In a holiday shortened week, dark pools were again a focus for regulators. This week FINRA sanctioned Goldman Sachs in connection with the operation of its dark pool.
The Commission, which bolstered its ALJ ranks this week, brought seven administrative proceedings. Five of those proceedings were related and involved short selling in violation of Rule 105. The two other actions centered on an audit failure and undisclosed conflicts of interest.
Remarks: Commissioner Luis A. Aguilar delivered remarks titled Evaluating Pension Fund Investments Through the Lens of Good Corporate Governance to Latinos on Fast Track Investors Forum, Washington, D.C. (June 27, 2014)(here). His remarks focused on corporate governance infrastructure, aligning executive compensation and performance, ensuring high quality financial reporting and the benefits of promoting diversity in the boardroom.
FCPA: Compliance Week published its 2014 Anti-Bribery and Corruption Benchmarking Report, a survey of over 180 executives involved in ethics and FCPA compliance and internal audit (here). The Survey focused on risk, dealing with third parties and due diligence.
Compliance: Cyber security, corruption and unethical behavior pose significant risks for business enterprises, according to a new survey by EY titled “Overcoming Compliance Fatigue’ (here). At the same time business organizations may be focusing their efforts in the wrong area while not effectively implementing the key building blocks of a good compliance system.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 0 civil injunctive actions, DPAs, NPAs or reports and 7 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Short selling-Rule 105: In the Matter of Derek W. Bakarich, Adm. Proc. File No. 3-15957 (July 2, 2014); In the Matter of Carmela Borocco, Adm. Proc. File No. 3-15985 (July 2, 2014); In the Matter of Tina M. Lizzio, Adm. Proc. File No. 3-15959 (July 2, 2014); In the Matter of Steven J. Niemis, Adm. Proc. File No. 3-15960 (July 2, 2014); In the Matter of William W. Vowell, Adm. Proc. File No. 3-15961 (July 2, 2014). Each Respondent was a trader for various periods for Jeffrey W. Lynn and his firm, Worldwide Capital which previously settled Rule 105 charges with the Commission. Each of the five traders in these proceedings worked for Mr. Lynn and his firm for varying periods of time. Each traded in violation of Rule 105 which generally prohibits selling short during a designated period prior two a secondary offering. Each trader settled with the Commission, consenting to the entry of a cease and desist order based on Rule 105. Each also agreed to pay disgorgement, prejudgment interest and a penalty. Mr. Bakarich will pay disgorgement of $16,231, prejudgment interest and a penalty of $9,739. Ms. Borocco will pay $215,233 in disgorgement, prejudgment interest and a penalty of $129,140. Ms. Lizzio will pay disgorgement of $28,864, prejudgment interest and a penalty of $17,319. Mr. Niemis will pay disgorgement of $130,842, prejudgment interest and a penalty of $78,505. Mr. Vowell will pay disgorgement of $51,519, prejudgment interest and a penalty of $30,911.
Offering fraud: SEC v. Duckson, Civil Action No. 10-3995 (D. Minn.) is a previously filed action against Todd Duckson, Capital Solutions Monthly Income Fund, LP, and Transactional Finance Fund Management LLC, a firm owned by Mr. Duckson that became an investment adviser to the Fund. In 2008 and 2009 the defendants marketed unregistered notes of the Fund based on a series of misrepresentations. The Commission’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Following trial a jury returned a verdict in favor of the Commission and against the defendants but found for the Fund on one count. On June 27, 2014 the Court entered a permanent injunction against each defendant based on the Sections cited in the complaint. It also directed that: the Fund pay disgorgement of $12,063,430 with prejudgment interest; Mr. Duckson and Transactional Finance, jointly and severally, pay disgorgement of $2,960,771 along with prejudgment interest; that Mr. Duckson individually pay disgorgement of $1,450,843 along with prejudgment interest; and that Mr. Duckson and Transactional Finance pay penalties of, respectively, $50,000 and $15,000. Mr. Duckson was also barred from serving as an officer or director of a public company for ten years. See Lit. Rel. No. 23036 (July 2, 2014).
