Securities Law Blog

In Manhattan, an investor lawsuit was dismissed against Canadian Imperial Bank of Commerce (CIBC) and four of its executives on March 17, 2010. Filed by Plumbers & Steamfitters Local 773 Pension Fund, the lawsuit was seeking class actions status on behalf of all the investors who bought CIBC shares in the U.S. between May 31, 2007 and May 29, 2008. The claimants alleged that CIBC committed securities fraud and misled investors about its mortgage-backed holdings.

U.S. District Judge William H. Pauley III threw out the case stating that the investors failed to adequately allege that the bank intended to defraud them. According to Judge Pauley, at no point did the plaintiff’s complaint make any reference to specific CIBC documents to discredit CIBC, nor did they demonstrate that CIBC possessed information that was contrary to their public statements. The Judge further asserted that given that the executives suffered large losses in their common stock holdings and compensation, it would be “nonsensical to impute dishonest motives” to them.

In his ruling, Judge Pauley wrote, “Knowledge of a general economic trend does not equate to harboring a mental state to deceive, manipulate, or defraud. CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy the plaintiff enjoys in hindsight.”

The former Chairman and CEO of infoUSA Inc. and infoGROUP Inc. (Info), has been charged by the Securities and Exchange Commission (SEC) regarding his alleged fraudulent use of corporate funds. The SEC complaint alleges that from 2003 to 2007, Vinod Gupta improperly used corporate funds to pay almost $9.5 million in personal expenses, and caused the company to enter into $9.3 million of undisclosed business transactions with other companies in which he had personal stake.

In an all too familiar scenario, the head of a company allegedly misuses funds to support a lavish lifestyle. In this case Gupta allegedly splurged on jet travel around the globe for friends and family, yacht expenses, credit cards, roughly 28 club memberships, numerous automobiles, at least nine homes in the U.S., and three personal life insurance policies, according to the SEC complaint.

The SEC also charged three former executives of the Omaha-based data compilation company for their roles in allegedly enabling Gupta to funnel illegal compensation to himself.

Vasant H. Raval, former chairman of Info’s audit committee, was charged for allegedly failing to respond appropriately to various red flags concerning Gupta’s expenses and Info’s transactions with Gupta’s other entities. According to the SEC, Raval failed to investigate concerns raised by two Info internal auditors that Gupta was submitting requests for reimbursement of personal expenses. The complaint further states that Raval omitted facts in a report to the board concerning Gupta’s expenses.

“Officers and directors must ensure that shareholders receive accurate and complete disclosure of all compensation paid to executives. Raval, as chairman of the audit committee, neglected these duties and allowed money to flow to Gupta unbeknownst to investors,” said Donald Hoerl, Director of the SEC’s Denver Regional Office.

The SEC alleges that Gupta’s expense reimbursement requests were “rubber-stamped” by two former chief financial officers, Rajnish K. Das and Stormy L. Dean. Das and Dean allegedly ignored concerns raised by other Info employees, and approved the reimbursement requests without sufficient explanation of business purpose and supporting documentation. The pair is also accused of falsely representing that all related party transactions with Gupta’s entities had been properly recorded and disclosed in the company’s financial statements to Info’s outside auditor.

Without admitting or denying guilt, Gupta, Raval and Info agreed to settle the SEC’s charges against them. Gupta will pay a total of $7,431,000, which includes disgorgement of $4,045,000, prejudgment interest of $1,145,400, and a penalty of $2,240,700. He has also agreed to an order prohibiting him from serving as an officer or director of a public company and placing restrictions on the voting of his Info common stock. Raval agreed to pay a $50,000 penalty and to an order barring him from serving as an officer or director of a public company for five years. Info consented to an Order to cease and desist from committing any further violations of the Securities Exchange Act.

The SEC’s case against Das and Dean is ongoing.

The Securities Investor Protection Corp. (SIPC) discovered Monday March 8, 2010 that a web site called i-sipc.com was mimicking the SIPC web site, sipc.org. Using the name International Securities Investor Protection Corp., “I-SIPC”, the site modeled itself after the SIPC site. It copied both the structural design and artwork in an alleged attempt to obtain sensitive information or money from victims of the Bernard Madoff Ponzi scheme.

The real SIPC works to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The SIPC will act as trustee or an independent court-appointed trustee in a brokerage solvency case to recover funds. Since the collapse of the Madoff scam, the SIPC has been providing funds up to $500,000 to certain investors who lost money. In order to utilize the organizations services, the victims provide their financial and other personal information.

