The focus this week was on the proposed SEC budget as new SEC Chair Mary Jo White told a House subcommittee that the agency needs about a 26% increase. Part of the additional funding is to hire almost 700 new staff members.
SEC enforcement, in conjunction with the Manhattan U. S. Attorney’s Office, brought a kickback action involving payments to an official of an Argentinian bank by employees of a New York brokerage firm. The Commission also brought its first action against a City based on statements not contained in the financing papers. In conjunction with that proceeding the agency also issued a Section 21(a) report cautioning city officials regarding their statements and noting that appropriate procedures should be in place to guard against material misstatements and omissions that could impact bond investors.
Finally, FINRA filed three settled actions centered on a failure to adequately implement anti-money laundering procedures.
Alert: The Commission, in conjunction with FINRA, issued an investor alert titled “Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them (here).
Remarks: Commissioner Luis Aguilar delivered remarks titled “The Need for Robust SEC Oversight of SROs,” Washington, D.C. (May 8, 2013). In his remarks the Commissioner argues the oversight regulation is necessary, citing a series of enforcement actions (here).
Testimony: Mary Jo White, SEC Chair, testified before the Subcommittee on Financial Services and General Government, House Committee on Appropriations (May 7, 2013). The topic was the proposed Commission budget. The agency is seeking an increase of about 26% which would add 676 new staff positions (here).
Remarks: Mary Jo White, SEC Chair delivered remarks titled “Regulation in a Global Financial System,” to the Investment Company Institute General Membership Meeting in Washington, D.C. (May 1, 2013). Her remarks focused on the SEC as an international regulator (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 1 civil injunctive action and 3 administrative proceedings (excluding tag-along-actions and 12(j) proceedings).
Kickbacks: SEC v. Clarke, Civil Action No. 13 CV 3070 (S.D.N.Y. Filed May 7, 2013) names as defendants Thomas Alberto Clarke Bethancourt known as Thomas Clarke and Jose Alejandro Hurtado, both employees of broker dealer Direct Access Partners, LLC or DAP; Haydee Leticia Pabon, a director for international sales of for a Venezuelan company; and Iuri Rodolfo Bethancourt, who purports to be President of a Panama corporation controlled by Defendant Clarke. A parallel criminal case and forfeiture action were also filed as noted below.
DAP is a New York based brokerage firm. In 2009 Mr. Clarke and two unidentified executives initiated DAP Global’s business of providing customers with fixed income trade execution services. Over an eighteen month period beginning in January 2009 DAP Global generated revenues of about $74 million primarily from riskless principal trades executed by DAP in Venezuelan sovereign or state-sponsored bonds for Banco de Desarrolo Economico y Social de Venezuela, known as BANDES. Those transactions were brought to DAP Global by Mr. Hurtado. Maria Gonzalez, a vice president of finance at BANDES, received kickbacks, and Mr. Hurtado received kickbacks in return for the business. About half of the revenue generated from the transactions was paid as expenses for the sham compensation to Messrs. Hurtado and Bethancourt with the understanding that portions of the payments would ultimately be transmitted to Ms. Gonzales. She was paid approximately $9 million. At the same time Mr. Bethancourt is alleged to have acted as a front for Mr. Clarke so he could collect additional cash. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(c)(1)(A). The case is in litigation and the SEC’s investigation is continuing.
Prime bank fraud: In the Matter of Ziad K. Adbelnour, Adm. Proc. File No. 3-15318 (May 7, 2013) is a proceeding which names as Respondent Mr. Abdelnour, the president and CEO of Blackhawk Partners, Inc. The firm is an unregistered private equity family office. For an eighteen month period beginning in September 2009 the firm offered in a web posting investments in prime bank instruments that were claimed to yield returns of as much as 600% without risk. The posting contained a warning about scams. No investors purchased. The Order alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 15(a). To resolve the action Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of an order barring him from the securities business and from participating in any penny stock offering with a right to apply for reentry after five years. He also agreed to pay a civil penalty of $25,000.
