Securities Mosaic® Blogwatch
October 17, 2014
For Now, The Broad Interpretation of "Foreign Officials" Under the FCPA Is Here to Stay
by Blake Osborn

In recent years, the DOJ and SEC have significantly increased their Foreign Corrupt Practices Act (FCPA) enforcement efforts, and in the process, have successfully advocated the theory that state-owned or state-controlled entities should qualify as instrumentalities of a foreign government under the FCPA. The FCPA defines a foreign official as "any officer or employee of a foreign government or any department, agency or instrumentality thereof." In August 2014, the government's broad definition of who constitutes a "foreign official" came into question for the first time when two individuals (Joel Esquenazi and Carlos Rodriguez) filed a petition for writ of certiorari with the Supreme Court to challenge their convictions under the FCPA and argued for the high court to limit the FCPA's definition of the term. However, on October 6, 2014, the Supreme Court declined to consider the potential landmark case effectively upholding the government's broad view of the term "foreign official."

A federal jury had convicted Messrs. Esquenazi and Rodriguez, former executives of Terra Telecommunications Corp., for their roles in a scheme to bribe officials at Haiti's state-owned telecommunications company, known as Haiti Teleco. Esquenazi was sentenced to fifteen years in prison (the longest such sentence in FCPA history), and Rodriguez received seven years. On appeal, the defendants argued that Haiti Teleco did not fall under the FCPA definition of an "instrumentality" because it is a foreign state-owned business as opposed to a government agency. Thus, the Haiti Teleco officials who received the bribes were not "foreign officials" under the FCPA.

The Eleventh Circuit disagreed with their arguments and affirmed the convictions. In so doing, the appeals court defined an "instrumentality" as any entity controlled by the government of a foreign country that performs a function that the controlling government treats as its own. However, what constitutes control and what constitutes a function of the government are fact-bound questions to be decided on a case by case basis. The Eleventh Circuit, therefore, essentially adopted the DOJ's fact based approach looking at who runs the company, who appoints executives, and where the company's profits end up when determining whether the employees of that company qualify as "foreign officials."

The Supreme Court's denial of review means that the Eleventh Circuit's broad definition of "foreign official" will continue to be used by both the DOJ and SEC in their FCPA enforcement efforts. During oral argument before the Eleventh Circuit, the DOJ argued that governmental ownership of as little as 10% of an entity in conjunction with other factors could satisfy the DOJ's interpretation of "instrumentality." As the settlement values for resolving FCPA enforcement actions continue to increase and the government has made it clear that they intend to cast a wide net, this recent development is a further reason why it is imperative for all US companies doing business abroad to carefully continue scrutinizing foreign companies (if it has any interest owned by the government) and foreign representatives before providing payments or subsidies.

October 17, 2014
Debevoise & Plimpton discusses SEC's Proposed Rule on Security-Based Swap Quotes
by Byungkwon Lim

On September 8, 2014, the Securities and Exchange Commission (the "SEC") published a proposed rule (the "Proposed Rule") providing that certain communications involving quotes of security-based swaps will not be deemed to constitute offers of such security-based swaps or of any guarantees of such security-based swaps that are securities for purposes of the registration requirements applicable to offers or sales of securities under section 5 of the Securities Act of 1933 (the "Securities Act"), if the security-based swaps may be purchased only by eligible contract participants ("ECPs")[1] and are traded on or processed through a trading system or platform that either is a registered national securities exchange or on a security-based swap execution facility (a "SBSEF") or is exempt from registration as a SBSEF.

Comments on the Proposed Rule are due on or before November 10, 2014.


Security-Based Swaps as Securities

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd Frank Act") amended the Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act") to include "security-based swaps" in the definition of "security," thereby subjecting security-based swaps to the provisions of those statutes and the rules and regulations of the SEC thereunder applicable to securities.[2]

As section 5 of the Securities Act requires that any offer and sale of a security either be registered under the Securities Act or be made pursuant to an exemption from registration, counterparties to security-based swaps are required to either register such transactions or rely on an available exemption. Further, Title VII amended the Securities Act to require that security-based swaps involving persons who are not ECPs ("non-ECPs") be registered under the Securities Act.

