Securities Law Prof Blog

Call for Papers: First Annual Workshop for Corporate & Securities Litigation

The University of Illinois College of Law and the University of Richmond School of Law invite submissions for the First Annual Workshop for Corporate & Securities Litigation. This workshop will be held on Friday, November 8, 2013, in Chicago, Illinois.

OVERVIEW: This annual workshop will bring together scholars focused on corporate and securities litigation to present their works-in-progress. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible. Appropriate topics include, but are not limited to, securities litigation, fiduciary duty litigation, or comparative approaches to business litigation. We welcome scholars working in a variety of methodologies, including empirical analysis, law and economics, law and sociology, and traditional doctrinal analysis. Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Illinois College of Law in Chicago, Illinois, on Friday November 8, 2013. Local costs (lodging and workshop meals) will be covered. Participants are asked to pay for their own travel expenses. The workshop is designed to maximize discussion and feedback. All participants will have read the selected papers. The author will provide a brief introduction to the paper, but the majority of the individual sessions will be devoted to collective discussion of the paper involved.

SUBMISSION PROCEDURE: If you are interested in participating, please send an abstract of the paper you would like to present to Jessica Erickson at jerickso@richmond.edu not later than Friday, May 31, 2013. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by Friday, June 28.

QUESTIONS: Any questions concerning the workshop should be directed to the organizers—Professor Verity Winship (vwinship@illinois.edu) and Professor Jessica Erickson (jerickso@richmond.edu).

SEC Charges JOBS Act Scam

Perhaps the first JOBS Act scam?  The SEC announced fraud charges against a Spokane Valley, Wash., company and its owner for misleading investors with claims to raise billions of investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.

The SEC alleges that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He also promised to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State’s economic recovery. The SEC alleges that Peterson used investors’ money for personal expenses, and is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.

 

According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states. 

(Thanks to Jennifer Taub for calling this to my attention.) 

FINRA Withdraws Proposed Rule Change to Require Link to BrokerCheck on Broker Websites

FINRA withdrew a proposed rule change to Amend FINRA Rule 2267 (Investor Education and Protection) that would have required members to include a prominent description of and link to FINRA BrokerCheck on their websites, social media pages and any comparable internet presence.  The proposed rule change was published for comment on January 25, 2013, and the SEC received 24 comment letters.  No explanation was given for the withdrawal (Release No. 34-69440; File No. SR-FINRA-2013-002).

SEC' Aguilar Calls for Inquiry into Twitter Hoax

SEC Commissioner Luis Aguilar said in an email to the Wall St. Journal that the SEC staff should look into yesterday's Twitter "hoax" that there were explosions at the White House and that the President was injured.  Although the story was quickly debunked, it caused the stock market to drop as a result of algorithmic trading. Mr. Aguilar said the SEC "needs to keep current on how technology is intersecting with, and effecting, the markets we regulate."  WSJ, SEC Official Seeks Inquiry Into Twitter Hoax

Capital One Settles SEC Charges of Understating Auto Loan Losses

The SEC charged Capital One Financial Corporation and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis. Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives – former Chief Risk Officer Peter A. Schnall and former Divisional Credit Officer David A. LaGassa – also agreed to settle the charges against them.

An SEC investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18 percent in the second quarter and 9 percent in the third quarter.

 

Capital One’s material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. Schnall and LaGassa caused Capital One’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One’s books and records violations.

Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.

Agenda for May 14 Credit Ratings Roundtable Announced

The SEC has announced the agenda for its May 14 Credit Ratings Roundtable; speakers will be announced later.  The program consists of three panels:  Credit Rating Assignment System, Rule 17g-5 Program (Unsolicited Ratings), and Alternative Compensation Models.

CFPB Releases Report on Senior Designations

On April 18 the Consumer Financial Protection Bureau released its report on Senior Designations for Financial Advisers.  Congress directed that its Office for Older Americans study the issue of "senior designation" titles used by financial advisers and make recommendations.  The Bureau

found that the use of senior designations is extremely confusing for consumers. There are more than 50 different senior designations currently used in today’s marketplace with senior designees recommending or selling a variety of products, such as securities, investment opportunities, financial products, and insurance products like annuities and long-term care insurance.

*    *    *

The recommendations in this report seek to reduce consumer confusion and protect consumers
by improving the: (1) dissemination of information and consumer education around senior
designations; (2) standards for the acquisition of senior designations; (3) standards for senior
designee conduct; and (4) enforcement related to the misuse of senior designations. The Bureau
believes that adoption of these recommendations will help older consumers avoid financial
advisers who would misuse their designations to sell inappropriate investment and financial
products.

