SEC Chair Mary Jo White announced that she will step down when the new administration takes over. That will leave the Commission with two sitting Commissioners unless there are confirmation hearings during the lame duck session which seems highly unlikely.
The SEC prevailed at trial in an insider trading case, securing a favorable jury verdict. The Commission, in conjunction with the DOJ and the Federal Reserve, settled FCPA charges with JPMorgan tied to its “Sons and Daughters” program which furnished jobs to relatives of government officials to secure business.
The agency also filed four other actions this week. One centered on an offering fraud involving a supposed energy company. Another was brought against the CEO of a U.S. subsidiary of a U.K. firm. It alleged that the CEO engaged in a series of actions which caused the premature recognition of revenue at the direction of senior finance officials of the parent firm. The other two actions centered on the sale of unregistered penny stocks.
SEC
Data base: The SEC approved a national market system plan to create a comprehensive database known at the consolidated audit trail This will permit regulators to track trading in U.S. securities more effectively (here).
CFTC
Remarks: Chairman Timothy Massad addressed the CME Global Financial Leadership Conference (Nov. 14, 2016). His remarks included a discussion of the impact of technology, including cyber attacks, on trading and potentially in the future as well as the significance of the clearing houses and market liquidity (here).
SEC Enforcement – Litigated Actions
Insider trading: SEC v. Sabrdaran, Civil Action No. 3:14-cv-4825 (N.D. Cal.). The SEC prevailed at trial in this action, securing a jury verdict against the defendant. The case centered on the December 17, 2010 announcement that pharmaceutical company InterMune, Inc. had secured the recommendation of European regulatory authorities to market its drug Esbriet in the European Union. On the date of the announcement the share price of InterMune’s NASDAQ traded shares jumped 151% while the price for its call options increased by over 356%.
Defendant Sasan Sabrdaran, a resident of San Francisco, was the director of Drug Safety Risk Management at InterMune. He is a long time friend of defendant Farhang Afsarpour, a British citizen and resident of Manchester, England. Mr. Afsarpour owned a number of restaurants.
In March 2010 InterMune submitted an application for marketing approval for Esbriet to the European Medicines Agency or EMA to market the drug in the EU. The firm had a small team whose job was to shepherd the application through the regulatory process. Mr. Sabrdaran began working with the team in June 2010 following which he was continually updated. Telephone and text messages indicate that prior to October 10 Mr. Sabrdaran began funneling information about the drug approval process to his friend, defendant Afsarpour. On October 11, 2010 Mr. Afsarpour opened a spread betting account with IG Index, a London based subsidiary of IG Group. Records indicate that subsequently the two men had additional communications. Indeed, on December 12, 2010 Mr. Afsarpour held “poker night” at his home at which he told participants to purchase stock. The next day Mr. Afsarpour sent a message on Facebook to a friend with the same message and agreed to buy shares for his friend in return for the purchase of gold.
Between December 10, 2010 and December 16, 2010 Mr. Afsoour purchased spread bets on the stock as well as shares. The broker hedged the spread bet positions by purchasing InterMune securities. Following the December 16, 2010 announcement Mr. Afsarpour had profits of $877,369. Others that he tipped also had profits. The complaint alleged violations of Exchange Act Section 10(b). Following trial the jury returned a verdict in favor of the Commission and against Mr. Sabrdaran. Remedies will be considered by the court at a date to be set.
