Raj Rajaratnam, the former founder of the Galleon Group LLC, is currently serving an 11-year prison term for multiple counts of securities fraud and conspiracy (please see our October 17, 2011, blog post). In the upcoming trial next week in Manhattan federal court, Rajat Gupta is facing five counts of securities fraud and one count of conspiracy for his alleged role in providing Rajaratnam with inside information concerning Goldman Sachs' business plans. Prosecutors say Rajaratnam acted upon that information and that both men profited from the exchange.
]]> Gupta's defense team objected strenuously to the admissibility of the recorded conversation in court, but U.S. District Judge Jed Rakoff said that the jury can hear the discussion because it is relevant to the alleged conspiracy between the two men."It is the one and only direct evidence of the telephone relationship between Mr. Rajaratnam and Mr. Gupta," Rakoff stated at a final pre-trial hearing yesterday.
The prosecution and defense teams will argue different interpretations of the call, during which Gupta is heard telling Rajaratnam of Goldman Sachs' business interests and potential acquisitions. Prosecutors say that is direct evidence of an insider-trading conspiracy. Gupta's legal team, conversely, says that Gupta was "basically confirming a rumor" that Goldman customers already knew about and that the government's evidence against Gupta is "speculation upon speculation."
If convicted on all counts, Gupta could draw a 25-year prison sentence.
Source: Reuters, "Gupta insider trading jury to hear Rajaratnam tapes," Grant McCool, May 16, 2012
]]>Carole Nelson, who was the chief financial officer of a program called POS Dream Homes, was also ordered by a U.S. district court judge in Washington, D.C., to pay restitution of more than $34 million to those investors. Her sentence also included three years of supervised release following her prison term.
]]> The Dream Homes program worked as a promise to invest participants' money in a variety of investments that would yield sufficient sums to pay off their home mortgages within a period of several years. In exchange for that performance, investors made minimum initial investments of $50,000, plus a $5,000 administrative fee.To present an image of success, Dream Homes made business presentations at premier hotels in New York City, Washington, D.C., and Beverly Hills. It also maintained offices in a number of states.
Some payments were made on behalf of investors, but the program operated essentially as a Ponzi scheme, with most of the money received being applied by Nelson and several co-conspirators to personal purchases.
Prosecutors say that there was no evidence of any investments generating revenue to pay off mortgages at any time during Nelson's tenure as CFO.
A handful of other defendants were convicted prior to Nelson on a number of charges, including fraud conspiracy, money laundering and wire fraud. Andrew Hamilton Williams, Jr., the company's former founder and owner, was sentenced to 150 years in prison.
Source: Loan Safe, "Big time mortgage scammer sentenced in Baltimore for massive $78 million mortgage fraud scheme," Alex Ferreras, May 15,
]]>Pursuant to that aim, FINRA has 22 board members, seven of whom are elected by the securities industry.
In what a recent Wall Street Journal article termed a "highly unusual" move, one of those latter directors agreed last week to resign his position after being disciplined by FINRA for his conduct as president of an investment firm.
]]> Joel R. Blumenschein is president of Freedom Investors Corp. Following an internal FINRA hearing on April 23, Blumenschein agreed to a settlement requiring him to step down from that position for three months pursuant to a ban imposed by the authority for his lax supervision of a broker. That employee was alleged to have inappropriately invested money for a Freedom Investors customer.Hearing examiners also stated that Blumenschein gave "evasive and contradictory" testimony concerning that matter.
Following the ban, which is set to run through July, Blumenschein initially stated that he would continue to serve as FINRA director until the expiration of his term in August.
He quickly amended that statement, though, when he said earlier this past week that he would "formally resign post haste" following submission of a formal resignation letter to the authority.
In doing so, Blumenschein said that he was "bowing to pressure from no one but myself." He added that the settlement was "mischaracterized" and that no finding of guilt was ever pronounced.
The authority has often been criticized by persons who question whether it is sufficiently aggressive in taking enforcement action against securities firms that engage in wrongdoing, given that it receives funding from those very entities.