Expanded Access to Quotes on SBSEFs and Exemption from Registration of Security-Based Swaps

Title VII also added a requirement that security-based swaps be traded on regulated trading platforms or exchanges in certain situations, as well as a mandatory clearing requirement for certain security-based swaps designated by the SEC. Additionally, Title VII requires security-based swaps that are subject to the clearing requirement to be executed on either a national securities exchange or on a SBSEF that is either registered as such or exempt from such registration, unless no exchange or SBSEF makes such security-based swap available for trading (the "trade execution requirement").

Title VII requires that any facility for trading or processing security-based swaps, including some of the electronic trading platforms currently used by security-based swap dealers ("SBSDs") to disseminate quotes to their clients, must be registered as a SBSEF or as a national securities exchange. Additionally, Title VII amended the Exchange Act to add various provisions governing regulation of SBSEFs, including provisions relating to the availability of bid, offer or other price information for security-based swaps, as well as an "impartial access requirement," requiring a SBSEF to establish objective standards for granting impartial access to trading on its facility.

The SEC's proposed rules for regulating SBSEFs require SBSEFs to admit as participants all ECPs that meet such standards for becoming a participant, and to provide at least a basic functionality to allow any participant the ability to make and display executable bids or offers accessible to all other participants.[3] In the release accompanying the Proposed Rule (the "Proposing Release"), the SEC notes that these requirements may prevent certain facilities that are required to register as SBSEFs from limiting the number or types of persons that have access to quotes on their trading platforms, as the rules for SBSEFs and national securities exchanges, once finalized, may require the publication or distribution of quotes for security-based swaps to be available to all participants in these platforms, and such participants may be able to further disseminate such quotes without restriction (via online services or otherwise).

Similar concerns were raised by commenters on the SEC's 2011 interim final rules (the "interim final exemptions") exempting certain security-based swaps from certain provisions of the Securities Act, the Exchange Act and the Trust Indenture Act of 1939 (the "Trust Indenture Act").[4] Commenters expressed concerns that certain communications involving security-based swaps, such as publication or distribution of price quotes, may be available on or through trading platforms on an unrestricted basis following the full implementation of Title VII, and that this unrestricted access could affect the availability of exemptions from the registration requirements of the Securities Act, such as the exemption in section 4(a)(2), for such security-based swaps.[5] Specifically, the publication or distribution of price quotes for security-based swaps traded or processed on or through trading platforms could be viewed as "offers" of those security-based swaps under the Securities Act, and such offers would require registration under the Securities Act or reliance on an available exemption. Such communications could also be considered offers to non-ECPs, even if non-ECPs are not permitted to purchase the security-based swaps.


The Proposed Rule provides that, for purposes of section 5 of the Securities Act, the publication or distribution of quotes relating to security-based swaps will not be deemed to constitute an offer, an offer to sell or a solicitation of an offer to buy or purchase such security-based swaps or any guarantees of such security-based swap that are securities, if such security-based swaps:

- May be purchased only by ECPs, and
- Are traded or processed on or through a trading system or platform that either (a) is registered as a national securities exchange (under section 6(a) of the Exchange Act) or (b) is registered as a SBSEF (under section 3D(a) of the Exchange Act) or exempt from such registration (pursuant to a rule, regulation or order of the SEC).


The Proposed Rule is intended to further the goal of Title VII of bringing the trading of security-based swaps onto regulated trading platforms and to avoid unintended consequences arising from the operation of such platforms by permitting security-based swaps to be executed on and processed through such platforms without concern that price quotes made with respect to such transactions may implicate the Securities Act registration requirements.

