Chinese affiliates of major audit firms and market professionals were the focus of securities enforcement litigation this week. Five PRC based affiliates of major international accounting firms were named as Respondents in an administrative proceeding the Commission directed be filed under Rule 102(e). The action potentially has far reaching consequences since the PRC based affiliates of the audit giants could be precluded from appearing and practicing before the Commission. Such a ruling could effectively deny access to the U.S. capital markets for Chinese issuers.
The Commission also filed two insider trading cases centered on market professionals. In one a market professional is alleged to have been at the center of a ten person, years long insider trading ring. In another the founder of an unregistered investment advisor used confidential information obtained in a bidding process to engage in insider trading, according to the allegations. Both cases are in litigation.
Remarks: Commissioner Luis Aguilar addressed the AICPA Conference on Current SEC and PCAOB Developments, Washington, D.C. (Dec. 3, 2012). His remarks included comments on the loss of investor confidence, understanding capital formation, investor protection, relying on the integrity of foreign audits, the role of the PCAOB and the importance of internal controls (here).
Remarks: Norm Champ, Director, Division of Investment Management, addressed the ALI CLE 2012 Conference on Investment Adviser Regulation, New York City (Dec. 6, 2012). His comments reviewed the work of the staff in a number of areas including Dodd-Frank, Form PF, the JOBS Act and the use by Funds of derivatives. He also commented on future division priorities (here).
Remarks: Paul A. Beswick, Acting Chief Accountant, addressed the 2012 AICPA National Conference on Current SEC and PCAOB Developments, Washington, D.C. (Dec. 3, 2012). His remarks included a discussion of international financial standards, three FASB projects related to disclosures in financial statements, convergence and auditor independence (here).
Remarks: Brian T. Croteau, Deputy Chief Accountant, addressed the 2012 AICPA National Conference on Current SEC and PCAOB Developments, Washington, D.C. (Dec. 3, 2012). His remarks included a discussion of audit policy matters and initiatives, the use of third party pricing service information, internal controls over financial reporting and COSO’s framework update project, the JOBS Act and Auditor and Audit Committee interactions (here).
Joint statement: The Office of International Affairs released a joint statement from leaders who oversee the OTC derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the U.S. The statement discusses coordination among regulators (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed four civil injunctive actions and one administrative proceeding (excluding tag-along-actions and 12(j) actions).
Insider trading: SEC v. Femenia, Civil Action No. 3:12 cv 803 (W.D. N.C. Filed Dec. 5, 2012) is an action against Wells Fargo investment banking associate John W. Femenia, who is alleged to have headed a 10 person insider trading ring. It included: Shawn Hegedus, a registered representative and long time friend of Mr. Femenia who is alleged to have been tipped by him; Aaron Wens and Matthew Musante, two other friends alleged to have been tipped by Mr. Femena; Anthony Musante, father of Matthew, also alleged to have been tipped by Mr. Femena; Danielle Laurenti, the girlfriend of Mr. Hegedus who is alleged to have tipped her along with four of his business colleagues, Roger Williams, James Hayes IV, and Kenneth Raby. The case centers on four take-over transactions: The acquisition by GENCO Distribution Systems of ATC Technology Corporation, announced on July 19, 2010; the purchase by Rock-Tenn Company of Smurfit-Stone Containers Corporation announced on January 23, 2011; the acquisition of K-Sea Transportation Partners by Kirby Corporation, announced on March 13, 2011; and the purchase of The Shaw Group by Chicago Bridge & Iron Company, announced on July 30, 2012. The ring participats netted about $11 million in illegal profits, according to the complaint. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation.
SOX 106: In the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116 (Dec. 3, 2012) is a proceeding against BDO China, Ernst & Young Hau Ming LLP, KPMG Huazhen (Special General Partnership), Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Ltd.
It is based on Rule 102(e)(1)(iii) and alleges violations of Section 106 of the Sarbanes-Oxley Act of 2002, as amended by the Dodd-Frank Act. That Section provides that a PCAOB registered firm that audits the financial statements of a U.S. issuer consents to produce its work papers on request by either the Board or the SEC. Here each Respondent, according to the Order, is registered with the PCAOB, audited the financial statements of a PRC based U.S. issuer and was requested by the agency to produce its work papers. Each Respondent declined, at least in part, based on their understanding that the law of the PRC precluded the production. The Order directs that a hearing be held before an ALJ to hear evidence.
