This Week In Securities Litigation (Week ending February 20, 2015)
The Commission recently filed an amicus brief defending its Dodd-Frank whistleblower rules. Those rules specify that the anti-retaliation provisions of those amendments to the Exchange Act protect those who chose not to report to the Commission but only internally. Yet the definition of whistleblower under Dodd-Frank is limited to those who report to the SEC.
Commissioner Gallagher continued to raise questions regarding disqualifications in his recent remarks. The Commissioner’s comments echo his recent dissent in the Oppenheimer matter.
This week SEC also filed an insider trading action, a misappropriation case, an action based on bid rigging, and a proceeding alleging fraudulent registration by an investment adviser. In addition, a case centered on a pyramid scheme and an investment fraud action brought in conjunction with the NYAG were filed.
SEC
Municipal securities markets: Commissioner Luis A. Aguilar, issued a Statement on Making the Municipal Securities Market More Transparent, Liquid and Fair (Bev. 13, 2015)(here).
Disqualifications: Commissioner Daniel M. Gallagher addressed the 37th Annual Conference on Securities Regulation and Business Law, delivering remarks titled Why is the SEC Wavering on Waivers? (Feb. 13, 2015). The Commissioner’s remarks follow his dissent on the question in the Oppenheimer case (here).
Whistleblowers: Berman v. Neo@Ogivy LCC, No. 14-4626 (2nd Cir. Brief filed Feb. 6, 2015) is an action in which the SEC filed an amicus brief addressing the scope of the protections for whistleblowers provided by the anti-retaliation provisions added to the Exchange Act by Dodd- Frank. Specifically, the issue in the brief centers on the question of whether a Commission rule, which provides that the anti-retaliatory protections apply to whistleblowers who report internally but not to the SEC, is entitled to Chevron deference. While the Commission argues in support of its rule, the Fifth Circuit has taken a contrary position (here).
Canadian securities class actions
Filings for new Canadian securities class actions have been essentially flat over the last three years, according to a recent report by NERA Economic consulting (here). Last year there were 11 securities class actions filed in Canada, the same as in the prior year and one more than in 2010. The largest number of these cases for a single year since 1997 was 15 in 2011 (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 4 civil injunctive actions and 2 administrative proceedings, excluding 12j and tag-along-actions.
Insider trading: SEC v. Zeringue, Civil Action No. 3:15-cv-00405 (W.D. La. Filed Feb. 19, 2015) is an action which names as defendants Scott Zeringue and Jessie Roberts. Mr. Zeringue is the vice president of construction operations at Shaw Group, Inc., an energy construction company. Mr. Roberts is his brother-in-law. The action centers on the acquisition of Shaw by Chicago Bridge & Iron on February 13, 2013. Prior to that time Mr. Zeringue learned of the then pending deal through his employment. He purchased 125 shares of Shaw, told his brother-in-law about the deal and asked him to purchase additional shares for him. Mr. Roberts made purchases, and tipped Friend A and a relative of that person. Both traded. Overall Mr. Roberts had trading profits of $765,000 while the other traders profits totaled $154,000. Mr. Roberts paid his brother-in-law $30,000 for the tip. The action alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 232022 (Feb. 19, 2015).
Bid-rigging: In the Matter of VCAP Securities, LLC, Adm. Proc. File No. 3-16389 (Feb. 19, 2015) is a proceeding which names as Respondents the firm, a registered broker dealer, and Brett Graham, its CEO. Vertical Capital LLC is an affiliated investment adviser which managed funds. The firm served as a liquidation agent for certain CDOs. As part of its undertakings and representations to the Trustee, the firm was not supposed to bid. To circumvent that restriction Respondents arranged for others to bid in the auctions on behalf of funds managed by Vertical. In making those binds Respondents were able to use confidential information obtained from the bidding process. The Order alleges violations of Exchange Act Section 10(b). Both Respondents settled, consenting to the entry of cease and desist orders based on the Section cited. The firm was censured. In addition, the firm paid $1,046,555 in disgorgement plus prejudgment interest while Mr. Graham paid $118,280 in disgorgement plus prejudgment interest. Mr. Graham will also pay a penalty of $200,000 and was barred from the securities business and from participating in any penny stock offering with a right to apply for re-entry after three years. The firm will not pay a penalty based on financial condition.
