The DOJ unsealed criminal charges against five individuals involved in the Rolls-Royce FCPA action previously brought by the DOJ, SFO and Brazilian authorities. The charges were filed in the Southern District of Ohio. Each executive except one pleaded guilty. Last week the Acting Assistant AG for DOJ’s criminal division and the co-director of the SEC’s enforcement division delivered remarks emphasizing the importance of FCPA and anti-corruption enforcement.
Markets: The Commission announced the formation and first members of the Fixed Income Market Structure Advisory Committee. The Committee’s initial focus will be on corporate bond and the municipal securities markets to advise the agency on the “efficiency and resiliency” of those markets. Twenty-two members of the committee were announced (here).
Remarks: Chairman Jay Clayton delivered remarks titled Governance and Transparency at the Commission at the PLI 49th Annual Institute on Securities Regulation, New York, New York (Nov. 8, 2017). His remarks focused on participation in voting by retail investors, enforcement centered on improving transparency for penny stocks, fee disclosure and transaction processing, and investor education (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 civil injunctive case and no administrative proceedings, excluding 12j and tag-along proceedings.
Financial fraud: SEC v. Campion, Civil Action No. 16-cv-08940 (S.D.N.Y.) is a previously filed action which named as a defendant Gavin Champion, the former president of KIT Digital, Inc. The complaint alleged an accounting fraud in which Mr. Campion participated in the improper recognition of $25 million in revenue from a sham licensing agreement. A final judgment by consent was entered, enjoining him from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and from aiding and abetting future violations of 13(a) 13(b)(2)(A) and 13(b)(2)(B). The order also bars him from serving as an officer or director of any public company. See Lit. Rel. No. 23980 (Nov. 8, 2017).
Financial Fraud: SEC v. Osiris Therapeutics, Inc., Civil Action No. 1:17-cv-03230 (D. Md. Filed Nov. 2, 2017). Osiris operated a bio-surgery business. Named as defendants along with the firm are: Phillip Jacoby, Jr., initially the CFO and later the Principal Accounting Officer; Gregory Law, initially the Vice President of Finance and later the CFO; Lode Debrabandere, the CEO of the firm; and Bobby Montgomery, the general manager of orthopedics and sports medicine and later the chief business officer. Osiris sold its products through an in-house sales force and a network of third-party distributors. The company also consigned products to distributors and end-users. Throughout 2014, and during the first three quarters of 2015, the company failed to maintain an effective system of internal controls. During the period the existing controls of Osiris were circumvented as the defendants sought to meet certain revenue targets by prematurely recognizing revenue, contrary to GAAP and/or announced company policies. Ultimately this resulted in the firm restating its financial statements for that period. According to that restatement the company overstated revenue by about 17% during 2014 and about 9% during the first three quarters of 2015. Revenue was overstated during the nearly two year period . The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2), 13(b)(5) and 20(a) and SOX Section 304. The case is in litigation.
Pay-to-play: U.S. v. Kang, No. 1:16-cr-00837 (S.D.N.Y.) is an action which names as a defendant Navnoor Kang, the former Director of Fixed Income and Head of Portfolio Strategy at the New York State Common Retirement fund and Deborah Kelly, a former managing director at brokerage firm Stern Agee. Mr. Kang was charged with having engaged in a pay-to-play scheme with Ms. Kelly in which he directed substantial amounts of Fund business to her in return for travel, entertainment and other perks. Both Mr. Kang and Ms. Kelly were charged with obstructing an SEC investigation which discovered the scheme. Previously, Ms. Kelly pleaded guilty and was sentenced. The scheme is described in detail here. Mr. Kang pleaded guilty to one count of conspiracy to commit securities fraud and one count of conspiracy to commit honest services fraud. Mr. Kang is scheduled for sentencing on February 23, 2018.
Financial fraud: U.S. v. Block (S.D.N.Y.) is an action against Brian Block, the former CFO of a publically traded REIT. Previously, he was found guilty of falsifying the books and records of the firm following a three wee trial. Specifically, in the second quarter of 2014 the firm discovered that in the first quarter filing it had incorrectly calculated a non-GAAP measure of cash flow for the firm, overstating it. Mr. Block was informed of this as the second quarter filings were being prepared. Rather than report the error to the audit committee, he falsified the second quarter results to continue the favorable trend from the prior quarter. This made the half year results consistent with analyst expectations. The court sentenced him to serve eighteen months in prison followed by three years of supervised release and directed that he pay a $100,000 fine. Restitution will be determined at a future date. See also SEC v. Block, Civil Action No. 1:16-cv-07003 (S.D.N.Y. Filed Sept. 8, 2016).