The Proposed Rule applies both to the initial publication or distribution of price quotes[6] for security-based swaps on eligible trading platforms, as well as any subsequent republication or redistribution of such price quotes on or through mediums other than eligible trading platforms, including online information services. Further disseminations of such price quotes by participants in such platforms would also be permitted without restriction. As the SEC clarifies in the Proposing Release, the treatment of such price quotes should not depend on who publishes or distributes the quotes or where the quotes are published or distributed, so long as only ECPs are permitted to purchase the security-based swaps that are the subject of such price quotes.

Certain commenters on the interim final exemptions expressed concern about the effect on the availability of Securities Act exemptions of other published communications they characterized as research. The SEC is considering whether the exclusion under the Proposed Rule for price quotes should be expanded to cover other types of communications and is requesting comment on the types of research materials that are distributed, the manner in which such research materials are distributed and the basis for characterizing such communications as research.

In addition, some commenters requested broader exemptions from the registration requirements of the Securities Act and the Exchange Act, and the indenture qualification provisions of the Trust Indenture Act, for security-based swaps entered into solely by ECPs, but the SEC declined to provide such broader exemptions.

Furthermore, the Proposed Rule is limited to the treatment of certain price quotes and would not otherwise affect the provisions of any exemptions from the registration requirements of the Securities Act. Thus, market participants must still make a determination as to whether an exemption from the registration provisions of the Securities Act is available with respect to a security-based swap, including whether such transaction complies with any applicable conditions of the exemption. Finally, the Proposed Rule does not limit in any way the scope or applicability of any other provisions of the federal securities laws, including the antifraud provisions in section 17(a) of the Securities Act, relating to both oral and written material misstatements and omissions in the offer and sale of securities, including security-based swaps.


[1] The term "eligible contract participant" is defined in section 1a(18) of the Commodity Exchange Act and includes a number of categories of persons, such as financial institutions; insurance companies; registered investment companies; commodity pools with total assets exceeding $5 million; registered broker dealers; registered futures commission merchants; registered investment advisors; certain employee benefit plans with more than $5 million in assets; certain corporations, partnerships and trusts with more than $10 million in assets; government entities such as the United States, a state or local municipality, a foreign government, a multinational or supranational governmental entity, or an instrumentality, agency or department of such entities; and individuals with more than $10 million invested on a discretionary basis (or more than $5 million, if such individual enters into an agreement or transaction to manage the associated risks).

[2] Swaps are regulated by the Commodity Futures Trading Commission (the "CFTC"), security-based swaps are regulated by the SEC and certain other derivatives (i.e., mixed swaps) are jointly regulated by both agencies. CFTC and SEC, Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, 77 Fed. Reg. 48208 (August 13, 2012).

[3] See section 761 of the Dodd-Frank Act (adding section 3(a)(77) of the Exchange Act); see also SEC "Registration and Regulation of Security-Based Swap Execution Facilities," 76 Fed. Reg. 10948 (Feb. 28, 2011).

[4] Concern over possible disruptions to the operation of the security-based swaps market while the SEC evaluated the implications of treating security-based swaps as "securities" under the Securities Act and Exchange Act led to the adoption by the SEC in 2011 of interim final rules exempting security-based swaps from certain provisions of the Securities Act, the Exchange Act and the Trust Indenture Act. SEC, "Exemptions for Security-Based Swaps," 76 Fed. Reg. 40605 (July 11, 2011). These exemptions apply to security-based swaps that prior to July 16, 2011, the effective date of Title VII, were "security-based swap agreements" and are defined as "securities" under the Securities Act and the Exchange Act as of such date due solely to the provisions of Title VII. The interim final exemptions exempt offers and sales of security-based swap agreements that became security-based swaps on the Title VII effective date from all provisions of the Securities Act, other than the anti-fraud provisions in section 17(a), as well as from the Exchange Act registration requirements and from provisions of the Trust Indenture Act, provided certain conditions are met. These exemptions were subsequently extended to February 11, 2017. In the Proposing Release, the SEC notes it may, as part of any final rules adopting the Proposed Rules, shorten or otherwise alter the expiration dates of the interim final exemptions.

