This Week In Securities Litigation (Holiday wrap-up edition)
Through the holidays (Dec. 19 – 31, 2014) the Department of Justice and the SEC continued to file securities enforcement actions. The Department brought an FCPA case which is now number two on the top ten list for amounts paid to resolve corruption charges. Alstom and certain subsidiaries pleaded guilty to FCPA charges, its U.S. subsidiaries entered into deferred prosecution agreements and the company agreed to pay a criminal fine of over $772 million.
The SEC brought a number of cases during the holiday period including: Settled insider trading charges in district court against an attorney and his wife; two offering fraud actions centered on misleading advertising for a new ETF; and an action based on undisclosed conflict involving an investment adviser.
SEC
Data analysis: The Commission announced a pilot program to facilitate investor analysis and comparisons of public company financial statement data. Under the program data furnished by companies in structured formats will be combined and organized into structured data sets and posted for bulk downloads.
Credit rating agencies: The Commission issued the annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations or NRSRCs.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 4 civil injunctive actions and 3 administrative proceedings, excluding 12j and tag-along-actions.
Principal transactions: In the Matter of Vero Capital Management, LLC, Adm. Proc. File No. 3-16328 (Dec. 29, 2014) is a proceeding which named as Respondents the registered investment adviser, Robert Geiger – its president, George Barbaresi – the general counsel, and Steven Downey – the CFO. From late 2010 to 2011 the Respondents caused funds managed by Vero Capital to purchase three notes worth $7 million from an affiliate without obtaining the required written consents first for this principal transaction. They also diverted $4.4 million from the managed funds to VERO Capital’s wholly-owned subsidiary by causing the funds to make a series of undocumented bridge loans to an affiliate. At the time investors were told they were winding down the funds but not about the loans which Respondents sought to conceal. The Order alleges willful violations of Advisers Act Sections 206(1), 206(2), 206(3) and 206(4). The proceeding will be set for hearing.
Offering fraud: SEC v. Argryropoulos, Civil Action No. 2:14-cv-09800 (C.D. Cal. Filed Dec. 23, 2014) is an action against Efstratios Argyropoulos, the founder and sole shareholder of defendant Prima Capital Group, Inc. Beginning in October 2010, and continuing for the next two years, the defendants raised $3,435,406 from 143 investors who were promised the funds would be used to acquire pre-IPO shares of Facebook and Twitter. Instead, the defendants misappropriated the funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The defendants settled the action, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. Each defendant also agreed to pay disgorgement and prejudgment interest. Mr. Argryropoulos will pay a financial penalty and has agreed to be barred from the securities business. The amount of the disgorgement, prejudgment interest and the penalty will be determined at a later date. See, Lit. Rel. No. 23169 (Dec. 23, 2014).
Offering fraud: SEC v. E-Monee.com Inc., Civil Action No. 13-cv-60637 (S.D. Fla.) is a previously filed action against the firm and, among others, Robert Cook. The complaint alleged an offering fraud in which the firm’s president, Estuardo Benavides, and Mr. Cook sold shares in E-Monee claiming the firm owned valuable Mexican bonds which were in fact worthless. Previously, Mr. Cook consented to the entry of a permanent injunction precluding him from violating Securities Act Sections 17(a)(1) and (3). On December 11, 2014, the Court directed Mr. Cook to pay a civil penalty of $150,000. See Lit. Rel. No. 23168 (Dec. 23, 2014).
False advertising: In the Matter of F-Squared Investments, Inc., Adm. Proc. File No. 3-16325 (Dec. 22, 2014) and SEC v. Present, Civil Action No. 1:14-cv-14692 (D. Mass. Filed Dec. 22, 2014) are actions against, respectively, the registered investment adviser and its co-founder and CEO, Howard Present. F-Squared is the largest marketer of index products using exchange traded funds. In August 2008 the adviser began creating a model portfolio of ETF’s in various sectors of the U.S. economy. One step involved the acquisition of the right to use a new quantitative algorithm that generated signals indicating when to buy or sell. The AlphaSector portfolio of ETFs was to rebalance periodically based on the signals. F-Squared launched the index in October 2008. It was marketed as having employed a highly successful strategy since at April 2001 with results based on actual investments rather than backtesting. In fact that claim was not true. The results were from backtesting and that process was flawed because of an inadvertent error. Mr. Present learned of the error in 2008 but took no steps to correct it. He was also the face of the advertising campaign for the new portfolio. The Order alleged violations of Advisers Act Sections 204(a), 206(1), 206(2), 207 and Investment Company Act Section 34(b). In resolving the matter the Commission took into account the remedial efforts of the adviser which included retaining an independent consultant. The firm also agreed to implement a series of undertakings. In settling the action the adviser admitted to a series of facts detailed in Appendix A to the Order which set-forth the predicate for the violations and admitted that its conduct violated the securities laws. The firm consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a $30 million fine. The complaint against Mr. Present alleges violations of Advisers Act Sections 206(1), 206(2), 106(4) and 207. The case is pending. See Lit. Rel. No. 23166 (Dec. 22, 2014).
