by T. GormanPosted on Posted in SECActions

Insider trading is often thought of as difficult problem to detect and a complicated violation to prosecute. Sometimes that is true. The Commission has brought a number of very difficult and complex actions over the years. Many of those involved multi-million dollar transactions and trading into the U.S. markets from foreign countries. Nevertheless, the Commission and its data analytics team is able to tack together bits and pieces of trading, information about IP addresses and telephone or text records to quickly bring an action against those involved.

Other cases are smaller, involving trading in the thousands of dollars and only in the U.S. While these cases do not draw the headlines like the huge multi-million deal where eight figure trading profits are not uncommon, the agency still diligently puts together the bits and pieces of evidence to prove the case. And, contrary to what many believe, the same effort goes into prosecuting the small, one-person case and a few thousand dollars of trading profits – its all illegal. That is at least one lesson from the Commission’s most recent case in the area, Jana Faith Kiena, CPA, Adm. Proc. File No 3-19824 (June 5, 2020).

Ms. Kiena, a CPA with an inactive license, was employed at Illumina, Inc. in the revenue department in 2019 as a contract employee. She processed revenue related to monthly service contracts for the firm. She also participated in what the firm called “group huddles” – phone meetings where the staff chatted about the revenue flow.

In late June 2019 Ms. Kiena participated in one “huddle” with seven other employees and an accounting manager. The group in the huddle learned that revenue for the quarter would be disappointing. On July 2, 2019 Ms. Kiena used her credit card to obtain a cash advance. She then paid $13,638.33 to purchase July 12, 2019 put option contracts on ILMN, her firm The strike price was $365 per share. Six days later she took $3,096 from her savings account and purchased more put options.

On July 11, 2019 Illumina announced that its preliminary revenue for the second quarter would be lower than expected, updating full year guidance. The stock price dropped from $363.66 to $305.05 or 16%. The next day Ms. Kiena sold the put options, securing a gain of $249,227.92. Within a month Ms. Kiena self-reported to the Commission staff. The Order alleges violations of Exchange Act Section 10(b).

To resolve the proceedings Ms. Kiena consented to the entry of a cease and desist order based on the section cited in the Order. She also agreed to the entry of an order denying her the privilege of practicing before the Commission as an accountant with the right to request consideration for a reinstatement after two years. In addition, she will pay disgorgement in the amount of her trading profits and a penalty equal to half that amount.

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by T. GormanPosted on Posted in SECActions

“It’s déjà vu all over again” Yogi Berra famously said. Is it? A flu virus, riots over injustice and angst over where everything is going – and that was 1968. And now we have a flu virus, riots and angst. And yet, the country keeps opening, the markets keep going up and the Commission moves forward with meetings, whistleblower awards and more.

Enforcement continued to investigate COVID related issues while filing cases tied to inspections, undisclosed conflicts based on fees, and undisclosed corporate perks.

Stay safe, stay healthy.

SEC

Whistleblower: The agency awarded $50 million to a whistleblower who furnished detailed, firsthand observations of misconduct by a company that resulted in a successful enforcement action and the return of funds to shareholders. This is the largest such award to an individual in the history of the program.

SEC Enforcement – Filed and Settled Actions

The Commission filed 1 civil injunctive action and 3 administrative proceedings last week, excluding 12j and tag-along-proceedings.

Proxy disclosures – compensation: In the Matter of Argo Group International Holdings, Ltd., Adm. Proc. File No. 3-19822 (June 4, 2020) is a proceeding which names as a Respondent the firm, an international underwriter of insurance. The action centers on the compensation paid to its CEO and President. Specifically, over a four-year period beginning in 2014, the CEO was paid over $5.3 million through a wide range of perquisites and personal benefits. The proxy failed to disclose most of the perquisites and personal benefits provided to the CEO. After his resignation in 2019 the CEO reimbursed the firm for certain items. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). To resolve the proceedings the firm agreed to cooperate with the Commission. Respondent consented to the entry of a cease and desist order based on the Sections cited in the Oder. It also agreed to pay a penalty of $900,000.

Marketing materials: SEC v. Navellier & Associates, Inc., Civil Action No. 3:17-cv-11633 (D. Mass.) is a previously filed action against the registered investment adviser and its founder and CIO, Louis Navellier. The action centered on false statements regarding the firm’s Vireo AlphaSector investment strategies. Previously, the Court granted partial summary judgment in favor of the Commission. The Court entered final judgment against the Defendants precluding future violations of Advisers Act Sections 206(1) and 206(2). The Court also directed that the defendants, on a joint and several basis, pay disgorgement of $28,964,571 and prejudgment interest of $6,513,619. In addition, the firm was ordered to pay a penalty of $2 million while Mr. Navellier was directed to pay $500,000. See Lit. Rel. No. 24826 (June 4, 2020).

