Securities Law Prof Blog

SEC Charges Colorado Man with Ponzi Scheme

The SEC charged Shawn R. Merriman of Aurora, Colorado, and his firm, Market Street Advisors, with conducting a multi-million dollar Ponzi scheme through the sale of interests in at least four investment funds. The Commission alleges that Merriman raised at least $17 to $20 million from at least 38 investors residing in such states as Colorado, Minnesota and Utah.

According to the Commission's complaint, filed April 7, 2009 in federal district court in Denver, Colorado, Merriman told investors that he would invest their funds in stocks and options, and he reported impressive and consistent annual returns to investors. Merriman repeatedly deceived investors, many of whom considered him a personal friend, by sending them fictitious account statements showing annual rates of return of 7 to 20 percent. Instead, Merriman did not trade stocks and options after his first year of operations, during which he suffered trading losses, and he used millions of dollars in investor funds to support his lavish lifestyle and pay out withdrawals by other investors. He also offered "rebates" to existing investors to entice them to invest additional money with him. Contrary to his representations to investors, the SEC alleges that Merriman used investor funds to repay other investors and for his own personal purchases of classic cars, motorcycles, motor homes, a cabin in Idaho, and fine art collections, including works by Rembrandt that are worth millions of dollars.

In addition to seeking emergency relief, including an asset freeze, the Commission seeks disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, financial penalties, and permanent injunctions barring future violations of the antifraud provisions of the federal securities laws.

SEC Gets Injunction Against Massachusetts Hedge Fund Manager

The SEC announced today that the Massachusetts federal district court entered a Final Judgment on April 8, 2009 against defendant Glenn Manterfield, a citizen of the United Kingdom, in connection with a civil injunctive action filed in April 2007 by the Commission against Manterfield, his business partner, and Lydia Capital, LLC, a registered investment adviser based in Boston, Massachusetts. The Final Judgment enjoined Manterfield, a principal of Lydia, from engaging in future violations of the antifraud provisions of the federal securities laws and holds him liable for $2,350,000 in disgorgement of profits from the conduct alleged in the Commission's complaint, plus prejudgment interest of $425,998, and a civil penalty in the amount of $130,000.

According to the SEC, from June 2006 through April 2007, Manterfield and his business partner, Evan K. Andersen, acting through Lydia, engaged in a scheme to defraud more than 60 investors, who invested approximately $34 million in Lydia Capital Alternative Investment Fund LP, a hedge fund managed by Lydia. The Amended Complaint alleges that defendants told investors that they intended to use the hedge fund's assets to acquire a portfolio of life insurance polices in the life settlement market. According to the Amended Complaint, Manterfield, Andersen, and Lydia made a series of material misrepresentations and omissions, including: (1) materially overstating, and in some instances completely fabricating the hedge fund's performance; (2) inventing business partners, offices, and investors in an attempt to legitimatize the firm and concealing the truth as to why key vendors and banks ceased relationships with the defendants; (3) lying about Manterfield's significant criminal history, and failing to disclose a February 2007 criminal asset freeze against him in England; (4) lying about how the hedge fund planned to address certain material risks and failing to disclose others; and (5) misstating the nature of the hedge fund's assets and its investment process. In addition, the Amended Complaint alleges that Manterfield and Andersen took millions of dollars of investors' funds by withdrawing investor monies to which they were not entitled.

The Final Judgment permanently enjoined Manterfield from violating the federal securities laws and holds Manterfield liable for $2,350,000 in disgorgement, plus prejudgment interest of $425,998, and a civil penalty in the amount of $130,000. Andersen has settled the Commission's action against him, and the action is still pending against Lydia.

SEC Proposes Alternative Approaches to Short Sale Regulation

The SEC today voted unanimously to seek public comment on whether short sale price restrictions or circuit breaker restrictions should be imposed and whether such measures would help promote market stability and restore investor confidence. In June 2007, the SEC voted to eliminate price restrictions.  The Commission decided to re-evaluate the issue due to extreme market conditions and the resulting deterioration in investor confidence.

The Commission voted to propose two approaches to restrictions on short selling. One would apply on a market wide and permanent basis, while the other would apply only to a particular security during severe market declines in that security. They include:

Market-Wide, Permanent Approach

Proposed Modified Uptick Rule: A market-wide short sale price test based on the national best bid (a proposed modified uptick rule).

