Mary Jo White, selected by the President as the next Chairman of the SEC, testified in her confirmation hearings before a Senate Committee this week. Ms. White promised the Committee that under her the agency would complete rule making for Dodd-Frank and the JOBS Act. The enforcement program would be “bold and unrelenting” the Committee was told.
SEC Enforcement brought another proceeding this week against a state tied to inadequate disclosures about its unfunded pension obligations when selling bonds. Actions were also based on related to investment funds overvaluing assets and using an agent to solicit investors who was not a registered broker dealer. An executive who traded in advance of a tender offer made by his company settled with the SEC as did two twin teen brothers in the UK who solicited investors with what they claimed was a stock picking robot. Finally, the agency announced the remedies obtained against one defendant in a 2006 old market timing case where the jury found in part in its favor on a negligent fraud theory but for the defendant on all scienter based claims.
Remarks: Norm Champ, Director, Division of Investment Management, addressed the Investment Advisers Compliance Best Practices Summit 2013 (Washington, D.C. March 11, 2013). His remarks included comments on rule making initiatives under the JOBS Act, a new position in the division that will focus on communicating with the asset management industry, and the Division’s recent initiative under Dodd-Frank to create the Risk and Examinations or REG group (here).
Testimony: Mary Jo White, President Obama’s nominee to become Chairman of the SEC, testified before the Senate Committee on Banking, Housing and Urban Affairs as part of the confirmation process. Her brief testimony focused largely on three key points: 1) Rule making:It is essential that the Commission finish “in as timely and smart a way as possible” rule making under Dodd-Frank and the JOBS Act. It needs to be “right, but it also needs to get . . . done.” 2) Enforcement:Enforcement will be a “high priority . . . [and it] must be bold and unrelenting . . . : 3) Markets: While experts disagree about the impact of high speed trading, dark pools, complex trading algorithms and intricate new order types, what is critical is that “a sense of urgency [be] brought to addressing these issues . . . “
SEC Enforcement: Litigated cases
Market timing: SEC v. O’Meally, Civil Action No. 06-CV-6483 (S.D.N.Y.) is a market timing action filed in 2006 against four registered representatives formerly employed by Prudential Securities, Inc. Three defendants settled. Defendant Fredeick O’Meally went to trial. The jury returned a verdict according to the verdict form: 1) Against the Commission on a count based on Exchange Act Section 10(b); 2) Against the Commission on a count based on Securities Act Section 17(a); 3) Against the Commission on a count based on intentional or reckless conduct under Securities Act Section 17(a)(2) and (3); 4) In favor of the Commission on a count based on negligent conduct under Securities Act Section 17(a)(2) and (3). In reaching its verdict the jury only found in favor of the Commission on six of the thirty three funds listed on the verdict form. This week the court entered an order directing Mr. O’Meally to pay $444,836 in disgorgement, prejudgment interest and a civil penalty of $60,000. The complaint alleged that when certain mutual funds attempted to block the trading of the defendants and their clients because they were market timing, fraudulent and deceptive practices were used to continue. See also Lit. Rel. No. 22643 (March 13, 2013).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 3 civil injunctive actions and 4 administrative proceedings (excluding tag-along-actions and 12(j) actions).
Investment fund fraud: SEC v. Wilson, Civil Action No. 2:13-cv-00188 (D. Utah Filed March 14, 2013) is an action against Edmund Wilson and Walter Ross related to the sale of securities by Fountain Group of Companies of Utah, Inc. Defendant Wilson was the president of the now defunct company. The defendants sought investors with real estate projects for their “substitution of collateral program.” Under this method of financing for a fee of either $80,000 or $150,000, paid to activate funding, millions of dollars could be raised from a form of collateral that was self-liquidating, meaning it did not have to be repaid. About $11 million was raised. Rather than invest the funds however, Mr. Wilson funneled them through other controlled entities. 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 case is in litigation. See also Lit. rel. No. 22644 (March 14, 2013).
