Securities Law Updates - from Lawupdates.com

Sen. Durbin Proposes Supermajority Vote of Shareholders to Curb Excessive Pay in Publicly Traded Corp.

2009-06-22T22:51:19+00:00

Securities Law | New Proposed Legislation || No. S. 1006 || , 05/7/2009 || || Sen. Richard Durbin (D-Il) has filed the Excessive Pay Shareholder Approval Act on May 7, 2009, seeking to curb excessive pay to employees of publicly-traded companies. The title of the bill is “A bill to require a supermajority shareholder vote to approve excessive compensation of any employee of a publicly-traded company, “ and was referred to Senate Committee on Banking, Housing, and Urban Affairs after its introduction on the Senate floor. The Excessive Pay Shareholder Approval Act would require a supermajority—60 percent—vote of the shareholders to approve a compensation structure in which any employee receives more than 100 times more than the average employee of that company. “Corporations could pay executives whatever they think is appropriate, but shareholders would have to OK packages that are 100 times as large as the average worker earns, “ explained Durbin in his speech introducing this legislation. This bill would require greater transparency in compensation and would encourage companies to think about how they pay their lower-paid workers, not just how they reward the people at the top, Durbin added. “To restore some balance, the shareholders of a corporation should have to approve lucrative compensation packages,” Durbin stated.

House Passes, Pres. Obama Signs into Law Anti-Financial Fraud Act

2009-06-22T22:43:58+00:00

Securities Law | New Statutes, Regulations and Rules || No. S. 386, H. R. 1748 || , 05/20/2009 || || On May 18th, 2009, the House of Representatives passed the final Fraud Enforcement and Recovery Act of 2009 (S. 386) by a vote of 338-52, which was signed into law by the President on May 20th. This bill will protect taxpayers by giving the Department of Justice more tools to fight fraud in the use of TARP and recovery funds, and to increase accountability for corporate and mortgage frauds that have contributed to the recent economic collapse. This measure also establishes a Financial Crisis Inquiry Commission, proposed by Democratic Caucus Chair John Larson and Republican Sen. Isakson, to examine the causes and factors leading up to the worst financial crisis since the Great Depression. This outside bipartisan commission will produce a detailed and clear-eyed examination of what went wrong by the end of 2010. Not only is this critical to bring accountability to a financial system that has rewarded irresponsible risk, it will help inform Congress as we move forward with common sense reforms to prevent these crises from happening in the future. An overview of the bill: Fighting Mortgage and Financial Fraud: • Updates Federal Fraud Statutes to Include Mortgage-Lending Businesses: Extends Federal fraud laws (including false statements, mail and wire fraud, and financial institution fraud) to apply to mortgage lending businesses, not directly regulated or insured by the Federal Government. These lenders were responsible for nearly half the residential mortgage market before the economic collapse, yet they remain largely unregulated and outside the scope of traditional Federal fraud statutes. • Protects Taxpayers Money by Applying Fraud Statute to TARP and Recovery Package: Makes it a federal crime for government contractors to defraud the government of funds under the Troubled Asset Relief Program and the economic stimulus package, including Government purchases of preferred stock in financial institutions. • Nearly Doubles FBI’s Mortgage, Financial Fraud Program: Includes $75 million for the FBI to nearly double the size of its mortgage and financial fraud program by hiring 190 additional special agents and more than 200 professional staff and forensic analysts. With this funding, the FBI can double its mortgage fraud task forces nationwide – from 26 to more than 50 – that target fraud in the hardest hit areas of our nation. • Increases Support for Prosecution, Investigation of Fraud Cases: Authorizes $50 million per year to U.S. Attorney’s Offices to staff the FBI’s fraud strike forces, and provides $40 million to the Department of Justice Criminal, Civil, and Tax Divisions to provide litigation and investigative support in fraud cases. • Strengthens Analytical, Investigative Capacities of HUD, Secret Service, US Postal Service: Authorizes $80 million for investigators and analysts at the U.S. Postal Inspection Service, the U.S. Secret Service, and the Office of Inspector General for the Department of Urban Housing and Development to combat fraud in Federal assistance programs and financial institutions. • Strengthen False Claims Act to Bolster Recovery of Taxpayers’ Dollars: Rectifies several federal court decisions that have narrowed the application of the False Claims Act, which allows individual whistle blowers with knowledge that a company, entity, or person has defrauded the U.S. Government to act as a private attorney general to recover the damages owed to taxpayers. Since 1986, suits filed under the Act have recovered over $22 billion in taxpayer money that otherwise would have been lost to fraud. Financial Crisis Commission: • Creates Financial Crisis Inquiry Commission: Creates an outside commission to investigate the causes of the current financial and economic crisis in the United States – similar to the investigation of the Pecora congressional subcommittee that examined the Stock Market Crash of 1929. The Pecora investigation uncovered fraudulent and unscrupulous practices on Wall Street that undermined the financial system. That congressional investigation contributed to the development of the regulatory system that governed our financial markets for decades. • Commission Goals: This commission will produce a detailed and clear-eyed examination of what went wrong, which is needed to bring accountability to a financial system that rewards unduly risky behavior, and to help inform Congress as we move forward with common sense reforms to prevent these crises from happening in the future. • Bipartisan Commission Made Up of Independent Experts: This Financial Markets Commission will be made up of 10 members (6 appointed by the Majority and, 4 by the Minority), with significant experience in banking, market regulation, taxation, finance, economics, housing and consumer protection. • Commission Report Next Year: The Commission will hold hearings, can issue subpoenas for witness testimony or documents and must report its findings and conclusions to Congress by December 15, 2010. • Examine Broad Range of Issues Leading to the Economic/Financial Crisis: The Commission will look at a broad range of areas, including the role of: fraud and abuse in the financial sector, state and Federal regulatory enforcement; credit rating agencies; lending practices and securitization; corporate governance and executive compensation; Federal housing policy; derivatives; GSEs; and short-selling, among others. The Commission is also required to examine the causes of major financial institutions that failed or were likely to fail without government assistance.

SEC Amends Rules Granting Additional Authority to the OGC in the Conduct of Investigations

2009-06-22T22:38:38+00:00

Securities Law | New Statutes, Regulations and Rules || No. 17 CFR Part 200, Release No. 34–59829 || , 04/28/2009 || || The Securities and Exchange Commission (“SEC”) has amended its rules to delegate to the General Counsel its authority to designate officers in authorized investigations conducted by the Office of General Counsel (“OGC”). By way of background, the OGC of the SEC has the authority to conduct authorized investigations under Section 21 of the Securities Exchange Act of 1934 (15 U.S.C. 78u, “Exchange Act”) of possible violations by attorneys of the Commission Rules of Practice. In connection with these investigations, it may be necessary from time to time to amend the formal orders to add or remove officers designated to conduct the inquiry. Section 21 (a)(1) of the Exchange Act of authorizes the SEC to conduct investigations regarding violations of the Exchange Act or its related rules or regulations. As part of such investigations, under Section 21(b) of the Exchange Act, the SEC may designate officers to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda or other records which the SEC deems relevant or material to the inquiry. A delegation of authority to the General Counsel to designate officers would spare the Commissioners and their staffs from having to review matters in which the SEC has already issued an order and which implicate no policy issues. This would allow the General Counsel to designate additional officers to take testimony and conduct investigations in those matters or similarly remove officer designations as may be necessary. This authority is identical to that granted to the Director of the Division of Enforcement with respect to authorized investigations conducted by that Division. This new rule took effect on May 4, 2009.

2Kirleis v. Dickie McCamey & Chilcote: Express Consent to Arbitrate Required, Even with Arbitration Provision in Corporate Bylaws

2009-05-28T23:02:00+00:00

Securities Law || Kirleis v. Dickie McCamey & Chilcote, 05/28/2009 || The Third Circuit had to weigh two competing principles – the contract law requirement that a party must explicitly consent to an arbitration agreement versus the corporate law principle that directors and shareholders of a corporation are charged with constructive knowledge and acceptance of the corporation’s bylaws. In Kirleis v. Dickie McCamey & Chilcote, 560 F.3d 156 (3rd Cir. 2009), under Pennsylvania law, the Court determined that even though the plaintiff was a shareholder and director of a law firm that contained within its bylaws an arbitration agreement, the plaintiff was not bound by that agreement because she had never signed any document explicitly expressing her consent to arbitrate.

House Passes Anti-Financial Fraud Bill After Senate Approval

2009-05-11T23:40:00+00:00

Securities Law | New Proposed Legislation || No. S. 386 || , 05/6/2009 || || The U.S. House of Representatives has passed by a vote of 367 to 59 an anti-financial fraud legislation, known as the Fraud Enforcement and Recovery Act, that seeks to add more teeth to the federal authorities’ fight against financial fraud. The House approval came after the Senate passed on April 28, 2009 the legislation that was sponsored by Sen. Patrick Leahy, D-Vt., and co-sponsored by Sen. Charles Grassley, R-Iowa, and Sen. Ted Kaufman, D-Del. The complete title of the proposed legislation is “To improve enforcement of mortgage fraud, securities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds, and for other purposes,” and was passed by the House on May 6, 2009. In total, the bill authorizes $245 million a year over the next two years to hire more than 300 Federal agents, more than 200 prosecutors, and another 200 forensic analysts and support staff to rebuild our nation’s “white collar” fraud enforcement efforts, said Sen. Leahy, the chairman of the Senate Committee on Judiciary, in a closing statement at the Senate session on April 28, 2009.

