Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

A Member of the Law Professor Blogs Network

Thursday, June 20, 2013

SEC Charges Another China-Based Company with Accounting Fraud

The SEC charged a China-based company and its CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts. The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People's Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger in 2009. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company's chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy. After suspicions of fraud were raised by the company's external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC's complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.

June 20, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 18, 2013

FINRA Files Proposed Rule Change to Amend Discovery Guide on E-Discovery Issues

FINRA filed with the SEC a proposed rule change to amend the Discovery Guide (“Guide”) used in customer arbitration proceedings to provide general guidance on electronic discovery (“e-discovery”)issues and product cases and to clarify the existing provision relating to affirmations made when a party does not produce documents specified in the Guide. The proposed rule change fulfills FINRA’s commitment to review the topics of e-discovery and product cases with the Discovery Task Force (“Task Force”) that FINRA established in 2011. FINRA believes that the proposedrevisions to the Guide will reduce the number and limit the scope of disputes involving document production in customer cases, thereby improving the arbitration process for the benefit of public investors, broker-dealer firms, and associated persons.

Public comments are due 45 days after publication in the Federal Register.

June 18, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Files Proposed Rule Change to Simplify Selection of All-Public Arbitrator Panel in Customer Disputes

FINRA has filed with the SEC a proposed rule change to amend FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) to make it easier for parties to select an all-public arbitrator panel in cases with three arbitrators. Comments are due 45 days after publication in the Federal Register.

Under the proposed rule change, FINRA would no longer require a customer to elect a panel selection method.  Instead, parties in all customer cases with three arbitrators would get the same selection method. FINRA would provide all parties with lists of ten chair-qualified public arbitrators, ten public arbitrators, and ten non-public arbitrators. FINRA would permit the parties to strike four arbitrators on the chair-qualified public list and four arbitrators on the public list. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the nonpublic list. (Rel. 34-69762)

In its accompanying Release, FINRA gives statistics since implementation of the All Public Panel Option:

[C]ustomers in approximately three-quarters of eligible cases have chosen the All Public Panel Option. Customers using the Majority Public Panel Option have done so by default 77 percent of the time,
rather than by making an affirmative choice (i.e., these customers did not make an
election in their statement of claim or accompanying documentation, and did not respond
to the follow-up letter FINRA sent).

As of March 31, 2013, customers selecting the All Public Panel Option have chosen to strike all of the non-public arbitrators in 66 percent of the cases during the ranking process. Customers have ranked one or more non-public arbitrators in 34 percent of cases and four or more in 13 percent of cases proceeding under the All Public Panel Option. Industry parties have ranked one or more non-public arbitrators in 97 percent of cases and have ranked four or more non-public arbitrators in 90 percent of cases.

FINRA has been tracking the results of arbitration awards decided by all public panels and majority public panels since implementation of the rule change. For the period February 1, 2011 through March 31, 2013, investors prevailed 49 percent of the time in cases decided by all public panels and 34 percent of the time in cases decided by majority public panels.

June 18, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, June 14, 2013

Former Regions Morgan Keegan Funds Directors Settle Charges They Failed Pricing Responsibilities

The SEC announced a settlement in an enforcement proceeding against eight former directors of five Regions Morgan Keegan open- and closed-end funds that were heavily invested in securities backed by subprime mortgages. The SEC alleged that the directors failed to satisfy their pricing responsibilities under the federal securities laws.

Specifically, the directors delegated their fair valuation responsibility to a valuation committee without providing adequate substantive guidance on how fair valuation determinations should be made. The directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds' fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities. The limited information provided to the directors was particularly problematic because fair valued securities comprised a significant percentage of the funds' net asset values (NAVs) - in most cases above 60 percent.

The settled order finds that the valuation committee to whom the directors delegated the fair valuation responsibilities did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the settled order finds that the funds overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged Morgan Keegan and others, and the firms later agreed to pay $200 million to settle charges related to that conduct.

The open and closed end funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.

The settled order finds that the directors caused the funds' violations of Rule 38a-1 under the Investment Company Act of 1940, which requires funds to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws. The directors are also ordered to cease and desist from committing or causing any violations and any future violations of that rule. The directors consented to the entry of the settled order without admitting or denying any of the findings, except as to jurisdiction.

June 14, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Revlon Settles SEC Charges It Misled Shareholders in Going Private Transaction

The SEC charged Revlon with misleading shareholders during a "going private transaction."  An SEC investigation found that during a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon engaged in "ring fencing" that deprived its independent board members from knowing critical information: the transaction's consideration had been deemed inadequate by a third party who evaluated whether current and former employees invested in Revlon common stock through the company's 401(k) plan could exchange their shares.  Revlon agreed to settle the SEC's charges and pay an $850,000 penalty.

