by T. GormanPosted on Posted in SECActions

The Division of Enforcement published its 2020 Annual Report on November 2, 2020 (here). The Report contains the now familiar sections: A Message from the Director keyed to highlights; a review and discussion of key areas of interest; a series of data charts; and lists of enforcement actions brought during the fiscal year.

Yet the overall Report differs from earlier years. While it is the usual blend of case cites, discussion of initiatives and scattered statistics, the true story is one of perseverance through adversity.

A year of success despite COVID:The Report begins by noting that once the Division moved past “that initial period of uncertainty [the Division] . . . ultimately achieved a remarkable level of success, including brining more than 700 enforcement cases during the fiscal year . . . an extraordinary accomplishment.” This point is illustrated by the citation to a sampling of cases which include:

Telegram Group, Inc., a case that centered on an unregistered offering of digital tokens or Grams that ultimately was part of a larger scheme to unlawfully distribute the Grams to the secondary public market;

Bausch Health, formerly Valeant Pharmaceuticals, an action keyed to improper revenue recognition;

BMW AG, a settled action in which two subsidiaries made inaccurate disclosures about the firm’s retail sales volume in the U.S while raising $18 billion from investors through bond offerings;

SCANA Corp., a litigated case in which the company was charged along with two senior executives for making false statements about a nuclear power plant expansion that was abandoned; and

Telefonaktiebolaget LM Ericsson, an FCPA action based on a large-scale bribery scheme involving the use of sham consultants to channel cash to government officials in multiple countries.

Cases in select areas:Cases filed in four areas, along with the Division’s litigation results, further illustrate the success of the program, according to the Report. The cases include actions centered on financial fraud, investment professionals and main street investors along with the litigation results.

Financial fraud and issuer disclosure has long been a focus of the Commission’s enforcement efforts. Yet recent efforts to duplicate historic results in this area have been less than successful. That continues to be true.

The Report cites a series of cases to illustrate the Division’s work. Those include: Revolution Lighting Technologies, an action in which the firm and its executives falsely inflated revenue for years; Iconix Brand Group, a case in which the CEO and COO beat Wall Street analysts’ consensus estimates by creating fictious revenue; and Hill International, an action were two former executives employed fraudulent accounting practices.

To be sure, the Division seems to be emphasizing financial fraud by, for example, announcing a new initiative toward the end of the fiscal year focusing on EPS, evidenced by two cases. Similarly, in the final quarter of the year perhaps a larger number of financial fraud actions were brought than in any period during the fiscal year. Those cases are apparently the product of focusing on data and metrics, according to the Report. What they do suggest is a new beginning in this area.

The Division also continued to focus on actions involving investment professionals while seeking to protect main street investors. As the Report notes, a series of cases tied largely to conflicts of interest centered on matters such as the failure to disclose the payment of 12b-1 fees were filed. This trend has been evident over the last several years, continued through 2020, and is fully consistent with protecting main street investors as the Commission has repeatedly noted.

Litigation success is another key point. The Report notes that over 40% of the standalone matters were not fully resolved at the time of filing. Whether this is atypical, resulted from difficulties tied to the pandemic or for other reasons is not discussed. More significant, however, is the statement that the Commission prevailed in each litigated action, an important point.

Other initiatives: Initiatives undertaken by the Division supplemented its case filing efforts. A key point involves the effort to hold individuals accountable. Over the course of the year the Commission charged “individuals in 72% of the standalone enforcement actions brought.” That percentage appears to be based on the fact that about 400 “standalone” case were filed – it is not based on the 700 plus number touted in the report.

A second is whistleblowers, an increasingly important initiative for enforcement. Since inception, about $562 million has been awarded. In fiscal 2020 the agency sought to accelerate the speed at which claims are evaluated. Last year about $175 million was awarded to 39 individuals – a 200% increase in the number of awards made in a single year over the next-highest year.

The Division also created the Office of Bankruptcy, Collections, Distributions and Receiverships to improve on the distribution of cash to harmed investors. About $600 million was returned to those investors in fiscal 2020. Whether this resulted from the new Office, the Supreme Court’s decision in Liu that was handed down in June 2020, or some combination thereof is not clear.

