As the Holidays grow close SEC Enforcement brought a series of cases which replicate areas it had continued to focus on over the calendar year. Those include: Muni bond flipping; pay-to-play; pre-release ADRs; insider trading; SARs; and FCPA. Since actions continue to be brought in these areas, it is reasonable to expect the Division will focus on these issues in the coming new year.
Finally, the Manhattan U.S. Attorney’s Office resolved the first ever criminal Bank Secrecy Action involving a registered broker-dealer. The settlement required the broker to admit the facts detailing a fraudulent pay-day-lending scheme operated by a felon and his attorney and the repeated red flags missed, full remediation of the pertinent compliance systems and the payment of $400,000 as a forfeiture in return for a two year deferred prosecution agreement.
Inspections: OCIE announced its Inspection and Exam Priorities for 2019 (Dec. 20, 2018). Those include: Compliance and risks in critical market infrastructure; retail investors and seniors saving for retirement; oversight of FINRA; cyber-security; and AML programs (here).
Rules: The Commission adopted Rule 6107, Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks. All stocks will participate in the test which is broken into two groups. One group will prohibit fess while the other will permit them up to a cap. The goal is to assess the impact of the practices across a spectrum of market data (here).
Rules: The agency adopted Final Rules to Allow Exchange Act Reporting Companies to Use Regulation A. This is designed to give reporting companies additional flexibility (here).
Reports: The Commission published two reports on credit rating agency showing a continued focus on compliance and competition (here).
Rule making: The Board adopted amendments to its auditing standards that are designed to strengthen regarding the work done by specialists.
Rule making: The Board adopted an auditing standard titled Auditing Accounting Estimates, Including Fair Value Measurements and certain other amendments.
Cornerstone Research, in cooperation with The New York University Pollack Center for Law and Business, published a report on SEC Enforcement activities tied largely to public companies and their subsidiaries. The report discusses the total number of cases filed, dollars ordered in judgments, venue selection and other issues. Cornerstone Research, SEC Enforcement Activity: Public Companies and Subsidiaries (December 2018). It is available here.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the SEC filed 6 civil injunctive case and 8 administrative proceedings, excluding 12j and tag-along proceedings.
Violation of bar: SEC v. Grenda Group, LLC, Civil Action No. 18-cv-00954 (W.D.N.Y.) is a previously filed action against the firm and Gregory Grenda, a former barred investment adviser. The complaint alleged that Mr. Grenda continued to participate in the advisory business in violation of the order. To resolve the action Mr. Grenda consented to the entry of a permanent inunction based on Advisers Act sections 206(1) and 206(2). He also agreed to pay a $25,000 civil penalty. In addition, the Commission entered an order barring Mr. Grenda from the advisory business with no right to re-apply. See Lit. Rel. No. 24377 (Dec. 20, 2018).
Unregistered broker: SECv. Davis, Civil Action No. 2:18-cv-10781 (C.D. Cal. Filed Dec. 18, 2018). The complaint names 13 individuals and their related firms for selling the unregistered securities of The Woodbridge Group of Companies LLC, a now defunct Ponzi scheme that tumbled into bankruptcy. Over about three years beginning in May 2014 Defendants solicited approximately 1, 000 investors to purchase securities in Woodbridge which was touted as a safe investment. In fact Woodbridge is a Ponzi scheme which eventually collapsed in bankruptcy after Defendants earned about $10.5 million in fees despite not being registered broker. Overall the scheme raised about $1.2 million. The complaint alleges violations of Securities Act sections 5(a) and 5(c) and Exchange Act section 15(a). The case is pending. See Lit. Rel.No. 2:18-cv-10481 (Dec. 18, 208); see also SEC v. Goodman, Civil Action No. 1:18-cv-25303 (S.D. Fla. Filed Dec. 18, 2018)(related case alleging violations of Securities Act sections 5(a) and (c) and Exchange Act section 15(a)(1); settled with a consent to an injunction based on the sections cited in the complaint and the payment of disgorgement in the amount of $2.29 million, prejudgment interest of $315,850 and a penalty of $100,00); SEC v. New, Civil Action No. 1:18-cv-03976 (S.D. Ind. Filed Dec. 17, 2018)(related action which named as defendants Alan New, David Knuth and Synergy Investment Services, LLC; the complaint alleges violations of the same sections as in New; settled with a consent to the entry of an injunction with monetary issues to be resolved at a later date). See Lit. Rel. No. 24376 (Dec. 19, 2018).