Fl Court Enters $3.15M Judgment Against James in Ponzi Scheme Suit

2009-05-9T00:01:01+00:00

Securities Law | New Settlements and Verdicts || No. No. 08-61516-CIV-ALTONAGA/BROWN || U.S. District Court for the Southern District of Florida, 03/23/2009 || The Securities and Exchange Commission (“SEC”) announced that on March 23, 2009, the United States District Court for the Southern District of Florida, entered a final judgment ordering Anthony A. James to pay $2,390,487.45 in disgorgement, plus prejudgment interest of $84,620.10 and a $130,000 civil penalty in connection with his scheme to misappropriate client funds and operate a Ponzi scheme. James is the principal of James Asset Advisory, L.L.C. (“James Asset”), an investment advisory firm, which is also impleaded as a defendant in the civil suit. James had previously consented to a judgment of permanent injunction and other relief in connection with the scheme enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5, thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (“IAA”). The district court entered the injunction on September 25, 2008. || On September 24, 2008, the SEC filed a civil injunctive action against James and James Asset for misappropriating client funds and operating a Ponzi scheme. The SEC’s complaint alleged that from at least April 2001 through January 2008, defendants received at least $5.2 million from at least 44 clients who were told by defendants that client monies would be invested in stocks, bonds, and mutual funds. According to the complaint, defendants never invested any client funds in the stock market or other investments. Instead, James misappropriated at least $2.4 million in client monies to fund his lavish lifestyle, including the purchase of a six-bedroom, 5,000 square foot home, a luxury condominium, a Porsche sports car, and season tickets to the Miami Heat games. SEC also asserted in its complaint that, like a classic Ponzi scheme, defendants transferred approximately $2.8 million from new clients to existing clients to repay principal or to create the illusion of profitable trading. In addition, to facilitate and otherwise conceal ftheir raud, the complaint added, defendants provided clients with false account statements reflecting securities holdings and returns that did not exist. The SEC’s complaint charged James and James Asset with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the IAA. On February 26, 2009, the SEC dismissed, with prejudice, its claims for disgorgement, prejudgment interest and a civil penalty against James Asset because the company is defunct and had no assets from which a judgment could be collected.

Service Can Assert TFRP Against PEOs, IRS Concludes

2009-05-8T23:45:00+00:00

Securities Law | New Statutes, Regulations and Rules || No. ILM 200916024 || , 03/6/2009 || || In this legal memorandum, the Internal Revenue Service (“IRS”) has stated that it can assert the trust fund recovery penalty(“TFRP”) against an officer of a professional employment organization (“PEO”) that failed to remit its clients’ trust fund taxes to the IRS. According to the IRS, a PEO is directly liable for the client companies’ unpaid trust fund taxes when the PEO files the client companies’ employment tax returns under the PEO’s name, and lists itself as the employer of the clients’ employees. By doing so, the PEO self-assessed its clients’ employment tax liabilities against itself. Assuming the IRS establishes that an officer of a PEO was responsible for the remittance of the client companies’ trust fund taxes to the IRS, then the IRS can assert the TFRP against that officer in order to collect the unpaid trust fund taxes of the client companies. By way of background, the IRS explained that small businesses often contract with professional employment organizations (PEOs), also known as employee leasing companies, to ensure compliance with workplace laws and regulations. In the typical contract between a PEO and a client, the PEO becomes the ‘co-employer’ of the clients’ employees. Each week, the client companies email, fax, or mail the PEO the number of hours worked by each employee. The PEO computes the FICA, Medicare, withholding tax, workers’ compensation, and 401(k) contributions of each employee and bills the client for the amount. The PEO then receives the amount from the client companies and the contract requires the PEO to pay the employees and make the clients’ federal tax deposits. However, some PEOs do not make the federal tax deposits and instead divert the funds entrusted to them for other purposes. The IRS added that some PEOs file the client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees. When the PEO does this, it self-assesses the clients’ employment tax liabilities as the PEO’s employment tax liability and the IRS assesses additional amounts of the client companies’ unpaid employment tax liabilities against the PEO as well. The Internal Revenue Code (“IRC”) section 6672(a) imposes a 100% penalty on any person required to collect, truthfully account for, and pay over trust fund taxes but who willfully fails to collect, truthfully account for, or pay over such tax, or who willfully attempts to evade the payment of such tax. The IRS clarified that this memorandum may not be used or cited as precedent.

Senate Approves Anti-Financial Fraud Legislation

2009-05-7T22:31:00+00:00

Securities Law | New Proposed Legislation || No. S. 386 || , 04/28/2009 || || The Senate has passed legislation authored by Senator Patrick Leahy (D-Vt.) to bolster existing tools and increase resources available to federal prosecutors to combat fraud. The Fraud Enforcement and Recovery Act (“FERA”), S. 386, will help both to protect Americans from fraud and recover taxpayers’ money lost to fraud. Leahy introduced the bipartisan legislation on February 5, 2009. The Senate Judiciary Committee, which Leahy chairs, reported the measure on March 5, 2009. By way of background, FERA contains the following features: • FERA provides resources for the Department of Justice, the Federal Bureau of Investigation, the U.S. Postal Inspection Service, the U.S. Secret Service and the Inspector General for the Department of Housing and Urban Development to hire additional fraud agents, analysts, investigators, prosecutors, and support staff to combat fraud. • FERA improves to fraud and money laundering statutes to strengthen prosecutors’ ability to combat the growing wave of fraud. • FERA amends the federal criminal fraud statute to specifically include “mortgage lending business,” as defined by the bill. • FERA expands the scope of money laundering crimes to cover all of the proceeds of illegal activity (i.e., gross receipts), not just the profits. • FERA strengthens the False Claims Act, one of the best civil tools available to root out fraud in government. From 2000-2008, the Justice Department recovered more than $15 billion in fraud for the government using the False Claims Act. Further, FERA authorizes the resources necessary for the Department of Justice (“DOJ”), the Federal Bureau of Investigation (“FBI”), and other investigative agencies to respond to this crisis. In total, the bill authorizes $245 million a year over the next two years to hire more than 300 Federal agents, more than 200 prosecutors, and another 200 forensic analysts and support staff to rebuild the country’s “white collar” fraud enforcement efforts. In his closing statement delivered at the Senate session on April 28, 2009, Leahy said, “ Mortgage fraud has reached near epidemic levels in this country. Reports of mortgage fraud are up 682 percent over the past five years, and more than 2800 percent in the past decade. …In the last three years, the number of criminal mortgage fraud investigations opened by the FBI has more than doubled, and the FBI anticipates that number may double yet again. Despite this increase, the FBI currently has fewer than 250 special agents nationwide assigned to financial fraud cases, which is only a quarter of the number the Bureau had more than a decade ago at the time of the Savings and Loan crisis. At the current levels, the FBI cannot even begin to investigate the more than 5000 mortgage fraud allegations referred by the Treasury Department each month.” The engrossed bill as passed by the Senate will now go to the House of Representatives for its approval.

Ponzi Scheme in Commodity Futures Trading Nets $86M for CFTC from Texas Businessman

2009-05-4T20:47:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 6:08cv187 || U.S. District Court for the Eastern District of Texas, 04/2/2009 || In a fraud suit relating to commodity futures and options contracts, the U.S. District Court for Eastern District of Texas has ordered Texas resident George D. Hudgins (d/b/a George D. Hudgins, L.L.C.) to pay $71 million to victims of his Ponzi scheme and a civil penalty of $15 million. The order also permanently barred Hudgins from the commodity industry. The consent order, entered on April 2, 2009, fully settled all charges in the civil lawsuit filed by the Commodity Futures Trading Commission (“CFTC”) on March 13, 2008 against Hudgins. According to the order, as early as June 2001 through May 2008, Hudgins fraudulently induced members of the public to invest approximately $88 million in a commodity pool that traded on-exchange commodity futures and options contracts. || Specifically, the order stated that Hudgins solicited investors through false representations in promotional packets, newsletters, group presentations and face-to-face meetings, including false statements about the length of time the commodity pool had been in existence, the historical profitability of the commodity pool, and the profits made by investors. For example, Hudgins falsely told investors and potential investors that from 2000 to 2007 the commodity pool produced net annual profits of from 22.5 percent to 99 percent, when the pool had a net loss each year since its inception in December 2003, and total losses of over $28 million as of April 30, 2008. See http://www.cftc.gov/newsroom/enforcementpressreleases/2009/pr5641-09.html. According to the district court, to lull investors into a false sense of security that their funds were not at risk, Hudgins sent investors false account statements, showing that their accounts were profiting from his trading activity. In fact, the accounts suffered millions in losses over their lifetime and Hudgins paid out approximately $17 million in false “profits” to certain investors from money Hudgins obtained from other victims of his fraud. Id. Further, after suffering millions of dollars in trading losses, court records show that Hudgins used the remainder of the money to support his lavish lifestyle, which included purchasing several antique classic sports cars, Tiffany jewelry, a 300-acre ranch along the Angelina River, and an airplane. Hudgins also commissioned and almost completed the construction of an airplane hangar. On May 13, 2008, at the CFTC’s request, Judge Davis froze Hudgins’ assets and appointed a receiver to recover and distribute Hudgins’ assets to defrauded investors. Of the $71 million solicited by Hudgins, the Receiver has collected over $24 million through the asset freeze, the sale of assets, the return of false profits already sent by Hudgins to certain investors, and the return of gifts made by Hudgins to family and friends. On March 12, 2009, the Receiver distributed these funds to defrauded investors on a pro rata basis. On December 15, 2008, after notice to all interested parties and a hearing, the district ourt entered its “Final Order Adjudicating Claims” in which the district court found, among other things, that the principal amount of the final approved claims of commodity pool participants defrauded by Hudgins totals $70,816,491. Subsequently, the district court increased the approved claims to $$70,864,679. Moreover, on January 9, 2009, the district court entered its “Order Regarding Petition 15: Order Approving First Interim Distribution” authorizing the receiver to disburse funds to Hudgins’ pool participants, provided that no notice of appeal has been filed with district court on or before sixty (60) days after its January 9, 2009 distribution order. In a separate criminal action, Hudgins pleaded guilty on September 9, 2008, to wire fraud, embezzlement, and money laundering. He was sentenced by U.S. District Court Judge Thad Heartfield on March 13, 2009, to 121 months in federal prison.