Investment fund fraud: SEC v. Hunter, Civil Action No. 12-cv-3123 (S.D.N.Y.) is an action against two teenage twin brothers who reside in the U.K., Alexander and Thomas Hunter. The brothers solicited thousands of investors through two websites which offered subscription based e-mail newsletters with stock picks from Merl, the stock picking robot who was alleged to have an excellent record of good returns. Over 47,000 investors, mostly from the U.S., signed up. The brothers made about $1.2 million in subscription fees. They also sold a home version of the software for the robot. What subscribers were not told is that the results were not from Marl but a another business of the brothers. Through another website they marketed their subscriber list to penny stock promoters as a way to boost their stock price. From this they were paid about $1.8 million to promote specific stocks. When U.K. authorities discovered the brothers they attempted to move their operations to Panama. This week both brothers settled with the SEC, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, Alexander will pay a $100,000 penalty while his brother will pay $75,000. No disgorgement was ordered. See also Lit. Rel. No. 22641 (March 12, 2013).
Insider trading: SEC v. Lackey, Civil Action No. 2:13-CV-2153 (W.D. Tenn. Filed March 11, 2013) is a settled insider trading case against Michael Lackey, formerly Vice-President and General Manager of International Paper Company. The case centers on the tender offer by his employer for Temple-Inland, Inc., announced on June 6, 2011. On April 30, 2011 Mr. Lackey attended a charity event with Executive A who was part of a team working on the tender offer. During the event the two men discussed the possible acquisition of Temple-Island. Mr. Lackey learned, according to the complaint, that there was “a good chance” the deal would proceed. Between May 2 and June 1, 2011 Mr. Lackey purchased 9,000 shares of Temple-Island in two accounts. At the time of the purchases International Paper had policies and procedures which required its employees to maintain the confidentiality of its information. Following the deal announcement Mr. Lackey sold his holdings, yielding profits of $56,533.89. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Mr. Lackey settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement in the amount of his trading profits, a penalty in that amount and prejudgment interest. See also Lit. Rel. No. 22640 (March 11, 2013).
Misleading disclosure: In the Matter of State of Illinois, File No. 3-14237 (March 11, 2013) is a proceeding which names as a Respondent the State of Illinois. It claims that the State mislead investors when selling about $2.2 billion in bonds over a four year period beginning in 2005. The proceeding alleges violations of Securities Act Sections 17(a)(2) and (3). Facing rising costs and a growing unfunded pension liability, in 1994 the State Assembly passed legislation designed to rectify the situation. Essentially the statutory plan called for achieving a 90% funded ration for each system by 2045. Part of the plan called for the State’s contributions to ramp up over a fifteen year period. This permitted Illinois to shift the burden associated with its pension costs to the future, creating a structural underfunding. From 1996 through 2010 the unfunded liability increased by $57 billion. Significant financial stress resulted. In its bond offering documents the State disclosed the Illinois statutory funding provisions but not that the plans were continually being underfunded. The deficit became worse in 2005 when the State amended the statutory plan and lowered the contributions or borrowed to cover the payments. Again the basic facts were disclosed but investors were not told that these actions exacerbated the structural underfunding, according to the Order. This resulted from the fact that the State failed to adopt or implement sufficient controls, policies, or procedures to ensure that material information was collected and disclosed. By 2009 the State began to take remedial steps. The proceeding was resolved in view of those actions, the continuing remedial efforts of the State and its cooperation. The State consented to a cease and desist order based on the Sections cited in the Order.
False valuation: In the Matter of Oppenheimer Asset Management Inc., Adm. Proc. File No. 3-15238 (March 11, 2013) is a proceeding which names as Respondents the management firm and Oppenheimer Alternative Investment Management, LLC, both of whom are registered investment advisers. The two advisers managed a fund of funds. From October 2009 through the following year the fund’s reports represented that its assets were valued based on the underlying managers’ estimated values. At the time the largest holding of the fund was Cartesian Investors-A LLC. Contrary to the representations in the materials it was valued at a price increased by the portfolio manager. This had the effect of materially increasing the valuation of the fund. Investors were told that the increased valuation of the fund was due to performance, rather than the valuation. This occurred in part from a failure to have proper procedures. The Order alleged violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act section 206(4). Respondents resolved the proceeding, consenting to the entry of a censure and a cease and desist order based on the Sections cited in the Order. In addition, they agreed to pay $2,269,098 in disgorgement and prejudgment interest. A portion of that amount was satisfied by a payment to settle a similar case brought by the Commonwealth of Massachusetts. Respondents are also required to pay a civil penalty of $617,579, an amount based on their cooperation and retain an independent consultant.
