This Week In Securities Litigation (Week ending August 21, 2015)
The Commission filed a settled FCPA action this week centered on hiring relatives of foreign officials tied to a sovereign wealth fund. In addition, the agency filed two actions involving Citigroup – one based on the market crisis and a second tied to compliance failures – a boiler room case, two offering fraud actions and three based on the miscalculation of AUM at one firm.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive cases and 7 administrative actions, excluding 12j and tag-along proceedings.
Boiler room: SEC v. Moshe Dunoff, Civil Action No. 2:15-cv-04732 (E.D. Pa. Filed August 20, 2015) is an action centered on a boiler room that was in operation over a two year period beginning in January 2009. Individuals located in Southeast Asia made unsolicited telephone calls to investors proposing a no-loss investment strategy. According to the proposal, investors could purchase common stock of public companies at a substantial discount. Later Chicago broker Gruber and Green would arrange for the sale of the shares at increased prices to institutional investors. The scheme raised about $1.5 million from 58 investors in 14 countries. Investor funds were deposited in six accounts opened by Mr. Dunoff at banks in Pennsylvania and Florida in the names of two fictitious companies. In fact, no stock was purchased and the claimed Chicago broker does not exist, according to the complaint. Mr. Dunoff retained part of the investor funds for himself and wired the remainder to accounts in the Philippines, Thailand and Indonesia controlled by others. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b) and Rule 10b-5(a) and (c). The case is pending. See Lit. Rel. No. 23325 (August 20, 2015).
Compliance: In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3-16764 (August 19, 2015) is a proceeding centered on compliance and surveillance failures at the firm that in some instances went undetected for years. Over a period of about ten years beginning in 2002 the firm’s monitoring of its trading was inadequate because it did not track thousands of transactions executed by several trading platforms or electronic systems. The firm also inadvertently routed 467,000 transactions on behalf of advisory clients to an affiliated market maker, Automated Trading Desk Financial Services LLC, which executed the transactions as principal at or near prevailing market prices. The violations resulted from failing to have adequate procedures. The Order alleges violations of Exchange Act Section 15(g). In assessing the remedies, the Commission took into account the firm’s prior regulatory violations. Respondent will implement a series of undertakings, including the retention of a consultant. The firm consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. In addition, it will pay a $15 million penalty.
Market crisis: In the Matter of Citigroup Alternative Investments LLC, Adm. Proc. File No. 3-16757 (August 17, 2015). Respondent Citigroup Alternative is a subsidiary of Citigroup Inc. It was the investment manager for the ASTA/MAT and Falcon funds. Respondent Citigroup Global Markets Inc., is an affiliate of Citigroup Inc. It recommended and sold share of ASTA/MAT, a leveraged municipal arbitrage fund, and Falcon fund, a multi-strategy fund invested in fixed income strategies and asset-backed securities which was also leveraged, to investors associated with it. From September 2002 through early 2007 Respondents offered and sold about $1.9 billion of investments in ASTA/MAT to about 2,700 investors and advisory clients of Citigroup Global. From late 2004 through October 2007 Respondents sold about $936 million of investments in Falcon to about 1,300 investors and advisory clients of Citigroup Global. In marketing the funds investors were told of their safety but not the actual risks. As the market crisis moved forward, and their condition deteriorated, shares continued to be sold without disclosing the then current financial condition or the true risks. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4). To resolve the action Respondents consented to the entry of cease and desist orders based on the Sections cited in the Order as well as censures. In addition, they will pay disgorgement of $139,950,239 along with prejudgment interest.
False AUM: In the Matter of Bradford D. Szezecinski, Adm. Proc. File No. 3-16760 (August 17, 2015); In the Matter of Tamara S. Kraus, Adm. Proc. File No. 3-16759 (August 17, 2015); In the Matter of Theodore R. Augustyniak, Adm. Proc. File No. 3-16758 (August 17, 2015). These proceedings arise out of the failure of Ariston Wealth Management, L.P., formerly a registered investment adviser, to properly state its AUM in filings. Specifically, in March of 2012 those files stated AUM was $190 million when in fact it was less than $80 million. In addition, the firm did not adopt policies and procedures as required by the Advisers Act prior to an October 2012 OCIE inspection. Mr. Szczecinski was the president, Ms. Kraus the Chief Compliance Officer and Mr. Augustyniak a vice president of the adviser. The Order as to Mr. Szececiniski alleged violations of Advisers Act Sections 206(4) and 207. He resolved the proceeding by agreeing to implement certain undertakings and consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he will pay a penalty of $25,000. The Order as to Ms. Kraus alleged violations of Advisers Act Sections 203A and 207. To resolve the proceeding she consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, she will pay a penalty of $10,000 and will implement certain undertakings. The Order as to Mr. Augustyniak alleged violations of Advisers Act Section 207. To resolve the matter he agreed to certain undertakings and consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, he will pay a penalty of $10,000.
