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SEC ENFORCEMENT TRENDS 2011

This report examines the SEC's efforts to rejuvenate its enforcement division after the market crisis, focusing on market reform, reorganization, and the growing trend of close cooperation with other agencies. It also explores significant cases related to insider trading, FCPA enforcement, and financial fraud.

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SEC ENFORCEMENT TRENDS 2011

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  1. SEC ENFORCEMENT TRENDS 2011 Thomas O. GormanDorsey & Whitney LLPWashington, D.C. www.secactions.com

  2. INDEX Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 4 Market reform . . . . . . . . . . . . . . . . . . . . . . .. 6 Reorganization . . . . . . . . . . . . . . . . . . . . . . 8 Close cooperation . . . . . . . . . . . . . . . . . . . 10 The reach of enforcement . . . . . . . . . . . . 15 The SEC in court . . . . . . . . . . . . . . . . . . . . 18 Significant market crisis cases . . . . . . . . . . 25

  3. INDEX Insider trading . . . . . . . . . . .. . . . . . . . . . . . 35 FCPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Financial fraud . . . . . . . . . . . . . . . . . . . . . . 63 Analysis and conclusions . . . . . . . . . . . . . . 77

  4. INTRODUCTION • In the wake of the market crisis the SEC has struggled to overcome scandal and regain its once sterling reputation • Over the past two years new Commissioners and new senior staff have worked diligently to rejuvenate and reinvigorate the once proud agency • The enforcement division for example has undergone what is claimed to be the largest reorganization in its history

  5. INTRODUCTION • To examine the results of those efforts and evaluate the future direction of SEC enforcement – points will be considered: • Market reform • Reorganization • Close cooperation • The reach of enforcement • The SEC in court • Significant market crisis cases • Focus on insider trading • The new era of FCPA enforcement • Financial fraud cases • Analysis and conclusions

  6. MARKET REFORM • Dodd Frank augmented the authority of SEC enforcement in a number of provisions including: • Enhanced antifraud authority under Exchange Act Sections 9, 10(1) and 15 • An expansion of the extraterritorial jurisdiction of the antifraud provisions • Extending aiding and abetting authority to include the Securities Act, the Investment Company Act and the Investment Advisers Act

  7. MARKET REFORM • Dodd Frank (cont’d) • Clarifying the SEC’s authority over formerly associated persons of regulated entities • Imposing joint and several liability on control persons in SEC actions • Authorizing nationwide service of subpoenas in SEC district court cases • Authorizing the SEC to impose collateral bars, and • Expanding the Commission’s authority to impose penalties to all cease and desist proceedings • Expanded whistleblower program

  8. REORGANIZATION • The division of enforcement has undergone what is perhaps the most significant reorganization in its history • The management structure was flattened, eliminating the branch chief position • Specialty groups were created • Asset management • Market abuse • Structured and new products • FCPA • Municipal securities and public pensions

  9. REORGANIZATION • New initiatives (cont’d) • Cooperation • New initiatives for individuals • Use of non-prosecution and deferred prosecution agreements • Carters, Inc. is the first corporate cooperation agreement. The underlying fraud is similar to Seaboard

  10. CLOSE COOPERATION • AG Eric Holder, in recent remarks stressed that the government will use the “full range of parallel criminal and civil enforcement resources to combat financial fraud” • There is a growing trend of closer cooperation between the SEC, DOJ and other agencies • Traditionally the SEC did formal referrals under the statutes

  11. CLOSE COOPERATION • Joint working task forces have accelerated the trend • 2002 post Enron the Financial Fraud Task Force was formed • 2009 by executive order a new and expanded task force was created • Virginia Task Force – USAOEVA, SEC and Virginia State regulators – focus on financial fraud

  12. CLOSE COOPERATION • Now referrals are much more likely to be informal. See generally SEC Enforcement Manual, Section 5.2.1 • The result has been the increased criminalization of securities enforcement • This has resulted in a blurring of the line between civil and criminal enforcement

  13. CLOSE COOPERATION • This trend can provide efficiencies for the government and the defense • It also has pitfalls: • U.S. v. Samueli, Case No. 10-500024 (C.D. Ca.) • U.S. v. Stockman; SEC v. Collins & Aikman, Civil Action No. 07-CV-24019 (S.D.N.Y. Filed March 27, 2007)

