The SEC brought an action against eight fund directors, six of whom were independent and members of the audit committee, alleging that they caused material misstatements in the valuation of fund assets by failing to implement proper standards. The agency also brought two actions focused on Chinese issues. In one the Commission alleged that defendants who had facilitated the entry into the U.S. capital markets for numerous Chinese issuers defrauded investors. The other focused on U.S. based entities engaging in insider trading and manipulation on the Hong Kong stock exchange.
The CFTC brought an action against Goldman Sachs for inadequate supervisory procedures which the firm settled. One Commissioner filed a separate statement calling on Congress to give the agency additional authority to impose penalties in view of the limitations in the case.
The PCAOB issued a report that analyzes the performance of audit firms reviewing internal controls. Overall the report is critical of firm performance, citing a number of deficiencies.
Finally, a former FBI agent and his wife were both sentenced to prison. The couple had teamed up to run what was essentially a Ponzi scheme.
Testimony: Robert Cook, Director, Division of Trading & Markets, testified before the House Capital Markets and Government Sponsored Enterprises Subcommittee (Dec. 12, 2012). His testimony reviewed the background of Title VII of Dodd-Frank regarding the swaps market, coordination with the CFTC, adoption of key rules, recently proposed rules and the issuance of a policy statement (here).
Statistics: NERA’s “The Flash Update: 2012 Trends in Securities Class Actions” details key projections regarding class actions for 2012: 1) Number of cases: The Report projects that 213 securities class actions will be filed by year end, down slightly from the 225 cases filed in 2011 and the 232 actions brought in 2010; 2) Settlements: In 2012 settlements are down dramatically compared to recent years to a projected 152 actions compared with 246 in 2012, 255 in 2010 and 227 in 2009; 3) Pending cases: In contrast, the Report projects that there will be 596 pending securities class actions by year end, up from the 541 and 570 pending at the end of, respectively, 2011 and 2010; and 4) Average settlement value: NERA projects that for 2012 the average settlement value will be $38 million compared to $23 million in 2011, $92 million in 2010 and $12 million in 2009. 4) Median settlement value: The median settlement value for 2012 will be $11.1 million, the highest in years.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 6 civil injunctive actions and 1 administrative proceeding (excluding tag-along-actions and 12(j) actions).
Insider trading/manipulation: SEC v. Tiger Asia Management, LLC (D. N.J. Filed Dec. 12, 2012) is an action against the firm, a Delaware corporation based in New York City which is an unregistered investment adviser and investment manager to Tiger Asia Overseas Fund, Ltd; Tiger Asia Partners, LLC, also a New York City based unregistered investment adviser of Tiger Asia Fund; Sung Kook or Bill Hwank, a New Jersey resident who is the principal and portfolio manager of Tiger Asia Fund and Tiger Asia Overseas Fund; and Raymond Park, a resident of New York and head trader for the funds.
The complaint centers on two sets of transactions. First, it alleges that between December 2008 and January 2009 Tiger Asia participated in three private placements for the securities of two Chinese banks. In each instance Mr. Park agreed not to trade in the shares of the bank as part of being a participant in the private placement. In each instance the agreement was breached and the fund shorted the shares on the Hong Kong exchange. As a result of the trading Tiger Asia had profits of about $16.2 million. Second, the complaint focuses on attempted manipulation on the Hong Kong exchange. In four instances Tiger Asia attempted to manipulate the month-end closing prices of certain stocks listed on the Hong Kong Exchange to depress them because it held large short positions. This action increased its management fees by fees by $496,000. The Commission’s complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4).
The defendants settled the action, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. In addition, defendants Hwang, Tiger Asia Management and Tiger Asia Partners will collectively pay disgorgement and prejudgment interest of $19,048,787. Each also agreed to pay a penalty of $8,294,348. Mr. Park agreed to pay $39,819 in disgorgement and prejudgment interest and a penalty of $34,897. The U.S. Attorney’s Office for the District of New Jersey announced a parallel action against Tiger Asia Management. The disgorgement and prejudgment interest paid by defendants Hwang, Tiger Asia Management and Tiger Asia Partners will be paid to the criminal authorities.
Manipulation: SEC v. Hart, Civil Action No. 12 CIV 8986 (S.D.N.Y. Filed Dec. 11, 2012) is an action against Steven Hart, the investment and portfolio manager and sole owner of Octagon Capital LLC, the general partner of Octagon Capital Partners Ltd, an investment fund. He also served as a portfolio manager for an Investment Fund. The complaint alleges that from 2007 through 2011 Mr. Hart engaged in over thirty matched trades in which he directed the fund of his employer to purchase microcap stocks at inflated prices from his controlled fund. This generated profits for Mr. Hart and losses for his employer. In a second facet of the scheme, Mr. Hart used inside information in 19 instances regarding PIPE offerings to trade in the securities of the company after executing a confidentiality agreement in which he agreed not to trade. As a result of these schemes Mr. Hart is alleged to have made about $831,071 in illicit trading profits. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). Mr. Hart settled the action, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to disgorge his trading profits, pay prejudgment interest and a civil penalty of $394,733. See also Lit. Rel. No 22567 (Dec. 11, 2012).
