The SEC announced its first whistleblower award in a retaliation case this week. The agency also brought an insider trading case, an action against an investment adviser, its general counsel and auditor based on a conflict, a books and records action against two bank officers and another offering fraud action.
Program: The SEC announced Compliance Outreach Program Seminars for investment adviser and investment company senior officers (here).
Proposed rules: The Commission proposed Rules to require companies to disclose the relationship between executive pay and the firm’s financial performance (here).
Proposed rules: The Commission proposed cross-boarder security-based swap rules regarding activity in the U.S. (here).
Whistleblowers: The SEC announced its first award to a whistleblower in a retaliation case. The award will be 30% of the amounts collected in the underlying case (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive cases and 3 administrative actions, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Xia, Civil Action No. 23249 (S.D.N.Y. Filed April 29, 2015) is an action centered on the merger of two Chinese e-commerce companies, 58.com and ganji.com, announced on April 14, 2015. Prior to that date the two defendants, Dr. Xiaoyu Xia and Ms. Yanting Hu, residents of Beijing, China, purchased out-of-the-money call options in 58.com between the time of the agreement and the announcement. Each defendant is connected to the financial industry in China. The complaint alleges violations of Exchange Act Section 10(b). The SEC obtained an asset freeze over the U.S. brokerage accounts used and the Court issued an order to show cause why a preliminary injunction should not issue. See Lit. Rel. No. 23249 (April 29, 2015).
Conflicts: In the Matter of Alpha Titans, LLC, File No. 3-16520 (April 29, 2015); In the Matter of Simon Lesser, CPA, CA, File No. 3-16519 (April 29, 2015). Respondents in the proceeding are: Alpha Titans LLC, a registered investment adviser; Timothy McCormack, its founder and CEO; and Kelly Kaeser, its general counsel and COO. Simon Lesser is a partner at McGladrey, a PCAOB registered accounting firm. Alpha Titans is the general partner of Alpha Titans LP and the manager of Alpha Titan, Ltd., two Feeder Funds. Investors placed money with the feeder funds that was directed into the Master Fund. Ultimately the investor funds were invested in unrelated private funds. Investments in the Feeder Funds were governed primarily by private placement memoranda and the funds’ limited partnership and operating agreements. Under those agreements the Feeder Funds paid the registered adviser management and performance fees. Alpha Titans and Mr. McCormack paid most of Alpha Titans’ operating expenses with the Feeder Funds’ assets. This created a conflict of interest between Alpha Titans and Mr. McCormack and the Feeder Funds, according to the Order. Payments for office rent, employee salaries and benefits and similar expenses totaled about $450,000. GAAP requires that related party relationships be disclosed in financial statements. Since Alpha Titans, the Feeder Funds and the Master Fund were under common control they were related parties. From 2009 through 2012 the payments to Alpha Titans were thus material related party transactions. Those payments were not disclosed, however, as a result of which the audit opinions were incorrect. In addition, the failure to prepare the financial statements in accord with GAAP meant that the adviser was not in compliance with the custody rule since those financial statements were distributed in an effort to comply with that rule. The Order in the Alpha Titans proceeding alleges willful violations of Advisers Act Sections 206(2), 206(4) and 207. In the Lesser action it alleges willful violations of Advisers Act Section 206(4). Each Respondent settled with the Commission, consenting to the entry of a cease and desist order based on the Sections cited in the Order in their respective action except that the order as to Mr. Kaeser is not based on Advisers Act Section 207(4)-7. Alpha Titans was also censured. In addition, Messrs. McCormack and Kaeser were both suspended from the securities business for twelve months. Mr. McCormack, however, can continue to be associated with Alpha Titans which began winding up prior to these actions and, pursuant to its undertaking, will continue to do so under the supervision of a monitor. Mr. McCormack’s association with the adviser will be subject to the monitor. Alpha Titans and Mr. McCormack will, on a joint and several basis, pay disgorgement of $469,522, prejudgment interest and a penalty of $200,000. Based on a declaration of financial condition a penalty was not imposed on Mr. Kaeser. Mr. Lesser is denied the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years. He will also pay a civil penalty of $75,000.
Books & records: In the Matter of Donald J. Torbert, CPA, Adm. Proc. File No. 3-16513 (April 27, 2015) is a proceeding which names as Respondents Mr. Torbert, the President and CEO of PAB Bankshares, Inc., a subsidiary of The Park Avenue Bank, and Nicole Stokes, the bank’s senior vice president and CFO. For the quarter ended June 30, 2009 the bank understated its loan losses for three large loans, resulting in positive net income of $342,000 despite reporting quarterly loses since September 30, 2008. If the losses were recognized the bank would have reported another loss. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding Messrs. Torbert and Stokes each consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Messrs. Torbert and Stokes will pay, respectively, civil penalties of $40,000 and $20,000.
Offering fraud: SEC v. Veros Partners, Inc., Civil Action No. 14-cv-659 (S.D. Ind. Filed April 22, 2015). The complaint alleges that at least $15 million was raised from over 80 investors in a series of offerings in 2013 and 2014. The defendants in the action include: Veros Partners, Inc., a registered investment adviser; Matthew Haab, an accountant and financial planner who founded Veros, continues to own a significant percentage of the firm and serves as its President, Treasurer and a director; Tobin Senefeld, the CEO and a registered representative at Pin Financial LLC who previously settled a Commission free riding case; Veros Farm Loan Holding LLC, the issuer for the 2013 offering; FarmGrowCap LLC, the issuer for the 2014 offering; and PinCap LLC, the issuer for the 2014 Bridge Loan offering.
