As summer draws to a close, the Commission continued its work under Dodd-Frank, issuing a staff study on financial literacy. It focuses on what investors want to know about financial professionals and investment products. Proposed rules were also issued under the JOBS Act regarding the general solicitation and advertising of securities offerings.
Enforcement actions continue to focus on insider trading. One case filed this week involves a former executive at Carter’s, Inc., the company that secured the first non-prosecution agreement under SEC’s recent initiative. A group of five cases were also brought centered on information misappropriated about a then upcoming tender offer by an accountant from his client board member.
Finally, the PRC continues to refuse to allow the production of audit work papers. In an action which mirrors one brought earlier by the SEC, securities regulators in Hong Kong are seeking an order against an audit firm that resigned from an engagement for a PRC based company after issues arose. The audit firm failed to produce the audit work papers when requested because local law restrictions.
Financial literacy study: The Commission issued a Financial Literacy Study as required by the Dodd-Frank Act. The staff study focuses on what investors want to know about financial professionals and investment products and services (here).
JOBS Act: The Commission proposed rules to implement the JOBS Act provision regarding general solicitation and advertising in securities offerings (here).
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 8 civil injunctive actions and 2 administrative proceedings (excluding follow on and 12j actions).
Conflicts; In the Matter of Matthew Crisp, Adm. Proc. File No. 3-14520 (Aug. 30, 2012). Mr. Crisp was formerly associated with Adams Street Partners, LLC, a registered investment adviser to a number of private equity funds. The Order alleges that Mr. Crisp usurped a corporate opportunity from Adams Street which he misappropriated for another entity with which he was secretly involved. In doing so he failed to disclose his conflicts, made misrepresentations and eventually received a payout of $150,000 that should have gone to Adams Street. His deceit also secured another investment opportunity for the undisclosed company from which he attempted to arrange a second payout. Although he later was forced to repay the money, Mr. Crisp initially profited by over $2 million from his actions. The Order alleges violations of Advisers Act Sections 206(1), (2) and 206(4). Mr. Crisp resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of an order barring him from the securities business with the right to apply for reentry after one year to the appropriate self-regulatory organization. In addition, he agreed to pay disgorgement of $89,761 to Adams Street and a civil penalty of $50,000.
Misrepresentations: SEC v. Wwebnet, Inc., Civil Action No. 12-CV-6581 (S.D.N.Y. Filed Aug. 28, 2012) is an action against the company and Robert Kelly, its CEO. Over a three year period beginning in 2005 the complaint alleges that the defendants made a series of misrepresentations to investors. Those included a misrepresentation about a related party transaction which permitted Mr. Kelly to funnel about $2 million to his personal accounts and others regarding the revenue of the company and his compensation. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Excessive mark ups: SEC v. Neves, Case No. 1:12-cv-23131 (S.D. Fla. Filed Aug. 28, 2012) is an action against Fabrizio Neves and Jose Luna, both registered representatives at now defunct Florida broker LatAm Investments, Inc. They are alleged to have defrauded a group of Brazilian pubic pension funds and a Columbian institutional investor out of about $36 million. The wrongful conduct took place over a three year period beginning in 2006 during which the men took fraudulent marked ups on about $70 million in structured notes issued by commercial banks. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c). Mr. Luna settled with the Commission, consenting to the entry of a permanent injunction based on the antifraud provisions cited in the complaint. He also agreed to pay disgorgement of $923,704.85 along with prejudgment interest and a penalty in an amount to be determined. In a related administrative proceeding Mr. Luna agreed to be barred from the securities business. Mr. Neves is litigating the action. See also, Lit. Rel. No. 22462 (Aug. 29, 2012); In the Matter of Angelica Aguilera, Adm. Proc. File No. 3-14999 (Aug. 29, 2012)(Failure to supervise proceeding against former principal of LatAm).
Insider trading: SEC v. Melvin (N.D. Ga. Filed Aug. 28, 2012); SEC v. Berry (N.D. Ga. Filed Aug. 28, 2012); SEC v. Coots (N.D. Ga. Filed Aug. 28, 2012); SEC v. Jackson (N.D. Ga. Filed Aug. 28, 2012); SEC v. Rooks (N.D. Ga. Filed Aug. 28, 2012). This is a group of cases centered on an accountant who, based on information he misappropriated from a client, tipped four friends who then furnished the inside information to others. The information concerned the then pending tender offer by French pharmaceutical company Sanofi-Aventis for Chattem, Inc., announced on December 21, 2009. The offer was for $93.50 per share, a 32.60% premium over the closing share price the day before the announcement. In November 2009 the Chattem board members were informed that Sanofi had a serious interest in acquiring the company. The next month one of its board members consulted with his personal accountant, defendant Thomas D. Melvin, Jr., about 50,000 Chattem options he held that would be automatically exercised if there was a change in the ownership of the company. After learning about the deal Mr. Melvin is alleged to have told four individuals, each named as a defendant, about the pending deal. Each traded: Charles Cain, his long time broker, who purchased 1,500 shares of Chattem which yielded $36,680.10 in trading profits following the announcement; Joel C. Jenks, a close friend, who purchased 1,000 shares of Chattem which yielded $24,337.43 in trading profits; R. Jeffrey Rooks, his partner at the accounting firm, who purchased $16,000 in Chattem shares, yielding trading profits after the announcement of $6,020.39; and C. Roan Barry, a close friend, who purchased 1,700 shares which yielded $41,859.71 in trading profits following the announcement.
