Defending 10b5-1 Plans

We haven't seen much interest in Rule 10b5-1 plans recently. I suppose that a declining market during recent years tempered the desire to sell stock. If so, we should see a rise in the interest in such plans once again.

For those unfamiliar with these plans, a 10b5-1 plan is used by insiders in public company to sell securities of their company, without running afoul of insider trading laws. The plans are detailed, specific plans that are designed to let executives sell off shares at regular intervals, regardless of events inside the company at the time of the sales. Properly structured and executed, the plans provide a clear defense to an insider trading allegation.

Years ago the SEC began investigating the use of the plans, or rather the alleged abuse of the plans. According to the Commission, some executives were attempting to modify their plans as events at the company unfolded, causing potential violations of Rule 10b5-1, the SEC rule that permits the use of such plans. I wrote about the issue back then - 10b5-1 Plans Under Attack.

Along with a potential increase in the use of the plans, the Commission is once again looking into the use of the plans. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation,  several recent Wall Street Journal articles suggest that some executives may have achieved above-market returns using the plans. These articles are reported to have drawn the interest of federal prosecutors and the SEC enforcement staff.

The problems that we have seen in the plans are in the execution of the plan itself, not in the creation of the plan. Defending executives in an SEC investigation over the use of a 10b5-1 plan  should not be a difficult endeavor. As noted in the article, although regulators and the media may scrutinize trades made under 10b5-1 plans even when above board and done according to best practices, a well-thought-out and implemented 10b5-1 plan may help a company and its executives avoid or ultimately refute accusations of impropriety.

More details are available at Rule 10b5-1 Plans: What You Need to Know

The attorneys associated with my firm include former SEC Senior Enforcement Attorneys and criminal prosecutors. In addition, I have been representing executive, financial professionals and firms in regulatory investigations and proceedings for over 25 years. If you have a question regarding an investigation, give me a call or send me an email - 212-509-6544 or astarita@beamlaw.com

Related articles

• Introduction to Insider Trading - The Legal vs. The Illegal
• SEC Intensifies Scrutiny on Stock Sales by Insiders and 10b5-1 Plans 
• The Fine Line Between Legal, and Illegal, Insider Trading 
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• SEC Says Congressional Insider Trading Not Illegal

Securities Enforcement and Social Media

Securities enforcement defense is a significant part of our practice. Last month we saw an important development in the application of securities law to social media. For the first time, the Enforcement Division of the SEC issued a Wells Notice based on a social media communication. We covered the news and the interaction of the securities laws and Facebook when the story broke. On the surface, this doesn't appear to be much of a Reg FD issue, given the prior release of the information, and the vast following that Netflix's CEO has on Facebook.

But it does raise a number of interesting questions. Even more if you are a securities defense attorney who is a computer-geek-wannabe and something of a social media expert.

The Harvard Law School Forum on Corporate Governance and Financial Regulation examines the issue and  the potential for liability arising from disclosures by corporate officers through social media in its article
Applying Securities Laws to Social Media Communications

SEC Charges Germany-Based Allianz SE with FCPA Violations

The SEC charged Germany-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) for improper payments to government officials in Indonesia during a seven-year period.

The SEC’s investigation uncovered 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.

Allianz, which is headquartered in Munich, agreed to pay more than $12.3 million to settle the SEC’s charges.

“Allianz’s subsidiary created an 'off-the-books' account that served as a slush fund for bribe payments to foreign officials to win insurance contracts worth several million dollars,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint submitted in 2005 reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using “special purpose accounts” to make illegal payments to government officials in order to secure business in Indonesia. The misconduct continued in spite of that audit.

For more information, visit SEC Charges Germany-Based Allianz SE with FCPA Violations.

Facebook Post Leads to Reg FD Problems for Netflix

Regulation FD requires companies to make announcements of material information to all investors at the same time. Adopted in 2000, the regulation is intended to help insure that all investors receive equal access to information.

Undoubtedly an unattainable goal, but it is the law. This week, Netflix learned that the hard way. Reed Hastings, the chief executive of Netflix, congratulated his team for a job well done in early July. On his public page, he crowed about the one billion hours of video that subscribers watched the previous month. The message was just 43 words.

