INSIDER TRADING CASE SETTLED WITH DISGORGEMENT AND INTEREST

The following excerpt is from the SEC website:

“The Securities and Exchange Commission announced today that on June 8, 2011, The Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York, entered a judgment against Gautham Shankar in SEC v. Cutillo et al., 09-CV-9208, an insider trading case the SEC filed on November 5, 2009. The SEC charged Shankar, who was a registered representative and a proprietary trader at the broker-dealer Schottenfeld Group, LLC during the relevant time period, with using inside information to trade ahead of the June 4, 2007 announced acquisition of Avaya Inc. and the September 28, 2007 announced acquisition of 3Com Corp.
In its complaint, the SEC alleged that Arthur Cutillo, a former attorney with the international law firm of Ropes & Gray LLP, misappropriated from his law firm material, nonpublic information concerning the acquisitions of 3Com and Avaya, and tipped the inside information, through another attorney, to Zvi Goffer, a proprietary trader at Schottenfeld, in exchange for kickbacks. The SEC further alleged that Goffer tipped the inside information to Shankar, who traded in the securities of Avaya and 3Com based on that information. The SEC also alleged that Shankar passed the 3Com tip to his friend, a portfolio manager at a hedge fund advisor, which also traded on this inside information.
To settle the SEC’s charges, Shankar consented to the entry of a judgment that: (i) permanently enjoins him from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders him to pay disgorgement of $111,521, plus prejudgment interest of $13,292. The judgment further provides that upon motion by the SEC, the Court later will determine issues relating to a civil penalty. In a related SEC administrative proceeding, Shankar consented to the entry of an SEC order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. Shankar previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud in a related criminal case, United States v. Gautham Shankar, 10-CR-996 (S.D.N.Y.), and is awaiting sentencing.
The SEC also announced today the entry of a judgment against Shankar in a separate case alleging insider trading in other securities.”

J.P. MORGAN SECURITIES LLC WILL PAY $153.6 MILLION IN SETTLEMENT

The SEC has settled its case against J.P. Morgan for misleading investors. It looks like good news for harmed investors. The following is an excerpt from the SEC website:

"Washington, D.C., June 21, 2011 – The Securities and Exchange Commission today announced that J.P. Morgan Securities LLC will pay $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back.
In settling the SEC’s fraud charges against the firm, J.P. Morgan also agreed to improve the way it reviews and approves mortgage securities transactions.
The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.
The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.

“J.P Morgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” said Robert Khuzami, Director of the Division of Enforcement. “What J.P. Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today’s settlement, harmed investors receive a full return of the losses they suffered.”
According to the SEC’s complaint against J.P. Morgan filed in U.S. District Court for the Southern District of New York, the CDO known as Squared CDO 2007-1 was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market. Marketing materials stated that the Squared CDO’s investment portfolio was selected by GSCP (NJ) L.P. – the investment advisory arm of GSC Capital Corp. (GSC) – which had experience analyzing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted.
The SEC alleges that by the time the deal closed in May 2007, Magnetar held a $600 million short position that dwarfed its $8.9 million long position. In an internal e-mail, a J.P. Morgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”
The SEC alleges that in March and April 2007, J.P. Morgan knew it faced growing financial losses from the Squared deal as the housing market was showing signs of distress. The firm then launched a frantic global sales effort in March and April 2007 that went beyond its traditional customer base for mortgage securities. The J.P. Morgan employee in charge of Squared’s global distribution said in a March 22, 2007, e-mail that “we are so pregnant with this deal…Let’s schedule the cesarian (sic), please!” By 10 months later, the securities had lost most or all of their value.
According to the SEC’s complaint, J.P. Morgan sold approximately $150 million of so-called “mezzanine” notes of the Squared CDO’s liabilities to more than a dozen institutional investors who lost nearly their entire investment. These investors included:
Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.
Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and payment of $18.6 million in disgorgement, $2 million in prejudgment interest and a $133 million penalty. Of the $153.6 million total, $125.87 million will be returned to the mezzanine investors through a Fair Fund distribution, and $27.73 million will be paid to the U.S. Treasury. The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities. In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.
In a separate complaint filed against Steffelin, who headed the team at GSC responsible for the Squared CDO, the SEC alleges that Steffelin allowed Magnetar to select and short portfolio assets. The complaint alleges that Steffelin drafted and approved marketing materials promoting GSC’s selection of the portfolio without disclosing Magnetar’s role in the selection process. In addition, unknown to investors, Steffelin was seeking employment with Magnetar while working on the transaction.
The SEC’s complaint charges Steffelin with violations of Sections 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest, and penalties against Steffelin.
Separately, GSC’s bankruptcy trustee has consented to the entry of an administrative order requiring the firm to cease and desist from committing or causing violations or future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder. GSC is in bankruptcy, and its settlement is subject to approval by the bankruptcy court.
The SEC’s investigation was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The SEC investigative attorneys were Carolyn Kurr, Jason Anthony, Jeffrey Leasure, and Brent Mitchell. The SEC trial attorneys that will handle the litigation against Steffelin are Matt Martens, Jan Folena, and Robert Dodge.”

