Record payments and a potentially significant MOU were the focus in securities enforcement litigation this week. French oil and gas giant Total paid the DOJ and the SEC $398 million to settle FCPA charges, the fourth largest sum paid in settlement of corruption charges. NASDAQ paid $10 million, the largest amount paid by an exchange to resolve a Commission administrative proceeding centered on its botched Facebook IPO.
The PCAOB executed a potentially significant MOU with its PRC counterparts which promises to make available the audit work papers for Chinese based issuers. The agreement is the first step toward transparency for Chinese based issuers. It also holds the promise of a future agreement on the SOX mandated inspections and perhaps resolving the three pending Commission actions focused on the question of work paper availability.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 1 civil injunctive action and 2 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Prior bar: SEC v. Grant, Civil Action No. 1:11-CV-11538 (D. Mass.) is a previously filed action against John Grant and others. The complaint alleges that Mr. Grant violated a Commission bar from association with an investment adviser by associating with his son’s firm, Sage Advisory Group LLC, and acting as an investment adviser. The court entered a final judgment by consent permanently enjoining Mr. Grant from violating Advisers Act Sections 206(1) and (2). The order also directs him to comply with the earlier bar. Mr. Grant, who is also an attorney, consented to the entry of an order permanently suspending him from practicing before the Commission as an attorney in a related follow-on proceeding. See also Lit. Rel. No. 22708 (May 30, 2013).
False filing: SEC v. Medlink International, Civil Action No. 12 Civ. 5325 (E.D.N.Y.) is a previously filed action against the company, its CEO Aurelio Vuono and its CFO James Rose. The complaint alleged that the defendants filed a false Form 10-K for the year ended December 31, 2010 because it contained a report representing that the audit of the financial statements had been completed when it had not. It further alleged that Mr. Vuono defrauded an investor when he took a check for securities based on a promise that it would not be cashed until the person could cover it and then later deposited it in a firm account against the express direction of the investor. The defendants resolved the case and the court entered final judgments of permanent injunction prohibiting future violations of Securities Act Sections 17(a) and Exchange Act Sections 10(b) and 15(d). The court also directed that each defendant disgorge, on a joint and several basis, the amount of the investor check which was $149,473.50 along with prejudgment interest. In addition, the court directed that each defendant pay a civil penalty. The company was ordered to pay a penalty of $650,000, Mr. Vuono $130,000 and Mr. Rose $130,000. A penny stock bar was also entered against the two individuals. See also Lit. Rel. No. 22709 (May 30, 2013).
Exchanges: In the Matter of The NASDAQ Stock Market, LLC, Adm. Proc. File No. 3-15339 (Filed May 29, 2013) is a proceeding which names as Respondents the Exchange and NASDAQ Execution Services, LLC, its registered broker dealer. The Order centers on errors surrounding the May 18, 2012 IPO for shares of Facebook. Specifically, there were significant difficulties with the offering and the initiation of trading because of a design limitation regarding the manner in which orders are crossed or matched and the subsequent decisions of exchange officials. When it was discovered that a design mechanism impacted the cross of buy and sell orders, officials permitted the initiation of secondary trading without determining the root cause of the difficulty. Eventually the difficulty caused 30,000 Facebook orders to remain stuck in the system for about two hours. The errors also caused problems with trading in the shares of Zynga. In addition, the Exchange violated its rules by assuming a short position in Facebook shares of more than 3 million shares. Ultimately it realized a profit on that position of $10.8 million. NES also failed to meet its capital requirements. The Order alleges violations of Exchange Act Sections 15(c)(3), 19(g)(1), Regulation SHO and Regulation NMS. To resolve the proceeding the Exchange will implement a series of undertakings. In addition, NASDAQ consented to the entry of a cease and desist order based on Exchange Act Section 19(g)(1), Regulation SHO, Regulation NMS and certain Rules. It also agreed to pay a civil money fine of $10 million, the largest against an exchange. NES consented to the entry of a cease and desist order based on Section 15(c)(3).