Now, Netflix and its chief may be in deep trouble for that brief post. On Thursday, Netflix disclosed that the Securities and Exchange Commission was considering taking action against the company and Mr. Hastings for its Facebook communication. The SEC sent Netflix and Hastings a Wells Notice, warning that it may file civil claims or seek a cease-and-desist order.

Related articles

• Netflix Exposes Reg FD Flaws (fool.com)
• Rex On Techs: There is no middle ground with Netflix (marketwatch.com)
• Hastings deserves SEC scrutiny (finance.fortune.cnn.com)

SEC Insider Trading Cases

As our readers and followers are aware, part of our practice is the representation of targets, defendants and potential defendants in insider trading investigations and complaints. Since 1985 when I was part of the defense team for the first civil prosecution of insider trading under the misappropriation theory, this specific area of the law has been part of my practice.

In SEC vs. Materia, the trial court found that Mr. Material, a financial printing firm employee, misappropriated confidential information from his employer and traded on that information. The Second Circuit adopted that reasoning, paving the way for the Supreme Court's adoption of the misappropriation theory of insider trading some 13 years later.

That case, and the entire concept of the misappropriation theory has always struck me as being wrong and intellectually dishonest. The "fraud" is not connected to the purchase or sale of a security, and the misappropriation theory simply reads the "in connection with" requirement of 10b-5 out of the statute.

However, I can't change the law, and today, with my new association with former SEC Senior Enforcement Attorneys Jim Sallah and Jeff Cox, we continue to represent those accused of insider trading across the country, and have expanded that area of our practices.

In doing so, we have  noticed an increase in insider trading cases brought by the Commission, which was recently confirmed by the SEC. In the recap of recent insider trading cases posted at the SEC's website, the Commission provides information regarding the 57 insider trading cases that it has brought over the last two calendar years.

Many of these cases have been discussed here on our blog, but the SEC provides information on their cases brought since 2009.  As we have noted in the past, the types of individuals accused of insider trading is interesting, and includes an Investment Bank Analyst, a Public Relations Executive, Former Major League Baseball Players, a Pharmaceutical Company Executive, Five Physicians, the Founder of Equity Research Firm, a Yahoo Executive and Ameriprise Manager, a Movie Producer and Ring of Relatives and Associates, an Expert Consulting Firm  and a host of stock brokers, traders and hedge fund managers.

The entire list is at the Commission's web site, and although they do not trumpet the cases they lost, such as the one they lost in Florida last year, where Jim Sallah successfully defended a doctor in an insider trading case, the list is an interesting look at those recent enforcement cases.

SEC List of Recent Insider Trading Cases

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• Lucky 7: The Insider-Trading Schemes That Paid the Most
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• Hedge funder faces insider trading charges
• Ex-SAC Capital Trader Charged in $276 Million Insider Trading Scheme
• Former J. Crew Exec Settles SEC Insider Trading Charges

SEC Charges Miami-Based Adviser with Hiding Trading Losses and Diverting Client Funds

In a complaint filed last week, the SEC charged a Miami-based investment adviser for defrauding his clients by concealing trading losses and diverting investor funds for personal use.

The SEC alleges that Anand Sekaran and his firm Wasson Capital Advisors Ltd. fabricated documents showing illusory profits after his trading strategy became unprofitable in 2008 and produced substantial losses for clients. The Commission also alleges that Sekaran also misused client funds to pay various personal and business expenses, and he collected fees in excess of what he was due under the arrangements he had with clients.

 According to the press release from the SEC, Sekaran and Wasson agreed to resolve the SEC’s charges as well as a parallel criminal action announced today by the U.S. Attorney’s Office for the Southern District of New York.

“An investment adviser’s fiduciary duty applies equally in good times and bad,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “Sekaran breached that duty when he concealed trading losses and misled clients rather than simply admitting that his investment strategy was unsuccessful.”

