The focus this week in securities enforcement continues to be SAC Capital. The firm’s owner received a grand jury subpoena in the on-going criminal and civil insider trading investigations being conducted by the Manhattan U.S. Attorney’s Office and the SEC. The investigations face a critical deadline in a few weeks as the five year criminal statute of limitations runs on certain trades.

The SEC received a warning from the FSOC regarding money market funds this week. The FSOC is reviewing comments on the money market fund proposals it put out last fall. If the SEC does not act by the time that review is completed, according to testimony from the Treasury Secretary, the FSOC may.

The Commission brought an action against an investment adviser which serves as a proxy adviser this week for failing to have adequate procedures regarding confidential information. The agency also filed another proceeding against a city tied to the municipal bond market and an insider trading case.

SEC

Remarks Commissioner Luis Aguilar delivered remarks titled Merely Cracking the Glass Ceiling is Not Enough: Corporate America Needs More than Just a Few Women in Leadership,” to the Women’s Executive Circle of New York, New York, New York (May 22, 2013). His remarks focused on gender diversity and the lack of diversity on corporate boards (here).

Remarks: Commissioner Luis Aguilar delivered remarks titled “The Role of Immigrants in Our Economy,” to the Georgia Hispanic Chamber of Commerce, Atlanta, Georgia (May 18, 2013). His remarks focused on the positive impact of immigrants on the U.S. economy and the need to ensure that small business has access to capital (here).

Remarks: Commissioner Daniel Gallagher delivered remarks at the 12^th European Corporate Governance & Compliance Law Conference, Dublin, Ireland (May 17, 2013). Topics discussed include the Commissioner’s critique of Sarbanes-Oxley and Dodd-Frank along with the encroachment of the federal government in traditional state areas and a caution about similar, possible action by the EU (here).

FSOC

Testimony: Treasury Secretary Jacob Lew testified regarding the annual report of the Financial Stability Oversight Counsel or FSOC before the Senate Committee on Banking, Housing and Urban Affairs. Money market funds, and the need for reform, were one key topic. The Secretary told the Committee that the FSOC remains concerned about the funds and cautioned the SEC: “The Council is currently considering the public comments on the proposed recommendations [issued in November 2012]. If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its process, the Council expects that it would not issue a final recommendation to the SEC. However, if the SEC does not pursue additional reforms that are necessary to address MMFs’ structural vulnerabilities, the Council should use its authorities to take action in this area.”

Supreme Court

Whistleblower: Lawson v. FMR LLC, No. 12-3 (S.Ct. Cert. granted May 20, 2013). The High Court agreed to hear a significant case concerning the coverage of the Sarbanes-Oxley whistleblower provisions. The central issue to is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Act. The case centers on claims brought by two former employees of the Fidelity mutual fund families. FMR Co., Inc. and a number of its subsidiaries are the defendants in the case. Those entities are private companies that contact with the publically traded funds. The district court denied a motion to dismiss which argued that the SOX whistleblower provisions do not extend to employees of contractors at private companies. The First Circuit reversed in a 2-1 decision.

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 2 civil injunctive action and 3 administrative proceedings (excluding tag-along-actions and 12(j) proceedings).

Confidential information: In the Matter of Institutional Shareholder Services, Inc., Adm. File No. 3-15331 (May 23, 2013) is a proceeding against the firm which is a registered investment adviser and the subsidiary of a public company. ISS is a full service proxy adviser that assists institutional investors. From 2007 through early 2012 an employee of the firm furnished confidential information to a proxy solicitor regarding the manner in which 100 institutional advisory clients were voting their proxy ballots . The employee, who is no longer with the firm, received meals and tickets in return. The violations occurred in part, according to the Order, because the procedures to protect the integrity of the process and confidential information were inadequate, although the firm had a code of ethics which prohibited such actions. The Order alleges violations of Advisers Act Section 204A. To resolve the proceeding the Respondent consented to the entry of a cease and desist order based on the Section cited and the entry of a censure. The firm also agreed to pay a civil penalty of $300,000 and implement certain procedures. Those include the retention of a consultant to review their procedures and make recommendations which will be adopted. The Commission acknowledged the cooperation of the company.

Insider trading: SEC v. Stilwell, Civil Action No. 13-civ-3437 (S.D.N.Y. Filed May 22, 2013) is an action centered on the acquisition American Physicians Capital, Inc. by The Doctors Company, announced on July 8, 2010. Defendant John Stilwell is the brother of an ACAP board member. He was employed at his brother’s investment firm. Beginning in March 2010 ACAP evaluated a potential sale of the company. The brother-director was involved in the evaluation process. As the process evolved defendant Stillwell misappropriated the inside information. He shared it with his friend, Dr. Michael Moore and sister-in-law, Jillian Murphy. During the last two weeks of April defendants Moore and Murphy and two of their friends purchased 8,200 shares of ACP stock. When the deal was announced the stock price spiked 28%. The three defendants settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). They also agreed to pay disgorgement, prejudgment interest and a penalty. Mr. Stilwell will pay about $41,500, Dr. Moore, about $113,000, and Ms. Murphy about $12,000. See also Lit. Rel. No. 22705 (May 22, 2013).

Misrepresentations: In the Matter of the City of South Miami, Florida, Adm. Proc. File No. 3-15329 (May 22, 2013). This action, alleging violations of Securities Act Sections 17(a)(2) and (3), centers on a bond offering initiated in 2002 to finance a public parking garage which became a mixed use project with retail space. Initially, the role of the developer was limited for tax reasons. After a May 2002 offering in which the City issued $49.8 million in tax exempt bonds for the project, portions of the money was loaned to the developer. That was not reflected in the documents executed with the Florida Municipal Loan Council or FMLC for the tax exempt portion of the project and was contrary to the advice of bond council. In 2005 the project was substantially restructured by City officials – essentially the retail space and the garage were ceded to the developer. This jeopardized the tax exempt status of the bonds. Subsequently, in an effort to complete the project, the City sought to borrow additional funds from the FMLC. It applied to join the FMLC bond pool but failed to state that the project had been significantly restructured or that portions of the earlier bond offering had been loaned to the developer. The papers were thus materially misleading as were subsequently filed certificates representing compliance with the applicable tax rules. In 2010 the City submitted a material event notice with the MSRB’s Municipal Market Access system, admitting for the first time that the tax exempt status of the bonds had been jeopardized. The City was, however, able to negotiate an arrangement with the IRS to preserve the tax exempt status for the shareholders. The proceeding was resolved with the City consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the City will retain a consultant to review its procedures for the next three years and make recommendations which will be adopted.

