As the Christmas and holiday season approaches, the SEC brought a series of actions. Those included two settled FCPA actions filed in tandem with the DOJ, one of which also involved foreign regulators and the payment of about $3.5 billion. The Commission also brought: an action centered on inadequate internal controls tied to improper revenue recognition: one involving a private equity firm keyed to improper financial information: a pay to play scheme involving the New York State Common Retirement Fund; and a case based on the market access rules.
Report: The Commission issued the Annual Staff Reports on Credit Rating Agencies (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 12 administrative proceedings, excluding 12j and tag-along proceedings.
False books and records: In the Matter of Badree Komandur, ACA, Adm. Proc. File No. 3-17746 (December 22, 2016) is a proceeding which names as Respondents: Wipro Limited, a firm based in India; Mr. Komandur, its controller; and Satish Arunachalam, CA, the assistant controller. From 2006 through 2009 Anup Agarwal, an employee in the Controllership Division, misappropriated about $4 million which he concealed by falsifying the books. During the period he made payments to the individual Respondents. As a result of these actions the books and records of the firm, filed with the Commission, were incorrect for the years 2008 – to 2010. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the case each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order (except the consent of the company does not include Section13(b)(5)). The company will implement a series of undertakings and paid a penalty of $5 million. The individual Respondents were each denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after four years.
Internal controls: In the Matter of Jack Henry & Associates, Inc., Adm. Proc. File No. 3-17742 (December 21, 2016). Respondent is the provider of information processing solutions for banks and credit unions. Over a two year period beginning June 30, 2012 the firm misstated revenue and net income because of the manner in which it recognized revenue. Specifically, in several instances the firm failed to recognize that contracts were so closely related that they should have been recorded and reported as parts of a single arrangement while in other instances revenue was prematurely recognized because the firm did not have vendor specific objective evidence regarding the fair value of the undelivered services. These failures were caused by inadequate internal controls. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the firm will pay a civil penalty of $780,000.
Pay-to-play: SEC v. Kang, Civil Action No. 1:16-cv-09829 (S.D.N.Y. Filed December 21, 2016) is an action which names as defendants: Navnoor S. Kang, the former Director of Fixed Income for the New York State Common Retirement Fund, the third largest public pension fund in the U.S.; Gregg Schonhorn, a registered representative at broker-dealer 1; and Deborah Kelley, a registered representative at broker-dealer 2. From early 2014, when Mr. Kang assumed his position, he received a total of about $180,000 over time in improper benefits from Mr. Schonhorn and Ms. Kelley. In return Mr. Kang directed transactions to their respective firms – a pay-to-play scheme. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office for the Southern District of New York.
Investment fraud: SEC v. Chambroonrat (D.N.J. File December 21, 2016) names as defendants Naris Chamroonrat who has dual citizenship in Thailand and the U.S. and Adam Plumber, a U.S. citizen recruited to the scheme. Over a two year period beginning in 2015 Defendants solicited investors to trade through the “day trading” firm of Nonko Trading. Arrangements were made for the investors to deposit their funds. Investors were directed to simulated trading venues where it appeared they were actually trading. In fact the Defendants misappropriated the $1.4 million raised. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 15(a) and 20(a). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office for the District of New Jersey.
Whistleblowers: In the Matter of SandRidge Energy, Inc., Adm. Proc. File No. 3-17739 (December 20, 2016). Beginning prior to August 12, 2011 when the Commission issued rules implementing Exchange Act Section 21F, SandRidge used a form of separation agreement for departing employees that contained three provisions impeding whistleblowers. Following the enactment of the Commission’s whistleblower rule, SandRidge would agree to modify the restrictive provisions on request in some instances. The company, however, continued to use the restrictive clauses in most of its agreements. On May 11, 2015 the staff contacted SandRidge regarding its agreements based on copies attached to Commission filings. The firm agreed to remediate the issue and undertook amendments. Former employees were told of the remediation. Nevertheless, when a former employee was contacted in February 2016, the person refused to speak with the staff, citing the terms of the severance agreement. On March 31, 2015 the company terminated an employee identified only as Whistleblower. Senior executives of the firm decided to terminate Whistleblower because the person was expressing concerns regarding the process by which the company calculated oil and gas reserves. Whistleblower had a history of raising such concerns which traced back to the time the person was hired in 2012. The person was terminated; no investigation was made of the claims. The Order alleges violations of Exchange Act Section 21F and Rule 21F-17. To resolve the matter the firm consented to the entry of a cease and desist order based on the Section and Rule cited in the Order. The firm also agreed to pay a penalty of $1.4 million.