SEC and Ralph Lauren Corp. Enter NPA over FCPA Violations in Argentina

The SEC announced a non-prosecution agreement (NPA) with Ralph Lauren Corporation in which the company will disgorge more than $700,000 in illicit profits and interest obtained in connection with bribes paid by a subsidiary to government officials in Argentina from 2005 to 2009. The misconduct was uncovered in an internal review undertaken by the company and promptly reported to the SEC.

The SEC said it determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company's prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC's investigation.

The NPA is the first that the SEC has entered involving FCPA misconduct. NPAs are part of the SEC Enforcement Division's Cooperation Initiative, which rewards cooperation in SEC investigations. In parallel criminal proceedings, the Justice Department entered into an NPA with Ralph Lauren Corporation in which the company will pay an $882,000 penalty.

According to the NPA, Ralph Lauren Corporation's cooperation included:

Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
Voluntarily and expeditiously producing documents.
Providing English language translations of documents to the staff.
Summarizing witness interviews that the company's investigators conducted overseas.
Making overseas witnesses available for staff interviews and bringing witnesses to the U.S.

According to the NPA, the bribes occurred during a period when Ralph Lauren Corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary. The misconduct came to light as a result of the company adopting measures to improve its worldwide internal controls and compliance efforts, including implementation of an FCPA compliance training program in Argentina.  Ralph Lauren Corporation's Argentine subsidiary paid bribes to government and customs officials to improperly secure the importation of Ralph Lauren Corporation's products in Argentina. The purpose of the bribes, paid through its customs broker, was to obtain entry of Ralph Lauren Corporation's products into the country without necessary paperwork, avoid inspection of prohibited products, and avoid inspection by customs officials. The bribe payments and gifts to Argentine officials totaled $593,000 during a four-year period.

Under the NPA, Ralph Lauren Corporation agreed to pay $593,000 in disgorgement and $141,845.79 in prejudgment interest.

SEC Announces Co-Directors of Enforcement Division

SEC Chairman White is beginning to stamp her identity on the agency.  As expected, the SEC announced that Acting Director George Canellos and former federal prosecutor Andrew Ceresney have been named Co-Directors of the Division of Enforcement.  Mr. Ceresney has previously worked with Ms. White both at the U.S. Attorney's office in Manhattan and as a partner at Debevoise & Plimpton. 

Mr. Canellos has been serving as Acting Director since January, and previously had been the division’s Deputy Director since June 2012.

Rep. Waters Introduces Investment Adviser Examination Improvement Act

Representative Maxine Waters (D-Cal.), along with Representative John Delaney (D-MD), again introduced legislation that would allow the SEC to charge user fees to fund examinations of investment advisers, the Investment Adviser Examination Improvement Act of 2013.  Currently, the SEC examines only about eight per cent of registered investment advisers each year.  Imposing user fees is a sensible solution, since the industry is opposed to the creation of an SRO for investment advisers and FINRA, which once appeared to want the job, now states it has no interest in becoming the SRO for investment advisers.  The proposed legislation also has the backing of a number of organizations including NASAA, which issued a supporting statement.  Nevertheless, the likelihood of action in the foreseeable future is remote.

InvNews, Waters introduces bill to fund investment adviser examinations

FINRA Approves Proposed Rule Changes for Submission to SEC

The FINRA Board of Governors approved several proposed rule changes that will be submitted to the SEC for review and approval.

The Board approved a proposal to publicly disseminate 144A transactions in TRACE-eligible securities for those asset types currently subject to dissemination.  FINRA is taking this step after reviewing the comments submitted in response to its September 2012 Regulatory Notice and in light of JOBS Act provisions. FINRA believes that making this information publicly available will help market participants determine the quality of their executions and help firms comply with their regulatory obligations.

FINRA also approved two proposed rule changes related to securities arbitration:

Arbitration Panel Composition
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 12403 to simplify the panel selection rules. Rather than requiring the customer to elect a panel selection method, parties in all customer cases with three arbitrators would have the same selection method. Under this method, all parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The rules would permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list. Alternatively, if the parties leave on the non-public list one or more of the same non-public arbitrators, the parties could have a majority public panel—that is two public and one non-public arbitrator.

