August 7, 2010
SEC Divided Over ClawbacksAccording to the Wall St. Journal, SEC Commissioner Luis Aguilar has pushed hard for clawbacks of executive pay when corporate books are cooked, putting him at odds with fellow Commissioners. WSJ, Clawbacks Divide SEC .
August 6, 2010
SEC-CFTC Committee Continues Examination of May 6 Market Events
The SEC and the CFTC announced the agenda and participant list for the third meeting of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues on August 11. The Joint Committee will continue its examination of the unusual market events of May 6, focusing on retail investor perspectives and the role exchange traded funds (ETFs) may have played.
Confirmed Panelists include:
Michael Mendelson, Principal, AQR Capital Management
Noel Archard, Head of U.S. Products, Blackrock
Charles Rotblut, Vice President and Editor, American Association of Individual Investors
Chris Nagy, Managing Director, Order Routing Sales and Strategy, TD Ameritrade
Kevin Cronin, Director of Global Equity Trading at Invesco
Pamela J. Craig, Chief Financial Officer, Accenture
Two Tobacco Companies Settle FCPA Charges
The SEC charged two major tobacco companies, Universal Corporation, Inc. and Alliance One International, Inc., with violating the anti-bribery provisions of the Foreign Corrupt Practices Act of 1977 ("FCPA") for their involvement in a multi-million dollar bribery scheme with government officials in Thailand to obtain nearly $30 million in sales contracts to supply tobacco. The SEC also charged Alliance One with paying bribes in Kyrgyzstan and making improper payments in China, Greece, and Indonesia and Universal with making improper payments in Malawi and Mozambique.
According to the SEC's complaint, between 2000 and 2004, Universal, in coordination with two of its competitors, Dimon, Inc. ("Dimon") and Standard Commercial Corporation ("Standard"), paid approximately $800,000 to bribe officials of the government-owned Thailand Tobacco Monopoly ("TTM") in exchange for securing approximately $11.5 million in sales contracts for its subsidiaries in Brazil and Europe. From 2004 through 2007, Universal also made a series of payments in excess of $165,000 to government officials in Mozambique through corporate subsidiaries in Belgium and Africa. Universal made these payments, among other things, to secure an exclusive right to purchase tobacco from regional growers and to procure legislation beneficial to the company's business. Between 2002 and 2003, Universal subsidiaries paid a total of $850,000 to high-ranking Malawian government officials. Universal did not accurately record these payments in its books and records.
From 2000 to 2004, in a coordinated bribery scheme with Universal, Dimon and Standard paid bribes of more than $1.2 million to government officials of the TTM in order to obtain more than $18.3 million in sales contracts. (In May 2005, Dimon and Standard merged to form Alliance One). Dimon characterized the payment of bribes to TTM officials as commissions paid to Dimon's agent in Thailand. Similarly, Standard personnel authorized improper payments to TTM officials and failed to record those payments accurately in Standard's books and records.
The SEC's complaint also alleges that, from 1996 through 2004, Dimon International Kyrgyzstan ("DIK"), a wholly-owned subsidiary of Dimon, paid more than $3 million in bribes to Kyrgyzstan government officials to purchase Kyrgyz tobacco for resale to Dimon's customers. Most of these payments were delivered in bags filled with $100 bills to a high-ranking government official. DIK also made improper payments to Kyrgyzstan tax officials. Additionally, Dimon made improper payments to tax officials in Greece and Indonesia. Standard also made an improper payment to a political candidate and provided gifts, travel, and entertainment expenses to foreign government officials in the Asian Region, including China and Thailand. Dimon and Standard failed to record these payments accurately in the companies' books and records.
Without admitting or denying the SEC's allegations, defendants Universal and Alliance One consented to the entry of final judgments permanently enjoining each of them from violating the anti-bribery, books and records, and internal control provisions of the FCPA, codified as Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. Universal and Alliance One are ordered to pay disgorgement of $4,581,276.51 and $10,000,000, respectively, and each is ordered to retain an independent monitor for three years.
In related criminal proceedings announced today, the U.S. Department of Justice filed criminal actions against a Universal subsidiary and two Alliance One subsidiaries charging each of them with one count of conspiring to violate the FCPA and one count of violating the anti-bribery provisions of the FCPA. Universal and Alliance One have entered into non-prosecution agreements with the DOJ and agreed to pay criminal penalties of $4,400,000 and $9,450,000, respectively, and retain independent monitors for a period of three years.
