6. The Continuation of Market Timing Cases
Market timing cases involving the SEC affected both sides of the trading desks. Those in charge of approving or facilitating market timing trades and as persons directly involved in market timing trades were singled out by the SEC, and significant monetary penalties were sometimes involved.
A. Bear, Stearns & Co, Inc. and Bear, Stearns, Securities Corp.
The SEC charged Bear, Stearns, & Co, Inc. and clearing firm Bear, Stearns Securities Corp. with market timing and late trading. The SEC said that BSSC was aware that it was processing late trades and that it knowingly gave priority customers deceptive trading devices so that mutual fund companies wouldn’t notice that market timing was taking place. The SEC also discovered that BSSC’s “timing desk” that was there to detect and prevent market timing actually helped clients engage in market timing activities.
Without denying or admitting to the SEC’s allegations, respondents agreed to stop engaging in future violations and pay $250 million in disgorgement and civil penalties. The also agreed to adopt procedures and policies that would improve compliance so future violations would not take place.
B. Security Brokerage Inc. and Daniel Calugar
Security Brokerage Inc (SBI) and Calugar settled a civil injunction action by the SEC accusing them of late trading and improper market timing between 2001 and 2003. Calugar is the former owner and president of SBI. The SEC said SBI created false internal records to cover up late trades. The commission accused Calugar of negotiating a “sticky asset” agreement with a mutual fund family involving the investment of hedge funds in return for market timing capabilities. SBI and Calugar did not admit or deny the allegations. Calugar, however, agreed to pay the $153 million penalties and disgorgement fine. He also consented to an entry blocking him from associating with any broker-dealer for at least one year and accepted a permanent injunction against future violations. SBI stopped being a registered broker-dealer in 2003.
C. Prudential Equity Group, LLC
The SEC charged four former Prudential Securities Inc. representatives with illegal market timing involving over 25 mutual funds. The respondents were accused of deceptive and fraudulent trading practices. PEG agreed to pay over $270 million in civil penalties and disgorgement.
D. Kenneth W. Corba and Stephen Treadway
Former PIMCO equity mutual funds executive Stephan Treadway was found guilty by a federal court of SEC’s charges that he engaged in breach of fiduciary duty, securities fraud, and other securities violations. Without admitting or denying the SEC’s findings, he agreed to pay $572,00 in penalties and disgorgement, as well as to a permanent injunction from future violations. He also agreed to being barred from associating with a broker-dealer and to not serve as a director or officer of an investment company for at least one year.
Corba, the former CEO of PEA Capital-the adviser of PIMCO-settled charges that he negotiated a “sticky asset” agreement allowing PIMCO Treadway to engage in market timing in return for long-term hedge fund and mutual fund investments.
7. Potential Fifth Amendment Privilege In NASD Proceedings
In two instances, the SEC put aside disciplinary actions made by the NASD after the former associated member firms and persons exercised their right against self-incrimination when responding to the NASD’s requests for information under Rule 8210.
In the case involving Frank P. Quattrone, who offered to provide information but not give testimony, the SEC set aside the NASD’s findings related to research analysts’ conflicts of interest and initial public offering spinning because the commission found that Quattrone had offered enough evidence to show there was a genuine issue of material fact related to whether NASD’s investigation was state action. The SEC also set aside NASD’s disciplinary action against him.
In the mater of Justine F. Ficken, a former general securities representative of Prudential Securities Inc. and Wachovia Securities LLC, the SEC set aside NASD’s disciplinary action against him, remanding further consideration. Ficken had refused to give testimony at on-the-record interviews concerning late trading and market timing. Ficken said he believed NASD acted as a state actor. The commission said its Quattrone opinion had not been issued when NASD took action and did not address the question of joint action as to whether it was a state actor. It also said Ficken could meet the burden for obtaining discovery and NASD needed to consider his discovery request.
8. Enforcement Action Against Outside Directors
The SEC filed enforcement actions involving financial reporting issues against eight former Spiegel, Inc. directors and officers. Three outside directors were involved in Spiegel’s decision to delay filing “required financial reports in order to avoid issuance by its outside auditor of a ‘going concern’ opinion.” Upon announcement of the actions, SEC’s Division of Enforcement Director, Linda Chatman Thomsen, said “Directors who keep important financial information from the investing public by purposely failing to file required financial reports will be sanctioned. Shareholders and investors deserve to know the unadulterated truth.”
Two of the directors agreed to a permanent injunction from future violations and to a civil penalty of $100,000. The third director agreed to an administrative order to cease and desist causing or committing future violations of the federal securities laws’ reporting provisions.
9. City of San Diego Sanctioned
In an administrative proceeding, the SEC charged the City of San Diego with failing to disclose in five municipal bond offerings key details regarding specific pension and retiree health care obligations. It also accused the City of not revealing that it was intentionally underfunding its pension obligations to increase pension benefits and defer costs at the same time.
The SEC said the City either knew or was reckless if it didn’t know that it had made misleading statements and that the City violated certain sections of the Exchange Act and Rule 10b-5 thereunder. The City did not deny or admit to the SEC’s findings, but it did agree to cease and desist from future securities fraud violations and to work with an independent consultant to help “foster compliance” related to disclosure obligations.
10. First SEC Case Under the USA PATRIOT ACT
The SEC brought its first action under the USA PATRIOT Act when it sanctioned Crowell, Weedon, and Co. for failing to properly document its CIP (customer identification program).
The SEC found that Crowell opened about 2900 customer accounts but did not follow verification procedures as stated in its CIP. The SEC said that, instead, Crowell relied on its representatives’ attestations that they had personal knowledge of the new customers. The SEC said Crowell violated record retention requirements and record-keeping rules. Crowell did not admit or deny the findings, but it did agree to cease and desist from any violations or future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder.
Shepherd Smith and Edwards represents investors who have lost investments because of the inappropriate actions of members of the securities industry. If you are one of those investors, contact Shepherd Smith and Edwards to schedule your free consultation. We have helped thousands of investors recover their losses.
The full, original article was originally published by the Bureau of National Affairs on April 9, 2007. You can also read the #1-5 Leading SEC Enforcement Developments on this Web site.
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