Discovery Guide Used in Investor Arbitration Proceedings
The Board authorized FINRA to file with the SEC proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases, and to clarify existing provisions relating to affirmations. Specifically, FINRA would amend the Discovery Guide introduction to:

1.include guidelines for arbitrators to consider when deciding disputes relating to the form of e-discovery;
2.add guidance on product cases to explain, among other matters, that these cases are different from other customer cases and that the Document Production Lists may not provide all of the documents parties usually request in a product case; and
3.clarify that a party may request an affirmation when an opposing party makes a partial production.

 

SEC Files Insider Trading Charges Against Former Proprietary Trader

The SEC filed an insider trading case against Joseph M. Mancuso, a former proprietary trader at the registered broker-dealer Schottenfeld Group, LLC, charging him with using inside information to trade ahead of five separate corporate acquisition announcements in 2007, resulting in illicit profits of approximately $350,000. 

The SEC's complaint alleges that Mancuso used material, nonpublic information he was tipped by his good friend and colleague, Zvi Goffer, also a former proprietary trader at Schottenfeld, to trade ahead of the announced acquisitions of Avaya, Inc., 3Com Corp., Axcan Pharma Inc., Hilton Hotels Corp. and Kronos Inc. As alleged in the complaint, the inside information Goffer tipped Mancuso concerning the 3Com, Axcan and Avaya acquisitions was misappropriated by two attorneys at the law firm Ropes & Gray, Arthur Cutillo and Brien Santarlas. The SEC alleges that Cutillo and Santarlas had access to inside information about potential acquisitions involving their firm's clients, and that Goffer paid them kickbacks in exchange for the information, using their mutual friend Jason Goldfarb as a conduit. As alleged in the complaint, Goffer traded on this inside information and tipped the information to Mancuso and others who also traded.

The SEC's complaint alleges that the inside information Goffer tipped to Mancuso concerning the Hilton and Kronos acquisitions came through Gautham Shankar, another former proprietary trader at Schottenfeld. As alleged in the complaint, Shankar was tipped the inside information by Thomas Hardin, a managing director at the hedge fund adviser Lanexa Management. The complaint alleges that Hardin was tipped the information by Roomy Khan, a consultant to a New York-based investment adviser, who had received the inside information from her friend, a credit rating company analyst. The SEC alleges that Goffer also paid kickbacks in exchange for this information. As alleged in the complaint, Goffer traded on this inside information and tipped Mancuso and others who also traded.

The SEC previously charged Goffer, Cutillo, Santarlas, Goldfarb, Shankar, Hardin, and other defendants in connection with this insider trading scheme.

SEC Charges Investment Adviser with Defrauding CALPERS

The SEC charged Umesh Tandon, the CEO of investment advisory firm Simran Capital Management, with lying to the California Public Employees' Retirement System (CalPERS) and other current and potential clients about the amount of money managed by the firm.  Tandon has agreed to settle the SEC's fraud charges.

Institutional investors such as CalPERS often use assets under management (AUM) as a metric to screen prospective investment advisers soliciting their business. An SEC investigation revealed that while pitching Simran's services, Tandon falsely certified to CalPERS that his firm satisfied its minimum AUM requirements. After fraudulently obtaining the business from CalPERS, Tandon also falsely inflated Simran's AUM in communications with other potential clients with whom he touted his firm's relationship with CalPERS. Tandon also fraudulently reported an inflated AUM in filings with the SEC, and he later attempted to mislead SEC examiners during a routine examination of Simran.

According to the SEC's order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.

Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

SEC's Walter: Implementing JOBS Act is An Agency Priority

SEC Commissioner Elisse B. Walter testified today before the House Subcommittee on Oversight and Investigations, Committee on Financial Services, on The Implementation of Title II of the JOBS Act.  In her written statement, she acknowledged that Title II rulemaking was required to be completed within 90 days of the JOBS Act's enactment and noted that public comment on the proposed rule was sharply divided:

Sixty-one commenters, including the majority of professional and trade associations/organizations, law firms and legal associations that submitted letters, expressed general support for the proposal, with many stating generally that the elimination of the prohibition on general solicitation or general advertising would facilitate capital formation. In addition, several supporters recommended that the proposed framework for verifying accredited investor status be supplemented in the final rule by including a non-exclusive list of specific verification methods that could be relied upon by issuers seeking greater certainty that they are satisfying the verification requirement. Eighty-one commenters expressed general opposition to the Commission’s proposal, including the Investor Advisory Committee formed by the Commission as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, all of the investor organizations, and all but one of the federal and state officials who submitted letters. Some of these commenters stated that the proposed rules, if adopted, would result in an increase in fraudulent securities offerings, with a number recommending that the Commission consider additional safeguards, such as those recommended in certain pre-proposing release comment letters. Currently, staff in the Divisions of Corporation Finance and Risk, Strategy, and Financial Innovation are developing recommendations for the Commission’s consideration as to how best to move forward with implementation of Title II.