Veros has about 300 advisory clients. Matthew Haab manages the advisory business. In 2012 Veros began offering farm operating loans. Those loans were extended to farmers to pay for seed, fertilizer, equipment and related expenses for a particular cop cycle. The offerings were intended to fund twelve to fourteen month operating loans for farmers during a particular crops season. They were to be repaid at the end of the season. Beginning in 2012, and continuing through 2014, the defendants solicited largely Veros clients to purchase interests in entities which held farm loans. In the 2012 offering about $4.8 million was raised from 59 investors. Those investors were told that the offering proceeds would be used to fund farm loans for the crop season. Investors would be paid 12% interest and repaid at the end of the season. By the end of the season the underlying farm loans were not repaid in full nor were investors. For the 2013 crop season the process was essentially repeated but investors were not told that portions of their funds would be used to pay investors from the 2012 offering or about certain fees. When the 2013 offering matured investors were entitled to receive about $10.8 million. Funds were not available. Investors in a subsequent bridge loan program and in the 2014 offering also were not paid because all the underlying loans were not repaid and portions of their funds were diverted to pay for the shortfall in earlier offerings. The complaint alleges violations of Exchange Act Section 10(b), each subsection of Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). The complaint is pending. See Lit. Rel. No. 23246 (April 24, 2015).
Insider trading: SEC v. Hixon, Civil Action No. 14-cv-158 (W.D.Tex.) is a previously filed action against Frank Hixon, Jr. The underlying complaint alleged that Mr. Hixon used inside information he learned during the course of his employment as an investment banker and, from late October 2011 through early 2013, traded in the accounts of his father and former girlfriend. When asked about the accounts by FINRA he denied any knowledge. He repeated the denials in a sworn declaration. Mr. Hixon settled with the SEC and the Court entered a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e) and directing the payment of a penalty in the amount of $682,500 on April 20, 3015. Judgments were also entered against the father and former girlfriend, named as relief defendants, requiring the payment of disgorgement in the amount of $920,315.68 along with prejudgment interest. Mr. Hixon previously pleaded guilty to parallel criminal charges. U.S. v. Hixon, No. 14-cr-227 (S.D.N.Y.). See Lit. Rel. No. 23248 (April 28, 2015).
Financial fraud: SEC v. Asti, Civil Action No. 03-CV-1417 (E.D.N.Y.) is the Commission’s long running financial fraud action centered on Symbol Technologies, Inc. The complaint was based on claims of fraudulent revenue recognition from quarter end channel stuffing. This week Robert Asti, a former executive at the firm, became the last defendant to settle with the Commission. Under the terms of the settlement Mr. Asti will be enjoined from future violations of Exchange Act Sections 10(b) and 13(b)(5). He will also be barred from serving as an officer or director of a public company and required to pay disgorgement and prejudgment interest of $90,952. A monetary penalty was not imposed based on substantial cooperation with the SEC and criminal authorities as well as his guilty plea and sentence to serve three years probation in the parallel criminal case. See Lit. Rel. No. 23247 (April 27, 2015).
Insider trading: U.S. v. Riley, Case No. 1:13-cr-00339 (S.D.N.Y.) David Riley, formerly the Chief Information Officer of Foundry Networks, Inc. was sentenced to serve 60 months in prison and pay a $50,000 fine based on insider trading charges. He was found guilty by a jury following a 13 day trial. The charges centered on two key events: 1) The acquisition of Foundry by Brocade Communications Systems, Inc., announced in July 2008; and 2) the April 2008 Foundry earnings announcement. Mr. Riley furnished inside information regarding both events to his long time friend, Matthew Teeple, a former analyst for San Francisco based hedge fund Artis Capital Management, L.P. The firm traded, yielding about $40 million in profits. Mr. Teeple previously pleaded guilty and was sentenced to serve 60 months in prison. The SEC filed a parallel action alleging violations of Securities Act Section 17(a) and Exchange Act Section 10(b). SEC v. Teeple, Civil Action No. CV 2010 (S.D.N.Y. Filed March 26, 2013). The action is pending and is discussed here .
Fraudulent sales: The regulator filed an action against Avenir Financial Group, its CEO Michael Clements and registered representative Chris Allen. The action centers on the sale of equity interests in the firm and promissory notes. The broker-dealer has raised over $730,000 in 16 issuances of equity or promissory notes. Most of the sales were to elderly customers. In one sale the firm raised about $250,000 from an elderly investor without disclosing that the broker was in desperate financial condition. A cease trade order was entered by consent. In addition, registered representative Cesar Rodriguez, who is also alleged to have made fraudulent sales of interests in the firm and diverted portions of the proceeds to his personal use, settled, consenting to the entry of an order barring him from the industry.
Fraud: The Australian Securities and Investment Commission charged Garth Robertson, the former CEO of Wickham Securities Ltd., with multiple counts of fraud. The charges center on a claim that he fraudulently obtained over $760,000 from the firm prior to its collapse. The firm is now in administration, owing about $27 million to 300 debenture holders.