Unregistered broker: In the Matter of William M. Stephens, Adm. Proc. File No. 3-15233 (March 8, 2013) is a proceeding against Mr. Stephens for acting as an unregistered broker in violation of Exchange Act Section 15(a). In 2002 Mr. Stephens settled a Commission proceeding based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2) centered on the investment of pension fund assets. There Mr. Stephens was the subject of a cease and desist order and barred from association with any investment adviser with the right to reapply after two years. He also was directed to pay a $25,000 civil penalty. He never reapplied. In this case he worked as an independent consultant for Ranieri Partners LLC which controls two entities that managed the investments of two funds. Those funds are advised by another entity controlled by Ranieri which is now a registered investment adviser. Beginning in 2008, and continuing for the next three years, Mr. Stephens was retained to raise money for the two funds. In that role he forwarded materials to investors including private placement memoranda and subscription documents; urged at least one investor to consider adjusting its portfolio allocations to accommodate an investment in the funds; and provided investors with confidential information about other investors and their capital commitments. In return he was paid transaction based compensation which over the period totaled about $2.4 million. Mr. Stevens settled with the Commission, consenting to the entry of a cease and desist order based on Exchange Act Section 15(a). He also agreed to be barred from the securities business and from association with an investment adviser and participating in a penny stock offering. While the Order directs that he pay disgorgement of about $2.4 million along with prejudgment interest, payment was waived based on his financial condition.
Unregistered broker: In the Matter of Ranieri Partners LLC, Adm. Proc. File No. 3-15234 (March 8, 2013) is the companion proceeding to In the Matter of William M. Stephens, discussed above. Respondent Ranieri Partners is the holding company of the funds and Respondent Donald Philips was the senior managing partner and a friend of Mr. Stephens. The Order alleges violations of Exchange Act Section 15(a) based on essentially the same facts as detailed above. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on Exchange Act Section 15(a). In addition, Ranieri agreed to pay a civil money penalty of $375,000. Mr. Phillips was suspended from association in a supervisory capacity from the securities business for a period of nine months and agreed to pay a penalty of $75,000.
Offering fraud: SEC v. Brown, Case No. CV 13-01629 (C.D. Cal. Filed Mar. 7, 2013) is an action against First Choice Investment, Inc., Advanced Corporate Enterprises, Inc., and their principal, Alvin Brown. It centers on essentially two on-going offering frauds. One started in January 2011 and continued at the time the complaint was filed. Through this offering Mr. Brown and FCI raised about $1.2 million by falsely promising returns on a real estate investment of 10% and a future IPO that would yield 150%. The returns have not materialized but Ponzi-like payments have been made. ACorp also engaged in a real estate offering fraud beginning in 2005 which raised almost $2 million over five years. Investors were falsely promised high returns and investment safety. Mr. Brown is alleged to have misappropriated the offering proceeds. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b). A TRO and freeze order requested by the Commission was granted. The case is in litigation. See also Lit. Rel. No. 22642.
Remarks: Richard Ketchum, Chairman and CEO of FINRA, addressed the Consumer Federation of America Consumer Assembly, Washington, D.C. (March 14, 2012). His remarks focused on the effect of a uniform fiduciary standard for those who render investment advice (here).
Investment fund fraud: John Sanders, Michael Strubel and Spencer Steinberg were charged with conspiracy to defraud in connection with an alleged Ponzi scheme. The three men claimed to be selling high value contracts related to Saunders Electrical Wholesalers Ltd, London. They have raised about £44 million over a four year period beginning in 2010. The UK Serious Frauds Office has arrested the men. Mr. Steinberg was also charged with serving as a director while disqualified.
Insider dealing: Richard Joseph was found guilty of six counts of conspiracy to deal as an insider. He was sentenced to serve four years in prison on each count. The sentences will run concurrently. Mr. Joseph obtained inside information on potential take-overs from a financial printer employed at JP Morgan Cazenove. Although the information was coded he was able to place spread bets in advance of the transactions and profit. Two years ago five others were convicted as part of the scheme which the Financial Services Authority has kept confidential until now.
Conflicts: The Securities & Futures Commission of Hong Kong banned Calvin Ho Kei Him from the securities business for a period of fourteen months. He was an associate at Morgan Stanley Asia Limited from November 2009 through November 2011. He was banned for failing to identify and disclose to his employer all securities accounts related to him and their stock trading activity; not taking adequate steps to avoid conflicts between the activity in the accounts and his employment as a research associate; and making false or misleading declarations regarding outside accounts.