Fraudulent certifications: SEC v. Hu, Civil Action No. 12-CV-5811 (S.D.N.Y.) is a previously filed action against Ren Hu, the former CFO of China Yingxia, a failed company which became publically traded through a reverse merger. The complaint alleged that Mr. Hu executed false SOX confirmations, representing that he had designed disclosure and internal controls. Rather, he assisted the company in evading its obligations in this regard and made misrepresentations to the auditors. This week the Court entered a final judgment of permanent injunction prohibiting future violations of Exchange Act Section 10(b) and 13(b)(2)(B). The defendant was also barred from serving as and officer or director of a public company for three years. No financial penalty was imposed based on his financial condition. See also Lit. Rel. No. 22704 (May 20, 2013).

Pay-to-play In the Matter of Neil M. M. Morrison, Adm. Proc. File No. 3-15049 is a proceeding initially filed on September 27, 2012. It centered on a pay- to- play scheme in which Goldman Sachs employee Neil Morrison, from November 2008 through October 2010, was engaged in the election efforts of the then Massachusetts Treasurer who was running for governor. Mr. Morrison substantially participated in the campaign during his work time at Goldman. He also used the firm’s resources which represented an undisclosed “in-kind” contribution and solicited campaign contributions while engaged in, or seeking to engage in, municipal underwriting business with the Treasurer’s Office. Within two years Goldman engaged in municipal securities business with issuers associated with the Massachusetts Treasurer. The Order alleged violations of Exchange Act Section 15B(c)(1) and the MSRB rules. This week Mr. Morrison settled with the Commission, consenting to the entry of a cease and desist order based on the Section and Rules cited in the Order. He is also barred from the securities business and from participating in a penny stock offering with a right to apply for reentry in five years. Mr. Morrison agreed to pay a civil penalty of $100,000.

Prime bank fraud: SEC v. Fowler, Civil Action No. 1:13-cv-1656 (N.D. Ga. Filed May 16, 2013) names as defendants Robert Fowler and his controlled entity, US Capital Funding II Series Trust 1, Inc. Beginning last August Mr. Fowler targeted investors, claiming that through US Capital’s relation with a prime bank millions of dollars in loans could be obtained. Mr. Fowler would then invest at least a portion of the money and later the profits would be split. To get started all that was necessary was an up front fee from the investors. To reassure investors, Mr. Fowler claimed the program had a triple A credit rating from S&P and the blessing of the SEC. The loans and investment program were fictitious and the claimed ratings and approval were misrepresentations. The only profit was the fees Mr. Fowler collected from investors and took for his own purposes. The complaint alleges violations each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 26. The case is in litigation. See also Lit. Rel. No. 22702 (May 17, 2013).

Excessive fees: In the Matter of Noonan Capital Management, LLC, Adm. Proc. File No. 3-14955 (May 17, 2013) is a proceeding which names as Respondents registered investment adviser Noonan Capital and its sole owner Timothy Noonan. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2), 203A(a)(1)(A), 204(a) and 207. There are two primary claims: First, the firm overcharged investors for its fees. From April 2009 through January 2011 the firm charged investors fees totaling $183,908 when in fact the fees should have been $92,212 using the formula in its Form ADV. Second, the firm misrepresented the amount of assets under management, claiming it had $25 million at one point and $39.4 at another. In fact the Order states Noonan Capital never had more than $9 million under management. To resolve the case, Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm’s registration was revoked and Mr. Noonan is prohibited from serving in any capacity with an investment adviser or investment company. The firm filed an affidavit demonstrating its inability to pay disgorgement or a civil penalty.

Criminal cases

Investment fund fraud: U.S. v. Sekaran (S.D.N.Y.) is an action in which defendant Anand Sekaran, who previously pleaded guilty, was sentenced to 30 months in prison. The case focused on the operation of an investment fund known as Wassen Capital Ltd. The fund traded options after being formed in 1997. Over a ten year period beginning in 1999 Mr. Sekaran solicited investor funds. As a result of substantial loses and withdrawals in 2009 and 2010 Mr. Sekaran defrauded investors by misrepresenting the true financial condition of the fund, furnishing them false statements and making Ponzi like payments to certain investors. During the course of the scheme he misappropriated about $500,000. Overall there were approximately $2 million in investor losses.

Investment fund fraud: U.S. v. Banet (N.D. Cal.) is an action against Hausmann-Alain Banet in which he was charged with six counts of wire fraud, eleven counts of mail fraud, and six counts of money laundering. The charges center on a scheme which took place from about June 2008 through July 2012. During that period the defendant solicited investor funds for Lion Capital Management Group LLC. The firm was supposed to invest in hedge funds. In fact the defendant misappropriated the money. Overall he received abut $1.3 million from investors. This week he pleaded guilty to mail fraud and wire fraud. Sentencing is scheduled for August 6, 2013.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information please click here.

The SEC brought another action against a City for inadequate disclosure in connection with a municipal bond offering. In the Matter of the City of South Miami, Florida, Adm. Proc. File No. 3-15329 (May 22, 2013). The action centers on a bond offering initiated in 2002 to finance a public parking garage. The project traces to 1997 when the City began considering building a parking garage. In connection with the project the City also sought a developer for related retail space.

In 2002 the City entered into arrangements with a developer for the retail space. The role of the developer was limited in accord with the applicable tax requirements. Later bond council informed City officials that proceeds from tax exempt bonds could not be used to finance the retail portions of the project. This admonition was not communicated to subsequent City administrations.

