SEC ENFORCEMENT ACTIONS
SEC Charges KKR With Misallocating Broken Deal Expenses
June 29, 2015 (Litigation Release No. 131)
Kohlberg Kravis Roberts & Co. (KKR) has agreed to pay nearly $30 million to settle the SEC’s charges of misallocating more than $17 million in broken deal expenses. The SEC also found that KKR incurred $338 million in broken deal or diligence expenses during a six-year period ending in 2011. KKR failed to expressly disclose how fund expenses would be allocated; KKR did not allocate any portion of the broken deal expenses to the co-investors for years.
SEC Announces Cherry-Picking Charges Against Investment Manager
June 29, 2015(Litigation Release No. 132)
The SEC has charged Mark P. Welhouse and his investment advisory firm, Welhouse & Associates Inc., for cherry picking better performing options for his personal account while allocating worse ones for his clients. These charges are the first stemming from the SEC’s new data intensive efforts to identify “cherry picking” trade allocations. The SEC alleges that Welhouse made $442,319 in ill-gotten gains by purchasing options en masse, then allocating them later in the day based on their change in value.
SEC Charges Goldman Sachs With Violating Market Access Rule
June 30, 2015 (Litigation Release No. 133)
Goldman Sachs has been charged for violating the market access rule when, due to a software error, roughly 16,000 mispriced options orders were sent to options exchanges on August 20, 2013. The error led to formerly-contingent orders to be sent out with $1 prices. The SEC found that Goldman Sachs had insufficient controls and preventative measures in place. Without admitting or denying the SEC’s findings, Goldman Sachs will settle the charges with a $7 million penalty.
SEC Charges Hedge Fund Advisory Firm With Conducting Fraudulent Fund Valuation Scheme
July 1, 2015(Litigation Release No. 134)
AlphaBridge Capital Management and owners Thomas T. Kutzen and Michael J. Carino have agreed to pay a combined $5 million penalty to settle the SEC’s charges for conducting a fraudulent pricing scheme, inflating the valuation pricing of securities they managed. AlphaBridge claimed to use price quotes obtained from brokers when instead they used their own derived pricing. Richard L. Evans was separately charged and has agreed to pay $15,000 for contributing to the pricing scheme while working as a broker-dealer representative. Mr. Evans is barred from working in the securities industry for at least one year while Mr. Carino is barred for at least three years. AlphaBridge and Kutzen are censured.
SEC Charges Former Stockbroker With Conducting Ponzi Scheme
July 1, 2015 (Litigation Release No. 135)
The SEC has charged Malcolm Segal with conducting a Ponzi scheme. Mr. Segal deceived investors and stole investor money from fraudulently selling “certifications of deposits (CDs)” with false claims of higher returns. Mr. Segal used investor money to support his lavish lifestyle. He raised nearly $15.5 million from at least 50 investors and played sneakily into stealing profits for his own benefits by purchasing CDs on behalf of investors and redeeming them early without investors’ knowing. The SEC further alleges that Segal, desperate to fund the payments, stole directly from his customers’ accounts, forging authorization documents, including that of a customer’s wife who had died before the fund transfer. Further criminal charges have been placed on Segal by the U.S. Attorney’s Office for the Eastern District of Pennsylvania. The investigation is being continued by the SEC.
SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation
July 1, 2015 (Litigation Release No. 136)
The SEC has proposed Rule 10D-1 which would require companies to have clawback policies for erroneously awarded incentive-based compensation. This rule is the last of the proposals concerning executive compensation required by Dodd-Frank. In the proposed rule, companies would be required to fully disclose their clawback policies.
SEC Charges Deloitte & Touche With Violating Auditor Independence Rules
July 1, 2015 (Litigation Release No. 137)
Deloitte & Touche LLP has been charged for violating auditor independence rules, settling the charges for over $1 million. Andrew C. Boynton was paid by the consulting affiliate of Deloitte at the same time he was serving on the boards and audit committees of three funds audited by Deloitte. Boynton and the funds’ administrator, ALPS Fund Services, have been charged and have agreed to pay $60,000 and $45,000, respectively.
SEC Solicits Public Comment on Audit Committee Disclosures
July 1, 2015 (Litigation Release No. 138)
The SEC has voted to publish a concept release, in order to receive public comments on current audit disclosure requirements. Specifically, the SEC is interested in how information about audit committees’ responsibilities and functions can better be relayed to investors. Public comment will be allowed for 60 days after the concept release is published in the Federal Registrar.
SEC Halts Pyramid/Ponzi Scheme Targeting Spanish and Portuguese Communities
July 2, 2015 (Litigation Release No. 139)
Daniel Fernandes Rojo Filho, his company DFRF Enterprises, and six promoters have been charged with fraud by the SEC for their involvement in a pyramid/Ponzi scheme. DFRF Enterprises, which claimed to operate over 50 gold mines in Africa and Brazil, raised over $15 million from 1,400 investors. The SEC alleges that Filho has withdrawn over $6 million from investor funds for personal expenditures including luxury cars.
SEC Reappoints Lewis H. Ferguson to Second Term on PCAOB
July 2, 2015 (Litigation Release No. 140)
The SEC has reappointed Lewis H. Ferguson for a second term on the Public Company Accounting Oversight Board (PCAOB) which will run until October 2019. The PCAOB oversees audits of financial statements of public companies and broker-dealers through registration, standard setting, inspection, and disciplinary programs. Mr. Ferguson was first appointed to the PCAOB in January 2011. Some of his qualifications include: serving as the PCAOB’s first General counsel from 2004 to 2007, serving as a partner in the law firm of Gibson Dunn & Crutcher LLP, serving as a partner at Williams & Connolly LLP, and serving as Senior Vice President (as well as General Counsel and Director) of Wright Medical Technology.
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