A look forward – a look back:
The Commission continued to propose modifications to regulations in an effort to update standards. Recently, for example, proposals were made to modify the definition of accredited investor. As the year drew to a close the agency proposed modifications to the auditor independence standards, many of which trace to the passage of the Sarbanes-Oxley Act nearly two decades ago.
Cases brought by the agency continue to focus on the retail investor. Two actions filed in the last week, for example, centered on market manipulations. One focused on a complex manipulation conducted by foreign nationals using a number of off-shore entities that is likely the product of a significant amount of data and analytical work. That action targeted unwitting investors with the sale of shares by secreting control persons in the context of a manipulation.
Auditor independence: The Commission proposed amendments to select rules regarding auditor independence. They are largely the product of the staff’s experience regarding auditor independence issues. The amendments focus on the definition of an affiliate of the audit clients, the definition of the professional engagement period, certain student loans and de minimis consumer loans and the relation to independence impairing lending relations and certain outdated transition and grandfathering situations. (Dec. 30, 2019)(here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive actions and no administrative proceedings last week, exclusive of 12j and tag-along actions.
Manipulation: SEC v. Bajic, Civil Action No. 1:20 -cv-00007 (S.D.N.Y. Filed Jan. 2, 1020) names as defendants Steve Bajic, Rajesh Taneja, Blacklight S.A. and eleven other individuals and off-shore entities. Defendant Bajic is a citizen of Canada, Mr. Taneja is a citizen of Vietnam and Blacklight is a controlled foreign corporation. Each of the other individual defendants, with one exception, is a foreign national. Each of the other entity defendants is an off-shore entity. Beginning as early as July 2015, and continuing until mid- 2019, Defendants Bajic, Taneja and others enabled control persons of certain public companies to sell their stock to retail investors. Messrs. Bajic, Traneja and others operated a scheme which essentially treated the entity defendants as a single enterprise and their assets as fungible. During the scheme various offshore nominee companies were used to disguise public company insiders so they could illegally dump their shares. To facilitate the process stock promoters were employed. About $7.7 in illegal profits were generated by the scheme. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(d) and 15(a). See also SEC v. Ciapala, Civil Action No. 1:20-cv-00008 (S.D.N.Y. Filed Jan. 2, 2020)(action against two individuals who facilitated the scheme detailed above; alleges violations of violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 9(a) and 10(b)). Each case is pending.
Fraudulent offering: SEC v. Longfin Corp., Civil Action No. 19-cv-5296 (S.D.N.Y.) is a previously filed action which named as defendants the firm and Venkata Meenavalli. The action centered on claims that the firm and its CEO misrepresented the nationality of the firm in public filings and its qualifications for Reg. A+. Defendants resolved the charges by consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). The injunction as to Mr. Meenavalli is also based Exchange Act Section 13(b)(5) while the orders as to the company are, in addition, based on Exchange Act Sections 13(a) 13(b)(2)(A) and 13(b)(2)(B). Mr. Meenavalli will pay disgorgement of $150,000 (his full salary) plus prejudgment interest of $9,000 and a civil penalty of $232,000. He will surrender all of his company stock and is permanently barred from serving as an officer or director of a public company and from participating in any penny stock offering. A default judgment as to the company, entered earlier, ordered the payment $6.8 million in monetary relief. A separate action involving the company, its CEO and others, centered on allegations regarding an illegal distribution of shares, was resolved earlier. A parallel criminal action filed by the U.S. Attorney’s Office for Manhattan. See Lit. Rel. No. 24706 (Jan. 3, 2020).
Manipulation: SEC v. Debo, Civil Action No. 20-cv-6 (S.D.N.Y. Filed Jan. 2, 2020) is an action which names as a defendant Ulrik Debo, a citizen of Monaco who claims to be an investment adviser with Imali Securities Ltd.. The firm, supposedly a portfolio company in the Cayman Islands. Beginning in the Spring of 2019 Defendant orchestrated a scheme to control a microcap shell firm and manipulate its shares. A nominee CEO was installed who supposedly controlled the majority of the firm shares. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24705 (Jan. 2, 2020). The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action.
