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Thomas O. Gorman,
Dorsey and Whitney LLP
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    SEC Brings Another Offering Fraud Case

    October 19, 2014

    The Commission filed another in what appears to be an unending series of offering fraud actions. Unlike many of its prior cases, this action centers on a Respondent who kept shifting his scheme to continually raise more money at the expense of innocent investors. In the Matter of Anthony Coronti, Adm. Proc. File No. 3-161203 (October 17, 29014).

    Respondent Coronti controls, Bidtoask LLC, also named as a Respondent in the proceeding. He claims to be the chairman and CEO of Corsac Inc., an investment adviser to a fund. Corsac Group Ltd, sometimes called, Corsac Fund, is also controlled by Mr. Coronti.

    From 2008 through 2011 Mr. Coronati offered investors units in Corsac Fund. In the first iteration of this offering, investors were told the fund invested in U. S. equity securities. The fund was looking for a 30% return with minimal risk.

    Eleven investors purchased units. There was no fund, according to the Order. When the money ran out, Mr. Coronati moved on.

    In another iteration of the scheme, Mr. Coronati offered investors shares in Corsac at a price of $5 per share. This time investors were told that the funds would be invested in a fund that would hold an IPO in the third quarter of 2012. Investors were assured the IPO price would be higher than what they paid. When the investor funds were drained, Mr. Coronati move on.

    In early 2012 Mr. Coronati began soliciting investors to purchase shares in a fund that held pre-IPO Facebook shares. This investment was offered through Bidtoask. Approximately $1.75 million was raised from 44 investors.

    While Mr. Coronati misappropriated portions of the money, in fact investor funds were used to acquire interests in a fund that actually owned pre-IPO Facebook shares. After the IPO, the funds were distributed to the investors, but portions were again misappropriated by Mr. Coronati.

    Finally, for about one year beginning in mid-2013, Respondents offered investments in two privately-owned technology companies. One was going to conduct an IPO investors were told. Rather than invest the funds as represented however, Respondents misappropriated the money.

    As the schemes unraveled Mr. Coronati attempted to placate investors by using portions of their money to pay others. False account statements were also distributed.

    The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Respondents resolved the proceeding, each consenting to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Cononati was also barred from the securities business and will pay disgorgement of $292,646.36, prejudgment interest and a civil penalty of $100,000. A fair fund will be created for investors.

    This Week In Securities Litigation (Week ending October 17, 2014)

    October 16, 2014

    The Commission prevailed in three litigated decisions. The agency secured a favorable jury verdict in an action centered on an offering fraud. In two other cases — one based on misrepresentations regarding the only company product and a second alleging an investment fund fraud – the SEC prevailed on summary judgment motions.

    The SEC also brought its first action centered on high-speed trading, alleging that a firm marked the close repeatedly over a six month period. In addition, actions were brought based on the failure of a broker to produce documents during an investigation, for aiding and abetting violations of the broker registration requirements and for insider trading and investment fund fraud.

    SEC

    Remarks: Commissioner Michael S. Piwowar delivered remarks at the Securities Enforcement Forum 2014, Washington, D.C. (October 14, 2014). His remarks centered on the need for due process and fairness, questioned if broken windows is an effective approach to enforcement and suggested that the 2006 statement on corporate penalties might be revisited (here).

    Statistics: The Commission issued a release titled: FY 2014 Enforcement Actions Span Securities Industry and Include First-Ever Cases. The Release tabulates the number of cases brought during the last fiscal year and highlights selected cases in a number of areas (here).

    CFTC

    Remarks: Chairman Timothy G. Massad addressed the Managed Funds Association (October 16, 2014). His remarks focused on ensuring that the new Dodd-Frank rules do not impose undue burdens and cross-border harmonization (here).

    SEC Enforcement – Litigated Actions

    Offering fraud: SEC v. iShopNoMarkup.com, Inc., Civil Action No. 04-CV-4057 (E.D.N.Y.) is an action against the company and its co-founder and former Chairman, Anthony Knight, and others. The complaint alleged that from 1999 to 2000 the defendants sold nearly 6.75 million shares of stock to over 350 investors, raising about $2.3 million. There was no registration statement in effect and material misrepresentations were made to investors. On October 14, 2014 a jury returned a verdict in favor of the Commission and against Mr. Knight, concluding that he violated Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Remedies will be determined at a later date. Mr. Knight was the sole remaining defendant in the action. See Lit. Rel. No. 23112 (Oct. 15, 2014).

    Misrepresentations: SEC v. Ferrone, Civil Action No. 1:11-cv-05223 (N.D. Ill.) is an action against Douglas McClain Sr., Douglas McClain Jr., Immounosyn Corporation, Argyll Biotechnologies. LLC, Stephen Ferrone and James T. Micell. The complaint claims that from 2006 through 2010 misrepresentations were made about the sole product of the company, a drug known as SF-1019. Specifically, investors were told that the company planned to commence the regulatory approval process for human clinical trials but were not told that the FDA had twice issued clinical holds on the applications which prevented the trials from moving forward. The Court granted the SEC’s motion for summary judgment as to Mr. McClain Sr., concluding that he failed to deliver Immunosyn shares to investors and made misrepresentations to them about the FDA approval process. The motion was also granted as to both McClain defendants for insider trading since each sold firm shares without disclosing the correct FDA status of the drug in violation of Exchange Act Section 10(b) and Securities Act Section 17(a). Remedies will be determined at a later date. See Lit. Rel. No. 23114 (Oct. 15 2014).

    Investment fund fraud: SEC v. Funinaga, Civil Action No. 2:13-CV-1658 (D. Nev. Order entered Oct. 3, 2014) is an action which names as defendants Edwin Yoshihiro Funinaga and MRI International, Inc. The complaint alleged an investment fund fraud which began in 1998, and continued through 2013. Over $800 million was raised from investors. Those investors were largely in Japan. Investors were told that the firm purchased medical accounts receivables at a discount. Full value would be realized from the insurance companies. Investors were assured that their funds were safe because of certain procedures. In fact the defendants were operating a Ponzi scheme, according to the complaint. Mr. Funinaga invoked his Fifth Amendment rights in the action.