A FINRA spokesperson counters that Blumenschein's ban and resignation announcement points, rather, to the regulatory strength of the authority, not weakness.
"It should give people comfort that FINRA is willing to take enforcement action against board members," he says.
Source: Wall Street Journal, "Finra director calls it quits," Jean Eagleshaw, May 1, 2012
]]>Hendrix Moreno Montecastro, 39, and his mother, Helen Moreno Pedrino, 60, were arraigned yesterday in Riverside County Superior Court. They refused to enter pleas, and the judge scheduled a trial date for next month after entering not guilty pleas on their behalf. Five other people have already pleaded guilty in the case.
]]> Montecastro and Pedrino were arrested in late 2009 and accused by prosecutors of fraudulently inducing investors to give them money for a return promise of outsized returns on real estate, diamonds and other investments.Those alleged to be defrauded -- many of them elderly and described as "mom-and-pop "investors -- turned over their savings and retirement funds to the couple, tapped out their credit cards and, on some occasions, even refinanced their homes to provide the money. Reportedly, more than 200 Riverside County homes eventually ended up in foreclosure as a result of the fraud.
Prosecutors added an additional 81 felony counts against Montecastro at his arraignment, resulting in a total of 312 counts against him. In addition to securities fraud, those counts include mortgage fraud, corporate identity theft, grand theft and elder abuse. His mother faces many of the same charges.
The defendants refuse to retain legal counsel in their defense, choosing instead to represent themselves. They have challenged the court's jurisdictional authority in the case and made other arguments that the judge has termed "word hash" and "gibberish."
Their trial is scheduled to begin June 21.
Source: The Press-Enterprise, "REAL ESTATE: pair handed 80 more felony mortgage fraud counts," Tiffany Ray, May 7, 2012
]]>Chesapeake Energy Corp. chairman and CEO Aubrey McClendon and co-founder Tom Ward operated a private hedge fund -- the Heritage Management company LLC -- from 2004 - 2008 that many energy-trading experts say was highly problematic in light of their corporate positions and duties to shareholders.
]]> McClendon was stripped of his title as chairman by Chesapeake earlier this week, although he will continue his duties as CEO. Ward is now CEO of another energy company.No legal action has been taken against either man, and McClendon -- who publicly apologized for his involvement with the fund -- says that he will now devote "full time and attention on execution of the company's strategy."
McClendon has not commented on whether he or Ward used inside information from their dealings with Chesapeake in their hedge fund trades, and Ward denies doing so. There is no evidence that they did, and Ward said he saw nothing wrong with the arrangement. Ward added that he did not know whether the energy giant's board was ever aware of the fund, but, notwithstanding what it did or did not know, he saw "no conflict of interest" in the fund trading in the same commodities that Chesapeake produces.
Many other industry insiders disagree with that view, however. One former Texaco trading-compliance executives says that personal trading in the same commodity "would be a clear no," adding that, "We would never have tolerated that, ever."
Another critic of the practice, an oil and gas industry analyst in New York, says that clear conflict-of-interest and ethical issues arise whenever an opportunity for personal gain exists from the ability to take advantage of non-public information.
Thus far, the SEC has declined to comment on the matter.
Source: MSNBC, "Inside Chesapeake, CEO ran private hedge fund," Joshua Schneyer, Jeanine Prezioso and David Sheppard, May 2, 2012
]]>And then the bottom fell out, owing to a number of factors, including the inability of many bank customers in states hit hardest by the recession to pay back what they borrowed and a class action lawsuit brought by investors alleging securities fraud committed by bank officers.
]]> The result was a bankruptcy filing in 2010, with the bank stating it had up to 5,000 creditors and liabilities potentially in excess of $50 million. TierOne's demise was the largest bank failure in Nebraska history.The class action suit was filed in May 2010, when a share of TierOne's stock was selling for $0.17.
Less than two years prior to that, it was selling for about $5.50 per share, an amount that the class action plaintiffs state was illusory and fraudulent. The lawsuit alleged that the plaintiffs relied in good faith on company financial statements showing a profitable enterprise and rising stock price, when, in fact, numbers released by TierOne were artificially inflated.