[5] Currently, such communications are not available on the trading platforms on an unrestricted basis because trading platform operators and SBSDs have discretion over authorizing participants to access trading platforms and to see quotes for security-based swaps from SBSDs using such platforms.

[6] To allow for flexibility and to avoid limiting the types of trading platforms that currently exist or may in the future exist, the SEC has not defined the specific type of price quotes covered by the Proposed Rule. (They could take a number of forms depending on the type of trading platform models, including indicative quotes, executable quotes, bids and offers, and other pricing information and other types of quote information that may develop in the future).

The full and original memorandum was published by Debevoise & Plimpton LLP on September 23, 2014, and is available here.

October 17, 2014
Customer Hit with $80,000 in Respondents' Attorney's Fees
by Mark Astarita

It is not often that a public customer is forced to pay a respondent's attorneys fees, but in a recent FINRA arbitration, that is exactly what happened.

According to the description in the FINRA arbitration award it appears that a public customer, representing herself, filed a claim against UBS for unauthorized transactions, unsuitable recommendations, negligent supervision and violation of FINRA's conduct rules, requesting 2.75 million dollars in damages. UBS denied the allegations and requested expungement for the broker.

A hearing was scheduled, and the Claimant did not appear, and did not request an adjournment. Rather than dismissing the case, the Panel took the extra step of giving the Claimant an additional week to explain her non-appearance and why her claim should not be dismissed.

Claimant did not respond, and UBS filed a request for attorneys fees and costs.

The Panel granted the request, dismissed the complaints, awarded UBS $81,000 in attorneys fees and costs of $9,000, and expunged the matter from the broker's record.

A dramatic result, but one which brings home the point that FINRA arbitrations are a serious matter, and should be treated as such. 

October 17, 2014
This Week In Securities Litigation (Week ending October 17, 2014)
by Tom Gorman

The Commission prevailed in three litigated decisions. The agency secured a favorable jury verdict in an action centered on an offering fraud. In two other cases - one based on misrepresentations regarding the only company product and a second alleging an investment fund fraud - the SEC prevailed on summary judgment motions.

The SEC also brought its first action centered on high-speed trading, alleging that a firm marked the close repeatedly over a six month period. In addition, actions were brought based on the failure of a broker to produce documents during an investigation, for aiding and abetting violations of the broker registration requirements and for insider trading and investment fund fraud.


Remarks: Commissioner Michael S. Piwowar delivered remarks at the Securities Enforcement Forum 2014, Washington, D.C. (October 14, 2014). His remarks centered on the need for due process and fairness, questioned if broken windows is an effective approach to enforcement and suggested that the 2006 statement on corporate penalties might be revisited (here).

Statistics: The Commission issued a release titled: FY 2014 Enforcement Actions Span Securities Industry and Include First-Ever Cases. The Release tabulates the number of cases brought during the last fiscal year and highlights selected cases in a number of areas (here).


Remarks: Chairman Timothy G. Massad addressed the Managed Funds Association (October 16, 2014). His remarks focused on ensuring that the new Dodd-Frank rules do not impose undue burdens and cross-border harmonization (here).

SEC Enforcement - Litigated Actions

Offering fraud: SEC v., Inc., Civil Action No. 04-CV-4057 (E.D.N.Y.) is an action against the company and its co-founder and former Chairman, Anthony Knight, and others. The complaint alleged that from 1999 to 2000 the defendants sold nearly 6.75 million shares of stock to over 350 investors, raising about $2.3 million. There was no registration statement in effect and material misrepresentations were made to investors. On October 14, 2014 a jury returned a verdict in favor of the Commission and against Mr. Knight, concluding that he violated Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Remedies will be determined at a later date. Mr. Knight was the sole remaining defendant in the action. See Lit. Rel. No. 23112 (Oct. 15, 2014).