She concluded by stating that the rulemaking "is a priority for the agency."

Call for Papers for National Business Law Scholars Conference: Deadline Extended to May 31

We have received an enthusiastic response to the Call for Papers for the National Business Law Scholars Conference, scheduled for June 12-13, at The Ohio State University School of Law.  We will have additional openings for anyone who would like to make a presentation but has not yet responded.  Thus, we have extended the deadline to MAY 31st.  See the Call for Papers, reposted below with the extended deadline date, for details on how to submit:

National Business Law Scholars Conference: Call-for-Papers

The National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by MAY 31, 2013.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in late May.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

 

FINRA Fines Merrill $1 Million for Best Execution Failures in Non-Convertible Preferred Shares Transactions

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket), and for failing to have an adequate supervisory system and written supervisory procedures in place. Merrill Lynch was also ordered to pay more than $323,000 in restitution, plus interest, to customers who did not receive best execution for their trades in non-convertible preferred securities. Additionally, FINRA has required Merrill Lynch to revise its written supervisory procedures regarding ML BondMarket best execution obligations within 30 business days.

FINRA found that Merrill Lynch had programmed a faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result, in instances when there was a better quote on a market other than the primary listing exchange, that quote was not reflected on ML BondMarket. The firm instead executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer (NBBO).

 

 

Judge Marrero Approves $600 Million SAC Insider Trading Settlement, Conditioned on Disposition of Citigroup Appeal

On March 15, 2013 the SEC filed an amended complaint against CR Intrinsic Investors, Mathew Martoma and Sidney Gilman and five relief defendants, alleging that CR Intrinsic participated in an insider trading scheme that caused hedge fund portfolios managed by CR Intrinsic and S.A.C. Capital Advisors to generate approximately $275 million in illegal profits.  The same day the SEC also submitted to the federal district court for its approval a final judgment as to CR Intrinsic that contained a permanent injunction against future violations, required CR Intrinsic, on a joint and several basis with the relief defendants, to disgorge approximately $275 million, together with $51.8 million pre-judgment interest, and a civil penalty of approximately $275 million.  The SEC also submitted to the court for its approval final judgments with respect to the five relief defendants.  On March 28, Judge Victor Marrero held a conference to consider the proposed settlements and to discuss issues raised by some courts in reviewing regulatory agency settlements containing "neither admit nor deny" provisions such as those contained in the proposed final judgments.  Today the court released Judge Marrero's decision and order, in which he granted approval of the Final Judgments "conditioned upon the disposition of the pending appeal in the U.S. Court of Appeals for the Second Circuit in S.E.C. v. Citigroup Global Markets, Inc., 11 Civ. 7387 (S.D.N.Y.)."

In his decision Judge Marrero make clear that he is troubled by the use of "neither admit nor deny" language "as they permit CR Intrinsic and the Relief Defendants to resolve the serious allegations against them involving a massive insider trading scheme 'without admitting or denying the allegations of the Complaint.'"  Because of the pendency of the Second Circuit's decision in Citigroup, addressing the issue of whether the district courts have the authority to reject settlements on account of this language, the Judge determined it was appropriate to approve the settlement "subject to a condition that it would become final upon a definitive determination in the Citigroup appeal that the district courts lack authority to reject such settlements on the basis of reservations about the 'neither admit nor deny' provision." 

In the event the Second Circuit does leave ground for district courts to accord higher scrutiny to such terms, Judge Marrero goes on to express his concerns about the use of such provisions.  He recognizes that courts must perform "a very delicate balancing act" and must avoid second-guessing or undue meddling in agency settlement decisions.  But he also finds it inconceivable that "Congress intended the judiciary's function in passing upon these settlements as illusory...." 

Judge Marrero suggests that there is a middle ground, a role for judicial scrutiny in high-profile cases:

Quantitatively, they should be gauged by the staggering amounts of money, both profits and losses, that typically are involved in underlying wrongdoing that is alleged, with huge numbers of victims seriously injured worldwide, correspondingly matched by the perceived outsized rewards the offenders seek to derive from the illicit and damaging behavior. Qualitatively, the measure of these events should be taken by the sheer magnitude of the culpability the offending conduct presumptively would entail -the higher levels of daring, of risk-taking, of outright abuse that manifest tougher grades of arrogance and greed, as well as cavalier disdain for victims and the public good alike.