In May 2002 the City issued $49.8 million in tax exempt bonds for the project. Shortly prior to the offering the City executed documents with the Florida Municipal Loan Council or FMLC for the tax exempt portion of the project. The City represented that proceeds of the offering would not be for private use and that the project would be conducted in accord with the applicable provisions of the IRS Code. Almost immediately after the offering, a portion of the proceeds were loaned to the developer.

After abandoning the project because of funding concerns, in 2005 it was substantially restructured by City officials. Essentially the retail space and the garage were ceded to the developer. This jeopardized the tax exempt status of the bonds. The Florida Municipal Loan Council and bond counsel were not informed of the changes.

The next year the project was still incomplete. The City sought to borrow additional funds from the FMLC to continue. In the Fall of 2006 the City applied to join the FMLC bond pool. The City failed to tell the FMLC that the project had been significantly restructured or that portions of the earlier bond offering had been loaned to the developer. Accordingly, the materials filed with in connection with the loan to contained material misrepresentations key to the tax exempt status of the project. Certifications filed by the City in each of the next two years stating that it was in compliance with the applicable requirements to maintain the tax exempt status were also inaccurate and materially incomplete.

In 2010 the City submitted a material event notice with the MSRB’s Municipal Market Access system. This notice acknowledged for the first time that the tax exempt status of the bonds had been jeopardized, although they had been trading for years. Subsequently, the City entered into agreements with the IRS under its Voluntary Compliance Agreement Program. Under the terms of the agreements the City was required to pay $260,325.40 and take steps to retire the bonds at the earliest possible date. To finance this the City had to borrow over $1.1 million. As a result of the settlement the tax exempt status of the bonds was preserved for the holders. The Order alleges violations of Securities Act Sections 17(a)(2) and (3).

The City resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, it will retain a consultant who will review the procedures of the City for the next three years and make recommendations which will be adopted.

This proceeding is one of a series of actions brought by the Commission centered on the municipal bond market. Like earlier actions against the City of Harrisburg, the State of Illinois and others, a critical common thread is the lack of procedures in the pertinent state or city government departments to ensure proper disclosure and compliance. This suggests that perhaps the time has come for a more comprehensive report on this critical issue. Perhaps more importantly, it should serve as a wake-up call to state and local government officials to examine and, if necessary reform, their procedures relating to municipal bonds.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information please click here.

New SEC Chair Mary Jo White many well be facing an early test of her leadership. The battle ground could be money market reform. The stakes are high – the SEC could find itself becoming less than relevant in a critical corner of the markets.

Treasury Secretary Jacob Lew testified regarding the annual report of the Financial Stability Oversight Counsel or FSOC before the Senate Committee on Banking, Housing and Urban Affairs, the Secretary informed the Committee. Money market funds, and the need for reform, were one key topic. The Secretary told the Committee that: “The Council remains concerned that vulnerabilities in wholesale funding markets could lead to destabilizing fire sales. Specifically, run-risk vulnerabilities related to money market mutual funds (MMFs), which became apparent during the financial crisis, still remain despite an initial set of reforms implemented [by the SEC] in 2010. In November 2012, the Council issued proposed recommendations for public comment to implement structural reforms of MMFs to reduce the likelihood of runs.”

Secretary Lew’s testimony echoes that of former SEC Chairman Mary Schapiro. In testimony before the same Senate Committee almost one year ago, Ms. Schapiro testified that: “. . . money market funds as currently structured pose a significant destabilizing risk to the financial system. While the Commission’s 2010 reforms made meaningful improvements in the liquidity of money market funds, they remain susceptible to the risk of destabilizing runs.” Testimony before the Senate Committee on Banking, Housing and Urban Affairs (June 21, 2012).

In the year since Ms. Schapiro’s testimony no reform has taken place. No proposed regulations have been issued for comment by the SEC. Two months after her testimony the Commission did consider proposals for reform. The proposed rules were not issued because the Chairman could not muster three votes necessary to issue the release. Ms. Schapior issued a statement on August 28, 2012 regarding the need for reform. Commissioners Gallagher and Paredes issued retorts calling for more study despite all the work which had been done on the question.

While the Commission studied, the FSOC moved forward. In November 2012 the Council “issued for public comment proposed recommendations to the SEC with three alternatives for reform to address the structural vulnerability of MMFs,” according to Secretary Lew in his testimony yesterday.

The next month the SEC staff completed another report on money market reform. Commissioner Gallagher praised it. In remarks on December 5, 2012 the Commissioner noted that the staff report provided needed research.

Whether the December SEC staff report is sufficient to generate new proposals for reform in this area has yet to be determined. What is clear however, is that the if the SEC fails to act the FSOC will. Secretary Lew told the Senate Committee yesterday that the FSOC is prepared to move forward if the SEC does not: “The Council is currently considering the public comments on the proposed recommendations [issued in November 2012]. If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its process, the Council expects that it would not issue a final recommendation to the SEC. However, if the SEC does not pursue additional reforms that are necessary to address MMFs’ structural vulnerabilities, the Council should use its authorities to take action in this area.”

New SEC Chair Mary Jo White suggested that a new approach for money market funds is under consideration in her May 1, 2013 remarks to the Investment Company Institute General Member Ship Meeting. Perhaps. But the clock is ticking. If the SEC fails to act, it may find itself becoming less than relevant in this critical area of the markets.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information please click here.

The Supreme Court agreed to hear a significant case concerning the coverage of the Sarbanes-Oxley whistleblower provisions. The central issue to be determined is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Act. Lawson v. FMR LLC, No. 12-3 (S.Ct. Cert. granted May 20, 2013).

Petitioners-plaintiffs are Jackie Lawson and Jonathan Zang, employees of the Fidelity mutual fund complex. Ms. Lawson was employed for fourteen years, most recently as the senior Director of Finance. Mr. Zang has been employed by Fidelity for several years, most recently with FMR Co., Inc. as an equity research analyst. The Respondent-defendants are privately held FMR, Co., Inc. and a number of its subsidiaries which operate the Fidelity group of mutual funds. Each publically held fund is a separate entity, registered with the SEC under Section 15(d) of the Exchange Act. Those funds have no employees. Rather, the directors of the fund contract with a privately held investment adviser which conducts all the activities of the fund.

