The Commission published a report on the new focus of the Enforcement Division, listing key priorities as cases involving retail customers and cyber issues. Groups have been established within the Division to focus on each of these priorities. The Commission also filed actions this week centered on insider trading, a failure to file SARs, offering frauds and the defrauding of retail customers. Finally, the DOJ secured guilty pleas from two corporate executives tied to the on-going Petrobras anti-corruption investigations.
Enforcement report/statistics: The SEC published a report on its Enforcement program, detailing the new focus for the Division and comparing statistics on actions brought over the last two fiscal years. Division of Enforcement Annual Report: A Look Back at Fiscal Year 2017 (here). The new focus calls for five principles to guide the work of the Division: Principle 1: Focus on the Main Street Investor. Principle 2: Focus on Individual Accountability. Principle 3: Keep Pace with Technological Change. Principle 4: Impose Sanctions That Most Effectively Further Enforcement Goals. Principle 5: Constantly Assess The Allocation of Our Resources. In assessing effectiveness the Report stresses the point that statistics do not tell the entire story. For example, in fiscal 2016 there were a total of 548 stand-alone enforcement actions compared to 446 in fiscal 2017. When the 84 actions tied to the Municipalities Continuing Disclosure Cooperation Initiative or MCDCI are eliminated, the results show a different picture. In fiscal 2016 464 stand-along enforcement actions were brought compared to 446 in fiscal 2017.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive case and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Ellerin, Civil Action No. 1:17-cv-12240 (D. Mass. Filed Nov. 14, 2017). Susan Ellerin and Edward Blumstein are named as defendants. Ms. Ellerin is the founder and president of STAT Resources, Inc., a statistical market research firm. Edward Blumstein, presently retired, worked in information technology services. He and Ms. Ellerin are close friends. Mr. Blumstein furnished IT services to Ms. Ellerin during the period. The action centers around the acquisition of ADT Corporation by certain entities financed by hedge fund giant Apollo in a deal announced prior to the opening of the market on February 16, 2016. An affiliate of the acquisition entity was Protection I Security Solutions. In July 2015 the chief revenue officer or CRO of Protection 1, a long-time friend of Ms. Ellerin, retained her to provide consulting services for the firm. Ms. Ellerin provided background research on companies in potentially adjacent markets prior to the meetings between Apollo and Protection I. The purpose of the work as Ms. Ellerin knew, was to provide a quick read on partnering potential. Through a series of contacts with CRO Ms. Ellerin was apprised of the deal discussions. As she obtained reports Mr. Blumstein purchased options for ADT while she bought shares. Following the deal announcement Ms. Ellerin sold her shares for a profit of $15,054. Mr. Blumstein exercised his options, yielding profits of $71,070. The complaint alleges violations of Exchange Act Section 10(b). To resolve the case, each defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. In addition, Ms. Ellerin will pay disgorgement of $15,054, prejudgment interest and a penalty equal to the amount of her trading profits. Mr. Blumstein will pay disgorgement of $71,070, prejudgment interest and a penalty equal to his trading profits. See Lit. Rel. No. 23986 (Nov. 14, 2017).
Unregistered offering/unregistered broker: In the Matter of Retirement Surety LLC, Adm. Proc. File No. 3-18061 (Nov. 14, 2017) names as Respondents, Retirement Surety and Crescendo Financial LLC, both of whom claimed to be Christian retirement planning centers. Also named as Respondents are Thomas Rose, David Leeman and David Featherstone, each of whom was a partner in each entity Respondent. Over a two year period, beginning in November 2013, Respondents acted a brokers for the sale of notes in Vetro, a limited liability company, earning commissions. The order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Respondents Rose and Leeman are also suspended for nine months from the securities business while Respondent Featherstone is suspended for six months. The entity Respondents will be dissolved. Questions regarding disgorgement and penalties will be resolved at a later date.
SARs: In the Matter of Wells Fargo Advisors, LLC, Adm. Proc. File No. 3-18279 (Nov. 13, 2017). Respondent Wells Fargo is a registered broker-dealer and investment adviser. The Bank Secrecy Act requires broker-dealers to file SARs with FinCEN under certain circumstances. Where there is continuing activity FinCEN does not require a filing in each instance. Rather, in such instances the firm after a ninety day review must file a SAR with an outside deadline of 120 days. Initially, Wells Fargo’s AML policies and procedures mirrored the FinCEN requirements. Those policies and procedures also required that investigative case notes be maintained in the firm’s internal systems. In March 2012 the firm began implementing changes to its systems regarding SARs. Under the modified procedures management significantly reduced the number of SARs filed. At the same time the firm repeatedly failed after filing a continuing activity SAR to make the requiring filing or to do so in a timely manner in at least 50 instances. Following an employee complaint, an internal investigation was conducted by an outside law firm. Subsequently, Wells Fargo filed 24 additional continuing activity SARs and 5 initial SARs. The Order alleges violations of Exchange Act Section 17(a) and rule 17a-8. To resolve the proceedings Respondent agreed to implement a series of undertakings which include conducting a review of its policies and procedures regarding the reporting of suspicious activity. Wells Fargo also consented to the entry of a cease and desist order based on the Section and Rule cited in the Order and to a censure. The firm will pay a penalty of $3.5 million.