Misrepresentations: SEC v. Ferrone, Civil Action No. 1:11-cv-05223 (N.D. Ill.) is an action against Douglas McClain Sr., Douglas McClain Jr., Immounosyn Corporation, Argyll Biotechnologies. LLC, Stephen Ferrone and James T. Micell. The complaint claims that from 2006 through 2010 misrepresentations were made about the sole product of the company, a drug known as SF-1019. Specifically, investors were told that the company planned to commence the regulatory approval process for human clinical trials but were not told that the FDA had twice issued clinical holds on the applications which prevented the trials from moving forward. The Court granted the SEC's motion for summary judgment as to Mr. McClain Sr., concluding that he failed to deliver Immunosyn shares to investors and made misrepresentations to them about the FDA approval process. The motion was also granted as to both McClain defendants for insider trading since each sold firm shares without disclosing the correct FDA status of the drug in violation of Exchange Act Section 10(b) and Securities Act Section 17(a). Remedies will be determined at a later date. See Lit. Rel. No. 23114 (Oct. 15 2014).

Investment fund fraud: SEC v. Funinaga, Civil Action No. 2:13-CV-1658 (D. Nev. Order entered Oct. 3, 2014) is an action which names as defendants Edwin Yoshihiro Funinaga and MRI International, Inc. The complaint alleged an investment fund fraud which began in 1998, and continued through 2013. Over $800 million was raised from investors. Those investors were largely in Japan. Investors were told that the firm purchased medical accounts receivables at a discount. Full value would be realized from the insurance companies. Investors were assured that their funds were safe because of certain procedures. In fact the defendants were operating a Ponzi scheme, according to the complaint. Mr. Funinaga invoked his Fifth Amendment rights in the action.

In considering a series of motions, the Court initially rejected defendants' claim that it lacked subject matter jurisdiction based on the application of 28 U.S.C. Section 2462, the five year statute of limitations. The Court concluded that the statute of limitations does not apply to disgorgement claims based on controlling Ninth Circuit precedent. Second, the Court rejected a claim that the action should be dismissed under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) which held that a cause of action under Exchange Act Section 10(b) does not have extraterritorial application. While the SEC claimed that Morrison has been overruled for government enforcement actions by Dodd-Frank, the Court did not reach that issue. Rather, the Court concluded that the securities transactions involved here closed, and title was transferred, in Nevada. That is sufficient under Morrison the Court found.

Finally, the Court concluded that there was sufficient evidence to grant summary judgment in favor of the SEC. The evidence demonstrates that the defendants made material misrepresentations regarding the investments. Mr. Funinaga had sole control over the investment fund and used the cash for his personal benefit. His control over the scheme, use of the funds, misrepresentations regarding the safety of the funds, when coupled with his assertion of the Fifth Amendment, were sufficient to establish the key elements of a claim. Accordingly, summary judgment was entered in favor of the Commission. See Lit. Rel. No. 23111 (October 10, 2014).

SEC Enforcement - Filed and Settled Actions

Statistics: This week the SEC filed 2 civil injunctive action and 4 administrative proceeding, excluding 12j and tag-along-actions.

Marking the close: In the Matter of Athena Capital Research, LLC, Adm. Proc. File No. 3-16199 (October 16, 2014) is a proceeding against the high speed trading firm, alleging marking the close, a form of market manipulation scheme. The scheme centers on trading during the NASDAQ closing auction and imbalances. Each day at about 4 p.m. NASDAQ ran a closing auction known as the closing cross. During the auction as many buyers and sellers are matched as possible. At times there are imbalances and notices are furnished to traders who can enter specific types of orders. Respondent implemented a series of high speed strategies, taking positions during the process and then overwhelming the market fractions of a second before the close, at times trading as much as 70% of the market during at the moment, to push the price in a direction favorable to its positions. The complex strategy was implemented daily over a six month period beginning in June 2009. The Order alleges violations of Exchange Act Section 10(b). The proceeding was resolved with Respondent consenting to the entry of a cease and desist order based on the cited Section and to a censure. The firm will also pay a $1 million penalty.