In settling the SEC’s charges, Sekaran and Wasson consented to a final judgment imposing permanent injunctions from future violations of the anti-fraud provisions of the federal securities laws. Sekaran separately consented to an SEC order barring him from the securities industry and penny stock industry. Sekaran is required to pay $2.3 million to satisfy restitution and forfeiture orders in the criminal matter.

For more details see the SEC's complaint and press release. If you believe you have been defrauded in a securities related matter, our attorneys, located in New York, New Jersey and Boca Raton, Florida, are available for a free consultation by phone. Email our office at info@beamlaw.com and we will connect you with the appropriate attorney. You can visit our web site - Securities Enforcement Attorneys and SECLaw.com - The Securities Law Home Page, for more information about our firm, and the securities laws in general.

Taking the SEC To Trial

The U.S. Securities and Exchange Commission, long known for settling enforcement actions without having to prove its case in court, is struggling to cope with a surge in the number of executives and companies willing to go to trial to defend themselves.

The SEC’s office in Washington is actively litigating about 90 cases, up more than 50 percent in the past year, Matthew Martens, the SEC’s chief litigation counsel, said in an interview. At the same time, Martens’ trial unit staff has stayed relatively flat at about 36. He recently added three more lawyers to his group and is looking to hire more.

Martens said its critical that his unit present a credible threat. “At the end of the day, if we can’t win cases, then people don’t settle. That’s the reality,” he said.

More...

Related articles

• SEC Targets Are Taking Their Chances at Trial
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Diamondback Capital Agrees to Settle SEC Insider Trading Charges

The SEC announced that Diamondback Capital Management LLC has agreed to pay more than $9 million ($6 million of allegedly ill-gotten gains and $3 million civil penalty) to settle insider-trading charges brought by the Commission on Jan. 18. As part of the proposed settlement, the Stamford, Conn.-based hedge fund adviser also has submitted a statement of facts to the SEC and federal prosecutors, and entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York. The proposed settlement would resolve charges of insider trading by Diamondback in shares of Dell Inc. and Nvidia Corp. in 2008 and 2009.

“We are pleased to have reached a prompt resolution of the charges against Diamondback,” said George S. Canellos, Director of the SEC’s New York Regional Office. “If approved by the court, we believe that the proposed settlement appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government’s investigation and the pending actions against former employees and their co-defendants.”

Diamondback Capital Agrees to Settle SEC Insider Trading Charges

SEC Obtains Emergency Relief Against St. Louis-Based Private Investment Funds after Charging Them and Their Principal with Fraud

The SEC has obtained an emergency court order to freeze the assets of St. Louis-based private investment funds and management firms after suing them and their principal for a scheme to defraud investors. It is alleged that the principal diverted more than $9 million of investors’ money to himself without their knowledge or consent. He recorded the transfers as ‘loans” in his companies’ books. He raised $88 million from investors who were told their funds would be invested in emerging financial services and technology companies.

“Morriss attempted to hide his illegal transfers of investor funds by calling them ‘loans’ when in reality he had no intention of paying back the money and instead went on a spending spree,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “It is fraud, pure and simple.”

SEC Obtains Emergency Relief Against St. Louis-Based Private Investment Funds after Charging Them and Their Principal with Fraud

SEC Charges Florida Bank Holding Company and CEO with Misleading Investors about Loan Risks During Financial Crisis

The SEC charged a holding company for one of Florida’s largest banks and its top executive with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis. It is alleged that BankAtlantic Bancorp and it's CEO made misleading statements in public filings and earnings calls so as to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and the CEO then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans.

“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This is exactly the type of information that is important to investors, and corporate executives who fail to make that required disclosure will face severe consequences."

SEC Charges Florida Bank Holding Company and CEO with Misleading Investors about Loan Risks During Financial Crisis

Texas-Based Accountant Pleads Guilty to Lying to SEC Investigators

The SEC announced that a Texas-based former audit partner at accounting and consulting firm BDO USA LLP has pled guilty to criminal charges for lying to SEC enforcement staff during investigative testimony. Last year the SEC issued subpoenas to BDO and the accountant who was responsible for auditing several hedge funds managed by an investment adviser that the SEC is investigating. The criminal information states that the audit is a central issue in the SEC inquiry, and investigators took testimony from the accountant to obtain information about his role in the audit process and assess his credibility. He was the subject of a 2005 NASD (now FINRA) proceeding alleging that he took $49,350 in funds from a former employer for his personal use.

