Securities Law Prof Blog

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

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Tuesday, March 26, 2013

SEC Charges Hedge Fund Analyst and Tech Executive with Insider Trading in Advance of Merger

The SEC charged Matthew Teeple, a California-based hedge fund analyst, with insider trading in advance of a merger of two technology companies based on nonpublic information he received from his friend, David Riley, an an executive at one of the companies. The SEC also charged Riley and another trader in the $29 million insider trading scheme.

According to the SEC, Teeple was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. Teeple’s source was Foundry’s chief information officer David Riley. Teeple then caused the San Francisco-based hedge fund advisory firm where he works to buy Foundry shares in large quantities in the days leading up to the public announcement, and the hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news. Teeple also tipped a Denver-based investment professional John Johnson whom he befriended through a previous working relationship, and Johnson made illegal trades based on the nonpublic information. Riley also tipped Teeple in advance of at least two other major announcements by Foundry, and Teeple’s firm traded on the nonpublic information to make profits or avoid losses.

In a separate action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Teeple, Riley, and Johnson.

March 26, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, March 22, 2013

Civil and Criminal Charges Brought Against Rengan Rajaratnam for Insider Trading

On Thursday the SEC charged Rajarengan “Rengan” Rajaratnam for his role in the massive insider trading scheme for which his older brother Raj Rajaratnam has been convicted.  According to the SEC, from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, the SEC alleges that Rengan Rajaratnam was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Rengan Rajaratnam.

The SEC has now charged 33 defendants in its Galleon-related enforcement actions. The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.

March 22, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 19, 2013

Former Oregon Gubernatorial Candidate Charged with Investor Fraud Involving Pre-IPO Shares of Facebook

This is a weird story:  Both the U.S. Attorney and the SEC have brought charges against Craig Berkman, a former Oregon gubernatorial candidate, alleging that he defrauded investors seeking to acquire highly coveted pre-IPO shares of Facebook and other social media companies.  According to the authorities, Berkman touted to investors that he had special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case.

The SEC also charged John B. Kern of Charleston, S.C., for his participation in the fraud as legal counsel to some of Berkman’s companies. When investors in Berkman’s phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, Kern falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties.

According to the SEC’s order instituting administrative proceedings, Berkman raised at least $13.2 million from 120 investors by selling membership interests in limited liability companies that he controlled and misappropriated virtually all investor funds that he raised.

The SEC’s order details a recidivist history for Berkman. The Oregon Division of Finance and Securities issued a cease-and-desist order and $50,000 fine against Berkman in 2001 for offering and selling convertible promissory notes without a brokerage license to Oregon residents. In June 2008, an Oregon jury found Berkman liable in a private action for breach of fiduciary duty, conversion of investor funds, and misrepresentation to investors arising from Berkman’s involvement with a series of purported venture capital funds known as Synectic Ventures. The court entered a $28 million judgment against Berkman. In March 2009, Synectic filed an involuntary Chapter 7 bankruptcy petition against Berkman in Florida for his unpaid debts arising from the 2008 court judgment. The parties to the bankruptcy proceeding reached a settlement with Berkman.

March 19, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, March 17, 2013

Former Mercury GC Settles Options Backdating Charges

Some of the SEC's cases involving options backdating have lingered on for years.  One of them, involving the former General Counsel at Mercury Interactive, has finally come to an end.  Susan Skaer consented to the entry of a permanent injunction and will pay $628,037 in disgorgement and prejudgment interest, representing the "in-the-money" benefit from her exercise of backdated option grants, and a $225,000 civil penalty. The settlement is subject to the approval of the United States District Court for the Northern District of California.

On May 31, 2007, the Commission charged three other former senior Mercury officers and Skaer with perpetrating a scheme from 1997 to 2005 to award Mercury executives and other employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's Complaint also alleged other misconduct by Skaer related to the award of stock options to Mercury executives and employees.

