The focus this week in securities enforcement continues to be SAC Capital. The firm’s owner received a grand jury subpoena in the on-going criminal and civil insider trading investigations being conducted by the Manhattan U.S. Attorney’s Office and the SEC. The investigations face a critical deadline in a few weeks as the five year criminal statute of limitations runs on certain trades.
The SEC received a warning from the FSOC regarding money market funds this week. The FSOC is reviewing comments on the money market fund proposals it put out last fall. If the SEC does not act by the time that review is completed, according to testimony from the Treasury Secretary, the FSOC may.
The Commission brought an action against an investment adviser which serves as a proxy adviser this week for failing to have adequate procedures regarding confidential information. The agency also filed another proceeding against a city tied to the municipal bond market and an insider trading case.
Remarks Commissioner Luis Aguilar delivered remarks titled Merely Cracking the Glass Ceiling is Not Enough: Corporate America Needs More than Just a Few Women in Leadership,” to the Women’s Executive Circle of New York, New York, New York (May 22, 2013). His remarks focused on gender diversity and the lack of diversity on corporate boards (here).
Remarks: Commissioner Luis Aguilar delivered remarks titled “The Role of Immigrants in Our Economy,” to the Georgia Hispanic Chamber of Commerce, Atlanta, Georgia (May 18, 2013). His remarks focused on the positive impact of immigrants on the U.S. economy and the need to ensure that small business has access to capital (here).
Remarks: Commissioner Daniel Gallagher delivered remarks at the 12th European Corporate Governance & Compliance Law Conference, Dublin, Ireland (May 17, 2013). Topics discussed include the Commissioner’s critique of Sarbanes-Oxley and Dodd-Frank along with the encroachment of the federal government in traditional state areas and a caution about similar, possible action by the EU (here).
Testimony: Treasury Secretary Jacob Lew testified regarding the annual report of the Financial Stability Oversight Counsel or FSOC before the Senate Committee on Banking, Housing and Urban Affairs. Money market funds, and the need for reform, were one key topic. The Secretary told the Committee that the FSOC remains concerned about the funds and cautioned the SEC: “The Council is currently considering the public comments on the proposed recommendations [issued in November 2012]. If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its process, the Council expects that it would not issue a final recommendation to the SEC. However, if the SEC does not pursue additional reforms that are necessary to address MMFs’ structural vulnerabilities, the Council should use its authorities to take action in this area.”
Whistleblower: Lawson v. FMR LLC, No. 12-3 (S.Ct. Cert. granted May 20, 2013). The High Court agreed to hear a significant case concerning the coverage of the Sarbanes-Oxley whistleblower provisions. The central issue to is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Act. The case centers on claims brought by two former employees of the Fidelity mutual fund families. FMR Co., Inc. and a number of its subsidiaries are the defendants in the case. Those entities are private companies that contact with the publically traded funds. The district court denied a motion to dismiss which argued that the SOX whistleblower provisions do not extend to employees of contractors at private companies. The First Circuit reversed in a 2-1 decision.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 2 civil injunctive action and 3 administrative proceedings (excluding tag-along-actions and 12(j) proceedings).
Confidential information: In the Matter of Institutional Shareholder Services, Inc., Adm. File No. 3-15331 (May 23, 2013) is a proceeding against the firm which is a registered investment adviser and the subsidiary of a public company. ISS is a full service proxy adviser that assists institutional investors. From 2007 through early 2012 an employee of the firm furnished confidential information to a proxy solicitor regarding the manner in which 100 institutional advisory clients were voting their proxy ballots . The employee, who is no longer with the firm, received meals and tickets in return. The violations occurred in part, according to the Order, because the procedures to protect the integrity of the process and confidential information were inadequate, although the firm had a code of ethics which prohibited such actions. The Order alleges violations of Advisers Act Section 204A. To resolve the proceeding the Respondent consented to the entry of a cease and desist order based on the Section cited and the entry of a censure. The firm also agreed to pay a civil penalty of $300,000 and implement certain procedures. Those include the retention of a consultant to review their procedures and make recommendations which will be adopted. The Commission acknowledged the cooperation of the company.
Insider trading: SEC v. Stilwell, Civil Action No. 13-civ-3437 (S.D.N.Y. Filed May 22, 2013) is an action centered on the acquisition American Physicians Capital, Inc. by The Doctors Company, announced on July 8, 2010. Defendant John Stilwell is the brother of an ACAP board member. He was employed at his brother’s investment firm. Beginning in March 2010 ACAP evaluated a potential sale of the company. The brother-director was involved in the evaluation process. As the process evolved defendant Stillwell misappropriated the inside information. He shared it with his friend, Dr. Michael Moore and sister-in-law, Jillian Murphy. During the last two weeks of April defendants Moore and Murphy and two of their friends purchased 8,200 shares of ACP stock. When the deal was announced the stock price spiked 28%. The three defendants settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). They also agreed to pay disgorgement, prejudgment interest and a penalty. Mr. Stilwell will pay about $41,500, Dr. Moore, about $113,000, and Ms. Murphy about $12,000. See also Lit. Rel. No. 22705 (May 22, 2013).