SEC Enforcement – Filed and Settled Actions
Statistics: During the last week the SEC filed 1 civil injunctive case and 4 administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Carter, Civil Action No. 8:16-cv-02070 (C.D. Cal. Filed Nov. 17, 2016) is an action which names as defendants: Patrick Carter, formerly a registered investment adviser who has been sanctioned by Texas and California securities regulators; 808 Renewable Energy Corp., which was formed by Mr. Carter and whose shares are traded over-the-counter; 808 Investments LLC, a firm controlled by Mr. Carter; Peter Kirkbridge, engaged as a sales representative; Martin Kinchloe, also engaged as a sales representative; West Coast Commodities, LLC, a firm controlled by Mr. Kinchloe; Thomas Flowers, engaged as a sales representative; and T.A. Flowers, LLC, a firm owned by Mr. Flowers. 808 Renewable is supposedly engaged in the renewable and efficient energy business. Over a five year period beginning in 2009 Defendants sold securities in the firm to over 500 investors across the country, raising over $30 million. Using a PPM and additional oral representations, investors were told that there funds would be used to acquire additional equipment, expand the business, that sales commissions would not exceed 10% and that the company had been pre-approved for a listing on the NYSE. The representations were false. In fact much of the investor money was misappropriate by Mr. Carter and commissions of up to 25% were paid. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(each subsection) and Exchange Act Section 10(b) and 15(a). Defendant Flowers and his firm settled, consenting to the entry of a permanent injunction based on each of the Sections cited in the complaint except the Order as to T.A. Flowers LLC is not based on Securities Act Sections 5(a) and 5(c). The order also directs that they paid disgorgement and prejudgment interest in the amount of $1.6 million and a penalty o $160,000. It imposes penny-stock bars. The action is pending as to the other defendants.
Financial fraud: In the Matter of Christopher Egan, Adm. Proc. File No. 3-17678 (Nov. 15, 2016). Respondent was the Head of Sales and CEO of Autonomy, Inc., a subsidiary of Autonomy Corporation, Plc., a U.K. firm. Autonomy is a software company based in Cambridge, England and San Francisco, California. It shares were traded on the London Stock Exchange until October 2011. Autonomy provided enterprise software design and managed unstructured data such as emails, video and voice messages that are stored outside data bases. Beginning in 2009, and continuing until late 2011 when the firm was acquired by Hewlett-Packard Company, senior executives at Autonomy’s headquarters crafted an executed a scheme to inflate the firm’s revenue using over 30 transactions totaling almost $200 million. The scheme centered on five U.S. value-added resellers of Autonomy software. Essentially senior firm executives directed Mr. Egan to step in when a reseller had not completed a deal at quarter end. The company would recognize the revenue and Mr. Egan would try and complete the transaction. These transactions boosted revenue 15%. Other improper practices such as backdating agreements and round trip transactions to fund resellers when deals were not completed were also employed. On August 18, 2011 HP acquired Autonomy. The purchase prices was $11.1 billion, a 64% premium over Autonomy’s stock price at the time. By November 20, 2012 HP announced a non-cash impairment charge of $8.8 billion due largely to the deal. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceeding Mr. Egan consented to the entry of a cease and desist order based on the Section cited in the Order. He will also pay disgorgement of $800,669 (the value received in the merger for his firm shares) and prejudgment interest. A penalty was not imposed based on his cooperation in a Commission investigation and/or related enforcement action.
Insider trading: SEC v. Valvani, Civil Action No. 16 Civ 4512 (S.D.N.Y.) is a previously filed action which names as defendants Sanjay Valvani and Gordon Johnston. The action centered on the acquisition of inside information from the FDA regarding the approval for a drug by Mr. Johnston from his former colleagues at the agency. At the time he was a consultant to a hedge fund. Mr. Johnston concealed that fact from his friends when he procured the information. He then transmitted the information to the hedge fund that employed him. The fund made millions of dollars on the trades. To resolve the case Mr. Johnston was permanently enjoined from violating Securities Act Section 17(a) and Exchange Act Section 10(b). He will pay disgorgement in the amount of $108,00 and prejudgment interest. The court will determine on a motion by the SEC if a penalty should be imposed. See Lit. Rel. No. 23688 (Nov. 14, 2016).
Unregistered securities: In the Matter of Casey Cummings, File No. 3-17675 (Nov. 14, 2016) is a proceeding centered on the sale of millions of shares of an unregistered penny stock. In essence, an individual identified as Former CEO took over Issuer A’s predecessor company, caused the firm to issue a series of promissory notes convertible into shares and then gave part of a note to Respondent who converted it to shares that were sold. The shares were unregistered. The Order alleged violations of Securities Act Sections 5(a) and 5(c). To resolve the action Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. He is also barred from participating in any penny stock offering and will pay disgorgement of $102,296, prejudgment interest and a penalty of $100,000. See also OTC Global Partners, LLC, Adm. Proc. File No. 3-17676 (Nov. 14, 2016)(similar action involving Raimundo Dias and his firm, OTC Global; resolved with a cease and desist order based on the same Sections and the payment of disgorgement in the amount of $39,241, prejudgment interest and a penalty of $45,000; the question of a penny stock bar will be determined at a later date).