The settlement with Skaer, if approved, will conclude the litigation.

March 17, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, March 15, 2013

SEC Charges San Diego Lawyers in International "Pump and Dump" Scheme

The SEC charged a group of Canadian stock promoters, two San Diego attorneys, a Bahamas-based broker-dealer, and other participants in an international “pump-and-dump” scheme involving two publicly traded U.S. companies, Pacific Blue Energy Corporation and Tradeshow Marketing Company Ltd.

According to the SEC’s complaint, Canadian stock promoters John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton, and their associates, used false and misleading promotions to pump up trading in the stock of the two microcap companies and made millions when they secretly dumped their own shares. The SEC alleges that the promoters sent investors false and misleading emails about the companies through two websites they controlled, Skymark Research and Emerging Stock Report, and used “boiler room” sales calls to tout the stocks, falsely claiming that the recommendations were based on independent research by Skymark and Emerging Stock Report.

The SEC also alleges that San Diego-based attorneys Luis Carrillo and Wade Huettel were central participants in the scheme who helped the promoters conceal their ownership interests in the companies, drafted misleading public filings, and provided misleading legal opinions. As part of the scheme, their law firm, Carrillo Huettel LLP, secretly received proceeds of stock sales in the form of a sham “loan.”

The SEC is seeking to have the defendants return their allegedly ill-gotten gains, with interest, and to bar Carrillo, Huettel, de Beer, John Kirk, Benjamin Kirk, Boyle, and Hinton from participating in penny stock offerings and from serving as public company officers or directors. The SEC is seeking civil monetary penalties from the attorneys, their law firm, and from de Beer.

March 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Hedge Fund Sigma Capital Agrees to Settle Insider Trading Charges Involving Expert Networks

The SEC announced another settlement today stemming from its investigation of expert networks and insider trading.  Hedge fund advisory firm Sigma Capital Management has agreed to pay nearly $14 million to settle charges that the firm engaged in insider trading based on nonpublic information obtained through one of its analysts about the quarterly earnings of Dell and Nvidia Corporation.  Jon Horvath, a former analyst at Sigma Capital, previously agreed to a settlement in which he admitted liability.  In addition, the SEC named two affiliated hedge funds – Sigma Capital Associates and S.A.C. Select Fund – as relief defendants that unjustly benefited from Sigma Capital’s violations. S.A.C. Select Fund is an affiliate of S.A.C. Capital.

The SEC’s complaint alleges that Horvath provided Sigma Capital portfolio managers with nonpublic details about quarterly earnings at Dell and Nvidia after he learned them through a group of hedge fund analysts with whom he regularly communicated. Based on the confidential information, Sigma Capital traded Dell and Nvidia securities in advance of earnings announcements in 2008 and 2009 for $6.425 million in gains for its hedge fund affiliates.

Sigma Capital agreed to pay disgorgement of $6.425 million plus prejudgment interest of $1,094,161.92 and a penalty of $6.425 million.

March 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

S.A.C. Affiliate Agrees to Pay over $600 Million to Settle Insider Trading Charges

Big headlines this Friday afternoon:  the SEC announced that Stamford, hedge fund advisory firm CR Intrinsic Investors--an affiliate of S.A.C. Capital Advisors-- has agreed to pay more than $600 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies. The settlement is the largest ever in an insider trading case, requiring CR Intrinsic to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest, and a $274,972,541 penalty.

The SEC charged CR Intrinsic with insider trading in November 2012, alleging that one of the firm’s portfolio managers Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who was selected by the pharmaceutical companies — Elan Corporation and Wyeth — to present the final drug trial results to the public.

The SEC’s complaint against CR Intrinsic, Martoma, and Dr. Gilman alleged that during phone calls arranged by a New York-based expert network firm for which Dr. Gilman moonlighted as a medical consultant, he tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma and CR Intrinsic then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week.

