A look forward; a look back:

The Supreme Court agreed to determine if the Commission can seek and obtain disgorgement as equitable relief for violations of the federal securities laws. Liu v. SEC, No. 18-1501. This case is on is on appeal from the Ninth Circuit. It will be discussed in future articles.

On August 21, 2019 the Commission published its Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Guidance Regarding Proxy Voting Responsibilities of Investment Advisers. The statement presented the prospect of proposed rule amendments.

In the wake of the statement the Council of Institutional Investors argued in a recent letter to the Commission that “evidence of pervasive factual inaccuracies in proxy advisors’ reports” is very weak. This argument follows the earlier submission of the organization, arguing that “if the SEC intends to impose a new regulatory structure on proxy advisory firms, it needs to develop evidence, not just leave it to assertions by the subjects of proxy advisor analysis.” The letters will be discussed in future articles.

The Enforcement Division filed one new case last week. It involved an off-shore firm and security based swaps.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and no administrative proceedings last week, exclusive of 12j and tag-along actions.

Security based swaps: In the Matter of XBT Corp. Sarl, Adm. Proc. File No. 3-19592 (Oct. 31, 2019) is an action which names as a Respondent the Swiss based firm that sells investment products through a website. Over a five-year period, beginning in 2014, offered and sold security-based swaps online through a website. The instruments were not registered; the exchange was not registered. The swaps involved tracked the real-time price of a variety of U.S. listed securities. Although different terminology was used, essentially the accounts participated in the price movements of an underlying asset without owning them. This action tracks the definition of a swap. The Order alleges violations of Securities Act Section 5(e) and 6(1) and Exchange Act Section 15(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to pay disgorgement of $31,687, prejudgment interest of $265 and a penalty of $100,000.

Insider trading: SEC v. Rungruangnavart, Civil Action No. 18-cv-03196 (N.D. Ill.) is a previously filed action against the Thai citizen. The action centers on trading by Defendant Bovorn Rungruangnavart and his brother, Badin, prior to the announcement that China based Shuanghul International Holdings would acquire Smithfield Foods, Inc. In advance of the deal announcement the brothers traded repeatedly in the shares of Smithfield based on information obtained from an investment banker. The Court entered a final judgment by consent against Defendant enjoining him from future violations of Exchange Act Section 10(b) and directing the payment of disgorgement in the amount of $274,339. See Lit. Rel. No. 24654 (Oct. 31, 2019).

Pyramid scheme: SEC v. DFRF Enterprises LLC, Civil Action No. 1:15-cv-12857 (D. Mass.) is a previously filed action which names as defendants Daniel Fernandes Rojo Filho, Heriberto C. Perez Valdes, Eduardo N. Da Silva, Jeffrey Feldman, Romildo Da Cunha, Wanderley Dalman and Gaspar Jesus based on their role in a pyramid scheme. The complaint alleged that Defendants recruited over 1,400 investors and raised over $15 million during a one year period, beginning in 2014, by falsely asserting claims regarding the ownership of over 50 gold mines and investments that were fully insured and guaranteed. The Court entered final judgments by default against defendants Filho, Da Cunha, Dalman, Jesus and Da Silva. The order enjoined each Defendant from future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). Defendants Filho, Da Cunha, Dalman, Jesus and Da Silva were also ordered to pay disgorgement and prejudgment interest in the amount of $10,269,827, $170,765, $98,064, $104,504 and $266,006 respectively. Defendant Filho was ordered to pay a penalty of $1 million while Defendants Da Cunha, Dalman, Jesus and Da Silva were each ordered to pay penalties in the amount of $160,000. See Lit. Rel. No. 24652 (Oct. 29, 2019).

Criminal Cases

Offering fraud: U.S. v. Robertson, No. 3:16-cr-133 (E.D. Va. Verdict Oct. 28, 2019). In this case a former football player at the University of Virginia and later in the NFL, Merrill Robertson, Jr., and his friend, Sherman Vaughn, were able to convince investors to entrust them with millions of dollars in investment funds. Following trial, a jury convicted Mr. Robertson of conspiracy, mail fraud, wire fraud, bank fraud and money laundering. The scheme traces to as early as 2008. Mr. Robertson and his firms, Cavalier Union Investments LLC and Black Bull Wealth Management LLC, began marketing their investment program. Defendant Robertson identified potential targets from his years as a football player at Fort Union Military Academy, the University of Virginia and in the NFL. Mr. Vaughn worked to raise funds for their claimed investments. Investors were led to believe that Mr. Robertson was an experienced investment adviser and that his firm was a qualified custodian for retirement funds. Investment funds were supposedly deposited into individual tax-deferred retirement accounts. The investments were secured by tangible cash-producing assets owned by the company, according to the sale pitch. In fact, the investor funds were not invested. The money was not secured. To the contrary, the money was diverted to the personal use of Mr. Robertson and his co-conspirator, Sherman Vaughn. Despite having raised over $10 million over an eight-year period, by 2015 Mr. R obertson and his compatriot were out of cash. New capital could not be raised. Mr. Robertson then turned to assisting friends with obtaining loans in return for a cut of the proceeds using false documents. Mr. Robertson is scheduled for sentencing on January 3, 2020.

Anti-Corruption/FCPA

U.S. v. Ahsani, No. 4:19-cr-00147 (S.D.Tx. Filed March 4, 2019). Cyrus Ahsani is the former CEO of a Monaco-based intermediary company that provided services for multinational firms in the energy sector. Saman Ahsani is the former COO of the same firm. Each executive resides in the U.K., although Mr. Ahsani once lived in the United States. Each man pleaded guilty on March 25, 2019 to one count of conspiracy to violate the FCPA to secure certain business contracts in foreign countries. Steven Hunter, the former business development manager of the firm, also pleaded guilty to one count of conspiracy to violate the FCPA but on August 2, 2018.

The charging papers as to Messrs. Cyrus and Saman Ahsani allege that beginning in 1999, and continuing until 2016, the former CEO and COO engaged in a scheme to violate the FCPA that took place in nine different countries: Algeria, Angola, Azerbaijan, the Democratic Republic of Congo, Iran, Iraq, Kazakhstan, Libya and Syria. Over the period millions of dollars in bribes were paid to officials in the various countries to obtain and or retain business tied to the energy sector.

The two former senior executives laundered the proceeds of the scheme to promote and conceal their actions, according to the charging papers. They also destroyed evidence to obstruct investigations in the U.S. and other jurisdictions. Mr. Hunter is alleged to have participated in the scheme by facilitating the payment of bribes to officials in Liberia between 2009 and 2015. Defendants Cyrus and Saman Ahsani are scheduled to be sentenced on April 20, 2020. Mr. Hunter is scheduled for sentencing on March 13, 2020.

The DOJ acknowledged that the SEC, along with the governments of Australia, Canada, France, Germany, Italy, Monaco, the Netherlands, Portugal, Switzerland and the U.S. provide assistance in the investigation.

Hong Kong

Internal controls: The Securities and Futures Commission reprimanded China Rise Securities Asset Management Company Ltd. and fined the firm $6.3 million for internal control failures and regulatory breaches. The regulator’s investigation found that the firm was unaware of certain short selling orders placed by an executive until notified by the Hong Kong exchange. The executive was eventually convicted of illegal short selling. The inquiry concluded that the firm did not have in place adequate control procedures to detect the trading and failed to implement procedures to monitor cross trading. The firm also failed to maintain proper records. The SFC considered the remedial procedures implemented by China Rise.