SEC OBTAINS PRELIMINARY INJUNCTION IN NEW YORK INVESTMENT ADVISER CASE

The following excerpt is from the SEC website:
March 28, 2012
The U.S. Securities and Exchange Commission announced that on March 27, 2012, the U.S. District Court for the Eastern District of New York issued an order granting a preliminary injunction and other relief against Brian Raymond Callahan of Old Westbury, New York, and Callahan’s investment advisory firms, Horizon Global Advisors Ltd., and Horizon Global Advisors, LLC.

The Commission's complaint, filed on March 5, 2012, alleges that Callahan defrauded investors in five offshore funds and used some of their money to buy himself a multi-million dollar beach resort property on Long Island. According to the Complaint, Callahan raised more than $74 million from at least two dozen investors since 2005. The Complaint alleges that Callahan promised investors that their money would be invested in liquid assets, but instead diverted investors’ money to his brother-in-law’s real estate project, which was facing foreclosure, in exchange for unsecured, illiquid, overstated promissory notes. According to the Complaint, Callahan and his advisory firms used these promissory notes to hide Callahan’s misuse of investor funds, and the overstated promissory notes inflated Callahan’s management fees.

At the SEC’s request, and after a Court hearing on March 27, 2012, the Court issued an Order preliminarily enjoining Callahan and his advisory firms with violating the antifraud provisions of Sections 17(a)(1), (2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a), (b) and (c) thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Among other things, the Order continues to freeze assets of Callahan and his advisory firms, requires Callahan and his advisory firms to repatriate assets that may be located outside of the United States, prohibits Callahan and his advisory firms from soliciting or accepting any new investments, and appoints Steven Weinberg of Gottesman, Wolgel, Malamy, Flynn and Weinberg, P.C. as receiver for the estates of Callahan’s advisory firms.

FINAL JUDGEMENT ENTERED AGAINST FORMER CFO OF BRISTOL-MYERS SQUIBB CO.

The following excerpt is fro the SEC website;

March 30, 2012

The Securities and Exchange Commission announced that on March 27, 2012, the United States District Court in New Jersey entered final judgments against Frederick S. Schiff, former CFO of Bristol-Myers Squibb Co. (Bristol Myers) and Richard J. Lane, former President of the Worldwide Medicines Group for Bristol Myers. Schiff and Lane consented to the entry of the final judgments without admitting or denying the allegations of the Commission’s complaint.

The Commission’s complaint alleged that for the period January 1, 2000 through December 31, 2001, Schiff and Lane deceived the investing public about the true performance, profitability and growth trends of Bristol Myers and a t their direction, Bristol Myers engaged in a “channel-stuffing” scheme. The complaint alleged that Bristol Myers used financial incentives to induce wholesalers to buy its pharmaceutical products in excess of prescription demand in order to artificially inflate its results, which in turn was necessary in order to meet Bristol Myers’ internal earnings targets and the consensus earnings estimates of Wall Street securities analysts. The complaint alleged that by doing so, Bristol Myers improperly recognized revenue from pharmaceutical sales associated with the channel-stuffing.

Schiff consented to a final judgment permanently enjoining him from violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, requiring him to pay disgorgement plus prejudgment interest totaling $130,992, and barring him from serving as an officer or director of a public company for one year. Lane consented to a final judgment permanently enjoining him from violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, requiring him to pay disgorgement plus prejudgment interest totaling $36,750, and barring him from serving as an officer or director of a public company for one year.

INSIDER TRADING BY MEMBERS OF "EXPERT NETWORK" LANDS ONE EXPERT IN PRISON

The following excerpt is from the SEC website:
March 27, 2012
SEC Obtains Final Judgment on Consent Against Winifred Jiau
The SEC announced that, on March 24, 2012, the Honorable Jed S. Rakoff, United States District Judge, United States District Court for the Southern District of New York, entered a Final Judgment on consent as to Winifred Jiau in the SEC’s insider trading case, entitled SEC v. Mark Anthony Longoria, et al., 11-CV-0753 (SDNY) (JSR).

This case alleges insider trading by ten individuals and one investment adviser entity, all of whom are consultants, employees, or clients of the so-called “expert network” firm, Primary Global Research LLC (“PGR”). The SEC filed its Complaint on February 3, 2011, charging two PGR employees and four consultants with insider trading for illegally tipping hedge funds and other investors. On February 8, 2011, the SEC filed an Amended Complaint, charging a New York-based hedge fund and four hedge fund portfolio managers and analysts who illegally traded on confidential information obtained from technology company employees moonlighting as expert network consultants. The scheme netted more than $30 million from trades based on material, nonpublic information about such companies as Advanced Micro Devices, Seagate Technology, Western Digital, Fairchild Semiconductor, and Marvell Technology Group Ltd. (“Marvell”). The charges were the first against traders in the SEC's ongoing investigation of insider trading involving expert networks.