Proposed Uptick Rule: A market-wide short sale price test based on the last sale price or tick (a proposed uptick rule).

Security-Specific, Temporary Approach

Circuit Breaker: A circuit breaker that would either:

Ban short selling in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker halt rule).

Impose a short sale price test based on the national best bid in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker modified uptick rule).

Impose a short sale price test based on the last sale price in a particular security for the remainder of the day if there is a severe decline in price in that security (a proposed circuit breaker uptick rule).

In addition, the Commission proposed amendments to Regulation SHO to require that a broker-dealer mark a sell order "short exempt" if the seller is relying on an exception to a short sale price test restriction or a circuit breaker rule.

Public comments on today's proposed amendments must be received by the Commission within 60 days after their publication in the Federal Register.

The full text of the rule proposals will be posted to the SEC Web site as soon as possible.

SIFMA Calls Proposed Changes to Arbitration Discovery Guide "Fundamentally Unfair"

On March 6, 2009 the SEC published for public comment FINRA's proposed rule change on  Amendments to the Discovery Guide to Update the Document Production Lists (Release No. 34-59534; File No. SR-FINRA-2008-024).  Comments were due April 3.  A number of comment letters have been filed in response to the proposal.  SIFMA filed a lengthy response asserting that some of the proposed changes were "fundamentally unfair" to brokers:

Our overarching general concern with the proposed amendments is that they go too far in certain areas – for example, in calling for the production to claimants of a broker’s own trading history and the trading history of wholly unrelated customers without any showing of relevance, need, or bearing on the case to justify production of these personal and sensitive records. This is particularly so for claims of excessive trading (List 3), unauthorized trading (List 9), and claims involving particular products or securities (List 12). To the extent the proposals require production of these records without such a showing, they are fundamentally unfair.

SEC and Beverage Creations Settle Charges of Sales of Unregistered Stock

The SEC announced today that Beverage Creations, Inc., a Minneapolis, Minnesota company, and two of its former officers settled SEC charges that they illegally sold Beverage Creations stock through certain stock promoters and promoted that stock with a false press release. On April 6, 2009, the Honorable Judge Jane Boyle of the U.S. District Court in Dallas entered final judgments against Beverage Creations, Inc., former Chief Executive Officer Robert Wieden and former Chief Operating Officer Patrick Dado.

In March 2008, the SEC sued Beverage Creations, Inc. and several stock promoters alleging that they sold 30 million shares of stock to the public without a registration statement filed or in effect. According to the complaint, the stock promoters (1) purchased shares directly from Beverage Creations, Inc., (2) touted Beverage Creations, Inc. to investors through a nationwide marketing campaign, and (3) immediately dumped their shares into the public market at grossly inflated prices. The SEC also charged that Beverage Creations, Inc. participated in the touting by issuing a false press release denying any relationship between the company and one of the stock promoters. In December 2008, the SEC amended its complaint to add Beverage Creations, Inc. officers Robert Wieden and Patrick Dado. According to the amended complaint, Wieden and Dado were responsible for Beverage Creations, Inc.'s public offering, and they authored and approved the false press release. The SEC charged Beverage Creations, Inc., Wieden and Dado with violations of Section 5 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Without admitting or denying the allegations, Beverage Creations, Inc., Wieden and Dado settled the action by consenting to entry of a court order that permanently bars them from violating Section 5 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Wieden and Dado will pay civil penalties of $20,000 each. The SEC's action against the remaining defendants is ongoing.

SEC Will Consider Short Sale Restrictions at April 8 Meeting

The SEC's Open Meeting Agenda for its April 8, 2009 meeting has one item that is being closely watched:

Item 1: Amendments to Regulation SHO
Office:  Division of Trading and Markets
Staff:  James Brigagliano, Josephine Tao, Victoria Crane, Joan Collopy, Christina Adams, Matthew Sparkes

Item 1: Amendments to Regulation SHO
The Commission will consider whether to propose rules restricting short sales under certain circumstances.

