The SEC continued with its “broken windows” approach to enforcement this week, filing a group of 34 actions based on the failure to file either a Form 4, Schedule 13D or Schedule 13G. The agency also filed an action alleging that a bank failed to properly disclose its non-accruing loans, another based on a concealed ownership scheme and one centered on portfolio pumping.

SEC

Office: The SEC announced the creation of the Division of Economic and Risk Analysis or DERA within the Division of Economic and Risk Analysis. It will coordinate efforts to provide data-driven risk assessment tools and models.

Testimony: Chair Mary Jo White testified before the Senate Committee on Banking, Housing and Urban Affairs (Sept. 9, 2014). Topics discussed included progress on Dodd-Frank, credit ratings, asset backed securities, municipal securities, private fund adviser registration, derivatives, clearing agencies, the Volker rule, corporate governance and executive compensation, the whistleblower program, investment adviser and broker dealer standards of conduct, specialized disclosure provisions, exempt offerings, customer data protection and agency resources (here).

Remarks: Norm Champ, Director, Division of Investment Management, addressed the Practicing Law Institute, Hedge Fund Management Seminar 2014, New York, N.Y. (September 11, 2014). His remarks covered topics which included what the Division knows about the industry, risk monitoring, compliance and examinations and alternative mutual funds (here).

CFTC

Testimony: Chairman Timothy Massad testified before the Senate Committee on Banking, Housing and Urban Affairs (Sept. 9, 2014). His testimony reviewed the role of the agency in derivative oversight, the implementation of Dodd-Frank, clearing, trading and the agenda going forward which includes competing the Dodd-Frank rules and robust compliance and enforcement (here).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the SEC filed 2 civil injunctive action and 37 administrative proceedings, excluding 12j and tag-along-actions.

Disclosure: In the Matter of Wilmington Trust Corporation, Adm. Proc. File No. 3-16098 (September 11, 2014) is a proceeding against the bank alleging that it had deficient underwriting and loan monitoring controls and failed to take appropriate action on many of its matured loans for protracted periods. As a result the bank omitted almost $339 million in matured loans past due 90 days or more from its disclosures for the third quarter of 2009. Similarly it omitted over $330 million in matured loans past due 90 days or more from its year end 2009 Form 10-K. When the bank decided to address this issue the next year, it negligently implemented various practices and full disclosure still was not made. In addition, in its Form 10-Q for the third quarter of 2009, and its Form 10-K for 2009, the firm negligently failed to disclosure significant increases in its non-accruing loans in accord with its policy. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding the bank consented to the entry of a cease and desist order based on the Sections cited in the order. It also agreed to pay disgorgement of $16 million along with prejudgment interest.

Filing violations: In the Matter of Ligang Wang, Adm. Proc. File No. 3-1694 (September 10, 2014) is one of 34 proceedings alleging a failure to file ownership reports such as a Form 4, as required by Exchange Act Section 16(a), or a Schedule 13D or 13G, as required by Exchange Act Section 13. According to the Commission, quantitative analytics were used to identify the violators. The actions were brought against: Thirteen individuals who were officers or directors of public companies, all but one of whom settled, agreeing to pay a penalty; five individuals who were beneficial owners of publically-traded companies who settled, agreeing to pay a fine; ten investment firms who settled beneficial ownership claims, each of whom agreed to pay a penalty; and six publically traded companies, charged with contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies, each of whom settled and agreed to pay a fine.