Private equity: SEC v. Platinum Management (NY) LLC, (S.D.N.Y. Filed December 19, 2016) is an action which names as defendants the private equity fund, a registered investment adviser; Platinum Credit Management L.P., a relying adviser of Platinum Management; Mark Nordlicht, Chairman of umbrella organization Platinum Partners; David Levy, owner and co-CIO of Platinum Management; Daniel Small a managing director and portfolio manager; Uri Ladesman, managing general partner of the group; Joseph Mann, employed in the IR department for the group; Joseph Sanfilippo, CFO for the group; and Jeffrey Shulse, CEO for Black Elk, a firm in which the fund had a major investment. The action centers on a fraud by Platinum Management and its related funds and entities led by Mr. Nordlicht. While the group projected prosperity, in fact it faced an increasing liquidity crisis beginning as early as November 2012. Key assets were vastly overvalued; a fraudulent scheme was orchestrated as to Black Elk Energy Offshore Operations under which about $100 million was diverted from a forthcoming asset sale for the benefit of preferred shareholders despite the fact that the Black Elk note holders had priority. Other schemes were created to keep the operation afloat such as taking out heavy short term borrowing at high interest rates and then falsely telling the auditors the loans were for investments. While a key feature of the funds was liquidity (redemptions on adequate notice), Messrs. Nordlicht and Landesman, aided by others, schemed to meet a wave of redemptions in 2015 by pressing investors to cancel. Separate investment funds under the Platinum Partners umbrella were also treated as fungible to aid liquidity. Eventually Platinum Management put a majority of the group’s assets in a side pocket to avoid the redemptions. In June 2016 the FBI executed a search warrant. Criminal charges were filed. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4), Exchange Act Section 10(b) and Securities Act Section 17(a).
Microcap fraud: In the Matter of Michael J. Muellerleile, Esq., Adm. Proc. File No. 3-17727 (December 16, 2016) names as Respondents Mr. Muellerleile, a California based attorney and the principal of M2 Law, and the firm. Respondents facilitated the distribution of unregistered shares of five microcap issuers by furnished transfer agents and brokers with false information and then maintaining the legal status of the five firms. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceedings Respondents each consented to the entry of a cease and desist order based on the Sections cited in the Order. Attorney Muellerleile is also denied the privilege of appearing and practicing before the Commission as an attorney and is barred from participating in any offering of a penny stock. Respondents will pay disgorgement of $73,058, prejudgment interest and a penalty of $70,000. See also the action naming as a Respondent Empire Stock Transfer, discussed below; In the Matter of Lan Phuong Nguyen, Esq., Adm. Proc. File No. 3-17726 (December 16, 2016)(proceeding against another attorney keyed to facts above alleging violations of Securities Act Section 17(a)(2); resolved with a consent to a cease and desist order and an order denying the right to practice before the Commission as an attorney, a penny stock bar and the payment of disgorgement of $11,000 and prejudgment interest); In the Matter of Joel Felex, Adm. Proc. File No 3-17728 (December 16, 2016)(action naming as Respondent the CEO of American Energy Development Corp., one of the firms involved in the distributions, which made false statements; Order alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Sections 10(b), 13(b)(5) and 15(d); resolved with a consent to a cease and desist order and the payment of $23,000 in disgorgement and prejudgment interest, a penalty of $37,000 and a penny stock bar).
Unregistered securities: In the Matter of Empire Stock Transfer, Inc., Adm. Proc. File No. 3-17729 (December 16, 2016) is a proceeding naming as Respondents the transfer agent, largely for penny stocks, and Mathew Blevins, it supervisor of transfers. The Order alleges that Respondents played a crucial role in the illegal distributions of the shares of four penny stock issuers. Those actions were taken despite numerous red flags which included the fact that the shares at times lacked any endorsements by the registered owners, in some instances lacked signature guarantee or other suitable evidence of authenticity and in other the shares constituted close to the entire float for the firm. The Order alleges violations of Securities Act Sections 5(a) and 5(c). The firm agreed to implement certain undertakings. To resolve the action each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to the entry of a censure. In addition, the firm agreed to pay disgorgement of $3,840 plus prejudgment interest and a penalty of $150,000. Mr. Blevins will pay a penalty of $20,000 and is barred from any association with a transfer agent or other market professional.
