U.S. Securities and Exchange Commission - Regulatory Failures - List of Major SEC Enforcement Actions 2009-2012

List of Major SEC Enforcement Actions 2009-2012

The U.S. Securities and Exchange Commission's Enforcement Division has brought the following major actions in 2009 to 2012:

  • In June 2009, the SEC sued Angelo Mozilo, former CEO of mortgage lender Countrywide Financial, and two other former officers, charging that they misled investors about the quality of Countrywide's loans while knowing the company was fueling its growth by letting its underwriting guidelines deteriorate and originating a growing number of risky subprime loans. In October 2010, the SEC settled the lawsuit and Mozilo was required to pay a fraction of the $521.5 million he had earned, just $67.5 million in penalties and disgorgement.
  • In August 2009, the SEC filed a suit against Bank of America, alleging that the bank failed to disclose $3.6 billion in bonuses that Merrill Lynch paid its employees. In January 2010, the SEC filed another suit against the bank, alleging it failed to disclose extraordinary fourth-quarter 2008 losses at Merrill Lynch prior to a December 5, 2008 shareholder vote to approve a merger between it and Merrill Lynch. In February 2010, Jed S. Rakoff, a federal judge derided, but approved a settlement to resolve the lawsuits, having rejected a previous settlement for $33 million as too small. He called the new agreement "inadequate and misguided" because the penalties were "very modest."
  • In October 2009, relying on informants and wiretaps, Raj Rajaratnam and his hedge fund, Galleon Group, were charged with an insider trading scheme that generated more than $25 million in illicit gains. Six others involved in the scheme were also charged, including senior executives at IBM, Intel and McKinsey & Company. Overall, the SEC in the Galleon series of cases has charged 29 defendants for widespread and repeated insider trading in the securities of more than 15 publicly traded companies, generating illicit profits or losses avoided of more than $90 million. The investigation involves cash payments by Rajaratnam and Galleon in exchange for material nonpublic information, and the investigation has ensnared corporate executives, consultants, rating agency personnel, proprietary traders, hedge fund executives, and public relations personnel. Rajaratnam was sentenced to 11 years in prison in the parallel criminal case, and the court entered a final judgment in the SEC civil case holding him liable for a civil penalty of $92.8 million, representing the largest penalty ever assessed against an individual in an SEC insider trading case.
  • In December 2009, three former executives of New Century Financial Corporation were charged with conspiring to mislead investors by not disclosing dramatic increases in the rate of borrowers who were defaulting almost immediately on their loans.
  • In April 2010, the SEC filed a suit against Goldman Sachs and one of its vice presidents, Fabrice Tourre, alleging that the firm misled investors with respect to a subprime mortgage product. The SEC charged that Goldman and Tourre did not inform clients that what they bought was crafted in part by hedge fund manager John Paulson, who was betting the product would fail. In July 2010, Goldman Sachs agreed to pay $550 million to settle the case, among the largest penalties ever assessed in the 76-year history of the SEC, although just 1% of Goldman's market value at the time and 2% of its cash balance in March 2010, and considered to be a "slap on the wrist". The penalties prompted a sigh of relief from Goldman and Wall Street. In announcing the settlement, Robert Khuzami, current director of the Enforcement Division, twice referred to it as "more than half a billion dollars", but Michael J. Driscoll, a professor and former senior managing director at Bear Stearns called it "a steal". A former SEC commissioner, Paul Atkins, said he was "embarrassed, as an American," describing the suit as "basically playing for headlines with very little substance." Eliot Spitzer said Goldman's reaction was "OK, we'll pay you $550 million to settle the Abacus case — that's a small price to pay for the $12.9 billion we got for the AIG bailout." Khuzami states that the penalty paid by Goldman Sachs ($535 million) was “30 to 40 times” what the firm hoped to earn from the Abacus deal ($15 million), and such a significant penalty sends a “cold, hard and sharp” message to Wall Street and risk managers that they better think twice before undertaking transactions that violate the law.
  • In July 2010, Citigroup, with a market cap of $120 billion, agreed to pay a $75 million penalty to the SEC for its failure to adequately disclose its exposure to subprime mortgage debt. Citigroup advised investors it held $13 billion in subprime investments when in fact it was more than $50 billion. Fines for misconduct were also assessed against the former chief financial officer, Gary Crittenden, and director of investor relations, Arthur Tildesley.
  • In September 2010, John Flannery, a former chief investment officer of State Street Bank & Trust Company, and James Hopkins, a former product engineer there, were charged with misleading investors about the bank's exposure to subprime investments. Earlier in the year, the SEC announced a settlement in which State Street agreed to pay $313 million in connection with the charges.
  • In October 2010, the SEC charged two hedge fund portfolio managers and their investment advisory businesses, Palisades Asset Management, LLC with overvaluing illiquid fund assets they placed in a “side pocket,” misappropriating investor assets, and making material misrepresentations in connection with a securities offering.
  • In December 2010, the SEC, the Department of Justice and other federal and state agencies announced the results of "Operation Broken Trust," a coordinated effort by the Financial Fraud Enforcement Task Force to target investment fraud. The operation resulted in prosecutions against 310 criminal defendants involving $8.3 billion in losses and civil actions against 189 defendants involving $2.1 billion in losses for fraud schemes that victimized more than 120,000 people throughout the country.

