by T. GormanPosted on Posted in SECActions

Internal controls have been a key theme for the Enforcement Division in recent months. Last fall for example, the Division issued a section 21(a) report discussing internal controls based on a series of cyber-security investigations. That discussion was grounded in the fundamentals of the Exchange Act provisions first enacted as part of the Foreign Corrupt Practices Act in 1977. It also added comments on elements such as training and knowledge – human components not typically referenced in control issue discussions.

In its second group of post-shutdown case filings, the Commission instituted settled administrative proceedings involving four issuers who have repeatedly admitted to internal control deficiencies to reinforce its point. The four proceedings involve a range of issuers. Each admitted to years of violations, from seven to ten years. Three of the four firms cured the deficiency – only one had not. Each firm settled, consenting to a cease and desist order precluding future violations. Each firm paid a penalty from a low of $35,000 to a maximum of $200,000. Only one firm was directed to implement an undertaking – it has failed to cure the deficiencies after ten years.

Typical of the proceedings is the action involving Lifeway Foods, Inc.: In the Matter of Lifeway Foods, Inc., Adm. Proc. File No. 3-18970 (Jan. 29, 2019). Respondent is a dairy food producer incorporated in 1986 which is based in Morton Grove, Illinois. The firm is controlled by a family.

For nine years Lifeway Foods had “significant deficiencies in the aggregate that constituted a material weakness in 2016,” according to the Order. Those material weaknesses, beginning as early as 2007, resulted from maters such as: Incomplete, inadequate and undocumented financial reporting processes; the lack of adequate financial statement review; and the failure to consistently demonstrate effective preparation, support and review of journal entries and account reconciliation. Many of the weaknesses recurred and were tied to financial reporting, accounting or entity controls. During the period three restatements were announced.

In late 2013 Respondent began remediating the issues. Two years later a SOX consultant was retained to assist. By the end of 2017 the process was completed. The consultant continues to work with the company. The Order alleges violations of Exchange Act section 13(a), 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceedings Respondent 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 $100,000. See also Digital Turbine, Inc., Adm. Proc. File No. 3-18971 (Jan. 29, 2019)(seven years of violations ending in 2018; resolved with a cease and desist order based on Exchange Act section 13(b)(2)(B) and payment of a $100,000 penalty); In the Matter of Cytodyn Inc., Adm. Proc. File No. 84994 (Jan. 29, 2019)(nine years of violations ending in 2017; resolved with a cease and desist order based on Exchange Act section 13(b)(2)(B) and the payment of a $35,000 penalty); In the Matter of Grupo Simec S.A.B. De C.V., Adm. Proc. File No. 3-18972 (Jan. 29, 2019)(ten years of violations which are currently being remediated; resolved with a cease and desist order based on Exchange Act section 13(b)(2)(B), an order to comply which certain undertakings which in part requires the retention of an independent consultant; and the payment of a penalty in the amount of $200,000).

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by T. GormanPosted on Posted in SECActions

The Commission did not spend a lot of time getting reoriented to being at the office. The first day back on the job the agency completed the resolution of a year old Ponzi scheme case that had raised about $1.2 billion by defrauding 8,400 investors. The filing of the Commission’s complaint in December 2017 ultimately resulted in the Woodbridge Group, a collection of 281 related companies directed defendant Robert Shapiro, tumbled into bankruptcy in Delaware. The suit ended the Ponzi payments. SEC v. Shapiro, Civil Action No. 1: 12-cv-24624 (S.D. Fla.).

The Commission settled with the firm, Mr. Shapiro and ten others, obtaining orders from the Court directing the payment of disgorgement and penalties totaling about $1 billion in a case that focused on the protection of retail investors, a key priority of the agency. The company will pay, for example, $892,173,765. That sum will be deemed satisfied by a Liquidating Trust being formed under a plan in the Woodbridge Chapter 11 case in U.S. District Court in the District of Delaware, No. 17-12560.

Separately, Mr. Shapiro was ordered to pay $18,546,643 in disgorgement along with $2,163,613,369 in prejudgment interest. He also consented to the entry of a permanent injunction, entered by the Court, prohibiting future violations of Securities Act sections 5 and 17(a) and Exchange Act sections 10(b), 15(a) and 20(a). Mr. Shapiro also consented to the entry of an order in an administrative proceeding which will bar him from the securities business and from participating in any penny stock offering. In addition, the Court entered orders against each of the other defendants. Collectively, RS Protection Trust and several relief defendants were ordered to pay about $5.3 million in disgorgement and pre-judgment interest.

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