Producing records: In the Matter of Judy K. Wolf, Adm. Proc. File No. 3-016195 (October 15, 2014). Ms. Wolf was a compliance consultant for Wells Fargo Advisors prior to her termination in June 2013. In 2009 she drafted the firm's policies and procedures governing how "look back" reviews would be conducted. On September 2, 2010, the day the acquisition of Burger King was announced, Ms. Wolf began a look back review of the trading surrounding the deal. She concluded that: 1) Wells Fargo account executive Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers purchased Burger King stock within 10 days of the announcement; 3) Mr. Prado and his customers each had profits that exceeded the $5,000 threshold specified in the look back review procedures; 4) Mr. Prado and Burger King were located in Miami; and 5) Mr. Prado, his customers and the acquiring company were all Brazilian. News articles about the event were not printed and included in the file despite a provision in the procedures requiring this step. The review was closed and therefore not forwarded to her supervisor. In July 2012 the Commission requested as part of its on-going investigation, and after charging Mr. Prado with insider trading, that Wells Fargo produce its compliance files relating to Mr. Prado. Although the production was eventually certified as complete, it did not include Ms. Wolf's file. When a second request was made in January 2013, her file was included in the production. Ms. Wolf's log stated "09/02/10 opened 24% higher@$23.35 vs. previous close of $18.86. Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12 [sic], the day prior to the announcement." Ms. Wolf provided contradictory testimony during the investigation. Initially, she denied altering the document. Later she admitted it. The Order alleges violations of Exchange Act Section 17(a) and the related rules. The proceeding will be set for hearing.

Unregistered broker: In the Matter of Edward L. Maggiacomo, Jr., Adm. Proc. File No. 3-16197 (October 15, 2014); In the Matter of Edward J. Hanrahan, Adm. Proc. File No. 3-16197 (October 15, 2014). The Respondent in each of these proceedings is a registered representative of a broker-dealer. Each proceeding centers on the fraudulent scheme of Joseph Camarmadre who defrauded insurance companies by recruiting individuals who were terminally ill to purchase variable annuities. The annuities, in effect, were short term investments that practically guaranteed an immediate return of the investment. To assist Mr. Camarmadre, who is under indictment as a result of the scheme, recruited Messrs. Maggiacomo and Hanrahan to facilitate the scheme and act as the brokers. Each Respondent is charged with aiding and abetting violations of Exchange Act Section 15(a). In addition, Mr. Maggiacomo is charged with violations of Exchange Act Section 10(b) for submitting false forms to his broker in connection with the annuity scheme. Each Respondent settled, consenting to the entry of a cease and desist order based on the Section or Sections cited in the respective Order. Each is also barred from the securities business and from participating in any penny stock offering with a right to reapply after five years. Mr. Maggiacomo will also pay disgorgement of $216,752.21 and prejudgment interest which will be offset by payments made in related actions. Mr. Hanrahan will pay disgorgement of $83,349.76 along with prejudgment interest but the amount will be offset by the $200,000 he has already paid to settle related claims.