In FY 2011, the Enforcement Division filed 735 actions, an 8.6% increase over FY 2010 and more than any other year in SEC history. It also obtained $2.8 billion in penalties and disgorgement. More significantly, the filed actions involve many highly complex markets, products and transactions, as well as charges against a significant number of individuals. One commentator noted that despite budget and other restraints, the SEC has recently “had a string of successes,” and has made progress “despite every disadvantage.” A sampling of FY 2011 and 2012 cases are set forth below.

  • In January 2011, the SEC charged Merrill Lynch with fraud for misusing customer order information to place proprietary trades for the firm and for charging customer undisclosed trading fees.
  • Also in January 2011, the SEC charged two Charles Schwab & Co. Inc. entities and two executives for failing to disclose the risks of investing in the YieldPlus fund, including its over-concentration in mortgage assets and that it was not, as Schwab advertised, a cash alternative that had only slightly higher risk than a money market fund.
  • In February 2011, the Commission brought charges in the “expert networking” insider trading cases, charging several technology company employees with tipping material nonpublic information concerning sales, earnings, and other performance data of their employers to multiple hedge funds and other investment professionals.
  • In February 2011, the SEC charged DHB Industries, Inc., a major supplier of body armor to the U.S. military and law enforcement agencies, for engaging in a large accounting fraud, and in addition separately charged three of DHB’s former outside directors and audit committee members for their complicity in the scheme.
  • In March 2011, the SEC charged three senior executives at Fair Finance Company with orchestrating a $230 million fraudulent scheme involving at least 5,200 investors, many of them elderly, by selling them interest-bearing certificates allegedly used to purchase and service discounted consumer finance contracts, but instead diverting the proceeds to themselves and others for luxury personal goods as well as to struggling and unprofitable entities that they controlled.
  • In March 2011, the Commission charged Cheng Yi Liang, a chemist at the U.S. Food and Drug Administration (FDA), with insider trading by trading securities using highly confidential information relating to FDA drug approvals that he accessed from an FDA database.
  • In April 2011, the Commission charged Matthew Kluger, a former corporate attorney, and Garrett Bauer, a Wall Street trader, for their involvement in a highly organized serial insider trading ring that traded in advance of at least 11 pending merger and acquisition announcements involving clients of the law firm Wilson Sonsini Goodrich & Rosati.
  • In April 2011, the SEC charged Wachovia with misconduct related to the sale of two collateralized debt obligations (CDOs), including charging excessive markups in sales to the Zuni Indian Tribe, and falsely representing that it acquired CDO assets at fair market prices when, in fact, 40 residential mortgage-backed securities (RMBs) were transferred from an affiliate at above-market prices to avoid losses on its own books.
  • In April 2011, the Commission charged Dr. Joseph “Chip” Skowron, a former portfolio manager for six health care-related hedge funds, with insider trading in a bio-pharmaceutical company based on confidential information he received unlawfully about the company’s negative clinical drug trial results.
  • In May 2011, the Commission charged Donald L. Johnson, a former managing director of The NASDAQ Stock Market, with insider trading on confidential information that he misappropriated while working in a market intelligence unit that communicates with executives at listed companies about impending public announcements that could affect their stocks.
  • In May, July and December 2011, the SEC charged J.P. Morgan Securities, Wachovia Bank and UBS Financial Services for participating in a wide-ranging scheme involving the fraudulent manipulation of municipal bond reinvestment transactions. Including previous actions filed against GE Funding Capital Market Services and Banc of America Securities, a total of approximately $743 million has been recovered in these settlements by all law enforcement agencies, including the SEC, involved in the cases.
  • In June 2011, the SEC charged J.P. Morgan Securities and one individual with misleading investors in a complex mortgage securities transaction by not informing investors that a prominent hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets.
