by T. GormanPosted on Posted in SECActions

The final lesson in the six–year saga of former Silicon Valley dotcom investment banking star Frank Quattrone is that persevering against the government pays. Mr. Quattrone, who has consistently maintained his innocence, finally ended his prosecution ordeal today when he and the government executed a non-prosecution agreement. Mr. Quattrone prevailed in three enforcement actions claiming improprieties stemming from his former role as a high flying investment banking star. First, the NASD charged Mr. Quattrone with “spinning” violations and undermining research analyst objectivity. At the same time, the NASD filed a complaint alleging that Mr. Quattrone failed to cooperate with an agency investigation when he asserted his Fifth Amendment rights. Based on this complaint, the NASD permanently barred him from the securities industry. After a successful appeal to the SEC, however, the NASD order banning him from the securities business was vacated and the NASD also dropped the “spinning” case. Lastly, Mr. Quattrone was charged criminally, for obstruction of justice, hindering an agency investigation and witness tampering arising out of his conduct during the government investigations of his investment banking activities. The first trial ended in a hung jury and although convicted during a second trial, the Second Circuit reversed the conviction on appeal. Mr. Quattrone’s legal woes ended with the government essentially agreeing to drop the case by signing a non-prosecution agreement. The agreement states that Mr. Quattrone will not be prosecuted if he continues to obey the law. Its been a long time for Mr. Quattrone but the lesson is clear: it can pay to persevere against the enormous weight of the government.

by T. GormanPosted on Posted in SECActions

On Friday August 18, the SEC announced that on August 7, the US Attorney for the District of Massachusetts charged a hedge fund advisor with thirteen counts of mail and wire fraud for his actions as the managing partner of Groundswell Partners LLC, the General Partner and management company of Groundswell Capital LP, a quantitative systematic hedge fund.  [U.S. v. Mark R. Conway, 06-CR-10236-PBS (D. Mass.)] (LR-19807) http://sec.gov/news/digest/2006/dig081806.txt  In 2005, the SEC brought an enforcement action against the same advisor based on allegations similar to those in the indictment. Litigation Release No. 19460 http://sec.gov/litigation/litreleases/lr19460.htm  What is noteworthy about this announcement is not the criminal or civil enforcement action.  These cases are just the most recent in a line of enforcement actions involving hedge funds.  Rather the more interesting question is why the SEC reached out – or perhaps overreached is a better term – to issue its hedge fund rules that became effective last February.  Those rules were struck down recently by the D.C. Circuit in Goldstein v. S.E.C., No. 04-1434 (June 23, 2006), prompting many funds to de-register or consider de-registering with the Commission.  Additionally, in response to an ABA request for a no-action letter, the SEC staff has been forced to clarify how the rules apply to funds that choose to remain registered and for those that elect to de-register.  http://www.sec.gov/divisions/investment/noaction/aba081006.pdf
Nevertheless, SEC Chairman Cox recently testified before congress that post Goldstein the Commission will continue to bring enforcement actions against hedge funds and hedge fund advisors who violate the antifraud, civil liability and other provisions of the federal securities laws. Indeed, the Chairman declared that “[h]edge funds are not, should not be, and will not be unregulated.” See Testimony Concerning the Regulation of Hedge Funds, Chairman Christopher Cox, July 25, 2006 http://www.sec.gov/news/testimony/2006/ts072506cc.htm  In view of the SEC’s past and current enforcement efforts why the hedge fund stretch last February? If the current provisions in the federal securities laws backed by a string of civil and criminal enforcement actions are not sufficient, surely the SEC knows how to approach Congress rather than take unauthorized regulatory action.