A look forward – a look back:
Following Thanksgiving, Black Friday and now Cyber Monday the Commission and other agencies return to a full agenda of rulemaking initiatives and enforcement issues. As the Commission moves forward it is facing, for example, an initiative to modernize regulation regarding derivates and funds, proposals tied to shareholder proposals and proposed amendments tied to the cash solicitation rules for advisers.
The agency will also confront a full plate of enforcement actions centered on main-street investors. A brief review of the cases detailed below is undoubtedly just a sample of the type of matters on the horizon as the world moves closer to the holidays.
ALJs: Chief Administrative Law Judge Brenda Murray will retire after 50 years of service. Here career has been marked by a dedication to service (Nov. 27, 2019).
SEC Enforcement – Litigated Actions
Misappropriation: SEC v. The Nutmeg Group LLC, Civil Action No. 09-cv-1775 (N.D. Il.) is an action which named as defendants the registered investment adviser and its owner, Randall Goulding. The firm previously settled. Mr. Goulding tried the case before a U.S. Magistrate. After a two-week hearing the Court entered findings of fact and conclusions of law against Mr. Goulding and in favor of the Commission. Those findings found that Mr. Randall had comingled investor funds with his personal assets, implemented flawed internal controls for valuing assets and transferred millions of dollars from investment pools to himself. Essentially, the owner used the advisory as his “personal piggy bank,” according to the findings. The Court concluded there were violations of Advisers Act Sections 206(1), 206(2), and 206(4). The Court ordered Mr. Goulding to pay disgorgement of $642,422, prejudgment interest of $583,230 and a penalty of $642,422. Separately the Court entered a final judgment against the firm which included permanent injunctions based on Advisers Act Sections 204, 206(1), 206(2) and 206(4). The Court also granted partial summary judgment against the advisory and its owner, finding that they violated Advisor Act Sections 206(1) 206(2) and 206(4)-8 and the related rules. See Lit. Rel. No. 24677 (Nov. 26, 2019).
SEC Enforcement – Filed and Settled Actions
The Commission filed 3 civil injunctive action and 4 administrative proceedings last week, exclusive of 12j and tag-along actions.
Offering fraud: SEC v. NIT Enterprises, Inc., Civil Action No. 19-2482 (S.D. Fla. Unsealed on Nov. 28, 2019) is an action which names as defendants: NIT Enterprises; two affiliated entities; Gary Smith, a director of NIT; Jason Ganton, a former registered representative who has been named in another settled Commission settled action in which he was barred from the industry; and James Cleary, also a former registered representative who was barred from the industry by FINRA. Over the last four years Defendants have defrauded over 100 investors in the U.S. and Canada who are largely seniors. Specifically, misrepresentations were made regarding the nature of the business and its potential for profits, the background of the former registered representatives and the future of the company. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a), and Exchange Act Sections 10(b) and 15(a)(1). The case is pending. See Lit. Rel. No. 24679 (Nov. 29, 2019).
Disclosure confidential information: In the Matter of Cynthia Holder, CPA, Adm. Proc. File No. 3-18346 (Nov 29, 2019) is an action which names as a Respondent, Ms. Holder, formerly the Executive Director in Department of Professional Practice-Inspections for a big four audit firm. This is one of a series cases arising from the misuse of confidential information by the auditing giant that was obtained improperly from the PCAOB. Ms. Holder was one of the firm partners that participated in obtaining certain information regarding the Board’s auditor inspection process to improve the audit firm’s inspection scores. The Order alleges violations of PCAOB Ethics Code Sections EC3 and EC9 and PCAOB Rule 3500T. To resolve the matter, Respondent consented to the entry of a cease and desist order based on the Sections and Rule cited in the Order. Ms. Holder is also denied the privilege of appearing and practicing before the Commission as an accountant.
Financial fraud: SEC v. MiMedx Group, Inc., Civil Action No. 1:1-cv-10927 (S.D.N.Y. Filed Nov. 26, 2019) is an action which names as defendants: The firm, a Florida based entity that sold shares during the period under a Form S-3 and registered shares for sale under Forms 8; Parker H. Pettit, the CEO of the firm; William Taylor, the COO of the company; and Michael Senken, the CEO of the company. Over a period of about four years the firm and the four executives named as Defendants engaged in a variety of illegal practices with several distributors to improperly recognize revenue and fraudulently inflate the firm’s income. For example, beginning in 2015 the firm entered into secret fraudulent side deals with Distributor E, the firm’s largest distributor, by altering the sales agreements to state that product need not be paid for until sold. When revenue from distributor E began to drop in 2015 other, similar agreements were entered into with Distributors A, B, C, and D. In 2015 Distributor A’s arrangements were altered to specify that product need not be paid for until permission was received from a foreign government. In the second quarter of 2015 the MiMedx recognized $1.4 million of revenue from product sales with Distributor B after concealing arrangements under which the owner of that firm received $200,000 from MiMedx to induce the purchase of product the company did not want or need under an agreement that permitted it to be swapped out at a later date. In the next quarter about $4.6 million in revenue was recorded from Distributor C by concealing another secret, improper agreement with that Distributor. Distributor D, a start-up with limited cash, was assured that it had a right of return on product purchased. Ultimately the scheme emerged through a series of announcements in 2018. The firm’s stock price dropped by about 74%. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(B), 13(b)(5) and 20(a). MiMedx settled with the Commission, consenting to the entry of permanent injunctions and an order requiring the payment of a $1.5 million penalty. See Lit. Rel. No. 24678 (Nov. 26, 2019).