Ms. Lawson initially raised concerns with FMR Co. in 2005 regarding the calculation of expenses. The amount of the expenses impacts the profits and ultimately the fees. Ms. Lawson objected to the amount of the expenses and the failure to disclose the methodology used to calculate them. Her complaint claimed that about $100 million was being improperly treated as an expense. After raising a series of objections she resigned claiming that the working environment was intolerable because of harassment.

Mr. Zang worked most recently for FMR as an equity research analyst. In 2005 he initially objected to a Statement of Additional Information which was being prepared for filing with the SEC, claiming it was inaccurate. The Statement was revised in accord with Mr. Zang’s objections. He also objected to the manner in which certain so-called “veiled index funds” were operated – funds which were essentially unmanaged index funds but for which Fidelity improperly collected a management fee. After the Statement was revised and filed he was terminated. He filed a complaint with OSHA as did Ms. Lawson. Both later filed actions in district court.

The district court rejected motions to dismiss filed by Fidelity. Its opinion centered on the term “employee” in the statute and the legislative history. The statute specifies that it protects an “employee” but fails to specify by whom that person must be employed. The legislative history, however, shows that Congress was particularly concerned with employees of institutions working for public companies, the court concluded thus supporting a reading of the statute which extends protection to employees of contractors. Subsequently, an application for an interlocutory appeal was granted.

The First Circuit reversed in a 2-1 decision. The majority concluded that the most natural reading of the term “employee” in the statute is that it only covers those at public companies. That conclusion was based largely on the title of the statute and caption which refer to “employees of publicly traded companies.” The Court declined to give deference to the decision of the Department of Labor in Spinner v. David Landau & Assocs., LLC, Nos. 10-111, 10115, 2012 Wl 1999677 (ARB May 31, 2012) which is to the contrary. The dissent, in contrast, argued that the statute plainly applies because a contractor of a public company terminated a whistleblower.

Before granting certiorari the Supreme Court requested the views of the United States. The Solicitor General argued that while the First Circuit decision is incorrect, the High Court should not take up this issue now. First, the Solicitor told the Court that the “statutory text identifies a broad range of entities and person who are prohibited from engaging in retaliation – a public company or ‘any officer, employee, contractor, subcontractor, or agent’ of such a company.” (internal quotations eliminated). Thus, by its plain terms, the statute is not delimited in the manner found by the First Circuit. This broad reading of the text is supported by the legislative record of the statute which was enacted in the wake of the Enron Corporation debacle and its deception which was facilitated by its outside auditors, Arthur Anderson.

Second, to the extent the statute is vague, the determination of the Department of Labor, which is charged with administering it, is entitled to Chevron deference. The decision in Spinner held that employees of contractors are entitled to protection.

Finally, while the First Circuit is incorrect, the Court should decline to hear the case at this time, according to the Solicitor. Presently, there is no conflict among the circuits. The lack of a conflict, coupled with the infrequency with which the federal courts have had to deal with this question, suggests that now is not the appropriate time for the Court to take up this issue.

Nevertheless, the Court decided to hear the case next term.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information please click here.

While the SEC Chair is battling Congress to secure a budget which approaches $2 billion the number of cases being brought by the enforcement program is dwindling. Regardless of what budget Congress actually gives the agency, a critical question will be how the resources are used and by what standard success will be measured. The number of cases filed during any given period, or even the amount of money obtained in resolved cases, is not the critical test of effective enforcement although those metrics may stimulate headlines.

Rather, the focus should be on the kind of cases being brought, the statement they make in the market place and the effectiveness of the remedies obtained. Stated differently, does the case halt wrong doers, inform the market place about Commission priorities and protect investors in the future by preventing a reoccurrence of the wrongful conduct? This will ultimately be the test by which the new administration being put in place at the SEC will be measured.

While the new administration will need time to install its program, a glimpse of what the Commission and its enforcement program is doing now was available on Friday when two new actions were filed. One is a civil injunctive case filed as an emergency action that involved three investors while the other is an administrative proceeding focused on an investment adviser to small to be eligible for Commission registration.

The first is SEC v. Fowler, Civil Action No. 1:13-cv-1656 (N.D. Ga. Filed May 16, 2013. This action was filed against Robert Fowler and his controlled entity, US Capital Funding II Series Trust 1, Inc. It centers on a prime bank fraud.

Beginning last August Mr. Fowler used US Capital Funding to raise $350,000 from three investors. He did this by targeting aspiring entrepreneurs and small business owners with a pitch of easy profits. Specifically, investors were told that through US Capital’s relation with a prime bank, millions of dollars in loans would be obtained. Mr. Fowler could then invest at least a portion of the money and later the profits would be split. To get started all that was necessary was an up front fee from the investors.

To reassure investors, Mr. Fowler claimed the program had a triple A credit rating from S&P and the blessing of the SEC. Of course the loans and investment program were fictitious. The ratings were misrepresentation. The only profit was the fees Mr. Fowler collected from investors and took for his own purposes. The complaint alleges violations each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 26. The case is in litigation. See also Lit. Rel. No. 22702 (May 17, 2013).

The Second is In the Matter of Noonan Capital Management, LLC, Adm. Proc. File No. 3-14955 (May 17, 2013). Registered investment adviser Noonan Capital and its sole owner Timothy Noonan are the Respondents. The Order which alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2), 203A(a)(1)(A), 204(a) and 207. The alleged violations center on two primary claims. First, the firm overcharged investors for its fees. From April 2009 through January 2011 the firm charged investors fees totaling $183,908 when in fact the fees should have been $92,212 using the formula in its Form ADV. Thus the firm overcharged — or “misappropriated” in the words of the Order – by about $91,696.