    In considering a series of motions, the Court initially rejected defendants’ claim that it lacked subject matter jurisdiction based on the application of 28 U.S.C. Section 2462, the five year statute of limitations. The Court concluded that the statute of limitations does not apply to disgorgement claims based on controlling Ninth Circuit precedent. Second, the Court rejected a claim that the action should be dismissed under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) which held that a cause of action under Exchange Act Section 10(b) does not have extraterritorial application. While the SEC claimed that Morrison has been overruled for government enforcement actions by Dodd-Frank, the Court did not reach that issue. Rather, the Court concluded that the securities transactions involved here closed, and title was transferred, in Nevada. That is sufficient under Morrison the Court found.

    Finally, the Court concluded that there was sufficient evidence to grant summary judgment in favor of the SEC. The evidence demonstrates that the defendants made material misrepresentations regarding the investments. Mr. Funinaga had sole control over the investment fund and used the cash for his personal benefit. His control over the scheme, use of the funds, misrepresentations regarding the safety of the funds, when coupled with his assertion of the Fifth Amendment, were sufficient to establish the key elements of a claim. Accordingly, summary judgment was entered in favor of the Commission. See Lit. Rel. No. 23111 (October 10, 2014).

    SEC Enforcement – Filed and Settled Actions

    Statistics: This week the SEC filed 2 civil injunctive action and 4 administrative proceeding, excluding 12j and tag-along-actions.

    Marking the close: In the Matter of Athena Capital Research, LLC, Adm. Proc. File No. 3-16199 (October 16, 2014) is a proceeding against the high speed trading firm, alleging marking the close, a form of market manipulation scheme. The scheme centers on trading during the NASDAQ closing auction and imbalances. Each day at about 4 p.m. NASDAQ ran a closing auction known as the closing cross. During the auction as many buyers and sellers are matched as possible. At times there are imbalances and notices are furnished to traders who can enter specific types of orders. Respondent implemented a series of high speed strategies, taking positions during the process and then overwhelming the market fractions of a second before the close, at times trading as much as 70% of the market during at the moment, to push the price in a direction favorable to its positions. The complex strategy was implemented daily over a six month period beginning in June 2009. The Order alleges violations of Exchange Act Section 10(b). The proceeding was resolved with Respondent consenting to the entry of a cease and desist order based on the cited Section and to a censure. The firm will also pay a $1million penalty.

    Producing records: In the Matter of Judy K. Wolf, Adm. Proc. File No. 3-016195 (October 15, 2014). Ms. Wolf was a compliance consultant for Wells Fargo Advisors prior to her termination in June 2013. In 2009 she drafted the firm’s policies and procedures governing how “look back” reviews would be conducted. On September 2, 2010, the day the acquisition of Burger King was announced, Ms. Wolf began a look back review of the trading surrounding the deal. She concluded that: 1) Wells Fargo account executive Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers purchased Burger King stock within 10 days of the announcement; 3) Mr. Prado and his customers each had profits that exceeded the $5,000 threshold specified in the look back review procedures; 4) Mr. Prado and Burger King were located in Miami; and 5) Mr. Prado, his customers and the acquiring company were all Brazilian. News articles about the event were not printed and included in the file despite a provision in the procedures requiring this step. The review was closed and therefore not forwarded to her supervisor. In July 2012 the Commission requested as part of its on-going investigation, and after charging Mr. Prado with insider trading, that Wells Fargo produce its compliance files relating to Mr. Prado. Although the production was eventually certified as complete, it did not include Ms. Wolf’s file. When a second request was made in January 2013, her file was included in the production. Ms. Wolf’s log stated “09/02/10 opened 24% higher@$23.35 vs. previous close of $18.86. Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12 [sic], the day prior to the announcement.” Ms. Wolf provided contradictory testimony during the investigation. Initially, she denied altering the document. Later she admitted it. The Order alleges violations of Exchange Act Section 17(a) and the related rules. The proceeding will be set for hearing.

    Unregistered broker: In the Matter of Edward L. Maggiacomo, Jr., Adm. Proc. File No. 3-16197 (October 15, 2014); In the Matter of Edward J. Hanrahan, Adm. Proc. File No. 3-16197 (October 15, 2014). The Respondent in each of these proceedings is a registered representative of a broker-dealer. Each proceeding centers on the fraudulent scheme of Joseph Camarmadre who defrauded insurance companies by recruiting individuals who were terminally ill to purchase variable annuities. The annuities, in effect, were short term investments that practically guaranteed an immediate return of the investment. To assist Mr. Camarmadre, who is under indictment as a result of the scheme, recruited Messrs. Maggiacomo and Hanrahan to facilitate the scheme and act as the brokers. Each Respondent is charged with aiding and abetting violations of Exchange Act Section 15(a). In addition, Mr. Maggiacomo is charged with violations of Exchange Act Section 10(b) for submitting false forms to his broker in connection with the annuity scheme. Each Respondent settled, consenting to the entry of a cease and desist order based on the Section or Sections cited in the respective Order. Each is also barred from the securities business and from participating in any penny stock offering with a right to reapply after five years. Mr. Maggiacomo will also pay disgorgement of $216,752.21 and prejudgment interest which will be offset by payments made in related actions. Mr. Hanrahan will pay disgorgement of $83,349.76 along with prejudgment interest but the amount will be offset by the $200,000 he has already paid to settle related claims.

    Insider trading: SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014) is an action against Zachary Zwerko, formerly a senior financial analyst at a major pharmaceutical company identified only as Pharma Co. His job responsibilities included conducting analysis in support of business combination and divestiture opportunities, giving him access to a shared hard drive where all deal information was stored. Mr. Zwerko’s longtime friend is Trader. Trader traded in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire Idenix Pharmaceuticals, Inc. While Mr. Zwerko did not work on that deal, he learn about it by accessing the hard drive and through an e-mail chain sent to him by his supervisor. He contacted Trader after learning the identity of Idenix which had been coded in deal documents. Trader began purchasing Idenix shares. Over time Mr. Zwerko continued to access information and contact Trader. Following the deal announcement Trader sold his shares, reaping profits of about $579,000. In 2012 Mr. Zwerko is also alleged to have tipped his friend Trader in advance of the April 23, 2012 pre-market open announcement that Ardea Biosciences, Inc. had agreed to be acquired by AstraZeneca PLC. In the months prior to the deal announcement, Aredea engaged in a series of confidential discussions with several companies, including Pharma Co., regarding possible acquisitions. Mr. Zwerko worked on the proposed deal. Although Pharma did not acquire Areda, the firm participated in the negotiations until at least a week prior to the announcement. During the negotiations Mr. Zwerko and Trader spoke on the phone, sometimes shortly after a meeting about the deal. Ultimately he purchased 9,800 shares through three brokerage accounts. Following the deal announcement he had trading profits of over $105,000. The Commission’s complaint alleges violations of Exchange Act Section 10(b). A parallel criminal case brought by the Manhattan U.S. Attorney’s Office filed criminal charges. Both cases are pending.