  14. CLOSE COOPERATION • Pitfalls (cont’d) • Consider the comments of Chief Judge Kozinski of the Ninth Circuit in a recent concurring opinion reversing a financial fraud case for lack of evidence: “this case has consumed an inordinate amount of taxpayer resources, and has no doubt devastated the defendant’s personal and professional life. The defendant’s former employer also paid a price, footing a multimillion dollar bill for the defense. And, in the end, the government couldn’t prove that the defendant engaged in any criminal conduct . . . This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clear separate conduct that is criminal from conduct that is legal . . .this is not only because of the dire consequences of conviction . . But also because criminal law represents the community’s sense of the type of behavior that merits the moral condemnation of society. . . When prosecutors have to stretch the law or the evidence to secure a conviction as they did here, it can hardly be said that such moral judgment is warranted.” U.S. v. Goyal, No. 08-1436 (9th Cir. 2010) (concurring).

  15. THE REACH OF ENFORCEMENT • Traditionally SEC enforcement has had a transnational reach where there was significant conduct or effects in the U.S. • In Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010) the Court held that Exchange Act Section 10(b) has no extraterritorial reach. The statute is limited to either actions on a U.S. securities exchange or those involving the purchase or sale in this country • Since this holding is based on the text of the statute it applies to private suits and those brought by the SEC

  16. THE REACH OF ENFORCEMENT • The SEC has essentially acknowledged the impact of Morrison. Report of Investigation, Moody’s Investor Services, Inc., Exchange Act Release No. 62802 (Aug. 31, 2010) • Declined to bring an enforcement action in a case where much of the conduct occurred in Europe but there were filings with the SEC filings • The Commission noted there were questions as to its jurisdiction • The Report cautioned that recent legislation would permit the SEC to bring an enforcement action in the future

  17. THE REACH OF ENFORCEMENT • Dodd-Frank extends the jurisdiction of the antifraud provisions as to the SEC and DOJ to include conduct within the U.S. that constitutes “significant steps in furtherance of the violation” even where the securities transaction is not in the U.S. and involves only foreign investors. • Questions remain however. The Section amends the jurisdictional provisions of the various securities laws. Morrison held that the statutes already provided for jurisdiction. However Section 10(b) did not afford a cause of action the Court held.

  18. THE SEC IN COURT • Most SEC enforcement actions are settled. Few corporations are willing to litigate with a government agency. For many individuals the cost is prohibitive. • Prevailing at trial is a key component of the SEC enforcement program. • In recent cases however the SEC has had at best mixed results.

  19. THE SEC IN COURT • Wins in court • SEC v. Jasper, Case No CV 08-6122 (N.D. Cal.). The SEC prevailed at trial in an option backdating case against Carl Jasper, former CFO of Maxim Integrated Products. The company and its CEO previously settled. • SEC v. Huff, Civil Action No. 08-06315 (S.D. Fla.) is a financial fraud action in which the SEC prevailed after a seven day bench trial against W. Anthony Huff. The case was based on a scheme to inflate revenue by recording a bogus $47 million letter of credit. • SEC v. U.S. Pension Trust Corp., Civil Action No. 07-22570 (S.D. Fla.) is a case in which the SEC prevailed after a five day bench trial against the company and its affiliates. The case centered on claims that investors in the fund were mislead about the nature of the investment and the commissions which ran as high as 85%.

  20. THE SEC IN COURT • Losses in court • SEC v. Rorech, Civil Action No. 09 Civ. 4329 (S.D.N.Y.) is perhaps the most high profile loss. • The case was the first insider trading case based on CDS. • The SEC prevailed on a jurisdictional challenge but lost on the merits following a bench trial. • The court concluded that the SEC had presented evidence of suspicious circumstances but failed to prove illegal tipping between the two defendants.

  21. THE SEC IN COURT • Losses in court (cont’d) • SEC v. Obus, Case No. 1:06-cv-3150 (S.D.N.Y.0 is an insider trading case which centered on the acquisition of SunSource by Allied Capital Corp. in 2001. • The SEC claimed that a member of the deal team tipped his friend who then tipped defendant Obus who traded and made a profit of $1.34 million • The court found no violation of duty by the deal team member because there was no confidentiality agreement and he had not been made a temporary insider. With no breach of duty there was no deception