Rule 105 short sales: In the Matter of Andrew F. Nicoletta, Adm. Proc. File No. 3-18941 (Dec. 19, 2018) is an action against trader Nicoletta and his controlled entities, Bela Industries LLC, Cranberry Rock Investments, Inc. and J.J. Newport Group, Inc. Over a two and one half year period beginning July 1, 2013 Respondents violated Rule 105 which prohibits short selling during a time window prior to a secondary offering 116 times by either selling short, mis-marking short trades as long or combining these techniques. Respondents resolved the proceedings, consenting to the entry of a cease and desist order based on Rule 105 of Regulation M. In addition Respondents will pay disgorgement of $643,932, prejudgment interest of $78,052 and a penalty of $370,583.
Muni-bond “flipping:” In the Matter of Chris D. Rosenthal, Adm. Proc. File No. 3-18936 (Dec. 18, 2018) is an action which names Mr. Rosenthal as a Respondent, financial adviser at UBS where he was a senior vice president. Over a four year period beginning in January 2012, Mr. Rosenthal engaged in a fraudulent scheme in the municipal securities markets known as “flipping.” The point of the scheme is to circumvent the rules which govern the proceedings during which municipal securities are issued to obtain difficult to purchase new issues.. To implement the scheme Respondent engaged in a series of fraudulent actions including falsifying zip codes on orders, using unregistered brokers to place improper customer orders and other, similar tactics. He also engaged in a fraudulent “parking” scheme in aid of the muni bond flipping scheme. The Order alleges violations of Securities Act section 17(a) and Exchange Act sections 10(b) and 15(a). To resolve the proceedings Mr. Rosenthal consented to the entry of a cease and desist order based on the sections cited in the Order and to the entry of a bar from securities business and from participating in any penny stock offering with the right to apply for reentry after five years. In addition, he will pay disgorgement of $284,080, prejudgment interest of $15,128 and a penalty of $75,000.
Pay-to-play: In the Matter of Ancora Advisors LLC, Adm. Proc. File No. 3-18937 (Dec. 18, 2018) is an action which names the registered investment adviser as a Respondent. The action focuses on political campaign contributions made by two covered associates to local elected Ohio politicians who had influence over decisions regarding the state pension funds. Contrary to Advisers Act rule 206(4)-5, the advisory provided services for compensation within the two year cooling off period. The Order alleges violations of Advisers Act section 206(4). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. The adviser will also pay a penalty of $100,000.
ADRs: In the Matter of The Bank of New York Mellon, Adm. Proc. File No. 3-18933 (Dec. 17, 2018). Respondent is a state-chartered bank based in New York City. Beginning in June 2011, and continuing for the next five years, BNY Mellon served as a Depositary bank that handled pre-released ADRs with pre-release brokers. The bank was involved in thousands of transactions. A number of the pre-release brokers that obtained pre-released ADRs from BNY Mellon over the period failed to properly adhere to the required practices for handling such transactions as detailed in the firm’s compliance manual. Pre-release agreements traditionally occurred when there may be a timing difference between the issuances of new shares and the ADR. When ADRs are issued under these circumstances the agreements among the pertinent parties essentially maintain the relations among them: The number of shares does not increase; the person holding the ADR is the beneficial owner of the shares. Effectively the pre-release broker or its customer must maintain the shares for the benefit of the ADR holders – for ordinary shares the Depositary must maintain the shares. Essentially the same arrangements apply when pre-release ADRs are issued over a dividend record date. Here the Depositary Receipts Division of BNY Mellon did not act reasonably with regard to the pre-release ADRs under the circumstances. Typically, the appropriate agreements were executed to ensure compliance with standard pre-release requires as reflected in the firm’s compliance manual. What might be viewed as essentially red flags, however, suggested that in fact the pre-release brokers were not in compliance with their obligations. Those red flags were ignored by BYN Mellon. The Order alleges violations of Securities Act section 17(a)(3). In resolving the proceedings Respondent cooperated with the staff investigation. BYN Mellon consented to the entry of a cease and desist order based on the section cited in the Order. The firm will also pay disgorgement of $29,369,032.43, prejudgment interest of $4,260,199.69 and a penalty equal to the amount of $20,558,322.70.