Judah and Excel Lease Fund Settle $40M Debenture Offering Suit in TX District Court

2009-05-4T20:42:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 5:09-CV- 0087-C || United States District Court for the Northern District of Texas, 04/23/2009 || Without admitting or denying the Securities and Exchange Commission’s (“SEC”) allegations, Texas businessman Benny L. Judah and his company, Excel Lease Fund, Inc. have consented to the asset-freeze and receivership orders, as well as permanent injunctions against future violations of anti-fraud provisions of federal securities laws, particularly the Securities Act of 1933 and the Securities Exchange Act of 1934. Judah has also consented to an injunction issued by the U.S. District Court for the Northern District of Texas prohibiting him or any entity he owns or controls from issuing securities in the future. The SEC had alleged that from January 2006 through at least March 2009, the Defendants engaged in a fraudulent offering of debenture securities issued by Excel. In offering materials, defendants represented that Excel sought to raise $50 million to fund Excel's equipment-leasing business, to fund Excel's "investments," and to retire debentures that Excel had issued earlier. In practice, however, Judah used offering proceeds in a manner grossly inconsistent with those representations. || Based on the SEC’s complaint, Judah was a resident of Lubbock, Texas, and the president and sole owner of Excel. Judah is not registered with the SEC in any capacity. Judah is a recidivist securities-law violator, the district court having imposed an injunction against him in 2001 for violations of the securities-registration and anti-fraud provisions of the federal securities laws, specifically Sections 5(a), 5(c), andI7(a) of the Securities Act [15 U.S.C. §§77e(a), 77e(c), and 77q(a)] and Section 10(b) ofthe Exchange Act [15 U.S.C. § 78j(b)] and of Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder. Complaint, paragraph 7, citing SEC v. Benny L. Judah and Excel Lease Fund, Inc., Civil Action No. 5:01-CV-045 (N.D. Tex., January 2001). In that case, the district court ordered Judah to pay a $50,000 civil penalty. The SEC also alleged that Excel is a Texas corporation headquartered in Lubbock, Texas. It was the issuer of the debentures. Excel has never registered any securities offerings with the Commission. According to the SEC, as of April 20, 2009, Excel had debentures issued and outstanding with a face value of approximately $40 million held by approximately 240 investors, primarily located in the Lubbock area. Excel is likewise a recidivist securities-law violator, the district court having imposed an injunction against it in 2001 for violations of the securities-registration and anti-fraud provisions of the federal securities laws, specifically Sections 5(a), 5(c), andI7(a) of the Securities Act [15 U.S.C. §§77e(a), 77e(c), and 77q(a)] and Section lOeb) ofthe Exchange Act [15 U.S.c. § 78j(b)] and of Rule 10b-5 [17 C.F.R. § 240.lOb-5] thereunder. Complaint, paragraph 8, citing SEC v. Benny L. Judah and Excel Lease Fund, Inc., Civil Action No. 5:01-CV-045 (N.D. Tex., January 2001). The SEC further alleged that Judah and Excel raised approximately $40 million from hundreds of investors through a high-yield debenture offering that started in January 2006. The Commission also alleged that Judah and Excel made several false and misleading representations and omissions in connection with the offer and sale of the debentures. Among other things, the SEC claimed that Judah and Excel represented to investors that investor funds would be used to retire an earlier series of debentures and for certain other legitimate business purposes. In fact, however, Judah used millions in investor proceeds to fund his securities day-trading habit and to make loans to other companies he owned. These unauthorized and undisclosed misuses of funds resulted in losses of millions of dollars. In addition, Judah and Excel failed to disclose material related party transfers to other companies Judah owned and overstated the assets supposedly backing the debentures by at least 30%. The complaint alleged that Judah and Excel violated the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint requested permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against defendants.

Unlawful Proprietary Trading Charges Net $42M for the SEC

2009-05-4T20:35:00+00:00

Securities Law | New Settlements and Verdicts || No. Nos. 09-1977/09-1976 /09-1978/09-1975 /09-1973 || U.S. District Court for the Southern District of New York, 03/24/2009 || Defendants Automated Trading Desk Specialists, LLC (“ATD”); E*Trade Capital Markets LLC (“E*Trade”); Melvin Securities, L.L.C. (“Melvin”); Melvin & Company LLC (“Melvin Co”); Sydan, LP (“Sydan”); and TradeLink, LLC (“TradeLink”) have settled unlawful proprietary trading charges filed by the Securities and Exchange Commission (“SEC”) in the U.S. District Court for the Southern District of New York. Without admitting or denying the allegations set forth in the six separate complaints, defendants have consented to entry of orders permanently enjoining them from engaging in the violations set forth in the complaints, particularly trading violations stated in Chicago Stock Exchange (CHX”) Article 9, Rule 17, and Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(1), and have agreed to disgorge ill-gotten gains totaling in the aggregate over $35.7 million and pay civil penalties totaling more than $6.7 million. || In its complaints, the SEC alleged that the defendants failed to meet their basic obligation as specialists to serve public customer orders over their own proprietary interests while executing trades on the CHX. According to the SEC, as specialists operating on the CHX, each of the defendants had a general duty to match executable public customer or “agency” buy and sell orders and not to fill customer orders through trades from the specialist firm’s own accounts when those customer orders could be matched with other customer orders. However, from 1999 through 2005, each defendant violated this obligation by filling orders through proprietary trades rather than through other customer orders, thereby causing upwards of $35 million in customer harm. The SEC’s complaints alleged that the violative conduct engaged in by the Defendants took three basic forms: —Trading Ahead. In certain instances, specialists filled one agency order through a proprietary trade for their firm’s account while a matchable agency order was present on the opposite side of the market, thereby improperly “trading ahead” of such opposite-side executable agency order. The customer order that was traded ahead of was then disadvantaged when it was subsequently executed at a price that was inferior to the price received by the firm’s proprietary account. For example, if a specialist has present on his book, at the same time, a marketable customer order to buy 1,000 shares of a security and a marketable customer order to sell 1,000 shares of the same security, the specialist would be obligated to pair off those matchable orders. Trading ahead would occur if the specialist filled the sell order from the firm’s proprietary account at $25.00 per share, and then subsequently executed the buy order at the inferior price of $25.05 per share. In this example, the buy order received a price inferior to that which it was entitled ($25.00) and the customer was disadvantaged by $50.00 (1,000 shares x $0.05 per share). —Interpositioning. In certain instances, after trading ahead, specialists also traded proprietarily with the matchable opposite-side agency order that had been traded ahead of, thereby “interpositioning” themselves between the two agency orders that should have been paired off in the first instance. By participating on both sides of trades, the specialist captured the spread between the purchase and sale prices, thereby disadvantaging the other parties to the transactions. Alternatively, specialists sometimes sold shares of a security into a customer buy order, and then filled the customer sell order by buying for the firm’s proprietary account at a lower price. In either case, the specialists participated on both sides of trades, capturing the spread between the purchase and sale prices, and disadvantaging the other parties to the transaction. —Trading Ahead of Unexecuted Open or Cancelled Orders. In certain instances, specialists traded ahead of opposite-side executable agency orders, as described above, but in these instances, the unexecuted orders were left open until the end of the trading day, or were cancelled by the customer prior to the close of the trading day before receiving an execution. The complaints further alleged that, during the relevant period, each of the defendants failed to make or keep current a blotter containing an itemized daily record of all purchases and sales of securities effected by it for its proprietary accounts. Specifically, the complaints allege that the Defendants sometimes received orders to buy or sell securities that are dually listed on the CHX and on a different exchange, such as the New York Stock Exchange (NYSE). In order to fill these orders, the specialist would sometimes place a corresponding order (lay-off trade) on the NYSE for the firm’s proprietary account. With respect to lay-off trades, the Defendants failed to make or keep current records showing the account for which each such transaction was effected, the name and amount of the securities, the unit and aggregate purchase or sale price, and the trade date. The SEC’s complaints alleged that by engaging in the conduct described above, the Defendants violated CHX Article 9, Rule 17, and Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(1) thereunder.

