Friday, July 31, 2015

Enforcement Actions: Week in Review


SEC Charges Three Penny Stock Promoters Behind Pump-and-Dump Schemes
July 21, 2015 (Litigation Release No. 152)
Former Oppenheimer & Co. Inc. employees: Scott A. Eisler, Arthur W. Lewis and Robert Okin, agreed to settle the SEC’s charges involving unregistered sales of billions of shares of penny stocks on behalf of an Oppenheimer customer. Lewis and Okin failed to respond to red flags associated with sales that violated the federal securities laws and allowed unregistered transactions to occur from individuals that they supervised. Eisler agreed to settle the SEC’s charges by paying a $50,000 penalty, Lewis is paying a $50,000 penalty, and Okin is paying a $125,000 penalty. Eisler will be barred from engaging in penny stock sales and from working in the securities industry for at least one year while Lewis and Okin will be barred from working in the supervisory capacity in the securities industry for at least one year.

Former Oppenheimer Employees Settle Charges Involving Unregistered Sales of Penny Stocks
July 23, 2015 (Litigation Release No. 153)
The SEC charged Joshua Samuel Aaron, Gery Shalon, and Zvi Orenstein for manipulating the microcap market by promoting, through e-mail, penny stocks in a pump-and-dump scheme. Aaon, Shalon, and Orenstein pumped the prices of shares they had in serval penny stock companies to as high as 1,800 percent and then dumped the shares, illegally profiting at least $2.8 million. The SEC seeks to bar these three men from engaging in penny stocks, and criminal charges have been placed on them from the U.S. Attorney’s Office for the Southern District of New York.

SEC Charges Mead Johnson Nutrition With FCPA Violations
July 28, 2015 (Litigation Release No. 154)
Mead Johnson Nutrition Company has agreed to settle the SEC charges by paying $12 million for violating the Foreign Corrupt Practices Act (FCPA), inaccurately reflecting more than $2 million in improper payments in its books and records during a five-year period. The China-based unit made improper payments at state-owned hospitals and misused marketing and sales funds, bribing healthcare professionals to recommend the company’s infant formula to patients who were ne or expectant mothers.

Daniel M. Hawke, Chief of Market Abuse Unit, to Leave SEC After 16 Years of Service
July 29, 2015 (Litigation Release No. 155)
Former Director of the SEC’s Philadelphia Office and current Chief of the Division of Enforcement’s Market Abuse Unit Daniel M. Hawke is leaving the SEC in August and returning to the private sector, having worked at the SEC for 16 years. Hawke has been in charge of the Market Abuse Unit since it was created in 2010. Prior to joining the SEC in 1999, Hawke had a private practice in D.C. for ten years.

SEC Charges Operators of Fraud Based in Upstate New York
July 30, 2015 (Litigation Release No. 156)
54Freedom Inc., CEO James P. Griffin, CFO and Treasurer James Wolle, and seven other companies have been named in fraud charges by the SEC. The SEC alleges that Griffin and Wolle misled investors about their companies’ prospects including falsely claiming an exclusive relationship with Lloyd’s of London and that their “charitable gift annutiies” were backed by reputable insurance companies. Over the course of seven years, the named companies are alleged to have raised $8 million from more than 125 investors. Griffin was arrested under charges of fraud and money laundering by the U.S. Attorney’s Office for the Northern District of New York.

Friday, July 17, 2015

Enforcement Actions: Week in Review


SEC Announces Settlement With Cooperator in Grand Central Post-It Notes Insider Trading Case
July 13, 2015 (Litigation Release No. 143)
The SEC announced a settlement with Frank Tamayo for cooperating in a continuing insider trading investigation where illegal information was passed via Post-It notes at Grand Central Terminal. Tamayo was alleged to distributing received tips from a law firm clerk to a stockbroker that he would meet up with at Grand Central Terminal, presenting the ticker symbol of the company that would be acquired on a post-it note or napkin. Mr. Tamayo was identified as the middleman in a previous charge against a law firm clerk and a stock broker last year involving insider trading which was filed in feral court New Jersey. Tamayo will not face a monetary penalty, but he is ordered to disgorge more than $1 million of his illegal profits from the insider trading scheme. He will be permanently prohibited from future violations.

