by T. GormanPosted on Posted in SECActions

The cover-up is virtually always worse than the underlying conduct. History is replete with instances where improper or even wrongful conduct was severely aggravated by an effort to conceal the conduct. That is precisely the case of former investment adviser – broker-dealer CEO who sought to conceal referral fees paid to attorney Peter Hershman. In the Matter of John W. Rafal, Adm. Proc. File No. 3-17760 (January 9, 2017); In the Matter of Peter Hershman, Esq., Adm. Proc. File No. 3-17761 (January 9, 2017).

Mr. Rafal was the CEO of dual registered Essex Financial Services, Inc. which held majority ownership of Essex Savings Bank. Mr. Rafal had a partial ownership interest in Essex Financial. Mr. Hershman was a Connecticut attorney who specialized in business, estate planning and tax law.

In 2010 Mr. Hershman began discussing the referral of a wealthy widow, one of his legal clients, to Mr. Rafal and Essex Financial. The client had combined assets of over $100 million. By the next year the two men reached an agreement under which attorney Hershman would be paid an annual fee of $50,000 quarterly from the advisory fees for referring the client. Mr. Hershman was to become a registered investment adviser.

The client subsequently retained Essex Financial to manage a portion of her funds. While Mr. Hershman failed to become an investment adviser he did stay in touch with the client and Mr. Rafal. He also continued to try and refer clients to the firm.

In mid-July 2012 the two men agreed that Mr. Hershman would bill Essex using statements representing that the payments were for legal fees. Eventually the fees were paid. Internal complaints at Essex concerning the undisclosed solicitation payments, however, resulted in a demand by the firm that they be repaid the next year. Although part of the fees was repaid to the firm Mr. Rafal made other arrangements to pay the fees. The fee arrangement was never disclosed to the clients.

In 2013 Mr. Rafal believed that rumors were circulating concerning him and the payment of illegal fees. He t sent a number of emails to firm clients and others falsely stating that the SEC had investigated the matter and issued a “no action” letter. When senior firm officials discovered the emails they ordered them retracted. Mr. Rafal complied.

Subsequently, Mr. Rafal testified in an investigation conducted by the Commission staff. During his testimony he stated that the fees had been repaid. He concealed from the staff the fact that he had made arrangements to pay the fees from accounts he controlled.

The Order as to Mr. Rafal alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the case Mr. Rafal admitted to the facts in the Order and consented to the entry of a cease and desist order based on the Sections cited in the Order. He is also denied the privilege of appearing or practicing before the Commission as an attorney and barred from the securities business and from participating in any penny stock offering. Mr. Rafal will pay disgorgement of $275,000, prejudgment interest and a penalty of $275,000. The U.S. Attorney for the district of Massachusetts announced criminal charges against Mr. Rafal for obstructing the proceeding of a federal agency.

The Order as to Mr. Hershman alleges violations of Advisers Act Section 206(1) and 206(4). Respondent Hershman resolved the action by consenting to the entry of a cease and desist order, without admitting or denying the facts, based on the Sections cited in the Order. He is also barred from the securities business and from participating in any penny stock offering. In addition, Mr. Hershman will pay disgorgement of $49,760, prejudgment interest and a penalty of $37,500. See also In the Matter of Essex Financial Services, Inc., Adm. Proc. File No. 3-17762 (proceeding against the firm alleging violations of Advisers Act Section 206(4); resolved with a consent to a cease and desist order and the payment of $170,000 in disgorgement and prejudgment interest).

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by T. GormanPosted on Posted in SECActions

The books, records and internal control provisions are an integral part of the FCPA. The Commission’s most recent action involving those provisions, however, centers on a claimed internal control failure by a firm when retaining a foreign agent and imposes liability on that firm and its subsequent acquirer without specifying an facts supporting the claim as to the acquiring firm. In the Matter of Cadbury Limited, Adm. Proc. File No. 3-17759 (January 6, 2017).

Cadbury is a U.K. based distributer of confectionaries and snack beverages. Its shares were listed on the NYSE at the time the firm was acquired by Respondent Mondelez International, Inc., on February 2, 2010. Cadbury’s shares were delisted later in 2010. Mondelez at the time was known as Kraft Foods.

Prior to its acquisition Cadbury conducted business in more than 30 countries, including India. In November 2009 the firm decided to increase production capacity in that country. To assist with the implementation of the project the firm decided to retain Agent No. 1. Following meetings with the company in January 2010, and obtaining two quotations from Agent No. 1, Cadbury India employees in Baddi where the project would take place recommended retention of the agent. No additional due diligence was undertaken. Shortly thereafter the Agent began work. A letter authorizing the representation was executed by Cadbury India on February 23, 2010.

Between February 10, 2010 and July 2010 Agent No. 1 submitted five invoices totaling $110,446. The Order quotes the invoices as stating that the services were for “providing consultation, arrange statutory/government prescribed formats of applications to be filed for the various statutory clearances, documentation, preparation of files and the submission of the same with govt. authorities” for specific licenses. The actual license applications were prepared by employees in the local subsidiary. Cadbury India obtained some of the licenses and approvals for the project.

At the time of the February 2, 2010 acquisition, Mondelez was unable to conduct complete pre-acquisition due diligence. Later in the year substantial, risk based post-acquisition compliance was conducted. That work did not identify the relationship with Agent No. 1.

In late 2010 the firm conducted an internal investigation related to Agent No. 1. The relationship was terminated. Mondelez took extensive remedial actions.

The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Cadbury India “did not conduct appropriate due diligence on, and properly monitor the activities of, Agent No. 1, which created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized purposes. In addition, Cadbury India’s books and records did not accurately and fairly reflect the nature of the services rendered by Agent No. 1.” There is no specification of what additional work Cadbury should have conducted. There is no allegation that Mondelez should have conducted additional post acquisition due diligence. And, there is no specification of facts supporting the claim that the books and records were false other than the quotation from the invoices set forth above.

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