August 5, 2010
SEC Settles Accounting Fraud Charges Against Navistar and Current and Former Officers
The SEC issued a cease-and-desist order against Navistar International Corporation (Navistar), CEO Daniel C. Ustian (Ustian), former CFO Robert C. Lannert (Lannert), Thomas M. Akers, Jr. (Akers), James W. McIntosh (McIntosh), James J. Stanaway (Stanaway), Ernest A. Stinsa (Stinsa) and Michael J. Schultz (Schultz). Each Respondent consented to the issuance of the Order without admitting or denying the Commission's findings as part of a global settlement.
The Order finds that at times from 2001 through 2005, Navistar overstated its pre-tax income by a total of approximately $137 million as the result of various instances of misconduct. Fraud by certain individuals at a Wisconsin foundry and in connection with certain vendor rebates and vendor tooling transactions accounted for approximately $58 million of that total. The remaining approximately $79 million resulted from improper accounting for certain warranty reserves and deferred expenses.
The Order directs Navistar to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and Ustian, Navistar's CEO, and Lannert, Navistar's former CFO, to cease and desist from causing any violations and any future violations of Section 13(b)(2)(B) of the Exchange Act.
Ustian and Lannert also agreed to comply with the forfeiture provisions of Section 304(a) of the Sarbanes-Oxley Act of 2002. Ustian consented to tender to the Company shares of Navistar common stock currently owned by Ustian in the amount of $1,320,000 and Lannert consented to pay $1,049,503 to the Company. Those dollar amounts reflect monetary bonuses that each received during the restatement period.
Additionally, the Order directs McIntosh to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and from causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; Akers, Schultz and Stanaway to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and from causing any violations and any future violations of Section 13(b)(2)(A) of the Exchange Act; and Stinsa to cease and desist from committing or causing any violations and any future violations of Exchange Act Rule 13b2-1 and from causing any violations and any future violations of Section 13(b)(2)(A) of the Exchange Act.
The Commission filed a parallel civil action in the United States District Court for the Northern District of Illinois against Akers, McIntosh, Stanaway, Stinsa and Schultz, in which each consented to pay civil penalties as follows: Akers — $100,000; McIntosh — $150,000; Stanaway — $50,000; and Stinsa — $25,000. A civil penalty was not imposed against Schultz because of a demonstrated inability to pay. These individuals consented to the filing of this complaint without admitting or denying its allegations.
Additionally, on August 5, 2010, the Commission issued a separate settled order concerning Navistar's former Controller, Mark T. Schwetschenau. The Order directs Schwetschenau to cease and desist from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(B) of the Exchange Act. The Order also denies him the privilege of appearing or practicing before the Commission with the right to request reinstatement after one year pursuant to Section 102(e)(1)(ii) of the Commission's Rules of Practice.
The Commission filed a parallel civil action in the United States District Court for the Northern District of Illinois against Schwetschenau in which he consented to pay $37,500 in civil penalties. Schwetschenau neither admitted nor denied the Commission's findings and allegations.
SEC Charges Two California Boiler-Room Operators with Green Energy Investment Fraud
The SEC charged two California boiler-room operators and four salesmen with conducting a fraudulent green energy investment scheme. The SEC's complaint names as defendants, boiler-room operators Joseph R. Porche, age 51, of Aliso Viejo, CA, and Larry R. Crowder, age 53, of Newport Coast, CA; and salesmen Konrad C. Kafarski, age 40, of Trabuco Canyon, CA, Carlton L. Williams, age 51, of Coto de Caza, CA, Gary K. Juncker, age 47, of Rancho Santa Margarita, CA, and Dale J. Engelhardt, age 46, of San Clemente, CA.
The SEC's complaint, filed in U.S. District Court in Santa Ana, alleges that between early 2008 to February 2009, Kensington Resources, Inc., through its principals, Porche and Crowder, and its salespeople, raised $11 million from approximately 200 investors nationwide selling unregistered shares of American Environmental Energy, Inc. ("AEEI") common stock. The SEC's complaint alleges that Porche, Crowder, and Kafarski falsely disclosed to investors that payments of sales commissions were limited to 10% of the funds raised, when, in reality, 25% of the funds raised were paid to salesmen and sales managers. The complaint further alleges that these defendants misrepresented how the funds raised would be used, telling investors that 80% of the funds raised would be used by AEEI to conduct its green energy business. In reality, most of the funds raised were kept by Porche and Crowder to fund their lavish lifestyles and only $315,000 of the $11 million raised went to AEEI.
The SEC seeks permanent injunctions, disgorgement with prejudgment interest, civil penalties, and penny stock bars against each of the defendants.
