Thursday, May 23, 2013
Neil M.M. Morrison, a former VP in the investment banking division of Goldman, Sachs, settled SEC charges that he engaged in a "pay-to-play" scheme. The SEC alleged that starting in July 2008 Morrison was employed by Goldman to solicit municipal underwriting business from the Massachusetts Treasurer's Office, among others. During the period from November 2008 to October 2010, Morrison was also substantially engaged in the political campaigns of Timothy Cahill, then-Treasurer of Massachusetts, and worked on the campaign during Goldman Sach work hours and using Goldman Sachs resources. The SEC found that Morrison's campaign activities constituted valuable undisclosed "in-kind" campaign contributions to Cahill attributable to Goldman Sachs. At the same time he was working on the campaign, he actively solicited municipal securities business from the Treasurer's Office.
The SEC barred Morrison from the securities industry with the right to apply for reentry after five years and also imposed a $100,000 fine. In re Neil M.M. Morrison, Sec. Exch. Act Rel. 69627 (May 23, 2013)
The SEC charged proxy adviser Institutional Shareholder Services (ISS) with failing to safeguard the confidential proxy voting information of clients participating in a number of significant proxy contests. ISS, which is registered with the SEC as an investment adviser, agreed to settle the charges by paying $300,000 and retaining an independent compliance consultant.
According to the SEC, an ISS employee provided a proxy solicitor with material, nonpublic information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots. In exchange for voting information, the proxy solicitor provided the ISS employee with meals, expensive tickets to concerts and sporting events, and an airline ticket. The breach was made possible in part because ISS lacked sufficient controls over employee access to confidential client vote information, as this employee gathered the data by logging into the ISS voting website from home or work and using his personal e-mail account to communicate details to the proxy solicitor. The employee no longer works at ISS.
According to the SEC's order instituting settled administrative proceedings, the breach occurred from approximately 2007 to 2012. ISS failed to establish or enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by ISS employees. Specifically, ISS lacked sufficient controls over employee access to databases of confidential client vote information.
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Today's Wall St. Journal has an article, by Joann S. Lublin and Kirsten Grind, on For Proxy Advisers, Influence Wanes, reporting that the influence of ISS and Glass Lewis is waning, as the management of companies are increasingly reaching out to institutional investors for support on key votes and money managers are increasingly relying on their own research. For example, both ISS and Glass Lewis recommended voting for the shareholder proposal to split the CEO and Chairman positions at JP Morgan Chase, yet it received only 32% of the vote. The SEC settlement certainly creates additional reputational problems for ISS.
Wednesday, May 22, 2013
The SEC charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district. According to its release:
An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami's participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.
South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.
Sunday, May 19, 2013
The Commission's complaint alleges that, since at least August 2012, Fowler and US Capital have raised at least $350,000 from investors by falsely promising high profits for investing in standby letters of credit or bank guarantees that would purportedly grant the investors loans, the proceeds of which would be invested for a significant profit. Fowler and US Capital instead misappropriated investor funds for personal and business uses. Fowler was actively soliciting additional investors for his scheme, the complaint alleged.
According to the complaint, Fowler targeted foreign-born small business owners with little or no experience in finance or investing.
Thursday, May 16, 2013
The SEC charged Charles J. Dushek and his son Charles S. Dushek and their Chicago-area investment advisory firm with defrauding clients through a cherry-picking scheme that garnered them nearly $2 million in illicit profits, which they spent on luxury homes, vehicles, and vacations. According to the SEC, the Dusheks placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.
According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day – and often several days – by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.
The SEC’s complaint charges the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.
Wednesday, May 15, 2013
The SEC charged China-based RINO International Corporation’s chief executive officer Dejun “David” Zou and chairman of the board Jianping “Amy” Qiu with engaging in a scheme to overstate the company’s revenues and divert proceeds from a securities offering for their personal use.
The SEC alleges that Zou and Qiu (who are husband and wife) diverted $3.5 million in company money to purchase a luxury home in Orange County, Calif., without disclosing it to investors. Conflicting information was provided to RINO’s outside auditor when questions were raised about the expenditure. Zou and Qiu also used offering proceeds to pay for automobiles as well as designer clothing and accessories without recording them as personal expenses or otherwise disclosing them in RINO’s public filings.
The SEC issued a trading suspension in 2011 against RINO, which is a holding company for subsidiaries that manufacture, install, and service equipment for the Chinese steel industry. The company became a China-based U.S. issuer through a reverse merger in 2007. The trading suspension was based on questions raised about RINO’s public filings — signed and certified by Zou and Qiu — overstating company revenues by including false sales contracts.