In the Matter of Gary H. Rabin, Adm. Proc. File No. 3-16096 (September 10, 2014); In the Matter of Advanced Cell Technology, Inc., Adm. Proc. File No. 3-16095 (September 10, 2014). Mr. Rabin was the CEO, CFO and chairman of the board of Advanced Cell. During his tenure in those positions he repeatedly failed to file the required Exchange Act Section 16(a) reports regarding his transactions in company securities. He also violated Securities Act Sections 17(a)(2) and 17(a)(3), failing to timely or accurately file reports of those transactions and by signing the Forms 10k and proxy statements of the company that were false because they failed to disclose his non-compliance, as well as Exchange Act Sections 13(a) and 14(a). Advanced Cell failed to disclose that its CEO had not filed all required Section 16(a) reports. As a result it violated Securities Act Section 17(a)(2) and Exchange Act Sections 13(a) and 14(a). Both proceedings settled. Mr. Rabin consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to pay a civil penalty of $175,000. The company consented to the entry of a cease and desist order based on the Sections cited in the order and to retain a consultant. The company will pay a civil penalty of $375,000.

Portfolio pumping: SEC v. Markusen, Civil Action No. 14-cv-3395 (D. Minn. Filed September 8, 2014) is an action against Steven Markusen, sole owner and CEO of Archer Advisors LLC, and investment manager for two private funds and also a defendant, and Jay Cope, an employee of Archer. From 2008 through 2013 the defendants bilked the funds out of over $1 million. They did this by charging the funds for fake research and improperly diverting soft-dollars to themselves. In addition, they manipulated the share price of CyberOptics Corporation, a thinly traded entity which was the largest holding of the funds, by marking the close on 28 days. This artificially inflated the value of the fund assets. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b) and 16(a) and Advisers Act Sections 206(1), (2) and 206(b) in addition to control person liability. The case is pending.

Financial fraud: SEC v. Heart Tronics, Inc., Civil Action No. SACV11-1962 (C.D. Cal. Filed Dec. 15, 2011) is a previously filed action against J. Rowland Perkins, Mark Nevdahl, the company, its co-CEO, Willie Gault, and former attorney Mitchell Stein alleging a series of frauds between 2006 and 2009. Mr. Perkins is alleged to have acted as CEO in 2008 and signed SOX certifications for three quarterly reports which contained materially false information. Mr. Nevdahl served as a trustee for a number of nominee accounts and blind trusts that Mitchell Stein and his wife used to secretly sell millions of dollars of Heart Tronics stock. Mr. Perkins settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of Exchange Act Section 13(b)(2)(B). He is barred from serving as an officer or director for three years and will pay a civil penalty of $42,500. Mr. Nevdahl settled, consenting to the institution and settlement of administrative cease and desist proceedings in which an order was issued finding that the willfully violated Securities Act Section 17(a)(3). He was ordered to cease and desist from aiding or abetting or committing any future violations of Section 17(a)(3). The order also suspends him from participation in any penny stock offering for a period of six months. In the Matter of Mark Crosby Nevdahl, Adm. Proc. File No. 3-16056 (September 5, 2014). See Lit. Rel. No. 23081 (September 10, 2014).

Concealed ownership: SEC v. Bandfield, Civil Action No. 1:14-cv-05271 (E.D. N.Y. Filed September 9, 2014) names as defendants Robert Bandfield, Andrew Godfrey and IPC Corporate Services LLC. IPC had a website which details its services. The shareholder services provided by the company included an arrangement through which stock ownership could be concealed. The methodology was explained in a series of recorded conversations with an undercover federal agent that began in 2013 and continued through early 2014. In those conversations Messrs. Bandfield and Godfrey explained that they had formed a number of Nevis and Belize entities. An IPC client does not legally own either the Belize Companies or the Nevis LLCs. It is used as a vehicle to hold the client’s shares. Mr. Banfield controls the Belize and Nevis entities. Neither Bandfield nor IPC ever filed a Schedule 13D or Schedule 13G. Yet during the period IPC and Mr. Bandfield acquired beneficial ownership of 5% or more of the outstanding common stock of at least one issuer that was registered under Exchange Act Section 12 and whose shares carried voting rights. The Complaint alleges violations of Exchange Act Section 13d. The Commission’s case and a parallel criminal action are pending.