In an amended complaint filed today, the SEC added S.A.C. Capital Advisors and four hedge funds managed by CR Intrinsic and S.A.C. Capital as relief defendants because they each received ill-gotten gains from the insider trading scheme.

The settlement is subject to the approval of Judge Victor Marrero of the U.S. District Court for the Southern District of New York. The settlement would resolve the SEC’s charges against CR Intrinsic and the relief defendants relating to the trades in the securities of Elan and Wyeth between July 21 and July 30, 2008. The settling parties neither admit nor deny the charges. The settlement does not resolve the charges against Martoma, whose case continues in litigation. The court previously entered a consent judgment against Dr. Gilman requiring him to pay disgorgement and prejudgment interest, and permanently enjoining him from further violations of the anti-fraud provisions of the federal securities laws.

March 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, March 11, 2013

Oppenheimer Advisers Settles Charges of Misleading Investors about Valuation and Performance

The SEC charged two investment advisers at Oppenheimer & Co. with misleading investors about the valuation policies and performance of a private equity fund they manage. Oppenheimer agreed to pay more than $2.8 million to settle the SEC’s charges. The Massachusetts Attorney General’s office today announced a related action and additional financial penalty against Oppenheimer.

According to the SEC, Oppenheimer Asset Management and Oppenheimer Alternative Investment Management disseminated misleading quarterly reports and marketing materials stating that the fund’s holdings of other private equity funds were valued “based on the underlying managers’ estimated values.” However, the portfolio manager of the Oppenheimer fund actually valued the fund’s largest investment at a significant markup to the underlying manager’s estimated value, a change that made the fund’s performance appear significantly better as measured by its internal rate of return.

According to the SEC’s order instituting settled administrative proceedings, the Oppenheimer advisers marketed Oppenheimer Global Resource Private Equity Fund I L.P. (OGR) to investors from around October 2009 to June 2010. OGR is a fund that invests in other private equity funds, and it was marketed primarily to pensions, foundations, and endowments as well as high net worth individuals and families.

Without admitting or denying the findings, Oppenheimer agreed to pay a $617,579 penalty and return $2,269,098 to those who invested in OGR during the time period when the misrepresentations were made. Oppenheimer consented to a censure and agreed to cease and desist from committing or causing any future violations of the securities laws. The firm is required to retain an independent consultant to conduct a review of its valuation policies and procedures.

Oppenheimer will pay an additional penalty of $132,421 to the Commonwealth of Massachusetts in the related action taken by the Massachusetts Attorney General.

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

Illinois Settles SEC Charges of Misleading Pension Disclosures

The SEC charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations. According to the SEC, Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.  This enforcement action marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The SEC charged New Jersey in 2010 with misleading municipal bond investors about its underfunding of the state’s two largest pension plans.

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

Friday, March 8, 2013

SEC Proposes Rules to Improve Systems Compliance and Integrity

The SEC unanimously proposed new rules to require certain key market participants to have comprehensive policies and procedures in place surrounding their technological systems. The SEC’s proposed Regulation SCI would replace voluntary compliance programs with enforceable rules designed to better insulate the markets from vulnerabilities posed by systems technology issues.

Self-regulatory organizations, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to carefully design, develop, test, maintain, and surveil systems that are integral to their operations. The proposed rules would require them to ensure their core technology meets certain standards, conduct business continuity testing, and provide certain notifications in the event of systems disruptions and other events.

The SEC will seek public comment for 60 days after publication in the Federal Register.

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

Thursday, March 7, 2013

SEC Charges California Attorney with Selling Rule 144 Opinions for a Business

The SEC charged a California-based lawyer who, according to its complaint, has made a business out of selling rule 144 opinions to enable sales of unregistered securities through his website.  While SEC actions against  attorneys for writing fraudulent opinion letters are not, unfortunately, unusual, the allegations in this case, if true, are egregious.