Financial fraud: In the Matter of the City of Harrisburg, Pennsylvania, Adm. Proc. File No. 3-15316 (May 6, 2013) is the first action against a city for statements not in the bond documents. The Order alleges that by December 2007 Harrisburg had outstanding obligations from both its general obligation bonds and the primary guarantees to its various component units totaling about $498 million. A substantial portion of this debt had been issued by the city Authority, relating to a Resource Recovery Facility or RRF. It was guaranteed by the city. In connection with the debt, the city executed a series of Continuing Disclosure Certificates which imposed certain financial disclosure obligations on it. Each year the financial data and disclosures were to be placed in a specified depository for investors. By late 2008 the Authority did not have sufficient revenue to meet its debt service obligations for 2009 and beyond without a significant rate increase for a waste disposal unit at its RRF. The required increase was not obtained. At the same time the city did not complete the required financial reports in a timely fashion and those done were inaccurate, leaving investors to rely on public statements of the city. The little information that was available was materially incomplete. Thus, although the 2009 budget and a transmittal letter were available on the city website, they failed to include funds for the guaranteed obligations of the Authority despite the fact that it was unlikely to have the ability to service the debt. The papers also misstated the city credit rating. An April 2009 address the Mayor made misleading statements by failing to detail the impact of the repayment obligations from the bonds. During the period the city did not have policies and procedures to ensure that the financial information released to the public was accurate in all material respects or ensure compliance with the Continuing Disclosure Certificates. The Order alleged willful violations of Exchange Act Section 10(b).
To resolve the matter the city agreed to a series of undertakings and consented to the entry of a cease and desist order based on Exchange Act Section 10(b). The Commission considered the cooperation of the city in resolving the proceeding.
Section 21(a) Report: Release No. 69516, Report under Section 21(a) of the Exchange Act, Report of Investigation in the Matter of the City of Harrisburg, Pennsylvania Concerning the Potential Liability of Public Officials with Regard to Disclosure Obligations in the Secondary Market. Thisis the companion report to the proceeding against the city of Harrisburg. It emphasized the applicability of the antifraud provisions to the statements of public officials and the need for adequate procedures to ensure that those statements are accurate and complete.
Investment fund fraud: SEC v. Wilcox, Civil Action No. 2:11-cv-01219 (D. Utah) is a previously filed action against Kevin Wilcox, Jennifer Thoennes and Eric Neslson alleging that they participated in a Ponzi scheme operated by Joseph Neslon. That scheme raised about $16 million from more than 100 investors. This week the Commission settled with defendants Nelson and Wilcox. Mr. Nelson consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay disgorgement of $168,000 and prejudgment interest, payment of which was waived based on financial condition. Defendant Wilcox consented to the entry of a similar injunction which added Securities Act Section 5 and Exchange Act Section 15(a). He agreed to pay disgorgement of $120,000 along with prejudgment interest, the payment of which waived except as to $23,23 based on financial condition. A default judgment was also entered against defendant Jennifer Thoennes. The Commissions action against Joseph Nelson is pending. See also Lit. Rel. No. 22695 (May 3, 2013).
Misappropriation: In the Matter of Walter v. Gerasimowicz, Adm. Proc. File No. 3-15024 (May 3, 2013) is a proceeding against Mr. Gerasimowicz; his firm, Meditron Asset Management, LLC, a registered investment adviser; and Meditron Management Group, LLC, an unregistered investment adviser. Beginning in September 2009, and continuing for about two years, Respondents are alleged to have diverted about $2.65 million from their client, Meditron Fundamental Value/Growth Fund, LLC. The funds were funneled to SMC Electronic Contracting Inc., a private company controlled by Mr. Gerasimowicz that is in Chapter 11. Respondents repeatedly failed to disclose, and misrepresented to Fund investors, the true nature of their actions regarding SMC and their deviations from the Fund’s disclosed valuation policy. The Order alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1),(2) and (4). To resolve the proceeding, Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Gerasimowicz will also be barred from the securities business and Meditron Asset Management is censured. The Respondents have agreed to pay disgorgement and third tier civil penalties in amounts to be determined by additional proceedings.