According to the SEC's order instituting settled administrative proceedings, controlling shareholder MacAndrews and Forbes (M&F) asked Revlon in 2009 to offer minority shareholders the option to exchange their common stock shares on a one-for-one basis for preferred shares with certain financial characteristics. The exchanged shares would then be provided to M&F to pay down Revlon's debt. The trustee administering Revlon's 401(k) plan decided that 401(k) members could tender their shares only if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) members would receive was at least equal to the fair market value of the exchanged common stock shares. The third-party financial adviser ultimately found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders.

The SEC's order finds that Revlon, In an attempt to avoid a potential disclosure obligation, engaged in what one employee termed as "ring fencing" to avoid receiving the adequate consideration determination from the third-party adviser:

•Revlon amended the trust agreement it had with the trustee to ensure that the trustee would not share the adequate consideration determination with Revlon.
•Revlon ensured that it was not a party to any engagement letter concerning the adequate consideration determination.
•Revlon directed the trustee to inform Revlon of its decision whether to allow 401(k) members to tender their shares without any reference to the adequate consideration determination.
•In a notice sent to the 401(k) members and publicly filed as an exhibit to the exchange offer documents, Revlon removed the explicit term "adequate consideration" and replaced it with citations to ERISA statutes.

The SEC's order finds that Revlon violated Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3(b)(1)(iii), which prohibits issuers and their affiliates in going private transactions from directly or indirectly engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit.

June 14, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 11, 2013

SEC's Office of Inspector General Makes Recommendations to Strengthen Economic Analysis of Rulemaking

The SEC's Office of Inspector General recently issued a report, Use of the Current Guidance on Economic Analysis in SEC Rulemakings, Report No. 518, detailing the results of its evaluation of the SEC's use of the current guidance on economic analysis in its rulemakings.  The final report contains six recommendations that, if fully implemented, should strengthen the SEC's economic analysis process and requests, within 45 days, a written corrective action plan that addresses the recommendations.  The report is available at the SEC Office of Inspector General's website.

The Report finds that the SEC rules in its sample followed "the spirit and intent" of the Current Guidance; all of the rules specified the justification for the rule, considered alternatives, and integrated the economic analysis into the rulemaking process.  However, some rules could have better clarified and specified the baselines in the economic analysis section.  In addition, only one of the twelve rules included a quantification of benefits of the regulatory action.  The report also finds that FINRA, other SROs, and PCAOB are not required to follow the SEC's Current Guidance in their rulemakings.

The report contains six recommendations to improve the SEC’s application of the requirements in the Current Guidance. One is that, in consultation with the rulemaking divisions and offices, RSFI develop a general outline for economic analysis sections in rule releases. The report also recommends that RSFI consider whether to create a management control, such as a guide, to achieve greater consistency in presentation of economic analyses.

June 11, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

CBOE Pays $6 Million to Settle SEC Charges of Regulatory Failures

The SEC charged the Chicago Board Options Exchange (CBOE) and an affiliate for various systemic breakdowns in their regulatory and compliance functions as a self-regulatory organization, including a failure to enforce or even fully comprehend rules to prevent abusive short selling.  CBOE agreed to pay a $6 million penalty and implement major remedial measures to settle the SEC's charges.

The financial penalty is the first assessed against an exchange for violations related to its regulatory oversight. Previous financial penalties against exchanges involved misconduct on the business side of their operations.

According to the SEC's order instituting settled administrative proceedings, CBOE demonstrated an overall inability to enforce Reg. SHO with an ineffective surveillance program that failed to detect wrongdoing despite numerous red flags that its members were engaged in abusive short selling. CBOE also fell short in its regulatory and compliance responsibilities in several other areas during a four-year period.  According to the SEC's order, CBOE moved its surveillance and monitoring of Reg. SHO compliance from one department to another in 2008, and the transfer of responsibilities adversely affected its Reg. SHO enforcement program. After that transfer, CBOE did not take action against any firm for violations of Reg. SHO as a result of its surveillance or complaints from third parties.

According to the SEC, CBOE failed to adequately enforce Reg. SHO because its staff lacked a fundamental understanding of the rule. CBOE investigators responsible for Reg. SHO surveillance never received any formal training and did not have a basic understanding of a failure to deliver.