The SEC alleges that Brian Reiss set up 144letters.com to promote his legal opinion letter business and advertise “volume discount” rates while noting “penny stocks not a problem.”  Reiss steered potential customers to his website by making bids on search terms through Google’s AdWords, and then relied on a computer-generated template to draft his opinion letters within minutes absent any true analysis of the facts behind each stock offering.  The letters from Reiss ultimately made false and misleading statements and facilitated the sale of securities in violation of the registration provisions of the federal securities laws.

According to the SEC’s complaint, Reiss began issuing the fraudulent legal opinion letters in 2008.  He advertised a $285 rate for each letter and a “volume discount” rate of $195 per letter.  The SEC alleges that the false and misleading statements that Reiss made in opinion letters induced transfer agents for several public companies to remove the restrictive legends from the stock certificates and permit the sale of free-trading shares to the public. 

The SEC seeks to bar Reiss from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act.  The SEC also seeks permanent injunctions – including an injunction prohibiting Reiss from providing legal services in connection with an unregistered offer or sale of securities.

 

March 7, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 5, 2013

Will the SEC Ever Propose a "Uniform Standard of Conduct" for Investment Advice Providers to Retail Investors?

Last week the SEC released its long-awaited Request for Data and Other Information (rel. 34-69013), in connection with its ongoing study on whether to propose rules for establishing standards of conduct for broker-dealers and investment advisers that provide personalized investment advice to retail investors.  (This project is sometimes described as proposing a “uniform fiduciary” standard of conduct, but as discussed below, this is a misnomer.)  Dodd-Frank Section 913 gives the SEC the authority to harmonize the regulation of investment advice providers and establish a standard of conduct for those who provide advice to retail customers.  The debate is a contentious one that predates Dodd-Frank, as broker-dealers and investment advisers compete fiercely for retail investors’ business and assert that their regulatory model best protects their customers.  The SEC staff study required by Dodd-Frank was released in January 2011, with two Commissioners opposing its release because of insufficient empirical evidence supporting the need for change.  In July 2011 the D.C. Circuit tossed the SEC’s proxy access rule for insufficient empirical analysis.  Since then the SEC committed itself to gathering more data before even putting a proposed rule out for public comment. Indeed, the SEC makes clear throughout the release that it has not yet determined whether to exercise its authority under Dodd-Frank section 913 to adopt standards of conduct for broker-dealers and investment advisers that provide personalized investment advice to retail customers. 

The SEC, in particular, seeks quantitative data and economic analysis to bolster the cost-benefit analysis that will surely be subject to exacting judicial review in a subsequent rule challenge.  This emphasis on cost-benefit analysis, however, should not deter retail investors and their advocates from submitting comments.  The SEC welcomes their contributions and acknowledges that retail investors are not likely to have significant empirical and quantitative information.

In addition to setting forth long lists of the types of information that the SEC is looking for, the SEC sets forth a “possible uniform fiduciary standard” that commenters are to assume, only for purposes of quantifying costs and benefits, that the SEC plans to adopt.  This hypothetical standard should come as no surprise to those who have followed this debate. 

The release states that any proposed standard of conduct “would be designed to accommodate different business models and fee structures.”  Indeed, the Dodd-Frank Act restricts the SEC’s flexibility to develop a true uniform fiduciary standard in several respects. Thus, commenters should assume that:
• Broker-dealers may continue to receive commissions (indeed, Dodd-Frank expressly so provides).
• Broker-dealers and investment advisers would not generally owe continuing duties to retail customers after providing advice; rather, “the question of whether a broker-dealer or investment adviser might have a continuing duty, as well as the nature and scope of such duty, would depend on the contractual or other arrangement or understanding between the retail customer and the broker-dealer or investment adviser.”  (Dodd-Frank expressly states that broker-dealers do not have a continuing duty of care or loyalty to the customer after providing personalized investment advice.) 
• Broker-dealers may continue to offer and recommend only proprietary or a limited range of products (again, Dodd-Frank specifically so provides).

