SEC Chairman Jay Clayton called for greater international cooperation in the enforcement of anti-corruption statutes such as the Foreign Corrupt Practices Act in remarks delivered before the Economic Club of New York on September 9, 2019 (here). The comments followed a review of initiatives taken by the Commission under his tenure to aid the main street investor, a key focus of the agency under Chairman Clayton.

The FCPA, spawned from corruption uncovered in the now infamous Watergate Hearings was written into law through SEC enforcement efforts that began as a lonely crusade for the United States. When the Act was written in the late 1970s, the country was well aware that it was largely going it alone in its effort to stem corruption in international business transactions. Nevertheless, then Enforcement Chief Stanley Sporkin, Senator William Proxmire and others championed the legislation which began with a narrow focus that has expanded over the years.

While enforcement was sporadic in the years immediately following the passage of the legislation, the creation of the OCED in the late 1990s lead to increased recognition of the need for such laws and more enforcement. Today many countries have passed anti-corruption laws similar to the FCPA. Nevertheless, Chairman Clayton is clear correct that the U.S remains the leader when it comes to enforcement efforts.

The Chairman is also correct in stating that increased international efforts are the best enforcement strategy. Illustrating the point through the use of economic game theory, Mr. Clayton posited that when everyone is enforcing FCPA type statutes, the rogue country may have an incentive to change its unethical conduct. On the other hand, when the enforcer is something of a lone wolf, there may be incentives to not implement anti-corruption laws. Indeed, common sense suggests such a result – it may be easier to ignore ethical standards and “cheat” as the Chairman said, than act in accord with anti-corruption laws under such circumstances.

What all of this suggests, as Mr. Clayton stated, is that more enforcement efforts are needed around the globe. That “more,” however, must come from other countries and institutions that are willing to work with the SEC, DOJ, OECD, and countries such as the U.K., Canada that have stepped-up enforcement.

Such efforts can begin with the SEC and DOJ streamlining enforcement with quicker, more focused, inquiries that hold accountable those who violate the FCPA. Those efforts can continue by increasing working arrangements and efforts with international organizations and other countries to ensure the kind of world-wide efforts the Chairman envisioned. A good place to start may be the Congressional budget hearings that will be held next month – the SEC and DOJ will each need additional resources to engage in the kind of efforts that the Chairman envisioned.

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Offering frauds have long been a staple of SEC enforcement. Many of these actions are straight forward, involving the sale of securities for a virtually worthless or non-existent business. Some are Ponzi schemes. Virtually all of these actions promise the investor a safe investment with good to sky-high returns.

The SEC’s most recent action in this area is different. It is based on the sale of unregistered securities. The seller is a securities law recidivist and operator of a boiler room. Unlike many cases in this area it did have a business – cartoons. Specifically, it claimed to operate a cartoon streaming service for kids. Unlike many operators in this area investors were not promised safety or sky-high returns. The company marketed itself “as an on-demand entertainment service for children that offers animated cartoons, live-action shows, games, and music via the web and mobile applications,” according to the complaint. SEC v. Toon Goggles, Inc., Civil Action No. 2:19-cv-07687 (D. Ca. Filed Sept. 5, 2019).

Defendant Ira Warkol founded Toons Goggles in 2010. The company focused on marketing entertainment for children. Nevertheless, in 2011 the California Department of Business Oversight issued a cease and desist and refrain order against Mr. Warkol.

Over a four-year, period beginning in 2012, Mr. Warkol raised over $19 million from at least 400 investors in a number of states. The shares were not registered or exempt. The California order was not disclosed to potential investors. While some of the offerings claimed to be limited to accredited investors, there were no verification procedures. The transaction records maintained were inadequate to document the transactions.

Although the five offerings were conducted at different points in time and purported to involve different vehicles for children’s entertain such as a streaming app or the creation of more content, the SEC alleged that they all constituted one, integrated, illegal offering. Those offerings were:

October 2011: This offering continued for about four years. It utilized a PPM and claimed to be exempt from SEC registration and limited to accredited investors. Its purpose was to raise capital for a Toons Goggles related entity that would acquire more cartoon content and develop material for Toons Goggles.

September 2013: The purpose of this offering was to create and/or publish mobile games. Some of the games would be based on cartoon shows appearing on the Toon Goggles platform. Investors were supposed to be accredited.

October 2013: This offering, tied to a related entity, used a PPM and claimed to be exempt from SEC registration. It was also supposed to be limited to accredited investors. 75 units that converted to Toons Goggles shares were offered.

November 2013: This offering also claimed to be exempt from SEC registration and limited they accredited investors. It was related to the October 2013 offering. The units were convertible into shares of another firm controlled by Mr. Warkol.

Yelta Productions: An offering of shares in this firm began about mid-2015. The firm was supposed to create, distribute, license and/or publish a cartoon series and related materials.

Since none of the offerings were registered or exempt. The Commission alleged that each violated Securities Act Sections 5(a) and 5(c). In addition, Mr. Warkol, who orchestrated the solicitations and securities sales, and was paid transaction based compensation. He was not a registered broker-dealer. Accordingly, the complaint also alleges violations of Exchange Act Section 15(a). The case is in litigation. See Lit. Rel. No. 24588 (Sept. 6, 2019).

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