by T. GormanPosted on Posted in SECActions

Cooperation was a major tenant in the retooling of the SEC’s enforcement program. Borrowing heavily from the Department of Justice, the Commission announced proposals to use non-prosecution agreements and deferred prosecution agreements to encourage cooperation in 2010. While the emphasis was on individuals, issuers were included. The idea was to encourage cooperation to speed investigations.

It has been almost two years since the first non-prosecution agreement was entered into by Atlanta based clothing manufacturer Carter’s, Inc. Since then the Commission has entered into one other non-prosecution agreement and two deferred prosecution agreements. It has also acknowledged that cooperation impacted the settlement in a number of other cases.

To assess the impact of the new cooperation proposals key, cases in which cooperation has been acknowledged by the Commission will be assessed. Those actions can be divided into three groups for discussion purposes: 1) Non-prosecution agreements; 2) deferred prosecution agreements; and 3) settled actions in which the Commission has acknowledged that cooperation impacted the resolution. The first two groups will be considered in this article while the remaining actions along with an assessment of the initiatives will be in an article published later this week.

No prosecution

Since the announcement of the proposals, the Commission has only entered into two non-prosecution agreement and two deferred prosecution agreements. The former were with Carter’s, Inc. and an executive at investment advisor AXA Rosenberg. The latter were with Tenaris S.A. and the Amish Help Fund.

The Commission’s first non-prosecution agreement arose out of the financial fraud at Carter’s, Inc. There senior executive Joseph Ellis manipulated certain industry standard rebates or discounts that were given to a large customer. Specifically, Mr. Ellis is alleged to have granted larger than appropriate rebates or discounts to induce larger sales. He concealed his actions with false documents, causing the revenue of the company to be significantly overstated for a period. When the scheme was announced the share priced dropped significantly. Mr. Ellis has been named in both civil and criminal actions. Two other executives have also been charged by the Commission.

Carter’s, Inc., was not prosecuted in view of its cooperation. Rather, the company entered into the first non-prosecution agreement with the Commission in December 2010. The agreement did not require an admission of liability although the company did agree not to deny the underlying conduct except in proceedings not involving the SEC. The company also agreed to fully cooperate with the SEC’s inquiry.

The SEC’s second non-prosecution agreement involved an executive at AXA Rosenberg, an investment adviser which settled an administrative proceeding. In the Matter of AXA Rosnberg Group, Adm. Proc. File No. 3-14224 (Feb. 3, 2011). The case there involved a computer modeling error that resulted in significant losses. In June 2009 senior management discovered the error. Shortly thereafter it was corrected for U.S. clients and later for others. The firm did not disclose the error to clients who were registering complaints. Eventually, it was disclosed to the Commission and investors. The company settled the proceeding with a cease and desist order, payments for the harm caused investors and a penalty and the implementation of certain procedures.

The executive who entered into a non-prosecution agreement had a limited role in the misconduct and had advocated internally at the company that it be disclosed earlier. He fully cooperated with the Commission from the time he was first contacts and before entering into an agreement with the agency. He was also retiring. Accordingly, there was little likelihood of a reoccurrence of the conduct by the executive and, as with the fraud at Carter’s, the wrongful conduct was limited in nature.

Deferred prosecution

The two deferred prosecution agreements reflect similar circumstances. The Commission’s first non-prosecution agreement was in an FCPA case with Tenaris S.A. There the company, a Luxembourg based international seller of steel pipe products and related services to the oil and gas industry, was alleged to have obtained confidential information through a local agent on the bidding process for certain contracts. The agent was paid a commission, portions of which went to state officials as bribes.

When Tenaris first learned of the actions by its subsidiary, the company self-reported and conducted an extensive investigation and analysis of the situation. It fully remediated the wrongful conduct.