Kickbacks: SEC v. Lee, Civil Action No. 11-cv-12118 (D. Mass.) is a previously filed action against ZipGlobal Holdings, Inc. and its CEO, Michael Hingham. The complaint alleges that the defendants were involved in a kickback scheme under which the representative of a major hedge fund – an undercover FBI agent — would purchase ZipGlobal stock in return for kickbacks. The Court entered final judgments by consent against each defendant. Each defendant was enjoined from violating Exchange Act Section 10(b). In addition, Mr. Lee was ordered to pay $105,603 in disgorgement which is satisfied by the forfeiture order of the same amount in a parallel criminal case. The judgment also prohibits Mr. Lee from acting as an officer or director of any issuer and prohibits his participation in any penny stock offering. See Lit. Rel. No. 23078 (September 4, 2014).

FINRA

Alert: The regulator issued a new investor alert titled Frontier Funds – Travel With Case (here).

PCAOB

Alert: The Board issued a Staff Audit Practice Alert on Auditing Revenue in Light of Frequent Observed Significant Audit Deficiencies (here).

Court of appeals

Extraterritorial reach: Ludmila Loginovskaya v. Oleg Batratchenko, Docket No. 13-1624-cv (2nd Cir. Decided September 4, 2014). Plaintiff is a Russian citizen resident in that country. The defendants include Oleg Batratchenko, a U.S. citizen resident in Moscow, and various Thor Group entities, including Thor United which is a New York corporation. Several of the group entities are registered participants in the commodities markets as commodity pool operators or commodity trading advisors. Under contracts with Thor United which were executed in Russia, Ms. Loginovskaya invested directly in that company. Thor in turn placed the funds in the Thor program. In part the money was put in U.S. real estate investments which suffered significant losses. Ms. Loginovskaya brought suit under CEA Sections 4o and 22. The district court dismissed the claim under Morrison. The Second Circuit affirmed.

Section 4o is an antifraud provision which is similar to Exchange Act Section 10(b). Section 22 provides for a private right of action where the claim results from: 1) receiving trading advise for a fee; 2) making a contract of sale or deposit in connection with any order to make such a contract; 3) the purchase, sale, or order for a commodity interest; and 4) market manipulation in connection with a swap or contract of sale.

Under the presumption against extraterritorial reach, a statute is presumed not to have such reach absent clear Congressional intent to the contrary. The CEA as a whole is silent as to extraterritorial reach. Likewise, Sections 4o and 22 do not evidence Congressional intent that would contradict the presumption. Following the approach of the Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the Second Circuit considered what it called the “focus of congressional concern.” In making this inquiry the Court considered Section 22 since it grants a private right of action rather than Section 4o, a general antifraud provision. Section 22 essentially limits clams to those of a plaintiff who actually traded in the commodity market. Accordingly, suits under the Section must be based on transactions “occurring in the territory of the United States” since there is no evidence Congress intended otherwise. Here plaintiff’s claim arises, according to the complaint, from the purchase, sale or placing of an order for the purchase or sale of an interest or participation in a commodity pool. To bring this claim within the limits of Section 22, plaintiff is required to “demonstrate that the transfer of title or the point of irrevocable liability for such an interest occurred in the United States.” In view of this requirement the claim fails because the agreement was entered into in Russia, not the United States. In reaching this conclusion the Court expressly declined to reach the question of how the presumption would impact Section 4o.

Judge Lohier dissented focused on Section 4o rather that Section 22 and argued that the cause of action was within that Section.

Hong Kong

Disclosure: The Securities and Futures Commission instituted a court proceeding against CITIC Limited and five if its former directors. The proceeding alleges that in 2008 misleading information was disclosed regarding the financial position of the firm arising from massive losses which the firm had suffered.

Japan

Manipulation: The Securities and Exchange Surveillance Commission recommended that a fine be imposed on an undisclosed party. The party manipulated the securities on the 10-year Japanese Government Board Futures on June 26, 2013. The penalty for this 330,000 yen.