Kickbacks: U.S. v. Clarke, 13-mag-0683 (S.D.N.Y. May 7, 2013) are actions centered on a kickback scheme involving a New York broker and an Argentinean bank. The criminal case names as defendants Tomas Alberto Clarke Bethancourt known as Thomas Clarke and Jose Alejandro Hurtado, both employees of broker dealer Direct Access Partners, LLC or DAP, along with Maria Gonzalez, a vice president of finance at Banco de Desarrolo Economico y Social de Venezuela, known as BANDES. The complaint alleges conspiracy and violations of the Travel Act. This is the companion case to the SEC’s action. It is based on the same facts detailed above. The USAO also filed a related forfeiture action.
Paul Novak, formerly a consultant to Willbros International, and an employee of a subsidiary, was sentenced to serve 15 months in prison and pay a $1 million fine. He previously pleaded guilty to one count of conspiracy and one substantive FCPA count. The court considered his cooperation.
The charges where based on a scheme which took place from late 2003 to early 2005 in which Mr. Novak and others made corrupt payments totaling over $6 million to varous Nigerian government officials and officials from a Nigerian political party. The purpose was to assist Willbros and its joint venture partner in obtaining and retaining the Eastern Gas Gathering System Project valued at about $387 million. Previously, the company entered into a deferred prosecution agreement which has now been dismissed and two executives pleaded guilty, receiving prison terms of 12 months and one day and 15 months based on their cooperation. Another executive is a fugitive.
Three firms were sanctioned for inadequate anti-money laundering programs by the regulator:
Atlas One Financial Group, LLC: The firm, based in Miami, Florida, was fined $350,000. Beginning in February 2007 and continuing through the spring of 2011, the firm failed to identify suspicious account activity and to adequately investigate numerous red flags. Although certain accounts had a pattern of millions of dollars moving through them, for example, no follow-up was conducted.
Firsttrade Securities, Inc.: The firm was fined $300,000. It is an online trading firm which catered to the Chinese community. Although the firm had many suspicious transactions involving Chinese issuer stocks and evidence of pre-arranged trades of Chinese issuers in related accounts, appropriate follow up was not undertaken. The firm failed to implement an adequate AML program.
Rodney Michel and Frank Brickell: Mr. Michel was the owner and Mr. Brickell the CCO, of World Trade Financial Corporation, San Diego, California. The owner was fined $250,000 and the COO $25,000 for failing to create and enforce a supervisory system and procedures to monitor unlawful transactions in unregistered penny stock between March 2009 and August 2011. During that period the firm handled transitions in 27.5 million shares of 12 penny stock issuers. Despite the fact that shares were not properly registered or eligible for an exemption, the transactions were executed.
Related parties: The Board reproposed for public comment an auditing standard titled Related Parties. The proposed standard would enhance the procedures used by the auditor to identify and evaluate a company’s significant unusual transactions. It would also require the auditor to conduct procedures to assess the risk of material misstatement in the financial statements. The standard is being reproposed to secure comments on changes made based on public comments.
Manipulation: The Australian Securities and Investments Commission banned former client adviser James Pearson of DJ Carmichael for market rigging. Specifically, between May 12 and July 15, 2011 he placed 20 orders on the ASX as part of an on-market buyback of units in the LinQ Resources Fund. The orders were entered late in the day causing the share price to be relatively high and creating a false or misleading appearance in the price for trading in the stock.
Deception: The Securities and Futures Commission of Hong Kong barred registered representative Andy Pau Chin Hung from the industry for 10 years. Previously he had been employed by KGI Asia Limited and KGI Futures (Hong Kong). The agency determined that he is not a fit and proper person based on the fact that he had assisted a third party with opening nominee securities trading account to dispose of certain securities, portions of which he accepted and placed in accounts of family members. The regulator also determined that he had concealed from his employer the fact that the accounts in which the securities were placed belonged to family members.
Manipulation: The Federal Financial Supervisory Authority, German, announced that following trial a businessman was convicted of stock manipulation and insider trading. The court handed down a sentence of five years and three months in prison and ordered the payment of €3.5 million in restitution. At trial the evidence demonstrated that the defendant had provided false confirmations to a bank official to secure a capital increase for the company. The defendant then engaged in transactions in those shares knowing that they were the result of a fraud. He also issued contrary buy and sell orders to push up the stock price to one which did not correspond to the actual supply and demand of shares.