Inspections: SEC v. E*Hedge Securities, Inc., Civil Action No. 1:20 -cv-22311 (S.D. Fla. Filed June 3, 2020). E*Hedge, controlled by Defendant Devon Parks, is an Exempt Reporting Adviser with the Commission. Its Form ADV, executed by Mr. Parks, states that the firm is a multi-state, internet investment adviser based in Las Vegas. In registering with the Commission as an investment adviser the firm relied on two exemptions. One is Rule 203A-2(d) while the second is Subsection 2(e) of the same rule. The former focuses on firms that are “required by the laws of 15 or more States to register as an investment adviser . . .” The latter applies to advisers that provide investment advice “to all clients exclusively through an interactive website . . .” E*Hedge registered under Rule 203A in early 2017. By 2019 the firm claimed to provide a platform for public offerings and private placements. By the next year – March 2020 – the business model apparently shifted. At that point E*Hedge began offering products and treatments related to COVID-19. The firm registered a website named “Covid19invest.com.” Over a two-month period in late 2017 the Commission’s exam staff from the LA Regional Office attempted to obtain materials for an exam. No documents were produced. No exam was conducted. By early 2020 the Commission’s exam staff from the Miami Office – an amendment to the firm’s filings claimed it was now based in Miami – sought to secure documents and conduct an exam. The staff received a series of excuses and requests for extensions. No records were produced, although those sought were required to be kept. No exam was conducted. In the end, the Commission learned that E*Hedge does not have any clients; it does not provide investment advice through an interactive website. Although the firm continues to hold itself out as an internet adviser, the E*Hedge is not eligible to register under the provisions of the Rule. The complaint alleges violations of Advisers Act Section 204(a) and 203(a). The case is pending. See Lit. Rel. No. 24825 (June 3, 2020).

Conflicts – share class selection: In the Matter of Oxbow Advisors, LLC, Adm. Proc. File No. 3-19817 (May 29, 2020). Oxbow is a Commission registered investment adviser. At various points in time beginning in January 2014 and continuing through 2019, the firm failed to properly disclose 12b-1 fees paid in connection with client purchases of certain shares. Oxbow advised clients to hold mutual fund share classes that charged 12b-1 fees despite the fact that lower-cost share classes of the same funds were available – many funds will permit clients to exchange shares that carried the fees without charge. At the beginning of the period, Oxbow disclosed in Form ADV Part 2A, Item 12 that a registered representative of an affiliated broker dealer “may . . . receive a portion of the distribution and Rule 12b-1 fees from the issuers of a limited number of mutual funds . . .” More recently, in March 2017 Oxbow amended its brochure to add disclosure stating that its investment adviser representatives of an affiliated broker-dealer might receive distribution fees and 12b-1 fees which “may create a conflict of interest by giving the Oxbow Supervised Person an incentive to recommend investment or insurance products based on compensation received by the Supervised Person, rather than on the client’s needs.” The disclosures made by Oxbow were inadequate, the Commission concluded. As an investment adviser, Oxbow owed its clients full and fair disclosure. Here the disclosures made did not provide sufficient detail on the conflict. In addition, the firm failed to maintain policies and procedures to properly implement its disclosure obligations. The firm’s failures violated Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Respondent agreed to comply with certain undertakings tied to the disclosure issues, to the entry of a cease and desist order based on the sections cited in the order and to a censure. The firm also agreed to pay disgorgement in the amount of $200,000, prejudgment interest of $31,958.25 and a penalty of $90,000. See also In the Matter of William Vescio, Adm. Proc. File No. 3-19820 (June 2, 2020)(proceeding against owner of Vescio Asset Management, LLP based on failure to disclose conflict tied to payment of 12b-1 fees; resolved with consent to a cease and desist order based on Advisers Act Section 206(2) and Securities Act Sections 17(a)(2) & (3) and a censure; the payment of disgorgement of $275,000, prejudgment interest of $7,631; the firm previously settled).

DOJ

Compliance: The Department issued an updated version of its Evaluation of Corporate Compliance Programs (June 2020). This version appears to be little changed from the prior version issued last year.

Credit ratings: The European Securities and Markets Authority fined Scope Ratings GmbH €640,000 and issued a public notice for breaches of the Credit Ratings Agency Regulation. The matter was in relation to the systematic application of its 2015 Covered Bonds Methodology and its revision.

Hong Kong

Unlicensed activity: Chong Kin Ting, former director and shareholder of Wonderful Wealth Group Ltd., was convicted in the Eastern Magistrates’ Court on June 4, 2020 of engaging in business dealings without being licensed. Mr. Chong, who pleaded guilty on four counts, was fined $8,000 and ordered to pay the costs of the Securities and Futures Commissions’ investigation. The charges were based on conduct in September 2012 during which Mr. Chong solicited two investors in connection with trading futures contracts and options for the firm.

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