Operation Broken Gate is the Commission’s latest undertaking which focuses on the role of gatekeepers, according to a recent SEC press release. Traditionally, the agency has focused on those viewed as gatekeepers – professionals, including auditors and attorneys – as way to halt securities law violations which might not otherwise occur without their assistance. In conjunction with the announcement three administrative proceedings were brought against auditors. A fourth action involving an auditor was brought the same day.
The SEC also filed another action tied to the EB-5 program. That program offers a path to citizenship for foreign nationals under certain circumstances generally tied to creating jobs in the U.S. for citizens. In addition, the Commission brought a series of investment fund and offering fraud cases.
Finally, SEC Chair Mary Jo White addressed the Securities Traders Association regarding market structure. During her remarks the SEC Chair focused on making decisions about markets and trading that are driven by data. To facilitate this process the Commission will be making available on a website data and research about the markets being obtained from its new market tracking software.
Whistleblowers: The SEC made an award of $14 million to an unidentified whistleblower who helped them quickly bring an enforcement action. The award is the largest for the agency to date.
Remarks: Chair Mary Jo White addressed the 14th Annual A.A. Summers, Jr. Corproate Securities and Financial Law Lecture, Fordham Law School in remarks titled The Importance of Independence (Oct. 3, 2013). Her remarks focused on the independence of the agency including the deference the courts should accord Commission positions (here).
Remarks: Chair Mary Jo White addressed the Security Trader’s Association 80th Annual Market Structure Conference, Washington, D.C. (Oct. 2, 2013). Here remarks discussed the fundamentals of market structure, grounding market structure assessments in empirical evidence and the posting of information and research on these topics on MIDAS for the public and to foster public debate (here).
Broker-Dealers: The Division of Trading and Markets issued a release titled Frequently Asked Questions about Liability of Compliance and Legal Personnel at Broker-Dealers under Sections (b)(4) and 15(b)(6) of the Exchange Act (here).
Quarterly and monthly statistics: During the most recent quarter the Commission filed 65 civil injunctive actions and 19 administrative proceedings (excluding follow-on actions and 12(j) proceeding). During the month of September 2013 the SEC filed 38 civil injunctive actions and 11 administrative proceedings. During the same periods last year the agency filed: 74 civil injunctive actions and 36 administrative proceedings for the quarter; 27 civil injunctive actions and 17 administrative proceedings during the month of September 2012.
Weekly statistics: This week the Commission filed or announced 12 civil injunctive actions and 5 administrative proceeding (excluding follow-on actions and 12(j) proceedings).
Best execution/fees: In the Matter of Manarin Investment Counsel, Ltd., Adm. Proc. File No. 3-15549 (Filed October 2, 2013) is an action which names as Respondents registered investment adviser Manarin Investment, its affiliated broker-dealer Manarin Securities Corp., and the founder and owner of the two entities, Ronald Manarin. The Order alleges that Mr. Manarin and Manarin Investment failed to obtain best execution and breached their fiduciary duty by purchasing Class A shares of mutual funds rather than institutional shares that were available at a lower cost thus requiring the related funds to pay ongoing 12b-1 fees that could have been avoided. In addition, the Respondent broker charged the related funds fees that exceeded those which are usual and customary. Respondents resolved the proceeding by consenting to the entry of cease and desist orders based on the Sections applicable to them. Specifically, Manarin Investment consented to the entry of an order based on Advisers Act Sections 206(2) and 206(4) and Securities Act Section 17(a). Manarin Securities consented to the entry of an order based on Securities Act Section 17(a) and Investment Company Act Section 17(e). Mr. Manarin agreed to the entry of an order based on Advisers Act Sections 206(2) and 206(4) as well as Investment Company Act Section 34(b) and Securities Act Section 17(a). The Respondents were also censured. As part of the settlement Mr. Manarin and Manarin Securities consented to the entry of an order requiring the payment of disgorgement in the amount of $331,910.51 along with prejudgment interest. Mr. Manarin will, in addition, pay a civil fine of $100,000.
