by T. GormanPosted on Posted in SECActions

The SEC Enforcement Division published its annual report, discussing the results of the last fiscal year (here). As with last year’s report, the glossy compilation of statistics, goals, and discussion emphasizes the achievement of the program while arguing that statistics do not fully reflect the accomplishments of the Division and its program. Yet there is little doubt that statistics are in fact a key question. Indeed, the emphasis on statistics is well illustrated by the analysis of SEC and DOJ enforcement results published by the New York Times on November 4, 2018 at https://www.nytimes.com/2018/11/03/us/trump-sec-doj-corporate-penalties.html (analyzing cases brought and penalties imposed under the current administration compared to those brought at the end of the prior administration).

The goals of the program – or principles as the Report calls them – are familiar: 1) Focus on Main Street investors; 2) individual accountability; 3) keep pace with technological change 4) impose remedies that most effectively further Enforcement goals; and 5) constantly assess the allocation of resources. The Report highlights each principle or goal. For example, the emphasis of principal one on the Main Street investor is illustrated by the creation of Retail Strategy Task Force. That group is designed to leverage “and implement strategies and techniques for addressing the types of misconduct that most affect retail investors.” An example of this focus is the Share Class Selection Disclosure Initiative or SCSDI, a program which traces its roots to cases developed earlier but turned into a cooperation program recently in a manner that is similar to the earlier Municipalities Continuing Disclosure Cooperation Initiative or MCDCI.

Similar examples are given for each of the other principles/goals. On principle 2, individual accountability, the Report notes that in over 70% of its enforcement cases in the last fiscal year charge an individual. The discussion of principle 3 – technological change — cites the work of the Cyber Unit, the case brought against Yahoo Inc. and the actions centered on initial coin offerings. The discussion of effective remedies – principle 4 – points to the settlements with the CEO of Theranos and Tesla where in each case the CEO of the firm, tied to the underlying violations, relinquished control of the firm. Finally, the fifth goal regarding the allocation of resources is reflected, according to the Report, by the overall results of the program despite an approximate 10% reduction in staff and the allocation of resources to ICOs and the implementation of the SCSDI.

The Report also includes an array of statistics. Those statistics begin with the number of cases brought. The report offers two different tables and ways to view the statistics. Table one includes the results of the MCDCI. This table shows that the number of enforcement actions brought in the last four years had generally declined with the exception of fiscal 2016: In FY 2015: 508 cases were filed; in FY 2016: 548; in FY 2017: 446; and in FY 2018: 490 cases were filed.

The table also details statistics for the number of follow-on administrative proceedings and delinquent filing cases. When those actions are added to the totals above the overall trend is not changed: in FY 2015 807 cases were filed; in FY 2016: 868; in FY 2017: 754; and in FY 2018 821 cases were filed.

A second table reiterates these statistics but excludes the cases that were part of the MCDCI. This exclusion alters the trend by showing that more standalone enforcement actions were brought last year than in fiscal 2015: In FY 2015: 449 actions were filed; in FY 2016: 464; in FY 2017: 446; and in FY 2018: 490 cases were filed. Adding the tag-along and delinquent filings actions does not change the trend: In FY 2015: 748 cases were filed; in FY 2016: 784; in FY 2017: 754; and in FY 2018: 821 actions were filed.

The reason for excluding the cases developed as part of the MCDCI –an approach initiated in the Report last year — is unclear. It does, however, materially alter the trend. That alteration is perhaps more pronounced since the actions developed as part of the SCSDI, an initiative modeled on the MCDCI, are included.

Likewise, the reason for detailing statistics about tag-along cases and delinquent filings is also unclear. The former are typically brought to secure remedies in an administrative proceeding such as a collateral bar in addition to those obtained in a federal court civil injunctive action. The latter is an on-going program in which lists of microcap issuers are reviewed in alphabetical order to assess which companies have not filed their periodic reports as required. Typically, the action brought ends with a default judgment. Neither group of cases is a measure of actual enforcement activity or efforts to achieve the goals of the program in the same sense as statistics regarding standalone enforcement actions.