Insider trading: SEC v. Pinto-Thomaz, Civil Action No. 1:18-cv-05757 (S.D.N.Y.) is a previously filed action centered on the acquisition of a paint firm by the Sherwin-Williams Co. Named as defendants are Sebastian Pinto-Thomaz, an analyst at a credit ratings agency who learned about the transaction, and the two friends he tipped, Abell Oujaddou and Jeremy B. Milui, each of whom traded. To resolve the matter each Defendant consented to the entry of a permanent injunction based on Exchange Act Section 10(b). In addition, each trading Defendant agreed to disgorge the profits while Mr. Pinto-Thomaz will pay the amount he received from Defendant Oujaddou. The payments will be satisfied by the forfeiture ordered in the parallel criminal case. Defendant Pinto-Thomaz is currently serving a 14 month prison sentence. Defendants Oujaddou and Millui each pleaded guilty. Each man is currently serving a 5 month sentence. Mr. Pinto-Thomaz was also barred from association with any nationally recognized statistical rating organization. See Lit. Rel. No 24757 (Jan. 2, 2020).
Insider trading: SEC v Mazzo, Civil Action No. 12-01327 (C.D. Cal.) is a previously filed action which named as defendants James Mazzo and David Parker. The complaint alleged that Mr. Parker traded on inside information about a then pending tender offer by a medical device firm. The information traced to baseball player Douglas DeCinces who had been illegally tipped by Mr. Mazzo. Mr. Parker resolved the action, consenting to the entry of a permanent injunction based on Exchange Act Sections 10(b) and 14(e). He will also pay disgorgement of $343,954 and a civil penalty of $56,046. See Lit. Rel. No. 24703 (Jan. 2, 2020).
False statements/net capital: SEC v. Mekawy, Civil Action No. 1:19-cv-11731 (S.D.N.Y. Filed Dec. 23, 2019) names as defendants Benjamin Mekawy, an employee of registered broker-dealer, Seidel LLC and Alan Seidel, founder and part owner the brokerage firm. The two men are charged with aiding and abetting net capital violations by the brokerage firm. First, Mr. Mekay concealed a six-figure liability for back rent by eliminating it from the general ledger. He later made false representations to the person preparing the net capital reports about it. Second, Mr. Mekaway submitted forged reports showing the firm had more funds than it actually had to the person preparing the calculations. Finally, Mr. Seidel lied to the person preparing the calculations by claiming that a $1 million deposit represented a capital infusion rather than a loan. The complaint alleges violations of Exchange Act Sections 15(c)(3) and 17(a)(1). The case is pending. See Lit. Rel. No. 24702 (Jan. 2, 2020). See also U.S. v Seidel, No. 1:19-mj-1952 (S.D.N.Y. Filed Dec. 23, 2019).
Binary options: SEC v. Atkinson, Civil Action No. 18-cv-01606 (M.D. Fla.) is a previously filed action which names as a defendant Timothy J. Atkinson, his former business partner, Jay Passerino, and All in Publishing, LLC. Michael Wright is also named as a defendant. The complaint alleged that Defendants, while claiming to be “affiliate marketers,” made and disseminated videos fraudulently showing people living lavish life styles from trading binary options and gave seminars on the topic. Each Defendant settled with the Commission. The final judgments, entered by consent, as to each Defendant impose permanent injunctions prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, Defendants Atkinson and All in Publishing were ordered to pay disgorgement of $27,208,987 along with prejudgment interest of $2,824,935. The order also directs Mr. Atkinson to pay a penalty equal to the amount of the disgorgement. The amount of disgorgement is off-set by any amounts paid in a parallel CFTC enforcement action. Mr. Wright was enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He was directed to pay disgorgement of $266,353 and a penalty equal to the amount of the disgorgement. See also Lit. Rel. No. 24701 (Dec. 30, 3019).
Accounting: The Australian Securities and Investment Commission noted that The Environmental Group Ltd. amended its accounting for the acquisition of RCR Energy Services and Baltec East following an inspection by the Commission. Specifically, the firm had recorded acquisition costs as good will. After the inspection by the Commission the item was expenses.
Conflicts: The Securities and Futures Commission reprimanded and fined RHB Securities Hong Kong Ltd. $6.4 million for failures related to regulatory requirements regarding conflicts of interest. The Commission concluded that the firm failed to: 1) Effectively implement its policy for avoiding actual and potential conflicts of interest involving research reports and the investment banking division; 2) adequately disclose its investment banking relationship with a client in a research report; and 3) to effectively monitor the trading activities of its research analysts. The firm also failed to adequately supervise its account executives by extending its testing and sampling procedures regarding the taping of client conversations.
Trades: The SFC censured CTIC Securities Brokerage (HK), CLSA and Beijing Enterprises Holdings Ltd. with respect to the buy-back of their shares. Specifically, each firm handled the purchases on the exchange for institutional clients as on-market transactions when in fact they were pre-arranged deals. This violates the code regarding buy backs.