The Commission continued to focus on rule modifications typically described as updating existing rules. This week the agency issued proposed rules designed to update the reporting for institutional investor holdings. Commissioner Allison Herron Lee issued a statement cautioning about the impact on transparency, one of the key goals of the federal securities laws (here).
Enforcement filed a settled FCPA action which did not have a parallel DOJ counter part. The division also brought an action centered on unauthorized trading and another on prohibited transactions regarding investment companies.
Form 13F: The Commission proposed to update Form 13 F on July 10, 2020, for institutional investors. The proposals will raise the filing threshold and make other targeted changes (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed no civil injunctive actions and 3 administrative proceedings last week, excluding 12j and tag-along-proceedings.
Offering fraud: SEC v. Zouvas, Civil Action No. CV -17-00427 (D. Ariz.) is a previously filed action which named as defendants Luke Zouvas, Christopher D. Larson and Cameron F. Robo. Mr. Larson obtained control of Crown Dynamics Corp., as General Counsel for the firm. Crown, a shell company, then merged with another. Mr. Larson arranged for the transfer of shares to various nominees and had a call center promote the securities. The $850,000 raised from investors was wired to accounts controlled by Mr. Larson. Previously, the Court concluded on a motion for summary judgment that Mr. Zouvas had violated Securities Act Section 17(a)(3). The Court entered judgments by consent as to Messrs. Larson and Robb. Those judgment preclude them from engaging in future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court also directed the two men to pay disgorgement and prejudgment interest, on a joint and several basis, in the amount of $320,472 and to each pay a penalty of $75,000. A five-year conduct based injunction and officer and director bar was also imposed against each man. Mr. Larson was previously suspended from appearing or prating before the Commission as an accountant. See Lit. Rel. No. 24851 (July 7, 2020).
Prime bank fraud: SEC v. Sims, Civil Action No. 8:19-cv-00995 (C.D. Cal.) is a previously filed action in which the Court entered final judgments against recidivist David Sims, his partner Mario Procopio and their lawyer, Ralph Craig Greaves. The Commission’s complaint alleged that the three men engaged in a prime bank fraud that raised over $1.4 million from investors. Defendants claimed that they had special access to trade platforms used by governments which gave them access to huge sums of capital, all of which was fabricated. The final judgments as to each defendant impose permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Sims will also pay a penalty of $813,000 and, jointly and severally with SIMS Equities, Inc., disgorgement of $813,000 and prejudgment interest of $123,028. Mr. Procopio will pay a penalty of $597,000 and, joint and severally with ALC Holdings, LLC and El Cether-Elyown, disgorgement of $597,000 and prejudgment interest of $90,000. Mr. Greaves will pay a penalty of $100,000. In a separate order, Mr. Greaves was permanently suspended from appearing and practicing before the Commission as an attorney. See Lit. Rel. No. 24849 (July 6, 2020).
Offering fraud: SEC v. Feiner, Civil Action No. 19-CV006269 (N.D. Ill.) is a previously filed action which named as defendants Zvi Feiner, his firm FNR Healthcare, LLC, and Erez Baver. Over a three-year period, beginning in 2014, Defendants raised at least $10 million from 62 investors who purchased interests in the firm. Investors were assured the securities were safe and a good investment. The funds were supposed to be invested in one of four related limited liability firms for a good purpose. While portions of the funds were invested as suggested, other portions were misappropriated. The key to the fraud may well have been the identity of Mr. Feiner. He was a well-regarded rabbi in Chicago. That was undoubtedly the reason Defendants targeted those in the Orthodox Jewish community. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24605 (Sept. 20, 2019). To resolve the matter, Mr. Feiner and his firm each consented to the entry of a permanent injunction based on the sections cited in the complaint. Defendants also agreed to pay disgorgement and prejudgment interest. The amounts will be determined by the Court at a later date. Previously, two entities named as relief defendants and controlled by the individual Defendants, agreed to pay disgorgement and prejudgment interest in the amount of $2,253,734. See Lit. Rel. No. 24848 (July 6, 2020).
Prohibited transactions: In the Matter of Franklin Advisers, Inc. Adm. Proc. File No. 3-19854 (July 2, 2020). Two firms are named as Respondents in the Order, Franklin Advisers, Inc., or FAV, and Franklin Templeton Investments Corp. or FTIC. The former is a registered investment adviser. The latter is a subsidiary of Franklin Resources, Inc., Toronto, also a registered investment adviser. The proceedings here center on Section 12(d)(1)(A) of the Investment Company Act which, generally, limits an investment firm’s ownership interests in other investment companies. Over an eleven month period, beginning in December 2014, the Allocation Funds (a particular series of Templeton funds) and eight LifeSmart Retirement Target Date Funds (another series) purchased shares of three ETFs each of which is a registered unaffiliated investment company. FAV sought to rely on Section 12(d)(1)(F) to exceed the limits of Section 12(d)(1)(A)(iii). The former permits a registered investment company to invest in unaffiliated investment companies in excess of certain limits if the acquiring company and its affiliates do not own more than 3% of the outstanding shares of the acquired company. The latter prohibits the purchase when the “acquisitions results in the acquired company and all other investment companies having an aggregate value of more than 10% of the total assets of the acquiring company” – a pyramiding limitation. The provisions of 12(d)(1)(F) could not be relied on, however, since FAV’s aggregate purchases of the three ETFs caused the Franklin Funds to exceed the firm wide 3% ownership limits of Section 12(d)(1)(F) for each ETF. At the time of the transactions FAV was responsible for implementing written policies and procedures designed to ensure compliance with the sections cited above. In late November 2015 the compliance department discovered the breach of the statutory limits. The client positions were reduced, generating losses of over $2.1 million for ETF No. 1 and gains of over $3.7 and $4.7 million for ETFS Nos. 2 and 3 respectively. FAV assessed the situation and decided not to reimburse the losses. That determination created an undisclosed conflict and was contrary to its disclosed policies and procedures that required reimbursement. There was no disclosure until mid 2016. The Order alleged violations of Investment Company Act Section 12(d)(1)(A) and Advisers Act Sections 206(2) and 206(4). After the Commission’s investigation began Franklin Funds’ board fully reimbursed the losses of the Allocation Funds, including interest. Respondents each resolved the proceedings following certain remedial steps. FAV consented to the entry of a cease and desist order based on the sections cited and a censure. FTIC also consented to the entry of a cease and desist order but only one based on the Investment Company Section cited. FAV also agreed to pay a penalty of $250,000 while FTIC will pay $75,000.