Unregistered broker: SEC v. Pittsenbargar, Civil Action No. 2:19-cv-10059 (C.D. CA. Filed Nov. 25, 2019) is an action which names as defendants Brertt Pittsenbargar and his firm MGM Home Remodeling LLC. This is one of a series of cases tied to the illegal distribution of securities by the Woodbridge Group. Previously, that group was the subject of a cease and desist order entered by the Texas Securities Commissioner on an emergency basis. Mr. Pittsenbargar consented to a cease and desist order entered by that agency after having been employed by Woodbridge Group as a compliance officer. Here Defendants raised about $18 million from 45 investors over a four-year period. As in other similar actions, the securities were unregistered. The Woodbridge Group is a Ponzi scheme. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 24676 (Nov. 25, 2019).
Internal controls: In the Matter of Calumet Specialty Products Partners, L.P., Adm. Proc. File No. 3-19607 (Nov. 25, 2019) is an actions which names the firm, a producer of specialty hydrocarbon products, as a Respondent. Beginning in late 2017 the firm experienced a series of events that impacted its financial reporting functions. Initially, three senior finance and accounting managers resigned. Subsequently, the firm discovered that it had internal control weaknesses and that its enterprise resource system had resulted in certain operating and reporting disruptions. As the issues continued, shareholders pressed for an announcement of financial results. The firm accommodated by issuing an earnings release attached to a Form 8-K. Later those results had to be corrected. The Order alleges violations of Exchange Act Section 13(a) and Rules 13a-11 and 12b-20. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Section and rules cited in the Order. A penalty of $250,000 was also imposed.
Offering fraud: SEC v. Coggeshall, Civil Action No. 2:19 (D. Az. Filed Nov. 22, 2019) is an action which names as a defendant Conrad Coggeshall who holds himself out as a financial advisor. Over a period of about one year beginning in April 2017, he solicited largely elderly investors to invest their retirement savings with him. About $700,000 was raised. The funds were to be invested. Steady returns were promised. In fact, Mr. Coggeshall did invest the funds but for his own account. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. 24673 (Nov. 25, 2019).
Internal procedures: In the Matter of Channing Capital Management, LLC, Adm. Proc. File No. 3-19605 (Nov. 22, 2019) names as a respondent the privately held investment firm. Channing Capital failed to adequately implement its written policies and procedures governing the allocation of trading commission costs associated with aggregated block securities trades for its institutional investor and pension fund clients. The firm did have allocation procedures which provided that costs associated with block trades should be allocated on a prorate basis. However, many clients had specific policies and procedures on the topic. The firm permitted those individual policies and procedures to override those adopted by the firm. This resulted in violations of Advisers Act Section 206(4) and Rule 206(4)-7. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section and rule cited in the Order and to a censure. The firm also agreed to pay a penalty of $50,000.
Misstatements: In the Matter of David Bandimere, Adm. Proc. File No. 3-15124 (Nov. 22, 2019) is a proceeding which names as a Respondent Mr. Bandimere. The proceeding centers on two entities the Commission alleged are Ponzi schemes in earlier litigation and Respondent’s sales of interests in those firms. In making those sales Respondent made one-sided presentations and earned transaction based compensation. The Order alleges violations of Securities Act Sections 5, 17(a)(2) and (3) and Exchange Act 15. To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. He is also barred from association with any broker-dealer and directed to pay disgorgement of $370,000 and a civil penalty of $130,000.
Remarks; Karen Chester, Deputy Chair, Australian Securities & Investment Commission, delivered remarks at the AICD Leaders’ Lunch titled A Truth Universally Acknowledged, Bisbane (Nov. 29, 2019). Her remarks focus on a shift in consumer protection centered on the idea that “a firm in want of a good fortune must be in want of good consumer outcomes” (here).
Remarks: Tim Lui, Chairman, Securities and Futures Commission, delivered the keynote speech at the Annual PwC Asset and Wealth Management Conference 2019 (Nov. 29, 2019). His remarks focused on asset management in times of change (here).
Agreements: The Bank of Japan and Monetary Authority Authority of Singapore renewed a bilateral local currency swap agreement (Nov. 29, 2019).