A look forward – a look back:

The new year looms with a host of issues for Chairman Jay Clayton and the other Commissioners. Those range from issues keyed to enforcement such as the availability of disgorgement to challenges from a group of state AGs regarding Regulation Best Interest and consternation over the recently modified no-action process of Corporate Finance. Collectively or individually these and other issues on the horizon have the potential to rewrite the rules on how matters are governed and/or handled.

Looking back at the last year, the cases filed in recent days seem be somewhat of a microcosm of the recent past, echoing at least some of the key themes: Pay-to-play, offering frauds, insider trading and undisclosed conflicts of an investment advisor. Those issues have been important for the Enforcement Division in the recent past. Whether they will continue to be key as the agency enters a new decade and additional matters looming on the horizon come into focus is difficult to discern. In probability, the new year will bring a mix of the old, blended and altered by the new in ways that are difficult to prognosticate. It should be a very interesting ride.

SEC Enforcement – Filed and Settled Actions

The Commission filed 2 civil injunctive actions and 1 administrative proceeding last week, exclusive of 12j and tag-along actions.

Insider trading: SEC v. Waldman, Civil Action No. 17-Civ-02088 (S.D.N.Y) is a previously filed action which names as defendants James Shaoul and Roger Schaoul, among others. The action centers on the tender offer by Intel Corporation for Mobileye, N.V., an Israel based software and technology developer. Executives at that firm tipped James Shaoul who intern tipped his brother Roger and his friend Amir Waldman about the deal. Judgments were entered against Roger and James Shaoul, enjoining them from future violations of Exchange Act Sections 10(b) and 14(e). Roger Shaoul was also ordered to pay disgorgement in the amount of $925,435, prejudgment interest in the amount of $3,143.95 and a penalty equal to the amount of the disgorgement. James Shaoul was ordered to pay a civil penalty of $4,145,982. See Lit. Rel. No. 24698 (Dec. 23, 2019).

Pay-to-play: SEC v. Kang, Civil Action No. 247000 (S.D.N.Y.) is a previously filed action which named as defendants Navnoor Kang, former director of fixed income for the NY State Common Retirement Fund, Gregg Schonhorn and Deborah Kelly, each of who were registered representatives at different brokerage firms. The Commission’s complaint alleged that Mr. Kang directed up to $2.5 billion in state business to the firms’ of Defendants Schonhorn and Kelley in return for tens of thousands of dollars in personal items. The Court entered final judgments as to each defendant based on consent. Each was enjoined from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Kang is also enjoined from participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee or agent. Previously, the Commission entered administrative orders regarding the other two defendants that bar them from the securities business. Defendants Kang, Schonhorn, and Kelley also agreed to pay disgorgement of $182,422, $3,598,046 and $168,721, respectively, plus prejudgment interest which is deemed satisfied by the restitution and/or forfeiture ordered in the parallel criminal actions. See Lit. Rel. No. 16-cv-9829 (Dec. 21, 2016).

Insider trading: SEC v. Wang, Civil Action No. 19-12557 (D. Mass. Filed Dec. 20, 2019) names as a defendant Songjiang or Sam Wang, the Director of Statistical Programing at Merrimack Pharmaceuticals, Inc. On two occasions, one in 2013 and a second in 2014, Mr. Wang tipped his close friend Schultz Chan about positive drug trial results. Mr. Chan traded prior to each announcement, yielding collective profits of about $245,203. Later in 2015 Mr. Wang, the Director of Biostatistics at Akebia Therapeutics, Inc., tipped his friend with information take from his firm. Mr. Wang traded prior to the public release of the information, yielding profits of over $108,000. The complaint alleged violations of Exchange Act Section 10(b). Both men were charged in parallel criminal actions brought b the U.S. Attorney’s Office for the District of Massachusetts. See also SEC v. Chan, Civil Action No. 1:16-cv-11106 (D. Mass. Filed June 14, 2016). See Lit. Rel. No. 24697 (Dec. 20, 2019).

Microcap fraud: SEC v. Kelley, Civil Action No. 2:14-cv-2827 (D.N.J.) is a previously filed action which named as a defendant S. Paul Kelley and others. The action centered on transactions in which defendants took two Chinese companies public through reverse mergers. In doing so they concealed their control over the entities through a number of off-shore vehicles, distributed unregistered shares and manipulated the share price. The Court entered an order directing that Defendant Robert Agriogianis, one of the group members, pay disgorgement of $1.3 million. The other defendants previously settled. See Lit. Rel. No. 24696 (Dec. 20, 2019).