The Division continued to try to speed the pace of investigations last year – a point also covered in last year’s report. The median investigation was completed in 21.6 months, a five year best. Similarly, complex investigations were completed in 34 months rather than 37 as in earlier years.

The Report also touts the Division’s efforts to accelerate investigations through meaningful cooperation. As an example of those efforts, the Report cited the case involving BMW where a reduced penalty was imposed for what is called “extensive cooperation, especially in light of COVID-19 challenges.” Just how this approach differs from that used in other years is not explained.

Conclusion: Perhaps the best statement about fiscal 2020 is not the case cites, the tables of statistics or the discussion of various initiatives, but the one offered by the Director in her opening letter: “the greatest of our achievements this year was the everyday work of the women and men of the Enforcement Division. The fact that they kept going. That they did their jobs. That they kept protecting investors. Through the darkness of late March and early April, through school closures, through work-from-home, through illness and worse. . .” they kept going. Those efforts are a testament to the Division, its leadership, the Commission and the public. Those efforts are the real results of 2020.

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by T. GormanPosted on Posted in SECActions

With the election on Tuesday, a key question is the aftermath. Even if the current administration prevails there will be changes. Rumors have swirled that the Commission’s Chairman will return to New York. Others have resigned – a co-director of enforcement, the director of corporation finance and the head of international. If a new administration prevails the changes will undoubtedly be significant. Then again it could be some time before the winner prevails. In this regard a good read is William Rehnquist’s Centennial Crisis, a detailed account of the disputed election of 1876.

In the past week SEC Enforcement prevailed in a bench trial in one of the last of a series of cases centered on pay-to-play allegations involving the New York pension fund. The agency also filed actions centered on unregistered broker charges tied to a boiler room and the failure to register security-based swaps.

Be safe and healthy this week — and please VOTE!!

SEC

Whistleblowers: The Commission continued to make large awards, this week. The agency awarded over $10 million to a person who furnished information that prompted the opening of an investigation and then assisted as it evolved, according to a release issued on October 29, 2020.

Rules: The Commission adopted a new framework for the use by Funds of derivatives on October 28, 2020. The proposal alters the rule-based approach traditionally used to one which is principle based (here). The initial proposed rules were issued for comment based on the unanimous vote of the Commission. The final rules were adopted by a 3-2 vote with Commissioners Allison Herren Lee (here) and Caroline A. Crensaw (here) dissenting, noting that the promise of the initial proposals was lost in enactment.

SEC Enforcement – Litigated Actions

Pay-to-play: SEC v. Paulsen, Civil Action No. 18-cv-6718 (S.D.N.Y.). The facts presented centered on a pay-to-play scheme involving a New York broker-dealer where John Paulsen and Deborah Kelley were employed and the New York State Common Retirement Fund. Navnoor Kang was the Director of Fixed Income and Head of Portfolio Strategy of the Pension Fund. In that capacity Mr. Kang was responsible for investing over $53 billion in fixed-income securities on behalf of the Fund. Policies of the Pension Fund precluded him from receiving gifts, benefits or consideration of any kind.

Ms. Kelly met Mr. Kang prior to his employment at the Pension Fund. Following his employment at the Pension Fund she invited him, for example, on a ski trip. In return for that and other gifts Mr. Kang used his position to direct the fixed income business to the brokerage firm employing Ms. Kelly and Mr. Paulsen. The broker-dealer’s Pension Fund business increased dramatically from $0 in the fiscal year ended March 1, 2014 to about $156 million in the next fiscal year. The subsequent year it increased to $179 million.

In late 2015 the SEC opened an investigation into the benefits provided to those involved. Prior to testimony Ms. Kelly and Mr. Kang agreed to align their stories and testify falsely to conceal the pay-to-play scheme. In late 2015 and early 2016 Ms. Kelley and Mr. Kang each falsely testified under oath before the SEC about the expenses that had been paid for by Ms. Kelly. From about 2014 through 2016 Mr. Kang, Ms. Kelly, and Mr. Paulsen are alleged to have defrauded the Pension Fund, denying the Fund its right to honest services.