Zou and Qiu agreed to settle the SEC’s charges by paying penalties and consenting to decade-long bars from serving as officers or directors of any company publicly traded in the U.S.
Friday, May 10, 2013
Thursday, May 9, 2013
The SEC and FINRA issued an investor alert, Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them. The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.
The alert explains that
Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.
The investor alert contains a checklist of questions to consider before selling away an income stream.
Philip A. Falcone, the CEO of Harbinger Group and Harbinger Capital, and the SEC's Enforcement Division have reached an agreement in principle to settle two SEC enforcement actions, according to a 10-Q filed by Harbinger Group. Under the terms of the settlement, Falcone will be barred for a period of two years from acting as an associated person of any broker, dealer, or investment adviser. After two years, Falcone may seek the SEC's consent to have the ban lifted. The settlement does not prevent Falcone from owning or controlling Harbinger Group or from serving as an officer or director of the company. Harbinger agreed to pay $18 million and to be overseen by a monitor to ensure compliance with the agreement. Neither Falcone nor Harbinger admitted or denied the allegations of fraud.
The SEC charged that Falcone put his own interests, including maintaining a "lavish lifestyle," above those of his investors.
Tuesday, May 7, 2013
The SEC charged four individuals with ties to Direct Access Partners (DAP), a New York City brokerage firm, in a scheme involving millions of dollars in illicit bribes paid to a high-ranking Venezuelan finance official to secure the bond trading business of a state-owned Venezuelan bank. According to the SEC's complaint, the global markets group at DAP executed fixed income trades for customers in foreign sovereign debt. DAP Global generated more than $66 million in revenue for DAP from transaction fees on riskless principal trade executions in Venezuelan sovereign or state-sponsored bonds for Banco de Desarrollo Económico y Social de Venezuela (BANDES). A portion of this revenue was illicitly paid to BANDES Vice President of Finance, María de los Ángeles González de Hernandez, who authorized the fraudulent trades.
The SEC's complaint charges the following individuals for the roles in the kickback scheme:
•Tomas Alberto Clarke Bethancourt, who lives in Miami and is an executive vice president at DAP. Known as "Tomas Clarke," he was responsible for executing the fraudulent trades and maintaining spreadsheets tracking the illicit markups and markdowns on those trades.
•Iuri Rodolfo Bethancourt, who lives in Panama and received more than $20 million in fraudulent proceeds from DAP via his Panamanian shell company, which then paid Gonzalez a portion of this amount.
•Jose Alejandro Hurtado, who lives in Miami and served as the intermediary between DAP and Gonzalez. Hurtado was paid more than $6 million in kickbacks disguised as salary payments from DAP, and he remitted some of that money to Gonzalez.
•Haydee Leticia Pabon, who is Hurtado's wife and received approximately $8 million in markups or markdowns on BANDES trades that were funneled to her from DAP in the form of sham finders' fees.
In a parallel action, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Gonzalez as well as Clarke and Hurtado.
Monday, May 6, 2013
For the first time, the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. The SEC charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated. An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. Harrisburg has agreed to settle the charges.
The SEC separately issued a report addressing the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.
The SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s fiscal situation was publicly available elsewhere. Information that was accessible on the city’s website such as its 2009 budget, 2009 State of the City address, and 2009 mid-year fiscal report either misstated or failed to disclose critical information about Harrisburg’s financial condition and credit ratings.
According to the SEC’s order instituting settled administrative proceedings, Harrisburg is a near-bankrupt city under state receivership largely due to approximately $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority. As of March 15, 2013, Harrisburg has missed approximately $13.9 million in general obligation debt service payments.
According to the SEC’s order, Harrisburg had not submitted annual financial information or audited financial statements since submitting its 2007 Comprehensive Annual Financial Report (CAFR) to a Nationally Recognized Municipal Securities Information Repository (NRMSIR) in January 2009. Beginning in July 2009, Harrisburg was obligated to submit financial information and notices such as principal and interest payment delinquencies and changes in bond ratings to a central repository known as the Electronic Municipal Market Access (EMMA) system maintained by the Municipal Securities Rulemaking Board (MSRB). Harrisburg did not submit its 2008 CAFR to EMMA, instead erroneously submitting it to a former NRMSIR on March 2, 2010. Harrisburg did not submit its 2009 CAFR to EMMA until Aug. 6, 2012, and did not submit its 2010 CAFR to EMMA until Dec. 20, 2012. The city did not submit material event notices about its failure to submit annual financial information or its credit rating downgrades until March 29, 2011, after the SEC had commenced its investigation.
The SEC’s order requires Harrisburg to cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The city neither admits nor denies the findings in the order. In the settlement, the SEC considered Harrisburg’s cooperation in the investigation and the various remedial measures implemented by the city to prevent further securities laws violations.