Insider trading: In the Matter of Jo Ann Myers, Adm. Proc. File No. 3-17735 (December 16, 2016) is a proceeding naming as Respondents Mrs. Myers, the wife of an executive employed at Biopharmaceutical company Alimera Sciences, Inc., and Hollis Pickett. In 2013 Mrs. Myers misappropriated inside information from her husband. In the first instance the information was negative. Mrs. Myers tipped her son, father and step-mother. Her father and son traded and avoided losses of about $31,661.20. In the second instance the information was positive. She tipped the same relatives resulting in trades by her son and father which had profits of $8,744.49. In the second instance Mr. Pickett individually purchased and directed his son to purchase another block of stock which yielded $8,656.50 in trading profits. The Order alleges violations of Exchange Act Section 10(b). To resolve the action each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Mrs. Myers will, in addition, pay disgorgement of $40,405.69 and prejudgment interest along with a penalty equal to the trading profits. Mr. Pickett will pay disgorgement of $48,656.50 along with prejudgment interest and a equal to the trading profits.
Order routing: In the Matter of Deutsche Bank Securities Inc., Adm. Proc. File No. 3-17730 (December 16, 2016). Deutsche Bank, the broker-dealer – investment adviser affiliate of the international banking giant, has smart order routers known as SuperX+. It primarily routes orders to dark pools and some non-displayed orders to exchanges. In connection with this routing system Deutsche Bank began marketing a component of SuperX+ called the “Dark Pool Ranking Model,” or DRPM. In essence, DPRM Rankings determined if the venue was eligible to receive an order while the probability of fill determined if the venue would receive an order. Deutsche Bank touted DPRM to clients and potential clients in conjunction with SuperX+. The firm did not tell clients that for extended periods it could not update the component – its information for stale – and in other instances the information used was from company employees. In addition, beginning prior to the difficulties with DPRM, and continuing until early 2015, Deutsche Bank failed to attach a copy of the SuperX subscriber manual and other materials to its Form ATS as required. The Order alleges violations of Securities Act Section 17(a)(2) and Rule 301(b)(2) of Regulation ATS. In resolving the proceeding the Commission considered the remedial efforts of the firm. Deutsche Bank admitted the facts on which the Order was based and consented to the entry of a cease and desist order based on the Section and Rule cited as well as to a censure. In addition, the firm will pay a penalty of $18.5 million.
Market access rules: In the Matter of Wilson-Davis & Company, Adm. Proc. File No. 3-17733 (December 16, 2016) is a proceeding which names the registered broker-dealer as a Respondent. From November 2011 through May 2013 the firm relied on an exception for bona fide market making to the requirement to locate a source of borrowable securities when selling short. Despite repeated transactions, the firm was not entitled to utilize the exception. It also failed to have adequate procedures as to the rule. The Order alleges violations of Rule 203(b)(1) of Regulation SHO, the locate rule related to short selling, and Exchange Act Section 15(c)(3), regarding procedures. The action will be set for hearing. See also In the Matter of Anthony B. Kerrigone, Adm. Proc. File No. 3-17732 (December 16, 2016)(settled action against former proprietary trader at the firm who was alleged to have caused the firm’s violation of the located rule; settled with consent to a cease and desist order based on the rule and payment of disgorgement of $486,840, prejudgment interest and a penalty of $50,000); In the Matter of Bryon B. Barkley, Adm. Proc. File No. 3-147731 (December 16, 216)(settled action based on same claims as those asserted against the firm, fining Mr. Barkley, the head trader for causing the violations; and Paul Davis, the CEO, finding that he violated the certification requirements of the market access rule – the first such action; Mr. Barkley consented to a cease and desist order based on Rule 203(b)(1) of Reg. SHO and Exchange Act Section 15(c) and Rule 15c3-5(b) and (e) of the Market Access Rule; he will pay disgorgement of $645,710, prejudgment interest and a penalty of $50,000; Mr. Davis consented to a cease and desist order based on Exchange Act Rule 15c3-5(e)(2) and will pay a penalty of $25,000).
