by T. GormanPosted on Posted in SECActions

Since the market crisis there has been a continuing outcry about holding senior corporate executives responsible. From Capitol Hill to citizens across the land there has been a continuous demand for some kind of Judge Roy Bean justice – hang them high! The Department of Justice has brought a series of actions against major Wall Street banks and others. The SEC has prosecuted dozens of cases, some of which named individual corporate officers as defendants. The penalties have grown in size from the hundreds of thousands of dollars initially imposed on one prominent Wall Street bank by the SEC to the billions the banks have recently paid to resolve actions. New polices like the Yates memo, demanding firms point the figure at executives to win cooperation credit have been adopted. Yet the clamor continues.

The latest iteration of the demand for a return to Judge Bean justice emerged from the Office of Senator Elizabeth Warren in a Report titled “Rigged Justice: 2016, How Weak Enforcement Lets Corporate Offenders Off Easy” (here). One need not read past the title of what promises to be an annual review, to garner the key theme — why are senior corporate executives such as those who run Wall Street banks not in jail? The Report explains: The Department of Justice “rarely seeks prosecution of individuals.” Their failure seems to be augmented by the SEC which is “particularly feeble, often failing to use the full range of its enforcement toolbox. Not only does the agency fail to demand accountability, the SEC frequently uses its prosecutorial discretion to grant waivers to big corporations so that those companies can continue to enjoy special privileges . . .”

In support of its thesis the Report goes on to summarize a number of key DOJ and SEC cases. Those cases are divided into seven categories: 1) Financial crimes and offenses; 2) education and student loans; 3) automobile safety law violations; 4) occupational safety laws; 5) environmental laws; 6) trade laws; and 7) drug manufacturer laws.

Threaded through the cases summarized in each category are two central themes: No individual prosecutions; no admissions made by the company. The discussion of the SEC’s settlement with Deutsche Bank is emblematic: “In May 2015, Deutsche Bank AG agreed to pay approximately $55 million to the SEC to settle allegations that the bank hid losses of over $1.5 billion in 2008-2009. The SEC stated that Deutsche Bank’s statements did not accurately reflect the ‘significant risk” it faced. Despite the fact that this was the second significant Deutsche Bank settlement of 2015, the company did not admit any wrongdoing, no individuals were held accountable, and the settlement was so small that one analyst stated that it ‘isn’t relevant for Deutsche Bank.’”

The thesis for the Judge Bean approach is simple and straight forward: “If a corporation has violated the law, individuals within the corporation must also have violated the law,” according to the report. Unstated is the thesis that jail for a few executives will cure what ails the world of Wall Street and big corporations as will being forced to make admissions. While these points seem intuitive their premise is at best doubtful. While admissions may satisfy a craving for retribution, the reason such a requirement will change the behavior of a large corporate entity is unclear.

To be sure corporations act through individuals. That does not necessarily mean, however, that the individual acts of various executives were undertaken with the requisite wrongful intent which must be established as the predicate to the kind of criminal liability that ends with a prison term. One need only recall the DOJ prosecution of two Bear Stearns portfolio managers which ended in not guilty verdicts despite a case built on their own emails which looked open and shut on its face; or the SEC’s attempt to prosecute a mid-level executive at a major New York bank which settled a market crisis case with a large fine that ended in a finding of not liable but, nevertheless, destroyed the man’s career (hardly justice). Given the repeated investigation of market crisis actions by numerous prosecutors from the DOJ, the SEC and an alphabet soup of other agencies, coupled with the enormous pressure to bring individual cases, it seems likely that if the evidence was there, the cases would have been brought.

Perhaps more importantly what gets lost in this race to the gallows is protecting the public against a repetition of the wrongful conduct in the future. Halting wrongful conduct and inflicting punishment is only really effective if the public is protected from a repetition in the future – a point the Report and many supports of the Judge Bean approach neglect. Stated differently, if big fines are just a cost of doing business – an unstated these of the Report – then the sanctions imposed failed while the remedies proposed by the Report and others are unworkable.

Key to protecting the public – including investors and shareholders of the firms involved — should be to install policies and procedures which ensure against a repetition of the wrongful conduct in the future. That frequently begins with “tone at the top.” It continues with good corporate governance procedures which ensure that executives are acting as stewards of the shareholder’s money and for their benefit, not some wrongful purpose. Ensuring excellence in corporate governance going forward should benefit everyone – the shareholders, the company and the public. While these remedies may not draw the kind of headlines and accolades on the street that huge fines and jail terms spawn, they can do what neither of those can — safeguard the public interest in the future. Its time to move past Judge Roy Bean justice (who despite his reputation as a hanging judge only tried to hang two man but really hung one – one other got away) and into a better future.

