by T. GormanPosted on Posted in SECActions

There may be a beginning to the end of the battle between U.S. and Chinese regulators over audit work papers relating to PRC based firms. The Public Accounting Oversight Board announced an MOU with its Chinese counterparts which promises to make audit work papers available on request.

The PCAOB and the China Securities Regulatory Commission or CSRC and the Ministry of Finance in China or MoF executed a Memorandum of Understanding on Enforcement Cooperation. Essentially, the agreement provides for the exchange of certain materials on request to assist in the enforcement of the laws of the parties to the agreement. In the MOU the parties pledge the “fullest assistance permissible to secure compliance with the respective Laws and Regulations of the Authorities.”

The assistance available under the MOU is defined to include furnishing “information and documents held in the files of the Requesting Party.” It also includes the exchange of documents which relate to:

Professional services – those “documents sufficient to identify all audit review or other professional services related to . . . “ the request;

Work papers – “audit working papers or other documents held by audit firms . . . “

Systems – “documents sufficient to identify firms’ quality control systems including organizational structures, policies adopted and procedures established to provide assurance of compliance with professional standards.”

The request may be denied where it would require the “Requested Party to act in a manner that would violate law . . . “ or on grounds of “public interest or essential national interest . . . “ The agreement does not provide for inspections as called for by the Sarbanes-Oxley Act. That is a point of continuing discussion.

The MOU comes at a critical point. The SEC has three pending actions focused on the question. One is a subpoena enforcement action against the PRC affiliate of Deloitte. It seeks the production of audit work papers relating to a Chinese issuer. SEC v. Deloitte Touche Tohmasu CPA, Ltd., Case No. 11-mc-512 (D.D.C.). The second is a proceeding against the same firm relating to a different audit. The proceeding is based on SEC Rule of Practice 102(e). It seeks an order which would preclude the firm from appearing and practicing before the Commission. Such an order it would effectively bar the firm from auditing a U.S. public company. In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants, Ltd., Adm. Proc. File No. 3-14872 (Filed May 9, 2012). Finally, there is the so-called “industry wide” proceeding against the PRC based affiliates of five international accounting firms. In the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116 (Filed Dec. 3, 2012). It is also based on Rule 102(e) and seeks the same relief as the proceeding against the Deloitte affiliate.

If effective, the agreement provides a framework for the production of audit work papers. The production of those papers would permit firms to comply with their obligations under Sarbanes-Oxley which requires that PCAOB registered audit firms produce audit work papers on request. Accordingly, the MOU has the potential to resolve the pending actions. While the agreement offers this promise, and the prospect of a future arrangement on inspections, implementation is critical. Ultimately the MOU may also hold the key to the world capital markets for PRC based enterprises — the kind of transparency sought by the agreement is critical to such access. For now, however, the MOU is a step in the right direction.

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. For further information please click here.

Tagged with: , , , ,

by T. GormanPosted on Posted in SECActions

The Commission’s revamped inspections program, which now utilizes a risk based approach and works more closely with the Enforcement Division,, continues to uncover wrongful conduct resulting in enforcement actions. This time the program discovered a front running trader who used his position for personal profit through secret trades in his wife’s account at the expense of the firm’s institutional clients. SEC v. Bergin, Civil Action No. 3:13 cv 1940 (N.D. Tx. Filed May 23, 2013).

Daniel Bergin is a highly experienced equity trader at registered investment adviser Cushing MLP Asset Management, L.P. The firm, which has about $2.5 billion under management and sponsors benchmark indices for master limited partnership issues, specializes in publicly traded energy infrastructure MLPs, royalty trusts and other energy income investments. Like other firms, Cushing employs traders such as Mr. Bergin to place client orders and particularly large ones in advantageous market centers in a manner which minimizes price movements unfavorable to the client. Mr. Bergin, who has been at Cushing since 2008, was the trader primarily responsible for Cushing’s equity trades.

Beginning in 2011 Mr. Bergin put his personal interests ahead of those of his employer and its clients, according to the SEC. Specifically, he began using brokerage accounts first at Fidelity Investments and later at Scottrade to trade ahead of firm clients. For example, on August 15, 2011 he was directed to buy 85,000 shares of Targa Resources Corporation, symbol TRGP. About two minutes after receiving the instruction in an email he began placing orders to acquire a total of 15,000 shares of the security in his wife’s Fidelity account. One his personal orders began executing he placed the firm orders. Later that day Mr. Bergin sold the shares of TRGP he purchased in his wife’s account, reaping a profit of $11,826.56. Mr. Bergin continued making similar trades throughout the period. Overall he had profits of about $1.7 million from same day, illegal trades.

At the time Mr. Bergin placed these trades, the firm had an ethics policy which precluded such transactions. He was also required by Commission rules to make periodic reports regarding the accounts to the firm which he failed to do.

In November 2011 Fidelity terminated the accounts of Mr. Bergin and his wife. This action followed a review by Fidelity Surveillance of the trading in the accounts and the corresponding transactions on behalf of Cushing’s clients. Fidelity’s affiliate, National Financial Services, LLC, was the clearing firm for one of Cushing’s executing brokers.

Subsequently, Mr. Bergin opened accounts with Scottrade and continued his illegal trading. Mr. Bergin did not disclose the Scottrade account in his wife’s name to the firm. Yet repeatedly throughout the period he executed certifications assuring the firm that he had disclosed all personal brokerage accounts and securities transactions although he had not. Similarly, in February 2013 he failed to disclose his wife’s account during an interview with the Commission’s staff.

The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Investment Company Act Section 17(j). An asset freeze was obtained at the time the complaint was filed to prevent Mr. Bergin from transferring any additional cash from the brokerage accounts. The case is in litigation. See also Lit. Rel. No. 22707 (May 24, 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. For further information please click here.

Tagged with: , ,