his firm hid from investors significant compensation earned in connection with two Facebook funds they managed. In written offering materials for the funds, Albukerk told investors he charged only a 5 percent fee for an initial investment and a 5 percent fee when the shares were distributed to fund investors upon a Facebook IPO. However, Albukerk obtained additional compensation by using an entity controlled by his wife to purchase the Facebook stock and then buying interests in that entity for the EB Funds while charging investors a mark-up. Albukerk also earned a brokerage fee on the acquisition of Facebook shares from the original stockholders. As a result of the fee and mark-up, investors in Albukerk’s two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials.

Without admitting or denying the SEC’s findings, Albukerk and EB Financial consented to entry of a SEC order finding that they violated Section 17(a)(2) of the Securities Act of 1933 and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Albukerk and EB Financial also agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000.

In the Matter of SharesPost Inc. and Greg Brogger

According to the SEC’s administrative proceeding against SharesPost and its CEO Greg Brogger, the online platform facilitated securities transactions without registering with the SEC as a broker-dealer. SharesPost engaged in a series of activities that constituted the business of effecting securities transactions and thus were required to register as a broker-dealer. SharesPost held itself out to the public as an online service to help match buyers and sellers of pre-IPO stock and allowed registered representatives of other broker-dealers to hold themselves out as SharesPost employees and earn commissions on transactions they facilitated through the SharesPost platform. SharesPost and affiliated broker-dealers also created a commission pool that was distributed by an executive to employees who were representatives of these broker-dealers. The company also collected and published on its website third-party information concerning issuers’ financial metrics, SharesPost-funded research reports, and a SharesPost-created valuation index. Additionally, the SharesPost platform was used to create an auction process for interests in funds managed by a SharesPost affiliate and designed to buy stock in pre-IPO companies.

SharesPost and Brogger consented to an SEC order finding that SharesPost committed and Brogger caused a violation of Section 15(a) of the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively. Subsequent to the SEC’s investigation, SharesPost acquired a broker-dealer and its membership agreement was approved by the Financial Industry Regulatory Authority (FINRA).

SEC Charges Two Ameriprise Advisors with Insider Trading

The SEC charged two Ameriprise financial advisors with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm.  According to the SEC, Timothy J. McGee and Michael W. Zirinsky, who are registered representatives at Ameriprise Financial Services, illegally traded in the stock of Philadelphia Consolidated Holding Corp. (PHLY) based on nonpublic information about the company’s impending merger with Tokio Marine Holdings. McGee obtained the inside information from a PHLY senior executive who was confiding in him through their relationship at Alcoholics Anonymous (AA) about pressures he was confronting at work. McGee then purchased PHLY stock in advance of the merger announcement on July 23, 2008, and made a $292,128 profit when the stock price jumped 64 percent that day.

In addition, according to the SEC’s complaint, McGee tipped Zirinsky, who purchased PHLY stock in his own trading account as well as those of his wife, sister, mother, and grandmother. Zirinsky tipped his father Robert Zirinsky and his friend Paulo Lam, a Hong Kong resident who in turn tipped another friend whose wife Marianna sze wan Ho also traded on the nonpublic information. The Zirinsky family collectively obtained illegal profits of $562,673 through their insider trading. Lam made an illicit profit of $837,975 and Ho, also a Hong Kong resident, profited by $110,580.

Lam and Ho each agreed to settle the SEC’s charges and pay approximately $1.2 million and $140,000 respectively.

SEC Charges Execs at Former Mortgage Company with Concealing Financial Collapse

The SEC charged Thornburg Mortgage Inc. chief executive officer Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett (whom the agency describes as the senior-most executives at formerly one of the nation’s largest mortgage companies) with hiding the company’s deteriorating financial condition at the onset of the financial crisis. According to the SEC, they schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. Behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make on-time payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008.

According to the SEC’s complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg’s auditor. For example, in a February 25 e-mail from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margins calls.” Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, “We don’t want to disclose our current circumstance until it is resolved.” The intention was “to keep the current situation quiet while we deal with it.”

The SEC alleges that the executives’ plan to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after filing the annual report. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy on May 1, 2009.

The SEC’s complaint charges Goldstone, Simmons, and Starrett with violations of the antifraud, deceit of auditors, reporting, record keeping, and internal controls provisions of the federal securities laws. The complaint seeks officer and director bars, disgorgement, and financial penalties.