Misrepresentations: In the Matter of the City of South Miami, Florida, Adm. Proc. File No. 3-15329 (May 22, 2013). This action, alleging violations of Securities Act Sections 17(a)(2) and (3), centers on a bond offering initiated in 2002 to finance a public parking garage which became a mixed use project with retail space. Initially, the role of the developer was limited for tax reasons. After a May 2002 offering in which the City issued $49.8 million in tax exempt bonds for the project, portions of the money was loaned to the developer. That was not reflected in the documents executed with the Florida Municipal Loan Council or FMLC for the tax exempt portion of the project and was contrary to the advice of bond council. In 2005 the project was substantially restructured by City officials – essentially the retail space and the garage were ceded to the developer. This jeopardized the tax exempt status of the bonds. Subsequently, in an effort to complete the project, the City sought to borrow additional funds from the FMLC. It applied to join the FMLC bond pool but failed to state that the project had been significantly restructured or that portions of the earlier bond offering had been loaned to the developer. The papers were thus materially misleading as were subsequently filed certificates representing compliance with the applicable tax rules. In 2010 the City submitted a material event notice with the MSRB’s Municipal Market Access system, admitting for the first time that the tax exempt status of the bonds had been jeopardized. The City was, however, able to negotiate an arrangement with the IRS to preserve the tax exempt status for the shareholders. The proceeding was resolved with the City consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the City will retain a consultant to review its procedures for the next three years and make recommendations which will be adopted.
Fraudulent certifications: SEC v. Hu, Civil Action No. 12-CV-5811 (S.D.N.Y.) is a previously filed action against Ren Hu, the former CFO of China Yingxia, a failed company which became publically traded through a reverse merger. The complaint alleged that Mr. Hu executed false SOX confirmations, representing that he had designed disclosure and internal controls. Rather, he assisted the company in evading its obligations in this regard and made misrepresentations to the auditors. This week the Court entered a final judgment of permanent injunction prohibiting future violations of Exchange Act Section 10(b) and 13(b)(2)(B). The defendant was also barred from serving as and officer or director of a public company for three years. No financial penalty was imposed based on his financial condition. See also Lit. Rel. No. 22704 (May 20, 2013).
Pay-to-play In the Matter of Neil M. M. Morrison, Adm. Proc. File No. 3-15049 is a proceeding initially filed on September 27, 2012. It centered on a pay- to- play scheme in which Goldman Sachs employee Neil Morrison, from November 2008 through October 2010, was engaged in the election efforts of the then Massachusetts Treasurer who was running for governor. Mr. Morrison substantially participated in the campaign during his work time at Goldman. He also used the firm’s resources which represented an undisclosed “in-kind” contribution and solicited campaign contributions while engaged in, or seeking to engage in, municipal underwriting business with the Treasurer’s Office. Within two years Goldman engaged in municipal securities business with issuers associated with the Massachusetts Treasurer. The Order alleged violations of Exchange Act Section 15B(c)(1) and the MSRB rules. This week Mr. Morrison settled with the Commission, consenting to the entry of a cease and desist order based on the Section and Rules cited in the Order. He is also barred from the securities business and from participating in a penny stock offering with a right to apply for reentry in five years. Mr. Morrison agreed to pay a civil penalty of $100,000.
Prime bank fraud: SEC v. Fowler, Civil Action No. 1:13-cv-1656 (N.D. Ga. Filed May 16, 2013) names as defendants Robert Fowler and his controlled entity, US Capital Funding II Series Trust 1, Inc. Beginning last August Mr. Fowler targeted investors, claiming that through US Capital’s relation with a prime bank millions of dollars in loans could be obtained. Mr. Fowler would then invest at least a portion of the money and later the profits would be split. To get started all that was necessary was an up front fee from the investors. To reassure investors, Mr. Fowler claimed the program had a triple A credit rating from S&P and the blessing of the SEC. The loans and investment program were fictitious and the claimed ratings and approval were misrepresentations. The only profit was the fees Mr. Fowler collected from investors and took for his own purposes. The complaint alleges violations each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 26. The case is in litigation. See also Lit. Rel. No. 22702 (May 17, 2013).
Excessive fees: In the Matter of Noonan Capital Management, LLC, Adm. Proc. File No. 3-14955 (May 17, 2013) is a proceeding which names as Respondents registered investment adviser Noonan Capital and its sole owner Timothy Noonan. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2), 203A(a)(1)(A), 204(a) and 207. There are two primary claims: First, the firm overcharged investors for its fees. From April 2009 through January 2011 the firm charged investors fees totaling $183,908 when in fact the fees should have been $92,212 using the formula in its Form ADV. Second, the firm misrepresented the amount of assets under management, claiming it had $25 million at one point and $39.4 at another. In fact the Order states Noonan Capital never had more than $9 million under management. To resolve the case, Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm’s registration was revoked and Mr. Noonan is prohibited from serving in any capacity with an investment adviser or investment company. The firm filed an affidavit demonstrating its inability to pay disgorgement or a civil penalty.
Investment fund fraud: U.S. v. Sekaran (S.D.N.Y.) is an action in which defendant Anand Sekaran, who previously pleaded guilty, was sentenced to 30 months in prison. The case focused on the operation of an investment fund known as Wassen Capital Ltd. The fund traded options after being formed in 1997. Over a ten year period beginning in 1999 Mr. Sekaran solicited investor funds. As a result of substantial loses and withdrawals in 2009 and 2010 Mr. Sekaran defrauded investors by misrepresenting the true financial condition of the fund, furnishing them false statements and making Ponzi like payments to certain investors. During the course of the scheme he misappropriated about $500,000. Overall there were approximately $2 million in investor losses.
Investment fund fraud: U.S. v. Banet (N.D. Cal.) is an action against Hausmann-Alain Banet in which he was charged with six counts of wire fraud, eleven counts of mail fraud, and six counts of money laundering. The charges center on a scheme which took place from about June 2008 through July 2012. During that period the defendant solicited investor funds for Lion Capital Management Group LLC. The firm was supposed to invest in hedge funds. In fact the defendant misappropriated the money. Overall he received abut $1.3 million from investors. This week he pleaded guilty to mail fraud and wire fraud. Sentencing is scheduled for August 6, 2013.