Insider trading: SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014) is an action against Zachary Zwerko, formerly a senior financial analyst at a major pharmaceutical company identified only as Pharma Co. His job responsibilities included conducting analysis in support of business combination and divestiture opportunities, giving him access to a shared hard drive where all deal information was stored. Mr. Zwerko's longtime friend is Trader. Trader traded in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire Idenix Pharmaceuticals, Inc. While Mr. Zwerko did not work on that deal, he learn about it by accessing the hard drive and through an e-mail chain sent to him by his supervisor. He contacted Trader after learning the identity of Idenix which had been coded in deal documents. Trader began purchasing Idenix shares. Over time Mr. Zwerko continued to access information and contact Trader. Following the deal announcement Trader sold his shares, reaping profits of about $579,000. In 2012 Mr. Zwerko is also alleged to have tipped his friend Trader in advance of the April 23, 2012 pre-market open announcement that Ardea Biosciences, Inc. had agreed to be acquired by AstraZeneca PLC. In the months prior to the deal announcement, Aredea engaged in a series of confidential discussions with several companies, including Pharma Co., regarding possible acquisitions. Mr. Zwerko worked on the proposed deal. Although Pharma did not acquire Areda, the firm participated in the negotiations until at least a week prior to the announcement. During the negotiations Mr. Zwerko and Trader spoke on the phone, sometimes shortly after a meeting about the deal. Ultimately he purchased 9,800 shares through three brokerage accounts. Following the deal announcement he had trading profits of over $105,000. The Commission's complaint alleges violations of Exchange Act Section 10(b). A parallel criminal case brought by the Manhattan U.S. Attorney's Office filed criminal charges. Both cases are pending.

Investment fund fraud: SEC v. The Estate of Vincent James Saviano, Civil Action No. 14-cv-13902 (Oct. 9, 2014) is an action against the estate and Palmetto Investments LLC, operated by Mr. Saviano prior to his death. Defendants claimed to be operating a pooled investment vehicle that conducted "extreme day trading." Investors were told it was highly profitable and received investment advice from an SEC registered adviser. In fact Mr. Saviano lost most of the $2 million of investor funds raised and misappropriated portions. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). It was brought to preserve assets for investors. A receiver has been appointed. See Lit. Rel. No. 23109 (Oct. 10, 2014).

Manipulation: SEC v. 8000, Inc., Civil Action No. 12-cv-7261 (S.D.N.Y.) is a previously filed action against the company, Thomas Kelly, the CEO of 8000, Jonathan Bryant and Carl Duncan. The complaint alleges that in 2009 and 2010 the defendants manipulated the shares of the company and sold unregistered securities using false legal opinions. This week the Court entered a final judgment against Mr. Kelly, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The order bars him from serving an officer or director and directs that he pay disgorgement of $415, 592 and prejudgment interest. See Lit. Rel. No. 23110 (Oct. 10, 2014).

Criminal cases

Investment fund fraud: U.S. v. Huggins, Case No. 1:13-mj-00301 (S.D.N.Y.) is an action in which Charles Huggins was found guilty of one count of conspiracy and one count of wire fraud following a two week jury trial. From 2008 through 2011 Mr. Huggins and others raised millions of dollars from investors through JYork Industries Inc. and Urogo Inc. Investors were told that their funds would be used to mine gold and diamonds from Sierra Leone and Liberia. Investors were also promised a high rate of return. In fact much of the money was misappropriated.


Insider trading: Hui Xiao, the firmer managing director of Hanlong Mining Investment Pty Ltd, appeared in court on 104 counts of insider trading. The charges stem from two schemes. In the first, from July 1-8, 2011, while in possession of inside information relating to a proposed takeover by Hanlong Mining of Bannerman Resources Ltd, Mr. Xiao procured his wife and two companies to acquire Bannerman contracts for a difference and shares. In the second, which took place from July 13-15, 2011, while in possession of inside information relating to a proposed takeover by Hanlong Mining of Sundance Resources Ltd, Mr. Xiao had his wife and two entities acquire Sundance contracts for a difference.

Hong Kong

Misappropriation: The Securities and Futures Commission banned Roger John and Hamish Cruden, both former directors and responsible officers of Salisbury Securities Ltd, from the securities business for life. The order is based on findings that the two misappropriated securities and sale proceeds belonging to clients in order to settle the instructions of another client and their own obligations. In addition, they failed to maintain the required level of capital and made false and misleading statements to the SFC.

