by T. GormanPosted on Posted in SECActions

A political intelligence consultant, a former employee at the Centers for Medicare and Medicaid Services or CMS, and two partners at a New York hedge fund were found guilty by a jury on charges of conspiracy, securities fraud and wire fraud centered on an insider trading scheme following a four week trial. U.S. v. Blaszczak, No. 1:17-cr-00357 (S.D.N.Y. Verdict May 4, 2018). See also SEC v. Blaszczak, Civil Action No. 1:17-cv-03919 (S.D.N.Y. Filed May 24, 2017).(parallel Commission enforcement action).

The Defendants convicted are: David Blaszczak, a political intelligence consultant and former CMS employee; Christopher Worrall, an employee of CMS since 1999 and long time friend of Mr. Blaszczak; and Theodore Huber and Robert Olan, partners and analysts at Deerfield Management Company, L.P., a healthcare-focused hedge fund in New York. Previously, Jordan Fogel, also a health care analyst at Deerfield, pleaded guilty to criminal charges and settled claims with the SEC. He entered into cooperation agreements with the U.S. Attorney’s Office and the SEC.

While the facts in the action trace to about 2009, it centers on alleged tips of inside information by Mr. Worrall to Mr. Balaszczak about three significant rate changes at CMS between May 2012 and November 2013, according to papers in the criminal case and the SEC’s complaint. CMS issues proposed and final rules that set the Medicare reimbursement rates for the following calendar year. The releases often impact the share price of firms that offer products and services covered by the impacted fee changes. Accordingly, the rate changes are made after the close of the market.

Mr. Worrall had access to material non-public CMS decisions concerning reimbursement amounts. Through his position at CMS Mr. Worrall monitored price changes. That position imposed a duty of confidentiality on Mr. Worrall. As a CMS employee he was subject to Section 21A(h) of the Exchange Act which imposes a duty of trust and confidence on executive branch employees to the U.S. Government and citizens of the United States with respect to material, non-public information. The Section was added to the Exchange Act by the STOCK Act of 2012. CMS, in addition, has an Employee Nondisclosure Policy that imposed similar duties regarding “market sensitive” information. The Standards of Ethical Conduct for Employees of the Executive Branch fortified those duties.

Despite his obligations, in three instances over a period of about one and one half years, Mr. Worrall furnished inside information on CMS rate changes that lowered reimbursement rates to his friend and former co-worked, Defendant Blaszczak. The information on each occasion was transmitted in personal meetings, on the telephone, in emails and through text messages. In each instance the information was conveyed by Mr. Blaszczak to those at Deerfield which then traded securities on behalf of certain funds. The trading resulted in over $3.9 million in illicit trading profits.

The information Mr. Blaszczak obtained from his friend was material, non-public information. Mr. Blaszczak knew the position of his friend at CMS and the access he had to such information. He touted his connection to CMS. Mr. Worrall furnished the information to his former colleague in view of the long standing friendship of the two men. He was also aware that the relationship furnished him with certain business opportunities such as the prospect of leaving CMS and entering the consulting business. While he had considered potential opportunities he did not, during the period here, accept them. Mr. Worrall did, however, use one job offer he rejected to secure a significant pay increase at CMS.

Those at Deerfield understood that the information furnished by Mr. Blaszczak traced to CMS. Those at Deerfield knew that Mr. Blaszczak had once been employed by the agency and that he maintained contacts with the CMS staff. They were also aware that the information he provided differed from that put out by other analysis and proved to be accurate. In fact, they sought out Mr. Blaszczak to verify information for them.

Each of the men down the tipping chain also benefitted from the illegal trading as did Mr. Worrall. Deerfield, where Messrs. Huber and Olan were partners, profited from the trades. The date for sentencing has not been set.

Mr. Blaszczak is also charged in a separate insider scheme. There he is alleged to have obtained confidential and nonpublic CMS information about cuts in reimbursement rates for home health products. Mr. Blaszczak is allged to have furnished that information to a portfolio manager at Visium Asset Management, L.P., another healthcare-focused hedge fund in New York City. That fund executed trades while in possession of the inside information, reaping profits of about $330,000. Christopher Plaford, the portfolio manager at Visium, has pleaded guilty and is cooperating with the government. The SEC’s enforcement action, which alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b), is pending.

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by T. GormanPosted on Posted in SECActions

Panasonic and one of its subsidiaries paid over $280 million to settle FCPA charges with the DOJ and the SEC this week. The charges are based on a years long scheme in which the subsidiary paid bribes centered in the Middle East regarding the sale of certain airplane equipment.

The Commission also announced three new actions this week. One named an attorney and his law firm for filing a registration statement with the Commission for a firm while concealing it was controlled by a convicted felon. A second centered on a years long offering fraud. The third was based a series of false press releases announcing sham transactions issued by a company and one of its officers to bolster the firm.

