Co-Director of Enforcement Steven Peikin announced his resignation. Mr. Peikin joined the staff shortly after Chairman Clayton, from Sullivan and Cromwell. Consideration is being given to again directing that audit firms for foreign issues make available their audit work papers for inspection by the PCAOB. In fact, this would simply reiterate existing authority of the Board and the Commission under SOX.

The Commission resolved a financial fraud action with Valeant and its officers. This is one of the few significant financial fraud cases brought in recent months. The agency also resolved an FCPÅ case with a consumer loan firm based on the activities of its former subsidiary in Mexico.

Be safe and health this week

SEC

Confirmation: Hester Peirce and Caroline Crenshaw were confirmed as Commissioners last week.

Resignation: Steven Peikin, Co-Director of the Division of Enforcement announced his resignation from the staff, effective August 14, 2020.

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and 6 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Insider trading: SEC v. Brewer, Civil Action No. 1:20-cv-06175 (S.D.N.Y. Filed August 6, 2020) is an action against Jack Brewer, the owner and principal of a Commission registered investment adviser and a consulting firm, each of which bears his last name. In December 2016 Mr. Brewer learned that COPsync, a microcap firm that operated a communication network for law enforcement officers, was engaged in efforts to sell 2 million shares of stock in a private placement, likely at a discount price. Mr. Brewer, who learned about the deal through his consulting arrangement, understood that the deal would likely have a negative impact on the share price. Accordingly, in late December 2016 he entered into a stock purchase agreement with the company to buy shares before the announcement of the deal. In the purchase documents he agreed not to sell the shares prior to the deal announcement. Nevertheless, before that announcement he sold 100,000 shares at prices ranging from $1.01 to $1.16. Following the deal announcement, the share price dropped about 30%. Mr. Brewer thus made about $35,000 by selling his shares before the announcement. In addition, Mr. Brewer aided and abetted the policy and procedure deficiencies of his firm which did not have procedures to preclude him from acting as an unregistered broker as he did between April 2015 and July 2017. The Order alleges violations of Exchange Act Sections 10(b) and 15(a) and Advisers Act Section 204A. The case is pending. See Lit. Rel. No. 24863 (August 6, 2020).

Conflicts/false statements: In the Matter of WBI Investments, Inc., Adm. Proc. File No. 3-19904 (August 5, 2020). Respondents WBI and Millington Securities, Inc. are registered investment advisers. Millington is affiliated with WBI and serves as an introducing broker for that firm’s orders placed on behalf of advisory clients. Millington did not charge WBI or its clients explicit commissions for its brokerage services. The firm was paid for order flow. To execute the orders forwarded by WBI, Millington sent them to a group of executing brokers each day. The orders were executed in large blocks by the group of executing brokers. Millington charged a flat fee for each share of stock purchased or sold, typically $0.0125 for a trade and $0.0150 for an ETF. Stated differently, the firm was paid for order flow. The amounts collected were retained by Millington. The executing brokers were paid by Millington through a net trading arrangement. Under that arrangement the securities bought or sold in the market were executed at one price and then bought or sold at a different price. The prices were netted with the difference going to the executing brokers. Clients were told that Millington received payment for order flow in connection with orders placed by WBI on behalf of clients. That arrangement would continue even if an arrangement with another broker might be cheaper for clients, according to the disclosure. What clients were not told until early 2017 is that the payment for order flow arrangements in general added or subtracted, depending on whether the transaction was a purchase or sale, about $0.02 to $0.03 per share to the market prices received by the executing brokers. Clients were also not told that the arrangement impacted the prices at which WBI’s client orders were executed. Indeed, on three instances in the late fall to early spring of 2014 and 2015 Respondents gave assurances that the payment for order flow arrangements did not affect the price at which WBI’s client orders were executed. The statements made by Respondents were materially misleading. In addition, at the time neither firm had adopted and implemented policies and procedures designed reasonably to prevent such violations. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. In addition, Millington will pay a penalty of $250,000 while WBI will pay $750,000. The funds will be transferred to the general fund of the U.S. Treasury, subject to Exchange Act Section 21F(g)(3).

Financial fraud: In the Matter of Valeant Pharmaceuticals International, Inc., Adm. Proc. File No. 3-19899 (July 31, 2020). The Quebec based pharmaceutical firm has shares listed on the TSX in Toronto and the NYS. In 2014 and 2015 the firm was pursuing a growth by acquisition strategy. Part of the firm’s strategy centered on its relation with Philidor Rx Services LLC, a licensed pharmacy formed in early 2013. Valent acquired an option to purchase the pharmacy in mid-December 2014. The relationship was terminated on October 30, 2015 following extensive media reports discussing the relation. By the end of the third quarter of 2014 Valeant obtained a $75 million order from Philidor. The order included one-time special pricing deal and exceeded Philidor’s credit limit. Valeant then approved a $70 million credit increase despite the fact that a large receivable with an overdue balance was outstanding. In early December 2014, Valeant received a $130 million order from Philidor which required another credit increase that was granted without following the usual procedures. When Valeant reported its results for the quarters ended September 30, 2014 through September 30, 2015 the disclosures were misleading since the impact of the Philidor arrangements was not disclosed. Indeed, Valeant did not disclose the requisite information about Philidor in the MD&A section of its quarterly reports on Form 10Q and annual report on Form 10K. In the second quarter of 2015 the firm recorded revenue for price appreciation credits received under its Distribution Service Agreements with wholesalers. Under these agreements, Valeant offset distribution fees owed to wholesalers with credits for price increases on its products held by wholesales in inventory. In June 2015 Valeant recorded about $110 million in net price appreciation revenue through a 500% price increase on one drug. The entire amount of the increase was erroneously attributed as revenue to numerous products. Four months later the firm made an investor presentation regarding Philidor following which the firm restated its financial statements. The firm also disclosed the existence of the price appreciation agreements for the first time. It did not disclose the impact from those clauses earned in 2015 on certain GAAP and non-GAAP measures. The Order alleges violations of Securities Act Sections 17(a)(2) and (3), and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and certain related rules. Respondent resolved the proceedings, consenting to the entry of a cease and desist order based on the sections and rules cited in the Order. The firm cooperated with the investigation and engaged in certain remedial acts. Respondent agreed to pay a penalty of $45 million. The money will go to a fair fund. See also In the Matter of J. Michael Pearson, Adm. Proc. File No. 3-19900 (July 31, 2020)(CEO and COB of the firm; resolved similar charges with consent to a cease and desist order based on the same sections and, in addition, SOX Section 304(a); paid penalty of $250,000); In the Matter of Howard B. Schiller, Adm. Proc. File No. 3-19901 (July 31, 2020)(Ex. V.P. and CFO; resolved with a consent to a cease and desist order based on same sections as in the forgoing proceeding; and payment of $100,000 penalty); In the Matter of Tanya R. Carro, CPA, Adm. Proc. File No. 3-19902 (July 31, 2020)(controller of firm; resolved with a consent to a cease and desist order based on the same sections as above (Order include Rule 102(e)), an order denying her the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after one year; and the payment of a penalty in the amount of $75,000).

Offering fraud: SEC v. Complete Business Solutions Group, Inc., d/b/a Par Funding, Civil Action No. 9:20-cv-81205 (S.D. Fla. Filed July 31, 2020) names as defendants Lisa McEhone and Joseph W. LaForte, a married couple, their firm, Par Funding, and a number of others engaged in a nationwide solicitation for their cash advance firm that resulted in about 1,200 investors purchasing unregistered securities for about one half a billion dollars. Initially the offering was halted by Pennsylvania regulators who were promised that the business soliciting investments in notes would terminate. In fact it continued but under a different guise using “Agent Funds” which were in fact agents selling the notes. The scheme was operated behind multiple veils designed to conceal the true nature of Par Funding’s loan practices, its track record and default rates and Mr. LaForte’s criminal record and control of the enterprise. Also concealed were three cease and desist orders from three state securities regulators and a maze of misrepresentations. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 20(a). The Court entered a temporary freeze order. The case is pending. See Lit. Rel. No. 24860 (July 31, 2020).

Criminal Cases

AML: U.S. v. De Jongh (S.D.Tx. Filed August 6, 2020) is a case which names as a defendant, Jose Luis De Jongh, a dual U.S. – Venezuelan citizen. He was charged with laundering the proceeds of a scheme involving corrupt payments made to secure a business advantage for his employer, Citgo, from PDVSA. The indictment alleges that the former head of the Special Projects Group directed that the funds be laundered over a six-year period beginning in 2013 and continuing through 2019. He directed that the funds be run through a series of accounts for shell firms in Panama and Switzerland. He also falsified documents. The indictment contains five counts of money laundering. The case is pending.

FCPA

In the Matter of World Acceptance Corporation, Adm. Proc. File No. 3-19905 (August 6, 2020). World Acceptance Corporation is a consumer loan firm based in Greenville, South Carolina. The firm sold its one wholly owned subsidiary, WAC Mexico, effective July 1, 2018. The subsidiary had two lines of business. One focused on small loans made directly to consumers. The other centered on loans to federal government employees.