Insider trading: SEC v. Cho, Civil Action No. 18-cv-11811 (S.D.N.Y. Filed Dec. 17, 2018) is an action which names as a defendant Peter Cho, the manager of an advisory practice at an international accounting firm. In early 2016 Mr. Cho’s fiancé was an employee at an Investment Bank advising Alaska Airlines regarding its acquisition of Virgin America, Inc., announced on April 4, 2016. His fiancé worked on the deal. While in possession of material deal information Mr. Cho purchased options on Virgin. After news reports on the deal in March Mr. Cho sold the options, netting profits of $68,729.43. He then purchased additional options which he held until after the deal announcement. When those options were sold he had profits of $182,656.76 based on the 42% price increase. The complaint alleges violations of Exchange Act section 10(b). Mr. Cho settled with the Commission, consenting to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay disgorgement of $251,386, prejudgment interest and a penalty. The total amount ordered to be paid is $522,777. See Lit. Rel. No. 24375 (Dec. 17, 2018).
Valuation of reserves: In the Matter of Santander Consumer USA Holdings Inc., Adm. Proc. No. 3-18932 (Dec. 17, 2018) is an action against the firm whose shares are traded on the NYSE. The firm purchases retail installment contracts at a discount to the amount financed. Over 75% of its assets are subprime. Accordingly, those assets carry a higher credit risk and may be more likely to default. Over eight consecutive reporting periods the firm failed to calculate and report its credit loss allowance in accord with GAAP. The firm also made errors in connection with key calculations. The errors trace to a time before the firm’s IPO in January 2014. The Order alleges violations of Exchange Act sections 13(a), 13(b)(2)(A) and 13(b)(2)(B. To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order. Santander also agreed to pay a penalty in the amount of $1.5 million.
SARs: In the Matter of UBS Financial Services Inc., Adm. Proc. File No. 3-18931 (Dec. 17, 2018) is an action which names the registered broker-dealer and investment adviser as a Respondent. The firm is a subsidiary of UBS Group AG, a public reporting company based in Switzerland. Beginning on January 2011, and continuing until early 2013, the firm had an anti-money laundering or AML policy. It was not reasonably designed to account for risks associated with services such as wires, internal transfers, check writing, ATMs and others. As a result the firm failed to properly implement its obligations under Exchange Act section 17(a) and rule 17a-8 relating to its obligations to file SARs. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section and rule cited in the Order. Respondent will also pay a penalty of $5 million. See also FinCen Order imposing $1.45 million penalty on firm for AML failures (Dec. 17, 2018).
Misappropriation: SEC v. Laws, Civil Action No. 18-cv-01063 (D.N.M. Unsealed Dec. 6, 2018) is an action which names as a defendant Thomas Laws, the CEO of Santa Fe Gold Corporation. The firm, traded on OTC Link, emerged from bankruptcy in June 2016. Subsequently, Santa Fe raised about $6.8 million through the sale of unregistered securities. From August 2016 to February 2018 the company transferred to Mr. Laws and his firm about $1.1 million for various business purposes. Mr. Laws misappropriated the money. When the firm discovered part of the theft Mr. Laws admitted to sealing about $930,000 but promised to repay. A promissory note was executed. By the time the note matured only $375,000 had been repaid. Then the firm identified another $170,000 that had been misappropriated. At present Mr. Laws had not repaid or accounted for at least $725,000 of investor funds. The complaint alleges violations of Securities Act section 17(a) and Exchange Act sections 10(b), 13(a), 13(b)(2) and 13(b)(5). The Court granted a freeze order. The case is pending.
