Institutional Investment Fraud and The Courts: District Court Won’t Stay Derivatives Case Alleging FCPA Violations, Control Person Claims Against Over Revenue Bond Purchases Can Proceed, Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence

District Court Won’t Stay Derivatives Case Alleging FCPA Violations
The U.S. District Court for the Eastern District of Louisiana decided not to stay a shareholder derivative lawsuit accusing Tidewater Inc. of violating the Foreign Corrupt Practices Act. Judge Jane Triche Milazzo believes that a stay would burden not just the court but also the defendants. The court threw out the case last year, concluding that shareholder plaintiff Jonathan Strong, who did not make a presuit demand on the Tidewater board, failed to plead with particularity why such a demand was futile.

Per Strong, the offshore energy services provider violated the act when it ignored payments of about $1.76M that a subsidiary made to government officials in Nigeria, allegedly to get around custom regulation to be able to import vessels into that nation’s waters, and Azerbaijan, allegedly as bribes over tax audits. The derivatives lawsuit was filed after the Tidewater and the subsidiary agreed to pay about $15.5 million in a related settlement with the US Department of Justice and the Securities and Exchange Commission.

Control Person Claims Over Revenue Bond Purchases Can Proceed
Plaintiffs Allstate Life Insurance Co. (ALL) and several individuals represented by Wells Fargo (WFC) as the indenture trustee of the bonds did bring up a material issue of fact as it relates to the defendant’s good faith for defense purposes, said a district court. The investors that bought bond purchases to finance an Arizona event center can therefore go ahead with their state and federal control person claims against the shareholder/chairman of two entities involved in the venture.

The plaintiffs contend that the defendants made misstatements in official statements and also allegedly failed to disclose feasibility studies demonstrating that the center would make a lot less money than what was stated it would. They also asserted control person claims against defendant James Treliving (a control person of defendants Global Entertainment Corp. and Prescott Valley Event Center LLC) under the Arizona Securities Act and the 1934 Securities Exchange Act. Finding that the plaintiffs succeeded in raising a material issue of fact that Treliving failed to act in good faith, the court denied his motion for summary judgment.

Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence
The U.S. District Court for the Eastern District of New York has ruled that ex-hedge fund portfolio manager Ward Onsa is subject to a four-point offense level investment adviser sentence enhancement for one count of securities fraud even though the government believed this was not warranted because he had not been advising investors, and, rather, was managing a money pool. Onsa had pled guilty to fraud over his alleged Ponzi scam.

Sentenced to 78 months behind bars and three years supervised released, as well as ordered to pay restitution, Onsa contended that his sentence shouldn’t have been enhanced because he wasn’t acting as an investment adviser when he solicited about $5 million from investors of the Century Hedge Fund Partners I LP, of which he was the lone portfolio manager and was supposed to get 50% of its profits. The hedge fund would go on to become insolvent. Now, Judge Dora L. Irizarry is affirming case law, which holds that hedge fund portfolio managers who get a percentage of the profit are investment advisers.

“Many have complained that prosecutors do not take action against those who perpetrate securities fraud,” said Stockbroker Fraud Attorney William Shepherd. “Here, the government is complaining that the punishment is too severe. Whose side is it on?”

Related Web Resources:

United States v. Onsa (PDF)

Strong v. Taylor

More Blog Posts:
Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action, Stockbroker Fraud Blog, March 26, 2013

Citigroup Will Pay $730M in Bond Lawsuit Alleging It Misled Debt Investors, Institutional Investor Securities Blog, March 20, 2013