Fraud: SEC v. Zhou, Civil Action No. 12-cv-8987 (S.D.N.Y. Filed Dec. 11, 2012) is an action against Huakang or David Zhou and Warner Technology and Investment Corporation. Mr. Zhou, who is president of Warner, has assisted numerous Chinese companies with accessing the U.S. Capital markets, including through reverse mergers. From 2007 through 2009 the complaint alleges that he engaged in a variety of misconduct including: 1) the unregistered sale of over $5 million of securities of a Chinese solar company; 2) the misuse of a significant portions of investment proceeds to pay personal expenses; and 3) orchestrating an elaborate scheme to try and list a Chinese real estate developer on NASDAQ which included manipulative trading to try to push the share price up to the $4 minimum required for listing. The scheme succeeded in the fall of 2010 when the firm was listed. The complaint alleges violations of Exchange Act Sections 10(b), 13(c), 15(a) and 16(a) and Exchange Act Sections 5(a), 5(c) and 17(a)
Offering fraud: SEC v. Premco Western, Inc., Case No. 2:12-cv-01120 (D. Utah Filed Dec. 10, 2012) is an action against the company and its owner Rodney Ratheal. Beginning in 2001, and continuing through 2012, the defendants raised over $4.1 million from about 100 investors in an offering fraud, according to the complaint. Investors were told that the oil and gas fields of the company were comparable to those of Kuwait and Saudi Arabia according to geologists. In fact they were “dry holes.” Investors were also told that no more than 10% of the funds would be used to support Mr. Ratheal when in fact about 70% went to his personal use. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and Exchange Act Section 10(b). The defendants settled with the Commission, consenting to the entry of permanent injunctions precluding future violations of the Sections cited in the complaint. Further, they consented to be jointly and severally liable for the payment of $2,927,037 in disgorgement, prejudgment interest of $4,445,221.48 and a penalty, none of which will be imposed based on their financial condition. See also, Lit. Rel. No. 22566 (Dec. 11, 2012).
Valuation of assets: In the Matter of J. Kenneth Alderman, CPA, Adm. Proc. File No. 3-15127 (Filed Dec. 10, 2012) is an action against eight mutual fund directors, six of whom are independent directors and members of the audit committee of the funds: Jack Blair; Albert Johnson; James Stillman McFadded; W. Randall Pittman; Mary Stone; and Archie Willis. Also named were directors J. Kenneth Alderman and Allen Morgan. The Funds involved were four closed end and one open ended fund. Each had a board of directors composed of two interested and four independent directors. All of the independent directors were members of the audit committee, chaired by Respondent Stone. The investment adviser was Morgan Asset Management, Inc.
At the end of the first quarter 2007 the Funds had a combined net asset value of about $3.85 billion. Large portions of those assets were complex, structured investments for which there was no ready market. Under the Policy and Procedure Manual for the Funds, the directors delegated to Morgan Asset the responsibility for carrying out certain functions related to the valuation of the portfolio securities in connection with calculating the NAV per share. While the Funds’ Valuation Procedures listed a series of factors to be considered, many of which were drawn from the pertinent literature, they provided no meaningful methodology or other specific direction on how to make the fair value determination. The actual task of assigning fair values on a daily based was performed by Fund Accounting, a function staffed by Morgan Keegan employees. In making their determinations of fair value, the Order alleges that no reasonable analytical method was used. Throughout the period the directors were unaware of the methodology utilized by Fund Accounting and the Valuation Committee to fair value the particular securities or types of securities. Likewise, they failed to inquire about the methodology used. As a result of the failure by the Directors to cause the Funds to adopt and implement reasonable procedures, the NAVs of the Funds were materially misstated from the end of March 2007 through early August of that year. Thus the prices at which the open ended Fund sold, redeemed and repurchased its shares were inaccurate. At least one registration statement, and other filed reports, contained NAVs that were materially misstated. The Form N-1A filed by the Select Fund for October 29 2007 that contained NAVs as of June 30, 2007 that were materially overstated, according to the Order. The Order alleges that the Respondents caused the Funds’ violations of Rules 22c-1, 30a-3(a) and 38a-1 of the Investment Company At of 1940. A hearing will be set in this matter.
