Friday, December 12, 2014

Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

SEC Sanctions Eight Audit Firms for Violating Auditor Independence Rules
December 8, 2014 (Litigation Release No. 272)
The SEC sanctioned the following firms for violating auditor’s independence criteria: BKD LLP, Boros & Farrington Accountancy Corporation, Brace & Associates PLLC, Robert Cooper & Company CPA PC, Lally & Co LLC, Lerner & Sipkin CPAs LLP, OUM & Co LLP, and Joseph Yafeh CPA Inc. While performing audits for their broker-dealer clients, these firms also prepared their clients’ financial statements, jeopardizing the impartiality of the audits. The firms agreed to settle their cases and will collectively pay $140,000 and comply with several undertakings to prevent future violations.

SEC Sanctions Operator of Bitcoin-Related Stock Exchange for Registration Violations
December 8, 2014 (Litigation Release No. 273)
The SEC sanctioned Ethan Burnside for operating two online exchanges (BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange) without registering the venues as broker-dealers or stock exchanges with the SEC. The two exchanges offered account holders the opportunity to trade securities using the virtual currencies Bitcoin and Litecoin. The two exchanges executed nearly 430,000 trades. Burnside will be fined $68,387.07, $58,387.07 in profits he made from the websites plus interest and a $10,000 penalty, and will be barred from the securities industry for at least two years.

SEC Penalizes Morgan Stanley for Violating Market Access Rule
December 10, 2014 (Litigation Release No. 274)
The SEC has fined Morgan Stanley $4 million for violating the market access rule, which requires broker-dealers to implement sufficient risk controls prior to giving customers access to security markets. The violation occurred when a trader from Rochdale Securities LLC purchased approximately $525 million in Apple Stock via Morgan Stanley’s electronic trading desk, even though Rochdale’s pre-set daily trading limit only amounted to $200 million. The trader was committing fraud as he altered a customer order to purchase 1,625 Apple shares into a purchase of 1,625,000 shares. The trader has been charged and sentenced to 30 months in prison.

SEC Announces Fraud Charges Against Buffalo-Based Firm and Co-Owners Accused of Misleading Investors in Hedge Fund
December 10, 2014 (Litigation Release No. 275)
The SEC announced fraud charges against Timothy S. Dembski and Walter F. Grenda Jr. for advising their clients at Reliance Financial Advisors to invest in Prestige Wealth Management, a hedge fund managed by Scott M. Stephan. Both Dembski and Grenda greatly exaggerated Stephan’s experience in the securities industry and convinced their clients to invest approximately $12 million in his hedge fund. The hedge fund began trading in April 2011, but did not generate positive returns and lost about 80 percent of its value by late 2012. In addition, the SEC alleges Grenda borrowed $175,000 from two of his clients to grow his advisory business, but he instead spent the money on personal expenses. Stephan has agreed to be permanently barred from the securities industry.

SEC Names Karol Pollock to Lead Exam Program in Los Angeles Office
December 10, 2014 (Litigation Release No. 276 )
The SEC announced that Karol Pollock will be named as the new Associate Director of the exam program in the Los Angeles Office. As Associate Director, she will oversee around 60 examiners, accountants, and attorneys responsible for examining firms in Southern California, Nevada, Arizona, Hawaii, and Guam. Pollock has 25 years of experience in securities enforcement and has notably played a role in the case against the former CEO and CFO of Gemstar-TV Guide International for their complex scheme that inflated licensing and advertising revenues.

SEC Announces Agenda for Meeting of the Advisory Committee on Small and Emerging Companies
December 11, 2014 (Litigation Release No. 277 )
The Advisory Committee on Small and Emerging Companies meeting on December 17 will focus on the definition of an “accredited investor” the SEC announced today. Certain securities are not required to be registered with the SEC if the securities are sold to an accredited investor. The meeting will begin at 9:30 in the multipurpose room at the SEC Headquarters in Washington D.C. The meeting is open to the public and will also be webcast live on the SEC’s website.

SEC Files Securities Fraud Charges Against Owner of Home Restoration Business in Upstate New York
December 12, 2014 (Litigation Release No. 278 )
The SEC announced securities fraud charges against David Fleet for selling unsecured notes to finance his real estate business Cornerstone Homes Inc. Fleet failed to inform his investors about many important aspects about his business, including lying about using bank financing after mortgaging company-owned real estate. After the real estate market went down, Fleet used investor money to secretly invest in stock options to try and save his business. Fleet subsequently lost $3-$4 million in investments and Cornerstone filed for bankruptcy.

SEC Charges Manhattan-Based Attorney With Conducting Ponzi Scheme
December 12, 2014 (Litigation Release No. 279 )
The SEC charged attorney Charles A. Bennett for running a Ponzi scheme and defrauding his clients. Bennett claimed he had a close connection with a Wyoming-based investment fund, which mainly invested in European real estate mortgage-backed securities. Bennett claimed these securities yielded anywhere from 6 to 25 percent over short periods of time. Bennett was able to raise around $5 million, but he did not have a connection with a Wyoming-based investment fund and did not use the investors’ money to purchase any securities. Instead, Bennett used the money to finance his own expensive lifestyle.

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