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Posts by: James Burns

Quid Pro Quo, yes or no? SEC Signs First Individual Deferred Prosecution Agreement

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The SEC this year has demonstrated its willingness to incentivize whistleblowers  and companies to share information about misconduct and assist with the SEC’s investigations.  To that end, the SEC issued its first Deferred Prosecution Agreement (DPA) with an individual on November 12, 2013.  A DPA is an agreement whereby the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.

This first DPA is with Scott Herckis, a former Fund Administrator for Connecticut-based hedge fund Happelwhite Fund LP.  In September 2012 Herckis resigned and contacted government officials regarding the misappropriation by the fund’s founder and manager, Berton Hochfeld, of $1.5 million in hedge fund proceeds.  Herckis further reported that Hochfeld had overstated the fund’s performance to investors.  Herckis’s cooperation with the SEC, including producing voluminous documents and helping the SEC staff understand how Hochfeld was able to perpetrate the fraud, led the SEC to file an emergency action and freeze $6 million of Hochfeld’s and the fund’s  assets.  Those frozen assets will be distributed to the fund’s investors. READ MORE →

Three’s Company, Too: The SEC’s New Enforcement Initiatives Will Be Waiting For You

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Last week the SEC announced the creation of three new Division of Enforcement initiatives designed to combat fraud in financial reporting and microcap securities and to enhance risk identification and analysis: (1) The Financial Reporting and Audit Task Force; (2) The Microcap Fraud Task Force; and (3) The Center for Risk and Quantitative Analytics.

The Financial Reporting and Audit Task Force will focus on expanding and strengthening the Division’s work in identifying securities violations, particularly in the areas of preparation of financial statements, issuer reporting and disclosure, and audit failures.  Using technology-based tools like the Accounting Quality Model, designed to identify red flags in areas particularly susceptible to fraudulent financial reporting, along with ongoing review of financial statement restatements and revisions, and analyzing industry performance trends, the Task Force will aim to detect fraud early and to increase prosecution of alleged securities violations involving false or misleading financial statements and disclosures.

The Microcap Fraud Task Force is a much more specialized unit, focusing exclusively on investigating fraud in the issuance, marketing and trading of microcap securities (typically low-priced securities issued by very small companies with limited assets).  The principal goal of this Task Force is to develop and implement long-term strategies for detecting and combating fraud in the microcap market, in particular by targeting who the SEC deems as “gatekeepers” or “significant participants,” namely, attorneys, auditors, broker-dealers, transfer agents, stock promoters and purveyors of shell companies. READ MORE →

SEC and FBI Try to Ketchup to Heinz Insider Traders

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Gavel and Hundred-Dollar Bill

In the latest development in an SEC lawsuit filed Friday, February 15, U.S. District Judge Rakoff extended a freeze on a Swiss Goldman Sachs account linked to possible insider trading in H.J. Heinz Company call options. The complaint alleges that these options were bought for $90,000 the day before the ketchup maker agreed to be bought by Warren Buffett’s Berkshire Hathaway, Inc. and Brazilian investment firm 3G Capital, giving the mystery investors $1.7 million in profits. The SEC said that the timing and size of the trades were suspicious because the account had had no history of trading Heinz stock over the last six months.

On Friday, February 15, Rakoff approved an emergency court order to freeze the assets in a Swiss trading account, which would prevent the investors from taking the profits out of the account until they showed up in court to “unfreeze” them. At a hearing the following week, none of the investors showed up. Rakoff relished: “They can hide, but their assets can’t run.” READ MORE →

Task Force Targets Bear Stearns; Other Banks in the Crosshairs

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After being formed to great fanfare in January 2012, the Residential Mortgage-Backed Securities Working Group, part of President Obama’s Financial Fraud Enforcement Task Force, stayed largely silent for eight months. No longer. With its October 1 filing of what could be a $87 billion lawsuit against Bear Stearns successor J.P, Morgan—as well as not-so-subtle hints of more lawsuits to come—the RMBS Working Group made its presence felt with a bang, not a whimper.

The lawsuit is unique among RMBS cases in that it does not focus on alleged misrepresentations or omissions made in connection with individual RMBS deals. Instead, the RMBS Working Group, acting through co-chair Eric Schneiderman, New York’s Attorney General, is taking on Bear Stearns’ entire RMBS business over a multi-year period. The complaint focuses on alleged defects in Bear Stearns’ due diligence process, accusing Bear Stearns of disregarding due diligence results showing the allegedly poor quality of the loans underlying its securitizations and of ignoring its own employees’ requests to correct perceived deficiencies in its due diligence process. The complaint also charges Bear Stearns with failing to comply with its stated post-closing obligations, including by not taking adequate steps to ensure that loan originators repurchased problematic loans from the RMBS trusts. Bear Stearns allegedly arranged side deals with the originators for confidential cash payments at a fraction of the contractual repurchase price, thus securing recovery for itself without passing it on to investors. The suit seeks a variety of remedies, including “restitution of all funds obtained from investors”—potentially all of the $87 billion in RMBS allegedly sold by Bear Stearns during the relevant period.
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