In addition, the SEC states that commenters should assume that broker-dealers would continue to be permitted to engage in principal trades and that the antifraud provision of the Investment Advisers Act (section 206(4)) would not apply to broker-dealers (although Dodd-Frank gives the SEC the authority to extend both these regulations to broker-dealers).

The SEC’s assumed “uniform fiduciary standard” would be comprised of two elements: a duty of loyalty and a duty of care.  With respect to the duty of loyalty, commenters should make the following assumptions:
• Required disclosure of all material conflicts of interest;
• Disclosure of the firm’s fees and services (including limitations on scope) and conflicts of interest in the form of a general relationship guide similar to Form ADV Part 2A, to be delivered at the time the customer relationship is entered into;
• Oral or written disclosure of any additional conflicts at the time the advice is provided;
• Prohibition on the use of sales contests (trips and prizes).

The SEC makes clear that conflicts of interest arising from principal trades would be treated the same as other conflicts of interest and would not incorporate the transaction-by-transaction disclosure and consent requirements of section 206(3) of the Investment Advisers Act.

With respect to the duty of care, the assumed standard of conduct would specify certain well-recognized minimum professional obligations for both broker-dealers and investment advisers:
• Suitability obligations, i.e., the investment advice provider must have a reasonable basis to believe that its recommendation about a security or an investment strategy is suitable for at least some customers and that it is suitable for the specific retail customer in light of that customer’s financial needs, objectives and circumstances (the FINRA suitability obligation);
• Product-specific requirements, i.e., specific disclosure, due diligence or suitability requirements for certain products, such as penny stock, options, mutual fund share classes;
• Duty of best execution;
• Fair and reasonable compensation.

The SEC also identifies in the release certain fiduciary principles currently applicable to investment advisers that commenters should assume would be extended to broker-dealers:
• Allocation of investment opportunities.  Firms would be required to disclose how it allocates investment opportunities among their customers and between customers and their own proprietary account (e.g., methods of allocating shares in IPOs)
• Aggregation of orders.  A firm may aggregate orders on behalf of two or more customers so long as the firm does not favor one customer over another.  It must make appropriate disclosures about its bundling practices.

The release goes on to identify several alternative approaches to the assumed “uniform fiduciary standard” and requests information about the relative costs and benefits of these alternatives  One alternative is an essentially “disclosure-only” approach  Another approach, proposed by SIFMA, would adopt a  standard of conduct that did not extend to broker-dealers the existing precedent on fiduciary duty under the Advisers Act.  The release also suggests other alternatives, including following models set by regulators in other countries. 

Finally, the SEC also requests information on potential areas for further regulatory harmonization of the obligations of broker-dealers and investment advisers. These include advertising and other communications to the public, supervision, licensing and registration of firms, licensing and continuing education requirements for associated persons, books and records, and the use of finders and solicitors.

To state the obvious: This request for data and information requests a lot of information, and there are many interested parties who are eager to win over the SEC to their point of view.  Hence, we can expect voluminous reports with quantitative and qualitative data and other economic analysis about the costs and benefits of the various formulations of standards of conduct.  It is unlikely that the SEC will be proposing a rule any time soon – if ever.  I personally am increasingly doubtful that the game is worth the candle.

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

Monday, March 4, 2013

SEC Charges Advisers to RAHFCO Hedge Funds with Fraud

The SEC recently filed charges relating to the fraudulent offer and sale of limited partnership interests in two hedge funds -- RAHFCO Funds LP and RAHFCO Growth Fund LP (collectively "RAHFCO Hedge Funds"). The Commission charged RAHFCO Management Group, LLC ("RAHFCO Management"), general partner of RAHFCO Hedge Funds; its principal, Randal Kent Hansen; Hudson Capital Partners Corporation (HCP), the sub-adviser/portfolio manager of RAHFCO Hedge Funds; and Vincent Puma, the principal of HCP, with securities fraud, for engaging in a fraudulent scheme that defrauded investors out of more than $10 million.