Undisclosed conflicts: In the Matter of Signalpoint Asset Management, LLC, Adm. Proc. File No. 3-15955 (July 2, 2014) is a proceeding which names as Respondents the registered investment adviser and John Handy, Jonathan Timson, Dennis Walker (collectively the Principals), each of whom is a principal of Walnut Capital Management, LLC, a wealth management firm. Michael Orzel, the COO of Signalpoint was also named as a Respondent. The Principals wanted to market to retail and institutional clients. Accordingly, they looked to establish a hybrid model, a money management firm that would permit them to do commission based business as registered representatives and fee based business through a registered investment adviser. They associated with a Dual Registrant who told them they could not register and own a separate investment advisory firm. They then formed Signalpoint, using nominees to conceal their interest. In advising some advisory clients to invest with Signalpoint the Principals failed to disclose their interest. The firm also did not disclose that interest in Forms ADV during the period. Mr. Orzel prepared the Form ADV. The Order alleges violations of Advisers Act Sections 206(2) and 207. The Respondents resolved the proceeding with the Principals and Signalpoint, agreeing to certain undertakings. In addition, the firm, and each of the Principals, consented to the entry of a cease and desist order based on Advisers Act Section 206(2). Each Principal will pay a penalty of $60,000. Mr. Orzel and Singalpoint consented to the entry of a cease and desist order based on Advisers Act Section 207. Mr. Orzel will pay a civil penalty of $35,000.
Audit failure: In the Matter of EFP Rotenberg, LLP, Adm. Proc. File No. 3-15952 (July 1, 2014) is a proceeding against the audit firm and one of its partners, Nicholas R. Bottini. The firm became the outside auditors to Universal Travel Group, a Nevada company headquartered in Shenzhen, China. The company is the product of a reverse merger. In 2010 and 2011 there were adverse reports published about the firm’s financial status. Its prior audit firm, which wanted to conduct extended procedures when it encountered difficulties during the engagement, resigned after the firm declined to permit the additional work. Respondents, in conducting their audit of Universal: Failed to have adequate client acceptance policies; failed to make inquiry of the prior auditor; did not adequately plan the engagement; failed to extend or revise procedures to address indications of fraud; and failed to have sufficient competent evidence and exercise due professional case. Nevertheless, the firm issued an unqualified audit opinion for the year ended December 31, 211 which was filed with the Commission. Mr. Bottini served as the engagement partner. The Order alleges that the Respondents engage in unprofessional conduct in violation of Rule 12(e)(1)(ii). In settling the matter the Commission considered the remedial efforts of the firm. To resolve the case each Respondent consented to the entry of a cease and desist order based on the Rule cited in the Order. A censure was also entered against the firm. The firm is precluded from accepting any engagement, or playing a significant rule in any engagement, where the client’s headquarters or principal executive offices are in the PRC or it has a significant subsidiary in that country. The audit firm also agreed to pay a penalty of $50,000. Mr. Bottini is denied the privilege of appearing and practicing before the Commission as an accountant with a right to reapply after two years. He was also directed to pay a penalty of $25,000.
Offering fraud: SEC v. Luna, Civil Action No. 10-CV-02166 (D. NV) is a previously filed action against attorney Marcus Luna, Nathan Montgomery, Adam Daskivich and David Murtha. The complaint alleged an offering fraud regarding the sale of shares in Axis Technologies Group, Inc. The Court previously granted the SEC’s motion for summary judgment against each defendant, finding violations of Securities Act Sections 5, 17(a)(1), (2) and (3) and Exchange Act Section 10(b). On June 27, 2014 the Court entered an order imposing sanctions. Under the order: Mr. Luna is precluded from providing legal services to anyone in connection with the offer or sales of securities pursuant to, or claiming an exemption under, Regulation D; a penny stock bar is imposed on each defendant; directing Mr. Luna and Minnesota Venture Capital to pay $4.98 million in disgorgement and a penalty of $2.03 million; Mr. Daskivich and Real Estate of Minnesota to pay $3.49 million in disgorgement and a penalty of $1.97 million; Mr. Murtha and Matrix Venture Capital to pay $1.72 and a penalty of $1.37 million; and Mr. Luna, joint and severally with the other defendants, $2.39 million. The Court denied the Commission’s request for injunctions.