The company resolved the possible charges with the DOJ by entering into a non-prosecution agreement and paying a $3.5 million criminal fine. It settled with the SEC by entering into a deferred prosecution agreement and agreeing to pay $5.4 million in disgorgement and prejudgment interest. Under the terms of the agreement the company will continue to cooperate with the Commission and implement certain remedial efforts.

The Commission’s second deferred prosecution agreement was with the Amish Help fund, an Ohio based non-profit corporation. The violations centered on the fact that the Fund, established to provide loans to members to further the Amish way of life, had not updated its prospectus in 15 years. The prospectus was used to sell investment contracts to fund the loans. Over its history the fund had 3,500 investors, over 1,200 borrowers and about $125 million in mortgage receivables. It had never had a default and no investor had suffered a realized loss.

When notified that it was in violation of state and federal securities laws, the Fund immediately cooperated, updated the prospectus, offered all existing investors the right of recession and took other remedial steps. Thus this action, like the one involving Tenaris, was predicated a limited situation where the wrongful conduct was fully remediated once discovered.

Each of the non-prosecution and deferred prosecution agreements entered into by the Commission to date have been consistent with the decision not to prosecute in the 2002 Seaboard Release, the Commission’s long standing initiative on cooperation. That Release centered on a limited financial fraud in a subsidiary where the company fully cooperated once the situation was identified. Similarly, the wrongful conduct in Carter’s, AXA, Tenaris and Amish Fund involved limited, contained wrongful conduct which was fully remediated. In each instance the company or the executive fully cooperated with the Commission and there were assurances that the wrongful conduct would not be replicated in the future.

Viewed in this context the new cooperation initiatives do not appear to have significantly expanded the circumstances under which the Commission will not insist on resolving the situation with a settled enforcement action. At the same time the new initiatives do give the agency additional options for resolving a case beyond simply settling an enforcement action as in the past. To fully assess the significance of the initiatives however, the other actions in which the Commission has acknowledged cooperation in settled actions must be carefully analyzed and assessed. Those cases will be analyzed in the second part of this article later this week.

Hurricane Sandy: The President suggested that those who want to aid the victims of this devastating storm contribute to the Red Cross. The link is here.

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

In a week when the financial markets were shut for two days by hurricane Sandy, the Commission filed actions focused on insider trading, financial fraud, false advertising, and, in addition, a stop order proceeding. One insider trading case stems from the seemingly never ending Galleon investigation. Another was against an advertising executive tipped by his insider – friend. The financial fraud case ties to earlier actions involving Carter’s, Inc. while the false advertising proceeding was against an investment adviser for statements made in the materials about its program. The stop order proceeding was instituted to halt share sales where the registration statement failed to disclose that a de facto officer of the company is a disbarred and previously enjoined attorney.

On Monday, the Supreme Court will hear argument in Amgen v. Connecticut Retirement Plans and Trust Funds. The issues focus on whether a securities law plaintiff must prove materiality at the class certification stage of the case and, if so, if the defendants must be given an opportunity to rebut application of the fraud-on-the-market theory prior to certification.

The SEC

Remarks: Chairman Mary Schapiro addressed the George Washington University Center for Law, Economics and Finance Fourth Annual Regulatory Reform Symposium on October 26, 2012. The Chairman reviewed SEC rule making under Dodd-Frank (here).

Remarks: Carlo di Florio, Director, Office of Compliance Inspections and Examinations, addressed the National Society of Compliance Professionals (Oct. 22, 2012). His remarks focused on conflicts of interest (here).

SEC Enforcement: Filings and settlements

Statistics: This week the Commission filed 3 civil injunctive actions and 3 administrative proceedings (excluding tag-a-long and 12j actions).