Second, the firm misrepresented the amount of assets under management. In its Form ADV filed in February 2009 the firm claimed to have $25 million under management. That representation was carried forward in an amended version of the filing. Subsequently, in a March 2009 filing the firm claimed it remained eligible for registration with the Commission because it had $39.4 million under management. In fact the Order stated that Noonan Capital never had more than $9 million under management.

To resolve the case the Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm’s registration was revoked and Mr. Nonan is prohibited from serving in any capacity with an investment adviser or investment company. The firm filed an affidavit demonstrating its inability to pay disgorgement or a civil penalty.

* * *

To be sure Fowler and Noonan Capital are only two cases, making it difficult to ascribe to them any statement about the enforcement program. The new administration at the Commission is just beginning and the budget has yet to be set. The critical point going forward, however, will be how the agency allocates its always scarce resources to establish a credible and effective over-all program and message. A key element of that will be the work of the enforcement division, the kind of cases it selects and prosecutes, its presence in the market place and the remedies obtained.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information please click here.

Companies with China based operations were a focus this week for the SEC. The Commission filed two financial fraud actions against companies whose operations were in the PRC. In one there seemed to be virtually no operations while in the other two sets of books were used to falsify revenue while proceeds of a securities offering were diverted to the use of the chairman and the controlling shareholder. The SEC also concluded its “golden goose” insider trading case, settling with the two remaining defendants. And, another defendant in the Dell insider trading case was sentenced to prison.

The Commission prevailed in the Second Circuit which affirmed the entry of an officer and director bar ordered by the district court following the settlement of an insider trading case. The Circuit Court declined, however, to adopt the SEC’s proposed test for issuing such orders.

SEC

Testimony: Chair Mary Jo White testified before the House Committee on Financial Services (May 16, 2013). The testimony reviewed the recent work of the divisions in support of the Commission’s budget request (here).

Remarks: Commissioner Daniel M. Gallagher addressed the 45^th Annual Rocky Mountain Securities Conference, Denver, Colorado (May 10, 2013). His remarks focused on the municipal securities markets and recent, related enforcement actions (here).

CFTC

Remarks: Commissioner Scott D. O’Malia addressed the Energy Risk USA 2013 Conference (May 14, 2013), delivering remarks titled “Dodd-Frank Regulatory Framework: What Questions Remain Unanswered.” Topics addressed include the large number of no-action and exceptive orders, the cross-boarder rules, futurization, the Volker Rule and data use (here).

SEC Enforcement: Filings and settlements

Weekly statistics: This week the Commission filed 3 civil injunctive action and no administrative proceedings (excluding tag-along-actions and 12(j) proceedings).

Cherry picking scheme: SEC v. Dushek (N.D. Ill. Filed May 16, 2013) is an action centered on a cherry picking scheme by the founder of an investment adviser and his son. The named defendants are Charles J. Dushek, his son Charles S. Dushek, and the state registered investment adviser, Capital Management Associates, Inc. From 2008 through 2012 the father and son team placed about 13,500 trades. Those trades were typically not allocated to either their accounts or those of a client for periods which ranged from a day to several days after the trade. Generally the profitable trades went to the accounts of the father and son and the unprofitable ones to the clients. Thus during the four year period here 75% of the trades for the father and son were profitable yielding $2 million in profits. For the clients only 25% were profitable yielding over $2 million in losses. For 17 consecutive quarters during the four year period the father and son had positive returns in their personal accounts at the time of allocation while the clients suffered losses. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is in litigation.

Investment fund fraud: SEC v. Deer Hill Financial Group, LLC, Civil Action No. 12-01317 (D. Conn.) is a previously filed action against the advisory firm and its principal, Stephen B. Blankenship. The complaint alleges that beginning in 2002 and continuing through 2011 the defendants misappropriated at least $600,000 from 12 brokerage customers by falsely representing that their funds would be invested through the advisory. The defendants settled with the Commission and the Court entered a final judgment as to each prohibiting future violations of Exchange Act Sections 10(b) and 15(a), Securities Act Section 17(a) and Advisers Act Sections 206(1) and (2). In a related action Mr. Blankenship was barred from the securities industry. In a parallel criminal case Mr. Blanenship previously pleaded guilty and was sentenced to serve 41 months in prison, pay a fine of $7,500 and make restitution in the amount of $607,516.81.

Financial fraud: SEC v. Rino International Corp., Civil Action No. 1:13-cv-00711 (D.D.C. Filed May 15, 2013) is an action against the company whose operations are based in China, Dejun “David” Zou, its founder and controlling shareholder, and Jianping “Amy” Qiu, its chairman. The complaint, which alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(5), 13(a), 13(b)(2)(A) and 13(b)(2)(B), states that the defendants inflated the revenues of the company and diverted offering proceeds to the personal use of the individual defendants. To implement part of the scheme the company had two separate sets of books, one for China and one for the U.S. The revenue recorded in the latter was 15 times higher than that in the former over about a two year period beginning in early 2008. Following a December 2009 offering of securities, portions of the proceeds were used to purchase a home, cars and other personal items for defendants Zou and Qiu. To resolve the case each defendant consented to the entry of a permanent injunction prohibiting future violations of the provisions cited in the counts of the complaint applicable to them. Defendants Zou and Qiu also agreed to pay penalties of $150,000 and $100,000 respectively in addition to the $3.5 million they paid as disgorgement in the related class action. The individual defendants also consented to the entry of an officer-director bar for ten years.