  22. THE SEC IN COURT • Losses in court (cont’d) • SEC v. Zachariah, Case No. 08-60698 (S.D.Fla.) is an insider trading case against a corporate director in which the court found for the defendant after a bench trial. • The case centered on trading by the director and others he was alleged to have tipped on two deals, one of which involved the company for which he served as a director. • The SEC proof was circumstantial and relied on inferring proof of inside information in each deal. The court rejected the SEC’s proposed inferences. • SEC v. Shanahan, Case No. 4:07-cv-1262 (E.D. Mo.) is an option backdating case against a corporate director who was a member of the compensation committee. • The SEC claimed the defendant violated the proxy provisions and aided and abetted false filings. • Previously the company settled similar claims and the company CEO who was the defendant’s father was convicted on criminal charges based on the same scheme. • Here the court concluded the SEC failed to establish the applicable standards as to what a member of the board and compensation committee had a duty to undertake with respect to the proxy filings.

  23. THE SEC IN COURT • Mixed results • SEC v. Berlacher, Civil Action No. 0-3-800 (E.D. Pa.) is a case in which the court rejected the key claims against a hedge fund operator. • The action centered on a series of PIPE offerings in which the defendant learned about the deal and then took positions in the market in advance of the filing of the resale registration statement. • The Court rejected claims based on the registration provisions and insider trading finding as to the latter that there was insufficient proof of an agreement. • The defendant was found liable for making a false statement as to his market position on one deal.

  24. THE SEC IN COURT • Mixed results (cont’d) • SEC v. Delphi Corp., Civil Action No 2:06-cv-14891 (E.D. Mich.) is an action tried against the former CEO and former Chief Accounting officers of the company on financial fraud claims. • The complaint centered on multiple schemes to boost revenue. • The jury found in favor of the former CEO on the only fraud claim against him but found him liable for lying to the auditors and aiding and abetting books and records violations. • The jury found the former CEO not liable on one fraud charge but liable on others.

  25. SIGNIFICANT MARKET CRISIS CASES • The SEC has been conducting dozens of market crisis investigations • Yet few significant cases have been brought • The cases brought to date fall into four groups showing mixed results: • Major Wall Street players • Lenders • New Jersey and • Others

  26. SIGNIFICANT MARKET CRISIS CASES • Major Wall Street players • SEC v. Goldman Sachs, Case No. 3229 (S.D.N.Y. Filed April 16, 2010) is an action centered squarely on the market crisis. • It is based on the construction of an entity called ABACUS using collateralized debt obligations tied to the subprime real estate market. • According to the complaint it was constructed at the request of Paulson & Co. so the fund could bet against the subprime market. Paulson influenced the construction, an undisclosed fact. The bank and one of its employees were named as defendants. • Goldman settled, consenting to the entry of a permanent injunction based on Securities Act Section 17(a) and paying a fine of $535 million, a record for an investment bank.

  27. SIGNIFICANT MARKET CRISIS CASES • Major players (cont’d) • SEC v. Citigroup, Inc., Civil Action No. 1:10-CV-01277 (D.D.C. July 29, 2010). The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Section 13(a). • It alleges that as the market crisis unfolded the bank falsely disclosed its exposure to the subprime market as $13 billion when in fact it was $56 billion. Two portfolios were not included despite the fact that two senior executives were repeatedly informed about them. • The bank settled consenting to the entry of an injunction based on the sections cited in the complaint, instituting certain procedures and paying a penalty of $75 million. The district court judge at first questioned the settlement and then reluctantly agreed to acquiesce to the Commission. • A related administrative proceeding was brought against the two officers. In the Matter of Gary L. Crittenden, Adm. Proc. File No. 3-13985 9filed July 29, 2010). The officers settled consenting to a cease and desist order based on Exchange Act Section 13(a) and agreeing to pay penalties of $100,000 and $80,000.

  28. SIGNIFICANT MARKET CRISIS CASES • Major players (cont’d) • SEC v. Bank of America, Case No. 09-5829 (S.D.N.Y.) is an action alleging violations of the proxy provisions by the bank in the acquisition by Merrill Lynch. • The complaint alleged that although the boards of both entities agreed to a bonus pool for Merrill executives of up to $5.6 billion the disclose materials omitted this fact and suggested otherwise. • The action was eventually settled with a consent decree, a $150 million fine and new procedures. • The settlement was questioned and heavily criticized by the court. The court considered the initially proposed $30 million fine inadequate and questioned not naming the officers. • The New York AG brought a parallel action against the bank and two senior officers. State of New York v. Bank of America (S.Ct. N.Y. Filed Feb. 4, 2010). The case is in litigation.

