I’m not sure whether this is a case of misinformation, jumping the gun, or maybe just a reading comprehension issue, but I’m guessing the Toledo Blade would like a do-over on this June 3 editorial ("SEC Backs the Bad Guys"), which was published one day after the Washington Post broke the news that the SEC would side with shareholders in the upcoming Supreme Court case involving the Enron investment banks.

You know the standard players in the securities enforcement world–the SEC, the NASD, the DOJ.  But do you know about the securities enforcement arm of financial news network CNBC that polices fictional insider trading? 

According to this Reuters article, CNBC’s presumably just-created securities enforcement team has opened an investigation following "unusual trading" and "potential irregularities" by entrants in its "CNBC Million Dollar Portfolio Challenge" contest.   As discussed in the article, as part of the portfolio challenge,

CNBC provided "aspiring moguls" with a fictional trading account, one million "CNBC Bucks" and the ability to trade individual stocks on U.S. exchanges.

A grand prize of $1 million was set to be awarded to the entrant that generated the highest portfolio returns between March 5 and May 25.

A CNBC spokesman said about 375,000 contestants had entered the challenge with a total of over 1.5 million portfolios. The winner was to have been declared by July 8, but the network said it was unsure if it would be able to do so.

Let this be a stern lesson to anyone else out there who would dare to engage in fictional insider trading–the CNBC Division of Enforcement is watching.

The White Collar Crime Prof Blog has this recent post about some "small potatoes" insider trading cases that the SEC has brought lately (for ill-gotten gains of $3,785, $2,897 and $4,317.01).  The post made me wonder: what is the smallest reported SEC insider trading case ever (dollar-wise)? 

Let’s turn this into a contest.  Send your submission for the smallest such case that you can identify (confirmatory hyperlink to some news story or SEC release required!)  to Best in Class via a Comment on this page.  The smallest identified case wins bragging rights plus…drumroll… a GCG umbrella that I will mail to you.  If that doesn’t get you motivated, what will?

Back in 2003 I wrote about the harsh words that the SEC had for AIG in its litigation release announcing the settlement of proceedings against Brightpoint, Inc., AIG and certain individuals related to alleged accounting fraud. The SEC stated that:

AIG played an indispensable part in the fraudulent transaction by selling Brightpoint a new “insurance” product that AIG had developed and marketed for the specific purpose of helping issuers to report false financial information to the public.

All but one of the defendants in the case, Brightpoint’s Director of Risk Management, Timothy Harcharik, settled with the SEC back in 2003. According to this Lawfuel article , the SEC’s case against Harcharik proceeded all the way to trial and on Friday of last week, following a four-day trial, “a jury in federal court in Manhattan today returned a verdict in favor of the SEC and finding Harcharik liable for aiding and abetting Brightpoint’s fraud and other violations of the securities laws. The sanctions to be imposed on Harcharik will be determined by the judge, Honorable Harold Baer, Jr., at a future point.”

In his May 16, 2007, testimony before the Senate Subcommittee on Financial Services and General Government Committee on Appropriations, SEC Chairman Christopher Cox announced that he has ordered the creation of a new office within the SEC “that will focus the efforts of all of the SEC’s offices around the country, and work full-time to return [SEC settlement] funds to wronged investors. The creation of this specialized function within the SEC will ensure that investors’ money is returned as quickly as possible, while minimizing the costs of the distributions.”

This new office, Mr. Cox stated, will help fulfill Congress’ vision, written into the Sarbanes-Oxley Act, of “Fair Funds” settlements through which penalties in SEC cases can be returned directly to injured investors. Specifically, the new office will help the SEC to “train professionals in this area, to develop consistent practices, and to routinize the execution of the Fair Funds function. Too much money is still undisbursed because of the complexities of the process, leaving investors uncompensated.”