Each person tipped by accountant Melvin is alleged to have tipped another: Mr. Cain told his friend, defendant Peter Doffing, and an unidentified individual; Mr. Doffling purchased out of the money call options which yielded trading profits of $378,979.32 following the deal announcement; the unidentified individual bought 250 shares which yielded $5,877.35 in illicit trading profits; Mr. Jenks is alleged to have tipped another unidentified individual who purchased call options which yielded trading profits of $38,802.71; Mr. Rooks tipped another unidentified individual who purchased 725 shares of stock which resulted in $12,461.75 in illicit trading profits; and Mr. Berry tipped defendant Ashley J. Coots, a friend and neighbor who, in turn tipped defendant Casey D. Jackson and another person. Mr. Coots purchased 540 shares of Chattem which resulted in $13,231.40 in illicit trading profits while Mr. Jackson bought 100 shares which yielded $2,369.78 in trading profits; the other person tipped by Mr. Coots bought 165 shares yielding $4,128.63 in profits following the deal announcement. The complaint against defendants Melvin, Cain, Jinks and Doffing alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending.
Defendants Berry, Coots, and Rooks settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Jackson also settled, consenting to the entry of an injunction based on Exchange Act Section 10(b). In addition, each agreed to pay disgorgement, prejudgment interest, and a penalty as follows: Mr. Barry, $55,091.51 and a penalty in the same amount; Mr. Coots $17,360.51 and a penalty of $13,231.80; Mr. Jackson $2,369.78 and a penalty of $1,184.89; and Mr. Rooks $18,482.14 and a penalty of $4,620.54. Mr. Rooks also agreed to be barred from appearing and practicing before the Commission as an accountant. His settlement reflects his cooperation with the Commission.
Suitability: SEC v. Marks, CV-12-4486 (N.D. Cal. Filed Aug. 27, 2012) is an action against Gary Marks, a former Sky Bell Hedge Fund Manager. Mr. Marks is alleged to have misrepresented the nature of the investments in funds and made unsuitable recommendations from 2005 to 2007 in connection with recommending fund of funds investments. The complaint alleged violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4)-8. To resolve the action Mr. Marks consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to pay disgorgement of $321,702 along with prejudgment interest and a penalty of $100,000. See also Lit. Rel. No. 22460 (Aug. 27, 2012).
Insider trading: SEC v. Martin, Case No. 1:12-CV-02922 (N.D. Ga. Filed Aug. 23, 2012); See also Lit. Rel. No. 22458 (Aug. 24, 2012). This is an action against former Carter’s Inc. executive Eric M. Martin, who was employed at the company from March 2003 until he was terminated six years later in March 2009. He was the Director and later Vice President of Investor Relations. Mr. Martin reported directly to the CFO. His job required him to help prepare senior management for earnings calls. Mr. Martin is alleged to have utilized the information from his position to trade in advance of earnings releases in the securities of the company. In some instances he was successful, making about $170,000 in illicit profits. In others he was not. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Investment fraud: U.S. v. Leiske, 8:08-cr-00176C.D. Ca.) is an action in which William Perry, a former stock broker and investment advisor, and Dennis Clinton, a former real estate investment manager were found guilty by a jury for their roles in a conspiracy to defraud a wealthy investor of $1 billion in an investment scheme. Each defendant was convicted of one count of conspiracy, two counts of mail fraud and six counts of wire fraud. The scheme centered on promises that funds would be invested in very high yield investments as part of the “Fed trade program.” That program was supposed to be operated under strict Federal Reserve guidelines. Investors were to meet a Federal Reserve official and the chairman of a major bank. Portions of the profits were to go to the investors while other parts were to be paid to charitable programs and others used for project finance. It turned out that the defendants made the representations about the program to an under cover FBI agent. The date for sentencing has not been set.
Investment fund fraud: U.S. v. Dinning, 2:12-cr-00084 (E.D.Va.) is a criminal action which names attorney Brian Dinning as a defendant in an indictment which charges 25 counts of wire fraud. Mr. Dinning raised over $2.9 million from 23 investors since 2005, according to the court papers. Investors were told they were investing in his entities which had luxury prosperities in South Africa along with mining interests. In fact much of the money was diverted to his personal use. The case is pending.
Audit work papers: The SFC requested that EY Hong Kong produce the audit work papers for Standard Water, a company which applied for listing to the Stock Exchange of Hong Kong in November 2009. In March 2010 E&Y told the Exchange that it was resigning as the reporting auditors for Standard after discovering certain inconsistencies in documentation provided by the company. Later the company withdrew its application for listing.
Subsequently, the SFC issued a formal notice to E&Y for the audit work papers. The firm failed to produce the papers since they are held by an affiliate in the Peoples Republic of China. A request to the PRC firm, Ernst & Young Hau Ming, also proved fruitless. Under an October 2009 statement by PRC authorities accounting records, including audit working papers, may be subject to claims of state secrecy. That law specifies that Hong Kong accountants are required to obtain the consent of the relevant PRC authorities before producing any accounting records to regulator even, even those in Hong Kong.
The SFC has applied to the court, seeking an order against E&Y. The court may, under the articles invoked, order the firm to comply with the request if it is satisfied that the audit firm does not have any reasonable excuse for not complying. The regulator is also continuing discussions with the mainland authorities who were consulted prior to the initiation of this its court proceeding.