Misappropriation: SEC v. Cohen, Civil Action No. 15-cv-0129 (D. N.J. Filed Feb. 19, 2015) is an action which names as defendants Michael Cohen and Proteonomix, Inc., a biotech company. Mr. Cohen is the CEO. From 2008 through 1012 Mr. Cohen diverted about $600,000 of corporate funds to his personal use by channeling company shares into entities supposedly controlled by his father-in-law. In fact Mr. Cohen controlled the bank and brokerage accounts for the entities and ultimately sold the for his benefit. The transfers were falsely recorded on the books and records of the company and were transferred in unregistered transactions. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). Each defendant settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. Mr. Cohen also agreed to the entry of office and director and penny stock bars. Monetary relief will be determined later. A parallel criminal action was filed. See Lit. Rel. No 23301 (Feb. 19, 2015).
Fraudulent registration: In the Matter of Logical Wealth Management, Inc., Adm. Proc. File No. 3-16390 (Feb 19, 2015) is a proceeding with names as Respondents the registered investment adviser and Daniel Goper, its President. From 2006 through 2011 the firm improperly registered with the Commission as an advise by inflating its assets. In June 2012 following Dodd-Frank the firm falsely represented that its principle office was in the State of Wyoming, the only state with no legislation for the registration of advisers. Under Dodd-Frank this permitted the firm to register with the SEC. The Order alleges violations of Advisers Act Sections 203A, 204(a), 204A, 206(4) and 207. The Respondents consented to the entry of cease and desist orders based on the Sections cited in the Order. In addition, the firm’s registration was revoked and Mr. Goper will pay a $25,000 civil penalty.
Pyramid scheme: SEC v. Johnson, Civil Action No. 1:15-cv-00299 (D. Colo. Filed February 12, 2015) is an action which names as defendants, Kristine Johnson, Troy Barnes and Work With Troy Barnes, Inc. Ms. Johnson and Mr. Barns are co-founders of the company. Since April 2014 the defendants have raised over $3.8 million from investors through videos and other promotions of the company. Investors were told that the firm generates extraordinary returns through a “triple algorithm” that the two individual defendants developed. This creates a limitless stream of life time returns. The firm is actually a Ponzi and pyramid scheme, according to the complaint. To date the individual defendants have misappropriated at least $200,000. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Investment fund fraud: SEC v. Malik, Civil Action No. 15-1025 (S.D.N.Y. Filed February 13, 2015). Defendant Mozzam Malik, who registered with FINRA as a stock broker trainee in 2007, was formerly a waiter, NYPD traffic agent and security guard who attended high school in Pakistan. His company, defendant American Bridge Investment Group, LLC, has not had a physical office since 2011. Since at least May 2011 Mr. Malik has solicited investors for his hedge fund. Many of the solicitations were made by unpaid staff who cold called potential investors. Potential investors were promised a partnership interest in Mr. Malik’s hedge funds. Those funds, investors were told, held a multi-million dollar portfolio of investments in various high profile IPOs and secured bond transactions. At times an offering memoranda was used which claimed the fund had a valuation of over $100 million. At other times e-mail was used to solicit investors. The promised returns were represented as being very high. The profits came from a proprietary, quantitative approach to investing combined with sophisticated risk-control techniques. All of this was supposedly supervised by Mr. Malik who, according to the website, had over a decade of Wall Street experience and had lead teams which managed over $5 billion. The claims were false. While about $840,774 was raised from investors, the fund never held much more than $90,000. The balance of the investor funds were misappropriated by Mr. Malik, according to the court papers. Ms. Ebert, an IR person who responded in e-mails which included her photo to investor complaints, does not exist, although the photograph was of a real person. The lady in the photograph had no knowledge of Mr. Malik or his operation. The Commission’s complaint alleges violations of Securities Act Sections 5(a) and 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). See Lit. Rel. No. 23197 (February 13, 2015). The case is pending. The NY AG brought a parallel criminal action.
Criminal cases
Investment fund fraud: U.S. v. Tagliaferri, Case No.1:13-cr-0115 (S.D.N.Y.) is an action in which the president of TAG Virgin Islands, James Tagliaferri, was sentenced to six years in prison for defrauding his investment advisory clients. Specifically, he was alleged to have taken undisclosed compensation in exchange for recommendations to clients, diverted client funds to his own purposes and caused fictitious securities into client accounts. He was convicted following a nearly five week jury trial (here).
Australia
Stop order: The Australian Securities and Investment Commission issued a stop order against Bitcoin Group Ltd. from publishing any statements concerning its intention to make a public offering of its shares until the filing of a prospectus. The firm was using social media to announce its intentions, targeting the Chinese community. The announcements were made prior to the time the firm registered as an Australian company and before any disclosure document was filed.