CFTC GETS INJUNCTION/CIVIL PENALTY/INJUNCTION JUDGMENT AGAINST FORINVEST GROUP

The following is an excerpt from the CFTC website:

"Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge James B. Zagel of the U.S. District Court for the Northern District of Illinois entered a default judgment and permanent injunction against ForInvest Group (aka ForInvests Group LLC) (ForInvest).
The judgment, entered on June 17, 2011, finds that ForInvest solicited clients to open off-exchange leveraged foreign currency (forex) trading accounts and acted as the counterparty to its customers for all of the forex transactions in these accounts, without being registered as a retail foreign exchange dealer (RFED) with the CFTC. ForInvest has never been registered with the CFTC in any capacity.
The judgment arises from a CFTC complaint filed in the U.S. District Court for the Northern District of Illinois on January 26, 2011 against ForInvest, a Delaware limited liability company, charging it with two registration violations of the Commodity Exchange Act and CFTC regulations. ForInvest was one of 14 foreign currency firms sued by the CFTC in a nationwide sweep of firms allegedly illegally operating without registering with the CFTC (see CFTC Press Release 5974-11, January 26, 2011).
Judge Zagel’s order permanently bars ForInvest from engaging in the illegal conduct charged in the CFTC complaint and orders ForInvest to remove its forex solicitation webpages from the Internet. The order requires ForInvest to pay a $280,000 civil monetary penalty and permanently bars ForInvest from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC.
This case is one of the first initiated by the CFTC to enforce new forex regulations that became effective on October 18, 2010. These new regulations require entities that wish to participate in the forex market to register with the CFTC and abide by regulations intended to protect the public.”

It looks like the CFTC is doing it’s job when it goes after 14 firms that are making illegal trades. The above is apparently only the first of many cases that the CFTC will bring forward.

LIMITED LIABILITY COMPANY CEO CONSENTS TO JUDGMENT

The following is an excerpt from the SEC website:

"On June 13, 2011, the Honorable Reggie B. Walton of the U.S. District Court for the District of Columbia entered a final judgment against C. Gregory Earls, the former chairman and CEO of U.S. Technologies, Inc., in SEC v. U.S. Technologies, Inc. and C. Gregory Earls, C.A. No. 02-2495 (JR) (D.D.C.). Without admitting or denying the allegations in the Commission’s complaint, Earls consented to the entry of a final judgment which imposes injunctive relief and prohibits him from serving as an officer or director of a public company for a period of 20 years. The Commission agreed to forego its claims for disgorgement and civil penalties in light of the judgment against Earls in a parallel criminal case in which he was sentenced to over 10 years in prison and ordered to pay nearly $22 million in restitution.
The Commission’s complaint alleged that from June 1998 through August 2002, Earls misappropriated approximately $13.8 million from investors who believed they were giving Earls money to purchase preferred stock and warrants from U.S. Technologies, Inc. (“UST”). According to the complaint, Earls carried out this scheme through a limited liability company he created called USV Partners LLC. The complaint alleged that Earls falsely told investors in USV Partners that the entity was created solely to purchase and hold UST stock and warrants, and that he would not take any management fees. According to the complaint, Earls lured more than one hundred investors into giving him more than $20 million to purchase UST stock and warrants through USV Partners. As alleged in the complaint, although UST badly needed the capital infusion, only a portion of the $20 million received from USV Partners investors was used to purchase UST stock and warrants. The complaint alleged that Earls misappropriated $13.8 million of investors’ money by paying himself $4.7 million in management fees and $9.1 million that he falsely classified as “Legal and Accounting” expenses.
The final judgment against Earls: (i) permanently enjoins him from violating Section 17(a) of the Securities Act; Sections 10(b) and 13(b)(5) of the Securities Exchange Act and Rules 10b-5 and 13b2-1 thereunder; and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and (ii) bars him from serving as an officer or director of a public company for a period of 20 years.
In a parallel criminal action, U.S. v. Earls, 1:03-CR-00364 (NRB) (S.D.N.Y.), Earls was previously convicted of 22 counts of criminal securities fraud, mail fraud and wire fraud, and was ordered to pay restitution of $21,971,628 and to serve a prison term of 125 months, followed by 3 years of supervised release.
This final judgment against Earls concludes the case. The other defendant, U.S. Technologies, Inc., previously consented to a final judgment ordering injunctive relief and, in a related administrative proceeding, a Commission order deregistering the company’s stock.”