Investment fund fraud: SEC v. Innovida Holdings, LLC, Case No. 1:12-cv-24326 (S.D. Fla. Filed Dec. 7, 2012) is an action against the company, a manufacturer of innovative, energy efficient building products, its CEO Claudio Osorio, a former Ernst & Young Entrepreneur of the Year Award winner, and its CFO Craig Toll. In 2009 and 2010 the defendants are alleged to have raised millions of dollars from investors, portions of which were diverted to personal use, through a series of misrepresentations. One investor, for example, was induced to add $3.7 million to his initial investment based on the claim that a sovereign wealth fund would buy units from existing shareholders at $2.50 per share. There was no deal with a sovereign wealth fund. Another investor was told that the company had a net worth of about $250 million which it did not. Another was told that Mr. Osorio had a significant stake in the company. Eventually an investor began a state court action against the company which resulted in the appointment of a receiver. The company ended in Chapter 11 bankruptcy. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is in litigation. See also Lit. Rel. No. 22563 (Dec. 7, 2012).
False opinions: SEC v. Jean-Pierre, Case No. 12 CIV 8886 (S.D.N.Y. Filed Dec. 6, 2012) is an action against attorney Guy Jean-Pierre for engaging in a fraudulent scheme to issue attorney opinion letters to facilitate the transfer of restricted microcap shares. In April 2010 the Pink Sheets banned Mr. Jean-Pierre from issuing opinions. Subsequently, he induced his niece, an unemployed attorney, to form Complete Legal Solutions, LLC with him. He then used the firm and her signature, without her knowledge, to continue issuing false opinions for at least eleven companies. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22562 (Dec. 7, 2012).
Testimony: Chairman Gary Gensler testified before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises (Dec. 12, 2012). His testimony focused on the reforms in the swap markets, international cooperation, and inquiries from market participants (here).
Statement: Commissioner Bart Chilton issued a statement concurring in part and dissenting in part regarding the settlement with Goldman, Sachs & Co. (below). While the Commissioner agreed the action should be settled, he noted that the fine was insufficient and called on Congress to increase the authority of the Commission in this area.
Inadequate procedures: Goldman, Sachs & Company settled a proceeding with the Commission arising out of the trading loss in late 2007 that resulted when a trader circumvented firm risk management procedures with regard to positions taken in the e-mini S&P 500. The trader used manual entries to circumvent those procedures and build an $8.3 billion position which, when unwound, resulted in a loss of over $118 million. Goldman was found to have failed to have procedures reasonably designed to detect and prevent the making such entries. After the trader was fired Goldman updated FINRA but failed to update the information furnished to the National Futures Association and the Commission. The firm agreed to pay a $1.5 million penalty to resolve the charges.
Investment fund fraud: U.S. v. Graves (E.D. Va.). Former FBI agent Robert Graves and his wife, Sara Turberville, were sentenced to serve, respectively 135 and 36 months in prison for there involvement in an investment fund fraud. Each defendant was convicted of one count of conspiracy, one count of mail fraud and four counts of wire fraud. The husband and wife conducted what was essentially a Ponzi scheme, raising money from investors under false pretenses and using the funds to repay others as well as for their personal use. The fraud continued even once investigations began with Mr. Graves making representations to the U.S. Bankruptcy Court, the SEC and others.
Investment fund fraud: Abdul Walji and Rentero Francisco, respectively, the CEO and President of Arista LLC, a California based investment fund, were charged in a six count indictment for defrauding investors out of millions of dollars. Arista was a registered commodity pool. Investors were told that their funds would be put in safe, conservative investments when in fact they were not. Trading losses were covered up by giving investors false statements which were also used to induce others to invest. In addition, investor funds were misappropriated, according to the charging documents. The case is pending.
Report: The Board issued a report summarizing observations regarding deficiencies in the audits by registered public accounting firms of internal controls. The report is based on observations from about 300 audits. The Board expressed concern regarding the deficiencies observed. The most common include: failure to indentify and sufficiently test controls that are intended to address the risks of material misstatement; failures to sufficiently test the design and operating effectiveness of management review controls used to monitor the results of operations; failure to obtain sufficient evidence to update the results of testing of controls from an interim date; failing to sufficiently test system-generated data and reports that support important controls; failing to sufficiently perform procedures regarding the use of the work of others; and failing to sufficiently identify and control deficiencies and consider their effect on both the financial statement audit and or the audit of internal control.
Boiler room: Michael McInerney was directed to pay £320,882 within six months or serve 3.5 years in prison for his role in a boiler room scheme. The boiler room was operated by Tomas, Kevin and Christopher Wilmont who defrauded about 1,700 investors out of £27.5 million. They were sentenced to serve 19 years in prison. Mr. McInerney acted as a banker for the scheme, setting up front accounts to collect the proceedings.