The SEC's order also found that not only did CBOE fail to adequately detect violations and investigate and discipline one of its members, but it also took misguided and unprecedented steps to assist that same member firm when it became the subject of an SEC investigation in December 2009. CBOE failed to provide information to SEC staff when requested, and went so far as to assist the member firm by providing information for its Wells submission to the SEC. The CBOE actually edited the firm's draft submission, and some of the information and edits provided by CBOE were inaccurate and misleading. The SEC brought its enforcement action against the firm in April 2012, and an administrative law judge recently rendered an initial decision in that case.

According to the SEC's order, CBOE had a number of other regulatory and compliance failures at various times between 2008 and 2012. CBOE failed to adequately enforce its firm quote and priority rules for certain orders and trades on its exchange as well as rules requiring the registration of persons associated with its proprietary trading members. CBOE also provided unauthorized "customer accommodation" payments to some members and not others without applicable rules in place, resulting in unfair discrimination. And CBOE and affiliate C2 Options Exchange failed to file proposed rule changes with the SEC when certain trading functions on their exchanges were implemented.

CBOE and C2 agreed to settle the charges without admitting or denying the SEC's findings. CBOE agreed to pay $6 million, accept a censure and cease-and-desist order, and implement significant undertakings. C2 also agreed to a censure and cease-and-desist order and significant undertakings.

June 11, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, June 10, 2013

SEC Alleges that Detroit Adviser Stole Money from Police & Firefighters' Pension Fund

The SEC and Chauncey C. Mayfield, the founder, president, and CEO of MayfieldGentry Realty Advisors, a Detroit-based investment adviser, agreed to settle charges that Mayfield stole nearly $3.1 million from the pension fund that the firm manages for the city's police officers and firefighters so he could buy two strip malls in California. The SEC charged four other top officials at the firm for helping him try to cover up the theft.  Mayfield and his firm agreed to settle the charges by paying back the stolen amount.  They neither admit nor deny the allegations in the settlement, which is subject to court approval. In a parallel criminal matter, Mayfield is awaiting sentencing in connection with his guilty plea for participation in the pay-to-play scheme.

June 10, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Saturday, June 8, 2013

SEC & Whittier Trust Settle Insider Trading Charges involving Dell & Nvidia Securities

The SEC charged Whittier Trust Company and fund manager Victor Dosti, a South Pasadena, Calif.-based wealth management company and a former fund manager, with insider trading on non-public information about technology companies. The charges are the agency’s latest in its ongoing investigation into expert networks and hedge fund trading.

According to the SEC, Whittier Trust Dosti participated in an insider trading scheme involving the , securities of Dell, Nvidia Corporation, and Wind River Systems. Dosti traded on confidential information that he obtained from Danny Kuo, a Whittier Trust fund manager who Dosti supervised. Kuo was charged by the SEC in January 2012 and is currently cooperating with the investigation.

Whittier Trust and Dosti agreed to pay nearly $1.7 million to settle the charges.

 

June 8, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, June 6, 2013

SEC Freezes Assets of Bangkok Trader for Insider Trading in Smithfield Securities

The SEC obtained an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week's announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.

According to the SEC, Badin Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts from May 21 to May 28 in an account at Interactive Brokers LLC. Rungruangnavarat allegedly made these purchases based on material, nonpublic information about the potential acquisition>  Among his possible sources is a Facebook friend who is an associate director at an investment bank to a different company that was exploring an acquisition of Smithfield. After profiting from his timely and aggressive trading, Rungruangnavarat sought to withdraw more than $3 million from his account on June 3.

According to the SEC's complaint filed under seal yesterday in U.S. District Court for the Northern District of Illinois, Smithfield publicly announced on May 29 that Shuanghui agreed to acquire the company for $4.7 billion, which would represent the largest-ever acquisition of a U.S. company by a Chinese buyer. Smithfield, which is headquartered in Smithfield, Va., is the world's largest pork producer and processor. Following the announcement, Smithfield stock opened nearly 25 percent higher than the previous day's closing price.

 

June 6, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Investor Warning: Binary Options!

The SEC is warning investors about the potential risks of investing in binary options and has charged a Cyprus-based company with selling them illegally to U.S. investors.  Binary options are securities in the form of options contracts whose payout depends on whether the underlying asset - for instance a company's stock - increases or decreases in value. In such an all-or nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased.

The SEC alleges that Banc de Binary Ltd. has been offering and selling binary options to investors across the U.S. without first registering the securities as required under the federal securities laws. The company has broadly solicited U.S customers by advertising through YouTube videos, spam e-mails, and other Internet-based advertising. Banc de Binary representatives have communicated with investors directly by phone, e-mail, and instant messenger chats. Banc de Binary also has been acting as a broker when offering and selling these securities, but failed to register with the SEC as a broker as required under U.S. law.