Account-intrusion/manipulation: U.S. v. Willner, No. 17-cr-620 (E.D.N.Y. Filed Nov. 8, 2017). Defendant Joseph Willner, a day-trader, was indicted for conspiracy to commit wire fraud, conspiracy to commit securities fraud and computer intrusions, securities fraud and conspiracy to commit money laundering. Over a three year period, beginning in the fall of 2014, Mr. Willner is alleged to have engaged in a computer intrusion and securities fraud scheme, profiting from a series of trades involving over 50 hacked online brokerage accounts. The proceeds were laundered by using Bitcoin, a crypto-currency. Mr. Willner and others are alleged to have repeatedly manipulated the share price of stocks using two sets of accounts. One set was his; the others were retail accounts hacked by scheme participants. To generate gains, trading between the two groups of accounts the trades was coordinated. For example, the hacker would place orders to either artificially raise or lower the price of select stocks. Mr. Willner would then execute trades on the opposite side through his accounts. The profits from the trades were split. The brokerage firms involved had losses of over $2 million. SEC v. Willner, Civil Action No. 1:17-cv-06305 (E.D.N.Y. Filed Oct. 30, 2017).
U.S. v. Mitsakos, No. 1:16-cr-00631 (S.D.N.Y). Defendant Nicholas Mitsakos created Matrix Capital Markets and marketed it as a successful hedge fund. Investors were told that the firm had outsized returns that beat market indexes and had millions of dollars under management. In fact at the time the firm had little capital and the returns shown to investors were based on a hypothetical portfolio Mr. Mtsakos manipulated. About $2 million was raised from investors. About $1.2 million was invested and largely lost. The balance went to the defendant’s expenses. Mr. Mitsakos pleaded guilty to one count of conspiracy to commit securities and wire fraud. The court sentenced him to serve 30 months in prison followed by two years of supervised release. In addition, Mr. Mitsakos was ordered to forfeit $861,163.32 and to pay restitution to the victims. The SEC filed a parallel case. SEC v. Matrix Capital Markets, LLC, Civil Action No. 1:16-cv-069395 (S.D.N.Y. Filed August 11, 2016).
Lying to auditors: U.S. v. Jacoby, No. 1:17-cr-00676 (S.D.N.Y. Filed Nov. 2, 2017). Former Osiris Therapeutics, Inc. CFO Philip Jacoby pleaded guilty to criminal charges stemming from the financial fraud at the company. The case centered on a fraud at the company in which the firm and its four senior executives improperly recognized revenue with four different vendors over almost a two year period to continue a positive trend (here). The conduct on which Mr. Jacoby’s plea was based stems from an October 2015 request by the firm’s auditors for additional documentation and information regarding the recognition of revenue in December 2014 from a vendor. The request was made in connection with an inspection by the PCAOB. Mr. Jacoby furnished false and misleading information to the auditors in response to the request. Specifically, he and others prepared a memorandum from the company to the auditors to justify the recognition of the revenue from the distributor. The memorandum claimed that Mr. Jacoby discussed the product sale terms with the owner in a conference call. The owner agreed to purchase 933 units from the company for over $1 million. In fact there was no telephone call. On November 5, 2015 Mr. Jacob also created a letter, backdated to December 29, 2014, that reflected an agreement between the company and the distributor. The same day Mr. Jacob sent the letter by email to the owner stating that he should write a “wonderfully warm and convincing email” about their several calls regarding the transaction noted in the letter. Mr. Jacoby pleaded guilty to one count of making fraudulent statements to the auditors. Sentencing is scheduled for February 2, 2018.
FCPA – Anti-Corruption
Remarks: Acting Asst. Atty. Gen. Kenneth A. Blanco, delivered remarks at the Foreign Corrupt Practices Act/Organization for Economic Cooperation and Development Anniversary Conference, NYU Law School (Nov. 9, 2017). His remarks reviewed the significance of the OECD Convention, noted that since 2016 the DOJ has brought over 35 cases against individuals and 17 charging corporation that have resulted in over $1.6 billion in fines; he also reviewed significant cases such as Odebrecht, Rolls-Royce, Telia and Vimpelcom and discussed the Kleptocracy Asset Recovery Initiative and the 1MDB action (here).
Remarks: Steven R. Peikin, Co-director, SEC Division of Enforcement, delivered remarks titled Reflections on the Past, Present, and Future of the SEC’s Enforcement of the FCPA, New York University School of Law (Nov. 9, 2017). His remarks reviewed the history of the Act, the creation of the FCPA group at the Commission, noted the increasing internationalization of enforcement citing the case against Telsa and limitation on these issues in the wake of the Supreme Court’s decision in Kokesh (here).