Mr. Cox also noted that since he became Chairman in 2005, the SEC has returned over $1.7 billion to investors from SEC settlements including WorldCom, Global Analysts Research, New York Stock Exchange Specialists, Hartford, and Bristol-Myers Squibb. He added that several large disbursements are pending and will be announced shortly. According to this article yesterday by the Associated Press, the SEC will move “very soon” to distribute about $3.4 billion owed to investors victimized by mutual-fund trading scandals.

If you ever find yourself losing sight of the serious committment many people have to ripping you or your company off, just spend a few minutes each day reading the SEC litigation releases or the financial/legal press.  Here are three things that caught my eye recently that have me on red alert:

1.  This article in today’s SecuritySearch.com notes that a class action has been filed against TJX, the company that operates the TJ Maxx stores, accusing it of negligence for not doing enough to secure customer data.  Apparently hackers ransacked the TJX computer network and exposed at least 45.7 million credit and debit card holders to identity fraud through a scheme in which they actually "aimed a telescope-shaped antenna at the store and used a laptop to snatch data transmitted between hand-held price-checking devices, cash registers and the store’s computers."

2.  According to the SEC, the former stock options administrator of a public company called Wireless Facilities, Inc. (WFI), saw fit to fraudulently issue himself over 700,000 shares of WFI stock and  transfer it to a brokerage account that he held jointly with his wife.  According to the SEC’s complaint, the administrator simply made false entries in WFI’s stock options software to create and then hide the unauthorized stock options grants, and then exercised/sold these securities for net proceeds of at least $7.7 million.

Apparently some of the trappings of this allegedly ill-gotten wealth was not lost on the couple’s neighbors, who reportedly watched the couple pour a huge amount of money into their home:

Since owning the Del Cerro house, the couple have added a pitched roof, a wide second-story deck, a security gate and wall, extensive landscaping and other additions.

“The amount of activity, financially, is incredible,” said Sal Dauria, who lives two houses down.

“I was told they were teachers,” he said yesterday. “There is a disconnect with what normal people make in income and the number of people” the Donlans have hired to work on the house.

It was not unusual to see as many as 10 laborers arriving in the morning, Dauria said.

3.  According to this SEC Complaint, a company called Aquacell raised more than $4.7 million by selling unregistered securities in the company.  The Complaint states that the company represented, among other things, that:

• Aquacell had developed a new energy source known as Eternergy that ”will revolutionize the world" and "will, over a period of 15 to 20 years, REPLACE oil, gas, coal, nuclear power, and other earth damaging sources of energy."
• Aquacell’s "team of scientists and engineers" were working on other products intended for release in the near future, including:

–a highly oxygenated water product that strengthens a consumer’s immune system ("Turbo3");

–a fire retardant gel or spray, ("Neverburn");

–a hydrogen cartridge that can increase a car’s gas mileage by two hundred miles per tank ("GasXtender");

–a replacement for platinum ("Platinum Replacement");

–an automobile that runs for months on Eternergy technology ("Eternergy Automobile");

–an insect repellent ("Mega-Repel");

–and a completely fraud-resistant credit card ("Plastic Genius").

• That established companies such as Duracell and Dell had expressed interest in licensing Aquacell’s battery products and other prominent companies had expressed interest in Aquacell’s revolutionary products, with each potential license worth millions of dollars.

Alas … it appears that your wait to put the GasXtender in your car so that you can ramp up to 230 mpg will be a long one.  The SEC alleges that "[a]ll of these claims are patently false. Aquacell has no management team or employees other than [the CEO], and no patents, licenses, contracts or products."

There is much more in the SEC’s complaint, which is recommended reading, and which includes numerous other allegations such as:

Although Aquacell’s website represents that [its CEO] obtained degrees from Michigan State University and Pace University, the only diplomas he has produced related to these statements are for fictional schools named Paice University and Michigan University, which he obtained from online diploma mills as something called "life degrees."

