by T. GormanPosted on Posted in SECActions

The Commission has been bringing an increasing number of actions involving regulated entities and investment advisers. The cases involve a variety of issues ranging from the failure to invest in accord with established procedures to miscalculating NAV. Its most recent action, however, charges an investment adviser and its senior officials with theft from the Detroit Police and Firefighters. SEC v Mayfieldgentry Realty Advisors, LLC, Civil Action No. 13-cv-12520 (E.D. Mich. Filed June 10, 2013).

In early 2008 a total of $3.1 million was taken from the Police and Fire Retirement System of the City of Detroit or PFRS to pay, in part, for the purchase of a shopping center acquired by the principles of registered investment adviser Mayfieldgentry or MGRA. The deal to purchase the shopping center had been inked at the close of 2007. PFRS was not informed about the deal nor did it consent. The money stolen would have funded benefits for more than 100 retired police officers, firefighters and surviving spouses and children for about one year.

MGRA at one point had about $750 million under management. It was founded by its president and CEO, defendant Chauncey Mayfield. He is the defendant in another Commission action centered on “pay-to-play” allegations. He pleaded guilty to one count of conspiracy to influence or reward local public officials in a related case. MGRA’s CFO and COO are, respectively, defendants Blair Ackman and Marsha Bass. W. Emery Mathews served as chief investment officer and Alicia Diaz was the general counsel. Both named defendants. Collectively the five defendants own MGRA.

PFRS’ business relationship with MGRA dates to 2002 when the firm directed the rehabilitation of a property owned by the pension fund. As the fund expanded its business, MGRA was selected to manage its properties. In May 2005 MGRA and PFRS executed a Real Estate Investment Advisory and Asset Management Agreement. In connection with the management of PFRS’ real estate investments, MGRA and Mr. Mayfield managed and controlled one of the fund’s bank accounts.

In January 2007 MGRA agreed to purchase select shopping center properties for $4.3 million. The adviser secured a bank loan for about $4.3 million of the purchases price. At year end with only $200,000 in cash the firm could not fund the balance of the purchase. Accordingly, in January 2008 Mr. Mayfield directed his CFO to wire $400,000 from the PFRS account the adviser controlled to the sellers of the shopping center properties. In February funding of the transaction was completed when Mr. Mayfield directed defendant Ackman to wire about $2.7 million from the PFRS checking account for the shopping center transaction.

From 2008 through 2011 Mr. Ackman furnished the pension fund with quarterly reports on the properties it owned. Regular report were also provided detailing funds transferred from the bank account. None mentioned the shopping center or the money take to pay for it.

In a May 2011 meeting the principles of MGRA, absent Mr. Mayfiled, met to review the firm’s budget. The money taken from the PFRS to fund the shipping centers was discussed. All agreed it had to be repaid without disclosing the fact to PFRS. Efforts to sell the shopping center properties were unsuccessful.

In a December 2011 meeting with PFRS, the adviser presented a detailed review of the budget for the fund which included an analysis of the advisory activities. Mr. Matthews told the group the fund had another strong year. Ms. Diaz stressed how well the properties owned by the fund were performing. That point was bolstered by Mr. Matthews who reported that the internal rate of return for the PFRS portfolio was 6.8%, thus exceeding relevant benchmarks. The PFRS representatives were not told that the rate of return would have been significantly impacted if the theft were considered. Indeed, no mention was made of the money taken to fund the shopping center until just prior to the time the Commission filed its “pay to play” action involving the firm in May 2012.

The SEC complaint alleges violations of Advisers Act Sections 206(1) and (2). Mr. Mayfield and the firm settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, they agreed to pay disgorgement of $3,076,365.88. The remaining defendants are litigating the case. See also Lit. Rel. No. 22720 (June 10, 2013).

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast nationally by the ABA and available in other Dorsey & Whitney offices. For further information please click here.

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by T. GormanPosted on Posted in SECActions

Today we have a guest post from Kimberley R. Anderson, a partner at Dorsey & Whitney, resident in the Seattle, Washington office. Kimberly is a member of the firm’s capital markets group and focuses her practice on corporate and securities issues and cross-boarder matters. Her post today discusses the SEC’s new guidance on conflict minerals, a controversial area which has spawned extensive comment. Secactions welcomes the submission of other posts in key securities law areas.

On May 30, 2013, the Securities and Exchange Commission (SEC) issued its long anticipated guidance on the conflict minerals rules. The highly burdensome rules, which require disclosure regarding use and sources of “conflict minerals,” were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FAQs provide significant relief for certain kinds of manufacturers, particularly those in the food industry. The FAQs are available here.

Background

In response to the extreme levels of violence in the Democratic Republic of the Congo (DRC), which Congress felt was financed in part by the trade of “conflict minerals,” in 2010 Congress mandated the SEC to adopt regulations requiring additional disclosure by SEC reporting companies that use conflict minerals in product manufacturing. Conflict minerals include tantalum, tin, tungsten and gold. All categories of SEC reporting companies are covered by the disclosure rules, including foreign private issuers and smaller reporting companies. The final rule release is available here.

SEC Guidance

The FAQs provide much needed clarification on a wide range of topics.

What constitutes a product for purposes of the rules?

· Perhaps most significantly, the FAQs specify that packaging containing conflict minerals is not considered part of the product, even if a “product’s package or container is necessary to preserve the usability of that product up to and following the product’s purchase.” The question of whether packaging is necessary to the functionality of the product, and therefore considered part of the product, has been a nagging question since the rules were adopted. Canned soup is one commonly used example of this question. Is the product soup, or soup in a can? Now we know that, according to the Staff, the product is just the soup.

· Issuers that manufacture or contract to manufacture equipment, such as a cruise ship, used to provide a service are not subject to the conflict minerals rules with respect to that equipment, “if that equipment is used for the service provided by the issuer and the equipment is retained by the service provider, is required to be returned to the service provider, or is intended to be abandoned by the customer following the terms of the service.”

· If an issuer manufactures or contracts to manufacture equipment containing conflict minerals that the issuer uses to manufacture its products, the issuer may subsequently resell the used manufacturing equipment without regard to the conflict minerals rules. Such manufacturing equipment is not considered to be a product of the issuer requiring a conflict minerals analysis.

What activities are not considered manufacturing or contracting to manufacture?

· Mining of conflict minerals is not considered manufacturing under the rules. In addition, the FAQs clarify that activities relating to mining are also not considered to be manufacturing. These activities include, but are not limited to: transporting the mined ore to a processing facility; crushing and milling the ore; mixing crushed/milled ore with cyanide solution; floating cyanide mixture through a leaching circuit; extracting gold from a leached circuit; melting leached gold (which is often referred to as smelting) into ingots or bars (which are often referred to as doré gold); and transporting the doré gold to refinery for the refining process.

· Etching or marking a logo or other identifier on a generic product manufactured by a third party is not considered to be “contracting to manufacture.”

What entities are subject to the rules?

· Voluntary filers are subject to the conflict minerals rules.

· Where the manufacturing activities are conducted by a consolidated subsidiary but not the issuer, the issuer must make the mandated inquiries and disclosures for itself and its consolidated subsidiaries.

· The FAQs provide some relief for newly public companies. Newly public companies may begin reporting with the first calendar year that begins no sooner than eight months after the effective date of the registration statement for its IPO.

Reporting Guidance

· Issuers must conduct reasonable country of origin inquiries for generic components included in manufactured products, if the generic components include conflict minerals.

· For products containing conflict minerals that are “DRC conflict undeterminable” or not “DRC conflict free,” product descriptions required by Form SD may be determined by the issuer based on the facts and circumstances, and need not include model numbers. However, the Conflict Minerals Report must clearly state that the product is “DRC conflict undeterminable” or “not found to be DRC conflict free.”

· Issuers that manufacture products containing conflict minerals which are “DRC conflict free” must still file a Form SD with an audited Conflict Minerals Report, but certain product information need not be specified.

· Failure to timely file a Form SD will not impact Form S-3 eligibility.

Conclusion

The conflict minerals rules have been subject to an ongoing lawsuit commenced last October by the National Association of Manufacturers, together with the U.S. Chamber of Commerce. The SEC guidance discussed above provides clarification and welcome relief, particularly to packaged goods manufacturers, but we expect the rules will continue to impose a significant burden on many issuers and their suppliers.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to cvitko.diane@dorsey.com). Webcast nationally by the ABA and available in other Dorsey & Whitney offices. For further information please click here.

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