Schapiro Outlines Agenda for Reform

In a speech today before the Council of Institutional Investors, Mary Schapiro set forth an impressive agenda for reform, including shareholder access, disclosure about directors and other corporate governance issues  and bolstering oversight over credit rating agencies.

Schapiro Outlines Agenda for Reform

In a speech today before the Council of Institutional Investors, Mary Schapiro set forth an impressive agenda for reform, including shareholder access, disclosure about directors and other corporate governance issues  and bolstering oversight over credit rating agencies.

Investor Alert for Stanford Investors

The SEC posted an Investor Alert for Stanford Investors on its website, warning that some investors in the Stanford International Bank CD program are being contacted by crooks who are offering their "services" to help return investors' lost funds.  The SEC also posted information about the court-appointed receiver.

SEC Obtains Emergency Action Against Alleged Ponzi Scheme Targeting Chinese-American Community

On April 3, 2009, the SEC filed an emergency action in the United States District Court for the Northern District of Texas to halt an on-going multi-million dollar Ponzi scheme and affinity fraud involving investments in Oversea Chinese Fund Limited Partnership, a hedge fund based in Toronto, Ontario, Canada. The Commission’s complaint alleges that Defendant Weizhen Tang, 50, of Toronto orchestrated the fraud scheme through entities he controls, including Defendants Oversea Chinese Fund Limited Partnership (“Hedge Fund”) and WinWin Capital Management, LLC, a Plano, Texas-based investment adviser (“Investment Adviser”). U.S. District Judge Jane Boyle granted a temporary restraining order, asset freeze, and other emergency relief against the Defendants, including the appointment of a receiver to take control of assets belonging to the Investment Adviser and two Relief Defendants — WinWin Capital Partners, LP, and Bluejay Investment, LLC, d/b/a Vintage International Investment, LLC.

The complaint alleges that from at least as early as 2004 to the present, Tang, acting through the Hedge Fund and other entities he controls, raised between $50 million and $75 million from more than 200 investors. According to the Commission’s complaint, Weizhen Tang (the self-described “Chinese Warren Buffet”) recently admitted to investors that the Hedge Fund operated as a Ponzi scheme since at least 2006. Specifically, the Commission alleges that Tang told investors in February 2009 that he and the Hedge Fund posted false profits on investors’ account statements for the purpose of concealing substantial trading losses, and to attract new investors to the Hedge Fund. Further, the Commission alleges that Tang admitted he used funds from new investors to return principal and pay out “fake” profits to other investors, which totaled at least $8 million in 2006, 2007, and 2008 — despite significant trading losses incurred during that time.

According to the Commission’s complaint, Tang specifically targeted members of the Chinese-American community and solicited U.S. investors to directly and indirectly invest in the Hedge Fund. The In addition to the emergency relief granted by the Court, the Commission seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil money penalties against the Defendants.

SEC Feels Pressure to Limit Short Sales

Should the SEC reinstate the uptick rule or consider other ways to restrict short-selling?  The New York Times says that some legislators are putting pressure on the regulator to do just that.  NYTimes, Some Revile Plan to Limit Short-Selling.

Meanwhile, today SEC Chair Schapiro said, in a speech to the Council of Institutional Investors:

We are, however, from an enforcement and regulatory perspective, looking at practices that may be contrary to fair and orderly markets. Later this week, the Commission will be considering proposing new rules limiting short sales in a down market. This is an issue that has both strong supporters and detractors — and we will be very deliberative in our effort to determine what is in the best interest of investors.

New York AG Charges Madoff Feeder Funds with Fraud

New York Attorney General Andrew M. Cuomo today announced charges against J. Ezra Merkin and the funds he controlled for violating New York’s Martin Act by concealing from his clients the investment of more than $2.4 billion with Bernard L. Madoff.  In a 54-page complaint filed in New York State Supreme Court, Cuomo alleges that investors, including several prominent charities and non-profits, entrusted their investments to Merkin, who then steered the money to Madoff without their permission, in exchange for $470 million in management and incentive fees.

The complaint also charges that Merkin ignored irregularities and other glaring red flags related to Madoff’s investments. As a result, hundreds of investors lost millions in investments, tragically including important charity organizations that were specifically targeted by Merkin. Attorney General Cuomo’s lawsuit seeks payment of damages and disgorgement of all fees by Merkin. The complaint also charges Merkin’s management company, Gabriel Capital Corporation (“GCC”). Merkin managed several funds, including Ascot Fund Limited, Gabriel Capital L.P., and Ariel Fund.