The SEC and the Commodity Futures Trading Commission (CFTC) today issued a joint Investor Alert to warn investors about fraudulent promotional schemes involving binary options and binary options trading platforms. Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements and may be engaging in illegal activity.

June 6, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 5, 2013

SEC Charges Penny Stock Company and CEO with Illegal Stock Offering and Insider Trading

The SEC charged Laidlaw Energy Group, a microcap company whose stock was suspended from trading recently, and its CEO Michael B. Bartoszek, who allegedly profited from selling his shares while investors were unaware of the company’s financial struggles.  According to the SEC, Laidlaw Energy Group and its CEO Bartoszek sold more than two billion shares of Laidlaw’s common stock in 35 issuances to three commonly controlled purchasers at deep discounts from the market price. Laidlaw did not register this stock offering with the SEC, and no exemptions from registration were applicable. Bartoszek knew that the purchasers were dumping the shares into the market usually within days or weeks of the purchases to make hundreds of thousands of dollars in profits. Laidlaw’s $1.2 million in proceeds from these transactions was essentially the sole source of funds for the company’s operations during most of its existence. Laidlaw, which is based in New York City, purports to be a developer of facilities that generate electricity from wood biomass.

The SEC alleges that these transactions diluted the value of shares previously purchased by common investors in the market, who were not told about the huge blocks of cheap stock Laidlaw was selling. Investors also were not aware that Laidlaw relied on these transactions to fund its operations entirely. The SEC suspended trading in Laidlaw stock in June 2011.

According to the SEC’s complaint filed in federal court in Manhattan, Bartoszek violated insider trading laws when he personally sold more than 100 million shares of Laidlaw common stock from December 2009 to June 2011, and made more than $318,000 in profits. As a result of the volume of Bartoszek’s sales and the lack of current, publicly available information about the company, these sales also violated the registration requirements of the federal securities laws.

The SEC seeks disgorgement plus prejudgment interest, financial penalties, and injunctive relief, and is seeking penny stock and officer and director bars against Bartoszek.

June 5, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, June 3, 2013

SEC Charges Atlanta Attorney with Defrauding Investors of $5.4 Million

On May 31, 2013, the SEC charged Robert A. Gist (“Gist”), an Atlanta attorney and former sports agent, and Gist, Kennedy & Associates, Inc. (“Gist Kennedy”), a company that Gist controls, with defrauding at least 32 customers out of at least $5.4 million while acting as an unregistered broker from approximately 2003 to the present.

According to the SEC’s complaint, Gist obtained the customers’ funds on the fraudulent pretense that he would invest conservatively in corporate bonds and other securities. Instead, Gist used the funds for his personal expenses, for the payment of purported dividends and proceeds from securities sales that he falsely claimed to have purchased on behalf of his customers, and for the operation of a company that he controlled until early 2013 known as ENCAP Technologies, LLC. The complaint further alleges that Gist regularly created and provided the customers of Gist Kennedy with fictitious account statements.

Without admitting or denying the SEC’s allegations, Defendants Gist and Gist Kennedy agreed to settle the case against them. The settlement is pending final approval by the court and would require disgorgement of $5.4 million plus prejudgment interest and civil penalties to be determined.

June 3, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC & Truck Manufacturer Settle Accounting Deficiency Charges

The SEC charged PACCAR, a commercial truck manufacturer, and a subsidiary with various accounting deficiencies that clouded their financial reporting to investors in the midst of the financial crisis.  PACCAR and its subsidiary PACCAR Financial Corp. agreed to settle the SEC’s charges.

According to the SEC’s complaint filed in federal court in Seattle, PACCAR is a Fortune 200 company that designs, manufactures, and distributes trucks and related aftermarket parts that are sold worldwide under the Kenworth, Peterbilt, and DAF nameplates. From 2008 through the third quarter of 2012, PACCAR failed to report the results for its parts business as a separate segment from its truck sales as required under Generally Accepted Accounting Principles (GAAP). For example, PACCAR’s 2009 annual report showed $68 million in income before taxes for its truck segment. However, PACCAR documents and board materials reviewed by senior executives depicted the trucks business with a $474 million loss and the parts business with $542 million profit to arrive at the net income before taxes of $68 million. By at least 2008, PACCAR should have been reporting aftermarket parts as a separate segment in its SEC filings, but failed to do so until year-end 2012.