Unprofessional conduct: In the Matter of Patrio & Zhao, LLC, Adm. Proc. File No. 3-15534 (September 30, 2013) is a proceeding naming as Respondents New Jersey based accounting firm Patrizio & Zhao LLC and one of its partners, Xinggeng (John) Zhao. The Order centers on alleged violations of Rule 102(e) of the Commission’s Rules of Practice in connection with professional work done for Keyuan Petrochemicals, Inc.
The company is the product of a reverse merger and has its headquarters in the PRC.
P&Z was retained by the company in 2009 before the reverse merger as the outside, independent auditors. Prior to its replacement at the end of 2010, Keyuan prepared reports included in filings made by the company with the Commission. Subsequently, the company’s Form 10K and its restated reports for 2009 and the first three quarters of 2010 disclosed a series of related party transactions which are at the center of the charges here.
From the outset Respondent Zhao had reason to believe that the engagement at Keyuan was high risk. The audit firm’s concerns should have been intensified when it encountered a series of red flags beginning with the company’s failure to identify any such transactions in its financial statements and its subsequent discovery of related party transactions. Yet Respondents failed to exercise the required level of care and professional skepticism in view of these facts while improperly relying on the representations of management. Indeed, Respondents failed to properly plan, conduct and document their work in accord with professional standards, according to the Order. In this regard they were a cause of Keyuan’s violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the proceeding Respondents each consented to the entry of a cease and desist order based on the Sections cited in the Order. Each Respondent is denied the privilege of appearing or practicing before the Commission as an accountant with a right to request reinstatement after three years. The firm also agreed to implement certain remedial procedures and pay a penalty of $30,000.
Unprofessional conduct: In the Matter of John Kinross-Kennedy, CPA, Admin. Proc. File No. 3-15536 (Filed Sept. 30, 2013). Since 2009 Mr. Kinros-Kennedy has served as an independent accountant for 23 public companies. The proceeding focuses largely on audits and reviews for six of those issuers. The Order alleges improper professional conduct within the meaning of Rule 102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. It also alleges willful violations of Exchange Act Sections 10A(j) regarding audit partner rotation and 10A(k) regarding reports to the audit committee as well as the pertinent rules. The underlying conduct centers on a failure to comply with the pertinent professional standards which include: Failing to exercise due care by not, for example, communicating with the predecessor auditor and the audit committee; failing to obtain sufficient competent evidential matter by, as in one case, not performing any work prior to issuing an opinion; failing to properly assess audit risk and obtain a reasonable assurance about whether the financial statements are free of material misstatement due to error or fraud; failing to properly document work in the audit work papers; and engaging Wilfred Hanson (see below) to perform engagement quality review procedures or EQR without determining that he was qualified. The proceeding will be set for hearing.
Unprofessional conduct: In the Mater of Wilfred W. Hanson, CPA, Adm. Proc. File No. 3-15537 (Filed Sept. 30, 2013) is related to the action against Mr. Kinross-Kennedy. Mr. Hanson, who at one time was an auditor for Arthur Young & Co., has since 2009 provided forensic accounting and litigation support for a forensic firm. The Order alleges that Mr. Hanson is not qualified to serve as an engagement partner, has not participated in an audit of a public company for over 35 years, has never worked on such an engagement under PCAOB standards and is not competent to serve as the engagement quality review partner. In conducting those procedures, as noted above, he failed to exercise due professional care. The Order thus alleges violations of Rule 102(e)(1)(ii) and 102(e)(1)(iv)(B)(2). To resolve the proceeding Mr. Hanson consented to the entry of an order which denies him the privilege of appearing or practicing before the Commission as an accountant with the right to request reinstatement after five years.
Unprofessional conduct: In the Matter of Malcolm L. Pollard, CPA, Adm. Proc. File No. 3-15535 (Filed Sept. 30, 2013) is a proceeding naming as Respondents Mr. Pollard and his firm, Malcolm L. Pollard, Inc. The Order centers on his work for three issuers and alleges improper professional conduct within the meaning of 102(e)(1)(ii) and violations of Exchange Act Sections 10A(a)(1) and (b)(1) and the related Rules. The underling conduct centers on allegations that Respondents failed to comply with the pertinent professional standards by failing to: Prepare and maintain adequate work papers; consider and documenting fraud risks; and failing to obtain written management representations. Respondents resolved the proceeding by consenting to the entry of an order directing them to cease and desist form violating the statutory Sections cited in the Order as well as the pertinent Rules. Accordingly, the Respondents are denied the privilege of appearing or practicing before the Commission as an accountant.