During the period bribes were paid in the form of entertainment, travel, meals and other items to secure fixed-income business from the Pension Fund, according to the charges. Ms. Kelley and Mr. Paulsen sought to conceal the scheme from their employer and its internal auditors. The records of the firm contained false entries regarding the payments made to Mr. Kang. The two brokers also lied to the internal auditors. Ms. Kelley eventually pleaded guilty in the criminal case as did Mr. Kang, and settled with the Commission. U.S. v. Kang, No. 1:16-cr-00837 (S.D.N.Y.); SEC v. Kang, Civil Action No. 16-cv-9029 (S.D.N.Y.). Mr. Paulsen was charged by the Commission with violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Following trial, the Court found him liable under each Section. Remedies will be considered in the future.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 1 administrative proceeding last week, excluding 12j and tag-along-proceedings.

Unregistered brokers: SEC v. Forester, Civil Action No. 249562 (C.D. Cal. File Oct 26, 2020) is an action which names as defendants Alex Forester, Michael Micks, Yarden Krampf, Christopher Lee, Sean O’Neal, Michael Raynor and Lee Sobel. The complaint alleges that over a four-year period, beginning in 2015, Defendants worked for a boiler room, soliciting people to purchase securities using cold calls. Those solicited were convinced to purchase securities in amounts and at prices that those behind the scheme arranged. Over $2.8 million in commissions were paid. The complaint alleges violations of Exchange Act Section 15(a)(1). Defendants Forester, Hicks and Krampf settled, consenting to the entry of permanent injunctions. The question of penalties was reserved for later consideration. See Lit. Rel. No. 24952 (Oct. 27, 2020).

Manipulation: SEC v. Taub, Civil Action No. 24951 (D.N.J.) is a previously filed action which names as defendants Joseph Taub and Elazar Shamalo. Defendants resolved this action and a final judgment was entered by consent against each Defendant enjoining them from future violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). Conduct based injunctions were also imposed with a 10 year duration. Defendants were, in addition, directed to pay disgorgement in the amount of $395,207 and prejudgment interest of $20,007, offset in part by a forfeiture order entered in a related civil forfeiture action. The underlying conduct, which took place over a two-year period, began in 2014. During the period Defendants placed at least 30,000 manipulative coordinated trades. See Lit. Rel. No. 24951 (Oct. 23, 2020).

Security-based swaps: In the Matter of Tradent Capital Markets Ltd, d/b/a Tradenet, Adm. Proc. File No. 90261 (October 23, 2020). Respondent is a private company based in Israel. Many of its customers are also U.S. citizens and/or based here. Since January 2016 Tradent has operated a website – Tradenet.com – that offers educational programs to customers which can teach them to trade U.S. and other securities. Buyers can purchase a Day Trading Educational Package designed to teach them the basics. The contract the purchaser executes describes the purchase and sale of securities, options and contracts for differences although no securities are actually purchased. The firm offered four other packages priced at different levels that gave the customer the opportunity to fund an account from which they could obtain a 70% interest in the net profits or no more than a specified amount of the losses which were limited by a mechanism that halted trading after a certain dollar level. Over a three-year period, beginning in November 2017, over 5,000 customers in the U.S. purchased and operated Tradent accounts. Those customers received about $1.7 million in payouts. The funds were transferred to U.S. accounts. No registration was in effect. The Order alleges that the contracts offered and sold by Tradent were security-based swaps and alleges violations of Securities Act Sections 5(e) and 6(1). In resolving the matter, Respondent took certain remedial actions and cooperated with the staff. The company consented to the entry of a cease and desist order based on the sections cited in the Order. The firm also agreed to pay a penalty of $130,000 which will be transferred to the U.S. Treasury.

CFTC

Cooperation: The Division of Enforcement issued new guidance regarding self-reporting and cooperation. The guidelines will be added to the Enforcement Manual. According to the release the “guidance describes potential scenarios where the staff may recommend the recognition of respondent’s self-reporting, cooperation or remediation . . .” which may result in a smaller penalty (here).

Singapore

Report: The regulator published a report forecasting Singapore GDP using SPF Data. The report was originally published in the Microeconomic Review (here).

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