False advertising: In the Matter of BTS Asset Management, Inc., Adm. Proc. File No. 3-15082 (Oct. 29, 2012). Respondent BTS Asset Management, Inc., a registered investment adviser, has operated the BTS High Yield Bond Fund program since 1981. Clients apply buy/sell signals from the adviser to mutual funds or variable annuities they select in the high yield bond sector with a view to capital preservation. The goal is to be in bonds when they are rising and move to a money fund when they are not. Since the early 1990s the advertisements for the bond program have claimed that it has had “no down years” since inception. In 2005 BTS learned that about half of its clients would have had a down year in 2004 with losses of up to 3.3% following the buy/sell signals. The fact that a significant percentage of its clients likely would have had results which materially varied from the “no down year” claim made the advertisements false and misleading, violating Advisers Act Section 206(4), according to the Order. To resolve the proceeding the adviser agreed to implement a series of procedures which include the retention of an independent consultant to review its compliance policies and procedures. BTS also agreed to the entry of a cease and desist order based on the Section cited in the Order and a censure. The firm will pay a $200,000 penalty as part of the settlement.

Stop order: In the Matter of the Registration Statement of Caribbean Pacific Marketing, Inc., Adm. Proc. File No. 3-15083 (Oct. 29, 2012) is a stop order proceeding to halt sales of shares in Caribbean Pacific. In the proceeding the Division alleges that the registration statement fails to disclose that William J. Reilly holds a de facto position with the company and that he is a disbarred attorney who is prohibited by a court order from involvement from any penny stock offering, serving as a corporate officer and director and from violating certain provisions of the federal securities laws. He has also been suspended from practicing before the Commission. A hearing will be held on November 15, 2012.

Undisclosed commissions: In the Matter of Tilden Loucks & Woodnorth, LLC, Adm. Proc. File No. 3-15081 (Oct. 29, 2012) named as Respondents Tilden Louchs & Woodnorth, LLC, Woodnorth, LLC, LaSalle St. Securities, LLC and Ralph Loucks. Tilden is a registered investment adviser that was formed by Mr. Loucks. LaSalle is a registered broker dealer. The action centers on undisclosed commissions. Tilden’s clients all maintained brokerage accounts at LaSalle which administered its back office functions. Most of the trades for Tilden’s clients were executed by LaSalle. Beginning in late October 2007, and continuing until early 2012, Tilden charged client commissions that exceeded the fees it paid LaSalle to execute trades. The higher commissions represented undisclosed compensation for Tilden and Mr. Loucks. Under this arrangement, clients paid on average $143.77 per trade, according to the Order. At the same time Tilden paid LaSalle an average of $37.47 to execute the trades. The excess went to Tilden. The arrangement was not disclosed. To the contrary, the Forms ADV told clients they were getting a discount. Tilden was paid over $186,000 in undisclosed compensation, shared by Mr. Loucks. The Order alleges violations of Advisers Act Section 206(2) and 207. To resolve the proceeding Tilden agreed to implement certain procedures. In addition, Tilden and Mr. Loucks consented to the entry of cease and desist orders based on Section 206(2) and 207. LaSalle consented to a similar order based on Section 206(2). Both entities agreed to the entry of a censure and to pay, jointly and severally, disgorgement of $170,319.94 along with prejudgment interest. The three Respondents also agreed, jointly and severally, to pay disgorgement of $16,288.18 along with prejudgment interest. Tilden and LaSalle will each pay a penalty of $100,000 while Mr. Loucks will pay $25,000.

Insider trading: SEC v. Chellam, Case No. 12 CV 7983 (S.D.N.Y. Filed Oct 26, 2012) is an action against former Xilins, Inc. CFO, Kris Chellam. In late 2006 Mr. Chellam tipped Raja Rajaratnam regarding downward trends about Xilinx’s business. At the time the information contradicted the company’s prior public projections. As a result of Mr. Chellam’s information, the Galleon hedge funds shorted Xilinx shares. After the company released the negative information on December 7, 2006, those funds had a profit of $978,684. At the time of the tip Mr. Chellam was good friends with Mr. Rajaratnam, had a significant investment in the Galleon funds and was discussing prospective employment with those funds which he eventually accepted. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a).