SEC Settles Insider Trading Charges Involving Dick’s Sporting Goods Acquisition of Galyan’s Trading Company

2009-05-4T20:29:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 2:08-CV-01361-AJS and No. 2:08-CV-01367-AJS || U.S. District Court for the Western District of Pennsylvania, 04/17/2009 || The U.S. District Court for the Western District of Pennsylvania has entered final judgments against Joseph J. Queri, Jr., a resident of Pittsburgh, Pennsylvania, and Kyle D. Kaczowski, a resident of Las Vegas, Nevada, in two separate district court cases. The SEC charged them, and fourteen other defendants, with insider trading in advance of Dick's Sporting Goods Inc.'s June 21, 2004 announcement that it intended to acquire Galyan's Trading Company, Inc. via a tender offer. Without admitting or denying the allegations in the complaint, Queri, Jr. and Kaczowski consented to the entry of a final judgment in which they were permanently enjoined from future violations of the anti-fraud provisions of the securities laws, Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Queri, Jr. also agreed to pay disgorgement of $1.00, to preserve the SEC's ability to establish a fair fund, and to pay a one-time civil penalty for tipping in the amount of $218,026.00. Kaczowski agreed to pay disgorgement of $20,193.00, plus prejudgment interest of $6,661.07, and a civil penalty for trading and tipping two friends in the amount of $30,133.00. || The SEC filed the two complaints on September 30, 2008 it filed in the U.S. District Court for the Western District of Pennsylvania against a total of sixteen individuals for insider trading in advance of Dick’s Sporting Goods Inc.‘s June 21, 2004, announcement that it intended to acquire Galyan’s Trading Company, Inc. via a tender offer. The complaints alleged: —Queri, Jr., Dicks’ Senior Vice President of Real Estate, tipped his close friend, Gary Gosson, and his father, Joseph Queri, Sr., about the acquisition. —Gosson, located in Syracuse, New York, tipped his friends defendants Gary L. Camp, Michael A. Santaro, Joseph A. Federico, Philip J. Simao, Mark J. Costello, and Alan J. Johnston, who all bought shares of Galyans stock. Johnston, in turn, tipped family members and friends, who also bought shares. Gosson gave Camp money to buy shares of Galyans stock through Camp’s brokerage account. Santaro and Federico shared profits with Gosson. —Queri Sr., located in Las Vegas, Nevada, tipped his friends James L. Jerome, Kaczowski, Gino M. Ferraro, Felix A. Crisafulli, and Thomas M. Heller, who all bought shares of Galyans stock. Jerome, in turn, tipped defendant Brandt A. England, who also bought shares. Kaczowski tipped two friends who traded. Ferraro tipped his son-in-law, defendant Franko J. Marretti III, who traded and tipped a business colleague. —The day after the public announcement, Galyan’s stock closed at $16.68, a 50.3% increase from the previous day’s closing price of $11.10. The traders collectively profited over $620,000 after selling their Galyans stock. After the case filing, five of the defendants agreed to settle with the SEC. Specifically, without admitting or denying the allegations in the complaint, Queri Sr., Santaro, Ferraro, Crisafulli and Heller consented to the entry of a final judgment, in which they were permanently enjoined from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. In addition to permanent injunctive relief, Queri Sr. agreed to pay disgorgement of $2,600.00, plus prejudgment interest of $728.59, jointly and severally with Ferraro, and a civil penalty, for tipping, in the amount of $105,647. Ferraro agreed to pay disgorgement of $13,092.00, plus prejudgment interest of $3,668.66, of which $3,328.59 is to be paid jointly and severally with Queri Sr., and a civil penalty, for trading and tipping, in the amount of $22,644.00. Crisafulli agreed to pay disgorgement of $13,327.00, plus prejudgment interest of $3,734.52, and a one-time civil penalty, for trading, in the amount of $13,327.00. Heller agreed to pay disgorgement of $7,639.00, plus prejudgment interest of $2,140.61, and a one-time civil penalty, for trading, in the amount of $7,639.00. Finally, Santaro agree to pay disgorgement of $18,782.00, plus prejudgment interest of $5,263.15, and a civil penalty, for trading, in the amount of $18,782.00.

SEC Secures $51M Final Judgment Against Tri Energy and Co-Defendants for Their Gold-Related Ponzi Scheme

2009-04-29T21:44:00+00:00

Securities Law | New Settlements and Verdicts || No. No. ED CV 05-00351 AG(MANx) || U.S. District Court for the Central District of California, 04/13/2009 || The Securities and Exchange Commission (“SEC”) has announced that the U.S. District Court for the Central District of California entered a final judgment on April 13, 2009, against defendants Tri Energy, Inc., H & J Energy Company, Inc., Robert Jennings, Arthur Simburg, and La Vie D'Argent (collectively the "Tri Energy Defendants"). In this settled action, the district court ordered the Tri Energy Defendants to pay $35 million in disgorgement and $2,048,466 in prejudgment interest, and ordered Simburg and Jennings to each pay a civil penalty of $7 million. $28,058,310 of the disgorgement is deemed satisfied by the criminal restitution ordered in a parallel criminal proceeding. In a related criminal proceeding, Simburg entered into a plea agreement, and on November 17, 2008 got a sentence of nine years imprisonment. After jury trial, the jury returned a guilty verdict against Jennings on July 11, 2008, for which Jennings was sentenced on November 17, 2008 to twelve years imprisonment. Defendant Henry Jones was extradited from Hong Kong and convicted after a jury trial on July 11, 2008, and was sentenced to twenty years imprisonment on April 3, 2009. || The SEC’s amended complaint, filed on August 10, 2006, stated that Tri Energy, Inc. and H & J Energy, Inc. represented themselves as companies engaged in the mining business. Defendant Jennings is the president and chairman of Tri Energy, as well as the president and treasurer of H & J Energy. The complaint stated that defendant Simburg of is the senior vice president of Tri Energy. Simburg allegedly led nightly investor conference calls in which he solicited investors and lulled them with fraudulent statements. He received investor money from funds sent to the Tri Energy bank account. Relief defendant La Vie D’Argent (“La Vie D’Argent”), a Nevada corporation, has a registered agent at Corporate Services Company, 2nd Floor, 723 So. Casino Center Blvd., Las Vegas, NV 89101. Defendant Simburg is president, secretary and treasurer of La Vie D’Argent. The amended complaint alleged that the aforementioned defendants, and others, perpetrated a massive fraud and Ponzi scheme involving a purported coal mine venture and a so-called international “gold deal.” The complaint claimed that defendants had been telling investors that these extraordinary profits were to be generated in part by helping an unnamed Saudi Arabian prince move gold from Israel through Luxembourg to the United Arab Emirates. In reality, according to the complaint, although some money had been paid out to investors, those funds appeared to have come from new investor money, and substantial amounts of investor funds had been transferred to bank accounts controlled by some of the defendants and relief defendants. Defendants recruited potential victims through claims that their investments were aimed, at least in part, at raising money for humanitarian and religious efforts. Defendants promised their victims outlandish returns on their investments of 100-1000% in as little as 60 days. Over 500 investors lost more than $50 million in the scheme. The district court previously on August 13, 2007, enjoined the Tri Energy Defendants from violations of the reporting and anti-fraud provisions of the securities laws (Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10-b-5 thereunder), and specifically enjoined them from soliciting investments of the type at issue in the SEC’s lawsuit. The SEC obtained a default judgment against Jones and his companies Marina Investors Group, Inc. and Global Village Records on March 20, 2008, enjoining them from future violations of the same provisions identified above, as well ordering $22,291,725 in disgorgement, $2,073,922 in prejudgment interest, and a $7 million civil penalty. The SEC also obtained final judgments against relief defendant Thomas Avery and his company T.M.A. Investment Enterprises and relief defendant R.P.J. Investment Group, Inc. on April 9, 2008, ordering $70,000 in disgorgement plus $4,342.42 in prejudgment interest jointly and severally between Avery and his company, and ordering $7,364 in disgorgement against R.P.J.

MA District Court Enters $2.91M Final Judgment Against UK Fund Manager for $ 34M Securities Fraud

2009-04-28T17:16:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 07-CV-10712-RGS || U.S. District Court for the District of Massachusetts, 04/8/2009 || The U.S. District Court for District of Massachusetts has entered a final judgment on April 8, 2009 against defendant Glenn Manterfield, a citizen of the United Kingdom, in connection with a civil injunctive action filed in April 2007 by the Securities and Exchange Commission (“SEC”) against Manterfield, his business partner Evan K. Andersen, and Lydia Capital, LLC, a registered investment adviser based in Boston, Massachusetts. The judgment enjoined Manterfield, a principal of Lydia, from engaging in future violations of the antifraud provisions of the federal securities laws and holds him liable for $2,350,000 in disgorgement of profits from the conduct alleged in the SEC's complaint, plus prejudgment interest of $425,998, and a civil penalty in the amount of $130,000. || The SEC originally filed its action against Manterfield on April 12, 2007 in the district court, and filed an amended complaint on May 1, 2007. The amended complaint alleged that from June 2006 through April 2007, Manterfield and his business partner Andersen, acting through Lydia, engaged in a scheme to defraud more than 60 investors, who invested approximately $34 million in Lydia Capital Alternative Investment Fund LP, a hedge fund managed by Lydia. The amended complaint alleged that defendants told investors that they intended to use the hedge fund’s assets to acquire a portfolio of life insurance polices in the life settlement market. According to the amended complaint, Manterfield, Andersen, and Lydia made a series of material misrepresentations and omissions, including: (1) materially overstating, and in some instances completely fabricating the hedge fund’s performance; (2) inventing business partners, offices, and investors in an attempt to legitimatize the firm and concealing the truth as to why key vendors and banks ceased relationships with the defendants; (3) lying about Manterfield’s significant criminal history, and failing to disclose a February 2007 criminal asset freeze against him in England; (4) lying about how the hedge fund planned to address certain material risks and failing to disclose others; and (5) misstating the nature of the hedge fund’s assets and its investment process. In addition, the amended complaint stated that Manterfield and Andersen took millions of dollars of investors’ funds by withdrawing investor monies to which they were not entitled. On April 12, 2007, the district court issued a temporary restraining order that, among other things, froze the three defendants’ assets. On May 3, 2007, the district court issued a consented-to preliminary injunction and ordered a continuation of an asset freeze of the defendants’ assets. In a related action in the United Kingdom, on February 29, 2008, the SEC filed a limited notice application with the High Court of Justice, Queen’s Bench Division seeking an emergency order freezing approximately $1 million in assets held by Manterfield in the United Kingdom. The SEC filed the application after learning that a separate freeze order previously obtained by British authorities against Manterfield’s assets might be lifted. After a hearing on the Commission’s application on February 29, 2008, the High Court of Justice issued an order freezing the assets until March 6, 2008. Manterfield consented to continue the freeze until the court held an evidentiary hearing to determine whether the freeze should be extended. An evidentiary hearing was held in the High Court of Justice on April 30, 2008 and May 1, 2008. On May 16, 2008, the High Court of Justice issued an order continuing the freeze of Manterfield’s assets until the resolution of the SEC’s pending enforcement action in the United States. Manterfield appealed the order to the Supreme Court of Judicature Court of Appeal. On November 26, 2008, the Court of Appeal held a hearing and, on January 28, 2009, the three-judge panel unanimously dismissed Manterfield’s appeal. See http://www.sec.gov/litigation/litreleases/2009/lr20993a.htm.

