by T. GormanPosted on Posted in SECActions

The article published each Monday typically reviews the actions filed the prior week. This week the article is being divided into two parts in view of the number of cases filed by the Commission as the fiscal year closed on Wednesday. The first half of the article is being published today. The second part will be published tomorrow.

The Commission closed out the Government fiscal year by filing a torrent of cases. Many of the cases reflect the extensive data analysis the Enforcement Division has employed in recent years. Tha strongly suggests that issuers, private companies and market professions carefully analyze their current compliance policies and procedures to ensure that the proper statistical metrics are being analyzed and reviewed.

The cases filed by the agency in the closing days of the quarter and fiscal year cover a range of areas. Those included Regulation SHO on short selling, manipulative trading which includes spoofing, insider trading, offering fraud, microcap fraud, financial fraud, unregistered brokers, internal controls, cherry picking and share class selection issues despite the very successful initiative the Division conducted.

Be safe and healthy this week

SEC

Regulations ATS and SCI: The Commission proposed to extend Regulations ATS and SCI to include Treasuries and other government securities, according to a release dated September 28, 2020.

Whistleblowers: In a September 30, 2020 release the agency announced the payment of almost $30 million for information from two whistleblowers. Two days earlier another press release announced the payment of $1.8 million to a company outsider.

SEC Enforcement – Filed and Settled Actions

The Commission filed 21 civil injunctive actions and 19 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Reg SHO: In the Matter of Morgan Stanley & Co., LLC, Adm. Proc. File No. 3-20103 (Sept. 30, 2020). Regulation SHO requires the netting of all positions in a particular equity security absent an exception. Here Respondent did not net the firm’s long and short swap positions in its prime brokerage business as required by the Regulation. Yet no exception permitted the firm to avoid the requirement. Respondent agreed to implement procedures which will result in compliance of its rules. The Order alleges violations of Regulation SHO. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Regulation cited. The firm agreed to pay a $5 million penalty and was censured.

False records: In the Matter of Meredith A. Simmons, Esq., Adm. Proc. File No. 3-20144 (Sept. 30, 2020) is an action an attorney who served as the CCO for Adviser A and its affiliated broker dealer. In October 2016 Respondent’s supervisor asked her to memorialize the compliance reviews that she had previously conducted as CCO. The supervisor pointed out that he was making the request because he was concerned about a particular transaction and possible future regulatory inquiries into an earlier investment. The reviews were not done. About 11 months later when Respondent’s supervisor asked about the reviews. Respondent prepared two memos, one dated just after the investment transaction which was sent to the supervisor. The second was backdated to before that deal and was put in the file. Later, when OCIE conducted an inspection, they were furnished with the second backdated memorandum. The Order alleges violations of Advisers Act Section 204(a). Respondent consented to the entry of a cease and desist order based on the section cited. In addition, she is precluded from serving serving in any compliance capacity with a broker dealer or adviser but may apply after three years to end the restriction. She is also denied the privilege of appearing before the Commission as an attorney for 12 months after which she may request reinstatement. Respondent will pay a penalty of $25,000 that will be transferred to the U.S. Treasury.

Perks: In the Matter of Hilton Worldwide Holdings, Inc., Adm. Proc. File No. 3-20109 (Sept. 30, 2020) centers on a three year period beginning in 2015 when the global hospitality firm failed to disclose certain perks extended to its CEO, President and board members. Those include expenses associated with the use of the corporate aircraft and hotel stays. The Order alleges violations of Exchange Act Section 13(a) and 14(a) and the related rules. Respondent resolved the matter by consenting to the entry of a cease and desist order based on the Sections cited in the Order and agreeing to pay a penalty of $600,000 which will be transferred to the U.S. Treasury. The size of the penalty was limited in view of the firm’s cooperation.

