With respect to the net worth standard, the SEC amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings.  SEC rules permit certain private and limited offering to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.”  Under the amended rule, which takes effect 60 days after publication in the Federal Register, the value of an individual’s primary residence cannot be included as an asset when calculating the investor’s net worth for purposes of determining “accredited investor” status.

With respect to mine safety disclosure requirements, the SEC adopted new rules outlining how mining companies must disclose the mine safety information required by Dodd-Frank.  Dodd-Frank’s disclosure requirements are based on the safety and health requirements applicable to mines under the Federal Mine Safety and Health Act of 1977, which is administered by the Mine Safety and Health Administration (MSHA).  The new SEC rules, which take effect 30 days after publication in the Federal Register, require mines to provide mine-by-mine totals for the following:

• Significant and substantial violations or mandatory health or safety standards under section 104 of the Mine Act for which the operator received a citation from MSHA;
• Orders under section 105(b) of the Mine Act;
• Citations and orders for unwarrantable failure of the mine operator to comply with section 104(d) of the Mine Act;
• Flagrant violations under section 110(b)(2) of the Mine Act;
• Imminent danger orders issued under section 107(a) of the Mine Act;
• The dollar value of proposed assessments from MSHA;
• Notices from MSHA of a pattern of violations or potential to have a pattern of violations under section 104(e) of the Mine Act;
• Pending legal actions before the Federal Mine Safety and Health Review Commission; and
• Mining related fatalities.

Liang admitted during his guilty plea that from approximately June 2006 through March 2011, he used the inside information he learned from the FDA’s internal tracking system to trade on pharmaceutical stocks.  Using accounts of relatives and friends to execute the trades, Liang purchased and traded pharmaceutical company securities based on positive or negative information he learned about the company’s product.  According to the DOJ, Liang’s insider trading scheme resulted in total profits and losses avoided of more than $3.7 million.

Sentencing is currently scheduled for January 9, 2012.  The maximum penalty for the securities fraud count is twenty (20) years in prison and a fine of $5 million, or twice the gross gain from the offense.  The maximum penalty for the false statement count is five years in prison and a fine of $250,000.

Pursuant to his plea agreement, Liang has agreed to forfeit $3,776,152, including a home and condominium, as well as funds held in ten (10) different bank or investment accounts.

According to the DOJ, the U.S. Securities and Exchange Commission is currently pursing civil charges against Liang and several accounts he controlled.

According to the evidence presented at trial, Allmendinger and Abdulwahab engaged in a scheme to defraud investors (most of whom were elderly and invested all of the money they had saved for their retirement) by misrepresenting A&O’s prior success, its size and office locations, its number of employees, the risks of its investment offerings, and its safekeeping and use of investor funds.  Abdulwahab also misrepresented to investors that he had a college degree in economics, and failed to disclose to investors that he previously pleaded guilty to a felony charge of forgery of a commercial instrument in Texas state court.

The evidence at trial demonstrated that Allmendinger and Abdulwahab caused more than 800 investors to lose more than $100 million, and that they used investors funds for personal enrichment, including purchasing multi-million dollar homes, luxury cars, and a 15-carat diamond ring.

Earlier this year, five other individuals connected with the A&O fraud scheme were also sentenced: Russell E. Mackert, A&O’s general counsel, was sentenced to 188 months in prison; Brent Oncale, A&O’s former owner and founder, was sentenced to 120 months in prison; David White, A&O’s former president, was sentenced to 60 months in prison; Eric M. Kurz, a wholesaler of A&O investment products, was sentenced to 60 months in prison; and Tomme Bromseth, an A&O sales agent, was sentenced to 36 months in prison.

According to the DOJ, the A&O investigation was conducted by the U.S. Postal Inspection Service, Internal Revenue Service, and the FBI, with significant assistance from the Texas State Securities Board, the Virginia Corporation Commission, and the SEC.  The investigation was coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases.  The task force is an investigative arm of President Obama’s Financial Fraud Enforcement Task Force, an interagency national task force that was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.