Mr. Chellam settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. In addition, he will pay $675,000 in disgorgement, prejudgment interest and a penalty of $978,684. Mr. Chellam will also be barred for five years from serving as an officer or director of a public company.

Insider trading: SEC v. Van Gilder, Case No. 1:12-cv-02839 (D. Colo. Filed Oct. 26, 2012) is an action against the CEO of Denver based VanGelder Insurance Co., Michael Van Gelder. It centers on the acquisition of Delta Petroleum by Tracinda Corporation, announced on December 31, 2007. In the weeks leading up to the announcement, a close person friend of Mr. Van Gelder furnished him with information about the deal. The friend was employed at Delta and involved in the transaction. As the deal developed the two friends exchanged dozens of text messages and telephone calls. Prior to the deal announcement Mr. Van Gilder purchased shares of Delta for his account as well as options and urged relatives, his broker and a co-worker to also buy. Following the deal announcement the share price increased by about 20% giving Mr. Van Gelder, one of his relatives, his broker and his co-worker trading profits of over $161,000.

Mr. Van Gelder is also alleged to have purchased Delta securities based on inside information from the same friend regarding the then up coming third quarter 2007 financial results. That trading resulted in $4,000 in ill-gotten gains. The Commission’s complaint alleges violations of Exchange Act Section 10(b). It is pending. The U.S. Attorney for the District of Colorado also announced a parallel criminal action against Mr. Van Gilder.

Financial fraud: SEC v. Johnson, Civil Action No. 1:12-CV-03709 (N.D. Ga. Filed Oct. 26, 2012) is an action against Michael Johnson, a divisional merchandise manager at Kohl’s. It centers on the fraud at Carter’s, Inc. in which senior executive Joseph Elles gave Kohl’s additional “accommodations” to secure orders provided that they be concealed from his company by deferring them and executing fraudulent confirmations. Mr. Johnson participated in the fraud by agreeing to the arrangements and executing the confirmations. The complaint alleges violations of Exchange Act Section 13b-5 and the related rules. The case is pending. See also Lit. Rel. No. 3421 (Oct. 26, 2012).

CFTC

Remarks: Chairman Gary Gensler addressed the Futures Industry Association Expo, Chicago, Ill., November 1, 2012 (by video). His remarks reviewed the recently issued swaps rules regarding clearing, transparency and cross border application. He also discussed the use of benchmarks (here).

FSA

Suitability: Martin Rigney a representative at Topps Rogers, was banned from the securities business and fined ₤117,330 for selling Unregulated Collective Investment Schemes or UCIS to clients without assessing their eligibility or suitability. The instruments are very complex and risky. Nevertheless, he had clients who invested substantial portions of their retirement funds in them. After he agreed to stop selling the instruments the representative attempted to transfer a UCIS from one client to another without telling the customer it had been suspended two years earlier. He also improperly exercised discretion over client accounts. Mr. Rigney is now bankrupt and his firm is in liquidation.

SFC

Manipulation: Li Jialin, the chairman of VST Holdings, Limited was sentenced to six months in prison and fined $240,000 in connection with a price rigging scheme. Previously, he was convicted on 10 counts of price rigging and 16 counts of failing to disclose his interest in shares of the company. Between August 2007 and January 2008 the defendant had three accounts through which he bought and sold VST shares in transactions that resulted in no change of beneficial ownership but did increase the share price. That increase supported a share placement in October 2007 and the year end share price performance.

Insider dealing; Simon Chui Wing Nin, the former assistant director of finance at CITIC Ltd. was convicted of insider dealing following an eight day trial. The evidence demonstrated that he was involved in calculating the amount the company would have to pay on certain investment contracts it purchased as a hedge on which CITIC would lose money. Before that information became available Mr. Chui sold most of his shares of CITIC, avoiding a loss of about HK$1.36 million.

Hurricane Sandy: The President suggested that those who want to aid the victims of this devastating storm contribute to the Red Cross. The link is here.

Tagged with: , , , ,