A second key group of statistics presented by the Report — and perhaps a more telling indicator of the Division’s efforts – are those showing the areas in which the cases have been brought. The report breaks down the number of enforcement actions brought into several categories. The top two categories in fiscal 2018 were securities offerings and investment adviser/investment company actions. The former is a group of cases composed largely of Ponzi scheme and similar actions. It represented about 25% of the cases brought. The latter group is composed actions which involved an investment adviser and/or a investment company. This group of actions constituted about 22% of the total cases filed.

The results for fiscal 2018 regarding the area in which cases were brought differs significantly from those for one year earlier. In fiscal 2017 the largest group of actions brought involved issuer integrity and accounting. That category of actions has traditionally been the largest. The second largest group of cases in fiscal 2017 involved offerings.

The change in the composition of Enforcement’s case load is consistent with the overall goals adopted by the Division last year as well as trends which extend beyond the current administration. Focusing on investment advisers and investment companies – most retail investors buy securities through mutual funds, pensions and similar vehicles – is fully consistent with the retail investor focus. In addition, the overall increase in the number of actions involving investment advisers and investment companies extends a trend which began under Chair White when a close working relation between Enforcement and OCIE.

The decline in the overall total amount of money ordered in enforcement actions is also consistent with the current focus of the Division. The report lists the amounts of money ordered in enforcement cases over the last four years as follows (in billions): FY 2015: $4.194; FY 2016: $4.083; FY 2017: $3.789; and FY 2018: $3.945. As the Report notes, the Supreme Court’s decision in Kokesh, imposing a statute of limitations on disgorgement, no doubt impacted these numbers.

A more important driver, however, is the change in the composition of the Division’s cases. While actions against investment advisers are consistent with the retail investor focus of the division they frequently do not result in the kind of monetary awards realized in actions against issuers. Thus, a decline in the total amount of money ordered is consistent with the overall focus of the Division.

Finally, while the Report’s claim that the number of cases is not a true measure of the Division’s work is no doubt true, it is at least a significant indicator. Indeed, the Division itself seems to recognize this point. In August 2018 the Division brought a total of 48 standalone enforcement actions. In September that number jumped to 73. Thus, in the last two months of the fiscal year a total of 121 standalone actions were bought – almost 25% of the cases filed in fiscal 2018 were filed just before year end.

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by T. GormanPosted on Posted in SECActions

The Commission issued proposed rules this week concerning disclosures for variable annuities and variable life insurance contracts. The agency also issued a statement clarifying certain matters regarding the business standards for security-based swap dealers and major security-based swap participants.

DOJ continued to bring FCPA related criminal actions against individuals. In one action two individuals were charged and one pleaded guilty in connection with the misappropriation of millions of dollars from IMBD and bribes paid to foreign officials as part of the scheme. Two more individuals pleaded guilty in connection with the Venezuelan PDVSA scandal. Finally, another individual pleaded guilty based on charges tied to efforts to bribe officials in Haiti.

SEC

Proposed rules: The Commission approved the issuance of proposed rules designed to improve the disclosures for variable annuities and variable life insurance contracts (here).

PAUSE list: The agency updated its Public Alert: unregistered Soliciting Entities or PAUSE list, adding 16 soliciting entities, four impersonators of genuine firms and eight bogus regulators. The list alerts investors to firms falsely claiming to be registered and flags those impersonating registered securities firms as well as bogus “regulators” who falsely claim to be government agencies or affiliates (here).

Final rules – mining: The Commission adopted final rules regarding the property disclosure requirements for mining registrants and the related guidance (here).

Statement – Securities based swaps: The Commission issued a Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants (here).

Inspections: The National Examination Program issued a Risk Alert dated October 31, 2018. It lists the most frequently cited compliance deficiencies over the last three years related to the Cash Solicitation Rule 206(3)-3. That rule prohibits payment by the adviser in cash to anyone who solicits clients (here).