False representations: SEC v. Ramirez, Civil Action No. 7:13-cv-00531 (S.D.Tx. Filed September 30, 2013) is an action centered on claims that the defendants defrauded those seeking a path to citizenship through the EB-5 program. The action names as defendants Marco Ramirez, the director of Operation USA Now, Bebe Ramirez, a director and managing member of the same firm and also the managing member of Now Co. Loan Services, LLC and three related entities. After forming USA Now in 2010 the Ramirez defendants sought to participate in the EB-5 program which provides a path to citizenship for foreign nationals under certain circumstances. The plan was to have USA Now approved as a Regional Center for the program by the U.S. Citizenship and Immigration Service or USCIS which administers the program. If granted USA Now, as a center, would be permitted to charge investors an administrative fee for providing investment opportunities and assisting with the preparation of the necessary paperwork for the visas. While an application was submitted, prior to any approval defendants solicited and obtained investor funds, assuring them the money was safe. It was not. The defendants siphoned it off to other entities and themselves, according to the Commission. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court granted the SEC’s request for a freeze order as to the accounts of the defendants. The case is in litigation. The Commission’s Office of Investor Education, in conjunction with the USCIS issued an Investor Alert in connection with this action.
Investment fund fraud: SEC v. Copland, Civil Action No. 0:13-cv-62127 (S.D. Fla. Filed September 30, 2013) is an action against Jenny E. Copland. Beginning in January 2009, and continuing through the Fall of 2011, Ms. Copland is alleged to have operated an investment fund fraud. Specifically, she raised about $4 million from more than 90 investors, primarily Columbian-Americans and Columbians resident in Florida, who were induced to purchase interesst in her company, Immigration General Services, LLC. Investors were told that the securities would return 5 – 9% interest per month. They were also told that the investments were safe, having FDIC insurance. In fact the funds were used in part to pay other investors. Other portions of the investor funds were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The U.S. Attorney for the Southern District of Florida filed a parallel criminal action. Both cases are pending.
`Offering fraud: SEC v. Fisher, Civil Action No. 3:13-cv-00683 (W.D. Wisc. Filed September 30, 2013) is an action against Jeremy Fisher and his companies, The Good Life Financial Group, Inc. and The Good Life Global, LLC. Over a three year period beginning in August 2009 Mr. Fisher raised over $1 million from 18 investors. The funds were supposed to be invested in a “special trading platform” that would generate significant returns. In fact little of the investor money was put in the investment platform which, from the bit of information known to Mr. Fisher about it, was a scam. Rather, much of the investor cash was diverted to Mr. Fisher’s use. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The defendants resolved the action, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. In addition, on a joint and several basis, they will pay disgorgement and prejudgment interest totaling $936,226 and a civil penalty of $150,000. See Lit. Rel. No. 22828 (October 2, 2013).
Looting: SEC v. Universal Travel Group, Civil Action No. 1:13-cv-01492 (D.D.C. Filed September 27, 2013) is an action against the company, a China based travel services entity, and its CEO, Jiangping Jiang, and Interim CFO Jing Xie. Over almost two years beginning in September 2008 the defendants failed to disclose the transfers of about $41 million to 34 unknown entities in Hong Kong and China. The funds came from stock sales in the U.S. The defendants also failed to disclose that UTG had transferred certain subsidiaries to third parties under arrangements that were designed to give UTG the economic benefits of ownership. It also did not disclose the fact that there were inadequate controls and that its revenues and profits in quarterly reports in 2010 were overstated. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)-5. The defendants resolved the action, by each consenting to the entry of a permanent injunction based on the Sections cited in the complaint. The two individual defendants will also be barred from serving as an officer or director of a public company for five years. In addition, UTG will pay a civil penalty of $750,000 while Messrs. Jiang and Xie will, respectively , pay $125,000 and $60,000. In a related action the Commission entered an order revoking the registration of the firm’s securities pursuant to Exchange Act Section 12(j). See Lit. Rel. No. 22823 (September 23, 2013).