The fake copycat group claims to be based in Geneva, as well as having ties to the United Nations and the International Monetary Fund. The site published images of stacks of U.S currency totaling $1.3 billion which was claimed to have been recovered in Malaysia in collaboration with Interpol. In an attempt to further legitimize its claims, the site posted alleged statements from Madoff victims who reported receiving funds from I-SPIC. The quotes were later found to have been lifted from a New York Times article and taken out of context.

“Investors who lose money in widely publicized schemes are often targeted by con artists looking to cash in on the victim’s desire to recover losses,” said Lori Schock, Director of the SEC’s Office of Investor Education Advocacy. “Victims of fraudulent schemes should be aware that such refund schemes commonly exist, and can be perpetrated through copycat web sites that appear similar to those of actual regulators or other organizations.”

According to SIPC President, Stephen Harbeck, SIPC learned of the phony site when an individual contacted the organization asking about the legitimacy of the I-SPIC. The individual had contacted I-SPIC via email, and received a response directing him to send $1,000 to an offshore account. Since the reported incident, the phony site has been disabled.

The appellate body of the Financial Industry Regulation Authority (FINRA) issued a ruling dismissing the charges against two senior personnel of Knight Securities, Kenneth Pasternak and John Leighton. The National Adjudicatory Council (NAC) reversed an earlier FINRA Hearing Panel decision that found the former CEO and the head of the firm’s Institutional Sales Desk, responsible for supervisory failures.

The original charges filed against Mr. Pasternak and Mr. Leighton stemmed from a March 2005 charging memorandum which alleged that “Pasternak and Leighton did not take reasonable steps to ensure that Knight Securities’ leading institutional sales trader adhered to ‘industry standards’ when executing orders for institutional customers.”

The NAC determined that FINRA failed to satisfy its burden of proof in relation to the 2005 allegations. According to the NAC, the evidence presented by FINRA did not support the claim that Mr. Pasternak and Mr. Leighton failed provide reasonable supervision, nor did it support allegations that Mr. Pasternak did not respond appropriately to “red flags” in relation to the sales trader’s execution of institutional customer orders.

The $100,000 fines, and other sanctions imposed on the two men were vacated by the NAC’s ruling.

The founders and co-owners of the Miami-based real estate development company Royal West Properties, Inc. have been charged with fraud for conducting a $135 million Ponzi scheme. The Securities and Exchange Commission (SEC) alleges that Gaston E. Cantens and his wife allegedly sold promissory notes to investors after acquiring various properties and later financing their sale.

According to the civil complaint filed by the SEC, the Cantens targeted members of the Cuban-American community. Well-known within the close-knit community, the couple gained the trust of mostly elderly investors whom they met at charitable and religious gatherings, and at events hosted at their Miami home. Mr. Cantens also allegedly used his connections as an alumnus and board member at the Belén Prep School to recruit investors. Outside of their immediate community, investors were attracted by televised commercials broadcast on Spanish-language channels nationwide.

Despite the Cantens not being registered with the SEC under the federal securities laws to make securities offerings to investors, reportedly no questions were asked of the couple that a community regarded as old friends.

In a statement given by Director of the SEC’s Miami Regional Office, Eric I. Bustillo commented on the couples’ recruiting tactics, saying that “They portrayed themselves as a pious couple closely involved with educational and religious organizations, while in reality they were living lavishly off money from defrauded investors.”

Along with allegedly using investor money to repay earlier investors, the SEC also contends that the Cantens misappropriated more than $20 million to fund personal business ventures, pay themselves high salaries, and allocated an estimated $1 million to their children and grandchildren citing “consulting fees”.

The Cantens allegedly made promises to investors of high annual returns of 9 to 16 percent. Investors were told the money would come from mortgages on land in southwest Florida sold by Royal West. The SEC claims that the Cantens made “numerous material misrepresentations and omissions about the safety and security of investors’ principal and returns, the success of Royal West’s business, the source of purported investment returns, and the use of investor funds.” The South Florida couple is charged with violating the securities registration and antifraud provisions of the federal securities laws. The SEC is seeking permanent injunctions, sworn accountings, disgorgement of ill-gotten gains and financial penalties against the Cantens.

The company that was started in 1982 allegedly began showing operating losses by 2002 when property owners began defaulting on their mortgages, but continued to promote their business as financially sound in order to attract new investors. The couple allegedly began using new investor funds to make principal and interest payments to earlier investors. When Royal West went bankrupt last year and ceased making interest payments, rumors began about the mismanagement of the real estate development company.

Following the charges issued March 3, 2010, the couple released a statement denying the SEC’s claims. Instead they cited the collapse of the real estate market as the cause of their company’s financial problems.