The SEC alleged that Jiau was a consultant associated with PGR who passed material, nonpublic information regarding the quarterly earnings of Marvell to defendants Samir Barai and Noah Freeman. Barai then traded on that information and reaped over $850,000 in illegal trading profits.

The Final Judgment entered against Jiau permanently enjoins her from violations of Section 10(b) of the Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rule 10b-5. The Commission separately recovered illicit trading profits from Jiau’s tippees. In a parallel criminal action against Jiau, she was ordered to pay more than $3 million in forfeiture and was sentenced to a 48-month term of imprisonment. In light of the foregoing, the Commission did not seek disgorgement or a civil penalty from Jiau in this settlement.

BRITISH VIRGIN ISLANDS CORPORATION AND RESIDENT OF SWITZERLAND SETTLE CHARGES OF INSIDER TRADING IN THE OPTIONS OF INTERMUNE, INC.

The following excerpt is from the SEC website:
March 30, 2012
The Securities and Exchange Commission announced that, on March 29, 2012, the Honorable George B. Daniels,U.S. District Judge for the Southern District of New York, entered a settled final judgment for insider trading in the options of InterMune, Inc. as to Michael S. Sarkesian, a Swiss citizen and resident, and Quorne Ltd., a British Virgin Islands limited liability company wholly owned by a Cyprus trust maintained for the benefit of a Sarkesian relation. The alleged illicit trading by Sarkesian and Quorne took place ahead of a December 17, 2010 announcement that the European Union’s Committee for Medicinal Products for Human Use, or CHMP, had recommended to the European Commission that it permit InterMune to market its developmental drug, Esbriet, in the European Union. Sarkesian and Quorne consented to the entry of the final judgment, which imposes injunctive and monetary relief. The Commission also announced that on March 27, 2012, it amended its complaint, filed on December 23, 2010 against one or more unknown purchasers of the options of InterMune, to name Sarkesian and Quorne as defendants.

In its amended complaint, the Commission alleges that Sarkesian was tipped to material non-public information concerning the CHMP’s recommendation in advance of the December 17 announcement and that, while in possession of this material non-public information, Sarkesian exercised his authority to manage and administer Quorne’s funds by recommending to Quorne that it purchase InterMune call options. As a result, Sarkesian caused Quorne to purchase 400 InterMune call options through a brokerage account in Switzerland on December 7 and 8, 2010. The market price of the 400 options rose over 500% following the December 17 announcement.

On December 23, 2010, on the same day that the Commission filed its initial complaint, the Court entered a Temporary Restraining Order freezing assets and trading proceeds from the alleged illicit trading and prohibiting the then-unknown purchasers from disposing of the options or any proceeds from the sale of the options. Quorne later sold the 400 options, the proceeds of which have remained frozen by Court order.
Without admitting or denying the allegations of the amended complaint, Quorne and Sarkesian consented to entry of a final judgment enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and ordering them jointly and severally to pay $616,000 in disgorgement and $93,806.17 in civil penalties pursuant to Exchange Act Section 21A. The monetary sanctions will be paid out of the frozen funds. See Litigation Release No. 21794 (December 23, 2010).

The Commission acknowledges the assistance of the Options Regulatory Surveillance Authority, the Swiss Financial Market Supervisory Authority, the Cyprus Securities and Exchange Commission, and the British Virgin Islands Financial Services Commission.

SERIAL FRAUDSTER BROUGHT TO JUSTICE

The following excerpt is from the SEC website:
March 27, 2012
SEC Obtains Summary Judgment against Serial Fraudster Matthew J. Gagnon
The Securities and Exchange Commission announced today that on March 22, 2012, the Honorable George Caram Steeh of the United States District Court for the Eastern District of Michigan granted the SEC’s motion for summary judgment and entered a final judgment against defendant Matthew J. Gagnon of Portland, Oregon and Weslaco, Texas. The Court found that Gagnon violated the registration, anti-fraud, and anti-touting provisions of the federal securities laws by promoting and operating a series of securities offerings through his website, www.Mazu.com, and ordered Gagnon to pay $4.1 million in disgorgement with prejudgment interest and a $100,000 civil penalty.

The SEC filed this action against Gagnon on May 11, 2010, alleging that since 1997, Gagnon had billed himself as an Internet business opportunity expert and his website as “the world’s first and largest opportunity review website.” According to the SEC’s complaint, from January 2006 through approximately August 2007, Gagnon helped orchestrate a massive Ponzi scheme conducted by Gregory N. McKnight and his company, Legisi Holdings, LLC, which raised a total of approximately $72.6 million from over 3,000 investors by promising returns of upwards of 15% a month. The complaint also alleged that Gagnon promoted Legisi but in doing so misled investors by claiming, among other things, that he had thoroughly researched McKnight and Legisi and had determined Legisi to be a legitimate and safe investment. The complaint alleged that Gagnon had no basis for the claims he made about McKnight and Legisi. Gagnon also failed to disclose to investors that he was to receive 50% of Legisi's purported "profits" under his agreement with McKnight. According to the complaint, Gagnon received a net of approximately $3.8 million in Legisi investor funds from McKnight for his participation in the scheme.