October 17, 2014
Our New "Rule 10b5-1 Trading Plans Handbook"
by Broc Romanek

Spanking brand new. By popular demand, this comprehensive "Rule 10b5-1 Trading Plans Handbook" covers a topic that many have requested. This one is a real gem - 72 pages of guidance.

DOJ Staffer Provides Fresh Guidance on Effective Compliance Programs

As noted in this Morrison & Foerster memo, Marshall Miller, the Criminal Division's Principal Deputy Assistant Attorney General in the DOJ, recently gave remarks about when a compliance program can help stave off indictment - or at least secure it more lenient treatment from the DOJ. Here's a blog from Jeff Kaplan with more info.

Podcast: Canadian Shareholder Activism

In this podcast, Amy Freedman of Kingsdale Shareholder Services discusses her firm's new report on Canadian shareholder activism-related developments & trends, including:

– Can you describe the level of proxy contest activity in 2014 relative to prior years, and reasons it may be declining or leveling off?
– Based on 2014 takeover activity, what is the BC Securities Commission position on poison pills, and what's the best guidance for companies?
– What are the current levels & scope of activism in M&A transactions?
– Can you describe the trends in shareholder engagement?
– What activism-related developments & trends do you anticipate going forward, and how should companies prepare?

– Broc Romanek

October 17, 2014
Cost of Compliance with SEC Conflict Minerals Rule High -- Even If Not As High As Feared
by Celia Taylor

According to a survey recently issued by Tulane University's Payson Center for International Development, issuers spent more than $700 million to comply with Dodd-Frank Section 1502 and the SEC's conflict minerals rule promulgated thereunder. The survey was based on responses from 112 of the 1,300 issuers that filed Form SD (the form on which conflict minerals disclosures must be made). These costs break down as follows: 

Total compliance cost for issuers

•The total aggregated and extrapolated expenses of the 1,300 issuers to comply with Dodd-Frank Section 1502 was $709.7 million by June 2014.

•Thus, on average, an issuer expended $545,962 to comply with the law.

$ value

A. Internal company time


B. Non-IT related external resources


C. IT gap / needs analysis


D. IT project element supporting conflict minerals traceability processes and reporting


E. Independent Private Sector Audit (IPSA)


Total  $709,751,142


These numbers are interesting as it appears that despite the allegation made in the original suit challenge the SEC's conflict minerals rule that the agency failed to conduct an appropriate cost-benefit analysis, the SEC actually came quite close - far closer than Tulane's original estimate. At the time of original prognosticating, Tulane assessed the costs of implementation to be approximately $7.93 billion - more than one hundred times greater than the estimate prepared by the SEC of $71.2 million (the lowest estimate was $387 million). Why such a differential in the original cost estimates and the final actual costs? In part, it might be explained by the fact that many issuers simply stated their products were "DRC conflict undeterminable" or it may be that the SEC was just right. Regardless, it cannot be denied that the aggregate cost is large - and of questionable impact.

The survey also asked issuers whether they would like to see any changes made to either Section 1502 or the conflict minerals rule to which 65% said yes, 4% said no and 31% had no comment. Included in the changes issuers would like to see are: 


-stipulate a de minimis exemption

-clarify rule

-focus on importation of 3TG

-render disclosure voluntary

-offer supply chain degree threshold exemption

-extend indeterminable period

-provide information on and certify SORs

-align with the EU proposed legislation

-promote standard process and systems across industry

-remove audit requirements

-expand scope to include diamonds

-remove mandatory disclosure 

Given that the conflict minerals rule is still under challenge it is possible that some of the items on issuers' wish lists will be met. It is not likely however that most of them will as the only portion of the rule not upheld was the requirement to label products as being "non-conflict free."

View today's posts

10/17/2014 posts

Securities Litigation and Regulatory Enforcement Blog: For Now, The Broad Interpretation of "Foreign Officials" Under the FCPA Is Here to Stay
CLS Blue Sky Blog: Debevoise & Plimpton discusses SEC's Proposed Rule on Security-Based Swap Quotes
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