Excessive fees: SEC v. Dappah, Civil Action No. 3:13-cv-00546 (W.D.N.C. Filed September 27, 2013) is an action against Frank Dappah and his firm, Yatalie Capital Management The complaint alleges that beginning in March 2012, and continuing through July 2013, Mr. Dappah charged grossly excessive advisory fees. In addition, his firm improperly registered as an investment adviser and made false statements in its Form ADV. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 203A, 204 and 207. The defendants executed consents to the relief sought in the complaint. See Lit. Rel. No. 22826 (September 27, 2013).
Misrepresentations: SEC v. OM Investment Management LLC, Civil Action No. 1:13-cv-23486 (S.D. Fla. Filed September 27, 2013) is an action against the investment adviser, its principal, Gignesh Movolia, and its director of investments, Edwin Gaw. The complaint alleges that the defendants made material misrepresentations regarding a series of items including: The holdings of the fund; the fund’s auditor; its sub-adviser; and its administrator. The defendants also failed to register the offering and sale of securities and distributed fabricated account statements. Defendants resolved the action, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The injunctions as to the two entities are also based on Advisers Act Sections 203A and 207 and Investment Company Act Section 7(a). The judgment freezes the assets of the defendants. The complaint also seeks disgorgement, prejudgment interest and civil penalties from defendants OM Investment Management and Movolia. Mr. Gaw agreed to pay a civil penalty of $100,000. In addition, defendants Movolia and Gaw consented to the entry of orders barring them from the securities business. See Lit. Rel. No. 22822 (September 27, 2013).
Option backdating: SEC v. Vitesse Semiconductor Corporation, Civil Action No. 10 Civ. 9239 (S.D.N.Y.) is a previously filed action against, among others, the company, its former CEO, Louis Tomasetta, and its former CFO Eugene Hovanec. The actions centered on an option backdating scheme that took place from 1995 through 2006 and allegations of channel stuffing from September 2001 through April 2006. The Commission settled with defendants Tomasetta and Hovanec. Defendants Tomasetta and Hovanec each consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and the financial reporting, record-keeping, internal controls, false statements to auditors, proxy, and securities reporting provisions. Both defendants also consented to the entry of an order barring them from serving as an officer or director of any public company for ten years. In addition, Mr. Tomasetta will pay $2,126,450 in disgorgement and a $100,000 civil penalty. His disgorgement obligation, which is in satisfaction of a claim to recover the in-the-money benefit from the exercise of backdated options, will be satisfied by his prior payment of $1.2 million and transfer of 814,655 shares of company stock to a fund established in a related class action. Mr. Hovanec will pay $781,280 in disgorgement in satisfaction of the in-the-money benefit claim, and a $50,000 civil penalty. His disgorgement obligation will be deemed satisfied by his prior payment of $250,000 and his transfer of 458,014 shares of Vitesse stock to the settlement fund in a related class action. Finally, the Commission determined not to seek civil penalties against two other defendants who had previously settled but had left the question of a monetary penalty unresolved. See Lit. Rel. No. 22825 (September 27, 2013).
Investment fund fraud: SEC v. Chapman, Civil Action No. 13-5648 (E.D. Pa. Filed September 26, 2013) is an action against William Chapman, Jr. and his companies, Alexander Capital Markets, LLC and Alexander Financial LLC. Over a three year period beginning in June 2006 defendants induced security holders to transfer their shares to them for use as loan collateral. Investors were told that their securities would be used to hedge or in arrangements with counterparties that would ensure the return of their securities. In fact the funds borrowed were used to pay other investors and for the defendants. The complaint alleges a violations of Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 22820 (September 27, 2013).
Misappropriation: SEC v. Velten, Civil Action No. 1:13-cv-23477 (September 26, 2013) is an action against Brian Velten. It alleges that he defrauded three senior citizens who held accounts at Fidelity Brokerage Services LLC. Between July 2003 and September 2012 the unregistered investment adviser opened accounts at Fidelity and, while falsely touting his trading expertise, executed transactions without authorization, including engaging in margin transactions. Defendant Velten also drew checks for himself on the accounts. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The action is in litigation. See Lit. Rel. No. 22821 (September 27, 2013).