Insider trading: SEC v. Devlin, Civil Action No. 08-CV-11001 (S.D.N.Y.) is a previously filed action against, among others, Jamil Bouchareb and Daniel Corbin and his related entities. They are the last defendants in this case which was known as the “Golden Goose” action. It centered on repeatedly trading on inside information misappropriated by Matthew Devlin, formerly a Lehman Brothers, Inc., representative, from his wife who was a partner in a public relations firm. She was known as the “golden goose” among the group. The Court entered judgments which permanently enjoined each of the remaining defendants from future violations of Exchange Act Sections 10(b) and 14(e). Mr. Corbin was also ordered to pay disgorgement of $164,515.50 along with prejudgment interest. Mr. Bouchareb was directed to pay disgorgement of $921,082 along with prejudgment interest. The disgorgement includes the trading profits of certain relief defendants. Previously, Messrs. Bouchareb and Corbin each pleaded guilty to parallel criminal charges and were sentenced to prison. The other defendants in the Commission’s case previously settled. See also Lit. Rel. No. 22700 (May 15, 2013)

Financial fraud: SEC v. Subaye, Inc., Civil Action No. 13 Civ 3114 (S.D.N.Y. Filed May 13, 2013) is an action against the corporation, a NASDAQ listed company whose operations were supposedly in the PRC, and its former CEO James Crane, a Massachusetts CPA. From 2008 through 2010 the revenue of the company steadily increased as the description of its main business dramatically shifted, according to the Form 10-K filed each year. Eventually the exchange delisted the firm for failing to comply with the listing standards and the PCAOB barred Mr. Crane from being an associated person of a registered public accounting firm. Following Mr. Crane’s resignation, a new CEO was appointed who, upon investigation, determined the company had virtually no assets or operations. The Commission’s complaint alleges violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is in litigation.

Criminal cases

Investment fund fraud: U.S. v. Holcum (S.D. Ca. Unsealed May 15, 2013) is an action which names Bradley Holcum as a defendant. The indictment charges eight counts of mail fraud, four counts of wire fraud and one count of securities fraud. It alleges that from 2004 through 2010 Mr. Holcum raised about $50 million from 150 investors who purchased promissory notes in a real estate project. Investors were assured that they would receive a first lien on the property which was to be developed. In fact investor notes were not secured as promised and in some instances Mr. Holcum sold the parcels of real estate without informing investors that the property they had financed for development was gone. As his financial condition deteriorated in 2008 Mr. Holcum continued to solicit investors. The case is pending.

Insider trading: U.S. v. Newman, 1-12-cr-00121 (S.D.N.Y.). Anthony Chiasson, the co-founder of hedge fund Level Global Investors, was sentenced on insider trading charges this week to serve 78 months in prison. Mr. Chiasson was convicted along with co-defendant Todd Newman, a portfolio manager at Diamondback Capital Management LLC, by a jury last December. Mr. Newman has been sentenced to serve 54 months in prison. The charges were based on trading on inside information regarding the earnings announcements of Dell Inc. and NVIDIA Corporation in 2008 and 2009. The SEC has a parallel case pending. SEC v. Adondakis, Civil Action No. (S12-cv-0409 (S.D.N.Y.).

Court of Appeals

Officer/director bars: SEC v. Bankosky, Docket No. 12-2943-cv (2^nd Cir. Decided May 14, 2013). The Circuit Court affirmed the issuance of a officer-director bar by the district court against a corporate executive who settled an insider trading case. The ruling is based on a settled case against Brent Bankosky of Takeda Pharmaceuticals International, Inc. As the director of global licensing and later a senior director during the period January 2008 through May 2011 he had access to inside information regarding transactions in which the company was involved. Contrary to company policy, Mr. Bankosky purchased call options in the shares of four entities involved in deals with Takeda prior to the public announcement.

In March 2012 the SEC and Mr. Bankosky settled this action which was based on the four trades. Without admitting or denying the facts alleged in the complaint he consented to the entry of a permanent injunction. He also agreed to pay disgorgement of $63,000, prejudgment interest, and a civil penalty equal to the amount of the disgorgement. Following the settlement the Commission moved for the imposition of an officer-director bar. The district court granted the motion and imposed a 10 year bar, utilizing the test in SEC v. Patel, 61 F. 3d 137 (2^nd Cir. 1995).

The Circuit Court affirmed. Officer-director bars are provided for in Exchange Act Section 21(d)(2) which requires a finding that the person who violated Section 10(b) is “unfit.” That standard was written into the Section in 2002 by the Sarbanes-Oxley Act. It lowered the standard from the prior “substantial unfitness.” On appeal the SEC argued that the bar should be affirmed but that the Patel standard is no longer applicable because of the change in the statute. The Commission contended that the six factor test used by the Court in Steadman v. SEC, 603 F. 2d 1126 (5^th Cir. 1979), which govern the propriety of issuing injunctive relief, should be considered. The Court concluded that the application of Patel is not erroneous. If the conduct met the pre-amended statutory standard there can be no doubt that the bar should issue under the new, lower standard the Court reasoned. Furthermore, the test is flexible and no single factor is dispositive or even mandatory. Likewise, other courts have continued to rely on Patel. The Court declined to adopt the SEC’s proposed standard.

ASCI

The Australian Securities and Investment Commission filed charges against Andrew Sigalla, a director of TZ Limited. Mr. Sigalla is allged to have made 16 payments of company funds to himself over a one year period beginning in March 2008. The payments totaled about $6.1 million and were used largely to pay for his gambling debts. The case is pending.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information here.

Sometimes it can be difficult to determine if you actually won. This may be the case for the SEC with the Second Circuit’s ruling in SEC v. Bankosky, Docket No. 12-2943-cv (Decided May 14, 2013). The Circuit Court affirmed the issuance of a director-officer bar by the district court against a corporate executive who settled an insider trading case. This is what the SEC requested. Yet the Court refused to update the out of date test by the district court to issue its order and to adopt the standard advocated by the agency, leaving the test for such orders in flux.

The ruling is based on a settled insider trading case against executive Brent Bankosky. He was employed at pharmaceutical company Takeda Pharmaceuticals International, Inc. as director of global licensing and later a senior director during the period January 2008 through May 2011. Those positions gave him access to inside information concerning transactions in which the company was involved. Contrary to company policy, Mr. Bankosky purchased call options in the shares of four entities involved in deals with Takeda prior to the public announcement.

In March 2012 the SEC and Mr. Bankosky settled this action which was based on the four trades. Without admitting or denying the facts alleged in the complaint he consented to the entry of a permanent injunction. He also agreed to pay disgorgement of $63,000, prejudgment interest, and a civil penalty equal to the amount of the disgorgement.