U.S. v. Contoguris, No. 2:17-cr-233 (S.D.Oh. Filed Oct. 12, 2017) is one of five individuals charged in connection with the Rolls-Royce FCPA action. The charges against the company centered on a years long scheme in which the firm paid bribes in a number of countries around the world. The settlement involved the DOJ, the U.K. Serious Frauds Office and the Brazilian Ministerio Publico Federal. The DOJ resolution in January 2017 was based on a deferred prosecution agreement. In the underlying complaint, filed in the Southern District of Ohio, the firm was charged with conspiring to violate the anti-bribery provisions of the FCPA. Rolls-Royce was alleged to have paid $35 million in bribes through third parties to foreign officials in Thailand, Brazil, Azerbaijan, Angola and Iraq. The company agreed to pay the DOJ a criminal penalty of $195,496.88, subject to a credit of about $25,579.17 for settlement payments to Brazilian authorities. The firm also entered into a deferred prosecution agreement in the U.K. with the SFO. The conduct involved bribes in China, India, Indonesia, Malaysia, Nigeria, Russia and Thailand between 1998 and 2013. The firm agreed to pay a penalty of about $604,808.39. In Brazil the firm will pay a penalty equal to the credit it obtained in the DOJ settlement because the underlying conduct in each case overlapped. The total paid by the firm to resolve all three proceedings is over $800 million.
Three Rolls-Royce executives and an official at an international engineering firm each pleaded guilty to one count of conspiracy to violate the FCPA. See, e.g., U.S. v. Finley, No. 2:17-cr-160 (S.D. Oh. Filed July 21, 2017). A fifth action was brought against Petros Contoguris, a foreign national who is the founder and CEO of Gravitas & Co., International Ltd. He was charged with paying bribes in furtherance of the scheme which involved Rolls-Royce Energy Systems, Inc., an indirect subsidiary of Rolls-Royce plc. Mr. Contoguris was charged with conspiracy, violating the FCPA and money laundering. This case is pending.
Churning: A FINRA hearing panel ordered that registered representative Mark Werner of Northport, New York be barred from the industry. He was also ordered to pay over $155,000 in restitution, disgorgement of over $10,000 and a fine of $80,000. The panel found that Mr. Werner had been the broker for an elderly couple until the husband’s death in 2012. Since then he has “plundered” the accounts of the elderly, blind widow. Over a three year period beginning in October 2012, for example, he placed over 700 trades, resulting in about $210,000 in commissions and $175,000 in losses. Her account was supposed to be traded in a conservative manner.
Boiler room: The Australian Securities and Investment Commission charged Jana Jaros and Jackson Lauence Malcolm Capper with operating a boiler room. Specifically, beginning in February, and continuing to about December, 2015 the two defendants hired staff and cold-called potential investors in an effort to sell securities. Both defendants have now pleaded guilty to the charges. Both were sentenced but released on condition of good behavior for three years with Mr. Capper on a $5,000 bond and Ms. Jaros on a $2,000 bond.
Unlicensed services: The ASIC obtained an order against Gallop International Group Pty Ltd., Gallop Asset Management Pty Ltd., and Ming-Chien Wang, freezing their funds and accounts. It also directed them not to furnishe financial services without being registered. The interim order will remain in force until further notice.
Agreement: The China Securities Regulatory Commission and the Australian Securities and Investment Commission entered into an agreement to promote innovation in financial services in their respective markets. The agreement underlies the significant, broader Australia-China trade investment relationship. China is Australia’s largest two-way trading partner in goods and services as well as the largest export market for the country. China is the world’s leader in financial technology or fintech, according to the release.
Insider dealing: The Court of Appeal upheld the decision of the lower court finding that two solicitors – Ms. Betty Young Bik Fung and Mr. Eric Lee Kwok Wa – and Lee’s sister had violated the insider dealing laws by insider dealing in the shares of Asia Satellite Telecommunications Holdings Ltd. The court also affirmed the finding that the three had engaged in fraud or deception involving the shares of Taiwan-listed Hsinchu International Bank Company Ltd. The initial charges were brought by the Securities and Futures Commission.
Unauthorized transactions: Yeung Leung Yuen, a former relationship manager of Citibank (Hong Kong) Limited,was banned from the industry for three years. The order is based on five unauthorized transactions conducted in a client account which resulted in losses of $22,233. Citibank bore the losses, not the client.
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 register click here.