Mary Jo White became the thirty-first chairman of the SEC this week. Ms. White take the helm of an agency at a cross-roads. While it has made great strides since the beginning of the financial crisis and a series of scandals many have questioned the vigor of its enforcement program. The agency also faces a full plate of rule making issues and faces additional challenges from issues which include high speed trading and dark pools.
FCPA enforcement returned this week with the Commission filing its first action of the year and the DOJ unsealing year old charges against individuals tied to one of its earlier corporate settlements. Insider trading continued to dominate the news with SEC and DOJ charges against a former big four audit partner who is alleged to have repeatedly tipped his friend who traded and made millions. And, the Commission filed an amended complaint against the sister of a defendant tied to the expert network insider trading investigations.
New chairman: Mary Jo White was sworn in as the thirty-first chair of the SEC on April 10, 2013.
Testimony: Lona Naliengara, Acting Director, Division of Corporation Finance, and John Ramsay, Acting Director, Division of Trading and Markets, testified before the House Subcommittee on Investigations, Oversight and Regulations, regarding the implementation of the JOBS Act. The testimony reviewed the Acts, proposed rules and studies undertaken by the staff to implement them (here).
Rules: The Commission adopted final rules in conjunction with the CFTC to help protect investors from identity theft. The rules require certain regulated entities such as broker dealers, mutual funds and investment advisers to adopt an identity theft program (here).
Remarks: Chairman Elisse Walter addressed the ABA Spring Meeting, Washington, D.C. (April 6, 2013). Her remarks focused on cross-boarder derivative issues (here).
Remarks: David W. Blass, Chief Counsel, Division of Trading and Markets, addressed the ABA Trading and Markets Subcommittee, Washington, D.C. (April 5, 2013). His remarks focused on the sale of interests in a private fund and broker issues arising from private equity practices (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 3 civil injunctive actions and 1 administrative proceeding (excluding tag-along-actions and 12(j) proceedings).
Insider trading: SEC v. London, CV 13-0255 (C.D. Cal. Filed April 11, 2013) is an action against former KPMG audit partner Scott London and his friend Bryan Shaw. The action alleges that Mr. London furnished his friend Bryan Shaw with inside information about five companies that were clients of KPMG between 2010 and 2012. The inside information concerned the earnings of three KPMG audit clients, Herbalife, Skechers and Deckers. Mr. London also obtained access to inside information about pending mergers for two former firm clients, RSC Holdings and Pacific Capital. Mr. Shaw is alleged to have made about $1.27 million on the trades. Scott London has stated that he furnished the information to aid his friend whose jewelry store experienced financial difficulties. In return for the inside information Mr. Shaw received cash, expensive jewelry, periodic dinners and concert tickets. The Commission’s complaint alleges violations of Exchange Act Section 10(b). A parallel criminal case was filed against Mr. London, charging conspiracy and securities fraud. The court papers in that action state that in 2011 Mr. Shaw voluntarily began to cooperate with authorities, recording meetings and telephone calls with Mr. London. U.S. v. London, 13-mj-0105 (C.D. Cal.).
Insider trading: SEC v. Nguyen, Civil Action No. 12-CV-5009 (S.D.N.Y. Amended complaint filed April 8, 2013) is an action in which the Commission amended its complaint to add as a defendant Thanhha Boa, an executive working in the finance department of Abaxis, Inc. She is alleged to have been the source of inside information for her brother, Tai Nguyen, the initial defendant and founder of Insights Research. He was also named in a parallel criminal case at the time the initial SEC complaint was brought. The SEC complaint alleged that Mr. Nguyen was tripped seven times from 2006 through 2009 and traded, reaping profits of about $144,000. He is also alleged to have passed inside information to Sonar Capital, an investment adviser based in Boston that advised several hedge funds, and Noah Freeman and Bari Capital and Samir Barai. Both men were named in criminal cases and the Commission’s expert networking case, SEC v. Longoria, Civil Action No. 11-cv-0753 (S.D.N.Y.).The Commission’s complaint against Mr. Nguyen, and the amended complaint against his sister, Ms. Beo, allege violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Ms. Beo agreed to settle with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. She also agreed to pay a civil penalty of $144,910 and to be barred from serving as an officer or director of a public company for five years.