Following the settlement the Commission moved for the imposition of an officer-director bar. The motion was supported by: 1) a stipulation that for purposes of the motion the facts in the complaint were true; 2) excerpts from Mr. Bankosky’s investigative testimony denying insider trading; and 3) e-mails demonstrating that he had inside information. The district court granted the motion and imposed a 10 year bar, citing the standard in SEC v. Patel, 61 F. 3d 137 (2^nd Cir. 1995).

In affirming the district court, the Second Circuit began with Exchange Act Section 21(d)(2) which governs the entry of such orders. The statute states in part that “the court may prohibit . . . any person who violated section [10(b)] . . . from acting as an officer or director of any issuer . . . if the person’s conduct demonstrates unfitness to serve as an officer or director . . . “ the “unfitness” standard was adopted in 2002 in the Sarbanes-Oxley Act, the Court noted. Previously, the standard had been “substantial unfitness.” It was altered to lower the burden of proof.

Patel utilizes a six factor test to determine if the bar should be entered. Under that test the Court considers: “(1) the egregiousness of the underlying securities law violation; (2) the defendant’s repeat offender status; (3) the defendant’s role or position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that misconduct will recur.” The test was drawn from an article by Professor Jayne W. Barnard titled When is a Corporate Executive “Substantially Unfit to Serve,” 70 N.C.L. Rev. 1489, 1492-93 (1992).

On appeal the SEC argued that the bar should be affirmed but stated that the Patel standard is no longer applicable because of the change in the statute. The Commission argued that the six factor test used by the Court in Steadman v. SEC, 603 F. 2d 1126 (5^th Cir. 1979) which govern the propriety of issuing injunctive relief should be considered. That test consideres: 1) the egregiousness of the conduct; 2) if it was isolated or recurrent; 3) the degree of scienter; 4) assurances against future violations; 5) the defendant’s recognition of the wrongful nature of the conduct; and 6) the likelihood that the defendant’s occupation will present opportunities for future violations.

The Court concluded that the application of Patel is not erroneous. If the conduct met the pre-amended statutory standard there can be no doubt that the bar should issue under the new, lower standard the Court reasoned. Furthermore, the test is flexible and no single factor is dispositive or even mandatory. Likewise other courts have continued to rely on Patel.

In reaching this determination the Court did not adopt the Steadman standard, which it found to be similar to Patel or the new nine factor test proposed in a post-Sarbanes-Oxley article by Professor Barnard titled Rule 10b-5 and the “Unfitness” Question, 47 Ariz. L. Rev. 9, 46 (2005). Indeed, the SEC opposed the adoption of the new test crafted by Professor Barnard. Here, in view of the record, it is clear that the district court’s decision was not clearly erroneous, the Circuit Court determined. Accordingly, it was affirmed.

While the reasoning of the Second Circuit is undoubtedly correct – if the higher standard is met it follows that the lower one has also been established – it leaves the law in the circuit in a state of flux. Patel is clearly dated and not correct as the SEC acknowledged. Steadman, advanced by the SEC, is similar to Patel as the Court stated and risks diminishing the unfitness standard by turning it into a rubber stamp – if an injunction is entered an officer-director bar seems likely to follow if the same standard is used. That is not the intent of the statute. This is particularly true in view of the severe impact such an order can have on the ability of a defendant to pursue a career. While Professor Barnard’s new proposed nine factor test might have provided some guidance, it was rejected by both the Court and the SEC. In the end, while the ruling gives the SEC the relief it sought, it leaves the agency with a test crafted to fit a different standard and no clear standard to follow when seeking an officer/director bar in the future.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information please click here.

Anthony Chiasson, the co-founder of hedge fund Level Global Investors, was sentenced on insider trading charges this week to serve 78 months in prison. U.S. v. Newman, 1-12-cr-00121 (S.D.N.Y.). Mr. Chiasson was convicted along with co-defendant Todd Newman, a portfolio manager at Diamondback Capital Management LLC, by a jury last December. Mr. Newman has been sentenced to serve 54 months in prison.

The cases some called the Dell insider trading cases, centered on a ring which gathered inside information from company employees at Dell Inc. and NVIDIA Corporation. Mr. Chaisson’s research analyst, Sam Adondakis, along with Jesse Tortora, Jon Horvath and Danny Kuo, who were research analysts at other firms, obtained and exchanged the information. It was then furnished to the portfolio managers at their respective firms who traded.

In 2008 and 2009 Mr. Chiasson received inside information from Mr. Adondakis related to Dell’s quarterly earnings. The information traced to Mr. Newman’s analyst, Jesse Tortora and Sandy Goyal, another analyst, and ultimately to a Dell employee. Mr. Chiasson received inside information regarding the May and August 2008 Dell earnings announcements. In each instance he caused Level Global to trade, reaping profits of about $58.5 million. Documents were created in an effort to conceal the predicate for the trades.

In 2009 Mr. Chiasson obtained inside information regarding the earnings of NVIDIA from Mr. Adonkaakis. He in turn had obtained the information from analyst Danny Kuo who worked for another investment firm. The information related to an up coming May 2009 earnings release. As a result of the trades Level Global had trading profits of about $10 million.

Messrs. Horvath and Kuo each pleaded guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud last year. Messrs. Tortora and Adondakis each pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud. All four men are awaiting sentencing. The SEC has a parallel case pending. SEC v. Adondakis, Civil Action No. (S12-cv-0409 (S.D.N.Y.).

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information here.

The Commission has filed a series of actions against China based issuers. Some have centered on financial fraud and misrepresentation claims such as SEC v. SinoTechEnergy Ltd., Civil Action No. 212-cv-00969 (W.D. LA. Filed April 23, 2012) and SEC v. Li, Civil Action No. CV-11-1712 (D. Ariz. Filed Aug. 30, 2011). Others focused on manipulation allegations such as SEC v. AutoChina Internatinal Ltd., Case No. 1:12-CV-01643 (D. Mass. Filed April 11, 2012). Still others centered on the misuse of corporate assets such as SEC v. Ming Zhou, Case No. 12 CV 1316 (S.D.N.Y. Filed Feb. 22, 2012).