A settlement in the case in the amount of $3.1 million was announced earlier this week, covering investors who bought bank stock between August 9, 2007, and May 14, 2010. It will be paid by TierOne's insurers.
Along with the corporation, several former TierOne executives were named as defendants in the lawsuit. Settlement documents state that they "adamantly deny any wrongdoing" in the matter.
Source: Lincoln Journal Star, "Class-action lawsuit over TierOne stock settled," Matt Olberding, May 1, 2012
]]>The story is a simple one. A former employee possessing valuable information about securities law violations made the decision to become a whistleblower and to transmit his information to the SEC.
]]> He hoped to maintain his anonymity, but he handed over personal notebooks that anyone who knew him would readily recognize as his. The SEC attorney investigating the matter showed the notebook to insiders at the company under investigation, who then knew who the source was. Cover blown.It is important to bear in mind that the whistleblower went to the SEC before it had formally adopted its new whistleblower program. The new whistleblower program has special rules for tipsters who want to remain anonymous. To take advantage of the new rules about anonymous tips, whistleblowers must have legal representation. Seasoned counsel would take steps to protect the identity of the whistleblower. Experienced counsel would not have allowed a client to simply hand over distinctive notebooks that would readily identify the client without first advising the client of the risks and proposing alternative methods for presenting the information.
Our experience with the SEC is that its attorneys are seasoned veterans with fine skills. The episode never should have happened. Hopefully, it never will again.
If you have a tip on a securities law violation, you don't have to be an employee or former employee to profit as a whistleblower. Contact us. Representing SEC whistleblowers on contingency.
]]>In regard to that concern, an agency spokesperson says that, "We do not reveal which witnesses may be cooperating with the government except as required by law or the governing rules of civil procedure."
]]> Notwithstanding that assurance, a corporate executive can sometimes read between the lines and make an educated guess as to who is working with the government pursuant to its investigation of wrongdoing.That is precisely what happened in what the Wall Street Journal calls an SEC "gaffe' committed during its investigation of Pipeline Trading Systems LLC, a company that buys and sells investors' orders privately without disclosing them to Wall Street in an alternative trading system called a "dark pool."
That agency error was committed when a government lawyer questioning a Pipeline executive about investment improprieties showed the man -- the company's chief of its trading affiliate group-- a whistleblower's notebook replete with trading notes and related details. The executive readily recognized the handwriting of its author, thus blowing the whistleblower's cover and compromising the SEC's case.
In a clear understatement, the whistleblower stated that he was disappointed with the disclosure of his identity.
The whistleblower began working with the SEC prior to the 2010 Dodd-Frank legislation that greatly expanded the whistleblower program. The agency states that, since the overhaul, which increased incentives for those coming forward, more than 1,000 tips -- many of them high quality -- have been received from people with close knowledge of wrongdoing by investment firms and corporations.
Source: Wall Street Journal, "Source's cover blown by SEC," Scott Patterson and Jenny Strasburg, April 25, 2012
]]>1. If you want to be an anonymous SEC whistleblower, you must have a lawyer. Both the SEC whistleblower rules and the CFTC's rules require you to have a lawyer if you want to proceed anonymously. You should talk to a lawyer about anonymity and confidentiality issues so you understand what you should be thinking about.
2. Your tip will be referred to a lawyer within the relevant agency. Choose a lawyer who talks the talk. Agency enforcement attorneys are more likely to talk to us to find out more than if you handle it yourself. This can benefit you in the end.
]]> 3. Some of our whistleblower clients have been asked for more information, additional documents, and some have been subpoenaed. You should have a lawyer for this. In our standard contingency-fee whistleblower engagement, you and we become a team and all of this is covered under the same contingency fee arrangement.4. There are a good number of rules for whistleblowers. Hire people who know the rules. Experience helps.
5. The SEC and CFTC may not return your calls, but we will.
6. Adding counsel helps to ensure that you know when to file a claim for a bounty - there are strict deadlines and if you miss your window of opportunity, there are no second chances. Regular monitoring of covered actions is essential.