Front running: SEC v. Bergin, Civil Action No. 3:13 cv 1940 (N.D. Tx. Filed May 23, 2013) is an action against Daniel Bergin, an equity trader at registered investment adviser Cushing MLP Asset Management, L.P. The firm specializes in publicly traded energy infrastructure MLPs, royalty trusts and other energy income investments. Cushing employs traders such as Mr. Bergin to place orders, and particularly large ones, in advantageous market centers in a way which minimizes price movements unfavorable to the client. In 2011 Mr. Bergin began using his wife’s brokerage account first at Fidelity Investments and later at Scottrade to trade ahead of firm clients. For example, on August 15, 2011 he was directed to buy 85,000 shares of Targa Resources Corporation, symbol TRGP. About two minutes after receiving the instruction in an email he began placing orders to acquire a total of 15,000 shares of the security in his wife’s Fidelity account. Once his personal orders began executing, he placed the firm orders. Later that day Mr. Bergin sold the shares of TRGP he purchased in his wife’s account, reaping a profit of $11,826.56. Mr. Bergin continued making similar trades throughout the period. Overall he had profits of about $1.7 million from same day, illegal trades. Mr. Bergin executed certifications assuring the firm that he had disclosed all personal brokerage accounts and securities transactions, although he had not. Similarly, in February 2013 he failed to disclose his wife’s account during an interview with the Commission’s staff. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Investment Company Act Section 17(j). The case is in litigation. See also Lit. Rel. No. 22707 (May 24, 2013).
U.S. v. Total, S.A., Criminal No. 1:13 cr 239 (E.D. Va. Filed May 29, 2013); In the Matter of Total, S.A., Adm. Proc. File No. 3-15338 (Filed May 29, 2013). French oil and gas giant Total, S.A. paid $398 million to the DOJ and the SEC to resolve FCPA charges. The actions stem from the efforts of the company to re-enter the Iranian oil market. In 1995 Total negotiated a development contract with the National Iranian Oil Company or NIOC, a government instrumentality, for the development of the Sirri A and E oil and gas fields. Prior to executing the agreement, Total met with an Iranian Official who had the ability to influence the award of the contract. The firm and the official entered into a so-called consulting arrangement which was used as a conduit for $16 million in corrupt payments over the next two and one half years.
In 1997 the company entered into a second arrangement with NIOC. This agreement was to develop phases 2 and 3 of the South Pars gas field, a joint venture with a number of other multinational oil and gas companies. As with the initial project, Total entered into a consulting arrangement with the Iranian official. Over the next several years the company made a series of payments under this agreement which totaled about $44 million. None of the payments were properly recorded in the books and records of the company.
Total resolved the criminal charges by entering into a deferred prosecution agreement under which it will pay a criminal fine of $245.2 million, retain a monitor for three years, continue to enhance its compliance systems and cooperate with enforcement officials. To resolve the SEC administrative proceeding the company consented to the entry of a cease and desist order based on Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B), and pay disgorgement of $153 million and retain a consultant.
MOU: The PCAOB and the China Securities Regulatory Commission or CSRC and the Ministry of Finance in China or MoF executed a Memorandum of Understanding on Enforcement Cooperation. Essentially, the agreement provides for the exchange of certain materials and calls for the parties to render the “fullest assistance permissible to secure compliance with the respective Laws and Regulations of the Authorities.” Under the Agreement the Board may now have access to the work papers relating to Chinese based issuers for the first time. The parties have also agreed to discuss the prospect of inspections.
Misappropriation: U.S. v. Hongjun (S.D.N.Y.) is an action which names as defendants Wang Hogjun and Chao Jiang, respectively, the former president and CEO and former vice president of corporate finance of China North East Petroleum Holdings Limited. In 2009 the company registered a shelf offering with the SEC, proposing to sell up to $40 million of common stock. Subsequently, the company made two separate offerings under the registration statement. The funds were to be used for general corporate purposes according to representations made to investors by the defendants. In fact the defendants misappropriated about $1.2 million of the proceeds for their own use. Mr. Jiang also testified falsely before the SEC. The indictment contains one count of conspiracy and four counts of securities fraud as to each defendant. Mr. Jiang is also charged with two counts of false statements to the Commission. The case is pending. See also SEC v. China North East Petroleum Holdings Limited, Civil Action No. 12 cv 7094 (S.D.N.Y. Filed Sept. 20, 2012).
Unauthorized transactions: The Securities and Futures Commission of Hong Kong banned Alex Chow Ho Kuen from the securities business for life. He was a service manager of Hang Seng Bank Limited. The action followed his conviction on criminal charges for conducting unauthorized transactions in the accounts of his clients as well as misappropriating their funds. The client funds were transferred to the account of his sister. The losses are estimated to be about $5 million. Mr. Chow was sentenced to serve 44 months in prison.
Manipulation: The Court of First Instance dismissed an appeal by the FSC of the manipulation charges against Liang Jiang, a fund manger. The FSC claimed that a pattern of purchasing shares in two different companies on the last trading day of the month was manipulative and artificially inflated the share price. Mr. Jiang contended he was rebalancing the portfolio. The court found against the FSC and the appeal of the agency was dismissed.