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 1 civil injunctive case and no administrative proceedings, excluding 12j and tag-along proceedings.

Misappropriation: SEC v. Kelly, Civil Action No. 1:18-cv-04939 (N.D. Ga. Filed Oct. 26, 2018) is an action which names as a defendant Sean Kelly, a registered representative at Center Street Securities, Inc., and his controlled entities, Lion’s Share Financial of East Cobb, Inc., Lionsshare Tax Services, LLC and Lion’s Share & Associates, Inc. Since 2014 Mr. Kelly and his entities have raised at least $1 million from 12 investors. Those investors were promised that their funds would be invested in a variety of vehicles such as CDs, private placements and real estate funds. In fact the money was misappropriated. The complaint alleges violations of each subsection of Securities Act section 17(a), Exchange Act section 10(b) and Advisers Act sections 206(1) and (2) along with aiding and abetting. The case is pending. See Lit. Rel. No. 24328 (Oct. 30, 2018). A parallel action is being filed by the U.S. Attorney’s Office for the Northern District of Georgia.

Fraudulent share sales: SEC v. Weber, Civil Action No. 1:18-cv-05019 (E.D.N.Y. Filed Sept. 5, 2018) is an action which names as defendants: Brian Weber who controls Bebida Beverage Co., also a defendant, which is the product of a reverse merger and is listed on OTC link but is not a reporting company. Over a two year period beginning in January 2014 Defendants engaged in a three-fold fraud to raise cash: 1) The firm’s transfer agent was convinced to issue shares for a fabricated convertible note; 2) the number of shares outstanding was artificially inflated to evade rule 144; and 3) fabricated transactions were used relating to other sham convertible debt to acquire money. About $208,000 was raised. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act section 10(b). To resolve the proceedings Mr. Weber consented to, and the Court entered, a final judgment permanently enjoining him from future violations. The order also directs the payment of disgorgement in the amount of $208,000, prejudgment interest of $23,436 and a penalty of $160,000. In addition, it imposes a permanent officer and director bar and penny stock bar. See Lit. Rel. No. 24329 (Oct. 31, 2018).

Manipulation: SEC v. Kueber, No. 15-cv-04479 (E.D.N.Y. ) is a previously filed action centered on Cynk Technology Corporation. The firm was not publicly traded. It had no real assets. There was no revenue. Defendant Philip Kueber, however, had control of the firm’s shares. Mr. Kueber then: Created false shareholders and executives; filed a false registration statement for Cynk; and filed a false affidavit with FINRA. Trading started. The share price spiked up to $21. The plan was apparently to sell the shares. The Commission, however, halted trading, ending the scheme. Mr. Kueber settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act section 17(a) and Exchange Act section 10(b). The order also permanently bars Mr. Kueber from serving as an officer or director of a public company or participating in a penny stock offering. See Lit. Rel. No. 24325 (Oct. 26 2018).

Criminal cases

Investment adviser fraud: U.S. v. Tuzman, No. 1:15-00536 (S.D.N.Y.) is an action in which defendant Irfan Amanat, the former owner and manager of Enable Invest Ltd., a Dubai-based investment fund, was found guilty by a jury of one count of conspiracy to commit wire fraud and one count of wire fraud. The charges are based on two schemes. The first centered on Maiden Capital LLC, a hedge fund based in North Carolina. Over a three year period, beginning in March 2009, Mr. Amanat and others concealed the fact that investments by the fund in Enable had been lost. The cover-up involved the creation of false account documents to conceal the millions of dollars in losses. The second involved an accounting fraud at KIT digital, a publicly traded firm. Over about the same time period as the first scheme Mr. Amanat and the CEO, CFO and others at the firm engaged in a cover-up from KIT shareholders, auditors and others, of the fact that millions of dollars of the firm’s capital had either been lost or misappropriated. The date for sentencing has not been set. Two co-defendants were previously convicted.