  29. SIGNIFICANT MARKET CRISIS CASES • Lenders • The two most significant cases involving lenders were brought against the officers of Countrywide Financial and New Century Financial, once the number one and three subprime lenders. Two significant market crisis cases that settled last year are SEC v. Mozilo, Case No. CV 09-03994 (C.D.Cal. Filed June 4, 2009) and SEC v. Morrice, Civil Action No. CV 09-01426 (C.D. Cal. Filed Dec. 7, 2009). • The former is against the officers of the number one sub-prime lender, Countrywide Financial, while the latter names as defendants the senior officers of New Century Financial, the number three sub-prime lender. • Each case essentially centered on fraud claims based on the failure of the defendants to disclose the true financial condition of the company as the sub-prime lending market tumbled down. • Mozilo also contained claims that Angelo Mozilo, the company chairman, engaged in insider trading as his company spiraled to a crash while Morrice includes additional financial fraud claims.

  30. SIGNIFICANT MARKET CRISIS CASES • Mozilo & Morrice (cont’d) • On the eve of trial the Commission secured what the headlines claim are significant settlements to resolve Mozilo. • Each defendant consented to the entry of an injunction and to pay disgorgement, prejudgment interest and a civil penalty. • Mr. Mozilo and former COO David Sambol agreed to injunctions based on the antifraud and reporting provisions while former CFO Eric Sieracki consented to the entry of an order based on Securities Act Sections 17(a)(2) and (3). • In addition to consenting to the entry of a permanent officer and director bar, Mr. Mozilo agreed to pay a total of $67.5 million, including $45 million in disgorgement and interest and a penalty of $22.5 million. • Mr. Sambol, who agreed to the entry of a three year officer/director bar, will pay disgorgement and interest of $5 million and a civil penalty of $520,000. • In his settlement Mr. Sieracki agreed to pay a penalty of $130,000 and to the entry of a Rule 102(e) order barring him from practicing before the Commission as an accountant for one year.

  31. SIGNIFICANT MARKET CRISIS CASES • Morrice (cont’d) • The Commission also fully resolved Morrice. Brad Morrice, the former CEO and co-founder, Patti Dodge, the former CFO and David Kenneally, the former controller settled with the SEC. • Mr. Morrice and Ms. Dodge each consented to the entry of an injunction prohibiting future violations of Securities Act Actions 17(a) and Exchange Act Sections 10(b) and 13(b)(5) as well as from aiding and abetting violations of Section 13(a). • Mr. Kenneally agreed to the entry of a similar injunction although it did not include Section 17(a). Each defendant agreed to the entry of an officer/director bar with a right to re-apply after five years. • In addition, Mr. Morrice will pay disgorgement $464, 364 along with prejudgment interest and a penalty of $250,000. Ms. Dodge will pay disgorgement of $379,808 along with prejudgment interest and a penalty of $100,000 while Mr. Kenneally will pay disgorgement of $126,676 along with prejudgment interest. • See also SEC v. State Street Bank and Trust Co., Case No. 1:10-CV-10172 (D. Mass. Filed Feb. 4, 2010); In the Matter of State Street Bank and Trust Co., Adm. Proc. File No. 3-13776 (Filed Feb. 4, 2010)(settled actions relating to misleading statements made to investors in a bond fund as the market unraveled).

  32. SIGNIFICANT MARKET CRISIS CASES • SEC v. Perry, Case No. CV 11-01309 (C.D. Cal. Filed Feb. 11, 2011); SEC v. Abernathy, Civil Action No. CV 11-01308 (C.D. Cal. Filed Feb. 11, 2011) are based on the failure of IndyMac. . • Perry, which names as defendants the former CEO and CFO, focuses on the impact of events on the capital of the bank, its efforts to bolster it through stock sales and the failure to update filings and offering documents which contained a mixture of statements which were dated and vague, boiler plate statements about the use of funds. None of this accurately and specifically disclosed the declining regulatory capital position of the bank or that the stock sale proceeds were intended to bolster it. • Abernathy, which also names a former CFO as a defendant, stems from the same basic allegations. The action centers more however on the negligent failure of another former CFO to ensure that updated information about difficulties with the consumer loan origination documents were included in current filings rather than boiler plate. Investors were thus not told about seriously flawed loan documents which portended problems with the loans. • Perry includes allegations of scienter based fraud and is in litigation. • Abernathy settled with a consent to a permanent injunction prohibiting future violations of Securities Act Sections 17(a)(2) and (3), the payment of disgorgement and prejudgment interest and a civil penalty. In addition, Mr. Abernathy agreed to the entry of an order barring him from practicing before the Commission as an accountant with a right to reapply in two year.

