Numbers were the focus this week as the Commission filed 81 administrative proceedings (must be near fiscal year end) and two civil injunctive actions. Seventy-one of the actions involved municipal issuers who self-reported under the Municipalities disclosure initiative. Another ten focused on investment advisers who negligently relied on certain information furnished by another adviser regarding the performance of an index recommended to clients. And, two other proceedings were brought against immigration attorneys involved in EB-5 programs for acting as unregistered brokers, an increasing trend in this area.
Jacob Alexander, at one time the CEO of Converse Technology, pleaded guilty to securities fraud based on option backdating. Mr. Alexander has been on the run for 10 years. He was remanded to jail pending sentencing. Finally, the PCAOB entered into a cooperation agreement with a German regulator.
Disclosure: The Commission announced that it is seeking comment on Disclosure Requirements Relating to Management, Security Holders and Corporate Governance Matters. Currently the requirements are in Subpart 400 of Regulation S-K (here).
Investment advisers: The Commission announced the adoption of Rules to Enhance Information Reported by Investment Advisers. The Rules focus on disclosures relating to separately managed accounts. They also require additional record keeping (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive action and 85 administrative proceeding, excluding 12j and tag-along proceedings.
Misstatements: In the Matter of Schneider Downs Wealth Management Advisers, Adm. Proc. File No. 3-17493 (August 25, 2016) is a proceeding which names as a Respondent the registered investment adviser. The Order alleges that the adviser made misstatements to certain advisory clients, including those with separately managed accounts, invested in F-Squared Investments, Inc. index. The adviser was negligent in relying on F-Squared’s materially inflated, hypothetical and back-tested performance track record that F-Squared had misrepresented. This resulted in violations of Advisers Act Sections 204(a) and 206(4). The proceeding was resolved with the entry by consent to a cease and desist order based on the Sections cited in the Order, and the payment of a penalty of $100,000. See also In the Matter of Banyan Partners, LLC, Adm. Proc. File No. 3-17495 (August 25, 2016)(same); In the Matter of Shamrock Asset Management, LLC, Adm. Proc. File No. 3-17492 (August 25, 2016)(same); In the Matter of J.J.B. Hilliard, W.L. Lyons, LLC, Adm. Proc. File No. 3-17498 (August 25, 2016)(same); In the Matter of AssetMark, Inc., Adm. Proc. File No. 3-17504 (August 25 2016)(same); In the Matter of Congress Wealth Management LLC, Adm. Proc. File No. 3-17503 (August 25, 2016); In the Matter of BB&T Securities, LLC, Adm. Proc. File No. 3-17502 (August 25, 2016); In the Matter of Constellation Wealth Advisors LLC, Adm. Proc. File No. 3-17501 (August 25, 2016); In the Matter of Executive Monetary Management, LLC, Adm. Proc. File No. 3-17499 (August 25, 2016); In the Matter of Ladenburg Thalmann Asset Management Inc., Adm. Proc. File No 3-17497 (August 25, 2016).
Order: In the Matter of Orinda Asset Management, LLC, Adm. Proc. File No. 3-17506 (August 25 2016) is a proceeding which names the registered investment adviser as a Respondent. The firm applied in 2011 for an exemptive order which would have provided relief from the requirement to obtain shareholder approval to enter or materially amend sub-advisory agreements and certain disclosures. Investment Management told the firm it would not approve a provision providing for termination payments should the firm recommend the sub-adviser’s termination for something other than cause. The adviser and Advisors Series Trust agreed to remove the provisions and filed an amended application. In the interim, the adviser and AST agreed to waive the ability to terminate the sub-adviser. Neither Orinda nor ATS told IM of the revised side agreement. IM then granted the exemptive order. The advisory agreements with each AST fund advised by Orinda incorrectly stated that the sub-advisory agreements could be terminated at any time and did not disclose the side agreement. The Order alleges violations of Investment Company Act Section 34(b). To resolve the case Orinda consented to the entry of a cease and desist order based on the Section cited in the Order, to a censure and agreed to pay a penalty of $75,000.
Unregistered broker: In the Matter of Martin J. Lawler, Adm. Proc. File No. 3-17420 (August 24, 2016) is a proceeding against attorney Lawler who specializes in immigration matters. This action arises out of EB-5 transactions – an immigration program in which a foreign national invests a specified sum – here $500,000 – creating jobs in the U.S in return for a permanent green card. The funds are typically invested in limited partnership shares which are securities. Mr. Lawler is alleged to have effectuated transactions in EB-5 securities, including recommending one or more EB-5 investment officers to his clients and serving as a liaison. He also assisted with documenting the investment funds and was paid transaction based compensation. The Order alleges violations of Exchange Act Section 15(a). To resolve the action Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and agreed to pay disgorgement of $115,000 and prejudgment interest. See also In the Matter of Thomas T. M. Ho, Adm. Proc. File No. 3-17418 (August 24, 2016)(settled proceeding against immigration attorney arising out of EB-5 program as above but where at least part of the fees were paid to an offshore bank although Respondent is based in the U.S.; resolved with a consent to a cease and desist order based on Exchange Act Section 15(a) and the payment of disgorgement of $37,500 and prejudgment interest and a penalty of $30,000).