Disclosure controls: In the Matter of HP Inc., Adm. Proc. File No. 3-20112 (Sept. 30, 2020). HP, the portion of Hewlett-Packard that retained the personal systems and personal investment segment of the firm in 2015 when segments were separated, was charged with engaging in a two-fold scheme. In one part that began in the second quarter of 2015, certain regional managers used a variety of incentives to accelerate or “pull in” sales that they otherwise expected to be pulled in later. In addition, the management in one region sold printing supplies to distributors known to be selling outside their territory, so-called “gray marketing.” Despite the risk that those sales practices could negatively impact operating profit in future quarters, there was no disclosure. In June 2016 the firm announced that it was changing its go-to-market model. The change was intended in part to address these two practices. The company took a net revenue reduction of about $450 million in the third and fourth quarters of that year. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the matter Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, the firm will pay a penalty of $6 million that will be transferred to the U.S. Treasury.

Manipulation: SEC v. Cicarelli, Civil Action No. 1:20-cv-11789 (D. Mass. Filed Sept. 30, 2020) is an action that names Drew M. Cicarelli, a promoter of microcap stocks, as a defendant. In May 2012 Defendant was retained by a group to manipulate the share price of Rarus Technologies, Inc. to permit the group to secretly dump their stock. Defendant used a group of intermediaries to promote the stock and conceal the group. Defendant was paid $150,000. Between June 6 and 7, 2012 over 3.3 million shares of Rarus were sold during the promotion run in the name of Defendant’s firm. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Re No. 24940 (Sep. 30, 2020). The U.S. Attorney’s Office for the district of Massachusetts filed a parallel criminal case.

Offering fraud: SEC v. Heckler, Civil Action No. 20-civ-4654 (E.D.N.Y. Filed Sept. 30, 2020) is an action which names as defendants Rand Heckler, a FINRA barred broker-dealer, and his firm. In 2015 Defendant Heckler solicited over $700,000 from an investor and his son, claiming that he ran a successful hedge fund. In fact, there was no hedge fund. Mr. Heckler misappropriated the funds and tried to conceal his misdeeds by sending phony account statements to the investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. See Lit. Rel. No. 24938 (Sept. 30, 2020).

Microcap fraud/manipulation: SEC v. Everett, Civil Action No. 2:20-cv-08985 (C.D. Cal. Filed Sept. 30, 2020) is an action that names as defendants Patrick J. Johnson, Charles Everett and NVC Fund, LLC. Each is affiliated with various microcap issuers. This case centers on three Microcap Firms whose shares were suspended from trading in early 2018. Beginning in late November 2017 Defendant Johnson and Everett fabricated debts owned by two of the Firms whose shares were later suspended. Those debts were acquired by a third party and extinguished in return for shares that were then sold to the public although they were not registered. Defendant Everett received klick backs on the sales. The principal of private equity fund NVC then pumped the shares of the Microcap Firms. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24937 (Sept 30, 2020).

Manipulation: SEC v. Stohlman, Civil Action No. 20-civ-04803 (E.D. Pa. Filed Sept. 30, 2020) is an action which names as defendants Joel Stohlman, Riciardo Richardson, Gary Wolff and Edward Heil. Mr. Heil is an attorney while the other three defendants are stock promoter. Over a two-year period, beginning in 2014, Defendants sought to manipulate the shares of three microcap stocks. In connection with those efforts they retained a person who supposedly was tied to a network of corrupt brokers that would conduct the manipulation. In fact, the person was an undercover FBI agent. The complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Sections 9(a)(1) and 10(b). The complaint is pending. See Lit. Rel. No. 24935 (Sept. 30, 2020).

Offering fraud: SEC v. McCabe, Civil Action No. 5:20-cv-04800 (E.D. Pa. Filed Sept. 30, 2020) is an action which names as defendants Robert McCabe and McCabe Properties. Over a 10 year period beginning in 2010 Defendant McCabe and his firm defrauded dozens of investors, raising over $1 million through the sale of shares in his entity. Mr. McCabe told investors his firm owned a profitable pharmaceutical firm and that by purchasing the shares they acquired an interest in that firm. In fact, there was no pharmaceutical firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 24934 (Sept. 30, 2020).

Unregistered broker/offering fraud: SEC v. Staisil, Civil Action No. 20-cv-2834 (D. Md. Filed Sept. 30, 2020). Previously the Commission brought a related action centered on Global Credit Recovery, a $345 million Ponzi-like scheme. A permanent injunction was obtained in September 2019. There was also a parallel criminal action. Defendant Michael Stasil, formerly a registered representative, acted as an unregistered broker and actively recruited investors over a five year period beginning in 2013 for that firm. He was paid $400,000 for his work. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24933 (Sept. 30, 2020).