  • In August 2011, the SEC charged Stifel, Nicolaus & Co. and a former Senior Vice President with defrauding five Wisconsin school districts by selling them synthetic CDOs funded largely with $200 million of borrowed money.
  • In September 2011, the SEC charged AXA Rosenberg and its founder, Barr Rosenberg, with fraud for concealing a significant error in the computer code of the quantitative investment model used to manage client assets. AXA Rosenberg paid $217 million to compensate harmed investors and a $25 million penalty. Barr Rosenberg paid a $2.5 million penalty and was barred from the industry for life.
  • In October 2011, the SEC sanctioned two electronic stock exchanges and a broker-dealer owned by Direct Edge Holdings LLC for violations arising out of weak controls that resulted in millions of dollars in trading losses and a systems outage.
  • In October 2011, the SEC charged Pipeline Trading Systems LLC and two of its top executives with failing to disclose to customers of Pipeline’s “dark pool” trading platform that the vast majority of orders were filled by a trading operation affiliated with Pipeline.
  • In October 2011, the SEC charged Citigroup with misleading investors about a $1 billion CDO by exercising significant influence over the selection of assets included in the CDO portfolio, and then taking a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup agreed to settle the SEC’s charges by paying a total of $285 million. The district court’s rejection of the proposed settlement is on appeal to the Second Circuit Court of Appeals.
  • In October 2011, the SEC charged former bank executives of California-based United Commercial Bank with concealing from investors large losses on several loans made by the bank and that appraisals for some of the loans had been reduced dramatically or that collateral securing the loans was insufficient or worthless.
  • In October 2011, the SEC charged former McKinsey & Company Global Head Rajat Gupta with insider trading for illegally tipping Raj Rajaratnam with insider information about the quarterly earnings of both Goldman Sachs and Procter & Gamble, as well as an impending $5 billion investment in Goldman by Berkshire Hathaway at the height of the financial crisis.
  • In December 2011, the SEC charged six former top executives of Fannie Mae and Freddie Mac, including two former CEOs, with misleading investors about the extent of each company’s holdings of subprime and other higher-risk mortgages.
  • In December 2011, the SEC charged seven former Siemens executives with anti-bribery violations for their actions in the decade-long bribery scheme to retain a $1 billion government contract to produce national identity cards for Argentine citizens.
  • In January 2012, the SEC charged two multi-billion dollar hedge fund advisory firms, Diamondback Capital and Level Global, as well as seven fund managers and analysts, involved in a $78 million insider trading scheme based on nonpublic material information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.
  • In February 2012, the SEC charged four former investment bankers and traders at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3.0 billion in subprime bonds during the height of the financial crisis.
  • In March 2012, the SEC charged the three senior-most executives at Thornburg Mortgage, Inc., formerly one of the nation’s largest mortgage companies, with hiding the company’s deteriorating financial condition at the onset of the financial crisis.
  • In March 2012, the SEC charged two managers with making false statements and pocketing undisclosed fees and commissions in connection with two private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms. Also charged was SharesPost, an online service that matches buyers and sellers of pre-IPO (initial public offering) stock, for engaging in securities transactions without registering as a broker-dealer.
  • In April 2012, the SEC charged Franklin Bank’s former CEO and CFO for their involvement in a fraudulent scheme designed to conceal the deterioration of the bank’s loan portfolio and inflate its reported earnings during the financial crisis.
  • In May 2012, the SEC charged UBS Puerto Rico and two executives with making misrepresentations about the liquidity and pricing of 23 proprietary closed-end funds, and concealing that it advantaged its own proprietary trades over those of its customers as it reduced its exposure to these assets.

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