Finally, the Commission announced a new investor tool called SALI. It is designed to permit investors to determine if a person was ever named in an SEC enforcement action and had a final judgment entered against them.

SEC

Remarks: Chairman Jay Clayton delivered remarks titled The Evolving Market for Retail Investment Services and Forward-Looing Regulation – Adding Clarity and Investor Protection while Ensuring Access and Choice at Temple University, Philadelphia, PA. (May 2, 2018). His remarks focused on retail investors, and the importance of clarifying the confusion in the market for investment advice as well as the legal obligations (here).

Investor tool: The Commission announced a new on-line search tool which will permit investors to determine if a person has been named in an enforcement action if a final judgment has been entered against them. This tool, called SEC Action Lookup for Individuals or SALI, will permit the public to determine if any person, not just professionals, has been named in a Commission enforcement action and had a final judgment entered against them. Currently the data base provides information on actions filed between October 1, 2014 and March 31, 2018.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 3 civil injunctive cases and no administrative proceedings, excluding 12j and tag-along proceedings.

Fraudulent offering: SEC v. Tracy, Civil Action No. 1:18-cv-01891 (N.D. Ga. Filed May 1, 2018) is an action which names as Defendants attorney Adam Tracy and his law firm, Securities Compliance Group, Ltd. Defendants filed registration statements with the Commission during the period April 2015 through October 2015 for Sonant Communications Corp. That firm was formed in May 2015 to provide telecommunications services for small and medium-sized businesses. It is an inactive Wyoming corporation based in Florida. A convicted felon – a person who had previously pleaded guilty to one count of conspiracy to commit securities fraud, mail fraud and wire fraud, and one count of securities fraud — requested Mr. Tracy to prepare and file the registration statement but conceal his participation with the firm. The attorney complied with the instructions. The registration was for 10 million shares to be offered at $0.30 per share for a total of $3 million. Mr. Tracy filed an attorney opinion with the registration regarding the firm. The convicted felon controlled the firm until his death in December 2015. Others were listed as the officers in the registration materials. The complaint alleges violations of Securities Act sections 17(a)(1) and (3). To resolve the matter each Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, Defendants agreed to pay disgorgement of $2,655.71 – the legal fees paid and prejudgment interest – and a penalty of $25,000. Mr. Tracy also agreed to the entry of a penny stock bar and to be suspended from appearing and practicing before the Commission as an attorney. See Lit. Rel. No. 24132 (May 2, 2018).

Offering fraud: SEC v. Adams, Civil Action No. 3:18-cv-252 (S.D. Miss. Unsealed May 1, 2018) is an action which names as defendants Arthur Adams and his company, Madison Timber Properties, LLC. Beginning in 2004 Defendants raised at least $85 million from over 150 investors. Those investors were lead to believe their money was being put into a venture that would pay substantial returns from harvesting timber in several states. In fact Defendants never obtained the rights to harvest any timber. Essentially the operation was a Ponzi scheme. The complaint, filed under seal on April 20, 2018, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of Mississippi filed a parallel criminal action against Mr. Adams. See Lit. Rel. No. 24129 (May 2, 2018).

False statements: SEC v. Revolutionary Concepts, Inc., Civil Action No. 1:18-cv-01832 (N.D. Ga. Filed April 27, 2018) is an action which names as defendants the company, a holder of several patents related to smart camera technology, Solomon RC Ali, the firm’s senior v.p. of Corporate Finance, Earnest Delong, an attorney, Rainco Industries, Inc., and Nicole Singletary, Mr. Ali’s girlfriend. Over a five year period beginning in 2012 Defendants Ali and Revolutionary issued a series of false press releases to promote the firm. Typically the releases announced a business transaction that was touted as being good for Revolutionary. In fact the deals were shams and arranged with friends of Defendant Ali. Rainco and Ms. Singletary aided and abetted the scheme, according to the complaint, while Mr. Delong violated certain beneficial ownership reporting requirements. The complaint alleges violations of each subsection of Securities Act section 17(a) and Exchange Act sections 10(b), 13(a), 13(d), 16(a) and 20(a). Each Defendant settled with the Commission except Mr. Ali. Revolutionary consented to the entry of a permanent injunction prohibiting future violations of Securities Act section 17(a) and Exchange Act sections 10(b) and 13(a). Defendants Rainco and Singletary each consented to the entry of a permanent injunction prohibiting future violations of Securities Act section 17(a) and Exchange Act sections 10(b) and 13(d) and a five year penny stock bar and, as to Ms. Singletary, a five year officer and director bar. Defendant DeLong consented to the entry of a permanent injunction prohibiting future violations of Exchange Act sections 13(d) and 16(a), a five year penny stock bar and a five year officer and director bar. Each settling Defendant agreed to pay a penalty of $25,000. Mr. DeLong also consented to the entry of an order suspending him from appearing and practicing before the SEC as an attorney. Section 12j actions have been initiated against each firm. Revolutionary has consented to the entry of an order delisting its securities. The proceeding as to Rainco will be set for hearing. See Lit. Rel. No. 24126 (May 2, 2018).