Proxy Access at Long Last?According to the Wall St. Journal, the SEC will adopt, by a 3-2 vote, a proxy access rule at its August 25 meeting. SEC Set to Open Up Proxy Process
SEC Settles Allegations of Hoax Tender Offers for U.S. Corporations
The SEC has agreed to settle charges against the late Hazem Al-Braikan, a Kuwaiti financial advisor, and Al-Raya Investment Company involving an alleged scheme to profit by issuing hoax takeover announcements for Harman International Industries, Inc. and another company. According to the SEC, in July 2009, Al-Braikan drafted and issued a bogus press release claiming that a non-existent private investment group in Saudi Arabia planned to acquire Harman International through a tender offer. According to the allegations in the Amended Complaint, Al-Braikan fabricated the press release over the weekend of July 18-19, 2009, scouring the internet for an appropriate graphic logo for his fictional entity and preparing various drafts of the hoax release, which he then faxed or emailed to various news organizations in the U.S. and abroad. He also made dozens of calls to various media outlets in the U.S. and abroad in an attempt to convince them to pick up the story. On the morning of Monday, July 20, a U.S. Internet news website posted the false announcement, which claimed that an entity called "Arabian Peninsula Group" was planning to make a public tender offer for Harman stock at $49.50 a share. At the time, Harman International's common stock was trading at about $25 per share. The false announcement led to a pre-market trading surge that drove Harman International's stock up by nearly 40%. After Harman International repudiated the announcement an hour later, the company's share price dropped precipitously, closing the day at $20.86, more than twenty percent lower than the prior trading day's close. The Amended Complaint also alleges that Al-Braikan perpetrated a similar hoax using Textron Inc. in April 2009, contacting media outlets about an alleged "scoop" regarding an upcoming takeover bid for Textron by a Middle Eastern company. In actuality, no such deal existed.
The Amended Complaint alleges that Al-Braikan profited by amassing large positions in Harman and Textron stock and Harman options in accounts that he controlled during the days and weeks before he created and released the false tender offer announcements. He then sold those positions at prices inflated by the false information, reaping profits for himself and others. Al-Braikan traded in accounts in his own name and that of Al-Raya, as well as accounts for himself and others at KAMCO. He also recommended the stocks to others, who bought and sold on his recommendation. Profits on the two hoaxes totaled more than $6.2 million.
All of the parties have agreed to settle this action and give back all profits gained as a result of the illicit conduct.
SEC Charges Former Business Director at Innospec with FCPA Violations
The SEC charged a former business director at Innospec, Inc., and the company's third-party agent in Iraq with violating the Foreign Corrupt Practices Act (FCPA) by engaging in widespread bribery of Iraqi government officials to land contracts under the United Nations Oil-for-Food Program and continue selling a fuel additive to Iraq after the program ended. Bribes also were paid to Indonesian officials to enable Innospec to sell the fuel additive to Indonesian state-owned oil companies.
The SEC, which charged Innospec earlier this year, alleges that David P. Turner was among senior Innospec officials who directed and approved more than $9.2 million in bribery payments either paid or promised to officials in Iraq or Indonesia. Bribes to Iraqi officials were arranged by Innospec's agent in Iraq, Ousama M. Naaman, whose commission payments included kickbacks to the Iraqi government in return for the Oil-for-Food contracts.
Both Turner and Naaman agreed to settle the SEC's charges against them. Turner agreed to disgorge $40,000 to settle the SEC's charges against him. Despite facing significant financial penalties, none were sought against him based on, among other things, his extensive and ongoing cooperation in the investigation. Naaman agreed to disgorge $810,076 plus prejudgment interest of $67,030, and pay a penalty of $438,038 that will be deemed satisfied by a criminal order requiring him to pay a criminal fine that is at least equal to the civil penalty amount. Naaman cooperated in the investigation after his extradition to the United States.
FINRA Arbitration Panel Awards ARS Purchaser $81 Million in Consequential Damages
Purchasers of auction rate securities that have sued for consequential damages resulting from the illiquidity of their investments have not fared well in court; for example, Aimis Art Corp. v. Northern Trust Securities, Inc., 641 F. Supp.2d 314 (S.D.N.Y. 2009), held these damages claims to be "speculative" and violative of section 28(a) of the Exchange Act. There is some evidence that purchasers may get better outcomes in arbitration. A FINRA arbitration panel, set up as part of a special arbitration program for ARS purchasers from firms that settled SEC charges, awarded an investor $81 million in consequential damages against UBS Financial Services. UBS says that it will seek to vacate the award, although the grounds for vacating are very narrow. Inv. News, UBS will seek to have $81M Finra ruling overturned.