Friday, May 3, 2013
SEC Chair Mary Jo White, in her first public speech, addressed the Investment Company Institute today and focused on Regulation in a Global Financial System. While some had speculated that she would take this opportunity to address mutual fund reform, and specifically money market funds, in fact she said little on the subject in her prepared remarks:
As the SEC works to develop and propose meaningful money market fund reform, our goal is to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs – runs in which retail investors are especially likely to suffer losses.
While I’m sure that you would like me to say more about this today, I’ll stop there as the staff and Commissioners are actively engaged in discussions designed to yield an appropriate and balanced proposal in the near future.
I am confident that the ultimate result of this process will take into account the views of Commissioners who vary in background and perspective, but share the goals of protecting investors and promoting market efficiency and capital formation. The SEC regulatory process is grounded in sound economic analysis and is well-informed by public comment, including helpful comments from the ICI fund investors and others with important and relevant perspectives on money market funds.
This is the process the SEC will bring to bear as it considers proposing money market fund reform. And I hope that ultimately it will lead to a good, investor-oriented result that has been informed by and can be shared with other regulators in the global marketplace.
Thursday, May 2, 2013
The SEC charged the gatekeepers of a pair of mutual fund trusts with causing untrue or misleading disclosures about the factors they considered when approving or renewing investment advisory contracts on behalf of shareholders.
An SEC investigation that arose from an examination of the Northern Lights Fund Trust and the Northern Lights Variable Trust found that some of the trusts' shareholder reports either misrepresented material information considered by the trustees or omitted material information about how they evaluated certain factors in reaching their decisions on behalf of the funds and their shareholders. The trustees and the trusts' chief compliance officer Northern Lights Compliance Services (NLCS) were responsible for causing violations of the SEC's compliance rule, and the trusts' fund administrator Gemini Fund Services (GFS) caused violations of the Investment Company Act recordkeeping and reporting provisions.
The firms and the trustees have agreed to settle the SEC's charges.
The five trustees named in the SEC enforcement action are: Michael Miola of Arizona, Lester M. Bryan of Utah, Anthony J. Hertl of Florida, Gary W. Lanzen of Nevada, and Mark H. Taylor of Ohio.
Some trusts are created as turnkey mutual fund operations that launch numerous funds to be managed by different unaffiliated advisers and overseen by a single board of trustees. The federal securities laws require all mutual fund directors to evaluate and approve a fund's contract with its investment adviser, and the funds must report back to shareholders about the material factors considered by the directors in making these decisions. The SEC Enforcement Division's Asset Management Unit has been taking a widespread look into the investment advisory contract renewal process and fee arrangements in the fund industry.
According to the SEC's order instituting settled administrative proceedings, the Northern Lights trusts included up to 71 mutual fund series from January 2009 to December 2010, most of which were managed by different advisers and sub-advisers. The trustees conducted 15 board meetings during that time period, and made decisions about 113 advisory and 32 sub-advisory contracts during what's known as the 15(c) process. Section 15(c) of the Investment Company Act requires fund directors to request and evaluate information that is reasonably necessary to evaluate the terms of any contract for an investment adviser of a registered investment company.
The SEC's order found that some boilerplate disclosures related to the 15(c) process that were included by GFS in some fund series shareholder reports contained untrue or misleading information. For example, one disclosure claimed that the trustees had considered peer group information about the advisory fee, however no such data had been provided to the trustees. Other disclosures misleadingly indicated that the fund's advisory fee was not materially higher than its peer group range, when in fact the fee was nearly double the peer group's mean fee or even higher. GFS failed to ensure that certain shareholder reports contained the required disclosures about the trustees' evaluation process and failed to ensure that certain series within the trusts maintained and preserved their 15(c) files.
The SEC's order also found that certain mutual fund series did not follow their policies and procedures for the trustees' approval of the investment advisers' compliance programs. Fund boards are required to approve the policies and procedures of service providers to a fund, including its adviser. The policies and procedures of each series within the Northern Lights trusts stated that the trustees could approve the compliance program of each series' investment adviser based on their review of an adviser's compliance manual or based on a summary provided by NLCS that familiarized them with the salient features of the compliance program and provided a good understanding of how the program addressed particularly significant compliance risks. Rather than following this process, the trustees' approval of the advisers' compliance programs was based primarily on their review of a brief written statement prepared by NLCS saying that the advisers' compliance manuals were "sufficient and in use" and a verbal representation by NLCS that such manuals were adequate.
Monday, April 29, 2013
The SEC announced that Greenwich, Conn.-based hedge fund advisory firm Level Global Investors LP agreed to pay more than $21.5 million to settle charges that its co-founder, who also served as a portfolio manager, and its analyst engaged in repeated insider trading in the securities of Dell Inc. and Nvidia Corp.