Anti-Corruption/FCPA

U.S. v. Jho, No 18-cr-538 (E.D.N.Y. Filed Nov. 1, 2018) names as defendants Low Taek Jho and Ng Ghong Hwe or Roger Ng, a former managing director at a major New York based financial institution. The two men, along with Tim Leissner (see below), also a former at the Financial Institution employee, conspired to launder billions of dollars embezzled from the 1Malaysia Development Fund or 1MDB and to violate the Foreign Corrupt Practices Act by bribing various Malaysian and Abu Dhabi officials. Messrs. Ng and Leissner were also charged with attempting to circumvent the internal controls of the Financial Institution in violation of the FCPA. Specifically, beginning in 2009, and continuing over the next five years, about $2.7 billion was misappropriated from 1MDB. That included funds IMDB raised through three bond transactions underwritten by the Financial Institution. In connection with the scheme the three men bribed government officials in Malaysia and Abu Dhabi to obtain and retain business from the Financial Institution. They also sought to launder the proceeds of the scheme through the U.S. financial system by purchasing luxury residential real estate in New York City and other areas, artwork and funding Hollywood films. Mr. Leissner pleaded guilty to one count of conspiracy to launder the proceeds and one count of conspiracy to violate the FCPA. He has been ordered to forfeit $43,700,000. U.S. v Leissner, No 18-cr-439 (E.D.N.Y. unsealed Nov. 1, 2018).

U.S. v. Guedez, No. 4:18-cr-00611 (S.D. Tx.) is an action which names as a defendant, Ivan Guedez, a Texas resident. Mr. Guedez pleaded guilty to one count of conspiracy to launder money. He is alleged to have participated in a scheme involving the owners of U.S. based firms to bribe Venezuelan government officials in exchange for securing additional business and payment priority for outstanding invoices, from Petroleos de Venezuela S.A. or PDVSA, the state owned oil company. Mr. Guedez and other PDVSA officials agreed that they would direct firm business toward the supplier in return for the bribes. The co-conspirators also received kickbacks. Mr. Guedez is the latest of several persons to have been charged in connection with this scheme. He is scheduled to be sentenced on February 20, 2019. See also U.S. v. Guruceaga, No. 1:18-cr-2085 (S.D. Fla. Plea entered Oct. 31, 2018)(action in which Abraham Edgardo Ortega, a Venezuelan national who was executive director of financial planning for PDVSA, pleaded guilty to one count of conspiracy to commit money laundering in connection with the scheme detailed above; sentencing is set for January 9, 2019).

U.S. v. Baptiste, No. 1:17-cr-10305 (D. Mass.). Roger Boncy, a business man based in Madrid, Spain was named in a superseding indictment along with co-defendant Joseph Baptiste, a resident of Maryland. The indictment alleges one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act, one count of violating the Travel Act and one count of conspiracy to commit money laundering. The charges are based on allegations that the two defendants solicited bribes from undercover agents posing as potential investors tied to a proposed development project for a port in the Mole St. Nicolas area of Haiti. The project involved the construction of multiple cement factories, a shipping-vessel recycling station, an international transshipment station with numerous slips for vessels, a power plant, a petroleum depot and tourist facilities. Estimated cost was $84 million. Messrs. Boncy and Baptiste, at a meeting in a Boston hotel, told agents that to secure government approval for the project they planned to channel payments to Haitian officials. The bribes would be transmitted through a Maryland based non-profit controlled by Mr. Baptiste. The meeting was recorded. Messrs. Boncy and Baptiste also discussed bribing an aid to a high-level elected official in Haiti who had a position on the port development project. The purpose was to secure the assistance of the official in authorizing the project. The telephone discussion was intercepted and recorded. Mr. Baptiste is scheduled to begin trial on December 3, 2018 in Boston.

ESMA

Exam priorities: The European Securities and Markets Authority published the priorities that European enforcers will particularly consider when examining 2018 financial statements of listed firms. Those priorities will focus on new IFRSs and non-financial information in the issues’ annual reports (here).

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