The Commission's complaint alleges that the RAHFCO Hedge Funds raised approximately $23.5 million from over 100 investors nationwide between 2007 and the funds' collapse in about May 2011. Additionally, the complaint alleges that the primary function of the Defendants' scheme was to convince investors to invest in fraudulent pooled investments that purportedly traded in options and futures on the S&P 500 Index and in equities, then the Defendants siphoned off the invested funds for the Defendants' own purposes.

The Commission's complaint seeks permanent injunctions, third-tier civil penalties, disgorgement plus prejudgment interest, and other relief against all of the defendants.

March 4, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Issues Alert on Investment Adviser's Custody Rule

The SEC  issued a Risk Alert on Significant Deficiencies Involving Adviser Custody and Safety of Client Assets.  It reports that the SEC's National Examination Program (NEP) "has observed widespread and varied non-compliance with elements of the custody rule," which is designed to protect advisory clients from the misuse or misappropriation of their funds and securities.  According to the Alert,

The custody-related deficiencies NEP staff observed can be grouped into four categories: failure by an adviser to recognize that it has “custody” as defined under the custody rule; failures to comply with the rule’s “surprise exam” requirement; failures to comply with the “qualified custodian” requirements; and failures to comply with the audit approach for pooled investment vehicles.

 

March 4, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Saturday, March 2, 2013

SEC Requests Comments on Standards of Conduct for Investment Advice Providers

The SEC has been promising it for some time, and on March 1 it finally released a request for data and other information relating to the benefits and costs of standards of conduct applicable to broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers. According to the release ( Download 34-69013):

Specifically, the SEC is requesting data and other information from the public and interested parties about the benefits and costs of the current standards of conduct for broker-dealers and investment advisers when providing advice to retail customers, as well as alternative approaches to the standards of conduct.

While the SEC is particularly interested in receiving empirical and quantitative data and other information, all interested parties are encouraged to submit comments, including qualitative and descriptive analysis of the benefits and costs of potential approaches and guidance.

The SEC recognizes that retail investors are unlikely to have significant empirical and quantitative information, and welcomes any information they would like to provide.

March 2, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, February 28, 2013

China-Based Company and Former CFO Settle SEC Accounting Charges

The SEC and Keyuan Petrochemical, a China-based petrochemical company, and its former chief financial officer settled charges of accounting and disclosure violations, with defendants agreeing to pay more than $1 million.  According to the SEC, Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.

The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.

Keyuan agreed to pay a $1 million penalty and Li agreed to pay a $25,000 penalty to settle the SEC’s charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement, in which Keyuan and Li neither admit nor deny the charges, is subject to court approval.

February 28, 2013 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, February 22, 2013

SEC Settles Backdating Charges With Two Former Mercury Execs

The SEC has pursued civil fraud claims arising from backdated stock options against Mercury Interactive LLC and various executives, including its General Counsel, since 2007.  Today it announced a settlement with two executives, Amnon Landan, the former Chairman and Chief Executive Officer, and Douglas Smith, a former Chief Financial Officer, but not with the GC.  In its suit the SEC charged Landan, Smith, and two other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint also alleges that during this period Landan and certain other executives backdated stock option exercises and made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings.

Landan consented to the entry of a permanent injunction and agreed to be barred from serving as an officer or director of any public company for five years. Landan will pay $1,252,822 in disgorgement and prejudgment interest, representing the "in-the-money" benefit from his exercise of backdated option grants, and a $1,000,000 civil penalty. Pursuant to Section 304 of the Sarbanes-Oxley Act, Landan will also reimburse Mercury, or the parent company that acquired it after the alleged misconduct (Hewlett-Packard Company), $5,064,678 for cash bonuses and profits from the sale of Mercury stock that he received in 2003. Under the terms of the settlement, Landan's Section 304 reimbursement shall be deemed partially satisfied by his prior return to Mercury of $2,817,500 in vested options.