The SEC charged PACCAR with violations of the reporting, books and records and internal control provisions of the federal securities laws, and charges PACCAR Financial Corp. with violations of the books and records and internal control provisions. Without admitting or denying the charges, they agreed to the entry of a permanent injunction and PACCAR agreed to pay a $225,000 penalty. The settlement, which is subject to court approval, takes into account that PACCAR and PACCAR Financial Corp. have implemented a number of remedial measures to enhance their internal accounting controls and improve their compliance with GAAP.

 

June 3, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Suspends Trading in 61 Shell Companies

The SEC suspended trading in the securities of 61 empty shell companies that are delinquent in their public filings and seemingly no longer in business, the SEC's second-largest trading suspension. Thinly-traded dormant microcap companies are frequently used by fraudsters in "pump-and-dump" schemes.

Through its Operation Shell Expel initiative, the SEC suspended trading in a record 379 companies in a single day last year.

 

June 3, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, May 31, 2013

Money Market Fund Reform on Agenda for SEC's June 5 Meeting

The SEC will consider money market fund reform again.  Its agenda for its June 5 meeting is:

•The Commission will consider a recommendation to propose amendments to certain rules under the Investment Company Act that govern the operation of money market funds and related amendments to Form PF under the Investment Advisers Act. 

 

May 31, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Broker Charged with Obstructing Justice for Lying to SEC Investigators

The SEC announced that the subject of an enforcement inquiry in Florida has has been criminally charged with obstructing justice and lying to SEC investigators looking into his real estate securities offerings to investors.  

The U.S. Attorney’s Office for the Southern District of Florida has filed criminal charges against former broker Robert J. Vitale.  According to the criminal information filed in U.S. District Court for the Southern District of Florida, the SEC issued subpoenas to Vitale and his investment company Realty Acquisitions & Trust in order to identify investor funds and assets related to the securities offerings. The SEC investigators subpoenaed Vitale for all related bank records and took his sworn testimony.

The criminal information alleges that Vitale lied about the existence of two separate bank accounts that he did not disclose to the SEC. Vitale was charged by the SEC several years ago for participating in a pump-and-dump market manipulation scheme. Vitale later settled the charges in federal district court and was barred from the brokerage industry.

May 31, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 29, 2013

SEC Charges French Oil & Gas Company with Bribing Iranian Official

The SEC charged France-based oil and gas company Total S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying $60 million in bribes to intermediaries of an Iranian government official who then exercised his influence to help the company obtain valuable contracts to develop significant oil and gas fields in Iran.  Total, whose securities are publicly traded on the New York Stock Exchange, agreed to pay more than $398 million to settle the SEC’s charges and a parallel criminal matter announced today by the U.S. Department of Justice.

The SEC alleges that Total made more than $150 million in profits through the bribery scheme. Total attempted to cover up the true nature of the illegal payments by entering into sham consulting agreements with intermediaries of the Iranian official and mischaracterizing the bribes in its books and records as legitimate “business development expenses” related to the consulting agreements. Total had inadequate systems to properly review the consulting agreements and lacked sufficient internal controls to comply with federal laws prohibiting bribery.

May 29, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASDAQ Pays $10 Million Fine to Settle Facebook Offering Violations

The SEC and NASDAQ settled charges relating to the initial public offering (IPO) and secondary market trading of Facebook shares, with NASDAQ agreeing to settle the SEC’s charges by paying a $10 million penalty – the largest ever against an exchange.


According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO.

NASDAQ then made a series of ill-fated decisions that led to the rules violations.  According to the SEC’s order, several members of NASDAQ’s senior leadership team decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ’s decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ’s fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.

The SEC’s order also charges NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ’s own Facebook trading through the unauthorized error account.

The SEC’s order finds that NASDAQ violated Section 19(g)(1) of the Securities Exchange Act of 1934 by not complying with several of its own rules, and that NES violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder by failing to maintain sufficient net capital reserves on May 18, 2012. NASDAQ and NES agreed to a settlement without admitting or denying the SEC’s findings. The order censures NASDAQ and NES, imposes a $10 million penalty on NASDAQ, and requires both NASDAQ and NES to cease and desist from committing or causing these violations and any future violations. The order also requires NASDAQ and NES to complete numerous undertakings.

May 29, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, May 24, 2013

SEC Charges Dallas Trader with Front-Running

The SEC announced fraud charges and an asset freeze against Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, a Dallas-based investment advisory firm, who allegedly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.

According to the SEC, Bergin secretly executed hundreds of trades through his wife's accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife's accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife's accounts from SEC examiners.

According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.

The SEC's complaint names Bergin's wife Jacqueline Zaun as a relief defendant for the purpose of recovering Bergin's illegal trading profits in her accounts.

May 24, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)