Offering fraud: SEC v. Quigley, Civil Action No. 17-cv-4695 (E.D.N.Y.) is a previously filed action against Michael and Brian Quigley. The complaint centered on an offering fraud in which the defendants solicited overseas investors to send money to the U.S. for purported investments. In fact the investments did not exist. The investor funds were misappropriated. The court entered a final judgment by consent as to Brian Quigley, imposing a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). The order also imposes a penny stock bar. The case is on-going as to Michael Quigley. See Lit. Rel. No. 23986 (Nov. 13, 2017).
Misappropriation: SEC v. Kelter, Civil Action No. 3:17-cv-1441 (M.D. Tenn. Filed Nov. 9, 2017) is an action against Jay Costa Kelter, a former registered representative. The action centered on defrauding three elderly clients whose accounts were under his control. In one instance Mr. Kelter misappropriated about $1.467 million by forging documents. In another instance he misappropriated about $200,000 by selling securities from the client account and then falsely claiming that he would invest the funds in a CD. In a third instance he guaranteed a client he would reimburse losses by making misrepresentations and omissions about his financial liquidity. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23984 (Nov. 13, 2017).
Offering fraud: SEC v. The End of the Rainbow Partners, LLC, Civil Action No. 1:17-cv-02670 (D. Col. Filed Nov. 8, 2017) names as defendants the firm which is controlled by Michael Anderson prior to his recent death (the Estate of Michael Anderson is a co-defendant). Beginning in March 2014, and continuing until earlier this year, the defendants raised about $5.3 million from 18 investors. Those investors were told that Mr. Anderson was a retired, successful hedge fund operator who would day trade their funds if portions of the profits were contributed to a charity supposedly operated to benefit battered women by his wife. In fact the representations were false and portions of the investor funds were misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The court granted the Commission’s request for an emergency freeze order. See Lit. Rel. No. 23987 (Nov. 14, 2017).
FCPA – Anti-Corruption
The U.K. Serious Frauds Office charged two men in relation to its Unaoil investigation with conspiracy to make corrupt payments. Specifically, the SFO charged Ziad Akle with one offense of conspiracy to make corrupt payments and Basil Al Jarah with two counts of conspiracy to make corrupt payments. The charges relate to efforts to secure the award of contracts in Iraq to Unaoil’s clients SBM Offshore. The SFO has also make an extradition request to Monaco for Saman Ahsani on related charges.
U.S. v. Mace, No. 4:17-cr-00618 (S.D.Tx.). Defendant Anthony Mace, CEO of SBM Offshore NV pleaded guilty to conspiracy to violate the FCPA. The guilty plea was based on a scheme which began before Mr. Mace became CEO. He authorized the payment of $16 million to five people listed on a spreadsheet he maintained despite a high risk that they were Equatorial Guinean officials. In connection with the plea, Mr. Mace also admitted that from 1996 through 2012 he and others used a third-party sales agent to pay bribes to foreign officials at Brazil’s Petroleo Brasileiro SA, known as Petrobras in exchange for assistance with winning bids. See also U.S. v. Zubiate, No. 4:11-cr-00591 (S.D.Tx.)(Firm executive Robert Zubiate also pleaded guilty to conspiracy to violate FCPA based on same scheme).
Insider trading: The Australian Securities & Investments Commission charged Jin Xi Li with 88 counts of insider trading. The charges stem from the announcement on March 30, 2015 that PanAust Ltd. or PNA had received a takeover bid from Guangdong Rising H.K. (Holding) Limited. The regulator alleged that prior to the announcement on 32 occasions in March 2015 Mr. Li acquired contracts for difference, that on 55 occasions in late March 2015 he procured others to acquire contracts for difference regarding PNA and that on March 25, 2015 he communicated inside information to another person.
Disclosure: The ASIC commenced proceedings against MG Responsible Entity Limited for failing to comply with its disclosure obligations. Specifically, the regulator claimed that at the end of February the firm issued guidance for the first half of the year. Later it failed to achieve the projections. When the firm became aware it would not make the projections it failed to alert the market as required by the pertinent disclosure obligations. The firm has admitted the failure. The court will determine a penalty.
Coin offerings: BaFin, the Federal Financial Supervisory Authority, issued a consumer warning regarding initial coin offerings, noting that the acquisition of cryptocurrency coins may result in substantial risks to investors since they are highly speculative.
Remarks: Keith Lui, Executive Director, Supervision of Markets, delivered the Keynote address at the WFC Global Conference of Central Securities Depositories 2017 (Nov.15, 2017). His address reviewed Hong Kong’s role as an international financial center (here).
Coin offerings: The Financial Conduct Authority issued a warning regarding the risks of investing in cryptocurrency contracts for differences, including spread bets. The products are “extremely high-risk, speculative products” the regulator noted.
Program: The Fourth Annual Dorsey Federal Enforcement Forum will be held on December 6, 2017. There will be panel discussions and presentation on EPA enforcement, SEC enforcement, investment advisers, international sanctions, FinTec, and FBI international corruption investigations, followed by a holiday party. Attend in person, listen on the web or watch a live stream; CLE available. For a detailed program and free registration click here.