    Investment fund fraud: SEC v. The Estate of Vincent James Saviano, Civil Action No. 14-cv-13902 (Oct. 9, 2014) is an action against the estate and Palmetto Investments LLC, operated by Mr. Saviano prior to his death. Defendants claimed to be operating a pooled investment vehicle that conducted “extreme day trading.” Investors were told it was highly profitable and received investment advice from an SEC registered adviser. In fact Mr. Saviano lost most of the $2 million of investor funds raised and misappropriated portions. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). It was brought to preserve assets for investors. A receiver has been appointed. See Lit. Rel. No. 23109 (Oct. 10, 2014).

    Manipulation: SEC v. 8000, Inc., Civil Action No. 12-cv-7261 (S.D.N.Y.) is a previously filed action against the company, Thomas Kelly, the CEO of 8000, Jonathan Bryant and Carl Duncan. The complaint alleges that in 2009 and 2010 the defendants manipulated the shares of the company and sold unregistered securities using false legal opinions. This week the Court entered a final judgment against Mr. Kelly, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The order bars him from serving an officer or director and directs that he pay disgorgement of $415, 592 and prejudgment interest. See Lit. Rel. No. 23110 (Oct. 10, 2014).

    Criminal cases

    Investment fund fraud: U.S. v. Huggins, Case No. 1:13-mj-00301 (S.D.N.Y.) is an action in which Charles Huggins was found guilty of one count of conspiracy and one count of wire fraud following a two week jury trial. From 2008 through 2011 Mr. Huggins and others raised millions of dollars from investors through JYork Industries Inc. and Urogo Inc. Investors were told that their funds would be used to mine gold and diamonds from Sierra Leone and Liberia. Investors were also promised a high rate of return. In fact much of the money was misappropriated.

    Australia

    Insider trading: Hui Xiao, the firmer managing director of Hanlong Mining Investment Pty Ltd, appeared in court on 104 counts of insider trading. The charges stem from two schemes. In the first, from July 1-8, 2011, while in possession of inside information relating to a proposed takeover by Hanlong Mining of Bannerman Resources Ltd, Mr. Xiao procured his wife and two companies to acquire Bannerman contracts for a difference and shares. In the second, which took place from July 13-15, 2011, while in possession of inside information relating to a proposed takeover by Hanlong Mining of Sundance Resources Ltd, Mr. Xiao had his wife and two entities acquire Sundance contracts for a difference.

    Hong Kong

    Misappropriation: The Securities and Futures Commission banned Roger John and Hamish Cruden, both former directors and responsible officers of Salisbury Securities Ltd, from the securities business for life. The order is based on findings that the two misappropriated securities and sale proceeds belonging to clients in order to settle the instructions of another client and their own obligations. In addition, they failed to maintain the required level of capital and made false and misleading statements to the SFC.

    Wells Fargo Compliance Officer Charged With Altering Document

    October 15, 2014

    The acquisition of Burger King by 3G Capital Partners is the matter that just keeps on giving – at least for SEC enforcement. Initially, the Commission brought an action against Wells Fargo broker Waldyr Da Silva Prado Neto, who misappropriated inside information about the transaction from a client, tipped others who traded and traded for his own account. SEC v. Prado, Civil Action No. 12-CIV-7094 (S.D.N.Y. Sept. 20, 2012); see also U.S. v. Prado, Case No. 13-mg-2201 (S.D.N.Y. Sept. 13, 2013). Then the Commission brought an action against Wells Fargo for failing to establish and enforce procedures to prevent the misuse of material, non-public information. In the Matter of Wells Fargo Advisors, LLC., Adm. Proc. File No. 3-16153 (Sept. 22, 2014). Now the Commission has instituted an administrative proceeding against a former Wells Fargo compliance officer for altering a record produced to the staff in connection with its investigation of the broker. In the Matter of Judy K. Wolf, Adm. Proc. File No. 3-016195 (October 15, 2014).

    Ms. Wolf was a compliance consultant for Wells Fargo Advisors prior to her termination in June 2013. In 2009 she drafted the firm’s policies and procedures governing how “look back” reviews would be conducted. Ms. Wolf was the sole compliance officer conducting these reviews. Most of her reviews closed with “no findings.” A log of those inquiries was maintained, although it did not specify the reason for terminating the inquiry.

    On September 2, 2010, the day the Burger King deal was announced, Ms. Wolf began a look back review of the trading surrounding the deal. She concluded that: 1) Mr. Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers purchased Burger King stock within 10 days of the announcement; 3) Mr. Prado and his customers each had profits that exceeded the $5,0000 threshold specified in the look back review procedures; 4) Mr. Prado and Burger King were located in Miami; and 5) Mr. Prado, his customers and the acquiring company were all Brazilian. News articles about the event were not printed and included in the file despite a provision in the procedures requiring this step. The review was closed and therefore not forwarded to the branch manager. Supervisors at Wells Fargo did not learn about the review until two years later when the SEC filed its insider trading action against Mr. Prado.

    In July 2012 the Commission requested as part of its on-going investigation, that Wells Fargo produce its compliance files relating to Mr. Prado. Although the production was eventually certified as complete, it did not include Ms. Wolf’s file. When a second request was made in January 2013, that file was included in the production. Ms. Wolf’s log stated “09/02/10 opened 24% higher@$23.35 vs. previous close of $18.86. Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12 [sic], the day prior to the announcement.”

    Ms. Wolf provided contradictory testimony during the investigation. Initially, she testified that the file had not been altered. She claimed that the date of 9/1/12 in the sentence quoted above was a typo. In addition, Ms. Wolf stated that the news articles were a primary reason for closing the file. Later Wells Fargo produced documents indicating that the Burger King log entry had been altered on December 28, 2012. A prior version of the log was produced that did not contain the sentence quoted above along with the metadata.

    Following her termination from Wells Fargo the Commission took Ms. Wolf’s testimony a second time. During the testimony she admitted altering the log.