Offering fraud: SEC v. Silea, Civil Action No. 4:20-cv-00737 (E.D. Tx. Filed Sept. 29, 2020) is an action which names as defendants Sebastian Silea, Christian Kranenberg and KS Cartel LLC, respectively the CFO of KS Cartel, the CEO of that firm, and an entity controlled by the two individual defendants. Over a period of about 3 years, beginning in 2017, Defendants raised about $1.1 million from 46 investors who purchased unregistered membership units in KS Cartel. The individual Defendants falsely claimed to be highly experienced industry professionals. They guaranteed no greater loss than half of the initial investment. Those individuals also estimated the investment would pay a 20-30% return per month. There was no basis for the claims; most of the money was not invested. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 24930 (Sept. 30, 2020).

Offering fraud: SEC v. Karlsson, Civil Action No. 20-civ-04615 (E.D.N.Y. Filed Sept. 29, 2020) names as defendants Roger Nils-Jonas Karlsson who describes himself as a System Analysis Manager. Over a period of about seven years, beginning in late 2012, Defendants marketed an investment called a Pre Funned Reversed Pension Plan that claimed to be the first such instrument. The instrument was supposedly developed by world class economists and had “huge” payouts tied to the value of gold. At least 2,200 investors acquired interests in Eastern Metals. The initial payment was $99. In the last 18 months about $3.5 million in digital assets were transferred to Defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24932 (Sept. 30, 2020).

Offering fraud: SEC v. Mixon, Civil Action No. 3:20-cv-00650 (M.D.L.A. Filed Sept. 29, 2020) is an action which names Todd Mixon as a defendant. Mr. Mixon represented to investors that he had learned to invest in foreign currency and was now a trader. Over a two-year period, beginning in August 2017, Defendant raised about $576,000 from investors by using a series of misrepresentations about the use of the funds and his ability to redeem their investments. The complaint alleges violations of each subsection of Securities Act Sections 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24931 (Sept. 30, 2020).

Unregistered broker/offering fraud: SEC v. Newman, Civil Action No. 0:20-cv-61976 (S.D. Fla. Filed Sept. 29, 2020) is an action which names as a defendant Mason Newman, formerly a registered representative. This action centers on an offering fraud regarding the sale of shares in NIT Enterprises by its former CEO and two barred brokers. In that action the Commission alleged that over 100 retail investors were defrauded. In this case, and the companion action cited below, the agency alleges that Defendant Newman, and Christian Baquerizo and Kevin Cardenas in the companion action, raised about $1.4 million selling unregistered NIT shares to retail investors. About $500,000 was paid in undisclosed commissions. Investors were cold-called by the three Defendants and furnished with false information regarding the firm and its prospects. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See also SEC v. Baqueizo, Civil Action No. 9:20-cv-81763 (S.D. Fla. Filed Sept. 29, 2020); Lit. Rel. No. 24936 (Sept. 30, 2020).

Offering fraud: SEC v. Gity, Civil Action No. 2:20-cv-14342 (S.D.F.L. Filed Sept. 29, 2020) is an action which names as the defendant, Thomas J. Gity, a convicted felon with no professional financial industry experience. Over about 1 year, beginning in January 2018, Defendant raised at least $6.8 million from 18 investors who were told that Mr. Gity was a highly- profitable digital asset trader who had never lost money. In reality little of the investor capital was put in a trading account; a significant part of the money was transferred to Defendant’s son. The complaint violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 2:20-cv-14342 (Sept. 29, 2020).

