by T. GormanPosted on Posted in SECActions

The SEC instituted administrative proceedings against the affiliates of five major accounting firms based in the Peoples Republic of China, or the PRC, which bodes ill for companies based there to have continued access the U.S. capital markets. In the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116 (Dec. 3, 2012). The Order names as Respondents: BDO China, Ernst & Young Hau Ming LLP, KPMG Huazhen (Special General Partnership), Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Ltd.

The proceeding is based on Rule 102(e)(1)(iii) which permits the Commission to temporarily or permanently deny any person found to have willfully violated or aided and abetted the violation of the Federal securities laws. Section 106 of the Sarbanes-Oxley Act of 2002, as amended by the Dodd-Frank Act, is alleged to have been violated. That Section provides that a PCAOB registered firm that audits the financial statements of a U.S. issuer consents to produce its work papers on request by either the Board or the SEC.

In this matter, each Respondent is registered with the PCAOB. Each Respondent is alleged to have have been engaged to audit the financial statements of a PRC based U.S. issuer. Each Respondent was served with a request by the Commission to produce all of its audit work papers for a designated period. Each Respondent declined, at least in part, based on their understanding that the law of the PRC precluded the production. The Order directs that a hearing be held before an ALJ to hear evidence.

This is not the first such proceeding by the Commission. Previously, a similar proceeding was instituted against the Deloitte PRC affiliate. In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Adm. Proc. File No. 3-14872 (May 9, 2012). That proceeding is also based on SOX Section 106 and Rule 102(e). That same firm is a defendant in a subpoena enforcement action brought by the Commission on essentially the same basis. SEC v. Deloitte Touche Tohmatsu CPA, Ltd., File No. 1:11-MC-00512 (D.D.C. Filed Sept. 8, 2011). That action was stayed earlier this year pursuant to a Commission request, citing on-going negotiations with a foreign regulator. The parties are due to report back to the Court in January.

To date the Commission’s efforts have been fruitless. If the impasse persists there may be a point at which PRC based companies are not be able to access the U.S. capital markets.

Program: Bloomberg Webcast: Current SEC Enforcement Trends (here)

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by T. GormanPosted on Posted in SECActions

Insider trading has long been a critical focus of enforcement officials. The actions by the Manhattan U.S. Attorney’s Office and the SEC against former SAC Capital employee Mathew Martoma have fueled speculation regarding the development of the on-going probes into the markets. That speculation was bolstered by the recent disclosure by SAC Capital that it has received a Wells Notice from the SEC staff. All of this, no doubt, impacts those who live on Main Street, intensifying their concern about the fairness of the markets for the average investor.

Friday the SEC brought another action against a market professional which can only serve to increase the anxiety of Main St reet about the fairness of the markets and the role of market professionals. SEC v. Massoud, Civil Action No. 3:12-cv-01691 (D.Ct. Filed Nov. 30, 2012). The action centers on the auction for Patriot Capital Funding, Inc. which was acquired by publically traded debt financier Prospect Capital Corporation in a deal announced on August 3, 2009. The defendant is J. Joseph Massoud, the managing member of Compass Group Management LLC, an unregistered investment company.

Compass Group founded Patriot Capital in 2002 to provide financing to small and mid-size companies. In 2005 the company conducted an IPO after which it was no longer affiliated with Compass.

By early 2009, however, Patriot was experiencing liquidity problems. That difficulty was compounded by problems with two key lenders. By the end of April 2009 FBR Capital Markets, Inc., Patriot’s financial advisor, approached Mr. Massoud about bidding for the company. After executing a confidentiality agreement which precluded the purchase of Patriot shares, Mr. Massoud and his firm analyzed confidential financial material about the firm, made available in a data room. Others were also given access to the data room and invited to submit bids for the financially troubled entity. During the bidding process Mr. Massoud reached out to others and learned about their bidding intentions.

In mid-May 2009, Mr. Massosud began purchasing Patriot shares. Specifically, from May 12 through July 22, 2009, he acquired 322,216 shares of Patriot stock in transactions on 15 different trading days. Many of those purchases were made following a conversation Mr. Massosud had with Patriot’s CEO in which he learned that some bids proposed to acquire the entire company and pay-off all of its debt.

Following the August 3 deal announcement that Prospect Capital would acquire the firm, Patriot’s share price increased from $1.79 per share to close at $3.84 per share. On August 25, 2012 Mr. Massoud sold all of his shares, netting profits of $676,000. The Commission’s complaint alleges violations of Exchange Act Section 10(b).

To resolve the case Mr. Massoud consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. He also agreed to disgorge his trading profits and pay prejudgment interest and a penalty equal to his trading profits. Mr. Massound will also be barred from serving as an officer or director, from the securities business and from participating in any penny stock offering. See also Lit. Rel. No. 22553 (Nov. 30, 2012).

Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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