The bill would amend Section 21F of the Securities Exchange Act (and Section 23 of the Commodity Exchange Act) to provide that, “[i]n the case of a whistleblower who is an employee providing information relating to misconduct giving rise to the violation of the securities laws that was committed by his or her employer or another employee of the employer, to be eligible for an award . . . the whistleblower, or any person obtaining reportable information from the whistleblower, shall—(A) first report the information . . . to his or her employer before reporting such information to the Commission; and (B) report such information to the Commission not later than 180 days after reporting the information to the employer.”

Under the bill, however, whistleblowers who do not comply with these internal reporting requirements may still be eligible for an award if the SEC determines (1) that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or (2) that internal reporting as not a viable option for the whistleblower based on (i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or (ii) other evidence of bad faith on the part of the employer.

The bill would also expand Section 21F’s current exclusion of eligible whistleblowers (which currently excludes from eligibility any whistleblower convicted of a criminal violation related to the matter at issue).  Under the bill, a person would be ineligible as a whistleblower if such person “has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct of violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond.”  The bill would also exclude whistleblowers who the SEC determines committed, facilitated, participated in, or were otherwise complicit in the misconduct at issue.

Further, under the bill, the SEC would be required to notify an entity prior to commencing any whistleblower-related enforcement action in order to allow the entity the opportunity to investigate and remedy the alleged misconduct—unless, based on evidence of bad faith or complicity at the highest level of management, the SEC determines that notification would jeopardize its investigation.  If a notified entity responds in good faith, the SEC would be required to treat the entity as having self-reported the information.

With respect to Section 21F’s anti-retaliation provisions, the bill provides that “[n]othing . . . shall be construed as prohibiting or restricting any employer from enforcing any established employment agreements, workplace policies, or codes of conduct against a whistleblower, and any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes shall not constitute retaliation . . . provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers.”

H.R. 2483 is co-sponsored by Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ), and Steve Stivers (R-OH).

Read the proposed legislation here.

Visit the SEC’s new Office of the Whistleblower website

According to the SEC, in the weeks preceding the public announcement of the AMO acquisition, DeCinces purchased at least 83,700 AMO shares.  When the public announcement was made on January 12, 2009, the stock price for AMO increased 143 percent, and DeCinces sold all of his shares for $1.2 million in profits.  Donahue, Jackson, and Wittenbach also sold their shares, respectively earning $75,570, $140,259, and $201,692 in profits.  Wittenbach’s sister, who also purchased shares in the weeks leading up to the public announcement, sold her shares for a $13,214 profit.

DeCinces, Donohue, Jackson, and Wittenbach agreed to settle the charges against them by disgorging their profits and paying prejudgment interest and penalties.  Specifically, without admitting or denying the SEC’s allegations, DeCinces agreed to pay a total of $2.5 million, Donohue agreed to pay a total of $113,355, Jackson agreed to pay a total of $293,026, and Wittenbach agreed to pay a total of $422,366.

DeCinces formerly played Major League Baseball as a third baseman for 15 seasons (1973–1987).  He began his career with the Baltimore Orioles, where he played for nine years.  He then played with the California Angels for six years before ending his career with a very brief stint with the St. Louis Cardinals.

View SEC’s charges
View complaint filed in the US District Court for the Central District of California

The Task Force’s Website:

• Directs victims of financial fraud to useful resources for identifying, reporting & recovering from financial fraud.

• Provides helpful information on how specific types of fraud complaints or cases of suspected fraud can be submitted to federal agencies for investigation.

• Offers tips on how individuals can protect themselves from financial crimes.

Without admitting or denying liability, Armor Holdings agreed to pay nearly $5.7 million in disgorgement, prejudgment interest, and penalties to settle the SEC’s complaint.  It also agreed to pay a $10.29 million fine to the U.S. Department of Justice to settle parallel criminal charges.  The settlement is subject to court approval.

View SEC Announcement
View SEC’s Complaint

The SEC has also filed suit against Edward S. Steffelin, who headed a team at GSC Capital Corp. (GSC) — an investment advisory firm that released misleading marketing materials supporting J.P. Morgan’s contention that the CDO assets were being selected by GSCP, the investment advisory arm of GSC.  The lawsuit alleges that Steffelin allowed the Magnetar hedge fund to select and short CDO portfolio assets and then drafted and approved marketing materials promoting GSCP’s selection of portfolio assets as the “independent manager,” without disclosing the hedge fund’s role in the selection process.