August 4, 2010
SEC Charges Former Deloitte Partner with Insider Trading in Securities of Audit Clients
The SEC today charged a former Deloitte and Touche LLP partner and his son with insider trading in the securities of several of the firm's audit clients. The agency alleges that Thomas P. Flanagan traded in the securities of Deloitte clients, often while serving as a liaison between those companies' management teams and Deloitte's audit engagement teams. In this role, Flanagan had access to advance earnings results and other nonpublic information from Deloitte's audit engagements with Best Buy, Sears, and Walgreens as well as the firm's consulting engagement with Motorola. Flanagan made trades in the securities of these and other companies while in possession of the confidential information, and also tipped his son Patrick T. Flanagan who then traded on the basis of the nonpublic information.
The Flanagans agreed to pay more than $1.1 million to settle the SEC's charges.
According to the SEC's complaint, filed in the U.S. District Court in Chicago, Thomas Flanagan worked at Deloitte for 38 years and rose to the position of Vice Chairman of Clients and Markets. The SEC alleges that Flanagan committed insider trading on nine occasions between 2005 and 2008 by trading in the securities of multiple Deloitte clients and a company acquired by Deloitte client Walgreens. Flanagan was in possession of nonpublic information about those clients that he learned through his duties as a Deloitte partner, including such material market-moving events as earnings results, earnings guidance, and acquisitions. Flanagan's illegal trading resulted in profits of more than $430,000. On four occasions, Flanagan relayed the nonpublic information to his son, who traded based on that information for illegal profits of more than $57,000.
In addition to the court-filed complaint alleging illegal insider trading, the SEC also instituted administrative proceedings against Thomas Flanagan, finding that he violated the SEC's auditor independence rules on 71 occasions between 2003 and 2008 by trading in the securities of nine Deloitte audit clients. As a result, the SEC's administrative order finds that Thomas Flanagan caused and willfully aided and abetted Deloitte's violations of the SEC's auditor independence rules under Regulation S-X. Flanagan also caused and willfully aided and abetted the clients' violations of the reporting and proxy provisions of the Securities Exchange Act of 1934.
According to the SEC's complaint, Thomas Flanagan concealed his trades in the securities of Deloitte's clients and circumvented Deloitte's independence controls. He failed to report the prohibited trades to Deloitte, lied to Deloitte about his compliance with its independence policies, and provided false information to Deloitte's personal income tax preparers about the identity of the companies whose securities he traded.
Without admitting or denying the SEC's allegations in the complaint and the findings in the administrative order, Thomas Flanagan consented to the entry of an order of permanent injunction, disgorgement with prejudgment interest of $557,158, a penalty of $493,884, and a denial of the privilege of appearing or practicing before the SEC as an accountant. Without admitting or denying the SEC's allegations in the complaint, Patrick Flanagan consented to the entry of an order of permanent injunction, disgorgement with prejudgment interest of $65,614, and a penalty of $57,656.
August 3, 2010
FINRA Files with SEC Proposal to Revise the Discovery GuideThe SEC has posted on its website the FINRA proposal to revise the Discovery Guide to expand the guidance FINRA gives to parties and arbitrators on the discovery process and to update the Document Production Lists. The proposal includes conforming changes to Rules 12506 and 12508 of the Customer Code.
SEC and GE Settle FCPA Charges Involving UN Oil for Food Program
The SEC settled Foreign Corrupt Practices Act books and records and internal controls charges against General Electric Company ("GE") and two GE subsidiaries — Ionics, Inc. (currently GE Ionics, Inc.) and Amersham plc (currently GE Healthcare Ltd.). The SEC alleges that two GE subsidiaries — along with two other subsidiaries of public companies that have since been acquired by GE — made $3.6 million in illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.
GE; Ionics, Inc.; and Amersham plc failed to maintain adequate systems of internal controls to detect and prevent the payments; and the defendants' accounting for these transactions failed properly to record the nature of the payments. GE; Ionics, Inc.; and Amersham plc, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining them from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering GE to disgorge $18,397,949 in wrongful profits, pay $4,080,665 in pre-judgment interest, and pay a civil penalty of $1,000,000.
The settlement with GE represents the Commission's fifteenth enforcement action brought in connection with the UN Oil for Food Program. In total, the SEC has recovered over $204 million in disgorgement of profits, prejudgment interest, and civil penalties in Oil for Food-related cases.
The Commission considered remedial acts promptly undertaken by GE and the cooperation the company afforded the Commission staff in its investigation. The Commission acknowledges the assistance of the Department of Justice, Fraud Section, and the United Nations Independent Inquiry Committee.
