by T. GormanPosted on Posted in SECActions

The Commission resolved its second action arising out of undisclosed conflicts tied to a municipal bond offering used to fund construction for charter schools. SEC v. Rangel, Civil Action No. 1:16-cv-06391 (N.D. Ill. Filed June 21, 2016). Defendant Juan Rafael Rangel began work at United Neighborhood Organization of Chicago or UNOC as Director of Programs. UNOC is a non-profit that provides management services to UNO Charter School Network, Inc., the operator of 16 charter schools in Chicago. It is the largest operator of charter schools in the state. In March 1996 he became UNOC’s CEO and President of UCSN. He was also a member of the board of UNOC and UCSN. Through his position Mr. Rangel was involved in every aspect of the management of the schools.

UNO became involved with charter schools in the late 1990s when its first school was opened. Between 2005 and 2009 the firm developed a network of charter schools. Increasingly, the firm needed more space. UNO lobbied the state of Illinois for school construction grants. In 2009 the state appropriated $98 million to fund the construction of charter schools for UNO. The next year UNO entered into a grant agreement with the Illinois Department of Commerce and Economic Opportunity or IDCEO. A second grant followed. The grants were for the construction of three schools.

Each grant agreement contained a provision regarding conflicts involving the officers and directors of the firms and their family members. In part the provisions prohibited conflicts which might give the appearance of “being motivated by a desire for private gain . . . for themselves or others, particularly those with whom they have family business . . .” Each agreement also stipulated that there were no existing conflicts and that IDCEO would be notified if one arose. Each concluded by providing that if there was a violation of the conflict provisions, the Agreements were suspended and the grant funds could be recovered in which case there would be no other source of funds for the construction. At the time of the grants Defendant was the CEO of UNOC, President of UCSN and a member of the UNOC and UCSN boards. UNO’s COO was Senior Vice President/Chief Operating Officer for UNOC. Defendant was a good friend of UNO’s COO and his family.

In connection with the construction of three schools a Window Subcontractor and Owner’s Representative were engaged to work on the projects. The Window Subcontractor was owned by a brother of UNO’s COO. The Owner’s Representative was owned by another brother of UNO’s COO. IDECO was not notified in writing as required by the agreements.

In October 2011 Charter School Refunding and Improvement Revenue Bonds were issued in the principal amount of approximately $37.5 million. The Official Statement that informed investors about the “Conflicts Policy.” That policy, investors were told, was more robust than required. The conflict regarding the Owner’s Representative was disclosed. The conflict regarding the Window Subcontractor was not. Investors also were not told that IDCEO had not been advised about the agreements. Nor were they told that IDCEO could recoup the grant money, effectively ending the construction and any ability to repay the bonds. The statement was signed by Defendant.

In February 2013 the Chicago Sun-Times published an article concerning the use of state grant funds. That article alleged violations of the conflict provisions of the grant agreements. UNO disputed the conflict allegations but noted that it decided to terminate its employment relationship with UNO’s COO, suspend its contract with the Owner’s Representative and authorized the retention of a retired federal judge to head an inquiry. Two months later IDCEO sent a letter stating that the grant agreements would be temporarily suspended and that additional payments would be withheld until further notice.

The complaint alleges violations of Securities Act Section 17(a)(2). Mr. Rangel resolved the action by consenting to the entry of a permanent injunction based on the Section cited in the complaint and by agreeing to be barred from participating in municipal bond offerings except for his own account. He also agreed to pay a civil penalty of $10,000. See Lit. Rel. No. 23578 (June 21, 2016).

The initial action based was resolved with defendants UNOC and UCSN agreeing to undertakings to improve their internal procedures and training. An independent monitor was also appointed. SEC v. United Neighborhood Organization of Chicago, Civil Action No. 1:14-cv-04044 (N.D. Ill. Filed June 2, 2014).