Offering fraud: SEC v. Hoppes, Civil Action No. 13-CV-00868 (M.D. Fla. Filed April 8, 2013) is an action against Glenn Hoppes, United States Energy Corp., TN-KY Development Fund LP, TN-KY Development Fund II and TN-KY Development Fund III LP. Mr. Hoppes is alleged to have recruited Joseph Hilton, a barred broker, to aid in selling partnership units in three drilling projects and financially support his boiler room operation. The units were sold utilizing misrepresentations about the drilling program while omitting information about Mr. Hoppes prior bankruptcy and the earlier SEC action against Mr. Hilton. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 15(a). The case is in litigation. See also Lit. Rel. No. 22669 (April 8, 2013).
Investment fund fraud: SEC v. Ryan, Civil Action No. 1:10-cv-00513 (N.D.N.Y.) is a previously filed action against John Ryan and his entity, Prime Rate and Return, LLC. The complaint alleges that from at least 2002 Mr. Ryan and Prime Rate operated a Ponzi scheme, selling over $6.5 million in promissory notes which claimed to pay rates of return ranging from 3.85% to 9% annually. A variety of fraudulent devices were used to perpetrate the fraud. The receiver for the company consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The judgment, entered by the Court, also requires the payment of $6.5 million in disgorgement and prejudgment interest. The disgorgement is deemed satisfied by the $71,927 recovered by the receiver plus any additional amounts recovered after certain court approved fees are deducted. The case is still pending as to Mr. Ryan who has been convicted on criminal charges arising out of the same facts. See also, Lit. Re. No. 22668 (April 8, 2013).
Unregistered securities: SEC v. Cuomo, Civil Action No. 1:11-cv-10633 (D. Mass.) is a previously filed action against David Affeldt and others centered on allegations regarding the sale of unregistered notes of Inofin, Inc. About $110 million was raised from investors in 25 states based on misrepresentations regarding how investor funds would be used and the performance of the company. This week Mr. Affeldt, a former sales agent of the company, settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 15(a) and Securities Act Sections 5(a) and 5(c). Mr. Affeldt also agreed to pay disgorgement of $147,039.00, prejudgment interest and a civil penalty of $50,000. Previously two officers of the company settled. The action remains pending as to one defendant. See also Lit. Rel. No. 22667 (April 5, 2013).
Investment fund fraud: SEC v. Inter Reef, Ltd., Civil Action No. 1:13-cv-1104 (N.D. Ga. Filed April 5, 2013) is an action against the company, doing business as Profitable Sunrise and three relief defendants. Profitable Sunrise is operating a scheme, according to the complaint, targeted at U.S. investors promising impossible rates of return of 1.6% to 2.7% per business day, compounded and additional returns for recruiting others to its investment programs. The solicitations were made through a website. The funds held by one relief defendant in Hungary have been frozen by officials there. The fraud appears to be operating from the U.K. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The court entered a freeze order at the time the complaint was filed. The case is pending. See also Lit. Rel. No. 22666 (April 5, 2013).
In the Matter of Koninklijke Philips Electronics N.V., Adm. Proc. File No. 3-15265 (April 5, 2013) is an action centered on improper payments alleged to have been made by Philips Poland over an eight year period beginning in 1999. The Order alleges that about 30 improper payments to healthcare officials ranging in value from 3% to 8% of the contract were made in connection with public tenders to purchase equipment. The Philips employees kept a portion of the payments as their “commission.” Frequently the payments, which were recorded incorrectly in the books and records of the company, were made through agents. In December 2009, 23 individuals were indicted in Poland. Three were former Philips Poland employees and 16 were healthcare officials. The indictment alleged violations of the laws regarding public tenders for healthcare equipment. Philips then conducted an internal investigation and discovered the improper payments. Early in 2010 the company self-reported and made the results of its investigation available.
