by T. GormanPosted on Posted in SECActions

SEC Enforcement Trends – Gate Keepers 

The SEC has long focused on the conduct of “gate keepers,” such as directors, attorneys and auditors, in an effort to enlist them as a kind of “advance guard” to be there on the spot and stop fraudulent transactions from occurring.  These efforts provoked sympathy from the Ninth Circuit Court of Appeals in one case, but not agreement that the SEC could create such an advance guard. SEC v. Arthur Young & Co., 590 F. 2d 785, 788 (9th Cir. 1979) (“We can understand why the SEC wishes to so conscript accountants. . . . The difficulty with this is that Congress has not enacted the conscription bill that the SEC seeks to have us fashion and fix as an interpretive gloss on existing securities laws.”). 

Nevertheless, efforts continue in view of the key role such gate keepers frequently play in corporate transactions.  It was in this context that then Judge and former SEC Enforcement Chief Stanley Sporkin wrote “Where also were the outside accountants and attorneys when these transactions were effectuated?,” Lincoln Sav. & Loan Ass’n v. Wall, 743 F. Supp. 901, 920 (D.D.C. 1990).   

Last year the SEC continued to pursue cases against gate keepers – and no doubt there will be many more in the coming months.  For example, last year the Commission brought an action against a former director of a biotech company who was alleged to have engaged in insider trading in advance of an announcement of FDA approval of a device for his company.  The director settled the enforcement action with consent to a statutory injunction and the entry of an order directing the payment of disgorgement and prejudgment interest of over $14,000 and a penalty of about $13,600.  SEC v. Mark Kishel, (N.D. Ga. Jan. 23, 2006), www.sec.gov/litigation/litreleases/lr19538.htm.  

Other cases focused on attorneys.  For example: 

In Re: J.B. Oxford Holdings, Inc., (Sept. 25, 2006), sec.gov/litigation/admin/2006ic-27497.pdf.  Where the complaint charged the former general counsel of a broker dealer holding company in a late trading scheme. 

SEC v. Biopure Corporation, et al., (D. MA. Sept. 13, 2006), www.sec.gov/litigation/litreleases/2006/lr119825.htm.  Which charged a former general counsel with aiding and abetting filing violations where those filings failed to disclose negative FDA news. 

SEC v. Alexander, et al., (E.D.N.Y. Aug. 9. 2006), www.sec.gov/litigation/litreleases/2006/lr19796.htm.  Which charged the former general counsel of Comverse in a scheme to backdate options.  

These examples from last year are perhaps only the beginning of an increased emphasis in this area.  As the options scandal continues to unfold, for example, the SEC and other regulators will clearly focus on the role of directors, attorneys, auditors and outside consultants.  In addition, the recent comments of Enforcement Chief Linda Thomsen noting that the staff is reviewing Rule 10b5-1 plans (see blog post 3/19/07) to determine if insider trading cases should be brought promises to bring increased scrutiny to the transactions of corporate directors.  All of this suggests that in the future the SEC Enforcement division will continue to view gate keepers as the advance guard and carefully scrutinize their activities, resulting in more gatekeeper-focused enforcement investigations and actions.

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.