A look forward – a look back:

The look forward is to a holiday weekend for all. To each, and all a great holiday weekend!!


Report on SEC Enforcement

Cornerstone Research, in conjunction with the Pollack Center for Law and Business at NYU, published their annual report on SEC Enforcement which focuses largely on statistics (here). Overall the Report tracks largely statistics on actions involving public companies and their subsidiaries.

The 526 enforcement actions filed by SEC Enforcement in FY 2019 is the largest number over the last seven years with the exception of 2016 when 548 cases were brought. The number filed last year eclipses that from FY 2018 when 490 cases were filed and 2017 with 446.

During that same seven-year period the Commission filed 95 actions involving public companies and their subsidiaries. That compares to 2018 with 72 such cases, 2017 with 65 and 2016 with 91. Fiscal 2019 thus has the largest number of actions involving public companies and their subsidiaries. However, 26 of the actions counted as involving public companies and their subsidiaries in FY 2019 were from the highly successful Share Class Initiative .

For FY 2019 Cornerstone and NYU report that for the first time actions involving investment advisers and investment companies was the largest group of cases. This is consistent with the statistics reported by the Division. Cases involving issuer reporting and disclosure were the second largest category. The third largest group of cases were those involving broker-dealers and FCPA allegations.

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.

Offering fraud: SEC v. Burkholz, Civil Action No. 1:19-cv-24713 (S.D. Fla. Filed Nov. 14, 2019) is an action which names as defendants Neil Burkholz, Frank Bianco, Palm Financial Management, LLC and Shore management Systems, LLC. The action centers on an offering fraud that is on-going and was being conducted by the two individual defendants and their entities. Specifically, the complaint alleges that since 2014 defendants have raised over $6 million from at least 55 investors, many of whom are senior citizens. In soliciting the funds defendants represented that the money would be profitably invested and that they were advisers who had fiduciary duties. In fact, much of the money was misappropriated. Other portions were used to repay earlier investors and part was lost in high risk options trading. The complaint alleges violations of Exchange Act Section 10(b). The Commission obtained a freeze order. The case is pending. See Lit. Rel. No. 24669 (Nov. 20, 2019).

Criminal cases

Cybersecurity: U.S. v. Parfionovas, No. 19-MJ- 883 (E.D.N.Y. Filed Nov. 21, 2019) is an action which names as a defendant Vytautas Parionovas, a resident of the Ukraine. Defendant was charged with computer intrusion, securities fraud, money laundering, bank fraud and wire fraud. The charges are based on a two pronged scheme. In one facet of the scheme Mr. Parfionovas and others would hack into accounts and steal the cash and at times trade the securities with the profits going to their accounts. When authorities began blocking these transactions the scheme changed. In a second facet of the scheme login information was obtained and messages were sent to foreign banks to secure the transfers of funds from the accounts of U.S. victims. The action is pending.

Mismarking: U.S. v. Shor, No. 1:18-cr-00328 (S.D.N.Y. Sentencing No. 19, 2019) is an action which named as a defendant Jeremy Shor, formerly a trader at Premium Point Investments L.P. The firm had funds which traded in residential mortgage backed securities and other instruments. Mr. Shor traded non-agency (not backed by the government) RMBS. The owner of Premium Point set targets for the funds to keep up with the competition. In order to meet the targets Mr. Shor and the owner mismarked the securities over a two-year period beginning in 2014. This overstated NAV at times by over $100 million. The mismarking also inflated the fees and helped keep investors from exiting the funds. Mr. Shor was found guilty by a jury. He was sentenced to serve 40 months in prison followed by three years of supervised release. See also SEC v Shor, Civil Action No. 1:18-cv-0415 (S.D.N.Y. Filed May 9, 2018).

Offering fraud: U.S. v. Cifuenrtes (D.N.J. Filed Nov. 18, 2019) is an action which charges husband and wife Alcibiades Cifuentes and Jennifer Wee Cifuentes with conducting an investment fund scheme over a three-year period beginning in 2012. The couple fraudulently induced investors to put their money into the foreign currency and commodity markets. Rather than invest the funds as promised, the investor capital was almost immediately misappropriated. Each Defendant pleaded guilty to four counts of wire fraud, one count of conspiring to commit wire fraud, and one count of theft by a commodity pool operator. The couple is awaiting sentencing.

FCPA/Anti-Corruption

U.S. v. Grubisich is an action charging Jose Carlos Grubisich, the former CEO of a publicly traded subsidiary of Odebrecht S.A., a Brazilin firm. Mr. Grubisich and other executives participated in a scheme that began in 2002 and continued through 2014 that involved the use of about $250 million of company money that was run through secret slush funds. The money was used in part to pay bribes to government official, political parties and others in Brazil. It was also used to obtain and retain business and help secure certain business advantages for the subsidiary. The money in some instances flowed through offshore entities and accounts in the U.S. The books of those entities were falsified to conceal the transactions. Odebrecht and its subsidiary previously pleaded guilty to charged tied to the transactions. The case is pending.