The criminal information alleges that during questioning in September 2011, the Texas-based accountant falsely testified to SEC staff that he was not aware of a $49,350 payment made on his behalf to his former employer. In fact, hewas aware that his attorney had repaid the $49,350 to the former employer as reimbursement of the funds he had allegedly taken for his personal use. The payment was made at the accountant’s direction and with his funds.

Texas-Based Accountant Pleads Guilty to Lying to SEC Investigators

SEC charges UBS With Overstating Prices

Yet another problem at UBS. What is going on over there? - SEC Charges UBS with Overstating Prices of Securities - some by 100%!

SEC charges UBS advisory arm with overstating prices of securities in three mutual funds - Securities Technology Monitor. - Financial Planning

Illinois-Based Adviser Charged by SEC in Social Media Scam

The SEC alleges that an Illinois-based investment adviser offered more than $500 billion in fake securities through social media websites.

“Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes,” said Robert B. Kaplan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Social media is no exception, and today’s enforcement action reflects our determination to pursue fraudulent activity on new and evolving platforms.”

“More and more, investors are using social media to help them with investment decisions. While social media can provide many benefits for investors, it also makes an attractive target for fraudsters. The Investor Alert provides some useful tips to help investors look out for securities fraud online,” said Lori J. Schock, Director of the Office of Investor Education and Advocacy.

SEC Charges Illinois-Based Adviser in Social Media Scam

SEC Charges Life Settlements Firm and Three Executives with Disclosure and Accounting Fraud

A Texas-based financial services firm, Life Partners Holdings Inc., and three of its senior executives have been charged by the SEC for their involvement in a fraudulent disclosure and accounting scheme involving life settlements. The firm failed to disclose risks, therefore misleading investors. Unknown to investors, the company was systematically and materially underestimating the life expectancy estimates, used to price transactions. These estimates have a large impact on the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders. It is also alleged that they also utilized improper accounting to increase the companies value.

SEC Charges Life Settlements Firm and Three Executives with Disclosure and Accounting Fraud

SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro

The SEC charged the largest telecommunications provider in Hungary and three of its former top executives with bribing government and political party officials in Macedonia and Montenegro to win business and shut out competition in the telecommunications industry. The SEC alleges that three senior executives at Magyar Telekom Plc. orchestrated, approved, and executed a plan to bribe Macedonian officials in 2005 and 2006 to prevent the introduction of a new competitor and gain other regulatory benefits. Magyar Telekom's subsidiaries in Macedonia made illegal payments of approximately $6 million under the guise of bogus consulting and marketing contracts. The same executives orchestrated a second scheme in 2005 in Montenegro related to Magyar Telekom's acquisition of the state-owned telecommunications company there. Magyar Telekom paid approximately $9 million through four sham contracts to funnel money to government officials in Montenegro.

SEC Charges Magyar Telekom and Former Executives with Bribing Officials in Macedonia and Montenegro

SEC Charges Securities Trader with Cross-Border Fraudulent Interpositioning Scheme

The SEC alleges that a former securities trader acted in concert with a Mexican investment adviser, InvesTrust, and unnecessarily inserted a separate broker-dealer as a middleman into securities transactions in order to generate millions of dollars in additional fees. The former trader, who resided in Coronado, Calif., at the time and currently lives in Mexico, agreed to pay $1 million to settle the SEC’s charges. The SEC also charged his former firm Investment Placement Group (IPG) and its CEO with failing to properly supervise. IPG agreed to pay more than $4 million to settle the charges.

In an interpositioning scheme, an extra broker-dealer is illegally added as a principal on trades even though no real services are being provided. The SEC alleges that the former trader colluded with InvesTrust and needlessly inserted a broker-dealer based in Mexico into securities transactions between IPG and InvesTrust’s pension fund clients, causing the pension funds to pay approximately $65 million more than they would have without the middleman.

