Deputy AG Sally Yates defended the DOJ corporate cooperation policy she with which she is identified in remarks this week. That policy requires business organizations to identify individuals and furnish the evidence regarding their misdeeds to earn cooperation credit. Ms. Yates insists that the policy is the new normal.
A report by Cornerstone Research concluded that the number of class actions centered on accounting issues continued to increase last year. Financial fraud and accounting actions is an area of focus for the SEC in recent years.
Finally, the SEC brought three civil injunctive actions this week. One focused on a shell creation group that had turned out nine fraudulent shells; a second involved an offering fraud implemented by a defendant in pending SEC and DOJ enforcement actions who was raising money for his defense; and a third centered on the misappropriation of client funds by a high end investment adviser.
SEC
Remarks: Andrew Ceresney, Director, Division of Enforcement, delivered remarks titled “Private Equity Enforcement” at the Securities Enforcement Forum West, San Francisco, CA (May 12, 2016). The Director’s remarks focused on issues related to undisclosed fees, fee shifting and conflict issues in private equity (here).
Remarks: Chair Mary Jo White delivered remarks titled “New Ways for the Financing of Small and Medium Enterprises and the Challenges of Crowdfunding” to IOSCO Panel 1, Lima, Peru (May 11, 2016). Her remarks focused on crowdfunding and alternatives (here).
Remarks: Commissioner Kara Stein delivered remarks titled “Digital Age Time for a New Revolution” at the Rocky Mountain Securities Conference, Denver, Colorado (May 6, 2016). The Commissioner addressed the need to update disclosure provisions for a digital age (here).
DOJ – Cooperation
Deputy Attorney General Sally Yates, in remarks delivered to the New York City Bar Association White Collar Crime Conference (May 10, 2016)(here), provided an update on the implementation of what has become known as the Yates Memo – the DOJ’s most recent iteration of its cooperation standards for business organizations. The Yates Memo states that “a company provide all the facts about individual conduct in order to qualify for any cooperation credit.” This is not new the Deputy AG suggested. And, while many have expressed concern about the policy, it is having a salutary effect, she noted. Indeed, other DOJ divisions are revamping their standards. While “change is hard” the Ms. Yates noted, this is the “new normal will exist.”
Accounting class actions
Last year the number of securities class actions filed with accounting allegations exceeded the average over the last ten years, according to a report prepared by Cornerstone Research titled Accounting Class Action Filings and Settlements, 2015 Review and Analysis (here). Likewise, the number of accounting cases filed last year alleging internal control violations was the highest since 2006 the Report notes. The 71 accounting cases filed last year is the highest number since 2011 when 80 such actions were initiated. At the same time the percentage of securities class actions that contain accounting allegations declined to 38% of the total cases filed (71 of 118) compared to 41% (69 of 101) in the prior year. The largest percentage of those accounting cases (38%) were filed in the ninth circuit – the highest number of such cases filed there in ten years. The number of actions involving firms listed on the NASDAQ and the NYSE was about evenly split.
Finally, last year about 30% of the accounting cases involved a restatement. That represents a decline from the 42% in the prior year, 40% in 2013 and 38% in 2012. In contrast, over the past six years most accounting cases contain allegations regarding internal controls. That trend accelerated last year with 52% of the actions containing such a claim. Similarly, the number of accounting case settlements containing such an allegations was the highest in 10 years.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 3 civil injunctive actions and 0 administrative proceedings, excluding 12j and tag-along proceedings.
Shell creation: SEC v. Husain, Civil Action No. 2:16-cv-03250 (C.D. Cal. Filed May 12, 2016) names as defendants Imran Husain and Gregg Jacin. The complaint alleges that the two men ran a “shell creation” factory which turned out shell companies with a business plan that was not implemented, false legal documents and a misleading registration statement filed with the Commission. Nine fraudulent shells were created, raising about $2.25 million. Stop orders were entered. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(d). The action is pending. See Lit. Rel. No. 23537 (May 12, 2016).
Offering fraud: SEC v. Arher, Civil Action No. 16-cv-3505 (S.D.N.Y. Filed May 11, 2016) is an action which names as defendants, Devon Archer, Bevan Cooney, Hugh Dunkerley, Jason Galanis, John Galanis, Gary Hirst and Michelle Morton. The case centers on a scheme initiated by Jason Galanis, a defendant in a prior Commission fraud action and a parallel criminal action, his father John and others involving a bond offering by a Native American tribe. Specifically, the two Galanis defendants, along with the others, induced the tribe to conduct a bond offering they had structured which was supposed to raise cash for annuities to benefit the tribe. Jason Galanis arranged for the $43 million offering to be purchased by two investment advisory firms with client funds. The proceeds were then diverted to the use of the defendants. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and 20(3), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4). See Lit. Rel. No. 23535 (May 11, 2016). A parallel criminal action was filed by the U.S. Attorney’s Office for the Southern District of New York.
Misappropriation: SEC v. Blazer, Civil Action No. 1:16-cv-03384 (S.D.N.Y. Filed May 6, 2016). Defendant Louis Martin Blazer III created a “premier” personal services advisory firm that catered to professional athletes, entertainers and high net worth individuals and their families. Based in Pittsburgh, Pennsylvania, Mr. Blazer, through a series of controlled entities, two of which were registered investment advisers for a time, performed services such as paying client bills, managing aspects of their personal lives and financial commitments, creating budgets and paying taxes. Mr. Blazer misappropriated about $2.3 million from clients between October 1, 2010 and January 2013. He had, however, returned about $790,000. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending.
Criminal cases
Manipulation: U.S. v. Mulholland (E.D.N.Y. May 9, 2016). Gregg Mulholland pleaded guilty to charges based on the manipulation of 40 different firms’ securities over a four year period, beginning in 2010. The manipulations yielded over $250 million in trading profits which were laundered through attorney accounts. Mr. Mulholland pleaded guilty to money laundering conspiracy. Mr. Mulholland was the secret owner of Legacy Global Markets S.A., an offshore broker-dealer and investment management company. The firm was based in Panama City, Panama and Belize City, Belize. Shell companies in Belize and Nevis, West Indies run by nominees were used to conceal the stock ownership of the group. While the group members also used aliases when conducting the market manipulations, in May 2014 Mr. Mulholland was caught on a court ordered wire tap admitting that he owned all the shares of a stock being manipulated. Following that statement the share price for the stock rose from $0.06 to $13.90 per share giving the firm a market valuation of over $ 4 billion at a time when it had no revenue or assets. The services of a U.S. based lawyer were used to launder the proceeds from that transaction and others.
FINRA
Supervision: The regulator fined Stephens Inc. $900,000 for inadequate supervision over the period 2013 to January 2016 of “flash reports” – that is, reports from research analysts that might have material non-public information in them.
PCAOB
Proposed standard: The Board re-proposed for public comment the auditor reporting standard to enhance the auditor’s report after receiving extensive public comments. The new standard provides additional information in the report regarding the communication of critical audit matters, auditor independence and auditor tenure (here).
U.K.
Insider dealing: Martyn Dodgson and Andrew Hind were convicted in a proceeding initiated by the Financial Conduct Authority alleging insider dealing in four stocks following a three month trial. Three others were acquitted. Mr. Dodgson had been employed at Morgan Stanley and other investment banks. He sourced the inside information from deals he worked on or the firm and furnished it to Mr. Hind who placed the trades.