Internal controls: In the Matter of Quantum Corporation, Adm. Proc. File No. 3-19626 (Dec. 20, 2019) is an action which names the manufacturer of hardware as a Respondent. Over about two years, beginning in 2015, the firm improperly recognized revenue from dozens of channel partners to whom it sold products. By late 2017 the firm recognized the errors and was forced to restatement its financial statements. The errors were caused by deficient internal controls. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $1 million.

Conflicts: SEC v. Springer, Civil Action No. 2:19-cv-02559 (E.D. CA. Filed Dec. 19, 2019) is an action which names as defendants Keith Springer and his firm, Springer Investment Management, Inc., a Commission registered investment adviser. The action traces to early 2014 when Mr. Springer and his firm began engaging in a pattern of deceptive conduct focused on retirees and near-retirees. Specifically, misstatements were made regarding Defendants compensation, conflicts of interest, expertise and Mr. Springer’s prior disciplinary history with the NYSE. The deception continued after investors became clients of the firm. Those clients were directed to investments that were focused on yielding Defendants millions of dollars in compensation. The complaint alleges violations of Advisers Act Sections 204, 206(1), 206(2), 206(4) and 207. The case is pending. See Lit. Rel. No. 24695 (Dec. 20, 2019).

CFTC

Manipulation: CFTC v. Rivoire, Civil Action No. 1:19-cv-11701 (S.D.N.Y. Filed Dec. 20, 2019) is an action which names as a defendant Christophe Rivoire, a resident of France and Head of North American Rates for the U.S. affiliate of a global investment bank. Defendant is alleged to have conducted a manipulation scheme to benefit his employer in an interest rate swap transaction with a bond issuer. The scheme took place in June and July 2012. During that period Mr. Rivoire worked with a trader under his supervision to “push the screen” regarding an upcoming U.S. dollar-denominated bond issuance with a five-year maturity, scheduled to be priced in July. Defendant was concerned about whether his employer would make money on the swap. To ensure that result, before the open on the day of the pricing, Mr. Rivoire worked with one of his traders to move the price and impact the spot in a manner that would be favorable to his firm. The complaint alleges violations of Section 6(c)(1) of the CEA. The case is pending.

Criminal cases

False broker-dealer records: U.S. v. Seidel, No. 1:19-mj-1952 (S.D.N.Y. Filed Dec. 23, 2019) is an action which names a defendants Alan Seidel and Benjamin Mekaway, with falsifying the books and records of broker dealer Seidel & Co., LLC. Those books and records were subsequently filed with the SEC and used to cover up the fact that the firm had net capital violations. Defendants are also charged with making false representations to the SEC. The scheme began in late 2016. The complaint includes one count of conspiracy, one count of falsifying required books and records of a broker-dealer and one count of falsifying records in a federal investigation. The case is pending.

Offering fraud: U.S. v. Dodson (C.D. Ca. Filed Dec. 20, 2019) charges Joe Stanton Dodson, the CEO of an energy company, with four counts of wire fraud, three counts of mail fraud and three counts of money laundering. The charges are based on a scheme that began in November 2012 and continued until May 2015 in which $15 million was raised by selling interests in three limited partnerships of oil and gas entities using a series of misrepresentations. Since the funds were comingled, expenses from one entity were paid by another. Mr. Dodson also misappropriated part of the funds from the entities. The case is pending.

Australia

Financial reporting: The Australian Securities and Investment Commission noted that The Environmental Group amended its accounting for the acquisition of two firms during the year ended June 30, 2019. The acquisition charges, which had previously been recorded as goodwill, were expensed. The amendment followed inquiries by the ASIC. The Commission noted that under the pertinent regulations, directors are primarily responsible for the quality of an entity’s financial report.

Hong Kong

Disclosure of interests: The Securities and Futures Commission reprimanded and fined Adams Asset Management (HK), a registered entity, $2.5 million for failing to ensure that the proper disclosures were made to the Exchange and the relevant listed companies regarding notifiable interests in the shares of certain Hong Kong listed firms in the portfolios it managed. This relates to 339 disclosure notices. The firm failed to properly implement the appropriate procedures to ensure that the required disclosures were made.

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Merry Christmas

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