SEC Charges Securities Trader with Cross-Border Fraudulent Interpositioning Scheme

SEC Charges GE Funding Capital Market Services with Fraud Involving Municipal Bond Proceeds

The SEC charged GE Funding Capital Market Services with securities fraud for participating in a wide-ranging scheme involving the reinvestment of proceeds from the sale of municipal securities. They agreed to settle the charges by paying approximately $25 million, which will be returned to affected municipalities or conduit borrowers. The firm also entered into agreements with the Department of Justice, Internal Revenue Service, and a coalition of 25 state attorneys general and will pay an additional $45.35 million. In addition to fraudulently manipulating bids, GE Funding CMS made improper, undisclosed payments to certain bidding agents in the form of swap fees that were inflated or unearned. These payments were in exchange for the assistance of bidding agents in controlling and manipulating the competitive bidding process.

The settlements arise from extensive law enforcement investigations into widespread corruption in the municipal reinvestment industry. In the past year, federal and state authorities have reached settlements with four other financial firms, and 18 individuals have been indicted or pled guilty, including three former GE Funding CMS traders.

For a list of other financial institutions charged prior to the settlement with GE Funding CMS follow the link below.

SEC Charges GE Funding Capital Market Services with Fraud Involving Municipal Bond Proceeds

SEC Charges California Company, Co-CEOs, and Attorney in Series of Fraudulent Schemes Pumping Company Stock

The SEC charged a purported heart monitoring device company and six individuals involved in a series of fraudulent schemes to artificially inflate the company’s stock. Among those charged are a former pro football player and a former Hollywood executive who were co-CEOs of Heart Tronics. An attorney who masterminded the scheme and brought in nearly $8 million in secret trades was also charged.

In addition to Heart Tronics, and the three individuals, the SEC charged three other individuals involved in the scheme, including the attorney ’s chauffeur and handyman , who carried out the fraud with him. The SEC also charged a stock promoter, as well as the trustee and stockbroker for a number of nominee accounts that the attorney used to unlawfully sell Heart Tronics stock.

In a parallel criminal investigation, the U.S. Department of Justice today announced the arrest of the attorney.

SEC Charges California Company, Co-CEOs, and Attorney in Series of Fraudulent Schemes Pumping Company Stock

SEC Charges Perpetrator of Washington-Area Ponzi Scheme

The SEC charged a Bethesda, Md. man, several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area. The SEC alleges that middle-class residents were lured by false pretenses and powerpoint presentations to invest in promissory notes. Many were encouraged to refinance their homes and utilize their personal savings and retirement funds to come up with more to invest. They were promised returns as high as 20 percent per year and told their investments were protected. Instead, the companies issuing the notes were engaged in high-risk, speculative options trading and suffered massive losses. Money from new investors was used to pay the returns to earlier investors and also for personal expenses.

The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors over a five year period. The scheme ultimately collapsed in the fall of 2010. The Bethesda man and five others have been charged.

SEC Charges Perpetrator of Washington-Area Ponzi Scheme

SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

The SEC filed an emergency enforcement action to stop a fraudulent scheme targeting investors seeking coveted stock in Internet and technology companies like Facebook and Groupon in advance of a public offering.

Several individuals utilized a newly-minted hedge fund (The Praetorian Global Fund) to claim to own shares worth tens of millions of dollars in companies such as Facebook and Groupon. The companies targeted were expected to soon hold an initial public offering. Taking advantage of investor interest in pre-IPO shares that are virtually impossible for company outsiders to obtain, the individuals solicited funds and gave investors a false sense of comfort that their money was protected by telling them that an escrow service was receiving their funds.

Yet in reality the individuals never owned the promised pre-IPO shares in these companies. The escrow service only served to transfer investor funds to personal accounts controlled by two of the involved individuals. The funds were then used for lavish personal expenses (private jets, cars, art) and to pay off other individuals involved.

The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of the matter, filed criminal charges against the lead individual, a Florida resident. The Florida resident has been the subject of prior SEC enforcement action and several state criminal actions.

SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon