This Week In Securities Litigation (Week of October 19, 2020)

The Commission filed actions this week focused on stock repurchases and the FCPA. The former charged firm for failing to have proper compliance procedures tied to its repurchase program. The latter centered on a Brazilian corruption scheme. While the Order ties the scheme into a U.S. company, the fraudulent scheme seemed to be more focused on corruption in Brazil.

Be safe and healthy this week


Rules: The agency announced final amendments to its Auditor Independence Rules on October 16, 2020. Initially proposed two years ago, the new modifications focus on simplifying, and in some instances contracting, the reach of prohibitions in Rule 2-01 under Regulation S-X. Specifically, the amendments address the definition of affiliate of the audit client, the engagement period, the definition of substantial stockholders and eliminated prohibitions that the Commission found to be de minimus. They also contain a framework for dealing with inadvertent violations that can arise under certain substances (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 2 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Controls: In the Matter of Andeavor LLC, Adm. Proc. File No. 3-2015 (Oct. 15, 2020) is a proceeding which names the energy company as a Respondent. In 2015 and 2016 the firm’s Board of Directors authorized the firm to spend $2 billion for share repurchases. That authorization was tied to the firm’s policy that prohibited repurchases while it was in possession of material non-public information. Specifically, a repurchase could not be done while the firm had inside information. In late February 2018 the company Chairman and CEO directed the repurchase of $250 million shares over a period of several weeks. At the time the CEO was scheduled to meet with his counterpart at Marathon. The repurchase was approved by the legal department under a Rule 10b-5-1 plan. Approximately 2.6 million shares was repurchased over the next few weeks. Shortly after the purchases Marathon reached an agreement in principle to acquire Andeavor. During the period Andeavor did not have sufficient procedures to assess the question of material non-public information with regard to that or any transaction. That was because “the company failed to appreciate that the probability of Marathon’s acquisition of Andeavor was sufficiently high at the time as to be material to investors” because “the process used did not require conferring with persons reasonably likely to have potentially material information regarding the significant corporate developments prior to the approval of the share repurchases.” The Order alleges violations of Exchange Act Section 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and agreed to pay a penalty of $20 million. A fair fund will be created.

Offering fraud: SEC v. Bradley, Civil Action No. 3:19-cv-00490 (W.D.N.C.) is a previously filed action which named as defendants Dana J. Brandley, Martin S. Hershey, D. Bradley, Inc., Bryant Boys, LLC, Distressed Lending Fund, LLC, Erdnit LLC, Hershey Enterprises, Inc., MW Enterprises LLC, Performance Holdings, Inc. and Performance Retire Rentals, LLC. According to the complaint, investors were told that their funds would be used to make loans to real estate developers. Those developers would in turn use the capital to acquire and rehabilitate homes in Charlotte, North Carolina and other areas of the country. In fact, a large portion of the investor funds were used to pay over $1 million in commissions and repay principal and interest due to other investors. Defendants Bradley and Hershey also are alleged to have overseen three securities offerings for a third-party real estate developer in Florida and operated as unregistered brokers. They were paid about $2.1 million in commissions. To resolve the action Defendants Bradley, Hershey, Performance Retire and Distressed Lending Fund consented to the entry of a final permanent injunction enjoining them from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants Bradley, Hershey, Bryant Boys, Bradley Inc., Emdit, Hershey Enterprises, MW Enterprises and Performance Holdings consented to the entry of a final judgment enjoining them from violating Exchange Act Section 15(a). The judgment orders Defendant Bradley to pay $19,494 in disgorgement and prejudgment interest and a $192,768 civil penalty and Defendant Hershey to pay $19,869 in disgorgement and prejudgment interest and a $192,768 civil penalty. The judgement reserves the question of disgorgement related to the broker-dealer registration issue for determination by the Court on motion by the SEC. See Lit. Rel. No. 24945 (Oct. 14, 2020).

Offering fraud: SEC v. Rowland, Civil Action No. 2:20-cv-05075 (E.D. Pa. Filed Oct. 13, 2020) is an action which names as a defendant Alexander S. Rowland, the CEO of Roaring Investments, Inc. or RII, an entity he formed. Over a four-year period, beginning in July 2016, Defendant Rolland raised just under $3 million from about 122 investors through his firm, RII. Investors were told that their funds would be invested in a variety of instruments such as IPOs, Forex, Crypto and others investments. Guaranteed returns ranged from 20% within a few weeks to 140% within a year. A number of investors liquidated accounts or took out home equity loans to invest. They received account records that were false – most of the cash was diverted to Defendant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office for the Eastern District of Pennsylvania. See Lit. Rel. No. 24944 (Oct. 13, 2020).