Prior to that sale the subsidiary WAC Mexico engaged in a bribery scheme that began in late 2010 and ended in mid-2017. It involved loans to government employees. There were advantages to these loans for the firm which included a reduced collection risk and greater job security for the borrower.

The loan contracts were extended to government and union officials. Bribes were paid to induce the officials to enter into the loan agreements. During the term of the agreements additional payments were made. Approximately $4.1 million in bribe payments were made to government officials and union officials in cash and by depositing the funds in a bank account or into an account of a friend. About $1.5 million was paid to government and union officials while $480,000 went to third party intermediaries who used the funds to pay government and union officials. The records are insufficient to determine how the remaining $1.5 million was distributed.

The firm also had inaccurate books and records and insufficient internal controls to detect or prevent the bribery. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, WAC agreed to pay disgorgement of $17,826.000, prejudgment interest of $1,900,000 and penalties of $2million. The funds will be transferred to the general fund of the U.S. Treasury subject to Exchange Act section 21F(g)(3).

Circuit Courts

SEC v. Yang, No. 19-55298 (9th Cir. August 6, 2020) is an appeal by defendant Robert Yang from the District Court’s order imposing certain monetary penalties. The settlement involving the Commission and two settling Defendants provided for injunctive relief but reserved the question of monetary relief for the Court. Once the Court entered its order Defendant Yang appealed.

The Circuit Court considered, in part, the propriety of a disgorgement order entered in the action in view of the decision in Liu v. SEC, 140 S.Ct. 1936 (2020). In that decision the Court concluded that because the remedy is equitable the orders must be “crafted so that their effect is restitutionary only. Defendants did not challenge the Commission’s calculations which was their burden. The Court held, however, that “it is unclear whether the district court limited its disgorgement orders [as to each defendant] . . . to their specific conduct where . . . it made them both jointly and severally liable for disgorgement amounts ordered . . . it is unclear that the ‘disgorgement amounts ordered are appropriate and necessary for the benefit of investors,’” quoting 15 U.S.C. Section 78u(d)(5) and Liu. Accordingly, the determination was remanded for a determination of whether the disgorgement orders were consistent with Liu.

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Investment advisers, as fiduciaries, are required to disclose material conflicts of interest. Those disclosures should be incorporated into their brochure – Part II of Form ADV. Those obligations, and the repeated failure of advisers to properly disclose material conflicts, are at least part of the reason the number of actions brought against investment advisers have continued to rise in recent years. The Commission’s most recent case in this area focuses not just on a failure to disclose a potential conflict but false representations that helped conceal the conflict. In the Matter of WBI Investments, Inc., Adm. Proc. File No. 3-19904 (August 5, 2020).

Respondents WBI and Millington Securities, Inc. are registered investment advisers. Millington is affiliated with WBI and serves as an introducing broker for that firm’s orders placed on behalf of advisory clients. Those clients included two ETFs. Millington did not charge WBI or its clients explicit commissions for its brokerage services.

Millington was in fact paid for order flow. To execute the orders forwarded by WBI, Millington sent them to a group of executing brokers each day. The orders were executed in large blocks by the group of executing brokers. Millington charged a flat fee for each share of stock purchased or sold, typically $0.0125 for a trade and $0.0150 for an ETF. Stated differently, the firm was paid for order flow. The amounts collected were retained by Millington.

The executing brokers were paid by Millington through a net trading arrangement. Under that arrangement the securities bought or sold in the market were executed at one price and then bought or sold at a different price. The prices were netted with the difference going to the executing brokers.

Clients were told that Millington received payment for order flow in connection with orders placed by WBI on behalf of clients. That arrangement would continue even if an arrangement with another broker might be cheaper for clients, according to the disclosure.

What clients were not told until early 2017 is that the payment for order flow arrangements in general added or subtracted, depending on whether the transaction was a purchase or sale, about $0.02 to $0.03 per share to the market prices received by the executing brokers. Clients were also not told that the arrangement impacted the prices at which WBI’s client orders were executed. Indeed, on three instances in the late fall to early spring time period of 2014 and 2015 Respondents gave assurances that the payment for order flow arrangements did not affect the price at which WBI’s client orders were executed.

The statements made by Respondents were materially misleading. In addition, at the time neither firm had adopted and implemented policies and procedures designed reasonably to prevent such violations. The Order alleges violations of Advisers Act Sections 206(2) and 206(4).

To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. In addition, Millington will pay a penalty of $250,000 while WBI will pay $750,000. The funds will be transferred to the general fund of the U.S. Treasury, subject to Exchange Act Section 21F(g)(3).

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