Release of Joint Staff Report on October 15, 2014
July 13, 2015 (Litigation Release No. 144)
The US Department of Treasury, the Federal Reserve Board, the Federal Reserve Bank of New York, the US Securities and Exchange Commission and the US Commodity Futures Trading Commission issued a joint report analyzing the significant volatility in the US Treasury market on October 15, 2014. The joint report provides insight and thorough analysis of the market conditions, offers a number of developments that aid in clarifying its volatility, highlights the changing structure of the U.S. Treasury market, and offers future steps for additional enhancement of the public and private sectors’.

OZ Management LP Admits Providing Inaccurate Data, Impacting Brokers’ Records and “Blue Sheets”
July 14, 2015 (Litigation Release No. 145)
OZ Management LP has been charged by the SEC for supplying inaccurate trade data to four prime brokers, leading to inaccurate books and records, including “blue sheets” provided to the SEC. The SEC alleges that for six years OZ Management inconsistently identified trades as long or short. OZ Management has agreed to settle the charges with a $4.25 million penalty.

SEC Charges 34 Defendants in Microcap Market Manipulation Schemes
July 14, 2015 (Litigation Release No. 146)
19 entities and 15 individuals have been charged by the SEC for involvement in alleged microcap market manipulation schemes. The charges include: fraud, touting, manipulative trading, and registration violations. Nine defendants have also been charged criminally. Those involved in the multiple schemes were stock promoters, microcap issuers, owners and employees of six firms, as well as customers.

SEC Chair White, Federal Agencies Join Forces for Military Consumer Protection Day 2015
July 15, 2015 (Litigation Release No. 147)
This past Wednesday, SEC Chair Mary Jo White led a Military Consumer Protection Day event at the Joint Base McGuire-Dix-Lakehurst. The event’s focus was on how military service members could best protect and manage their finances. Also in attendance were officials from the U.S. Postal Inspection Service, the Department of Justice’s Services Members and Veterans Initiative, the U.S. Attorneys’ Housing and Civil Enforcement Section of the Fair Housing Program, the FBI’s Securities Fraud Program and the U.S. Secret Service.

SEC Charges Purported Investment Adviser in San Diego With Stealing Client Funds and Conducting a Ponzi Scheme
July 16, 2015 (Litigation Release No. 148)
San Diego-based investment advisor Paul Lee Moore has been charged by the SEC for stealing clients’ funds and running a Ponzi scheme. The SEC alleged that Moore and his firm, Coast Capital Management, raised $2.6 million, $2 million of which Moore stole for personal use. The remaining funds were used to repay earlier clients making redemption requests. Coast Capital, now defunct, was not registered with the SEC or state regulators as an investment advisor. Moore also faces criminal charges.

SEC Charges Pennsylvania Attorney with Insider Trading in Advance of Merger Announcement
July 16, 2015 (Litigation Release No. 149)
Hebert K. Sudfeld has been charged with insider trading of Harleysville Group, Inc. stocks in advance of the 2011 $760 million merge announcement between Harleysville and Nationwide Mutual Insurance Company, violating the antifraud provisions of the federal securities laws and an SEC antifraud rule. Mr. Sudfeld stole inside information without being involved in the merger, illegally trading news that increased Harleysville’s stock price by 87% when the merger was announced in September 2011. Using the stolen information, Sudfeld purchased Harleysville stock and then sold the purchased shares once the merger was announced, leading to approximately $79,000 in illegal profits. The SEC seeks to place penalties against Sudfeld, requesting the return of the illegal profits as well as prejudgment interest.