Smith also consented to a permanent injunction.  He will disgorge $451,200, representing the "in-the-money" benefit from his exercise of backdated option grants, and pay a $100,000 civil penalty. Pursuant to Section 304 of the Sarbanes-Oxley Act, Smith will also reimburse Mercury or its parent company $2,814,687 for profits received from the sale of Mercury stock in 2003 and a cash bonus received for 2003. Under the terms of the settlement, all of Smith's disgorgement and all but $250,000 of his Section 304 reimbursement shall be deemed satisfied by his prior repayment to Mercury of $451,200 and his foregoing of his right to exercise vested options with a value of $2,113,487.

 

February 22, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, February 15, 2013

SEC Freezes Assets in Swiss Account in Heinz Insider Trading Investigation

It was reported this morning that the SEC had opened an investigation into possible insider trading in connection with the acquisition by Berkshire Hathaway of H.J. Heinz Co., and here's the official announcement from the SEC:

The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.

*    *    *

In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.

The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.

The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence.

February 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Default Judgment Against "America's Prophet"

The SEC announced today that a Manhattan federal district court entered default judgments against Sean David Morton (Morton), whom the SEC describes as "a nationally-recognized psychic who bills himself as 'America's Prophet'," and his wife, relief defendant Melissa Morton, and corporate shell entities co-owned by the Mortons (including the Prophecy Research Institute).  The SEC charged Morton with engaging in a multi-million offering fraud. According to the Commission's complaint, Morton fraudulently raised more than $5 million from more than 100 investors for his investment group, which he called the Delphi Associates Investment Group (Delphi Investment Group).

According to the Commission's complaint, Morton used his monthly newsletter, his website, his appearances on a nationally syndicated radio show called Coast to Coast AM, and appearances at public events, to promote his alleged psychic expertise in predicting the securities markets, and to solicit investors for the Delphi Investment Group. During these solicitations, Morton made numerous materially false representations. For example, Morton falsely told potential investors that he has called all the highs and lows of the stock market, on their exact dates, over a fourteen year period. In private one-on-one correspondence with potential investors, Morton was even more aggressive in his solicitation. For example, Morton wrote to a potential investor urging he invest more money in the Delphi Investment Group "RIGHT NOW…[Because] [o]nce the DOLLAR starts to DROP, which will happen soon, we are set to make a FORTUNE!"

Bizarrely, according to the SEC, the defendants never properly answered the allegations in the complaint. Instead, the Mortons filed dozens of papers with the Court claiming, for instance, that the Commission is a private entity that has no jurisdiction over them, and that the staff attorneys working on the case do not exist.

February 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, February 14, 2013

SEC's Walter Says Staff Plans to Seek Information from Public on Retail Financial Advice Providers

We have not heard much lately from the SEC about a "uniform fiduciary duty" for broker-dealers and investment advisers.  Today, at a Senate Banking Committee hearing on "Wall Street Reform: Oversight of Financial Stability and Consumer and Investor Protections,"  SEC Chairman Elisse B. Walter stated (in her written testimony)  that since the publication of the IA/BD Study by the SEC staff, in January 2011:

the staff, including the Commission’s economists, continues to review current information and available data about the marketplace for personalized investment advice and the potential impact of the study’s recommendations. While we have extensive experience in the regulation of broker-dealers and investment advisers, we believe the public can provide further data and other information to assist us in determining whether or not to adopt a uniform fiduciary standard of conduct or otherwise use the authority provided under Section 913 of the Dodd-Frank Act. To this end, the staff is drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. The request aims to seek information from commenters – including retail investors, as well as industry participants – that will be helpful to us as we continue to analyze the various components of the market for retail financial advice.

The written testimony also summarizes other steps taken by the agency to implement Dodd-Frank.

 

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