The SEC announced on Friday that on April 24, 2007, a court entered a default judgment against Defendants Blue Bottle Limited and Matthew Charles Stokes in an action filed by the SEC back in February 2007.  The court’s order "enjoins Stokes, a citizen of Guernsey, and Blue Bottle, a Hong Kong chartered company, from violations of the antifraud provisions of the federal securities laws, and orders them jointly and severally liable for $10,846,785 in disgorgement and penalties" (over $2.7 million in disgorgement of profits from alleged illegal trading and an over $8.1 million penalty equal to three times the profits from the illegal trading).

As previously discussed here, the SEC claims that beginning in January 2007, Blue Bottle and Stokes, "immediately prior to the publication of news releases by 12 different U.S. public companies, repeatedly traded in the securities of those companies, including options and equities trading."  The SEC claimed back in February that the defendants "appeared" to have stolen the information through means which "may include, but may not be limited to, hacking into computer networks or otherwise improperly obtaining electronic access to systems that contained material, non-public information about imminent news releases."

Interestingly, however, although the SEC did obtain the $10 million default judgment, last week’s announcement still does not state how the defendants are alleged to have obtained advance information about the news releases.

Well, I guess this was inevitable.  That doesn’t make it any less extraordinary, or any less "memorable," as the AP put it in this article.

For the first time that I’m aware of, someone contacted by the SEC as part of an inquiry is claiming to have a case of amnesia.  Not just the standard "I don’t recall," but the full-blown checking-yourself-into-the-hospital-due-to-your-amnesia variety.  The SEC promptly sued him anyway.

On Thursday, April 5, the SEC sued Economics professor Albert E. Parish, Jr. and Parish Economics alleging that funds offered and sold by the defendants, which were purported to hold approximately $134 million in assets, in fact did not.  The SEC alleged that "without disclosure to the investors, virtually all of the assets of the funds have been dissipated."

According to the AP article, the SEC says that after it attempted to contact Parish about this matter, Parish "checked into a local hospital claiming to have amnesia." 

The article adds that:

The Charleston Southern University professor reported dizzy spells and blurred vision while teaching on March 29 and was taken to Trident Medical Center, the Post and Courier of Charleston, S.C., reported Friday. The SEC filed its lawsuit Thursday.

The SEC announced on Wednesday that it had filed a settled insider trading action against a consultant to Del Laboratories, Inc., a manufacturer of cosmetics and over-the-counter pharmaceuticals.  The consultant, who had formerly been the CFO of Del, allegedly deduced that an acquisition was imminent from an unusual flurry of activity he saw while in Del’s offices one day (unusual closed door meetings, rumors and conversations amongst employees afraid they’d lose their jobs, etc.) and made a series of  "suspicious" trades in retirement accounts belonging to him and his wife.

How "suspicious?"  According to the SEC’s complaint, enough that when he placed the order in his wife’s account, his wife’s broker, "concerned about the suspicious trading activity," asked the consultant whether he worked for Del and whether he had any inside information.  The complaint alleges that the consultant "responded ‘no’ to both questions."

According to the SEC, the consultant made a "paper profit" of just over $38,308 by trading in advance of the announcement.  As discussed here on the White Collar Crime Prof. Blog, "the SEC Enforcement Division’s current push on insider trading cases means that they will pursue even the small ones."  Of course, the SEC has pursued cases involving far less in ill-gotten gains in the past, even for amounts less than $1,000.

The SEC announced today that it had received a jury verdict in its favor in its case against the former CFO and the former controller of Gateway Inc.  The verdict is the latest in a recent string of courtroom victories for the SEC, which was reportedly 10-0 in trials in 2006.

The SEC’s press release highlighted one unfortunately-named scheme in which the CFO allegedly

took steps to prop up sales with a scheme to offer pre-approved financing to individuals whose credit applications had previously been denied by Gateway. This effort continued into the third quarter with even riskier credit candidates and became known within Gateway as the "DDS program," which stood for "deep, deep sh[–]," according to documents and testimony from company insiders. As a result, Gateway misleadingly announced that its consumer sales had increased substantially without disclosing in the Management’s Discussion and Analysis (MD&A) portion of its SEC filings that sales were made to a far riskier credit class of consumers.