    The Order alleges violations of Exchange Act Section 17(a) and the related rules. The proceeding will be set for hearing.

    The Second Time Around Analyst Is Charged With Insider Trading

    October 14, 2014

    The second time around proved to be the undoing of a senior financial analyst at a pharmaceutical company identified only as Pharma Co. Two years ago he supposedly furnished material non-public information about a proposed take-over to his longtime friend, identified as Trader. Trader traded and profited. No action was brought. In 2014 the analyst supposedly furnished the same friend inside information on another transaction. This time the SEC and the Manhattan U.S. Attorney filed civil and criminal charges against the analyst. SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014).

    Zachary Zwerko was a senior financial analyst at Pharma Co. His job responsibilities included conducting analysis in support of business combination and divestiture opportunities. Accordingly, he had access to a shared drive that contained confidential project folders regarding potential transactions.

    Mr. Zwerko’s longtime friend is Trader who was a 2008 classmate at business school. Since that time the two have maintained a social relationship.

    Trader traded in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire Idenix Pharmaceuticals, Inc. whose shares were listed on the NASDAQ stock market. The transaction traces to April 2014 when the two firms entered into confidential, non-public discussions regarding a potential business combination. By mid-May confidentiality and standstill agreements were executed.

    Mr. Zwerko did not work on the Idenix transactions. By May 5, 2014, however, he began accessing confidential information about the deal. Those documents referenced the deal by a code name. On May 20 Mr. Zwerko’s supervisor sent him and others and email chain that referenced the deal, noting that a few days earlier a non-binding offer had been made. The lead email referenced the discount rates used for financial modelling and cited Idenix. The chain discussed the acquisition, using the code name.

    Minutes after receiving the e-mail, Mr. Zwerko accessed Yahoo Finance for Idenix from his work computer. Later that day he reviewed headlines about the company. That evening he accessed folders relating to the deal at the office.

    On the same day he received the e-mail from his supervisor, Mr. Zwerko sent a text to Trader. Later that evening, the two friends spoke on the phone. Two minutes after the call ended Trader placed an order for 1,000 shares of Idenix. Although it was not executed, starting the next day Trader purchased shares, investing over $219,000.

    Mr. Zwerko continued to access confidential material about the deal at work and contact Trader:

    • On May 21, 2014 the analyst accessed a confidential file at work that contained a revised offer and noted the proposed deal would go to the board on May 27;
    • On June 3, Mr. Zwerko accessed another confidential file on the deal;
    • On June 3, a few hours after accessing the file, Mr. Zwerko called Trader; and
    • On June 4, 5 and 6 Trader purchased additional shares.

    Following the deal announcement Trader sold his shares, reaping profits of about $579,000.

    In 2012 Mr. Zwerko is alleged to have tipped his friend Trader in advance of the April 23, 2012 pre-market open announcement that Ardea Biosciences, Inc. had agreed to be acquired by AstraZeneca PLC. In the months prior to the deal announcement, Aredea engaged in a series of confidential discussions with several companies, including Pharma Co., regarding possible acquisitions. Mr. Zwerko worked on the proposed deal. Although Pharma did not acquire Areda, the firm participated in the negotiations until at least a week prior to the announcement.

    During the negotiations Mr. Zwerko and Trader spoke on the phone. For example, on February 27, 2012, there was an internal meeting at Pharma regarding a non-binding offer to Ardea. Hours after the meeting Mr. Zwerko called Trader’s cell phone. The next day Trader began purchasing Ardea securities. Ultimately he purchased 9,800 shares through three brokerage accounts. Following the deal announcement he had trading profits of over $105,000.

    The Commission’s complaint alleges violations of Exchange Act Section 10(b). The criminal case alleges one count of conspiracy to commit securities fraud. Both cases are pending.

    SEC Charges E*Trade Subs: When Is the Due Diligence Sufficient?

    October 13, 2014

    Having the correct compliance procedures in place can often be critical. The SEC and the DOJ have repeatedly emphasized this in FCPA cases. Conducting due diligence can be equally critical. For gatekeepers such as lawyers, accountants and brokers, conducting appropriate due diligence can mean the difference between preventing a violation and becoming entangled in it. That was the result for two E*Trade subsidiaries who sold millions of shares of microcap stocks that were not registered despite representations to the contrary from their clients. In the Matter of E*Trade Securities, LLC, Adm. Proc. File No. 3-16192 (October 9, 2014).

    From March 2007 through April 2011 the two E*Trade subsidiaries named at Respondents at various times facilitated the sale of millions of unregistered microcap shares for three Customers, according to the Order. Customer A opened an account with E*Trade in early 2007; Customer B opened an account later that year; and Customer C opened an account in March 2010. The Customers are institutional clients.

    During the period the three Customers routinely acquired large quantities of newly issued penny stocks in private offerings. The Customers represented to E*Trade that the stocks were acquired in PIPE offerings. The size of the deposits varied from several thousand shares to a billion. The shares were issued by 247 companies. Generally the shares were resold within a short period. There were no registration statements on file with the Commission for the shares.

    Respondents did not ask Customers A and B to identify the specific exemption from registration relied on. Likewise, the two Customers were not asked for documentation regarding any exemption. Rather, the two subsidiaries made the following inquiries:

    • What was the intended trading activity;
    • Customer A was asked for written representations that the shares were freely tradable;
    • Customer A furnished written representations that it would comply with the applicable law;
    • Respondents visited the offices of both customers several times to determine that they were reputable;
    • Beginning in March 2009 Respondents reviewed pending deposits to determine if they had financial risk; and
    • In November 2009 the trading history of both Customers was reviewed.

    From March 2010 through April 2011 “Enhanced Due Diligence” was conducted regarding share deposits for Customers A and C. Under this process written representations were obtained from the Customer and issuer that the shares were freely tradable. Opinions from attorneys were also obtained that were based largely on representations from the reseller and issuer. Respondents also researched the attorneys.

    These procedures were inadequate, according to the Order. While Securities Act Section 4(a)(4) exempts from registration brokers’ transactions, it is unavailable when the broker knows, or has reasonable grounds to know, that the shares are not exempt. To rely on the exemption a reasonable inquiry must be conducted. The scope of that inquiry depends on the surrounding facts and circumstances.

