by T. GormanPosted on Posted in SECActions

In recent years the SEC has brought a series of investment and offering fraud actions. Typically those actions center on schemes which promise to-good-to-be-true returns in which investors lose substantial sums. In what may be a unique wrinkle, the Commission’s latest case in this series involves two securities professions using a firm which was, but apparently should not have been, a registered investment adviser, to market its fraudulent investment scheme first to a trust company later accused of fraud by the SEC and then to a firm operated by a convicted, enjoined and disbarred attorney operating under an assumed identity and an investment professional. SEC v. Paul, Civil Action No. 2:16-cv-01320 (E.D. Pa Filed April 1, 2016).

The defendants in the action are: Joseph Paul, a former registered representative; John Ellis, also a former registered representative; James Quay, an attorney convicted of tax fraud, disbarred and later enjoined in a Commission fraud action and ordered to pay over $2 million; and Donald Ellison, also a former registered representative.

Messrs. Paul and Ellis are the co-founders of Paul-Ellis Investment Associates LLC, registered as an investment adviser with the Commission in 2009 despite its apparent ineligibility. In 2011 the Commission cancelled the registration. Aptus Planning LLC was operated by Messrs. Quay and Ellison as an estate planning service.

Over a two year period beginning in 2010 Messrs. Clark and Ellis marketed themselves as experienced money managers with a highly successful track record in ETFs through their advisory firm, PEIA. Using a variety of offering materials the two men claimed to have investment strategies that generated returns from over 8% to as high as 56%. Those strategies, investors were told, were implemented through PEIA which supposedly had over $150 million in AUM.

In early 2011 Messrs. Clark and Ellison marketed their expertise and that of their firm to Summit Trust Company, a Las Vegas based, state chartered trust company. Summit marketed trust administration, estate planning and custodial services. The trust company began investing in PEIA. Eventually those investments totaled over $2.6 million. When the funds were withdrawn later in 2011 Summit had losses of about 28%, in addition to the almost $9,000 in advisory fees paid. Two years later the Commission filed a fraud action against Summit and its principles. Eventually a default judgment was entered.

Messrs. Paul and Ellis also began marketing PEIA to Messrs. Quay and Ellison and Aptus in 2011. PEIA marketing materials were furnished to Aptus and its principals regarding a claimed investment program. Without doing any due diligence on the fraudulent materials, Messrs. Quay and Ellison recommended the program to their clients using mass mailings and dinner seminars. Mr. Quay used an assumed identity to conceal his background. Fourteen investors put almost $1.3 million in the program. Portions of the funds were misappropriated by Messrs. Paul and Ellis. Other portions were lost as a result of unauthorized trading.

The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2), 206(4) and 207. The case is pending. See Lit. Rel. No. 23510 (April 4, 2016).

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by T. GormanPosted on Posted in SECActions

DOJ’s continuing focus on individuals has spawned a new one year FCPA Pilot Program which offers companies enhanced cooperation credit The new Pilot Program is part of an overall effort to bolster FCPA compliance. Those efforts include increasing the size of the Fraud Unit which supervises such investigations by 50%, adding 10 additional prosecutors, establishing three new FBI squads of special agents devoted to FCPA investigations and prosecutions and enhancing coordination with foreign counter-parts.

For companies that qualify for the additional cooperation credit under the Pilot Program there is the prospect of receiving a significant reduction off the bottom of the fine amount calculated under the sentencing guidelines and perhaps a declination. To be eligible for this new credit the company must disgorge all profits and meet the following criteria, according to a Memorandum authored by Fraud Section Chief Andrew Weissmann, dated April 5, 2016:

Self report: The firm must voluntarily self-report prior to an imminent threat of disclose by a government investigation. If the company has an obligation to take such action the DOJ will not consider it to be self-reporting. Likewise, the report must be timely, meaning that it is within a reasonable time after the company becomes aware of the offense. The report must contain all of the facts including those relating to individuals who participated in the offense.

Full cooperation: In addition to the requirements under the Principles of Federal Prosecution of Business Organizations, the reporting organization must meet a series of criteria to receive full credit under the Pilot Program. Those include:

  1. Disclosure on a timely basis of all facts relevant to the wrongful conduct, including those relating to actions by individuals;
  1. taking proactive steps to disclose facts related to the investigation and identifying opportunities for the government to obtain relevant evidence not within the firm’s possession or otherwise known to the government;
  1. preserving all relevant evidence;
  1. providing timely updates on the internal investigation of the company; where requested, de-confliction of a internal investigation with the government investigation;
  1. furnishing all relevant facts regarding the potential criminal conduct of third-party companies and their employees;
  1. on request making current and former employees available for interview by the DOJ;
  1. making all relevant facts gathered by the company along with those from its internal investigation availalbe, including the attribution of facts to specific sources where that will not violate privilege;
  1. the disclosure of overseas documents and where they were located, unless such disclosure is prevented by foreign law; the firm has the burden of establishing that it worked diligently to identify all available legal avenues for making the evidence available but that it is precluded;
  1. facilitating the third party production of documents and witnesses from foreign jurisdictions unless prohibited; and
  1. when requested furnishing translations.

To qualify for full credit under the Test Program the firm must also take a series of remedial actions. Those include demonstrating that the firm: has a culture of compliance; that sufficient resources are dedicated to compliance and that the function is independent; that an effective risk assessment tailored to the situation has been done; how compliance personnel are compensated and promoted compared other employees; that auditing is done of the compliance function to assure effectiveness; the reporting structure of compliance within the company; that appropriate discipline is undertaken; and any additional steps necessary to demonstrate recognition of the seriousness of the firm’s misconduct, acceptance of responsibility and the implementation of the remedial steps.

Firms which quality may secure a 50% reduction off the bottom end of the guideline range for the fine and generally should not require a monitor. If the firm does not self-report but meets all the other criteria of the program it may obtain up to a 25% reduction off the bottom of the guideline range for the fine.

The goal of the Program is enhanced compliance. As the Memorandum makes clear, the Test Program “is intended to encourage companies to disclose FCPA misconduct to permit the prosecution of individuals whose criminal wrongdoing might otherwise never be uncovered by or disclosed to law enforcement. Such voluntary self-disclosures thus promote aggressive enforcement of the FCPA and the investigation and prosecution of culpable individuals.”

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