The SEC's complaint further alleged that beginning in August 2007, Gagnon fraudulently offered and sold securities representing interests in a new company that purportedly was to develop resort properties. The complaint alleged that Gagnon, among other things, falsely claimed that the investment was risk-free and "SEC compliant," and guaranteed a 200% return in 14 months. In reality, however, Gagnon sent the money to a twice-convicted felon, did not register the investment with the SEC, and knew such an outlandish return was impossible. Gagnon took in at least $361,865 from 21 investors.
The SEC's complaint also alleged that in April 2009, Gagnon began promoting a fraudulent offering of interests in a purported Forex trading venture. Gagnon guaranteed that the venture would generate returns of 2% a month or 30% a year for his investors. Gagnon's claims were false, and he had had no basis for making them because Gagnon never reviewed his friend’s trading records before promoting the offering, which would have shown over $150,000 in losses over the previous nine months.

The SEC's complaint charged Gagnon with violating Sections 5(a), 5(c), 17(a) and 17(b) of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief already obtained, the complaint sought preliminary and permanent injunctions, disgorgement, and civil penalties from Gagnon. On May 24, 2010, the SEC obtained an emergency order freezing Gagnon’s assets and other preliminary relief. Subsequently, on August 6, 2010, the Court granted an order of preliminary injunction against Gagnon pursuant to his consent.

In granting the Commission’s motion and entering final judgment, the Court found that Gagnon “purposefully built up an image of trustworthiness in the on-line investing community and exploited this trust.” The Court also found that Gagnon “repeatedly committed egregious violations of the federal securities laws” and “has shown no remorse for his conduct.”

The Court’s final judgment against Gagnon permanently enjoins him from future violations of Sections 5(a), 5(c), 17(a) and 17(b) of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and orders Gagnon to pay $3,613,259 in disgorgement, $488,570.47 in prejudgment interest, and a $100,000 civil penalty.

FEDERAL AGENCIES WANT REVISIONS TO LEVERAGED FINANCE GUIDANCE

The following excerpt is from a FDIC e-mail:
Agencies Propose Revisions to Leveraged Finance Guidance
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (the agencies) are seeking comment on proposed revisions to the interagency leveraged finance guidance issued in 2001. Transactions that are covered by this guidance are characterized by a borrower with a degree of financial or cash flow leverage that significantly exceeds industry norms as measured by various debt, cash flow, or other ratios.

The agencies observed tremendous growth in the volume of leveraged credit leading up to the crisis and in the participation of non-regulated investors.  While there was a pull-back in leveraged lending during the crisis, volumes have since increased while prudent underwriting practices have deteriorated.  As the market has grown, debt agreements have frequently included features that provide relatively limited lender protection, including the absence of meaningful maintenance covenants and the inclusion of other features that can affect lenders’ recourse in the event of weakened borrower performance.  In addition, capital structures and repayment prospects for some transactions, whether originated to hold or to distribute, have been aggressive.  Management information systems (MIS) at some institutions have proven less than satisfactory in accurately aggregating exposures on a timely basis, and many institutions have found themselves holding large pipelines of higher-risk commitments at a time when buyer demand for risky assets diminished significantly.

Leveraged finance is an important type of financing for the economy, and banks play an integral role in making credit available and syndicating that credit to investors.  It is important that banks help provide financing to creditworthy borrowers in a safe and sound manner.
In light of the market’s evolution, the agencies propose replacing the 2001 guidance with revised leveraged finance guidance that refocuses attention to five key areas:
Establishing a Sound Risk-Management Framework:  The agencies expect that management and the board identify the institution’s risk appetite for leveraged finance, establish appropriate credit limits, and ensure prudent oversight and approval processes.  
Underwriting Standards:  These outline the agencies’ expectations for cash flow capacity, amortization, covenant protection, and collateral controls and emphasize that the business premise for each transaction should be sound and its capital structure should be sustainable irrespective of whether underwritten to hold or to distribute.
Valuation Standards:  These concentrate on the importance of sound methodologies in the determination and periodic revalidation of enterprise value.
Pipeline Management:  This highlights the need to accurately measure exposure on a timely basis, the importance of having policies and procedures that address failed transactions and general market disruption, and the need to periodically stress test the pipeline.
Reporting and Analytics:  This emphasizes the need for MIS that accurately capture key obligor characteristics and aggregates them across business lines and legal entities on a timely basis.  Reporting and analytics also reinforce the need for periodic portfolio stress testing.
Although some sections of the guidance should apply to all leveraged transactions (for example, underwriting), the vast majority of community banks should not be affected as they have no exposure to leveraged loans.
Comments on the proposed guidance must be submitted to the agencies no later than June 8, 2012.