Financial fraud: In the Matter of Manitex International, Inc., Adm. Proc. File No. 3-20099 (Sept. 29, 2020) is a proceeding which names as a Respondent the manufacturer and distributor of heavy equipment. Beginning as early as 2014 the firm and its senior officers engaged in three schemes – COO Andrew Rooke and GM Stephen Harrison as to the first and CFO Michael Schneider as to the second. The schemes falsified the firm financial statements. In the first, the company improperly accounted for, and misled the auditors about, its inventory. Specifically, the firm created false inventory lists and shipping documents that were furnished to its auditors. There was a $1.39 million inventory short fall. In the second, Manitex improperly recognized revenue of about $12 million by using an improper bill and hold scheme. The firm undertook a series of remedial acts and cooperated with the investigation. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 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. It also agreed to pay a penalty of $350,000 which will be transferred to the U.S. Treasury. See also In the Matter of Andrew Rooke, Adm. Proc. File No. 3-20100 (Sept. 29, 2020)(based on same facts; settled with a cease and desist order based on the same sections as above, the denial of his privilege to appear before the Commission as an accountant; a bar from serving as an officer or director; and payment of a penalty of $80,000 that goes to the U.S. Treasury); In the Matter of Stephen Harrison, Adm. Proc. File No. 3-20101 (Sept. 29, 2020)(based on same facts; resolved with a cease and desist order on the same basis as the others and an officer and director bar; no penalty imposed based on cooperation; In the Matter of Michael Schneider, CPA, Adm. Proc. File No. 3-20102 (Sept. 29, 2020)(based on same facts; resolved with a cease and desist order as in the other cases; denial of privilege to appear before Commission as an accountant and an officer/director bar, with right to apply for re-entry as to each after 5 years; and payment of a penalty of $55,000 that will be transferred to the U.S. Treasury).

Offering fraud/Ponzi scheme: SEC v. Wallach, Civil Action No. 3:20-cv-06756 (Sept. 29, 2020) involved a Ponzi scheme operated by defendant Lewis Wallach, the former president of Professional Financial Investors, Inc. The firm was supposedly a real estate investment

management firm based in California. Over $26 million was raised from investors as part of a larger scheme operated by the now deceased founder of the firm. Misrepresentations were made about the finances of the firm and its resources. Mr. Wallach misappropriated the funds and diverted them to his personal use. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Part II of this article will be published tomorrow

Tagged with: , , , ,

by T. GormanPosted on Posted in SECActions

This is the second of two posts which reviewing the new amendments to the SEC’s whistleblower rules. The first appeared on Wednesday. It reviewed the background and the proposed amendments to the rule (here). This post analyzes the comment letters and the final rule amendments.

Overview of the Comment Letters

The Commission received approximately 150 comment letters. The positions advocated ranged the from those who thought the program was a huge success and should not be changed to persons who clearly did not favor it. Many of the Comments centered on the provisions regarding the amount of the award and what a number of commentators saw as an effort to impose some type of cap on the amount. Others focused on questions keyed to the program documents discussed in a technical amendment and to the provisions dealing with related actions. A sampling of the comments is set forth below.

Better Markets: The letter notes that by “any measure, the statutorily mandated Whistleblower Program has been a wild success, yet the Commission is proposing changes that risk snatching defeat from the jaws of victory.”

SIFMA: The letter states that “SIFMA supports many of the Commission’s ideas set forth in the Proposing Release.”

Senators: A letter by six Senators — Sherrod Brown, Jack Reed, Elisabeth Warren, Patrick Leahy, Chris Van Hollen, and Cristopher Coons and one from Senator Chuck Grassley — addressed the question of what all viewed as an effort to cap awards. As the letter from the six Senators states: “Regrettably, the Proposal could deter whistleblowers . . .” by creating confusion because “it suggests the SEC could cap awards.” A letter by the National Whistleblower Center and another from two Stanford Professors essentially echoed this position.

Center for Capital Markets Competitiveness: This letter states in part that the “bounty program . . . administered by the SEC has operated on a broad set of nebulous and subjective criteria. While a certain degree of confidentiality is required under Section 21F . . . the paucity of details in the orders granting (and denying) bounty awards provides little if any decision-useful information to regulated persons as to what conduct they should avoid.”

The Amendments Adopted

On September 23, 2020 the SEC adopted final amendments to its whistleblower rules (here)(“Final Release”). Those adopted focused on expanding the scope of the awards, giving the agency discretion to increase small awards, memorializing existing practice to eliminate situations where there are other award programs and addressing Digital Realty. The Final Release ends with a section on Guidance.