    Here Customers A, B and C were continually faced with a series of red flags which should have raised a question as to whether they were engaged in an illegal distribution: 1) each acquired substantial amounts of newly issued penny stocks; 2) those shares were acquired from little known, non-reporting issuers; 3) they were acquired through private unregistered transactions; 4) the shares were immediately resold; and 5) the funds were wired out. Nevertheless, Respondents failed to conduct the kind of searching inquiry that was required under the circumstances. Accordingly, Respondents willfully violated Securities Act Sections 5(a) and 5(c).

    To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited and to a censure. On a joint and several basis Respondents will pay disgorgement of $1,402,850, prejudgment interest and a penalty of $1 million.

    SEC Wins Summary Judgment Ruling In Ponzi Scheme Case

    October 12, 2014

    The Commission prevailed in an investment fund scheme action, obtaining a favorable summary judgment ruling. In reaching its conclusion the Court rejected claims that the action was time barred and that the cause of action was outside the scope of Exchange Act Section 10(b). SEC v. Funinaga, Civil Action No. 2:13-CV-1658 (D. Nev. Order entered Oct. 3, 2014).

    The SEC named as defendants Edwin Yoshihiro Funinaga and MRI International, Inc. The complaint alleged an investment fund fraud which began in 1998, and continued through 2013, in which over $800 million of investor funds were raised. Those investors were largely in Japan.

    Investors were told that the firm purchased medical accounts receivables at a discount. Full value would be realized from the insurance companies. Investors were assured that their funds were safe because of the “role of state governments” which provided guarantees through the deposit system. Investor funds were supposedly kept in “special lock box accounts” managed by an escrow agent.

    In fact the defendants were operating a Ponzi scheme, according to the complaint. Investors were repaid with funds raised from other investors. The supposed escrow agent claimed the funds were transferred to Mr. Funinaga. In a statement to the Japanese Financial Services Agency, Mr. Funinaga admitted that investor funds were used to repay other investors. Other portions of the investor funds were diverted to the personal use of Mr. Funinaga who invoked his Fifth Amendment rights in the action.

    In considering a series of motions the Court initially rejected defendants’ claim that it lacked subject matter jurisdiction based on the application of 28 U.S.C. Section 2462, the five year statute of limitations. The SEC opposed this motion, claiming that the cause of action continued until 2013 and, in any event, the statute does not apply to equitable remedies. Following SEC v. Ring, 991 F. 2d 1486 (9th Cir. 1993) the Court concluded that the statute of limitations does not apply to disgorgement claims. While other jurisdictions have applied Section 2462 to all forms of relief, Ring is controlling here.

    Second, the Court rejected a claim that the action should be dismissed under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) which held that a cause of action under Exchange Act Section 10(b) does not have any extraterritorial application. While the SEC claimed that Morrison had been overruled for government enforcement actions by Dodd-Frank, the Court did not reach that issue. The Court noted that other jurisdictions have found a “lack of clarity” on this point, citing. SEC v. Chi. Convention Ctr., LLC, 961 F. Supp. 2d 905, 916-17 (N.D. Ill. 2013). Rather, the Court concluded that the securities transactions involved here closed and title was transferred in Nevada. That is sufficient under Morrison the Court found.

    Finally, the Court concluded that there was sufficient evidence to grand summary judgment in favor of the SEC. Here the evidence demonstrates that the defendants made material misrepresentations regarding the investments. Mr. Funinaga had sole control over the investment fund and used the cash for his personal benefit. His control over the scheme, use of the funds, misrepresentations regarding the safety of the funds, when coupled with his assertion of the Fifth Amendment are sufficient to establish the key elements of a claim. Defendants’ attempt to refute the evidence of the SEC by claiming that the Court does not have jurisdiction is not sufficient. Accordingly, summary judgment was entered in favor of the Commission. See Lit. Rel. No. 23111 (October 10, 2014).

    This Week In Securities Litigation (Week ending October 10, 2014)

    October 09, 2014

    The Fifth Circuit decided a significant case on loss causation. The Court concluded that the truth could emerge from a series of disclosures which, in and of themselves were not sufficient to uncover the fraud, but which when considered together were adequate.

    The SEC, after emptying out the pipeline of cases at the close of the government fiscal year, brought two actions this week. On is a proceeding against a current and former subsidiary of E*Trade for selling unregistered microcap shares. The other is an investment fraud action.

    SEC

    Remarks: Keith Higgins, Director of Corporation Finance, delivered remarks titled “Shaping Company Disclosure” before the George A. Leet Business Law Conference (Oct. 3, 2014). His remarks focused on the staff disclosure initiative, noting that they are considering if it should be more principle based and also the role of technology (here).

    Alert: The National Exam Program issued a Risk Alert titled “Broker-Dealer Controls Regarding Customer Sales of Microcap Securities” in conjunction with the settlement of the E*Trade case discussed below (here).

    CFTC

    Remarks: Commissioner Mark Wetjen addressed the Global Markets Advisory Committee Open Meeting (October 9, 2014). He reviewed the bilateral discussion on CCP equivalency and the NDF clearing mandate (here).

    SEC Enforcement – Filed and Settled Actions

    Statistics: This week the SEC filed 1 civil injunctive action and 1 administrative proceeding, excluding 12j and tag-along-actions.

    Unregistered sale of securities: In the Matter of E*Trade Securities, LLC, Adm. Proc. File No. 3-16192 (October 9, 2014) is a proceeding with names as Respondents the broker-dealer and G1 Execution Services, LLC, formerly known as E*Trade Capital Markets, LLC. Both were subsidiaries of E*Trade Financial Corporation during the time period of this action. Beginning in March 2006, and continuing through April 2011, Respondents facilitated the sale of thousands of shares of unregistered penny stocks, apparently relying on Securities Act Section 4(a)(4), the brokers exemption. Clients repeatedly deposited shares of microcap stocks, claiming that they were free trading and directed that they be sold. The funds were wired out immediately. While Respondents conducted some due diligence initially, it was insufficient to claim the exemption. Later in the period additional inquiry was made but Respondents ignored several red flags and failed to conduct the kind of “searching inquiry” necessary. The Order alleges violations of Securities Act Sections 5(a) and 5(c). Respondents resolved the matter with each consenting to the entry of a cease and desist order based on the Sections cited in the Order and a censure. In addition, Respondents, on a joint and several basis, will pay disgorgement of $11,402,850, prejudgment interest and a penalty of $1 million.