  33. SIGNIFICANT MARKET CRISIS CASES • In the Matter of State of New Jersey, Adm. Proc. File No. 3-14009 (Aug. 18, 2010). The Order claimed that the state violated Securities Act Sections 17(a)(2) and (3) in connection with the sale of municipal bonds from August 2001 through April 2007. • Essentially the State is alleged to have made it appear as a result of certain legislative action that two large pension funds discussed in the offering materials were funded when in fact they were not. When the state became aware of the underfunding it failed to take any steps to correct the situation. • Until 2007 and 2008 when disclosure counsel was retained, the state did not have any written policies and procedures regarding the review or updating of bond offering documents. By the time the proceeding was filed policies had been adopted and a committee created to oversee the entire disclosure process. • The case was resolved with the entry of a cease and desist order. The proceeding has particular significance in view of the effects of the market crisis and con-going financial difficulties of many states and municipalities.

  34. SIGNIFICANT MARKET CRISIS CASES • Two other market crisis cases brought last year which are in litigation are SEC v. ICP Asset Management LLC, Civil Action No. 10-cv-4791 (S.D.N.Y. Filed June 21, 2010) and SEC v. Farkas, Civil Action No. 1:10 cv 667 (E.D. Va. Filed June 16, 2010). • ICP is an action against a registered investment adviser and its related entities. The complaint centers on transactions involving four multi-billion dollar collateralized debt obligations in which ICP Asset Management and the other defendants are alleged to have repeatedly defrauded certain clients in certain transactions. The case is in litigation. • Farkas is a fraud action against Lee Farkas, the former chairman of mortgage lender Taylor, Bean & Whitaker. • Prior to its collapse, Taylor Bean was the largest non-depository mortgage lender in the country. When the lender began having liquidity problems as early as 2002, • Mr. Farkas is alleged to have shuffled funds among various accounts and engaged in other fraudulent conduct including using sham transactions to conceal the true nature of the company. • Mr. Farkas was recently convicted in the parallel criminal case. U.S. v. Farkas (E.D. Va. Filed June 16, 2010). The Commission’s case is pending.

  35. INSIDER TRADING • Insider trading has long been an enforcement priority. • In recent years however it has become a focal point not just for the SEC but also the Department of Justice and, in particular, the U.S. Attorney’s Office for the Southern District of New York. • Working under the auspices of the President’s Executive Order creating a broad financial fraud task force, the SEC and the New York USAO have developed a close working relationship. • Together they have adopted an aggressive stance which may rewrite the definition of insider trading.

  36. INSIDER TRADING • Blue collar tactics • U.S. v. Rajaratnam, Case No. 09 mg 2307 (S.D.N.Y.); U.S. v. Chiesi, Case No. 09 Mg 2307 (S.D.N.Y.); SEC v. Galleon Management, L.P. Civil Action No. 09-CV-8811 (S.D.N.Y. filed Oct. 16, 2009). • The Galleon cases, which began with criminal and civil charges against hedge fund mogul Raj Rajarantnam, New Castle Funds LLC trader Danielle Chriesi, and others, were the first insider trading cases to make wholesale use of what many consider to be blue collar tactics. • The cases are built in large measure on the repeated use of wire taps, wired informants and similar techniques. While law enforcement has long utilized these tactics in organized crime and drug prosecutions, the use in white collar cases has been limited. • The charges in the two cases are predicated on overlapping insider trading schemes involving trading in multiple securities. Those include shares of Polycom, Hilton, Google, AMD and Clearwire. The information supposedly came from multiple sources including insiders at the company. • The Rajarantanam jury is currently deliberating.

  37. INSIDER TRADING • Blue collar tactics (cont’d) • U.S. v. Goffer, Case No. 9 Mg. 2438 (S.D.N.Y.); SEC v. Cutillo, Civil Action No. 09-09208 (S.D.N.Y. filed July 2, 2009). Shortly after the Galleon cases were brought, another insider trading ring was uncovered. • This one centered on information flow from the law firm of Ropes and Gray. Firm lawyer Arthur Cutillo and another attorney, Jason Goldfarb, were at the center of the ring which included a number of hedge fund traders. • Following these indictments more charges were brought. To date fourteen have pleaded guilty. Nine civil settlements have been executed. Ms. Chiesi and each of the defendants charged with her has pleaded guilty. The central figure of the cases, Raja Rajaratnam, is scheduled for trial shortly.