SEC v. Subaye, Inc., Civil Action No. 13 Civ 3114 (S.D.N.Y. filed May 13, 2013) takes these cases one step further. A newly appointed executive slated to take over the company traveled to the PRC to investigate the operations which had been reported in Commission filings to generate millions of dollars from dozens of customers only to discover little more than a bit of cash and a few documents, according to the complaint. No company.

Subaye is a Delaware company that supposedly had its primary operations in the PRC. Its shares were registered with the Commission for trading and listed on NASDAQ. Its CEO, defendant James Crane, was a Massachusetts CPA.

Revenue for the company continually increased eve as its focus changed. In 2008 its Form 10-K reported that the firm was a provider of video in China. That business yielded $29 million in revenue for 2008. The next year was even more profitable according to the firm’s 2009 Form 10-K. Subay had $48 million in revenue in 2009. The source of the revenue changed however. Now the Form 10-K reported that the company was developing what it believed to be the first online shopping mall in the world utilizing “3D imaging throughout the online customer interface.”

The next year was even better. Subaye reported revenue of $39.1 million. The Form 10-K reported another shift in business. Now the company was “fully committed to one business model focused entirely on the second generation cloud computing product.”

Things began to unravel at the end of 2010. Mr. Crane replace Canadian audit firm DNTW with PricewaterhouseCoopers Hong Kong. The new auditors began asking questions. Who are the customers? Where is the support for the marketing expenses? Can we see the documents supporting the revenue? Mr. Crane considered replacing the firm. PWC HK resigned in February 2011.

One month earlier the PCAOB had filed a settled action against Mr. Crane and his audit firm. The action was based on the inability of the Board to inspect the firm and its failure to file the required reports and pay its dues. Mr. Crane and his company consented to the entry of an order in which he was barred from being an associated person of a registered public accounting firm.

In late February 2011 NASDAQ commented proceedings to delist the company for failing to comply with listing standards. Mr. Crane resigned as CFO a short time later. No response was filed with the exchange.

Alexander Holternmann, a German business executive who had once facilitated a transaction for the company, was appointed to a management role and later CEO. In June, one month after his appointment, he made his fateful trip to the PRC to examine company operations. What he found is that he was not really in charge of much at all.

The Commission’s complaint alleges violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is in litigation.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information here.

DOJ and SEC enforcement officials have made it clear in recent years that anticorruption and FCPA enforcement is a key priority. More cases have been brought in the last several years than in the history of the Act. Huge sums are being paid by increasing numbers of companies to resolve potential FCPA cases – in addition to the substantial amounts being spent on investigations and remediation. Increasing numbers of individuals have been prosecuted and sentenced to prison. While in the last year there have not been as many cases as in some earlier years, there should be no doubt that the DOJ and the SEC continue to view FCPA enforcement as a top priority.

All of this should make the results of the 12^th Global Fraud Survey by Ernst & Young of significant interest to corporate officials and their advisers (here). The survey clearly reflects the increasing compliance efforts of many companies. At the same time it raises troubling questions.

Key findings from the survey include:

Boards: Tone at the top is critical to any compliance system. Yet 52% of those in the corporate suite report that boards need a more detailed understanding of the business if they are to be an effective safeguard against corruption practices.

Increasing enforcement: There is no doubt that in the U.S. and other countries anticorruption enforcement is an increasing priority. Yet 39% of the survey respondents reported that bribery or corruption practices occurred frequently in their country.

Risk in growing markets: In 2011 thirty-one of thirty six reported FCPA cases focused on conduct in growing markets, according to the survey. In those countries, however, corruption continues to be a major difficulty. In Brazil 84% noted that bribery and corrupt practice were widespread. In the Czech Republic 80% made a similar report while in Indonesia it was 72%, Mexico 60% , Turkey 52% and China 14%.

Difficult economic conditions: An increasing number of respondents indicated a willingness to make cash payments to obtain or retain business. In the most recent survey 15% indicated a willingness to make such payments compared to 9% one year earlier. Similarly 5% stated they would be willing to misstate financial performance if necessary compared to 3% one year earlier.

Type of payments: The type of payments respondents indicated they were willing to make to obtain or retain business is also instructive. In the survey 30% indicated a willingness to pay for entertainment to retain business while 16% would make gifts and 15% would cash payments.

Compliance policies: Recent high profile FCPA cases such as the one involving Morgan Stanley have focused on compliance procedures as have many business groups in lobbying for a compliance defense. The survey found that 81% of those responding have compliance procedures in place. At the same time only a little more than half report that there is training on anticorruption policies, a key element of any effective system as enforcement officials have repeatedly stressed.

Enforcement: A critical issue in implementing any compliance system is enforcement. Ineffective enforcement can suggest the system has not been effectively implemented and increases the risk that enforcement officials will view it as less than adequate. Yet 45% of those responding in the E&Y survey report that breaches of company anticorruption policies have not been disciplined.

Third parties: A large number of corruption enforcement actions center on agents and vendors. Yet 44% of those responding do not conduct background checks on third parties. While 59% of those responding indicated that they used an approved supplier database, that suggests that a large percentage of companies fail to check the ownership or backgrounds of third-party suppliers.

Pressure: Difficult economic conditions can increase the likelihood of violations. When presented with a list of questionable actions, 47% of the CFOs surveyed reported that one or more could be used in an economic down turn. At the same time 52% of that same group reported that company management is likely to cut corners to meet targets.

Overall the survey confirms that the increased enforcement efforts by the DOJ and the SEC have had an impact. Many companies are implementing compliance systems. At the same time there is a question regarding the effectiveness of those systems in view of the responses regarding third parties, training and enforcement. Perhaps most disturbing are the survey results indicating the increasing numbers of those willing to utilize improper means to achieve an end. Regardless of how good the compliance system is, it can be subverted by those willing to engage in wrongful conduct. This may also suggest that the tone at the top is not adequate and corporate boards and executives need to do more to ensure a culture of compliance.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14^th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast Nationally by the ABA. For further information here.