7. Lawyers help to ensure that your forms requesting a bounty are filled out properly. There are rules about this. If you supplied information leading to a successful recovery by the SEC or CFTC, bounty time is no time for mistakes.
8. There are standards for awards. Hire advocates who will thoughtfully prepare your application for an award when the time comes.
9. What if you are wrongfully denied your award? There is a process to challenge a determination denying you your bounty, but it involves litigation. The possibility of litigation is built into our standard contingency fee engagement.
10. Special rules designed to protect whistleblowing employees against retaliation might not help you. People who thought they were protected sometimes find out - too late - that they are not protected. Don't get burned thinking you are safe just because you have heard that whistleblowers are protected. A lawyer can help protect you.
If you have a tip on a securities law violation, contact us. Representing SEC and CFTC whistleblowers on contingency.
]]>One man was charged with wire fraud. Government prosecutors charged a second accomplice with money laundering. Both those men are in custody. A third man not yet taken into custody at the time the federal complaint was announced was charged with conspiracy to commit wire fraud and money laundering.
]]> In the first scheme, which was carried out between December 2008 and November 2009, the men operated a company called the Rockford Group. They told investors they were a "leading private equity firm" that could get the investors a 15 percent return on money invested in personal injury lawsuits.The government states that, in fact, no money was invested at any time. Instead, it was wired to bank accounts overseas. The investors in that fraudulent scheme -- about 200 in all -- allegedly lost about $11 million.
A second scheme involved the solicitation of money for what the men stated was an IPO in General Motors stock. That scheme was short-circuited by a would-be investor who suspected fraud.
A third scheme was similar to the first, with investors believing their money was being used to fund litigation. The defendants instead spent it on clothing, gold and other items. Investors defrauded in that scheme lost about $5 million.
An experienced securities litigation law firm can provide individual and institutional investors with diligent and proven representation in any matter involving securities or investment fraud claims.
Source: Thomson Reuters News & Insight, "Litigation-funding firms were $15 min fraud," U.S., April 18, 2012
]]>Bennett states that his agency needs to do something about that to help those investors understand the risks and avoid inappropriate financial decisions and to ensure that brokers do not sell such securities inappropriately.
"We don't have a qualm with the product," Bennett recently said. "We just want to make sure that people who are selling [and buying] them understand them."
]]> Owing to their risks, leveraged and inverse ETFs are viewed by industry insiders as being appropriate investments for only a small minority of professional traders. The securities are focused on ramping up short-term returns and can be extremely volatile investments to hold for more than a very short period of time.Securities and Exchange Commission and FINRA regulators have been closely watching and often investigating this class of ETFs for many years, but cases of enforcement actions taken against brokerages and individual brokers have been rare.
That will now seemingly change, with FINA announcing that it will bring cases against some brokerages for inappropriately selling the securities. Those companies have not been identified. Bennett says that the actions will "make statements" concerning what brokerages need to be doing to properly train brokers and appropriately sell the ETFs.
Investors with claims against brokerages for securities fraud or other matters often file claims with FINRA and have their cases proceed to arbitration. An experienced securities arbitration attorney can respond to an investor's questions and concerns regarding any aspect of FINRA or other securities arbitration, as well as provide strong representation in an arbitration proceeding.
Source: Reuters, "FINRA to bring cases over leveraged, inverse ETFs," Suzanne Barlyn and Jessica Toonkel, April 18, 2012
]]>A recent case involving AutoChina International Ltd. -- which traded shares on NASDAQ until last October, when its listing was suspended for failure to file required documents with the SEC -- is the latest in a string of investigations by regulators who allege that some China-based companies are engaging in acts of insider trading and investment fraud in the United States.
]]> The SEC filed a civil lawsuit earlier this month against AuthoChina, charging company insiders with making several hundred bogus trades in recent months, all geared toward raising trading volume to make AutoChina shares look more attractive to potential lenders and investors.AutoChina says the claim is "without merit" and that, unlike some other Chinese companies that have been delisted for being essentially shell entities, AutoChina is a bona fide and major commercial vehicle sales and leasing company.