Criminal cases

Offering fraud: U.S. v. Kenner, No. 13-CR-607 (E.D.N.Y. Sentencing Oct. 5, 2020). Phillip Kenner began his career as a Boston based financial advisor. He developed a list of clients which included professional hockey players from the National Hockey League. Today Mr. Kenner is preparing to serve 17 years in federal prison. He is also forfeiting $17 million along with all of his right, title and interest in assets that include an oceanfront resort in Mexico, real property in Hawaii and a Falcon 10 jet airplane. Defendant Kenner was convicted on counts of conspiracy and securities fraud at a trial where 40 witnesses testified and over 1,000 exhibits were introduced. The exhibits included audio recordings made by several victim investors memorializing how the one-time investment adviser siphoned millions of investor dollars into a web of holding companies from which he diverted funds for his enterprises, real estate ventures and car racing ventures. The convictions centered on three schemes. The first involved a land deal in Hawaii in which he misappropriated the funds put up by investors and maxed out their credit lines. A second involved Eufora LLC, founded by a co-defendant but worthless. Again, the investors lost all of their investments because the true condition of the firm was concealed. Finally, by early 2009 the Hawaii investor credit lines received notices of default. Mr. Kenner has successfully concealed for years the fact that he had wiped out the investor funds. Despite the defaults Mr. Kenner and a co-defendant convinced the investors to invest in a Global Settlement Fund. More than $2.9 million dollars was put into the fund. Defendant Kenner and his co-defendant diverted the investor money to themselves.


In the Matter of J& F Investmentos, S.A., Adm. Proc. File No. 3-20124 (October 14, 2020). The action centers on bribery in Brazil and the acquisition of Pilgrim’s Pride Corporation, a NASDAQ traded U.S. based meat company. Named as Respondents are J&F Investmentos, S.A., a Brazilian firm that served as a holding company for brothers Wesley Batista and Joesley Batista, also of Brazil, and JBS, S.A., a global meat producer based in Brazil.

From 2009 through 2015 the brothers made illegal payments totaling about $150 million for the benefit of the Brazil Finance Minister and various political parties and candidates in Brazil at the request of the Minister. In return they got assistance in obtaining, and maintaining, $2 billion in equity financing from the Brazilian National Development and its affiliate — BNDES.

In 2009 the Batista brothers also began aggressively expanding their business in the United States meat market by making acquisitions. Part of that effort included a deal executed in December 2009 through JBS, an entity they controlled. That firm acquired 65% of Pilgrim’s shares for $800 million. The ownership stake was later increased to over 78%. Portions of the money came through BNDES.

After acquiring control of the firm, the Batista brothers, at the request of the Minister, created a series of shell companies. Those firms had bank accounts at a U.S. investment bank. The account statements were regularly made available to the Minister. Those accounts were maintained until a total of $150 million in illicit payments had been made for the benefit of various political parties and candidates in Brazil in 2014 and 2015 at the request of the Minister. Pilgrims management was unaware of the bribery scheme, although at times funds from JBS and the company were comingled.

Respondents caused Pilgrims to rely extensively on JBS management and other services. The control exercised by the Batista brothers over Pilgrim’s as they continued their bribery scheme resulted in the firm failing to disclose their fraudulent that scheme which ultimately undercut the internal controls of the firm: “By failing to disclose their improper relationship with the Minister and the funding of the bribery scheme, the Batistas ensured that Pilgrims internal accounting controls failed to detect and prevent their misconduct.” That also resulted in inaccurate books and records and incorrect information being supplied to the firm’s auditors.

In 2017 Joesley and Wesley Batista disclosed their role and cooperation with a widespread Brazilian corruption scheme and investigation to management of the company. Each subsequently resigned from the firm. Respondents indirectly received about $800 million in 2015 and 2016 as a result of dividends paid by Pilgrims to JBS USA. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).

In resolving the matter, the Commission took into consideration the cooperation and remedial efforts of the Respondents as well as a series of undertakings that will be executed. To resolve this matter with the Commission, Respondents consented to the entry of a cease and desist order based on the sections cited in the Order and agreed to implement certain undertakings. In addition, Respondent JBS will pay disgorgement of $26,866,565 which will be transferred to the U.S. Treasury. Respondents Joesley Batista and Wesley Batista will each pay a penalty of $550,000 that will also be paid to the Treasury. There were also settlements with the DOJ and the Brazilian authorities.


Job development: The National Jobs Council appointed the Institute of Banking & Finance Singapore as Jobs Development Partner for Financial Services Sector, October 16, 2020 (here).


Program: The European Securities and Markets Authority published its 2021 Work Program on October 2, 2020 (here). The Program details the regulator’s priorities and areas of focus over the next twelve months in support of its mission to enhance investor protection and promote stable and orderly financial markets.