SEC Approves FINRA Rule Change on Filing of Misleading Information as to Membership or Registration

2009-04-27T17:25:01+00:00

Securities Law | New Statutes, Regulations and Rules || No. Release No. 34-59789; File No. SR-FINRA-2009-009 || , 04/21/2009 || || The Securities and Exchange Commission (“SEC”) has approved a proposed rule change (SR-FINRA-2009-009) submitted by the Financial Industry Regulatory Authority (“FINRA”) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to adopt FINRA Rule 1122 (Filing of Misleading Information as to Membership or Registration) in the Consolidated FINRA Rulebook. By way of background, On March 3, 2009, the “FINRA” (f/k/a National Association of Securities Dealers, Inc. (“NASD”)), filed with the SEC, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, a proposed rule change to adopt NASD IM-1000-1 as FINRA Rule 1122 in the consolidated FINRA rulebook without material change. The proposed rule change was published for comment in the Federal Register on March 19, 2009.4 The SEC received no comment letters in response to the proposed rule change. NASD IM-1000-1 provides that the filing of membership or registration information as a Registered Representative with FINRA which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or the failure to correct such filing after notice thereof, may be deemed conduct inconsistent with just and equitable principles of trade and may be subject to disciplinary action. The proposed rule change renumbers NASD IM-1000-1 as FINRA Rule 1122 in the Consolidated FINRA Rulebook and clarifies its applicability to members and persons associated with members by specifying that “no member or person associated with a member” shall file incomplete or misleading membership or registration information. FINRA also eliminates the reference to the filing of registration information “as a Registered Representative” to clarify that the rule applies to the filing of registration information regarding any category of registration. In addition, FINRA deletes the reference that the prohibited conduct may be deemed inconsistent with just and equitable principles of trade and subject to disciplinary action as unnecessary and to better reflect the proposed adoption of the NASD IM as a stand-alone FINRA rule. After careful review, the SEC found that the proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder that are applicable to a national securities association, and in particular, with Section 15A(b)(6) of the Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. According to the SEC, FINRA’s adoption of NASD IM-1000-1 as FINRA Rule 1122 in the Consolidated FINRA Rulebook clarifies its applicability and provides notice to members of behavior that violates just and equitable principles of trade.

SEC Approves Proposed Amendment to Rule 123C Relating to Suspension of Certain Requirements on the Closing of Securities on the Exchange

2009-04-23T17:39:01+00:00

Securities Law | New Statutes, Regulations and Rules || No. Release No. 34-59755; File Nos. SR-NYSE-2009-18 and SR-NYSEAltr-2009-15 || , 04/13/2009 || || The Securities and Exchange Commission (“SEC”) approved proposed rule changes (SR-NYSE-2009-18) submitted by the New York Stock Exchange (“NYSE”) and NYSE Alternext US (n/k/a “NYSE Amex LLC”) (SR-NYSEAltr-2009-15) under Rule 19b-4 of the Securities Exchange Act of 1934 amending Rule 123C. The purpose of the amendment is to provide the exchanges with the ability to temporarily suspend certain requirements relating to the closing of securities on the exchanges. On October 2, 2008, NYSE filed for immediate effectiveness to amend NYSE Rule 48 to provide NYSE with the ability to suspend certain rules at the close when extremely high market volatility could negatively affect the ability to ensure a fair and orderly close. NYSE amended Rule 48 on a temporary basis in order to respond swiftly to market conditions at that time. The Rule 48 amendments are scheduled to end on April 30, 2009. On December 1, 2008, NYSE Amex (then known as NYSE Alternext US LLC) relocated its equities trading to facilities located at NYSE’s main trading floor at 11 Wall Street, New York, New York (the “Equities Relocation”). NYSE Amex’s equity trading systems and the facilities at Wall Street are operated by NYSE on behalf of NYSE Amex. In connection with the Equities Relocation, NYSE Amex adopted NYSE Rules 1-1004, subject to such changes as necessary to apply the rules to NYSE Amex, to govern trading on the NYSE Alternext Trading System beginning on December 1, 2008.8 In particular, among the rules adopted in substantively identical form were the rules at issue in this proposal—most notably, NYSE Rules 48, 52, and 123C. The temporary provisions of Rule 48 provide that a qualified Exchange officer could declare an extreme market volatility condition before the scheduled close of trading in cases where the exchange noted volatility during the day’s trading session and evidence of significant order imbalances at the close. For example, A declaration of extreme market volatility at the close under Rule 48 permits each Exchange to temporarily suspend Rule 52 (Hours of Operation). Also, A declaration of extreme market volatility at the close also permits each Exchange to temporarily suspend NYSE Rules 123C(1) and (2) (Market on the Close Policy and Expiration Policy) in order to allow cancellation or reduction of market-at-the-close (“MOC”) and limit-at-the-close (“LOC”) orders after 3:50 p.m. The exchanges therefore believe that the ability to temporarily suspend rules at the close should be available on a security-by-security basis as part of Rule 123C, which governs the closing process at the Exchange. The exchanges therefore proposed deleting the extreme market volatility at the close condition from Rule 48 and returning Rule 48 to a form substantively identical to the form of NYSE Rule 48 prior to NYSE’s October 2, 2008 filing amending that rule.