Misappropriation: SEC v. May, Civil Action No. 7:180 cv 01168 (S.D.N.Y. Dec. 13, 2018) is an action which names as defendants investment advisor Hector May and his daughter Sonia May. Over a five year period beginning in 2013 Defendants misappropriated at least $7.9 million from 165 advisory clients in a manner consistent with a Ponzi scheme. The clients knew and trusted Defendants; fabricated documents were used to help conceal the scheme. Client funds were also used to make Ponzi type payments. The complaint alleges violations of Securities Act section 17(a), Exchange Act section 10(b) and Advisers Act sections 206(1) and 206(2). Defendant has consented to the entry of a partial judgment against him in which he consents to injunctive relief with monetary and other relief to be determined at a later date. Mr. May pleaded guilty in the parallel criminal action to one count of conspiracy to commit wire fraud. Sentencing is scheduled for March 15, 2019.
IPO shares: The regulator fined Merrill Lynch $6 million for selling IPO shares to industry insiders and others. Specifically, over an eight year period beginning in 2010 the firm made at least 1,462 prohibited sales of IPO shares in 325 offerings to 149 customers. The sales involves shares such as Facebook, General Motors Co., Linkedin Corp. and Twitter Inc. FINRA’s rules governing IPOs are designed to preclude such activity and ensure fairness. The broker not only failed to comply with the rules, its systems were inadequate.
Offering fraud: U.S. v. Barkany, No. 13-cr-362 (E.D.N.Y.) is an action in which Defendant Gershon Barkany was sentenced to serve 56 months in prison for operating a Ponzi scheme through which he misappropriated $62 million from 10 investors over a four year period tracing to 2009. Mr. Barkany previously pleaded guilty to one count of wire fraud. The scheme was based on inducing investors to believe that their funds would be placed in a riskless ventures involving putting funds into the purchase of Manhattan or other city real estate. One investor put in over $46 million. In fact, there were no deals. The prison sentence will be followed by three years of supervised release. Issues involving restitution and forfeiture will be considered at a later date.
SARs: U.S. v. Central States Capital Markets, LLC (S.D.N.Y. Dec.19, 2018) is an action which charges the registered broker-dealer with violating the Bank secrecy Act by willfully failing to file SARs regarding a pay-day lending fraud run by Scott Tucker, a convicted felon, and his attorney. The scheme operated over a period of years under the guise of a “rent-a-tribe” cover under which Mr. Tucker gave Native American Tribes nominal interests in his operations so that their sovereign immunity could be claimed. During the period, which traces back to the 1990s, the broker-dealer ignored a series of red flags including Tucker’s fraud conviction, evidence of the “rent-a-tribe” scam, an FTC action and others. This case was resolved with a two year deferred prosecution agreement under which the broker will improve and properly implement their compliance systems, admit the facets of the action and pay $400,000 in forfeiture in return for a dismissal of the charges. This is the first ever Bank Secrecy criminal prosecution of a broker-dealer.
Insider trading: U.S. v. Jung, No. 1:18-cr-00518 (S.D.N.Y.) is an action in which Defendant Woojae Jung a/k/a Steve Jung, pleaded guilty to one count of securities fraud. The charge is based on the fact that Mr. Jung previously was employed at an investment bank here he misappropriated material inside information about 10 corporate deals and traded through the account of another. The trading resulted in illicit profits of about $130,000. The date for sentencing has not been set. See also SEC v. Jung, Civil Action No. 1:18-cv-0411 (S.D.N.Y.).
