Weekly News Update: SEC Sues Over Unlawful Distribution of Securities and Announces New Enforcement Initiatives

By James Kollar | Posted on

The Securities and Exchange Commission recently announced charges against ten Argentine citizens who unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also obtained an emergency order to freeze assets in the U.S. brokerage accounts of the defendants. The ten Argentinians allegedly received more than one-third of Biozoom’s shares when the company changed their name from Entertainment Art and moved from producing leather bags to developing biomedical technology. In a one month span, the defendants then sold more than 14 million of the shares for a profit of almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze. According to the SEC’s complaint, the defendants claimed they had purchased their shares from Entertainment Art shareholders between November and March. However, the SEC has said that these agreements were false because the Entertainment Art shareholders had sold all of the stock three years earlier. “Today’s action, along with the SEC’s trading suspension order last week, demonstrate the SEC’s ability and commitment to act swiftly to halt ongoing illegal conduct and preserve assets,” Antonia Chion, associate director of SEC enforcement, said in the agency’s statement.

The Securities and Exchange Commission announced three new initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas of the market and bring new technology and analytical capacity to bear in its investigations. The new Financial Reporting and Audit Task Force will be dedicated to detecting fraudulent financial reporting and is designed to enhance ongoing enforcement efforts related to accounting and disclosure fraud. The enforcement division also formed the Microcap Fraud Task Force to target abusive trading in securities by microcap companies, focusing on those that do not regularly report their financial results publicly. In addition, the SEC has created the Center for Risk and Quantitative Analytics, which will support and coordinate the division’s risk identification and assessment through data and analysis. The initiatives are an indication of the SEC’s increasingly vigorous approach to identifying fraud. “By directing resources, skill, and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity,” division co-director Andrew Ceresney said in the release.

SEC Forecasts an Increase in Whistleblower Cases and Awards

By Goodwin Procter LLP | Posted on

[Editor’s Note: The following post is authored by Goodwin Procter LLP]

On June 12, 2013, the U.S. Securities & Exchange Commission announced its second-ever whistleblower award under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Having received over 3,000 whistleblower tips in the first year of the revamped program, the SEC made its first whistleblower award in August of 2012 and is expected to issue an increasing number of awards in the coming months. (more…)

Court Vacates Resource Extraction Rule, Remands to SEC for Further Proceedings

By James Kollar | Posted on

Recently, a U.S. federal judge threw out a securities regulation requiring oil companies to disclose their payments to foreign governments for oil and gas rights.

The Securities and Exchange Commission’s extractive resources rule was added (Section 1504) to the 2010 Dodd-Frank Wall Street reform law. Human rights groups and other proponents of the law argue it would help combat corruption and wasteful spending in resource-rich nations. (more…)

FTC Wins Injunction Against Defendants Promising Mortgage Relief

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Recently the FTC won injunctive relief after filing a complaint against ten phony mortgage relief operations.  The complaint alleges that three individuals and seven companies “prey on financially distressed homeowners by luring them into membership programs or loan modification services with promises that they will receive legal representation . . . to save their homes from foreclosure.”  Defendants charged up-front fees and then failed to follow through on their promise of services.  A temporary restraining order was issued against Defendants, freezing their assets and shutting down their businesses and websites.  (more…)

Delaware Court of Chancery Upholds Statutory and Contractual Validity of Exclusive Forum-Selection Bylaws

By Davis Polk & Wardwell LLP | Posted on

[Editor’s Note: The following update is authored by Davis Polk & Wardwell LLP]

Yesterday, Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery upheld the statutory and contractual validity of bylaws separately adopted by the boards of directors of Chevron and FedEx that designated the Delaware courts as the exclusive forum for disputes regarding the internal affairs of the respective companies. The ruling should help clear the way for boards of directors to adopt exclusive forum-selection bylaws as a means to address the ever-increased and well-documented problem of multi- forum stockholder and derivative litigation. However, uncertainties remain (including, most notably, whether non-Delaware courts consistently will enforce such bylaws) that may cause some boards to await further developments before adopting such provisions. (more…)

Court Holds that Tolling Does Not Apply to a Securities Act Statute of Repose

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Last week the Second Circuit decided an unsettled question of law in In re IndyMac Mortgage-Backed Sec. Litig.  The court held that the tolling rule does not extend to the three-year statute of repose in the 1993 Securities Act.  The court also held that non-party members of a would-be class cannot intervene to revive claims previously dismissed for lack of jurisdiction.  The court affirmed the District Court for the Southern District of New York’s denial of motions to intervene on behalf of plaintiffs not originally named in the class action.  (more…)

Dodd-Frank Progress Report

By Davis Polk & Wardwell LLP | Posted on

[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]

The Davis Polk Dodd-Frank Progress Report is a monthly publication that uses empirical data to help market participants and policymakers assess the progress of the rulemaking and other work that has been done by regulators under the Dodd-Frank Act.

State of Play to Date

In the past month, no rulemaking requirements were due, no new rules were proposed to meet rulemaking requirements and one rulemaking requirement was finalized. (more…)

CFTC Wins Fund Registration Court Appeal

By James Kollar | Posted on

The U.S. Court of Appeals for the District of Columbia Circuit decided in favor of the Commodity Futures Trading Commission (CFTC) on June 25, upholding a 2012 rule that imposed new registration and reporting requirements on certain commodity pool operators and commodity trading advisers.

Under the rule, advisers to mutual funds and exchange-traded funds need to register with the CFTC if their commodity trades, including futures, swaps and options, exceed certain thresholds, with the exclusion of pure hedges.

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Supreme Court Finds Arbitration Agreements Waiving Class Actions Preclude Antitrust Class Actions Even Where Individual Claims Are Small

By Arnold & Porter LLP | Posted on

[Editor’s Note: The following post is authored by Arnold & Porter LLP]

On June 20, 2013, the Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant (“Italian Colors”), significantly strengthening the application of arbitration clauses in class action cases. The Court held that arbitration clauses with class action waivers, including in antitrust cases, are enforceable regardless of whether the value of an individual plaintiff’s claim was exceeded by the cost to arbitrate. In the 5-3 decision, authored by Justice Scalia, the Court continued two trends its decisions have featured the last few years: constricting class action litigation and enforcing arbitration agreements, even those that prohibit class actions. (more…)

Ponzi Scheme Results in SEC Charges for Two Dallas-Based Broker-Dealers

By James Kollar | Posted on

Recently the SEC charged two executives of a medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The SEC alleges that Duncan J. MacDonald and Gloria Solomon solicited investments for Global Corporate Alliance (GCA) by falsely promoting the company as a proven business with strong revenue. In reality, the business had no operating history and virtually no sales.
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