    Investment fund fraud: SEC v. Nationwide Automated Systems, Inc., Civil Action No. CV 14 07249 (C.D. Cal. Unsealed October 7, 2014) names as defendants the company, Joel Gillis and Edward Wishner, respectively, the president and treasurer of the firm.

    Beginning in 1999, and continuing to the present, Nationwide and Mr. Gillis have offered securities in the form of ATM sale and leaseback agreements to the public. Since January 2013 the Defendants have raised about $120 million from investors through the sale of the ATM leaseback offering. Defendants used a standard set of agreements to implement their scheme which involved a sale of the machine and its lease back to the defendants. Nationwide agreed to pay the investor $0.50 for each approved transaction at the machine. In addition, the investor was guaranteed a return of 20% or more and was assured that the firm had a 19 year track record of success. Payments were in fact made to investors, largely from the funds of other investors. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 20(a), Securities Act Sections 5(a) and (c) and of each subsection of 17(a). The case is pending. See also Lit. Rel. No 23106 (October 8, 2014).

    Misappropriation: SEC v. Mannion, Civil Action No. 1:10-cv-03374 (N.D. Ga.) is a previously filed action against Paul Mannion, Andrew Reckles and PEF Advisors LLC and PEF Advisors Ltd., both co-owned by the individual defendants. The complaint alleged violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2) based on claims that the defendants fraudulently overvalued certain assets of the funds: that assets were misappropriated and that misrepresentations were made to a stockholder in connection with a stock purchase; and that warrants belonging to a hedge fund client were inappropriately exercised. It was settled by instituting an administrative proceeding. That proceeding concluded with the entry of a cease and desist order against Messrs. Mannion and Reckles based on Advisers Act Section 206(2). In addition, each was barred from the securities business and from participating in any penny stock offering with a right to apply for reentry after two years. Previously, the Court granted the SEC’s motion for summary judgment on the stock warrant claim, finding a violation of Advisers Act Section 206(2) but also granted the defendants’ motion for summary judgment on the Section 10(b) claims as to the warrants and all claims as to the valuation allegations. The Commission then dismissed certain claims remaining and entered into the settlement. See Lit. Rel. No. 23108 (October 8, 2014).

    Misrepresentations: SEC v. Eiten, Civil Action No. 1:11-cv-12185 (D. Mass.) is a previously filed action against stock promoter Geoffrey Eiten and his firm, National Financial Communications, Inc. The complaint alleged that the defendants published material misrepresentations in their penny stock news letter based on information from paying clients that were not checked. The Court entered a final judgment this week, enjoining Mr. Eiten from future violations of Exchange Act Section 10(b) which included certain restrictions relating to penny stocks and a penny stock bar. The order also requires the payment of $605,262 in disgorgement, prejudgment interest and a civil penalty of $50,000. The firm previously defaulted. See Lit. Rel. No. 23107 (October 8, 2014).

    Court of appeals

    Loss causation: Public Employees’ Retirement System of Mississippi v. Amedisys, No. 13-30580 (5th Cir. Decided October 2, 2014) is a case in which the Court concluded that a series of small disclosures collectively were sufficient to establish loss causation.

    Amedisys provides home health services. About 90% of its revenue came from Medicare payments. During the class period Medicare paid a flat fee for the treatment of a patient with at least five but fewer than ten therapy visits per episode – a course of treatment over sixty days. More was paid if there were over ten visits. In 2008 Medicare revised the rules, dropping the ten visit threshold in favor of paying increased reimbursements upon the occurrence of six, fourteen and twenty visits during an episode for medically necessary services. Plaintiffs claim that the company committed fraud by pressuring employees into providing medically unnecessary treatment visits to hit the more lucrative reimbursement thresholds. The officer defendants made a series of false statements. The truth finally emerged through a series of five partial disclosures, according to the complaint. The share price dropped, injuring plaintiffs.

    The district court found the five partial disclosures insufficient to reveal the truth about the fraud and dismissed for not adequately pleading loss causation. The Fifth Circuit reversed. The five partial disclosures are: 1) A research report about firm’s accounting and Medicare billing practices; 2) The company President and CEO and its CIO resigned to pursue other interests; 3) A study published in the Wall Street Journal on Medicare reimbursements by a Yale professor analyzed payments to Amedisys, revealing a questionable pattern of home visits clustered around reimbursement targets that changed after the revision of the targets; 4) the fact that the Senate Finance Committee, the SEC and the DOJ all launched inquiries regarding the Medicare billing practices of the company following the Wall Street Journal article; and 5) the fact that the company announced disappointing quarterly results.

    The critical question is whether the relevant truth emerged, the Court noted. Here each of the events may not be sufficient to establish loss causation, although the Wall Street Journal article added new information to the market in the form of an expert analysis of previously disclosed data. Collectively, however, “the whole is greater than the sum of its parts.” Together these facts are sufficient to demonstrate that the truth emerged, establishing, at this stage of the case, loss causation.

    Hong Kong

    Breach of duty: The Securities and Futures Commission obtained an order banning Ho Yik Kin, a former executive director of Tack Fat Group International, from serving as a director or being involved in the management of a public company for a period of six years. The order was based on admissions that he failed to fulfill his duties by signing minutes of board meeting in which significant transactions were undertaken when in fact he did not attend the meetings.

    UK

    Client funds: The Financial Conduct Authority fined David Gillespie, Managing Director, and David Welsby, Finance Director of Pritchard Stockbrokers, respectively £10,500 and £14,000 (which would have been £144,000 and £72,000 but for financial hardship) and banned each from the securities business. The firm was also censured and would have been fined £4,932,600 but for its financial condition. The penalties were imposed for serious violations of the client money rules which require that such funds be kept in a segregated account. Specifically, client funds were kept in an opaque off-shore facility which was not supposed to be used and the funds were wrongly utilized to pay business expenses and shortfalls were not repaid. As a result there is a deficiency of about £3 million in client funds.

    Libor manipulation: The Serious Frauds Office announced that a senior banker from a leading British bank pleaded guilty to conspiracy to defraud in connection with the manipulation of LIBOR.