Prime bank fraud: SEC v. Cooper, Civil Action No. 1:13-cv-05781 (D.N.J. Filed September 27, 2013); SEC v. Frederickson, Civil Action No. 1:13-cv-05787 (D.N.J. Filed September 27, 2013) are two action which center on prime bank fraud schemes. The first names as defendants Brett Cooper and his related companies. The complaint in that action alleges three fraudulent schemes. The first is a prime bank fraud scheme in which Mr. Cooper raised about $1.4 million by claiming to have special access to programs that allowed individuals to pool their funds and obtain an investment opportunity typically only available to Wall Street insiders. Through this opportunity they would have access to instruments from the world’s largest banks and obtain returns of up to 1,000% in as little as 60 days. In the second Mr. Cooper offered investors the opportunity to participate in the purchase and trade of a $100 million bank guarantee if the investor funds were pooled in an attorney trust account. The investment opportunity and the account were fraudulent. The third involved the sale of a claimed Brazilian sovereign bond. An investor was told that $50,000 was necessary as a fee to locate an investor and open a brokerage account to market the bond. The documents for the account were forged. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).
The second action is against attorney David Frederickson and his law office. It alleges that he aided and abetted Brett Cooper in two of his prime bank schemes by serving as the escrow agent. The defendants resolved this action, consenting to the entry of permanent injunctions which prohibit future violations of Exchange Act Section 10(b). The injunctions also prohibit each of the defendants from participating in the issuance, offer, or sale of securities involving bank guarantees, medium term notes and similar instruments. The defendants, jointly and severally, paid disgorgement and prejudgment interest of $7,257 and a civil penalty of $25,000. Mr. Frederickson also consented in a separate proceeding to the entry of an order under Rule 102(e)(30 suspending him from appearing and practicing before the Commission as an attorney.
Offering fraud: SEC v. Petro-Suisse Ltd., Civil Action No. 12-CV-6221 (S.D.N.Y.) is a previously filed action against the company and Mark Gasarch. The action centers on 21 limited partnership interests offered by Petro-Suisse to finance drilling which contained materially false and misleading information. On September 26, 2013 the Court entered final judgments against the defendants prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The order also requires that the defendants, jointly and severally, pay disgorgement of $8,370,000 which is deemed satisfied by previous payments made by the company. In addition, Mr. Gasarch was ordered to pay a civil penalty of $130,000. See Lit. Rel. No. 22829 (October 2, 2013).
Investment fund fraud: SE v. Fujinaga, Civil Action No. 2:13-cv-01658 (D. Nev. Filed under seal on September 11, 2013) is an action against Edwin Fujinaga, MRI International, Inc. and CSA Service Center, LLC which centers on a claim that over $800 million was raised from investors based on misrepresentations. Specifically, investors were told that their funds would be used to purchase medical accounts receivable that medical providers in the U.S. held against insurance companies. The instruments would be purchased at a discount and then the defendants would attempt to resell them at a higher value. In fact much of the investor money was used to either pay other investors or for the personal use of Mr. Fujinaga. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b0. The Court entered a freeze order. The case is pending. See Lit. Rel. No. 22832 (Oct. 3, 2013).
Disclosure: A proceeding was filed seeking a temporary cease and desist order against John Carris Investments LLC and its CEO, George Carris. The action seeks to halt the solicitation of customers to purchase Fibrocell Science, Inc. without making the proper disclosures. Respondents are also alleged to have fraudulently sold stock and notes in Fibrocell’s parent firm, Invictus Capital, Inc. by failing to disclose is poor financial condition.
The sole director of Sonray Capital Markets Pty Ltd, a firm licensed by the Australian Securities & Investments Commission, pleaded guilty to seven criminal charges including false accounting, furnishing false documents to the ASIC, theft and obtaining financial advantage by deception. The charges stem from taking funds from client trading accounts which ultimately resulted in a deficiency in the segregated client account funds. In a solvency report Mr. Johnson also made a false statement about equity injections of $5.2 million into Sonray. Previously, the CEO of the company pleaded guilty to criminal charges and was sentenced to five years in prison.