Offering fraud: SEC v. EnviraTrends, Inc., Civil Action No. 8:15cv1903T27 (M.D. Fla. Filed August 17, 2015). Defendant EnviraTrends is a development stage firm that claimed to be in the business of selling memorial products for pets, scooters and involved in exports to China. Defendant Russell Haraburda is the founder of EnviraTrends and served as its CEO, President and Director. He controlled the company. Over a three year period beginning in mid-2009 the defendants raised over $2.3 million through the sale of EnviraTrends shares to over 100 investors in thirteen states. Defendants made a series of false statement in connection with those sales which concerned its business plan and operation, going public, the use of investor funds and the performance of the company. In February 2012 the firm filed a Form 8-A/12G with the SEC, registering its shares under Section 12(g) of the Exchange Act. Thereafter the firm was required to make Section 13(a) filings. It failed to make the required filings and its stock was deregistered. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a) and 15(d)(1). Each defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the defendants will, on a joint and several basis, pay disgorgement and prejudgment interest of over $2.3 million. Payment of all but $150,000 was waived based on financial condition. Mr. Haraburda was also barred from serving as an officer or director of a public company and participating in any penny stock offering. See Lit. Rel. No. 23321 (August 17, 2015).
Offering fraud: In the Matter of Success Trade, Inc., Adm. Proc. File No. 3-16755 (August 14, 2015). Respondent Success Trade is the Washington, D.C. based parent of registered broker dealer Success Trade Securities, Inc., also a Respondent, and BP Trade, Inc., a software company. Both are operated by Fuad Ahmed, as is BP Trade. Success Trade Securities operated as a deep discount broker. The firm never generated sufficient cash flow to be successful. After borrowing working capital at rates of 50-53% the firm sought to raise additional capital by marketing notes. The PPM had a schedule of how the funds would be used for the business. Instead they were diverted to other matters.
By November 2012 Respondents were again facing severe financial pressure. Success Trade did not have cash flow to cover its obligations. Accordingly, Respondents persuaded a number of note holders to either extend the notes or convert their investment to equity, typically offering higher interest rates or lower conversion prices than were authorized by the PPM. In connection with those efforts, note holders were not told the true financial condition of the firm and were provided inaccurate information. The note offering was not registered or exempt from registration because many of the investors were both non-accredited and unsophisticated. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Respondents resolved the action, consenting to the entry of a cease and desist order based on the Sections cited in the Order. They also agreed to pay, on a joint and several basis, disgorgement of $12,777,395.80 and prejudgment interest. Respondents will, in addition, pay on a jointly and severally, a penalty of $12,777,395.80. Additional proceedings will be held to determine if a bar order as to Mr. Ahmed is appropriate.
FCPA
In the Matter of The Bank of New York Mellon Corporation, Adm. Proc. File No. 3-16762 (August 18, 2015). Respondent BNY Mellon is a global financial services firm which at times operates through subsidiaries and affiliates. One unit is BNYM Asset Servicing. Another is wholly owned BNY Mellon Boutique, an asset management firm.
Middle Eastern Sovereign Wealth Fund became a client of BNYM Asset Servicing in 2000. The services were largely custodial. Two years later Asset Servicing entered into an arrangement with the Wealth Fund under which the assets could be loaned out in accord with certain guidelines. In 2009 the Wealth Fund became a client of Asset Management, designating the Boutique to manage about $711 million in assets. Under the terms of the agreement the assets under management could be increased.
Officials X and Y, both senior officials connected to the Wealth Fund, began seeking internships for relatives in 2010. At the time BNY Mellon had established summer internship programs with specific criteria and procedures for securing a position. Eventually three relatives of the officials were given internships without following the usual procedures. BNY Mellon retained the Boutique mandate and further assets were transferred by Official X’s department within a few months. BNY Mellon retained its existing custody and securities lending business which continued to grow.
BHY Mellon had a code of conduct and a specific FCPA policy. During the time period, however, BNY Mellon “had few specific controls relating to the hiring of customers and relatives of customers, including foreign government officials,” according to the Order. Here the senior managers were able to approve the hiring of the interns without any review by persons with legal or compliance backgrounds. Accordingly, the Order notes, the system of internal accounting controls were deficient.
The Order alleges violations of Exchange Act Section 30A and Section 13(b)(2)(B). The Commission acknowledged the cooperation of BNY Mellon and its remedial acts which, prior to the SEC’s investigation, included initiating reforms to its anti-corruption policy to address the hiring of government officials’ relatives.
To resolve the case Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, BNY Mellon agreed to pay disgorgement of $8.3 million, prejudgment interest and a civil money penalty of $5 million. BNY Mellon acknowledged that a penalty of over $5 million was not imposed based on its cooperation.
PCAOB
Report: The Board published its Annual Report on Inspections of Broker and Dealer Auditors. It continued to record a high level of independence findings and audit deficiencies (here).