by T. GormanPosted on Posted in SECActions

SEC Enforcement Trends – Trading Abuses 

The Enforcement Division has long focused on situations in the markets where traders took advantage of situations, exploited conflicts of interest and took unfair advantage to tilt the playing field.  Last year there were several examples of these type of cases: 

·         SEC v. Joseph J. Spiegel, (D.D.C. Jan. 4, 2007), www.sec.gov/litigation/litreleases/2007/lr19956.htm.  A settled civil injunctive action against a former hedge fund portfolio manager which alleged fraud and registration violations involving short selling in connection with a PIPE.  The defendant consented to the entry of a statutory injunction and order requiring the payment of a $110,000 penalty. 

·         In the Matter of Spinner Asset Management, LLC, Et al., (Adm. Dec. 20, 2006), www.sec.gov/litigation/admin/2006/33-8763.pdf. A settled administrative proceeding brought against a fund for fraud and registration violations relating to selling short in connection with a PIPE.  The respondent consented to a cease and desist order and an order directing the payment of over $435,000 in disgorgement. 

·         SEC v. Friedman, Billings, Ramsey & Co., (D.D.C. Dec. 20, 2006), www.sec.gov/litigation/litreleases/2006/lr1950.htm. A settled civil injunctive action which alleged insider trading relating to the firm’s market maker account and registration violations related to short selling in connection with a PIPE offering.  The investment banking firm consented to the entry of a statutory injunction, an order directing the payment of disgorgement, prejudgment interest and a penalty of over $3.7 million and, in a related administrative proceeding, an order of censure.  

Two other significant trading abuse cases last year involved trading ahead and a variety of trading abuses in the auction rate securities markets: 

·         In the Mater of Sanjay Singh, (Adm. Mar. 21, 2006), www.sec.gov/litigation/admin/33-8673.pdf.  Popularly known as the “squawk box case”  this settled administrative proceeding is based on claims that brokerage employees used information regarding institutional investor trades heard over the firm “squawk box” to trade ahead of firm clients.  The respondent consented to the entry of a cease and desist order, a bar from the business, and an order directing payment of $37,500 as disgorgement. 

·         In the matter of Bear Stearns, Citigroup, Goldman Sachs, Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Morgan Stanley DW, RBC Daibn Rauscher, Banc of America, A.G. Edwards, Morgan Keegan, Piper Jafray, SunTrust and Wachovia, (Adm. May 31, 2006), sec.gov/litigation/admin/2006/33-8684.pdf.  This settled administrative proceeding alleged fraudulent trading practices in auctions for auction rate securities.  Each respondent consented to the entry of a cease and desist order and an order requiring the payment of a penalty of either $1.5 million, $750,000 or $125,000 under the two-tiered settlement structure.  

No doubt the enforcement division will continue to focus on these and other types of trading abuses in the future.  Unfairness in the trading markets is a traditional area of focus.  Many of the cases in the future may focus on PIPE offerings where traders seek to take advantage of the fact that the market price of the stock tends to fall in the subsequent offering or hedge funds and complex trading ahead schemes such as the one which is the focus of the current Wall Street sweep. 

by T. GormanPosted on Posted in SECActions

In a series of House Committee on Appropriations meetings this week, high ranking members of the SEC, FDIC, and IRS have given testimony before the Financial Services and General Government subcommittee concerning the subprime lending crisis.  Notably, SEC Chairman Christopher Cox told the subcommittee that through its newly minted task force, the Commission is examining whether or not sellers of portfolios of subprime mortgages packaged into securities provided proper disclosures to the buyers.  In responding to the recent subprime scandal – subprime loans are loans made to borrowers with low credit scores – Mr. Cox said, according to Bloomberg, “To the extent that these loans are securitized and to the extent that they become part of problems, fraud or accounting problems related to that, we want to be there as enforcers.”  Similarly, according to the AP, in mid-march SEC Director of Enforcement Linda Thomsen indicated that the Commission is looking into “all the actors and their roles.”

The subprime scandal came into focus around the beginning of March when reports surfaced that Federal prosecutors and securities regulators were investigating sales in the shares of New Century Financial Corporation.  Reportedly, the SEC had requested a meeting with New Century executives and, on February 28, New Century learned of a parallel criminal investigation in the United States attorney’s office in Los Angeles.  The “mortgage meltdown” however, has been a building storm for many subprime lenders.  As the housing bubble continued to expand, many lenders looked favorably at providing loans to people unable to qualify for conventional loans.  When housing prices failed to rise and low interest rate ARMs converted to higher interest rates, many of the subprime borrowers defaulted on their loans.  While it is a laudable service to assist people who otherwise would not be able to own a home, since last year several such companies have gone bankrupt.  The resulting scrutiny has put the remaining lenders in the hot seat.

Although Mr. Cox did not provide detail as to the number or identity of the companies the Commission is currently investigating, clearly the SEC poised to launch a wide-scale investigation.  As Ms. Thomsen notes, the SEC will look at all key players, including gatekeepers such as lawyers and accountants.  In view of the current Congressional and regulatory focus in this area and the continuing media coverage, subprime lenders and related persons will continue to be an area of intense interest by the SEC, DOJ and others.  Companies in this line of business would be well advised to carefully review their lending practices and the public disclosures made in connection with any transactions with counsel versed in responding to SEC inquiries before a subpoena or request for information is served, if at all possible.  Being out in front of any such request typically permits the company to control the inquiry and, if there is a difficulty, obtain a better resolution of the matter.