SEC Settles Charges Against Citigroup and Two Former Officers Involving Subprime Mortgage-Related Assets
The SEC and Citigroup Inc.settled charges that Citigroup misled investors about the extent of the company's exposure to sub-prime mortgage-related assets during 2007. According to the SEC, between July 20, 2007 and November 4, 2007, in response to intense investor interest in the topic, Citigroup repeatedly made misleading statements about the extent of its holdings of assets backed by sub-prime mortgages in earnings calls and public filings. Throughout the period in question, Citigroup represented that its sub-prime exposure in Citigroup's investment banking unit, Citi Markets & Banking, was $13 billion or less, when in fact, at all times during that period, the investment bank's sub-prime exposure was over $50 billion.
Citigroup agreed to pay a $75 million penalty to settle the SEC's charges.
Separately, the SEC also instituted settled cease-and-desist proceedings against Gary Crittenden, Citigroup's former chief financial officer, and Arthur Tildesley, Jr., Citigroup's former head of Investor Relations, for their roles in causing Citigroup to make certain of the misleading statements. Crittenden agreed to pay $100,000, and Tildesley agreed to pay $80,000.
New York Times columnist Andrew Ross Sorkin criticizes the settlement since the corporate fine essentially comes from the Citigroup shareholders.
SEC Charges Wyly Brothers with Securities Fraud
The SEC brought an action charging that Samuel E. Wyly and his brother, Charles J. Wyly, Jr. (hereinafter the "Wylys"), engaged in a 13-year fraudulent scheme to hold and trade tens of millions of securities of public companies while they were members of the boards of directors of those companies, without disclosing their ownership and their trading of those securities. According to the complaint, the Wylys' scheme defrauded the investing public by materially misrepresenting the Wylys' ownership and trading of the securities at issue while enabling the Wylys to realize hundreds of millions of dollars of undisclosed gain and other material benefits in violation of the federal securities laws governing the ownership and trading of securities by corporate insiders.
The public companies involved in the Wylys' scheme to defraud were, according to the complaint, Michaels Stores, Inc., Sterling Software, Inc., Sterling Commerce, Inc., and Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Limited) ("Scottish Re") (hereinafter collectively referred to as "the Issuers"). The complaint alleges that shares of the Issuers were traded on the New York Stock Exchange throughout the period of the Wylys' scheme.
According to the complaint, the fraud involved an elaborate sham system of trusts and subsidiary companies located in the Isle of Man and the Cayman Islands (collectively hereinafter the "Offshore System") that enabled the Wylys to hide their ownership and control of the Issuers' securities (hereinafter "Issuer Securities") through trust agreements that purported to vest complete discretion and control in the offshore trustees. In actual fact and practice, according to the complaint, the Wylys never relinquished their control over the Issuer Securities and continued throughout the relevant time period to vote and trade these securities at their sole discretion.
The complaint alleges that through their use of the Offshore System, the Wylys were able to sell without disclosing their beneficial ownership over $750 million worth of Issuer Securities, and to commit an insider trading violation resulting in unlawful gain of over $31.7 million. According to the complaint, the Wylys' attorney and fellow director of three of the Issuers, Michael C. French ("French"), and their stockbroker, Louis J. Schaufele III ("Schaufele"), substantially assisted the Wylys' fraudulent scheme, each reaping financial rewards for doing so. .
The complaint charges that all four defendants violated, and that French and Schaufele also aided and abetted the Wylys' violations of, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, as well as other statutory violations. The SEC seeks injunctions against future violations of the relevant statutes and rules, disgorgement of unlawful profits with prejudgment interest, civil monetary penalties, and officer and director bars against the Wylys and French.
SEC Seeks Public Comment on Investment Advice Study
The SEC published a request for public comment to inform its study of the obligations and standards of care of broker-dealers and investment advisers providing personalized investment advice about securities to retail investors. The study is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which President Obama signed into law on July 21, 2010.
As required by the Dodd-Frank Act, the SEC is requesting public input, comments, and data on issues related to the effectiveness of existing standards of care for brokers-dealers and investment advisers, and whether there are gaps, shortcomings, or overlaps in the current legal or regulatory standards. The public comment period will remain open for 30 days, following publication of the comment request in the Federal Register.
SEC Seeks Public Comment on Regulatory Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions that require the SEC to undertake various initiatives, including rulemaking and studies touching on many areas of financial regulation. The SEC has set up a website where members of the public are invited to submit their views, even before official comment periods may be opened. While the Commission has responsibilities under other provisions of the Act, the list covers major regulatory topics and other more immediate matters. The Commission may add additional email addresses in the future.