DPAs & NPAs: The Commission adopted the proposed amendments regarding DOJ DPAs and NPAs. The proposal regarding SEC non-judicial and administrative proceedings was also adopted. The new provisions thus expand the scope of the whistleblower provisions. The program will now extend to certain DOJ actions involving DPAs and NPAs. Under the amendments the program will also extend to Commission actions that are outside the context of a judicial or administrative proceeding. See Rule 21F-4(d). The Commission chose not to include state actions in the amendments, indicating a lack of insight into those matters. See Rules 21F – 4(d) and (e).

Amounts: The Commission also resolved the question about the amounts by focusing on smaller awards. Traditionally about 75% of the awards made under the program are $5 million or less. The amendments added Exchange Act Rule 21F-6(c) which incorporates a presumption for awards of that size stating that the Commission will pay a meritorious claimant the statutory maximum amount if no negative criteria are present. This will permit the agency to maximize small awards.

In contrast, the Commission chose not to adopt proposed Rule 21F-6(d)(2) regarding large awards. That provision would have formalized a process under which the agency would conduct an enhanced review of certain large awards and possibly make downward adjustments. This ended the controversy that many commentators viewed as an effort to impose a “cap” on the amount of large awards.

Other cases: An amendment to Rule 21F-3(b) essentially codifies the Commission’s approach to determining whether an action is related for purposed of making an award. As the press release issued with the Final Release notes: “This amendment codifies the Commission’s approach to determining whether an action is a related action . . .” If there is a separate award scheme the other action would not be eligible for an award.

Digital Realty: To address the Court’s ruling regarding the definition of the term whistleblower, the Commission will modify Rule 21F-2 , creating a uniform definition of the term “whistleblower” — the key issue in the Supreme Court’s decision. Accordingly, there will be a uniform definition for Section 21F. The Commission also clarified the extent of retaliation protection by amending Rule 21-2(H)(2) to protect certain lawful acts. The agency is also issuing interpretative guidance defining the concept.

Other provisions: The Commission approved a series of amendments to speed, clarify and enhance the process. See, e.g., Rule 21F-4(e)(clarify definition of “monetary sanctions”); Rule 21F(6)(amended to clarify agency discretion in applying award factors and fixing amount); Rule 21F-9 (amended to give agency more flexibility); Rule 21F-8 (discussing forms to be used); Rule 21F-12 (clarifying list of materials agency can consider); Rule 21F-13 (materials that can comprise administrative record).

Interpretative guidance: The Commission is also publishing interpretive guidance to clarify the meaning of the phrase “Independence analysis” which is key to the award process. Under that process the person must provide “evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information,” according to the Final Release. The guidance goes on to discuss other factors the agency will consider in making an assessment.

Adoption: The Commission approved and adopted the proposals detailed above by a 3-2 vote of the Commission. Commissioners Allison Herren Lee and Caroline A. Crenshaw dissented. Commissioner Herren expressed concern about the provisions granting discretion to the Commission regarding the amount of the awards. As she stated in her comments: “I find myself unable to support this rule because of the treatment given to the central issue of the Commission’s discretion to reduce awards . . . “ in certain cases.

Commissioner Crenshaw agreed with her fellow Commissioner. She also expressed concern with the guidance regarding the phrase independent analysis. In this regard the Commissioner noted that “I worry this guidance will inadvertently impact the perception of the type of information the Commission considers valuable.”

Each comment by the two dissenting Commissioners echoes statements made in the comment letters. Each was considered in the Final Release. Some have lingered from the beginning of the program.

Discussion

The SEC whistleblower program is by any measure a huge success. Since its inception nearly a decade ago there is no doubt that it has made significant contributions to the success of the SEC Enforcement Program.

The rule amendment process which generated a significant amount of consternation, may well be a reflection of the program success. As Better Markets stated in its comment letter, the fear was that the agency would somehow “mess-up” a successful program.

Now, however, after wading through 150 comment letters, venting arguments about “caps” and “discretion” and the amount of awards, the final rules have been issued. The headline of a recent press release by the National Whistleblower Center may tell it all: “U.S. Securities and Exchange Commission’s Vote Reaffirms Broad Support for Whistleblower Program But Includes Worrisome Changes.” Senator Chuck Grassley posted a statement of approval on his website the day the amendments were approved. Nobody would dispute the success of the SEC whistleblower program or that it has been broadened and strengthened.

Tagged with: ,