Judge Marrero notes, in particular, that less than four months after the SEC initially filed its complaint, CR Intrinsic and the relief defendants reached agreement with the SEC and agreed to pay essentially everything that the SEC demanded and arguably as much as the SEC would be able to recover if it prevailed at trial.  Yet the defendants are not "admitting nor denying" the allegations:

In this Court's view, it is both counterintuitive and incongruous for defendants in this SEC enforcement action to agree to settle a case for over $600 million that would cost a fraction of that amount, say $1 million, to litigate, while simultaneously declining to admit the allegations asserted against it by the SEC. An outside observer viewing these facts could readily conclude that CR Intrinsic and the Relief Defendants essentially folded, in exchange for the SEC's concession enabling them to admit no wrongdoing.

The court also expressed concern about the pendency of the related criminal proceeding against Mortoma.  The dismissal of charges against Martoma or an acquittal at trial could make the SEC's decision to include "neither admit nor deny" provisions in the settlements of the other defendants appear reasonable.  Conversely, a guilty plea or conviction at trial could establish facts potentially decisive to the SEC's allegations of wrongdoing in this enforcement action.  The pendency of the criminal proceeding, which might be resolved in a matter of months, provided the judge with an additional reason not to rubber stamp the proposed final judgments.

Judge Marrero also identified "two important, potentially counterproductive effects" that would flow from approval of these settlements: 

First, final approval at this time would deny the private plaintiffs of the benefit of a resolution that potentially could ease the burden of proving their case, prolong their litigation, and diminish the amount they could recover....Second, to the extent it takes the parties longer to resolve the private litigation, it imposes a heavier burden on the courts. The Court must accord these adverse effects serious consideration where, as here, they result from a policy or practice of the Government.

Finally, Judge Marrero identified another serious shortcoming of settlements that include "neither admit nor deny" language: "that of the public and its interest in knowing the truth in matters of major public concern."

In conclusion:

the Court once again emphasizes that, while [judicial] deference is particularly appropriate in unexceptional cases, courts must bring to bear enhanced scrutiny in reviewing proposed consent judgments in certain extraordinary cases alleging extraordinary public and private harms, in recognition of their particular importance to the public interest notwithstanding the deference normally accorded the policy decisions of federal administrative agencies."

Judge Marrero's opinion is well worth reading.  However the Second Circuit decides the Citigroup appeal, it is certain that the debate on this issue will not be over.  (Download SECvSAC)

Denver Businessman Settles SEC Insider Trading Charges in Delta Petroleum Stock

The SEC charged Scott Reiman, described as a prominent Denver-based businessman, with insider trading based on confidential information he obtained from the CEO of Delta Petroleum that was about to secure a huge investment.   According to the SEC, Reiman obtained the inside information ahead of the company’s announcement that it had secured a $684 million investment from private investment firm Tracinda. After the major investment was publicly announced, Delta Petroleum’s stock price jumped almost 20 percent and Reiman reaped substantial illicit profits. The SEC previously charged Reiman’s source, then-CEO Roger Parker, as well as another trader, Michael Van Gilder, in this insider trading investigation.

To settle the SEC’s charges, Reiman agreed to pay nearly $900,000 and be barred from the securities industry and from serving as an officer or director of a public company for at least five years.

According to the SEC’s order instituting proceedings, Reiman is the founder and president of the Denver-based investment firm Hexagon Inc. He received repeated tips from Parker about Tracinda’s potential investment in Delta Petroleum. On three occasions in late November and early December 2007, Reiman bought Delta Petroleum stock or highly speculative option contracts shortly after speaking to Parker, including once within minutes after getting off the phone with him. When Delta publicly announced the Tracinda investment on Dec. 31, 2007, the value of Reiman’s fraudulently obtained Delta Petroleum securities soared nearly 20 percent.

Reuters: OCC Will Fault JP Morgan over Madoff Accounts

Reuters reports that the Office of the Comptroller of the Currency is expected to issue a cease and desist order against JP Morgan Chase, which served as Bernard Madoff's bank, for failing to conduct adequate due diligence and report suspicious activity under the anti-money laundering regulations.  No timing for the regulatory action was given.  Exclusive: U.S. Regulator to Fault JPMorgan Over Madoff Accounts

SEC Charges Rogue Trader with Bringing Down Brokerage Firm

The SEC charged David Miller, a former institutional sales trader at Rochdale Securities, a Connecticut-based brokerage firm, with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.

Miller agreed to a partial settlement of the SEC's charges and also pleaded guilty today in a parallel criminal case.

The SEC alleges that on Oct. 25, 2012, Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.

In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.