    SEC Brings Another ATM Based Ponzi Scheme Case

    October 08, 2014

    Ponzi and investment scheme cases are a staple of SEC enforcement in the post Madoff world. Emerging, however, may be a new trend based on a subset of these frauds – investments in ATM machines. At the close of last month the Commission filed an investment fund fraud case centered on the solicitation of investors for a business which operated ATM machines. SEC v. Ferguson, Civil Action No. 3:14-cv-04188 (N.D. Cal. Filed September 29, 2014). Now the Commission has brought another Ponzi scheme case centered on the lease of ATM machines. SEC v. Nationwide Automated Systems, Inc., Civil Action No. CV 14 07249 (C.D. Cal. Unsealed October 7, 2014).

    Nationwide names as defendants the company, Joel Gillis and Edward Wishner. The company purports to be an ATM machine provider which works with high-traffic retail locations and claims to have 80 branches and 1,000 certified technicians on standby. Nationwide claims to service more than $1 billion in ATM transactions per month. Mr. Gillis is the president of Nationwide. He essentially runs the business. Mr. Wishner is the treasurer, vice president and secretary of the company.

    Beginning in 1999, and continuing to the present, Nationwide and Mr. Gillis have offered securities in the form of ATM sale and leaseback agreements to the public. Since January 2013 the Defendants have raised about $120 million from investors through the sale of the ATM leaseback offering.

    Defendants used a standard set of agreements to implement their scheme. Those included an ATM Equipment Purchase Agreement, a lease agreement and an addendum. Typically investors paid $12,000 to purchase an ATM. The machine was then leased back to the defendants who operated it. Investors agreed in the contracts not to interfere with the operation of the machine which included not ever contacting the site where it was installed.

    Nationwide agreed to pay the investor $0.50 for each approved transaction at the machine. In addition, the investor was guaranteed a return of 20% or more and was assured that the firm had a 19 year track record of success.

    Payments were in fact made to investors who were also provided a monthly statement regarding their investment. The payments came largely from money paid to the company by other investors. For example, during April, May and June 2014 over $23 million was deposited in the Nationwide bank account. Only a little over $390,000 came from legitimate ATM transactions. At the same time about $18.4 million was deposited from investors. Yet the firm paid about $23.4 million to investors under the sale and leaseback agreements. Portions of the money raised were also transferred to entities affiliated with Mr. Wishner.

    In August 2014 Nationwide bounced about $3 million in checks written to investors. By the end of the month the firm’s bank accounts were reduced to about $200,000. Hundreds of investors called seeking payment. Investors were offered excuses. At the same time the defendants continued to raise money from other investors. For example, in late August and early September 2014 about $3.8 million was raised from investors. During the same period only $52,436 was raised from ATM transactions while about $2 million was paid out to investors.

    The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 20(a), Securities Act Sections 5(a) and (c) and of each subsection of 17(a). The case is pending. See also Lit. Rel. No 23106 (October 8, 2014).

    Loss Causation In A Securities Fraud Case From a Stream of Small Disclosures

    October 07, 2014

    A critical element in a Section 10(b) and Rule 10b-5 securities fraud claim for damages is loss causation. Mandated as a key component of such a claim by the PSLRA, the element provides the essential link between the alleged injury and the claimed damages. It is not enough that the plaintiff claim the price of the securities purchased was inflated by the fraud. Rather, the PSLRA, as interpreted by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), requires plaintiffs demonstrate that the truth emerged about the fraud and that he share price drop resulted primarily from the revelation of that fraud.

    A recent Fifth Circuit decision concluded that the truth emerged – or enough of it – through a series of disclosures despite the fact that each may not have been sufficient to inform the market of the truth. Public Employees’ Retirement System of Mississippi v. Amedisys, No. 13-30580 (5th Cir. Decided October 2, 2014).

    Amedisys provides home health services to patients with chronic health problems. About 90% of its revenue comes from Medicare payments. During the class period Medicare paid a flat fee for treatment of a patient with at least five but fewer than ten therapy visits per episode – a course of treatment over sixty days. If the number of treatments exceeded ten, more was paid. In 2008 Medicare revised the rules, dropping the ten visit threshold in favor of paying increased reimbursements upon the occurrence of six, fourteen and twenty visits during an episode for medically necessary services.

    Plaintiffs claim that the company committed fraud by pressuring employees into providing medically unnecessary treatment visits to hit the more lucrative reimbursement thresholds. As the fraud unfolded the defendants, which include the company and several of its officers, made a series of materially false statements which artificially inflated the price of Amedisys’ stock. The truth finally emerged through a series of five partial disclosures, according to the complaint. The share price dropped, injuring plaintiffs.

    The district court found the five partial disclosures insufficient to reveal the truth about the fraud and dismissed for not adequately pleading loss causation. The First Circuit reversed.

    The five partial disclosures are:

    • Research report: The report raised questions about the firm’s accounting and Medicare billing practices. The share price dropped over 17% the day it was issued despite contrary claims by the company.
    • Employee departures: The company President and CEO and its CIO resigned to pursue other interests. The share price dropped over 21%.
    • WSJ: A study published in the Wall Street Journal of Medicare reimbursements by a Yale professor analyzed payments to Amedisys, revealing a questionable pattern of home visits clustered around reimbursement targets that changed after the revision of the targets. It also quoted a former company nurse who stated employees were told to get 10 visits, the last of which was not always necessary. The share price dropped over 6% following publication of the article.
    • Government investigations: The Senate Finance Committee, the SEC and the DOJ all launched inquiries regarding the Medicare billing practices of the company following the Wall Street Journal article.
    • Disappointing quarterly earnings: The company announced disappointing quarterly results for the second quarter. The share price declined over 24%.

    The critical question here is whether the relevant truth emerged. This means that “the truth disclosed must make the existence of the actionable fraud more probable than it would be without that alleged fact, taken as true,” according to the Court. The disclosure need not be in one episode – it can gradually be perceived in the market place.

    Here each of the events may not be sufficient to establish loss causation. The report is “admittedly inconclusive . . . Speculation of wrongdoing cannot by itself arise to a corrective disclosure,” according to the Court. Likewise, the resignation of the officers by itself is insufficient, although the share price drop is not insignificant.

    The Wall Street Journal article, while based on public facts which normally are insufficient to reveal the truth, does contain new information – an expert analysis. The analysis of complex economic data understandable only through expert analysis does plausibly present new information that is not merely confirmatory.