  38. INSIDER TRADING • Blue collar tactics (cont’d) • Expert network cases: The Manhattan U.S. Attorney’s Office and the SEC recently unveiled the so-called “expert network” investigation. This inquiry, built on the same blue collar tactics, focuses on information flow from expert networks that grew up in the wake of SEC Reg. FD. That regulation was intended to level the playing field for the dissemination of corporate inside information. • Shortly after the raids, the first cases were brought by the U.S. Attorney. U.S. v. Shimoon, Case No 10 Mg 2923 (S.D.N.Y.) named four individuals as defendants. One was previously employed by expert network Primary Global Management while three were corporate consultants. • The case focused solely on information flow – the charges are conspiracy and wire fraud, not insider trading. The SEC did not initially file an enforcement action. After more criminal charges were filed which include insider trading, the agency brought an insider trading enforcement action. SEC v. Longoria, Civil Action No. 11-CF-07530 (S.D.N.Y.). The government has stated the investigation is in its early stages.

  39. INSIDER TRADING • Aggressive tactics • The SEC has been very aggressive in many insider trading cases. In some instances the agency has brought insider trading charges based on little more than the trading data. • SEC v. One or More Unknown Purchasers of Martek Biosciences Corporation, Case No. 10 Civ. 9527 (S.D.N.Y. Filed Dec. 22, 2010) • The case was filed just days after the event in order to freeze trading profits of persons as yet to be identified. It is based on the take over by Royal DSM N.V., a Dutch company, of Maryland based Martek Biosciences Corporation. It was announced on December 21, 2010. • Just days before the announcement 2,616 Marteck call options were purchased through an account at UBS. The purchases represented over 90% of the volume for the transaction days. When the deal was announced the share price increased by 36% giving the account an unrealized profit of $1.2 million. The Commission filed its complaint alleging violations of the antifraud provisions on December 23 and obtained a freeze order.

  40. INSIDER TRADING • Aggressive tactics (cont’d) • SEC v. One or More Unknown Purchasers of Options of InterMune, Inc., Case No. 10-Civ. 9560 (Filed Dec. 23, 2010) • It centers on an announcement from the European Union’s Committee for Medicinal Products for Human Use regarding a drug of InterMune, Inc., a biotechnology company based in Brisbane, California. • When the Committee announced it would recommend the drug for approval on December 17, 2010, the share price for the company increased about 144%. • Just days before the announcement 400 call options were cleared through UBS Securities LLC. On one day the purchases represented 100% of the volume while on another they were 57%. A few days later 237 option contracts cleared through Barclays Capital, New York. The unrealized profits for the two accounts are $912,000. • Again the Commission quickly filed a complaint and obtained a freeze order.

  41. INSIDER TRADING • Aggressive tactics (cont.) • SEC v. Di Nardo, Civil Action No. 08-cv-6609 (S.D.N.Y. filed July 25, 2008) is an insider trading action filed against unknown purchasers of DRS Technologies securities where in discovery the identity of the trader was determined. The trader settled last year. • SEC v. Condroyer, Case No. 1:09-cv-3600 (N.D. GA. Filed Dec. 22, 2009) is an insider trading case against two French nationals residing in Belgium who traded just before a take over announcement. The SEC obtained a freeze order despite the fact that there is no evidence in the complaint alleging a source of inside information or any connection between the individuals.

  42. INSIDER TRADING • Pushing the edge • In some cases the SEC pushes the edge of what is insider trading • In SEC v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Filed Sept. 30, 2010) the case is based on the trading of family and friends. The group is alleged to have made about $1.6 million in trading profits. • Gary Griffiths and Cilff Steffes, who are related, both work for Florida East coast Railway, LLC. On May 8, 2007 it was announced that Fortress Investments Group LLC would take over the company. The transaction traces to a determination of the board in December 2006 to solicit bids for the company. Over a period of time bidders toured the properties. • Gary and Cliff are alleged to have had inside information which is the predicate for the trading. • According to the SEC’s complaint Gary, a vice president and chief mechanical officer who reported to the COO, had inside information because: 1) In early March before the deal the CFO asked him to prepare a comprehensive list of company equipment; 2) he was aware of a number of unusual people touring the property and he “believed” they were investment bankers for a possible sale; 3) employees asked him if the company was up for sale and they would lose their job; and 4) he arranged a monitored rail trip for the Fortress executives in a special rail car reserved for visitors. Cliff observed similar events. 5) One defendant settled with the Commission. The others are litigating the case.