Insider trading: SEC v. Massoud, Civil Action No. 3:12-cv-01691 (D.Ct. Filed Nov. 30, 2012) is an action that centers on the auction for Patriot Capital Funding, Inc. which was acquired by debt financier Prospect Capital Corporation in a deal announced on August 3, 2009. The defendant is J. Joseph Massoud, the managing member of Compass Group Management LLC, an unregistered investment company. In early 2009 Mr. Massoud was contacted about bidding to acquire Patriot which was suffering liquidity problems. Others were also contacted to bid. Each bidder was given access to confidential information about the company located in a data room. During the bidding process Mr. Massoud reached out to others and learned about their bidding intentions. In mid-May 2009, Mr. Massosud began purchasing Patriot shares, eventually acquiring 322,216 shares. Following the deal announcement Mr. Massoud sold all of his shares, netting profits of $676,000. The Commission’s complaint alleges violations of Exchange Act Section 10(b). To resolve the case Mr. Massoud consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. He also agreed to disgorge his trading profits and pay prejudgment interest and a penalty equal to his trading profits. Mr. Massound will also be barred from serving as an officer or director, from the securities business and from participating in any penny stock offering. See also Lit. Rel. No. 22553 (Nov. 30, 2012).
Insider trading: SEC v. Cornelsen, 12 CIV 8712 (S.D.N.Y. Filed Nov. 30, 2012) is an action against Brazilian citizen and banker Igor Cornelsen and Bainbridge Group Inc., a controlled entity through which he traded securities. Mr. Cornelsen became a customer of broker Waldyr Da Silva Prado, then of Wells Fargo Advisers, LLC, in 2008. During that time the broker learned from a client that Burger King Holdings, Inc, would be acquired by affiliates of private equity Fund 3G Capital Partners, Ltd. in a deal announced on September 2, 2010. On May 17 2010, the complaint alleges that Mr. Prado sent an e-mail to Mr. Cornelsen in Portuguese which requested that he call to obtain some information. A ten minute phone conversation that day was followed by the purchase of 2,850 Burger King call options the next day. Over the summer Mr. Cornelsen continued to trade Burger King options. In late August the broker assured him in an e-mail that everything was under control When the deal became public the two men exchanged e-mails. Mr. Cornelsen sold his options, reaping profits of over $1.68 million. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e).
To resolve the case the defendants consented to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. They also agreed to disgorge the trading profits and pay prejudgment interest. In addition, Mr. Cornelsen will pay a civil penalty of $3,362,180. See also SEC v. Prado, Civil Action No. 12 CIV 7094 (S.D.N.Y. Filed Sept. 20, 2012).
Misappropriation: SEC v. China North East Petroleum Holdings Limited, Civil Action No. 12-CV-8696 (S.D.N.Y. Filed Nov. 29, 2012) is an action against the company, its CEO and president and former chairman, Wang Hongjun, its founder Ju Guizhi, and its v.p. of corporate finance, Jiang Chao. The complaint alleges that the defendants engaged in a series of transactions and undisclosed related party transactions in which company funds were diverted to corporate insiders, including a substantial portions of the money raised in an offering. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) & (B) and 13(b)(5). The case is in litigation.
Manipulation: SEC v. East Delta Resources Corp., Civil Action No. CV 10-0310 (E.D.N.Y.) is an action against the company and two brothers, Mayer Amsel and David Amsel. The complaint alleged that the two individuals engaged in numerous wash sales of the company stock, netting them over $1 million. Previously, the Commission prevailed on the liability issues in a summary judgment motion. Following a hearing the court entered a judgment which includes a permanent injunction based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) and ordered disgorgement in the amount of $936,780.46 and prejudgment interest. In addition, Mayer Amsel was directed to pay a civil penalty of $445,000 while David Amsel will pay $715,000. The judgment was entered October 18, 2012. See also Lit. Rel. No. 22561 (Dec. 6, 2012).
Remarks: Commissioner Bart Chilton addressed the Information Management Network, Global Indexing and Conference, Phoenix, Az. (Dec. 4, 2012) in remarks titled: Trimming the Tree—Regulation and Recovery. The Commissioner’s remarks covers topics which included market integrity, high speed trading and technology difficulties (here).
Alert: The SEC and FINRA issued a new investor alert titled: Year-End Investment Considerations for Individual Investors. It notes that investors should consider asset allocation, evaluate if their investments require rebalancing, consider the tax impact and evaluate the background of their investment professional (here).
Audit practice alert: The regulator published a Staff Audit Practice Alert on Maintaining and Applying Professional Skepticism in Audits.
Suitability: The Hong Kong regulator issued a public reprimand to President Securities (Hong Kong) and imposed a $2 million fine for failing to act in the best interests of its clients in connection with accepting subscriptions in 2008 for Lehman Brothers related structured products. The clients were referred by its parent and the firm staff executed the account opening forms without contacting the clients or fully informing them about key aspects of the investments.
False information: Finet Group Ltd. and its former chairman, Yu Gang, were fined for providing false information to the Stock Exchange. The company and its former chairman also pleaded guilty to two summonses for failing to disclose the interest of the current chairman in filings.
The Australian regulator fined BGC Partners (Australia) Pty Ltd. $45,000 for withholding buy and sell order on the ASX 24 Market which potentially precluded other participants from participating as counterparty to the orders.