SEC v. Teva Pharmaceutical Industries Ltd., Civil Action No. 1:16-cv-5298 (S.D. Fla. Filed December 22, 2016) is an action against the firm, based in Petah Tikva, Israel, which is a global pharmaceutical firm and the largest generic drug manufacturer in the world. Its ADRs are listed on the NYSE. The firm has three subsidiaries implicated here, Teva LLC or Teva Russia, Teva Ukraine LLC, or Teva Ukraine and Teva Mexico, a group of subsidiaries. From October 2010 through 2012 the firm paid bribes to a government official in Russia. From May 2002 through March 2011 the company paid bribes to a government official in the Ukraine. From 2011 through 2012 the company paid bribes to government officials in Mexico. As a result of these actions Teva realized over $214,596, 170 in profits. The bribes were paid in various ways designed to conceal them. The Commission’s complaint alleges violations of Exchange Act Sections 30A and 13(b)(2)(A). To resolve the case the company consented to the entry of a permanent injunction based on the Sections cited in the complaint. The firm also agreed to pay $236 million in disgorgement and interest. In addition, the firm settled with the DOJ. The firm was charged in a one count information with conspiracy to violate the anti-bribery provisions of the FCPA. Teva entering into a deferred prosecution agreement, agreed to retain an independent compliance monitor and to pay a penalty of $283 million. See Lit. Rel. No. 23708 (December 22, 2016).
SEC v. Braskem, S.A., Civil Action No. 1:16-cv-02488 (D.C. Filed December 21, 2016). Braskem S.A., is a Sao Paulo based producer of petrochemicals and thermoplastic products whose ADRs are traded on the NYSE. Its controlling shareholder is Odebrecht S.A., a privately held Brazilian international construction firm. The firms resolved FCPA bribery charges with the SEC, the DOJ and Brazilian and Swiss authorities. Odebrecht and Braskem pleaded guilty to criminal charges and Braskem also entered into an FCPA consent decree with the SEC. Overall the settlement involves the payment of about $3.5 billion by the two firms.
The case centers on a scheme that traces to 2001 as to Odebrecht and 2006 as to Braskem. Over the period Odebrecht made over $788 million in illicit payments. Over the period Braskem executives directed the payment of over $250 million in bribes to Brazilian officials through Odebrecht and a labyrinth of offshore entities. Firm officials sought to secrete the payments by falsifying the books and records. Throughout the period, Braskem’s policies, procedures and controls failed to specifically address the FCPA. The firm’s code of conduct failed to prohibit improper payments to foreign officials or political parties or to even reference the FCPA. Its procurement and accounts payable processes during the period did not have adequate payment approval standards.
The SEC’s complaint alleged violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the action Braskem consented to the entry of an injunction prohibiting future violations of the Sections cited. The firm also agreed to pay disgorgement in the amount of $65 million to the SEC and retain an independent consultant. See Lit. Rel. No. 23705 (December 21, 2016). See Lit. Rel. No. 23705 (December 21, 2016).
To resolve charges with the DOJ Odebrecht pleaded guilty to a one-count criminal information charging conspiracy to violate the anti-bribery provisions of the FCPA. The firm agreed that the appropriate criminal fine is $4.5 billion but that amount is subject to further analysis since the company may not be able to pay that amount. Braskem pleaded guilty to a one-count criminal information also charging conspiracy to violate the FCPA anti-bribery provisions. The firm has agreed to pay a total criminal penalty of $632 million. Sentencing is scheduled for January 2017 in related proceedings. The firm did not self-report but cooperated during the investigation yielding a reduction in the fine from the bottom of the range calculated under the sentencing guidelines.
Braskem also settled with the Ministerio Publico Federal in Brazil and the Office of the Attorney General in Switzerland. Under the terms of those agreement the company will pay disgorgement of $325 million (including the amount paid to the SEC). The firm agreed to pay 70% of the total criminal penalty to Brazilian authorities and 15% to Swiss. The U.S. will receive about $94.6 million of the total criminal penalties paid or 15%.
Under the terms of the criminal plea agreements both firms will continue to cooperate with enforcement officials, adopt enhanced compliance procedures and retain independent compliance monitors for three years. The combined $3.5 billion settlement is the largest ever global foreign bribery resolution.
Records: The regulator determined that twelve firms failed to maintain their records as required since they were not in a format that prevents alteration known as “write once, read many” or WORM. Each firm was sanctioned. The firms are: Wells Fargo Securities, $4 million; RBC Capital Markets, $1.5 million; RBS Securities, $2 million; Wells Fargo Advisors, $1.5 million (jointly with other affiliates); SunTrust, $1.5 million; LPL Financial, $750,000; Georgeson Securities, $650,00; and PNC Capital Markets, $500,000.