Criminal Cases

Offering fraud: U.S. v. Doumanis, No. 1:17-cr-00087 (S.D.N.Y.) is an action in which Danny Pratte pleaded guilty to conspiracy to commit securities fraud. The charge is based on an offering fraud that began in 2008 and continued for the next six years. Investors purchased private placement shares in Terminus Energy based a series of false representations. The nearly $8 million raised was misappropriated. Previously, two other defendants each pleaded guilty to one count of conspiracy to commit securities fraud. See also SEC v. Terminus Energy, Civil Action No. 1:17-cv- 01117 (S.D.N.Y. Filed Feb. 14, 2017).

Misappropriation: U.S. v. Polese, No. 1:18-cr-20028 (D. Mass.) is an action in which Defendant James Polese pleaded guilty to one count of conspiracy and investment adviser fraud, eight counts of bank fraud and one count of aggravated identity theft. Mr. Polese was charged along with Cornelius Peterson. The charges allege that from about 2014 through June 2017 the two men misappropriated approximately $500,000 from their clients by transferring funds out of their client accounts without their permission. In August 2014 about $100,000 was taken from a client account to invest in a wind farm project despite the fact that the investment was not authorized by the client. In May 2015 the two men used $400,000 from another client account to back a letter of credit for the wind farm. In 2017 Mr. Polese transferred funds from client accounts for his personal expenses on several occasions. Sentencing is set for August 2, 2018. See also SEC v. Polese, Civil Action No. 1:18-cr-10186 (D. Mass.).

Anti-Corruption/FCPA

U.S. v. Panasonic Avionics Corp., No. 1:18-cr-00118 (D.D.C. Filed April 30, 2018); In the Matter of Panasonic Corporation, Adm. Proc. File No. 3-18459 (April 30, 2018). Panasonic Corporation and Panasonic Avionics Corporation or PAC, a wholly owned subsidiary, agreed to pay over $280 million to resolve FCPA charges with the DOJ and the SEC. The firm did not self-report but did cooperate after receiving a subpoena from the SEC and terminated several employees involved in the conduct. The firm also took remedial steps which included installing new procedures. A corporate monitor was installed because the procedures are untested. Panasonic’s ADRs were traded on the NYSE until mid-2016. PAC is a U.S. based, wholly owned subsidiary that designs, engineers, manufactures and sells in-flight entertainment systems and global communications services to airlines and others.

The actions trace to 1986 when PAC retained Sales Rep to assist with contract negotiations. Although Sales Rep had no qualifications for the job he served over the years as the exclusive representative for all PAC sales to over 50 airlines in the Middle East, Africa and Central and South Asia. Many of the firms were state owned. After a period his sons assisted hm. Sales Rep was an employee but payments to him were made through his British Virgin Islands entity. From 2007 through 2016 Sales Rep was paid over $184 million in commissions.

Government Airlines was one of PAC’s most significant customers. In 2004 PAC and Government Airlines executed a 10 year Master Product Supply Agreement which ultimately grossed over a billion dollars for the firm. Sales Rep helped negotiate the deal. Government Airlines appointed its employee – Government Official – to serve as the primary point of contact. Government Official had substantial authority regarding the purchases of Government Airlines. Over a period of years Amendments were negotiated to the deal which brought in millions of dollars for PAC. During the negotiations Government Official sought and obtained personal benefits from Sales Rep. A key benefit was an annual salary paid through a third-party vendor. Government Official not only wielded significant influence, he furnished Sales Rep with valuable information which helped the firm get better deals. While PAC’s internal audit group flagged the payments to Government Official as high risk, they continued.

From 2007 through January 2014 the firm also engaged various consultants. They were paid through the Office of the President which had a budget controlled by PAC Executive One. One consultant provided confidential information while another was retained to prevent the person from working for a competitor. PAC ultimately paid about $1.76 million to purported consultants, including Government Official, who provided few if any legitimate consulting services. Finally, in the first quarter of 2012 the firm prematurely recorded $82 million from Amendment Six to the master agreement. This resulted in the firm overstating pre-tax income by about 9% or $38.5 million.

The SEC’s Order alleged violations of Exchange Act sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 30A. The section 10(b) charge was added in view of the premature revenue recognition. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Respondent also agreed to pay disgorgement of $126,900,000 and prejudgment interest of $16,299,018.93. PAC resolved the proceedings with the DOJ by agreeing to pay a criminal penalty of $137 million, about 20% below the bottom of the sentencing guidelines. The firm entered into a deferred prosecution agreement. It was charged with one count of causing the books and records of its parent to be falsified. A monitor will serve for two years, followed by a third year of self-reporting.

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