Eighth Circuit Reinstates Fund Advisory Fee Action Against Ameriprise Financial

2009-04-22T19:35:01+00:00

Securities Law | New Judicial Opinions || No. No. 07-2945 || U.S. Court of Appeals for the Eighth Circuit, 04/8/2009 || In this suit over mutual fund fees, the U.S. Court of Appeals for the Eighth Circuit has reversed a district court’s dismissal of a suit claiming violation of fiduciary duty of fund advisers under Section 36(b) of the Investment Company Act of 1940 (“ICA”). Plaintiffs led by John E. Gallus, shareholders of eleven mutual funds, claimed that fund manager and adviser Ameriprise Financial, Inc. (“Ameriprise”) breached its statutory fiduciary duty by misleading them during the negotiation and demanding excessive fees. Citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982), the U.S. District Court for the District of Minnesota granted defendant Ameriprise’s motion for summary judgment. On appeal, the Eighth Circuit held that the district court erred in holding that no Section 36(b) violation occurred simply because defendant's fee passed muster under the standard laid down in Gartenberg. According to the Eighth Circuit, although the district court properly applied the Gartenberg factors for the limited purpose of determining whether the fees constituted a breach of fiduciary duty, it erred in rejecting a comparison between the fees defendant charged its institutional clients and its mutual funds clients. Further, the district court should have determined whether defendant purposefully omitted, disguised or obfuscated information regarding fees charged different types of clients in its presentations to the board of directors representing plaintiffs. || This appeal required the Eighth Circuit to examine the scope of the fiduciary duty imposed on advisers of mutual funds by § 36(b) of the ICA, 15 U.S.C. § 80a-35(b). The plaintiffs are shareholders of eleven mutual funds (“the Funds”) that are registered investment companies under the ICA. The Funds are managed and distributed by affiliates of the defendants (collectively, “Ameriprise”). The plaintiffs filed this lawsuit on June 9, 2004, alleging that Ameriprise had breached its fiduciary duty under § 36(b) of the ICA. Sec 36(b) of the ICA states in part: “For the purposes of this subsection, the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser . . .” The fees paid to Ameriprise for advising the Funds are negotiated each year by the Funds’ board of directors (the “Board”), whose primary responsibility is to represent the plaintiffs and other shareholders during the fee negotiation. According to the plaintiffs, Ameriprise breached its statutory fiduciary duty by misleading the Board during the negotiation and demanding excessive fees. The Eighth Circuit summarized the plaintiffs-appellants’ arguments into three claims: (1) the fee negotiation was inherently flawed because it was based not on Ameriprise’s costs and profits but on external factors—namely the fee agreements of similar mutual funds in the market; (2) Ameriprise provided comparable advisory services to institutional, non-fiduciary clients at substantially lower fees than it charged the plaintiffs, to whom it owed a fiduciary duty; and (3) Ameriprise misled the Board about its arrangements with non-fiduciary clients to prevent the Board from questioning the higher fees demanded by Ameriprise. The district court granted defendants’ motion for summary judgment. The district court based its decision on an analysis of the factors set out in Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982). In ordering reversal, the Eighth Circuit noted the ruling laid down in Gartenberg. In Gartenberg, the Second Circuit analyzed § 36(b) and created the framework that has served as the starting point for interpreting a fund adviser’s fiduciary duty. According to the Eighth Circuit, the plaintiffs in Gartenberg argued that, because of their fund’s exponential growth, the adviser’s fee had become so disproportionately large that it constituted a breach of fiduciary duty. After reviewing what the Second Circuit called the “tortuous legislative history” of § 36(b), the Second Circuit concluded that the purpose of the provision was to mitigate the competitive deficiencies of the mutual fund industry. Opinion, p. 8, citing Gartenberg, 694 F.2d at 928-29. Accordingly, the Second Circuit in Gartenberg held that the relevant test for a fee is whether it “represents a charge within the range of what would have been negotiated at arm’s-length in light of all the surrounding circumstances.” Id. at 928. The Eighth Circuit also examined the Seventh Circuit’s ruling in Jones v. Harris Associates, 527 F.3d 627 (7th Cir. 2008), which according to the Eighth Circuit, eschewed the Gartenberg approach. Jones rejected the proposition that courts should evaluate the reasonableness of an adviser’s fee, holding that “(a) fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation.” Id., p. 9, citing Jones at 632. The Seventh Circuit based its conclusion on two fundamental premises: the plain meaning of the word “fiduciary” and a rejection of the economic assumptions inherent in Gartenberg. According to the Seventh Circuit, the plain meaning of “fiduciary” is a requirement of “candor in negotiation, and honesty in performance” and nothing in the obscure legislative history of § 36(b) alters that conclusion. Id. at 632-33. After a review of the cases, legislative history, and academic work surrounding § 36(b), the Eighth Circuit concluded that the Gartenberg factors provide a useful framework for resolving claims of excessive fees, notwithstanding the substantial changes in the mutual fund industry that have occurred in the intervening years. The Eighth Circuit explained that The Eighth Circuit explained that the proper approach to § 36(b) is one that looks to both the adviser’s conduct during negotiation and the end result. Id., p. 12, citing In re Mutual Funds Investment Litigation, 590 F. Supp. 2d 741, 760 (D. Md. 2008). Here, the Eighth Circuit found that the district court erred in holding that no § 36(b) violation occurred simply because Ameriprise’s fee passed muster under the Gartenberg standard. According to the Eighth Circuit, although the district court properly applied the Gartenberg factors for the limited purpose of determining whether the fee itself constituted a breach of fiduciary duty, it erred in rejecting a comparison between the fees charged to Ameriprise’s institutional clients and its mutual fund clients. In part, the Eighth Circuit added, the district court based its decision on dicta from Gartenberg that refused to compare the adviser’s fees for fundamentally different investment vehicles—money market mutual funds and equity pension funds. The district court should have considered the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts because the investment advice may have been essentially the same for both accounts. Likewise, the district court should not have engaged in so limited a scope of review. Ameriprise’s conduct must be evaluated independent from the result of the negotiation. The district court concluded that Ameriprise did not breach its fiduciary duty in one way (by setting a fee that was exorbitant relative to that of other advisers), but it should have also considered other possible violations of § 36(b)said the Eighth Circuit. Specifically, the district court should have determined whether Ameriprise purposefully omitted, disguised, or obfuscated information that it presented to the Board about the fee discrepancy between different types of clients. The Eighth Circuit noted that the record indicated that there are material questions of fact on this issue. On the basis of the foregoing, the Eighth Circuit reversed the district court’s judgment, and remanded the case for further proceedings consistent with its decision.

Former CFO of HP Company Settles Stock Option Backdating Charges with $2.29M Payment

2009-04-22T16:32:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 07-2822 (RS) || U.S. District Court for the Northern District of California, 03/23/2009 || Sharlene Abrams, a former chief financial officer of Mercury Interactive, LLC, (“Mercury”) has settled civil fraud charges arising from an alleged scheme to backdate stock option grants and from other alleged misconduct. Without admitting or denying the allegations in the Securities and Exchange Commission's (“SEC”) complaint, Abrams consented to the entry of a final judgment permanently enjoining her from violating and/or aiding and abetting violations of the antifraud, financial reporting, record-keeping, internal controls, false statements to auditors, securities ownership reporting and proxy provisions of the federal securities laws, and barring her from serving as an officer or director of a public company. Abrams will pay $2,287,914 in disgorgement, of which $1,498,822 represents the "in-the-money" benefit from her exercise of backdated option grants, and a $425,000 civil penalty. Under the terms of the settlement, Abrams' disgorgement of her "in-the-money" benefit, totaling $1,498,822, would be deemed satisfied by her previous voluntary payment of that amount to Mercury. || By way of background, Mercury (formerly known as Mercury Interactive Corporation) was acquired by Hewlett-Packard Company (“HP”) by an agreement consummated on November 8, 2006, and is now a non-trading subsidiary of HP. Prior to the consummation of the merger, Mercury was a corporation headquartered in Mountain View, California, and organized under the laws of Delaware. The company made software used to test and optimize information technology systems and software applications. One of the product solutions it sold was marketed as a means to implement best practices frameworks for Sarbanes-Oxley compliance. At the time of the conduct described in the SEC’s complaint, the company’s common stock was registered with the SEC pursuant to Section 12(g) of the Exchange Act and listed on the NASDAQ under the symbol “MERQ.” On May 31, 2007, the SEC charged Abrams and three other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The SEC’s complaint alleged that during this period certain company executives—namely former chairman and chief executive officer Amnon Landan, former chief financial officers Abrams and Douglas Smith, and former General Counsel Susan Skaer, and Abrams—backdated stock option exercises, made fraudulent disclosures concerning Mercury’s “backlog” of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses. The SEC previously filed settled charges in this matter against Mercury and three former outside directors of Mercury, namely Igal Kohavi, Yair Shamir, and Giora Yaron. On May 31, 2007, the SEC filed civil fraud charges against Mercury based on the stock option backdating scheme and other fraudulent conduct noted above. Mercury settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. On September 17, 2008, the SEC filed settled charges against the three former outside directors of Mercury alleging that they recklessly approved backdated stock option grants and reviewed and signed public filings that contained materially false and misleading disclosures about the company’s stock option grants and company expenses. The outside directors settled the matter by consenting to permanent injunctions and the payment by each director of a $100,000 penalty. Mercury and the outside directors settled the charges without admitting or denying the allegations in the SEC’s complaint.

SEC Releases Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies

2009-04-22T16:22:00+00:00

Securities Law | New Statutes, Regulations and Rules || No. 17 CFR Parts 210, 211, 229, 239, 240, and 249; Release Nos. 33-9026; 34-59775; FR-79 || , 04/16/2009 || || The Securities and Exchange Commission (SEC”) is adopting technical amendments to various rules, forms and schedules under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The SEC also is making certain technical changes to the Codification of Financial Reporting Policies (“CFRP”). According to the SEC, these revisions are necessary to conform those rules, forms, schedules and the CFRP to two recently issued Statements of Financial Accounting Standards (“SFAS”) issued by the Financial Accounting Standards Board (“FASB”): SFAS 141 (revised 2007), Business Combinations, and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (collectively “Statements”) were both issued in December 2007. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, certain sections in the CFRP and various forms and schedules prescribed under the Securities Act and Exchange Act. By way of background, the SEC said that on April 25, 2003, it issued a policy statement recognizing the FASB’s financial accounting and reporting standards as “generally accepted” for purposes of the Federal securities laws. The SEC explained that its rules and regulations generally require compliance with U.S. generally accepted accounting principles (“GAAP”), and the requirements of the SEC’s rules, forms and schedules generally are used to interpret, supplement, or expand upon GAAP requirements. The purpose of these technical amendments and revisions is to eliminate obsolete terminology and revise reporting and disclosure requirements as necessary to achieve consistency between the SEC’s compliance requirements and SFAS 141(R) and SFAS 160, both issued by the FASB in December 2007. For example, the SEC amended various rules in Regulation S-X, items in Regulation S-K, and forms and schedules filed under the Securities Act and the Exchange Act to replace references to “minority interests” with “noncontrolling interests.” The SEC explained that these amendments will replace references to “minority interests” with “noncontrolling interests” in order to be consistent with SFAS 160. The SEC further explained that Section 23(a)(2) of the Exchange Act requires the SEC, in adopting rules under the Exchange Act, to consider the competitive effects of such rules, if any, and to refrain from adopting a rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Because these amendments merely make technical changes to update references to applicable FASB pronouncements, the SEC did not anticipate any competitive advantages or disadvantages will be created.

2Day v. Staples: The “Reasonable Belief” Required for SOX Whistleblower Protection

2009-04-21T20:16:00+00:00

Securities Law || Day v. Staples, 04/21/2009 || In Day v. Staples, 555 F.3d 42 (1st Cir. 2009), the Court of Appeals for the First Circuit ruled that the “reasonable belief” requirement for whistleblower protection under the Sarbanes-Oxley Act of 2002 (“SOX”) includes both “objective” and “subjective” reasonableness. In this case of first impression before the First Circuit, the court agreed with the Fourth Circuit’s interpretation of SOX whistleblower protection requirements and denied the protection to an aggrieved employee whose allegations failed to meet the basic elements of a securities fraud claim. The court’s ruling also suggests that employers who take seriously and investigate their employee’s claims may have a viable defense in whistleblower protection cases.