Unregistered broker: In the Matter of Kenneth Meissner, Adm. Proc. File No. 3-16175 (Dec. 23, 2014) is a previously filed proceeding which named as Respondents Mike Tomich, among others. The Order alleged that Gary Snisky raised about $4.3 million from 40 investors from late 2011 through early 2013. Investors were sold membership interest in Arete, LLC and other, similar, controlled entities. Sales people promoted the memberships and promised investors no-risk, profitable alternatives to traditional annuities by offering interests supposedly backed by the U.S. government. Mr. Tomich was a salesman who raised $969,848 as part of this scheme. Although he was not registered as a broker, he received transaction based compensation. Mr. Tomich resolved the matter, consenting to the entry of a cease and desist order based on Exchange Act Section 15(a). He also agreed to be barred from the securities business, to pay disgorgement of $48,327.00, prejudgment interest and a civil penalty of $48,000.
Insider trading: SEC v. Grewal, Civil Action No. 8:14-cv-02026 (C.D. Cal. Filed Dec. 22, 2014) is an action against Shivbir Grewal and his wife Preetinder. It centers around the March 11, 2013 announcement by Spectrum Pharmaceutical, Inc. that it suffered a significant reduction in earnings due to a drop in orders for its top selling product. Mr. Grewal, a shareholder in a law firm that served as outside counsel to the company, learned about the pending announcement from the company on March 5, 2012. Two days later he sold all of his shares in the company. He also told his wife about the pending announcement. She sold her shares. After the announcement the share price dropped 35%. Mr. Grewal avoided losses of $30,343.17 while his wife avoided losses of $14,400.05. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Each defendant settled the action, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, each agreed to disgorge a sum equal to the loses avoided, pay prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 23167 (Dec. 22, 2014).
Accounting fraud: SEC v. Dunn, Civil Action No. 07-CV-2058 (S.D.N.Y.) is a previously filed action arising out of a financial fraud at Nortel Networks Corporation. The Commission dismissed with prejudice all claims against the five remaining defendants, Frank Dunn, Douglas Beatty, Michael Gollogly, MaryAnne Phapill and Douglas Hamilton following the acquittal in a Canadian criminal proceeding of Messrs. Dunne, Beatty and Gollogly. See Lit. Rel. No 23165 (Dec. 19, 2014).
FCPA
Alstrom S.A., a French power and transportation company, resolved FCPA charges with the Department of Justice. Specifically, the firm pleaded guilty to a two-count criminal information charging books and records and internal control violations. Alstrom Network Schweiz AG, the firm’s Swiss subsidiary, pleaded guilty to a criminal information charging conspiracy to violate the anti-bribery provisions. Alstrom Power Inc. and Alstom Grid Inc., two U.S. subsidiaries, entered into deferred prosecution agreements, admitting that they conspired to violate the anti-bribery provisions of the FCPA. The firm will also pay a criminal penalty of $772,290,000. The charges are based on a wide-ranging bribery scheme that involved paying bribes to government officials and falsifying the books and records. There were violations in Indonesia, Egypt Saudi Arabia, the Bahamas and Taiwan. Generally, the bribes were paid in connection with power, grid and transportation projects for state-owned entities. The Department considered a variety of factors in resolving the case including: The fact that Alstom failed to voluntarily disclose the misconduct even though it was aware of related misconduct at a U.S. subsidiary that previously resolved corruption charges; its long term refusal to cooperate; the firm’s lack of an effective compliance and ethics program; and its prior criminal misconduct. Alstrom is now second on the list for the top ten payments made to resolve FCPA charges. Previously, five individuals were charged in connection with this scheme.
FINRA
Failure to register: The regulator fined Monex Securities Inc. $1.3 million and its CCO, Jorge Martin Ramos Landero, $15,000 and suspended him from serving in any principal capacity for 45 days. The charges stem from the execution of a contract arranged by Mr. Ramos with the Mexican parent of Monex which permitted numerous employees to engage in the securities business on Monex’s behalf without registering with FINRA.
Customer protection rule: Pershing LLC was fined $3 million for violating the customer protection rule and related supervisory failures. FINRA concluded that from November 2010 through August 2011 Pershing failed to maintain adequate reserves to meet the reserve deposit requirements. The firm also failed to promptly obtain, and later maintain, physical possession of control of certain customers’ fully paid and excess margin securities. The firm’s supervisory procedures were also inadequate.
Hong Kong
Market misconduct: The regulator charged Andrew Left of Citron Research with market misconduct. The action alleges that Mr. Left caused Citron to publish a false research report on its website regarding Evergrande Real Estate Group Ltd. Just prior to the publication of the report Mr. Left sold short 4.1 million shares of Evergrande which he later bought back, making a notional profit of over $2.8 million.