In response to the internal investigation Philips terminated and disciplined several employees. New management was installed in Philips Poland. The company also retained three law firms and two audit firms to conduct the investigation and design remedial measures to address the issues and took significant remedial steps. To resolve the proceeding the company consented to the entry of a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and (B) and agreed to pay disgorgement of $3,120,587 along with prejudgment interest. A penalty was not imposed based on the cooperation of the company.
Bizjet: DOJ unsealed indictments against four employees of the company, Bernd Kowaleski, the former president and chief executive officer of the company, Jald Jensen, the former sales manager, Peter DuBois, the former vice president of sales and marketing and Neal Uhl, the former vice president of finance. Messrs. DuBois and Uhal pleaded guilty on January 5, 2012, about two months before the company settled. Each entered a guilty plea to one count of conspiring to violate the Foreign Corrupt Practices Act. Mr. DuBois also entered a guilty plea to one count of violating the FCPA. Each man’s sentence was reduced to probation and eight months of home confinement. Under the sentencing guidelines Mr. DuBois would have received a sentence of 108 to 120 months in prison while Mr. Uhl would have been sentenced to serve 60 months in prison. Messrs. Kowaleski and Jensen have not been arrested. Both fled in January 2012.
The charges against the four men stem from the conduct alleged in the underlying case against the company. There company officials were alleged to have paid bribes to officials employed by the Mexican Policia Federal Preventiva, the Mexican Coordination General de Transportes Aereos Presidenciales, the air fleet for the Gobierno del Estado de Sinaloa, the air fleet for the Goblerno del Estado de Sonora and the Republica de Panama Autoridad Aeronautica Civil. In some instances the bribes were paid directly. In others they were paid through a shell company owned by a company official. Bizjet was named in a one count criminal information alleging conspiracy to violate the FCPA anti-bribery provisions. The company entered into a deferred prosecution agreement with DOJ. U.S. v. Bizjet International Sales and Support, Inc., Case No. 12 cr 61 (N.D. Okla. Filed March 14, 2012)
Offering fraud: A temporary cease and desist order was entered and a proceeding brought against on-line broker dealer Success Trade Securities, Inc. and its CEO and President, Fuad Ahmed. The proceeding alleges that the firm, its CEO and others raised more than $18 million selling Success Trade promissory notes to 58 investors, many of who were former NFL and NBA players, using misrepresentations regarding the size of the offering and the finances of the firm. While investors were told that the offering would only be for $5 million through the sale of promissory notes in fact it exceeded that size by about 300%. Misrepresentations were also made about the finances of the firm and its debt and ability to pay the promised 12.5 to 26% interest. The action is pending.
Remarks: Richard G. Ketchum, Chairman and CEO of FINRA, addressed the National Compliance Outreach Program for Broker-Dealers, Washington, D.C. (April 9, 2013). His remarks included comments on improved compliance, concerns about complex products and the risks of conflicts (here).
Failure to supervise: The Securities and Futures Commission reprimanded China Everbright Securities or CES and Chan Kam Hop, a representative with the firm who was also fined $400,000 for failing to properly supervise a CES account executive. Specifically, the account executive repeatedly claimed to have witnessed the execution of account opening documents and to have explained investment risks to clients when in fact he had done neither. The Commission took into account that when CES learned of the matter it promptly conducted an internal investigation and cooperated.
Concealed account: The agency suspended Sky Cheung Shi Gail for 30 months and fined him $500,000 for maintaining a securities account in his wife’s name that was concealed from his employer, Quam Securities Company Ltd., and used to trade in stocks that were the subject of his news columns. At times he delayed the publication of certain material to ensure that securities could be purchased in the account.
Unauthorized transactions: Ms. Luk Ping was barred from re-entering the industry for 10 months for operating two discretionary accounts without proper authorization from the client. The agency also found that she failed to keep proper records of transactions.