Program: The Second Annual Dorsey Enforcement Forum will be held on Wednesday February 24, 2016 beginning at 1:00 p.m. Three panels of experts will discuss: 1) Trends in SEC enforcement; 2) FERC and CFTC market manipulation actions; and 3) Current developments in Financial Services Regulatory Enforcement. The program will be video cast, webcast and live in Washington, D.C. at the Willard Office building, 1455 Pennsylvania Ave. Lunch will be available beginning at noon; open bar at the conclusion of the program. No charge but registration is required by contacting Mr. Gorman’s assistant, Hanan Romodan at Romadan.hanan@dorsey.com

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by T. GormanPosted on Posted in SECActions

The Commission filed a series of actions this week which included: three cases based on insider trading; an accounting action against a company and its employees; an audit failure; the unregistered sale of securities; and the sale of non-existent securities.

SEC

Rules: The SEC adopted Cross-Border Security-Based Swap Rules for U.S. Activity. The rules focus on the registration requirements as a security-based swap dealer for those outside the U.S. with personnel in the country (here).

Testimony: Stephen L. Cohen, Associate Director, Division of Enforcement, testified before the Senate Judiciary Committee regarding the EB-5 Immigrant Investor Program (February 2, 2016). Mr. Cohen reviewed the program, the SEC’s enforcement actions related to EB-5 projects and the efforts of the agency to educate investors in the area (here).

CFTC

Testimony: Chairman Timothy Massad testified before the House Appropriations Committee, Subcommittee on Agriculture, Rural Development, Food and Drug Administration and Related Agencies (February 10, 2016). The testimony focused on the budget request (here).

Remarks: Chairman Timothy Massad delivered remarks titled “Taking Stock of Financial Resilience” before the OFR-FSOC 2016 Annual Conference (February 5, 2016). His remarks included comments on clearinghouse resilience in the U.S. and abroad, data reporting and steps to strengthen the financial system (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 4 civil injunctive case and 5 administrative proceeding, excluding 12j and tag-along proceedings.

Fraud: SEC v. Ruehle (S.D. Cal. Filed February 11, 2016) is an action against Greg Ruehle. It alleges that he sold stock he did not own, raising about $1.9 million from 100 investors. To facilitate the fraud he fabricated the necessary documents. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. The U.S. Attorney’s Office for the Southern District of California filed a parallel action.

Unprofessional conduct: In the Matter of Frazer Frost, LLP, Adm. Proc. File No. 3-17112 (February 11, 2016) is a proceeding which names as Respondents the PCAOB registered audit firm, Susan Woo, CPA and Miranda Suen, CPA, an engagement partner and manager at the firm, respectively. The proceeding centers on the review of the third quarter 2010 interim financial information and 2011 year end audit of China Valves Technology, Inc. The firm had misled investors about the acquisition of Watts Valve (Changsha) Company, Ltd and, in 2011 materially overstated income and understated liabilities at a subsidiary. Because Respondents failed to conduct their review and audit in accord with the applicable standards they engaged in unprofessional conduct. For example, in the 2011 audit the firm correctly recognized the need to exercise heightened professional skepticism during the audit since the internal controls were inadequate. Respondents, however, failed to follow their own audit plan. The Order alleges violations of Rule 102(e) and Rules 2-02 and 20-06 of Regulation S-X. The proceeding will be set for hearing.

Prime bank fraud: SEC v. Tahmazian, Civil Action No. 2:16-cv-954 (C.D. Ca.. Filed February 11, 2016) is an action which alleges that Jilbert Tahmazian, a California attorney, fraudulently obtained about $6 million from at least four investors tied to a prime bank fraud. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and each subsection of 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23465 (February 11, 2016).

Insider trading: In the Matter of Abdallah Fadel, Adm. Proc. File No. 3-17111 (February 10, 2016). Respondent was employed by Whirlpool Corporation. He began in 2007. In early 2009 he transferred into a group within the finance department called Financial Planning and Analysis. The focus of the group was furnishing management and the board with an analysis of the firm’s financial results. Almost immediately after joining the group Mr. Fadel began trading in advanced of earnings announcements despite firm policies. Indeed, prior to three earnings announcements spread over 2009, 2010 and 2011 he purchased options and traded profitably in advance of firm announcements. The Order alleged violations of Exchange Act Section 10(b). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. He is also barred from serving as an officer or director of a public company. In addition, he will pay disgorgement of $109,077, prejudgment interest and a penalty of $36,000.

Investment fund fraud: SEC v. Malik, Civil Action No. 15-1025 (S.D.N.Y.) is a previously filed action against Moazzam Malik and American Bridge Investment Group, LLC. The action alleged that Mr. Malik deceived investors in connection with the sale of limited partnership interests in his hedge fund, raising about $1 million. The court entered, by consent, a final judgment as to the defendants precluding violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The order also precludes the defendants from soliciting additional investors or accepting additional investments from existing investors. Defendants will pay disgorgement, on a joint and several basis, of $1,005,244.70, prejudgment interest and a penalty of $2,850,000 as to Mr. Malik and $13,775,000 as to the firm. See Lit. Rel. No. 23463 (February 10, 2016).