FCPA
In the Matter of JP Morgan Chase & Co., Adm. Proc. File No. 3-17684 (Nov. 17, 2016) is an action which names the international financial institution as a Respondent but centers on its Asia subsidiary, JPMorgan Securities (Asia Pacific) Ltd. or JPMorgan APAC. Beginning in 2006 senior officials at the subsidiary created a client referral program, sometimes called the Sons and Daughters Program, to generate business. Under the program candidates referred by clients and government officials were hired. Specifically, the program was intended to influence officials to award investment deals to JPMorgan APAC. Indeed the program was revamped in 2009 to prioritize hires linked to upcoming client transactions. For example, in 2009 a Chinese government official told officials at the subsidiary that hiring a referred candidate would significantly influence the role of the firm in an upcoming IPO for a Chinese SOE. JPMorgan APAC created a job for the person in the New York office, although the candidate was not qualified for an investment banking job. The firm was retained for the IPO.
Over 100 candidates referred by foreign government officials at more than twenty Chinese SOES were hired. The firm obtained over $100 million in business from the SOEs. In addition, referrals from over ten different government agencies were hired. The legal and compliance review for these referrals became a formality. JPMorgan APAC investment bakers and supporting personnel provided inaccurate or incomplete answers to secure approval. No candidate was rejected by the legal and compliance review. The SEC’s order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B).
To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will also pay disgorgement of $105,507,668 and prejudgment interest. Respondent also agreed to implement a series of undertakings.
JPMorgan APAC also settled with the Department of Justice. The firm entered into a non-prosecution agreement and, after admitting to the fact, agreed to pay a $72 million criminal fine. While the firm did not self-report it did cooperate with the investigation. That cooperation included conducting a internal investigation, making foreign based employees available for interviews in the United Sates, and producing document from foreign countries in a manner that did not implicate foreign privacy laws. The firm also terminated six employees who participated in the program and disciplined 23 others who failed to effectively detect the misconduct or supervised those who were involved. Ovr $18.3 million in financial sanctions were imposed on current and former employees. The fine paid acknowledges this cooperation – it is 25% below the bottom of the sentencing guidelines calculation.
Finally, the firm settled with the Federal Reserve System’s Board of Governors which issued a cease and desist order and assessed a $61.9 million civil penalty.
FINRA
Reporting violations: The regulator imposed $3.4 million on Oppenheimer & Co for reporting violations, failing to comply with discovery obligations in arbitrations and supervisory failures. Specifically, the firm failed to report that it had received a Wells Notice from the SEC related to AML failures, did not produce relevant documents as required in seven arbitrations between 2010 and 2013 and failed to reasonably supervise the application of sales charge waivers to eligible mutual fund sales.
Australia
Insider trading: Fei Yu was convicted of insider trading following his guilty plea. Mr. Yu admitted purchasing shares and contracts for a difference in Veda Advantage Limited in January 2007 while he possessed inside information about a proposed takeover of the firm by Pacific Equity Partners. The securities were purchased through accounts in the name of his mother and his name. He obtained the information from a friend employed by a financial adviser working on the deal.
U.K.
Offering fraud: David Gerald Dixon was charged by the Serious Frauds Office with defrauding investors by inducing them to purchase shares in the now defunct companies he created, Arboretun Sports (UK). Investors were told there was no risk and that there were dramatic rates of return in the gambling syndicate. In reality Mr. Dixon misappropriated the investor funds. He was convicted and sentenced to three years and ten months custody on each count and disqualified from serving as a company director for ten years. A confiscation order of £275,000 was entered against him. He has three months to satisfy the order or face two years imprisonment as a default sentence.
Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).