  43. INSIDER TRADING • The Commission cases can also be divided into the following categories • market and other professionals • Corporate executives and • family and friends

  44. INSIDER TRADING • Market and other professionals • SEC v. Poteroba, (S.D.N.Y.) Filed March 25, 2010 and U.S. v. Poteroba (S.D.N.Y. Filed March 25, 2010). The defendants are Igor Poteroba, a managing director at UBS Securities in their Healthcare Group, and Alexander Koval, previously employed at Citigroup Asset management, and Alexander Vorobiev. • Each defendant is a Russian National. • The criminal and civil cases are based on essentially the same scheme. • The criminal information, alleging one count of conspiracy and three counts of securities fraud, claims that Mr. Poteroba tipped defendant Koval about six different companies over a four year period beginning in 2005. The trading generated about $870,000 in illegal profits. • The SEC complaint, alleging violations of Exchange Act Sections 10(b) and 14(e), centers on the same conduct but adds five additional deals. Both cases are in litigation.

  45. INSIDER TRADING • Market and other professionals (cont’d) • SEC v. Garcia, Civil Action No. 10 C 5268 (N.D. Ill filed Aug. 20, 2010). The defendants are Juan Jose Fernandez Garcia, the head of European equity derivatives at Banco Santander, S.A. and Luis martin Caro Sanchez. Both are residents of Madrid, Spain. • The case centers on the unsolicited bid for Potash Corporation of Saskatchewan by BHP Billiton Plc announced on August 17, 2010. The announcement of the deal was followed by a share price increase of 27%. Banco Santandar was an adviser to Potrash. • Prior to the bid Mr. Garcia purchased 282 Potash call options for $13,669. After the announcement they were sold at a profit of $576,033. Mr. Sanchez purchased 331 call options in Potash in mid-August at a cost of $496,953.33. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Mr. Garcia recently settled consenting to an injunction, paying disgorgement and a small fine. . • See also In the Matter of David W. Baldt, Adm. Proc. File No. 3-13887 (Filed May 11, 2010). Here a portfolio manager for bond funds learned of large redemptions and is alleged to have suggested to family members that they liquidate their holdings); SEC v. Marquardt, Civil Action No. 10-10073 (D. Mass. Jan. 20, 2010)(settled action against fund administrative officer who learned that certain actions would result in a reduction of NAV after which he and his family redeemed their holdings.

  46. INSIDER TRADING • Market and other professionals (cont’d) • SEC v. Flanagan, Civil Action No. 10-CV-4885 (N.D. Ill. Filed Aug. 4, 2010) is an action against Thomas P. Flanagan, former Vice Chairman of Deloitt, resident in its Chicago office and his son Patrick, the COO of a private company. • According to the complaint, between 2005 and 2009 Mr. Flanagan traded on inside information nine times, making 71 trades through multiple accounts. The information concerned audit clients of the firm. Overall Mr. Flanagan made profits of about $430,000. The complaint also claims that Mr. Flanagan in some instances tipped his son who traded, making profits of about $57,000. • The action was resolve with each defendant consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act sections 10(b) and 14(e). Each defendant also agreed to disgorge their trading profits and pay prejudgment interest along with a civil penalty equal to the trading profits. • In addition, Mr. Flanagan consented to the entry of an order denying him the right to appear and practice before the Commission as an account in a separate administrative proceeding. Lit. Rel. 21612 (Aug. 4, 2010). • See also SEC v Gansman, Civil Action No. 089-CV - 4918 (S.D.N.Y. Filed May 18, 2008). This is a settled insider trading case against attorney James Gansman who was employed in the transaction advisory group of Ernst & Young an is alleged to have repeatedly tipped his friend and former stock broker Donna Murdoch. • SEC v. Foley, Civil Action No. 1:00-CV-00300 (D.D.C. Filed Feb. 25, 2010) is a settled case in which Mr. Foley obtained inside information from his employment at Deloitte and tipped two others.