SEC BRINGS ADDITIONAL FRAUD CHARGES AGAINST CO-FOUNDER OF CHINA VOICE HOLDING

Below is an additional release by the SEC regarding China Voice Holding. The following is and excerpt from the SEC website:

"On June 20, 2011, the Commission filed an amended complaint in the U.S. District Court for the Northern District of Texas (Dallas Division) in its case against the co-founder of China Voice Holding Corp., David Ronald Allen, and multiple other defendants. The SEC’s amended complaint charges China Voice, Allen, and William F. Burbank IV (China Voice’s former chairman and CEO) with reconstituting former subsidiaries of China Voice at Voice One Corp. without informing China Voice investors.
On April 28, 2011, the SEC filed a complaint in federal court in Texas, alleging that Allen, Burbank, and China Voice engaged in a series of false and misleading statements and material omissions to investors about China Voice’s financial condition. Today’s complaint alleges that this fraudulent behavior extended to renaming two China Voice subsidiaries and reconstituting them at Voice One and that Allen and Burbank are now involved in running Voice One.
Also as alleged in the SEC’s original complaint, Allen, with the assistance of two associates, launched what became an ongoing fraud that sought to raise at least $8.6 million from investors, telling them that their funds would be used to make loans to profitable businesses with demonstrated track records. The Commission alleged that contrary to what investors were told, proceeds were used to pay back earlier investors; to make payments to Allen and his associates; and to make payments to Allen-affiliated businesses, including China Voice. Today’s amended complaint alleges that Allen also used investor funds to make payments to Voice One, contradicting the disclosures made to investors. The amended complaint also names as a defendant yet another company used by Allen to help carry out the fraud on investors.
The SEC’s amended complaint charges Allen, Alex Dowlatshahi, Christopher Mills, and various related companies with violations of 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 10b-5 thereunder. The SEC’s amended complaint also charges China Voice, Burbank, and Allen for a series of fraudulent statements about China Voice’s financial condition and business prospects, as well as Gerald Patera, Ilya Drapkin, and Robert Wilson for their roles in the scheme, including violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. In addition to the preliminary relief, the SEC’s amended complaint seeks permanent injunctions, disgorgement, prejudgment interest, and financial penalties against all defendants, as well as penny stock bars against Allen, Burbank, Patera, Drapkin, and Wilson, and officer and director bars against Allen and Burbank.
The SEC’s investigation is ongoing."

CFTC COMMISSIONER BART CHILTON COMMENDS SARKOZY

The following article is an excerpt from the CFTC website:

Statement on the Address by President Nicolas Sarkozy before the European Commission's Conference on Commodities and Raw Materials, Brussels
Commissioner Bart Chilton
June 14, 2011

"I commend President Sarkozy, not only for his leadership, but for his thoughtful understanding of the circumstances in which we find ourselves. The President got it exactly right when he spoke about the need for thoughtful regulations to address excessive speculation and the need to harmonize regulations. Appropriate speculative limits need to be instituted as soon as possible. I also completely agree on the need to avoid regulatory arbitrage where markets could migrate to the least regulation nation. We need to avoid a regulatory sidewalk sale and work together for harmonized rules that make markets more transparent and more competitive."


Last Updated: June 14, 2011