“Grand Theft Auto” Game Maker to Pay $3M to Settle Illegal Stock Option Backdating Charges

2009-04-6T16:32:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 09- cv-3313 || U.S. District Court for the Southern District of New York, 04/6/2009 || Take-Two Interactive Software, Inc. (“Take-Two”), the publisher and distributor of the “Grand Theft Auto” computer video game, has agreed to pay $3 million to settle accusations filed by the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) that it had engaged in illegal stock options backdating over a seven-year period. Without admitting or denying the SEC's allegations, the company also agreed to the issuance of an injunction against future violations of certain provisions of the federal securities laws. The settlement is subject to approval by the United States District Court for the Southern District of New York. If court approval is obtained, the settlement will conclude the SEC's investigation of this matter with respect to the company. As part of the settlement agreement with the New York County District Attorney, the company acknowledged that certain of its former directors and officers engaged in certain illegal behaviors related to the historical granting of stock options, and the district attorney agreed not to prosecute the company or its corporate subsidiaries for conduct related thereto. In addition, the company agreed to pay $300,000 to the District Attorney for reimbursement of costs related to the district attorney's investigation, to undergo a review of its corporate governance structure by external legal counsel, and to hire an administrator for its stock plan. || According to the SEC, Take-Two defrauded investors by granting backdated, undisclosed “in the money” stock options to officers, directors, and key employees while failing to record required non-cash charges for option-related compensation expenses. See http://www.sec.gov/litigation/litreleases/2009/lr20982.htm. Specifically, the SEC’s complaint alleged that on over 100 occasions from 1997 through September 2003, Take-Two looked back and picked grant dates for the company’s incentive stock options, resulting in grants of “in-the-money” options. According to the complaint, Take-Two used several means to backdate options, including pre-priced option pools, backdating of employment agreements, and “pick-a-date” backdating, whereby a set exercise price for the grants was chosen, and then a past grant date was selected when Take-Two’s stock price most closely corresponded to the set exercise price. On at least 26 occasions, the backdated grant dates coincided with dates of historically low annual and quarterly closing prices for Take-Two’s common stock. These “fortuitous” grant dates, the complaint alleges, could not have been selected so consistently without the benefit of hindsight. The SEC also asserted that Take-Two granted these options without complying with its own stock option plans and, generally, without the Board or a Committee thereof approving the grant dates or exercise prices. The complaint further stated that Take-Two officers and employees prepared documents falsely indicating that the option grants had been made on earlier dates when Take-Two’s stock price had closed lower. The complaint alleged that because of the undisclosed backdating scheme, Take Two filed with the SEC and disseminated to investors current, quarterly and annual reports, proxy statements and registration statements that contained materially false and misleading statements concerning the true grant dates and proper exercise prices of stock options. In doing so, Take-Two created the false and misleading impression that stock options were granted in accordance with the terms of the applicable stock option plans. According to the complaint, Take-Two materially understated its compensation expenses and materially overstated its quarterly and annual pre-tax earnings and earnings per share in its financial statements. On February 28, 2007, Take-Two restated historical financial results for multiple years to record additional non-cash charges for option-related compensation expenses totaling $42.1 million net of tax. The SEC previously settled with former chief executive officer and chairman Ryan Brant for his alleged role as the architect of the fraudulent options backdating scheme. SEC v. Ryan Ashley Brant, Civil Action No. 1:07 CV 1075 (DLC) (S.D.N.Y. 2007) (filed February 14, 2007). In that action, Brant was permanently enjoined from violating and/or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls and securities ownership reporting provisions of the federal securities laws; permanently barred from serving as an officer or director of any public company; and ordered to pay disgorgement of $4,118,093, prejudgment interest of $1,143,000, and a civil penalty of $1 million. Brant also pled guilty to felony criminal charges of falsifying business records in the first degree and paid $1 million in lieu of fines and forfeiture to state and local New York authorities.

NASDAQ Market-Issuer Escala Consents to Final Judgment in Accounting and Disclosure Fraud Case

2009-04-3T17:10:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 09 CV 2646 (DLC) || U.S. District Court for the Southern District of New York, 03/23/2009 || Without admitting or denying the allegations in the complaint filed by the Securities and Exchange Commission (“SEC”), Escala Group, Inc. (“Escala”) consented to a permanent injunction against future violations of anti-fraud and reporting provisions of federal securities laws, specifically the Securities Exchange Act of 1934 (“Exchange Act”) and its implementing rules. The SEC filed the disclosure and accounting fraud case against then-NASDAQ national market issuer Escala; its founder and former chief executive officer Gregory Manning, 62; and its former chief financial officer Larry Lee Crawford, 60, alleging fraudulent related party transactions between Escala and its parent company, Afinsa Bienes Tangibles, S.A. ("Afinsa"). Escala is a network of companies in the collectibles market specializing in stamps, among other things. Afinsa was a privately held Spanish company that sold investments in portfolios of stamps in Europe. According to the complaint, the fraudulent related-party transactions ceased after May 2006, when Spanish authorities raided Afinsa's offices and charged Afinsa and certain individuals with engaging in a massive unlawful pyramid scheme. || The SEC complaint alleged a fraudulent business scheme based upon the secret and dramatic manipulation of collectible stamp values, in which Escala, Manning, and Crawford violated the antifraud and reporting provisions of the federal securities laws by: 1. failing to disclose the related party status of Barrett & Worthen, Inc., resulting in control of the Brookman Catalogue, and failing to disclose the revenues obtained by virtue of Afinsa and Manning’s control of the prices in the Brookman Catalogue; 2. falsely representing that Escala sold Afinsa several large stamp archives at prices determined by reference to independent stamp catalogues and appraisals when in fact Manning set the catalogue prices and influenced and edited the appraisals; and 3. falsely reporting a payment for business combination-related expenses as the “sale” of certain antiques. The complaint further alleged that Escala and Manning also violated the antifraud provisions by selling back to Afinsa in a round-trip transaction inventory acquired from Afinsa in direct contravention of Escala’s public promise not to do so. The SEC stated in its complaint that these false and misleading disclosures and omissions were material in that the related-party transactions contributed over $80 million to Escala’s revenues and allowed Escala to meet its forecasts for either revenue or pre-tax net income for the third quarter and for year-end of fiscal year 2004, and for the first quarter and year-end in fiscal 2005. According to the complaint, as a result of these transactions, Escala went from trading at $1.47 per share on January 23, 2003, to a $32-per-share company with a purported market cap of $898 million in the span of a few years. The SEC charged Escala with violations of anti-fraud, reporting, disclosure, and accounting provisions of federal securities laws, particularly Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A) and (B)] and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13, (17 C.F.R. §§ 240.10b-5, 240.12b-20, 13a-1 and 13a-13).

New FINRA Rule Seeks to Strengthen Anti-Fraud Measures for OTC Equities

2009-04-2T18:37:00+00:00

Securities Law | New Statutes, Regulations and Rules || No. Release No. 34-59605; File No. SR-FINRA-2008-055 || , 03/19/2009 || || The Securities and Exchange Commission (“SEC”) has approved an amendment to an existing rule of the Financial Industry Regulatory Authority (“FINRA”) regarding equities transacted over the counter (“OTC”), or those that are not sold on the exchanges. The change seeks to strengthen measures that address potential fraud and abuse in transactions involving securities not listed on an exchange and certain other higher risk securities. By way of background, FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,000 brokerage firms, about 173,000 branch offices and approximately 659,000 registered securities representatives. Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. Prior to the SEC’s approval of the rule change, FINRA proposed to adopt NASD Rule 2315 (“Recommendations to Customers in OTC Equity Securities”) as FINRA Rule 2114 in the Consolidated FINRA Rulebook. The existing rule mandates that a member conduct a due diligence review of an issuer’s current financial and business information before recommending a covered security. The rule supplements existing FINRA rules and the federal securities law, including suitability obligations and the requirement that any recommendation to a customer have a reasonable basis. The rule requirements go beyond the basic suitability obligations to ensure that a registered representative has, at a minimum, confirmed the existence of and reviewed essential information that reveals the financial condition and business prospects of these riskier issuers. The proposed rule change would expand the scope of the rule to cover a recommendation to buy any “OTC Equity Security,” irrespective of whether the security is published on a quotation medium. The term “OTC Equity Security” would have the same meaning as in NASD Rule 6610 (which has been renumbered as FINRA Rule 6420 in the Consolidated FINRA Rulebook) and encompasses any non-exchange-listed security and certain exchange-listed securities that do not otherwise qualify for real-time trade dissemination. FINRA believes that those OTC Equity Securities not published on a quotation medium pose the same, if not greater, risk of fraud and manipulation that the rule seeks to redress. The proposed rule change also would add a definition of “current material business information” to include “information that is ascertainable through the reasonable exercise of professional diligence and that a reasonable person would take into account in reaching an investment decision.” The proposed rule change would eliminate the exemption from the rule for a security with a worldwide average daily trading volume value of at least $100,000 during each of the six calendar months preceding the recommendation, as well as a related exemption for a convertible security where the underlying security satisfies the trading volume exemption requirements. FINRA believes that the advent of the Internet and the increased number of trading venues has rendered that threshold unreliable to screen out less risky securities.

