by T. GormanPosted on Posted in SECActions

The SEC has been focusing on municipal bond offerings, filing a series of enforcement actions. An action brought this week is the first, however, based on the Dodd-Frank fraud section related to municipal advisers. The action center on the use of what the Orders allege is confidential information. In the Matter of School Business Consulting, Inc., Adm. Proc. File No. 3-17288 (June 13, 2016).

Respondents in the proceeding are Terrance Bradley, a 26 year veteran of a California school district and the founder of School Business Consulting. The firm was formed after his retirement from the school system to serve as a consultant for school districts.

In September 2010 Keygent LLC, a registered municipal adviser whose business focuses solely on advising school districts and community colleges regarding bond issues, retained School Business. The firm was named to Keygent’s Advisory Board and was paid a monthly fee. This gave the adviser access to the extensive contracts of Mr. Bradley throughout the California school system.

Among the clients solicited for Keygent were those of School Business. In some instances Mr. Bradley reviewed pitch books used by Keygent before they were sent to the school districts. In other instances he separately recommended to his clients that they meet with Keygent.

During the hiring process for five School Business clients, Keygent received confidential information about them from the firm. California law did not require a bidding process but many districts used one. Each of the candidates for the municipal advisor position were expressly directed not to have contact with any officials at the district except the single official specified in the RFQ. This limitation was intended to permit the districts to control the information disseminated, placing each candidate on the same footing. Mr. Bradley had drafted, or assisted in drafting, the RFQ documents used by five school districts.

Mr. Bradly provided what is alleged to have been confidential information to Keygent. That included advanced copies of draft interview questions; a draft of the RFQ document for one district which later incorporated a suggestion made by the adviser that required a competitor to disclose negative information; information about competitors; and advice on how to answer certain interview questions.

The school district clients were not aware that Mr. Bradley shared the information

with Keygent, although he did advise them of his affiliation with the firm and recused himself from the actual interview process for four of the five districts (one insisted he attend despite Mr. Bradley’s statement that he had a conflict). Mr. Bradley was not authorized to share the information.

Based on the foregoing School Business was engaged in the solicitation of a municipal entity, according to the Order. Accordingly, it was required to register as a municipal advisor under Exchange Act Section 15B(a)(1). Under Section 15B(c)(1) such an adviser has a fiduciary duty to its municipal entity clients. MSRB Rule G-17 requires that in the conduct of its municipal securities business every broker, dealer, municipal securities dealer and municipal adviser deal fairly with all persons and not engage in unfair, deceptive or dishonest conduct. Likewise, Exchange Act Section 15B(a)(5) prohibits fraudulent and deceptive practices while undertaking the solicitation of a municipal entity. The Order alleges violations of these Sections.

To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on Exchange Act Sections 15B(a)(1)(B), 15B(A)(5) and 15B(c)(1) and MSRB Rule G-17. Mr. Bradley was barred from the securities business. School Business was censured and will pay a penalty of $30,000. Mr. Bradley will pay a penalty of $20,000. See also In the Matter of Keygent LLC, Adm. Proc. File No. 3-17287 (June 13, 2016)(proceeding against the adviser and Anthony Hsieh and Chet Wang, both managing directors of the firm; the proceeding is based on the conduct detailed above; the firm agreed to a series of undertakings; Respondents consented to the entry of a cease and desist order based on Exchange Act Sections 15B(a)(5) and 15B(c)(1) and MSRB Rule G-17. The firm will pay a penalty of $100,000, Mr. Hsich $30,000 and Mr. Wang $20,000).

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by T. GormanPosted on Posted in SECActions

The SEC has been touting the large cash awards it has been handing out to whistleblowers. The agency views whistleblowers as a key source of potential information about wrong-doing which can give them tips and facilitate investigations. As part of these efforts the Commission has been advancing its view that to qualify as a whistleblower the person need not first report the information to the SEC. Compare Berman v. Neo@ogilvy LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015)(deferring to SEC view that need not first report to agency to be a whistleblower where statute is vague) with Assade v. G.E. Energy (USA), 720 F. 3d 620 (5th Cir. 2013)(holding that must first report to SEC to be whistleblower).

A recent decision by the eighth circuit court of appeals now adds to the debate over who can qualify as a whistleblower. Beacon v. Oracle America, Inc., No. 15-1729 (8th Cir. Decided June 6, 2016). There the court concluded that one must “establish that a reasonable person in his [the whistleblower’s] position, with the same training and experience, would have believed . . .” that the conduct complained of violated the federal securities laws to be engaged in protected activity.

Vincent Beacom joined Oracle America, Inc. in February 2011 as the Vice President of Sales in the Americas Division for the Retail Global Business Unit. The unit, which was divided into three regions, comprised a very small portion of Oracle’s business, generating about 0.4% of its $31 billion in revenue. It was run General Manager Michael Webster.

Mr. Webster changed the forecasting process after assuming his position. Previously, the firm used a bottom-up process. Mr. Webster shifted the revenue projection process to a top-down model. During the first three quarters of 2012 the process over-projected revenues. Nevertheless, the unit was only a small amount of sales away from meeting projections.

Mr. Beacom claimed that as a result of the missed projections the General Manager directed that deals be recorded which did not meet the appropriate criteria. He also claimed to have repeatedly voiced concerns to Mr. Webster about the new projection method which forwarded information up the management chain that might be used in the process of giving guidance.

On March 5, 2012 Mr. Webster was fired. That followed a January trip by Messrs. Beacom and Webster during which Mr. Beacom challenged the projection practice as “intentionally forecasting false revenue” and a meeting he had with an HR Representative during which concern was expressed over the process. Following his termination Mr. Beacom filed an action against Oracle alleging violations of the whistleblower protection statute.

The circuit court reviewed the suit following a grant of summary judgment by the district court in favor of the company. SOX prohibits a publically traded company from discharging an employee in retaliation for providing information to a supervisor or another person at the company about “any conduct which the employee reasonably believes constitutes a violation of” certain Sections of the Act, the applicable SEC rules or any provision of federal law relating to fraud against shareholders. To assert a claim the employee must establish four points: 1) that he engaged in protected activity; 2) his employer knew he was engaged in such activity; 3) that he suffered an adverse employment action; and 4) the protected activity was a contributing factor in the adverse action. If those points are established the employer may prove by clear and convincing evidence that it would have taken the same action absent the protected activity.

To qualify as protected conduct the complaint must satisfy an objective standard demonstrating that a person in the same position viewing the facts would reasonably believe that the employer violated the federal securities laws. This fact intensive standard is typically not conducive to summary judgment. It has been adopted by the second, third and sixth circuits.

Applying the objective standard against the record in this case, it is clear that the district court’s decision should be affirmed, the court concluded. The conduct here centers on projections. The projections involved missed the mark by no more than $10 million. In a firm which generates billions of dollars in revenue this would be insufficient to establish securities fraud. According, the claimed protected conduct fails the objective test. Mr. Beacom was not a protected whistleblower.

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