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by T. GormanPosted on Posted in SECActions

A Massachusetts based medical imaging company resolved FCPA charges with the DOJ and the SEC stemming from actions taken by its Danish subsidiary and its CFO. The actions center on about 180 suspicious transactions in Russia involving $21.6 million in revenue and another 80, valued at about $3.8 million, in Ghana, Israel, Kazakhstan, Ukraine and Vietnam. The transactions took place from 2001 through early 2011. The DOJ resolved the action with a non-prosecution agreement and the payment of a criminal fine based on partial cooperation. The SEC, noting that the firm “generally cooperated,” resolved its case with a settled administrative proceeding involving the firm and the former CFO of the subsidiary. In the Matter of Analogic Corporation, Adm. Proc. File No. 3-17305 (June 21, 2016).

Analogic Corporation is based in Peabody, Massachusetts. The firm sells advanced medical imaging, ultrasound and security technology systems. Lars Frost, also named as a Respondent by the SEC, is a resident of Denmark. Beginning in late October 2008, and continuing through September 2011, he served as the corporate controller and CFO of BK Medical ApS, a wholly owned Danish subsidiary that sells ultrasound equipment.

Analogic’s ultrasound business is largely conducted by BK Medical. Sales are to end users either directly or through distributors. The scheme at the center of the two actions was implemented through distributors. The transactions in Russia are typical. They were implemented in a series of steps:

Sale terms: The terms of the deal were set. BK Medical and the Russian distributor agreed on the terms of a sale and its actual price. BK Medical then created a fictitious invoice at an inflated price which was often 100% higher than the actual price.

Invoice: BK Medical’s customer service staff created a false invoice using a cut and paste process. The false invoice would accompany the product when shipped.

Contract: Frequently the distributor would send BK Medical a proposed contract for the sale at the inflated price. The contract would be executed.

Payment: The distributor would pay the inflated price. BK Medical only recorded the agreed upon actual price. The balance of the payment was credited to the accounts receivable for the distributor. That resulted in a net credit position for the distributor.

Third party payments: Later the distributor would direct BK Medical to make a payment from the accounts receivable balance to a third party. The payment would be made without any due diligence. The payees included apparent shell companies in various parts of the world. The payments were not made through BK Medical’s accounts payable system as required by the internal controls. Rather, there was just a credit to cash and an offsetting debit to the distributor’s receivables account. Signatures were executed on the fake invoice.

Amounts: The majority of the third party payments were less than the amounts by which the distributor had previously overpaid.

A similar procedure was used to implement the scheme in the five other countries involved. The BK Medical CFO personally signed off on 150 of the payments.

The scheme either emerged, or a red flag appeared, in two instances during its course, but it continued. The first was in 2004 when the BK Medical vice president of sales made inquiries at the Russian distributor. He learned that in the Russian market the word “bribe” is not used. Rather, the discussion focused on customer obligations. The second was in 2008 when a senior vice president at Analogic concluded that BK Medical presented a significantly greater risk of FCPA violations than the firm’s other lines of business. A recommendation was made to validate the partners of the distributor and business ethics and training was undertaken.

The DOJ resolved this matter with BK Medical by entering into a non-prosecution agreement. The firm admitted to the facts of the scheme in the agreement and paid a $3.4 million penalty. The DOJ considered the fact that the firm self-reported and its remediation for which it received credit. Only partial credit was given because initially only part of the facts learned in the firm’s internal investigation were disclosed.

The SEC’s Order alleged violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The firm consented to the entry of a cease and desist order based on Sections 13(b)(2)(A) and 13(b)(2)(B). It will pay disgorgement of $7,672,651 and pre-judgment interest. Mr. Frost consented to the entry of a cease and desist order based on the same Sections, and, in addition, Section 13(b)(5). He will pay a penalty of $20,000.

In resolving the case the SEC considered the firm’s cooperation which included: 1) self-reporting; 2) improving BK Medical’s distributor due diligence and distribution agreements; 3) terminating a number of employees including Mr. Frost, the vice president of sales and disciplining others; 4) enhancing the parent’s general oversight of the subsidiary and hiring a corporate compliance officer; 5) remediating and improving the internal controls; and 6) requiring additional and ongoing compliance training at the parent and subsidiary agreement.

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