Third Circuit: Ex-Partner’s Suit Against Dickie, McCamey & Chilcote Law Firm Should Proceed

2009-04-2T17:36:00+00:00

Securities Law | New Judicial Opinions || No. No. 07-3504 || U.S. Court of Appeals for the Third Circuit, 03/24/2009 || Ruling on an issue of first impression, the U.S. Court of Appeals for the Third Circuit has found that Alyson J. Kirleis, an ex-partner of Dickie, McCamey & Chilcote, P.C. (“DMC” or “firm”) could proceed with her employment discrimination suit against her former law firm , and could not be compelled to arbitrate her claims. Kirleis filed her sex discrimination and sexual harassment suit in the U.S. District Court for the Western District of Pennsylvania. In response, the firm filed a motion to compel arbitration pursuant to 9 U.S.C. § 4, citing a mandatory arbitration provision in its bylaws. The district court denied the motion and the firm filed this timely appeal. In affirming the district court’s ruling, the Third Circuit held that Kirleis was able to show evidence that she was never informed of and never agreed to any arbitration clause in the firm's bylaws. The Third Circuit rejected the firm’s argument that Kirleis ‘s status as a shareholder of the company should put her on constructive notice of the arbitration provision and implied her intent to be bound thereby. The Third Circuit reasoned that under Pennsylvania law, explicit agreement is essential to the formation of an enforceable arbitration contract. Thus, the firm’s argument that Kirleis impliedly agreed to arbitrate her claims must fail under Pennsylvania law. || In this appeal, the Third Circuit considered a question of first impression under Pennsylvania law: whether a shareholder/director may be compelled to arbitrate her civil rights claims pursuant to corporate bylaws to which she has not explicitly assented. When first presented with this issue, the Third Circuit petitioned the Pennsylvania Supreme Court to certify the question because it exposed tension between corporate law principles and arbitration contract principles. The Pennsylvania Supreme Court denied the petition, so the Third Circuit answered the question. By way of background, Kirleis practiced law with DMC She worked at the firm as a summer associate in 1987 and became a full-time associate the following year. In 1998, Kirleis became a class B shareholder and was promoted to class A shareholder/director in 2001. Since she became a shareholder/director, Kirleis’s relationship with the firm has been governed by the firm’s corporate bylaws. Kirleis filed two complaints against the firm in the district court alleging sex discrimination, retaliation, and hostile work environment in violation of federal and state law. The firm filed a motion to compel arbitration pursuant to 9 U.S.C. § 4, citing a mandatory arbitration provision in its bylaws. The district court denied the motion and the firm filed this timely appeal. In this case, the firm argued that Kirleis’ status as a shareholder/director charged her with constructive knowledge of the terms of the bylaws and manifested her acceptance of the arbitration provision. In support of this argument, the firm noted that Kirleis accepted compensation and perquisites pursuant to the bylaws. In ruling on this argument, the Third Circuit cited the rule that arbitration is a matter of contract. Opinion, p. 7, citing John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 547 (1964). The Third Circuit also cited the Federal Arbitration Act (“FAA”), reflects a “strong federal policy in favor of the resolution of disputes through arbitration.” Id., citing Alexander v. Anthony Int’l, L.P., 341 F.3d 256, 263 (3d Cir. 2003). But this presumption in favor of arbitration “does not apply to the determination of whether there is a valid agreement to arbitrate between the parties.” Id., p.. 7-8, citing Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002). Before compelling arbitration pursuant to the FAA, a court must determine that (1) a valid agreement to arbitrate exists, and (2) the particular dispute falls within the scope of that agreement. Id., citing Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529, 532 (3d Cir. 2005). Here, the Kirleis was able to specify in her affidavit the specific circumstances that rendered the formation of an agreement to arbitrate impossible. For example, she swore under oath that she “was never provided with a copy of the By-Laws of defendant Firm,” “never signed any agreement or document which refers to or incorporates the arbitration provision in the By-Laws,” and “never agreed to arbitrate . . . claims against firm.” Id., p. 10. Not only are these allegations sufficiently specific, they are uncontested by the firm, the Third Circuit found. Hence, the district court did not err in finding that Kirleis’ affidavit is an evidence that created a genuine issue of material fact regarding the existence of an agreement to arbitrate. The Firm next argued that Kirleis’s status as a shareholder/director of the Firm put her on constructive notice of the arbitration provision in the bylaws and implied her intent to be bound thereby. The Third Circuit however rejected this argument, stating that under Pennsylvania law, explicit agreement is essential to the formation of an enforceable arbitration contract. Id., p. 14, citing Emmaus Mun. Auth. v. Eltz, 204 A.2d 926, 927 (Pa. 1964); Philmar Mid-Atl., Inc., v. York St. Assoc. II, 566 A.2d 1253, 1255 (Pa. Super. 1989). Thus, the firm’s argument that Kirleis impliedly agreed to arbitrate her claims must fail under Pennsylvania law. The Third Circuit added that Kirleis never received a copy of the only document containing the firm’s arbitration provision. Without this document, Kirleis could not have explicitly agreed to arbitrate her claims. Id., pp. 17-18, citing Quiles v. Financial Exchange Co., 879 A.2d 281 (Pa. Super. Ct. 2005). On the basis of the foregoing, the Third Circuit affirmed the judgment of the district court.

CO District Court Issues Separate Judgments of Guilt and Acquittal in “Pump and Dump” Stock Suit

2009-04-1T22:25:00+00:00

Securities Law | New Settlements and Verdicts || No. No. 03-CV-00636-WDM-PAC || U.S. District Court for the District of Colorado, 03/6/2009 || The U.S. District Court for the District Court of Colorado has issued a judgment of guilt against Jonathan Curshen, and found him liable for securities fraud for acting as a promoter in an internet "pump and dump" scheme. This type of scheme involved artificially pushing up the price and volume levels of a company’s shares on a stock exchange through various devices (the “pump”), and then selling these stocks for a profit (the “dump”). Here, the district court found after bench trial conducted on April 30 and May 1, 2009 that in early 2000, Curshen knowingly or recklessly posted on various Internet sites baseless projections and other financial information about Freedom Golf Corporation (“Freedom”), a now-defunct Denver-based golf club manufacturer. In a separate order, the district court entered an amended judgment dismissing the complaint against Timothy J. Miles, a principal shareholder of Freedom, finding him not liable for securities fraud after a bench trial held on June 20 and 21, 2005. The district court dismissed the complaint against Miles with prejudice after concluding plaintiff Securities and Exchange Commission (“SEC”) failed to prove that false statements Miles made were material to investors. || The SEC’s complaint alleged that in the fall of 1999, Miles provided a broker-dealer with false information to be filed with the National Association of Securities Dealers (“NASD”), now called Financial Industry Regulatory Authority (“FINRA”), in order to initiate public trading of securities issued by Freedom’s predecessor company. The complaint also alleged that from late January through early March 2000, Miles paid two stock promoters, Carter Allen Jones, including his company C. Jones & Company (“C. Jones”) and Curshen, to hype Freedom through the internet, telephone, and mail. Specifically, the complaint stated that Jones arranged for the dissemination of between 25 and 35 million unsolicited “spam” e-mails touting Freedom in February 2000. During the same period, the complaint further stated, Johnson created baseless profit, revenue, and expense projections for Freedom Golf that Jones published on his company’s internet website, and that Curshen publicized on an internet message board. In addition, the complaint asserted that Jones and Curshen failed to disclose the full amount that Miles was paying them to tout Freedom Golf, in violation of the federal securities laws. The complaint further asserted that Freedom’s stock price and trading volume was pumped up to artificially inflated levels as a result of the false and misleading e-mails and baseless price projections. According to the complaint, during the course of this manipulation, Jones, Miles, and Curshen all sold shares of Freedom Golf stock and reaped profits of more than $500,000. The SEC’s complaint alleged that as a result of the conduct described above, C. Jones, Jones, Miles, Johnson, and Curshen violated the antifraud provisions of the federal securities laws, and C. Jones, Jones, and Curshen also violated the anti-touting provisions of the federal securities laws. The district court’s final judgment enjoined Curshen from violating Sections 17(a) and 17(b) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5, and barred him from participating in any penny stock offering. The final judgment also ordered Curshen to pay disgorgement of $66,235, representing profits gained from his participation in the illegal scheme. The district court reserved jurisdiction as to prejudgment interest and a civil penalty. According to the district court’s findings concerning Miles, Miles arranged to have false information submitted on a Form 211 to the NASD (now FINRA) to arrange for Freedom’s predecessor, Auric Enterprises, quoted on the Over-The-Counter Bulletin Board. The false information concerned Miles’ relationships to many of Auric’s shareholders, among other things. The district court, however, rejected the SEC’s argument that the false information would have been material to a reasonable investor. Previously, Carter Allen Jones, another promoter, and his company, C. Jones, were permanently enjoined by default against future violations of Sections 17(a) and 17(b) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Jones was ordered to pay disgorgement and a civil penalty. Based on the SEC’s motion, the district court dismissed its claims of disgorgement and penalties against C. Jones, because it was defunct. In addition, Freedom’s president, Gaylen Johnson, previously consented to a permanent injunction against future violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 13a-1 and 13a-13. Johnson was also barred from participating in any offering of a penny stock. Based on his financial condition, the SEC did not seek a civil penalty.