SEC Pays More Than $3 Million to Whistleblower
July 17, 2015 (Litigation Release No. 150)
The SEC has awarded over $3 million to a company insider who provided useful information that contributed to a successful enforcement action against a complex fraudulent scheme. This payout is the third highest award to date under the SEC’s whistleblower program. Under the whistleblower program, whistleblower identities are protected and whistleblower awards can range from 10 percent to 30 percent of the money collected when penalties exceed $1 million.

Michele Anderson Named Associate Director in the Division of Corporation Finance
July 17, 2015 (Litigation Release No. 151)
The SEC promoted Michele Anderson to be positioned as the Associate Director in the agency’s Division of Corporation Finance where she will supervise the Office of Mergers and Acquisitions and its Office of International Corporate Finance. Ms. Anderson’s qualifications include: serving as the SEC’s Chief of Office of Mergers and Acquisitions since 2008, serving as an attorney-advisor from 2004 to 2008, and serving as Legal Branch Chief of the Office of Telecommunications.


Thursday, July 16, 2015

Gonzalez, Mora and Lewis v Royal Alliance - $1.4 million
non-traded REIT, Annuity Award

In July 2015, a FINRA arbitration panel in San Francisco, CA ordered Royal Alliance Associates to pay $1,401,687 in well-managed account damages measured against a 60% stock, 40% bond benchmark, punitive damages, attorney fees and expert witness fees. The Claimants were three AT&T retirees who took lump sum payouts rather than pensions and invested with Royal Alliance. You can read the award here. Dr. McCann testified on liability and damages over Royal Alliance’s sale of non-traded REITs (Inland American Real Estate Trust and Dividend Capital Diversified Property Fund) and variable annuities to the Claimants for their retirement portfolio.

Dr. McCann’s “Fiduciary Duties and Non-traded REITs” can be downloaded here and SLCG’s blog posts on non-traded REITs can be found here.

Friday, July 10, 2015

Enforcement Actions: Week in Review


SEC Charges Oil Company and CEO in Scheme Targeting Chinese-Americans and EB-5 Investors
July 6, 2015 (Litigation Release No. 141)
The SEC has charged CEO Bingqing Yang and her company Luca International Group for fraud. The SEC alleges that Yang gave presentations with falsely depicting a large, successful company. Yang allegedly used new investors’ funds, in a Ponzi-scheme fashion, to make payments to older investors. The SEC also claims that over $2.4 million of investors’ funds was used on a house purchase, a gardening/pool services, a vacation to Hawaii and personal taxes. Further the SEC alleged that Yang raised approximately $8 million from EB-5 investors and diverted funds for personal gain, leaving no realistic possibility of repaying back the loans since the loan was not fully secured and the Luca entity being funded was in debt. Hiroshi Fujigami and his company Wisteria Global have agreed to settle the SEC charges from acting as brokers and selling securities illegally to two Luca entities. Fujigami and Wisteria are required to disgorge the commissions of more than $1.1 million. Fujigami will be barred from the securities industry and from participating in any penny stock offering.

SEC Advisory Committee on Small and Emerging Companies to Hold Conference Call Meeting
July 8, 2015 (Litigation Release No. 142)
On July 15 at 1:00 p.m., the SEC’s Advisory Committee on Small and Emerging Companies will hold a public meeting by telephone conference to continue discussions regarding topics discussed on June 3 which are public company disclosure effectiveness and regulatory treatment of “finders” that assist companies in capital raising activities.

Thursday, July 2, 2015

Enforcement Actions: Week in Review


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.

Artmire v First Midwest Securities - $850,000 Churning Award

In July 2015, a FINRA arbitration panel in Dallas, TX ordered First Midwest Securities to pay over $850,000 in compensatory damages, punitive damages, attorney fees, expert witness fees and interest after a hearing wherein the Claimant alleged Respondents churned the Claimant's accounts. You can read the award here. Dr. McCann testified to the egregiousness of the churning and damages on behalf of the Claimant. First Midwest Securities was bought this spring by Royal Alliance, part of the AIG Advisor Group.