In a pattern of fraudulent concealment and misrepresentation spanning nearly two decades, according to the complaint, Merkin held himself out as a skilled money manager and used his social and charitable connections to raise over $4 billion from hundreds of individuals, charities, and other investors.  Merkin turned virtually all of this money over to third-party money managers, including Madoff.

During individual conversations with investors, and through fraudulent quarterly reports, investor presentation materials, and offering documents, Merkin concealed the role Madoff played and misrepresented the role he played in managing the funds, according to the complaint. Though acting primarily as a marketer and a middleman, Merkin pocketed hundreds of millions of dollars in management and incentive fees from his investors.

Charities and non-profit organizations were particularly susceptible to and victimized by Merkin’s deceptive tactics.  Over 10 percent of the assets managed by Merkin belonged to non-profit organizations.  Merkin collected his customary fees from nonprofits that invested with him, but typically did not disclose, or actively obscured, that Madoff was actually managing some or all of the funds they invested.

Merkin kept a total of $2.4 billion of investors’ funds in Madoff – funds that Merkin had fiduciary obligations to protect – even though he knew of irregularities and other glaring red-flags related to Madoff’s investments.  Indeed, at least two of Merkin’s most trusted colleagues repeatedly told Merkin that Madoff’s returns were too good to be true— one warning that it could be a Ponzi scheme. Merkin knew that investment professionals were suspicious of Madoff because, beyond Madoff’s uncommonly steady returns, there were fundamental questions about Madoff’s money management business that suggested fraud.  Merkin read, and kept in his files, two press articles questioning Madoff’s practices and returns, and several of Merkin’s own investors told Merkin that due to these questions, they would not invest with Madoff. 

Merkin commingled his personal funds, including his management fees from Ascot and Gabriel, with the funds of his management company, GCC.  Merkin used GCC funds to make purchases for his personal benefit, including purchases of over $91 million of artwork for his apartment. 

The Complaint charges Merkin with violations of the Martin Act, General Business Law § 352 et seq., for fraudulent conduct in connection with the sale of securities, Executive Law § 63(12) for persistent fraud in the conduct of business, and New York’s Not-For-Profit Corporation Law §§ 112, 717, and 720 for breaches of fiduciary duty in connection with Merkin’s service on the boards of certain non-profit organizations.  Attorney General Cuomo’s lawsuit seeks payment of damages and disgorgement of all fees by Merkin, restitution and other equitable relief.

Kelly on Soft Law In Securities Regulation

The Hardening of Soft Law in Securities Regulation, by Claire Kelly, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

Securities law regulation frequently utilizes soft law, or non binding standards and principles of conduct. Often soft law standards have hardened into treaties, statutes or rules. As securities regulation becomes more international, this trend will continue. Numerous international bodies are involved in the development of securities standards and many of them operate by building consensus among experts in an informal setting. This Article discusses four examples of the use and hardening of soft law in the international realm: the establishment of international financial reporting standards; the development of MOUs; the negotiation of an anti-bribery treaty; and the regulation of credit rating agencies. Soft law norm development thus allows for speed, flexibility and expertise necessary to respond to fast breaking developments. Despite problems of authority, process, and legitimacy, the authors argue that soft law securities regulation is generally desirable internationally as it counteracts competitive races to the bottom, and makes regulatory cooperation more palatable.
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Muradoglu on the UK Financial Crisis

The UK Crisis of 2008: What is Real and What is Behavioural?, by Yaz Gulnur Muradoglu, City University London - Sir John Cass Business School, was recently posted on SSRN.  Here is the abstract:

This paper is about the crisis of 2008 in the UK. I first discuss the triggers of the crisis in the UK, then go over the immediate reactions to it in the form of short term policies and conclude with a discussion of long term policies. The crisis of 2008 has its roots in the sub-prime crisis of the US. UK imported it due to its well developed and international financial sector. Some of the triggers of the crisis of 2008 are real and some are behavioural. Systemic nature of high leverage in all sectors including financial, corporate and household, international nature of financial sector, and opacity of balance sheets are the real triggers. The underestimation of risks by almost all agents in the economy is behavioural. I argue that some of the conditions that led to the Crisis of 2008 will not change and should be regulated. Behavioural factors should now be considered carefully in designing the new regulation

G-20 London Summit Communique

Here is the full text of the G-20 Communique resulting from the London Summit.