    Finally, the Court considered the disappointing quarterly results and the three government inquiries. While normally the initiation of an investigation is not sufficient to establish loss causation, in this case these facts must be considered with the others. Media speculation here was followed by three government investigations targeting the reimbursement practices of the company. In the glare of this spotlight Amedisys could no longer game the system and its earnings dropped. Throughout all of these events the share price dropped significantly. Collectively “the whole is greater than the sum of its parts.” Collectively, these facts are sufficient to demonstrate that the truth emerged, establishing at this stage of the case, loss causation.

    THE ORIGINS OF THE FCPA: LESSONS FOR EFFECTIVE COMPLIANCE AND ENFORCEMENT — CONCLUSION

    October 07, 2014

    This is the final part of an occasional series. The first is available here, the second here, the third here, the fourth here and the fifth here. The entire paper will be published by Securities Regulation Law Journal early next year.

    Conclusion: The FCPA Today

    The FCPA was unique in the world at passage. It was born of controversy and scandal. The Watergate hearings which transfixed Director Sporkin and the rest of the country spawned unprecedented and far ranging issues and questions. The hearings ushered in a new era of moral questioning.

    In the turmoil of that environment Director Sporkin focused on corporate governance, viewing corporate boards and officers as stewards of investor funds. That principled view propelled the SEC investigations, enforcement actions and the Volunteer Program, all of which culminated after two years of Congressional hearings and debate in the Foreign Corrupt Practices Act.

    The statute was intended to implement the principles that gave rise to its birth. It was tailored and focused:

    · Bribery prohibited: The anti-bribery provisions prohibit issuers and other covered persons from corruptly attempting, or actually obtaining or retaining, business through payments made to foreign officials;

    · Accurate books and records: The books and records provisions were designed to ensure that issuers – those using money obtained from the public – keep records in reasonable detail such that they reflect the substance of the transactions;

    · Auditors get the truth: Making misstatements to auditors examining the books and records of issuers was barred; and

    · Effective internal controls: Companies were required to have internal control provisions as an assurance that transactions with shareholder funds are properly authorized and recorded.

    The impetus for the passage of the FCPA was not a novel crusade but the basic premise of the federal securities laws: Corporate managers are the stewards of money entrusted to them by the public; the shareholders are entitled to know how their money is being used. The settlements in the early enforcement actions and the Volunteer Program were designed to implement these principles. The FCPA was written to strengthen these core values.

    Today the statute continues to be surrounded by controversy. While the FCPA is no longer unique in the world, U.S. enforcement officials are without a doubt the world leaders in enforcement of the anti-corruption legislation. A seemingly endless string of criminal and civil FCPA cases continues to be brought by the Department of Justice (“DOJ”) and the SEC. The sums paid to resolve those cases are ever spiraling. What was a record-setting settlement just a few years ago is, today, not large enough to even make the list of the ten largest amounts paid to settle an FCPA case. The reach of the once focused statute seems to continually expand such that virtually any contact or connection to the United States is deemed sufficient to justify applying the Act.

    For business organizations the potential of an FCPA investigation, let alone liability, is daunting. Compliance systems are being crafted and installed which often incorporate each of the latest offerings in the FCPA market place at significant expense. If there is an investigation, the potential cost of the settlement is only one component of the seemingly unknowable but surely costly morass facing the organization. Typically business organizations must deal with the demands of two regulators in this country and perhaps those of other jurisdictions. The internal investigations that are usually conducted to resolve questions about what happened are often far reaching, disruptive, continue for years and may well cost more than the settlements with the regulators. Since most companies cannot bear the strain of litigating an FCPA case, enforcement officials become the final arbitrator on the meaning and application of the statutes – arguing legal issues may well mean a loss of cooperation credit with a corresponding increase in penalties.

    Enforcement officials today continue to call for self-reporting as the SEC did at the outset of the Volunteer Program. Today, however, while many companies do self-report since they may have little choice, there can be an understandable reluctance in view of the potential consequences. Indeed, self-reporting might be viewed as effectively writing a series of blank checks to law firms, accountants, other specialists and ultimately the government with little control over the amounts or when the cash drain will conclude.

    This is not to say that companies that have violated the FCPA should not be held accountable. They should. At the same time it is important to recall the purpose of the statutes: To halt foreign bribery and to ensure for public companies that corporate officials are accountable as faithful stewards of shareholder money.

    While business organizations may express concern about enforcement, accountability begins with the company, not the government. That means installing effective compliance systems using appropriate methods, not just adopting something off the shelf or purchasing the latest offering in the FCPA compliance market place. It means programs that are effective and grounded in basic principles, not just ones that furnish good talking points with enforcement officials if there is a difficulty.

    The key to effective programs is to base them on the principles of stewardship which should be the bedrock of the company culture. Accountability for the funds of the shareholders begins with effective internal controls, a key focus when the statute was passed which remains critical today. As Judge Sporkin recently commented: “The problem I see in compliance is that they are not really putting in the kinds of effort and resources that’s necessary here. And I really think that you’ve got to get your compliance department, your internal audit department working together; in too many instances you find that they’re working separately.” Transcript at 18.

    The focus is also critical. These systems are not just a defense to show regulators if something goes wrong. Rather, the systems should reflect the culture of the organization. As SEC Commissioner John Evans stated as the events which led to the passage of the FCPA were unfolding:

    “I am somewhat concerned that the issue of illegal and questionable corporate payments is being considered by some in a context that is too narrow, legalistic, and short-sighted. In view of the objectives of the securities laws, such as investor protection and fair and honest markets, compliance with the spirit of the law may be more meaningful and prudent than quibbling about meeting the bare minimum legal requirements. I would submit that many companies and their profession accounting and legal advisers would serve their own and the public interest by being less concerned with just avoiding possible enforcement action by the SEC or litigation with private parties and more concerned with providing disclosure consistent with the present social climate. Such a course of conduct should promote the company’s public image, its shareholder relations, its customer relations, and its business prospects . . . .” Evans at 14-15.

    Accountability is also critical on the part of enforcement officials. Every case does not demand a draconian result with a large fine, huge disgorgement payments, multiple actions or a monitor. Every case need not be investigated for years at spiraling costs which may bring diminishing returns. The statutes need not be interpreted as an ever expanding rubber band with near infinite elasticity. Rather, enforcement officials would do well to revisit the remedies obtained in the early enforcement cases and those employed with great success in the Volunteer Program. And, they would do well to recall the reason 450 major corporations self-reported without a promise of immunity or an offer of cooperation credit: As Judge Sporkin said, “They trusted us.”