Municipal bonds: In the Matter of the City of Alameda, Ad. Proc. File No. 3-17421 (August 24, 2016) is one of 71 settled proceedings filed by the Commission under its Municipalities Continuing Disclose Cooperation Initiative. In each instance the Respondents self-reported in return for reduced sanctions. Each action centers on the continuing disclosure obligations of issuers. City of Alameda is typical There the Order alleged that in certain official statements for municipal securities the Respondent affirmatively stated that it had materially complied with prior agreements to provide continuing disclosure when in fact it had not. The Order alleged violations of Securities Act Section 17(a)(2). To resolve the proceeding the City consented to the entry of a cease and desist order based on the Section cited in the Order. It also agreed to comply with certain undertakings which require the City to establish appropriate written policies and procedures, have periodic training regarding its continuing disclosure obligations, update past delinquent filings and certify compliance with the undertakings. Under the Initiative the SEC has now filed 143 settled actions against 144 Respondents.
Offering fraud: SEC v. Secured Income Reserve, Inc., Civil Action No. 9:16-cv-8190 (S.D. Fla. Filed August 24, 2016) is an action which names as defendants the firm, Ilona Mandalbaum, David Zimmerman, Tamda Marketing, Inc. and Mathew Sage. The firm was supposed to extend loans to senior citizens collateralized by their life insurance proceeds. Its majority shareholder is Mr. Mandelbaum who was previously enjoined in a Commission enforcement action. Mr. Zimmerman is the firm’s vice president for investor relations and president of Tamda. He was also enjoined in a prior Commission enforcement action. Defendant Sage is a director, Secretary, Treasurer and COO of Secured. He was also enjoined in a prior Commission enforcement action. The complaint alleges a fraudulent offering of Secured’s shares which continued over five months beginning in February 2013. Investors were defrauded out of about $5 million. The PPM used for the offering failed to disclose the background of the individuals involved or the use of the proceeds, portions of which were taken by Mr. Mandelbaum for other business interests and to partially fund the purchase of a home for his daughter. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). To resolve the actions, Secured, Tamda and Messrs. Mandelbaum, Zimmerman and Sage agreed to the entry of permanent injunctions. The three individual defendants also agreed to the entry of officer/director bars. In addition, Secured will pay disgorgement of $588,242, prejudgment interest and a $775,000 penalty; Mr. Mandelbaum will pay disgorgement of $392,752, prejudgment interest and a penalty of $320,000; Mr. Sage will pay a penalty of $240,000; and Tamda will pay $148,350 in disgorgement, prejudgment interest and a penalty of $148,350. See Lit. Rel. No. 23626 (August 24, 2016).
Disclosure: In the Matter of Apollo Management V, L.P., Adm. Proc. File No. 3-17409 (August 23, 2016). The proceeding centers on inadequately disclosed fees, a failure to fully disclose the terms of a loan agreement and inadequate supervision. Respondents are Apollo Management V, L.P., Apollo Management VI, L.P., Apollo Management VII, L.P. and Apollo Commodities Management, L.P. Each is a private equity fund adviser registered with the Commission as an investment adviser. The parent of each is Apollo Management V. First, Respondents failed to properly disclose how they terminated monitoring fee agreements until after investors had put in their capital and the fees were paid. Second, in June 2008 the general partner to Fund VI, Advisors VI, entered into a loan agreement with Fund VI and four parallel funds and failed to adequately disclose that the accrued interest would be allocated to the capital account of Advisers VI. Finally, from January 2010 through June 2013 a former senior partner of Respondents improperly charged personal items and services to advised funds. After repeated instances and an internal investigation Respondents reported the conduct to the Commission. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceeding Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondents will pay disgorgement of $37,527,000 and prejudgment interest which will be paid to a disgorgement fund. They will also pay a penalty of $12,500,000 and acknowledge that the amount was limited to that sum based on their cooperation.
Offering fraud: SEC v. Jones, Civil Action No. 1:16-cv-01695 (D.D.C. Filed August 19, 2016). Defendant Michael Jones is currently a uniform salesman. Previously, he was a registered representative at a number of broker-dealers. In 2007 he was barred from association with any FINRA member by the regulator. From April 2010 through July 2013 he was the sole shareholder and director of Green Bash, LLC. During that period he sold convertible promissory notes of the firm to 20 investors in 12 states, raising $706,145. The sales were made on the telephone and using a PPM that contained a series of misrepresentations about the financial prospects of the firm and the size of the offering. Portions of the funds raised were used to pay interest on the notes to some investors. Other portions of the offering proceeds were used by Mr. Jones for his personal expenses. The complaint alleges violations of Securities Act Sections 5 and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). Defendant Jones settled with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the complaint, including an order prohibiting him from participating in the issuance, offer or sale of any security (except for those acquired on a national securities exchange for his own account). In addition, he will pay disgorgement of $709,654, prejudgment interest and a penalty equal to the amount of the disgorgement. He agreed to settle a to be filed administrative proceeding that will bar him from the securities business. See Lit. Rel. No. 23622 (August 22, 2016).
Cooperation agreement: The Board announced an agreement with the German Auditor Oversight Body effective immediately. The Agreement calls for cooperation with respect to joint inspections and the exchange of confidential information. The Board had a similar agreement with the AOB’s predecessor.
Option backdating: U.S. v. Alexander (E.D.N.Y.) Jacob Alexander, formerly the CEO of Converse Technologies, Inc. pleaded guilty to securities fraud, stemming from his role in backdating stock options at the firm over ten years ago. Mr. Alexander previously fled but was extradited from Namibia earlier this month. He was remanded to jail pending sentencing.
Manipulation: The Securities and Futures Commission suspended the license of associated person Ku Yuen Leung for eighteen months for engaging in manipulative activities. Specifically, Ku created the false or misleading appearance over a 21 day period in November 2010 with respect to the shares of Agricultural Bank of China by placing large sized bid orders for ABC shares to drive up the prices of related warrants. The orders were cancelled immediately after he sold the warrants at inflated pries, reaping profits of $15,500.