In January 2012, the SEC filed insider trading charges against Level Global, the firm's co-founder Anthony Chiasson, a former analyst Spyridon "Sam" Adondakis, and six other defendants, including five investment professionals and the hedge fund advisory firm Diamondback Capital Management. The SEC alleged that Adondakis was a member of a group of closely associated hedge fund analysts who illegally obtained highly sensitive information regarding the financial performance of Dell and Nvidia before this information was made public. The illegally obtained information involved Dell and Nvidia's revenues and profit margins and sometimes indicated that the tech companies' quarterly results would differ significantly from the consensus expectations of Wall Street analysts.
According to the SEC, during 2008 and 2009, Adondakis passed the information on to Chiasson, who used it to execute trades on behalf of hedge funds managed by Level Global and reap millions of dollars in illegal profits. In 2011, following news reports of the government's investigation, Level Global, which had once managed as much as $4 billion, announced that it would close its business and begin returning money to its investors. It is presently in the process of winding down its business.
The settlement with Level Global, which is subject to court approval, requires the firm to disgorge $10,082,725 in fees that it reaped from the alleged insider-trading scheme, to pay prejudgment interest of $1,348,824, and to pay a penalty of $10,082,725. Level Global has also agreed to the entry of an order permanently enjoining the firm from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Section 17(a) of the Securities Act of 1933.
Level Global neither admits nor denies the SEC's allegations. Adondakis previously pleaded guilty to parallel criminal charges and agreed to a settlement with the SEC in which he admitted liability for insider trading. The SEC is continuing to pursue its insider trading claims against the firm's co-founder Chiasson, who was convicted in December 2012 of securities fraud in a parallel criminal proceeding.
Saturday, April 27, 2013
On April 25, 2013, a federal court in New York found defendants Joshua Constantin and Windham Securities, Inc. jointly and severally liable for over $2.49 million and defendant Brian Solomon liable for over $249,000 in disgorgement, pre-judgment interest, and civil penalties. In addition, the court found relief defendants Constantin Resource Group, Inc. (CRG) and Domestic Applications Corp. (DAC) jointly and severally liable with Constantin and Windham for over $760,000 and $532,000, respectively, of disgorgement and pre-judgment interest.
The SEC's complaint alleged that Windham, Windham's owner and principal Constantin, and former Windham managing director Solomon fraudulently induced investors to provide more than $1.25 million to Windham for securities investments. The complaint alleged that defendants made false claims to the investors about the intended use of the investors' funds and about Windham's investment expertise and past returns. Instead of purchasing securities for the investors, the defendants misappropriated the investors' funds and then provided false assurances to the investors to cover up their fraud.
On April 2, 2013, the court issued an opinion granting the SEC's motion for summary judgment in its entirety. Based on the undisputed evidence, the court found that "[t]he litany of misrepresentations that Solomon and Constantin made to their clients is striking;" that Constantin "diverted [investors'] funds to his own purposes;" and that "both Solomon and Constantin provided clients with misleading documents to cover up the fraudulent nature of their investment scheme." On April 25, 2013, the court issued a supplemental order finding Windham, Constantin, Solomon, CRG, and DAC collectively liable for more than $2.74 million in disgorgement, pre-judgment interest, and civil penalties.
The SEC will hold an Open Meeting on Wednesday, May 1, 2013 at 10:00 a.m., in the Auditorium, Room L-002. The subject matters of the Open Meeting will be:
•Item 1: The Commission will consider whether to propose new rules and interpretive guidance for cross-border security-based swap activities and to re-propose Regulation SBSR and certain rules and forms relating to the registration of security-based swap dealers and major security-based swap participants.
•Item 2: The Commission will consider whether to reopen the comment periods and receive new information for certain rulemaking releases and the policy statement applicable to security-based swaps proposed pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Friday, April 26, 2013
Perhaps the first JOBS Act scam? The SEC announced fraud charges against a Spokane Valley, Wash., company and its owner for misleading investors with claims to raise billions of investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.
The SEC alleges that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He also promised to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State’s economic recovery. The SEC alleges that Peterson used investors’ money for personal expenses, and is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.
According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states.
(Thanks to Jennifer Taub for calling this to my attention.)
Wednesday, April 24, 2013
The SEC charged Capital One Financial Corporation and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis. Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives – former Chief Risk Officer Peter A. Schnall and former Divisional Credit Officer David A. LaGassa – also agreed to settle the charges against them.
An SEC investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18 percent in the second quarter and 9 percent in the third quarter.
Capital One’s material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. Schnall and LaGassa caused Capital One’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One’s books and records violations.
Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.