The SEC filed civil charges earlier this year against China-based Puda Coal Inc., stating that it was defrauding investors by inducing them to invest in a company that actually lacked any assets
Additionally, and just last week, a federal court acted on a government complaint charging several Chinese citizens with insider trading in Zhongpin Inc., a food processor. The court froze the accounts of defendants who SEC investigators say were trading in the company's shares ahead of its public announcement concerning an offer to take it private.
A recently issued securities report states that China-based companies were involved in nearly 40 percent of all SEC accounting-related investigations last year.
Source: Bloomberg, "SEC alleges stock manipulation by AutoChina," Elaine Kurtenbach, April 12, 2012
]]>The indictment against the three men alleges that they ran a Ponzi scheme from 2006 to 2010 pursuant to which they raised about $26 million through fraudulent representations. Authorities say that the men issued promissory notes and told investors that monies received were being used to finance the stones' shipments.
]]> Instead, investigators state that, while some of the proceeds were used to pay back initial investors in classic Ponzi scheme fashion, much of the money that the group received was funneled toward their personal use. The indictment states that the men used investors' money liberally to make mortgage and car payments and to buy clothes, jewelry, air tickets and finance resort vacations.The men "shuttled the investors from one deceptive securities offering to another in an attempt to maintain their house of cards," said a United States attorney involved in the case.
The case was coordinated through the Financial Fraud Enforcement Task Force, an interagency group established under the Obama presidency to more effectively investigate and prosecute financial crimes.
The three defendants face 20 years of potential prison time on the most serious criminal count against them.
Source: Loan Safe, "Three defendants accused of defrauding investors of $26M in securities fraud scheme," Even Bedard, April 6, 2012
]]>The program encourages direct reporting of securities fraud and other improprieties, for example, while virtually all securities companies already have well-established compliance and compensation programs internally for reporting corporate wrongdoing. Commission officials say that the new program brings in higher quality information and cuts down investigation times. Company executives counter that it undermines their in-place systems and will too often encourage claims that lack legitimacy.
]]> No award has yet been paid by the government to any whistleblower who has provided information through the new program, given that a number of hurdles must be cleared in a case before compensation comes into play. An investigation must be completed, of course, and regulators must decide to act upon what they have learned through a whistleblower by taking legal action against a company or its employees and receiving a recovery. A whistleblower must also wait through a public notice period, during which other claimants can also apply for an award.The SEC has stated on multiple occasions that the program does not seek to supplant or undermine the internal systems that companies already have in place to address and rectify fraud. They note that whistleblowers who go to their companies first have a better chance of garnering compensation in a completed enforcement action that is at the higher end of what informers are eligible to receive.
The compensation range for whistleblowing tips that lead to government recoveries is generally 10 to 30 percent of what the government collects in excess of $1 million.
Source: Reuters, "Comply: Getting a grip on whistleblowers," Suzanne Barlyn, March 23, 2012
]]>The Iowa Public Employees' Retirement System filed a complaint late last month in a New York federal court, stating that Deloitte "aided and abetted" former managers of a trading company in which the fund was heavily invested by being negligent in its audits of the company.
]]> The managers of that entity, WG Trading Co. -- an alleged Ponzi scheme -- were indicted in 2009 on conspiracy to defraud investors of more than $550 million in an investment fraud that lasted for well over a decade. One of them pleaded guilty to securities fraud and other charges. The other has pleaded not guilty.The fund's complaint specifically alleges that Deloitte "acted in willful blindness of the scheme" and that the auditors were so deficient in their duties that "no reasonable auditor would have made the same decisions if confronted with the same facts."
The fund states that it relied directly and heavily on Deloitte's "clean" reports to invest in WG Trading and suffered millions of dollars in losses as a result.
Deloitte disputes that charge, calling it "ill conceived" and without any basis in fact. The firm states that it audited the financials of a separate WG Trading Company partnership that was not involved in any fraud, and had no dealings with WG Trading Co.
The lawsuit was filed in the U.S. District Court in Manhattan.
Source: Bloomberg, "Deloitte & Touche sued in New York over WG Trading fraud," Chris Dolmetsch, Bob Van Voris, March 23, 2012
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