Prime bank fraud: SEC v. Coddngton, Civil Action No. 113-cv-03363 (D. Colo.) is a previously filed action in which judgements were entered by consent against defendants Merlyn C. Geisler and Marshall D. Gunn, Jr. The action centered on a prime bank fraud. Specifically, the complaint alleged that Mr. Coddington told investors his firm would pledge CMOs as collateral for loans that would be used in a year-long program generating profits of 250% to 475%. The program did not exist. Judgments were entered against the two men based on Securities Act Sections 5(a), 5(c) an 17(a) and Exchange Act Sections 10(b) and 15(a). Mr. Gensler will pay disgorgement of $653,000, prejudgment interest of $111,604 and a penalty of $150,000. Mr. Gunn will pay disgorgement of $197,500, prejudgment interest of $33,754 and a penalty of $50,000. See Lit. Rel. No. 24847 (July 2, 2020).
Unauthorized trades: In the Matter of Michael D. Tannen, Adm. Proc. File No. 3-19853 (July 2, 2020) is a proceedings which names as a Respondent Mr. Tannen, a registered representative with Global Arena Capital Corp. Over a period of about 60 days two registered representatives at the firm executed a large volume of unauthorized trades in non-discretionary customer accounts. Respondent Tannen permitted the representatives to utilize his representative code for certain of the customer accounts during the period. He was compensated $20,000 for his actions. The Order alleges violations of Securities Act Section 17(a)(3). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order. He was also ordered to pay disgorgement of $20,000, prejudgment interest of $4,645.35 and a penalty of $15,000. Finally, he is barred from the securities business and from participating in any penny stock offering.
In the Matter of Alexion Pharmaceuticals, Inc., Adm. Proc. File No. 3-19852 (July 2, 2020). Alexion is a global biopharmaceutical company. Drugs developed by the firm serve patients with life-threatening, rare and ulta-rare diseases. The transactions here involve a drug called Soliris, developed and approved to treat two such diseases. Sales of Soliris during the period 2010 through 2015 were effected through local subsidiaries. In Turkey the firm entered the market in 2009. Sales lagged. The next year a senior Ministry of Health official suggested making payments to government officials.
The firm retained a consultant who was paid over $1.3 million, portions of which went to local government officials. Two employees of the local subsidiary made some of the payments to the consultant by having local reimbursement records falsified. Records were made in pencil and little was furnished in the way of documentation to substantiate the claim that expenses were being reimbursed. Overall, the Turkish subsidiary of the firm was “unjustly enriched by over $6.6 million” as a result of the scheme, according to the Order.
In Russia, the local subsidiary of the firm also paid officials to sell the drug. Soliris was sold through an NPS process. Reimbursements were made through regional healthcare spending. The regions had to allocate funds to Soliris in the local budget. Over $1 million in payments to these officials were made over a four-year period, beginning in 2011, to increase the number of approved prescriptions. The payment records were falsified. As a result, Alexion was “unjustly enriched by over $7.5 million” through its Russian subsidiary, according to the Order. Finally, in the firm’s Brazil and Columbia subsidiaries, the record and control systems were inadequate. This permitted employees to divert funds from proper business purposes to other matters. The inadequacy persisted over a two-year period, beginning in 2014. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
In resolving the matter Alexion undertook certain remedial efforts and cooperated with the staff’s investigation. The firm consented to the entry of a cease and desist order based on the sections cited in the Order. Alexion will also pay disgorgement of $14,210,194 and prejudgment interest of $3,766,337. The funds will be paid to the U.S. treasury, “subject to Exchange Act Section 21F(g)(3). The firm will pay a penalty of $3.5 million. That amount will be paid to the U.S. treasury, “subject to Exchange Act Section 21F(g)(3).
U.S. v. Lavidas, No. 1:19-cr-00716 (S.D.N.Y. Sentenced July 6, 2020) is a proceeding in which Telemaque Lavidas, an entrepreneur and pharmaceutical company executive, was sentenced to serve one year and a day in prison after being convicted of insider trading by a jury. Defendant’s father, a prominent Greek business man who was on the board of Pharmaceuticals, Inc. during the period the firm was developing a cancer drug. As the drug progressed the father tipped his son who intern told his friend Georgios Nikas who traded and tipped others. Mr. Nikas and those he tipped made over $15 million in illegal profits.