  47. INSIDER TRADING • Corporate executives • SEC v. Horn, Civil Action No 1:10-CV-00955 (N.D. Ill. Feb. 16, 2010) is a case where the executive traded for his own account. Defendant Gerald Horn was the medical director for one of the facilities of LCA Visions, Inc. • According to the complaint, from December 2005 through August 2006, the defendant made six separate trades while in possession of inside information. The information came from reviewing internal reports about the number of eye surgeries done. From this data Mr. Horn estimated revenue. By trading in LCA options the defendant made profits of $869,629. The case is in litigation. Lit. Rel. No. 2114 (Feb. 16, 2010). • SEC v. Wagner, Case No. 1:10-cv-10031 (D. Mass. Filed Jan. 11, 2010). The defendant, Brooke D. Wagner, is the former VP of Corporate communications of Indevus Pharmaceuticals, Inc. • According to the SEC Mr. Wagner learned that the FDA had expressed concerns about the side effects of a drug for which the company was seeking approval. Prior to the public announcement about the FDA letter, the defendant sold his shares and later sold short. The share price fell about 69% following the announcement. • To settle the case Mr. Wagner consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions of the federal securities laws. He also agreed to pay disgorgement of about $64,000 along with prejudgment interest and a civil penalty equal to the amount of the disgorgement. Lit. rel. No. 21370 (Jan. 11, 2010)

  48. INSIDER TRADING • Corporate executives (cont’d) • SEC v. Lyva, Civil Action No. 09 CV 1565 (S.D. Cal.) is a settled action against the former director of strategic marketing analysis for Qualcomm who traded in call options before the announcement that the company had obtained a significant litigation settlement. • SEC v. Navarro, Civil Action No. 4:10-CV-189 (N.D. Okla. Filed march 31, 2010) is a settled action against a crude oil purchasing manager who liquidated his holdings after learning of unannounced cash flow difficulties. • SEC v. Fogel, Case No. 1:10-CV-10097 (D. Mass. Jan. 22, 2010) is a settled case against former vice president who traded prior to an acquisition by his company.

  49. INSIDER TRADING • Corporate executives (cont’d) • SEC v. Self, Civil Action No. 10-cv-430 (E.D. Pa. Filed Sept. 1, 2010) James Self, executive director at Merck & Co., tipped his friend, Stephen Goldfield, an unemployed former hedge fund manager according to the complaint. • Prior to the acquisition in April 2007 of AstraZeneca by Medimmune, Inc., Mr. Self and others were solicited by investment bankers representing Medimune about a possible acquisition. Mr. Self was on the team which reviewed the material non-public information about the deal. • By March 2007 Mr. Self furnished his friend with information on the subject. Mr. Goldfield purchased Medimmune options and, following the deal announcement, made profits of $13.9 million. • The case settled with each defendant consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act section 10(b). Mr. Self also agreed to pay a civil penalty of $50,000 based on his financial condition. Mr. Goldfield agreed to disgorge the trading profits along with prejudgment interest. All but $600,000 of that amount was waived based on his financial condition. Lit. Rel. No. 21638 (Sept. 1, 2010); • SEC v. Berrettini, Civil Action No. 10-CV-01614 (N.D. Ill. Mar. 31, 2010) is an action against former director of real estate for Philips Electronics who tipped his friend about a take over by his company.

  50. INSIDER TRADING • Family and friends • SEC v. McClellan, Case No. CV 10 5412 (N.D. Cal. Filed Nov. 30, 2010) is an action against two couples who are alleged to have formed an international insider trading ring. • Arnold McCelland and his wife Annabel reside in San Francisco. Mrs. McCelland’s sister and her husband, James and Miranda Sanders, reside in London. According to the complaint, Arnold McCelland, is a mergers and acquisition tax partner at Deloitte. He misappropriated inside information on six deals over a two year period beginning in 2006. • Both couples used the information to trade. In addition, Mr. Sanders, in some instances, furnished the information to customers at the brokerage where he worked. • The FSA in London has filed charges against the Sanders in the U.K. as well as customers of the brokerage. Mrs. McCelland has also been indicted on obstruction of justice charges in connection with the SEC investigation. The cases are in litigation. • SEC v. Cohen, Case No. 10 CV 2514 (S.D. Cal. Filed Dec. 8, 2010) is a case centered on an insider trading ring involving two brothers, a fraternity brother and an uncle where the source of the information is alleged to have been the employment of one brother. • SEC v. Temple, Case No. 10-cv-1058 (D. Del. Filed Dec. 7, 2010) is an action involving two brothers-in-law where one is alleged to have misappropriated the inside information from the law firm where he worked.

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