SEC Charges New York Attorney with Participating in Illegal Penny Stock Scheme

On April 2, 2009, the SEC filed a civil complaint in United States District Court for the Southern District of Florida against south Florida residents Frank C. Calmes, Lynn D. Rowntree, and Manny J. Shulman, New York attorney James E. Pratt, and Younger America, Inc., formerly known as Infinity Acquisition Corp. and Infinity Music Corp., alleging that the defendants conducted an illegal penny stock distribution scheme that generated ill-gotten gains of approximately $3.9 million between 2004 and 2008.

The complaint alleges that Calmes, Rowntree, and Shulman devised a scheme to illegally sell large amounts of stock of small companies after they had arranged for the companies' shares to be publicly quoted. According to the complaint, these illegal stock distributions were often facilitated by baseless legal opinion letters written by Pratt and in some cases by fraudulent wash trades by Rowntree. The complaint further alleges that Calmes and Shulman took control of Younger America, one of the companies they had helped become publicly quoted, and disseminated false information to facilitate illegal sales of its stock by themselves and others. According to the complaint, many of Shulman's illegal sales were made through accounts held by his wife, Krystal A. Becnel, who is named in the Commission's complaint as a relief defendant.

The Commission seeks officer and director bars against Calmes and Shulman, penny stock bars against Calmes, Rowntree, Shulman, and Pratt, and disgorgement, plus prejudgment interest, and civil penalties against all of the defendants.

University of Cincinnati Presents Symposium on Regulatory Reform

The University of Cincinnati College of Law presents its annual Corporate Law Symposium tomorrow  April 3 on New Models of Regulating the Financial Markets: The SEC's Future as it Turns 75.  Here is a brief description:

April 3, 2009 — 8:00 a.m. - 4 p.m.
The U.S. financial markets and financial institutions have long enjoyed a reputation for promoting capital formation, market stability, and investor protection. The financial meltdown and other market events, however, have renewed criticisms of the U.S. regulatory model as outmoded, anticompetitive, and ineffective.  In addition, the collapse of major financial services companies and the Bernard Madoff scandal have seriously damaged the Securities and Exchange Commission’s reputation as regulator of the securities markets.

The 75th Anniversary of the Securities and Exchange Commission marks an appropriate occasion for an examination of these issues.  The Symposium’s speakers will address proposals for regulatory reform from a variety of perspectives, both academic and practical.

Speakers include James Cox (Duke), Adam Pritchard (Michigan), Roberta Karmel (Brooklyn), Jerry Markham (Florida International), Olufunmilayo Arewa (Northwestern), Janis Sarra (British Columbia) and Jonathan Sokobin (SEC Risk Assessment). 

The event is being webcast.  For further information, see the website.

Massachusetts Charges Fairfield Greenwich with Fraud

Secretary of the Commonwealth of Masssachusetts Galvin today filed fraud charges against Fairfield Greenwich, a Madoff feed fund.  All the documents are available on the website.

NASAA Posts Information on ARS Claims Procedures

NASAA has posted on its website information on how to file ARS claims, specific to the firm and the investor's state.  NASAA explains:

Several brokerage firms have entered, or are expected to enter into, settlements with state securities regulators in cases arising from the sale by those firms of auction rate securities. Those settlements provide, among other things, that many customers of those firms are entitled to receive a refund of the purchase price of those securities from the firm. Despite receiving those refunds, some customers may believe they have incurred consequential damages as a result of their purchase and ownership of the auction rate securities. The settlements also provide for a “special arbitration procedure” which may be used by customers attempting to recover those consequential damages. This site describes those special procedures.

FINRA Arbitration Filings Up 90% Over 2008

Summary Arbitration Statistics from FINRA's website:

New Case Filings through February 2009:
 
2007        535
2008        561
 2009        1,065
 2009  vs 2008    90%