Australia

Remarks: James Shipton, Australian Securities and Investment Commission Chair, addressed the Parliamentary Joint Committee-Corporations and Finance Services (Nov. 19, 2019). His remarks focused on enforcement work centered on major financial institutions (here).

Hong Kong

Guidance: The Securities and Futures Commission issued a new statement reminding listed companies about their disclosure obligations. The circular also discussed the measures expected of asset managers (Nov. 21, 2019)(here).

Singapore

Consultation: The Monetary Authority of Singapore issued a consultation paper proposing to allow payment token derivatives to be traded on Approved Exchanges and to regulate the activity under the Securities and Futures Act. Interested parties are invited to submit comments and proposals by December 20, 2019 (Nov. 20, 2019).

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Earlier this year the SEC’s Enforcement Division published its annual report, reviewing FY 2019 which ended on September 30, 2019. As in the past, the Report reviewed not just the statistics from the year but also the entire program and its goals.

Nevertheless, statistics from the program remain a key issue metric for many who track trends SEC enforcement actions. Cornerstone Research, in conjunction with the Pollack Center for Law and Business at NYU, published their annual report which focuses largely on statistics (here). Overall the Report tracks largely statistics on actions involving public companies and their subsidiaries, documents trends which echo those in the Enforcement Division Report.

The report

The 526 enforcement actions filed by SEC Enforcement in FY 2019 is the largest number over the last seven years with the exception of 2016 when 548 cases were brought. The number filed last year eclipses that from FY 2018 when 490 cases were filed and 2017 with 446.

During that same seven-year period the Commission filed 95 actions involving public companies and their subsidiaries. That compares to 2018 with 72 such cases, 2017 with 65 and 2016 with 91. Fiscal 2019 thus has the largest number of actions involving public companies and their subsidiaries.

As the Report notes, however, 26 of the actions counted as involving public companies and their subsidiaries in FY 2019 were from the highly successful Share Class Initiative program that centered on investment advisers purchasing mutual fund shares for clients that paid fees back to them rather than the lower price shares which did not make such payments.

When the actions tied to the Share Class Initiative are removed from the total, only 69 actions were filed against public companies and their subsidiaries. That compares to FY 2018 when 72 were filed, 2017 with 65, 2016 with 91 and 2015 with 82.

For FY 2019 Cornerstone and NYU report that for the first time actions involving investment advisers and investment companies was the largest group of cases. This is consistent with the statistics reported by the Division. Cases involving issuer reporting and disclosure were the second largest category. The third largest group of cases were those involving broker-dealers and FCPA allegations.

Finally, statistics regarding cooperation and the amount of disgorgement and prejudgment interest are reported. While the percentage of cases that involved cooperation and no monetary settlement ticked up slightly in FY 2019, at 5% it remained a very small component of the actions reported. Indeed, the percentage of cases involving cooperation and no penalty has been consistently quite small since 2013. In contrast, from 2010 through 2013 the percentage ranged from as high as 18% to a low of 10%.

The largest component of settlement dollars in 2019 was disgorgement and prejudgment interest at 59%. That compares to 49% in FY 2018, 63% in 2017 and 54% in 2015. Overall, the 59% in 2019 is the highest percentage since 2010 with the except of three years — 2013 a 63%, 2014 at 71% NS 2017.

Comment

As the Division notes in it is earlier reports, statistics are only one point of consideration when evaluating the Enforcement Program. Nevertheless, they do serve to highlight certain trends.

First, the trend that has been developing for several years fully emerged last year. The largest group of cases involved investment advisers and investment companies. That trend traces back several year and while it was no doubt impacted by the Share Class Initiative, it reflects a key focus of SEC Enforcement.

Second, there is no doubt that the Share Class Initiative was very successful. That result should be considered in conjunction with the percentage of actions resolved without a financial component. While the number ticked up to 5%, in 2019 for that group of actions, over the last several years it is quite low, particularly compared to the earlier part of the decade. Some might argue that those numbers may in part reflect the insistence of the agency on obtaining disgorgement. While that may be correct, that point could also be asserted with respect to the early part of the period.

Third, although the Division’s Report cited the negative impact of Kokesh, the statistics here fail to support the contention. To the contrary, as a percentage of the overall amount of dollars in Commission settlements, the amount of disgorgement and prejudgment interest in FY 2019 is one of the larges figures this decade. While one might argue that additional disgorgement and prejudgment interest could have been obtained but for the Supreme Court’s decision and the short limitation period (which is being addressed in draft legislation), the agency could avoid much if not all of the impact of that case if it limited its requests to actual equitable disgorgement to be returned to those harmed.

Finally, the success of the Share Class Initiative, coupled with the statistics on cooperation and monetary awards, more than suggests that the Division consider its approach to the question of cooperation. Reserving the question of cooperation credit to its discretion until the end of the action may seem prudent. Yet the Share Class Initiative and the dismal percentage of cases that involved cooperation with no monetary settlement component more than suggests that a new approach in merited.

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