Manipulation: SEC v. AutoChina International Limited, Civil Action No. 1:12-CV-10643 (D. Mass.) is a previously filed action against the firm and, among others, Hui Kai Yan, a senior executive. The complaint alleged manipulation of the firm shares. The firm and Mr. Yan settled with the Commission and the Court entered final judgments prohibiting each defendant from engaging in future violations of Securities Act Section 17(a) and Exchange Act Sections 9(a), 9(a)(1), 9(a)(2) and 10(b). In addition, the firm was ordered to pay a penalty of $4.35 million. Mr. Yan was directed to pay a penalty of $150,000 and is barred from acting as an officer or director of a public company. See Lit. Rel. No. 23033 (June 27, 2014).
Dark pools: The regulator fined Goldman Sachs Execution & Clearing, L.P. $800,000 for failing to prevent trade throughs in its alternative trading system. The order protection rule generally requires that trading centers trade at the best quoted price or route orders to the trading centers quoting the best price. From July 29, 2011 through August 9, 211 over 395,000 transactions executed in SIGMA-X were the execution traded through a protected quotation at a price inferior to the National Best Bid. Goldman Sachs was unaware that it was trading through a protected quotation in these instances. The firm has returned $1.67 million to disadvantaged customers.
Financial fraud: SEC v. Monterosso, Nos. 13-10341, 13-10342, 13-10464 (11th Cir. Opinion June 30, 2014). The action centers on a financial fraud at GlobeTel Communications Corporation, a telecom company. In 2007 the Commission brought an action against executives Joseph Monterosso and Luis Vargas. The Commission’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 13(b)(2)(A).
The case centered on a fraudulent scheme to inflate revenue. Between 2004 and 2006 GlobeTel bought and sold large blocks of calling minutes with particular origination and termination points. The firm generated revenue by connecting individual callers with locations they called. The calls were routed through GlobeTel’s switch. Firms such as GlobeTel pay by the minute for the right to route calls through the switches to the network of another company. GlobeTel’s revenue depended on the traffic routed through its switch. In 2004 the “off-net” program was implemented to enhance reported revenue. The program referred to telecom traffic run on a switch that was not owned by GlobeTel or its subsidiaries, Volta, Lonestar and Centerline. In essence, the program created false invoices to reflect transactions between GlobeTel’s subsidiaries and other companies.
In 2004 and 2005 the fraudulent off-net revenue accounted for about 58% and 87.4% of GlobeTel’s revenue, respectively. For the first quarter of 2006 it accounted for about 92% of the revenue. The District Court granted summary judgment in favor of the Commission and against Messrs. Monterosso and Vargas.
On appeal a key issue argued by the two defendants hinged on the application of Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2011 (2011). Each defendant contended that they could not be held liable under the antifraud provisions in view of the Supreme Court’s decision. Janus addressed the scope of liability under Section 10(b) and Rule 10b-5. In its decision the Court focused on the provision in the rule which states that it is unlawful to “make any untrue statement of a material fact in connection with the purchase or sale of securities,” the Circuit Court noted. The Janus Court held that the maker of a statement is the person or entity with the ultimate authority over it, including the content and how to communicate it. In that case participating in preparing a prospectus was not sufficient to impose liability. The defendants in this case contend that while they may have participated in the “off-net” program, they did not make any statement and therefore cannot be held liable. The Court rejected this contention. Janus only addressed Rule 10b-5(b), it does not concern Rule 10b-5(a) and (c) or Securities Act Section 17(a). Indeed, the language of Section 17(a) does not require a defendant to “make” a statement to be liable. Likewise, subsections (a) and (c) of Rule 10b-5 do not incorporate that requirement. And, in any event, the case here does not hinge on making a false statement. Rather, the action is concerned with the commission by the defendants of deceptive acts as part of a scheme to generate fictitious revenue for GlobeTel. Thus Janus is not relevant. The Court affirmed the grant of summary judgment.
Gatekeepers: Investment adviser Tony Maher, who owned and controlled PST Management Pty Ltd. which acted as a adviser to the ARP Growth Fund for two years, was sentenced to 25 months in prison. Previously, he pleaded guilty to making false statements regarding the valuation of the fund while taking more than $500,000 in payments.