Manipulation: U.S. v. Vassallo, No. 17-cr-372 (E.D.N.Y. Plea Dec. 14, 2018)) is an action which names as a defendant Anthony Vassallo, a former broker-dealer who was a manager at Plainview based Elite Stock Research. Later he worked at Melville based My Street Research and related firms which operated as a boiler room. This week Mr. Vassallo pleaded guilty to conspiracy to commit securities fraud in connection with the sale of shares in CES Synergies, Inc. and First Choice Health Care Solutions, Inc. The underlying conduct traces to May 2013. Over a period of three years Mr. Vassello and others engaged in a scheme to manipulate and artificially control the share price of CES and First Choice. A key part of the scheme was to conceal the control of Defendant and others. Mr. Vassallo is one of 16 individuals charged in July 2017 in connection with a $147 million stock manipulation scheme. He is the 11th defendant to plead guilty. The date for sentencing has not been set.
Manipulation: U.S. v. Falci, No. 3:17-cr-00228 (D.N.J. Verdict Dec. 13, 2018) is an action in which Vincent Falci was convicted on three counts of wire fraud and one count of securities fraud by a jury following a two-week trial. The jury deliberated for about 90 minutes. The verdict is based on Mr. Falci’s operation of the Vicci Fund which he started in 2012. After raising abut $20 million from investors based on false claims regarding his expertise, Defendant essentially looted the fund, diverting over $10 million for his personal benefit over a four year period. Investors were furnished with false statements. Sentencing is scheduled for March 21, 2019.
In the Matter of Paul A. Margis, Adm. Proc. File No. 3-18938 (Dec. 18, 2018) is an action which names the President and Chief Executive Officer of Panasonic Avionics Corporation, the wholly owned, subsidiary of Panasonic Corporation as a Respondent. The action (detailed here) centered on extending a lucrative consulting position to a government official in return for obtaining and retaining business from a state-owned airline. While the agreement was being negotiated PAC offered the government official a $200,000 retirement consulting position. The official accepted. The subsidiary ultimately paid about $875,000 under the arrangement.
Finally, Mr. Margis also authorized payments of just under $1 million for two other consultants. Those individuals furnished virtually no services in return for the payments. He also caused the firm’s books and records to be falsified and made misrepresentations to the auditors. The Order alleges violations of Exchange Act sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Mr. Margis also agreed to pay a penalty of $75,000. See also In the Matter of Takeshi “Tyrone” Unonaga, Adm. Proc. File No. 3-18939 (Dec. 18, 2018)(action naming PAC’s then CFO as a Respondent tied to the contract referenced above which was backdated and improper revenue recognition, all of which was certified by Mr. Unonaga; resolved with a consent to the entry of a cease and desist order based on same sections and denial of privilege to appear and practice before Commission as an accountant; also payment of a $50,000 penalty).
Contracts-for-difference: The European regulator announced it is extending the bank on selling these instruments to the investing public until February 1, 2019 Dec. 19, 2018). BaFin, the German national regulator announced a similar measure (Dec. 20, 2018)
Disclosure: The Securities and Futures Commission initiated proceedings in the Market Misconduct Tribunal against CMBC Capital Holdings Limited for failing to disclose material non-public information in a timely fashion. Specifically, the firm obtained its five month unaudited accounts on October 13, 2014 showing a significant cumulative profit for the period. Nevertheless, the firm failed to disclose the accounts until November 7, 2014. The proceedings are pending.
Agreements: The SFC held high level meetings and talks with the China Securities Regulatory Commission or CSRC regarding enforcement. Specifically, the two regulators have agreed to coordinate and cooperate within their sphere regarding enforcement matters.
Alstom Power Ltd. sales executive Nicholas Reynolds of Alstom Power Ltd. was convicted by a London jury of conspiring to bribe politicians and employees at a Lithuanian power plant to obtain lucrative contracts. Prosecutors presented evidence demonstrating that Mr. Reynolds was involved in the falsification of records to avoid scrutiny of the bribes paid by Alstom to secure business contracts.