Accounting: In the Matter of Monsanto Company, Adm. Proc. File No. 3-17107 (February 9, 2016) is an action against the company; Sara Burnquell, the External Reporting Lead at the firm during the period; Jonathan Nienas, the U.S. Strategic Account Lead for the Roundup Division; and Anthony Hartke, U.S. Business Analyst in the Roundup Division. The case stems from improper accounting tied to programs designed to promote the firm’s key product – Roundup – that resulted in a restatement of Monsanto’s financial statements for its annual reports for 2009 and 2010 and the quarterly reports for 2011. The programs designed to boost Roundup sales were similar. The initial program focused on retailers. Essentially the program induced retailers to purchase supplies of Roundup on the promise of a rebate program rolled out the next year. The rebates for the 2009 purchases were recognized in 2010 when in fact they should have been accounted for in conjunction with the sales. The firm had a similar matching problem regarding a rebate program for distributors. In Canada, France and Germany Monsanto utilized similar programs to boost sales but then improperly accounted for the rebates as selling, general and administrative expenses. The Order alleged violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) as well as the related rules. Monsanto undertook a series of remedial efforts, including the retention of an independent ethics and compliance consultant. To resolve the proceeding the company consented to the entry of a cease and desist order based on the Sections cited in the Order, except Section 13(b)(5). The firm will also pay a penalty of $80 million. Respondent Brunnquell consented to the entry of a cease and desist order based on each of the Sections cited in the Order, except Section 13(b)(5). In addition, she is denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after two years. She will also pay a penalty of $55,000. Respondent Hartke consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a) and 13(b)(2)(A). He is denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after one year and will pay a penalty of $30,000. Finally, Respondent Nienas consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(5). He will also pay a penalty of $50,000.

False statements: SEC v. Saltsman, Civil Action No. 07-cv-4370 (E.D.N.Y.) is a previously filed action against Martin Weisberg, among others, in which the Commission alleged that he made false statements in the filings of two companies regarding an Israeli investor group. The court entered a final judgment by consent prohibiting future violations of Exchange Act Sections 10(b), 13(a) and 14(a). Mr. Weisberg pleaded guilty in a parallel criminal action in which he was ordered to pay restitution. Mr. Weisberg was suspended from appearing or practicing before the SEC as an attorney in a separate action. The case continues as to other defendants. See Lit. Rel. No. 23462 (February 8, 2016).

Unregistered broker: In the Matter of Phillip Cory Roberts, File No. 3-16888 (February 8, 2016) is a proceeding which names as Respondents Mr. Roberts, previously an associated person at a brokerage firm, and Bay Peak, LLC which marketed itself as an investment firm. Respondents, since at least 2005, have acquired domestic shell companies for reverse merger transactions with China-based operating companies. They have also engaged in transactions to fiancé those business combinations and the resulting issuers. Specifically, Respondents worked with the firm to raise capital through private placements, warrant financings, initial public offerings or direct investment. Respondents participated in key steps of the financing process. They typically received negotiated compensation in the form of shares, advisory and consulting fees and bonus payments. In some instances it was transaction based. The Order alleges violations of Exchange Act Section 15(a). To resolve the matter Respondents agreed to certain undertakings which included the return of all the shares for eleven transactions. They also consented to the entry of a cease and desist order based on the Section cited in the Order. Respondent Roberts was barred from the securities business and from participating in any penny stock offering with a right to apply for reinstatement after five years. Respondents will pay, on a joint and several basis, disgorgement of $114,141, prejudgment interest and Mr. Roberts will pay a penalty of $10,000.

Insider trading: SEC v. Munakash, Civil Action No. 2:16-cv-00833 (C.D. Cal. Filed Feb. 5, 2016). The action centers on the acquisition of GSI Commerce Inc., an e-commerce company, by eBay, Inc., announced on March 28, 2011. Defendant Robert Munakash is the owner of a small business which employed Carlos Rodriguez, also a defendant. Mr. Munakash is a long time personal friend of Executive A. In February 2011 Executive A and Mr. Munakash traveled to the Dallas Super Bowl together. Mr. Munakash was a guest of the firm. During the Super Bowl trip Executive A told his friend that there were several groups interested in pursuing an acquisition or deal with GSIC. In addition, there were other potential deals. After returning from the Super Bowl Mr. Munakash furnished the information about the potential transaction, including the fact that a possible offer may be forthcoming, to his broker, defendant Marc Winters. The two men had a long and mutually beneficial business relationship. Mr. Munakash also recommended that his mentee, defendant Rodrigues, purchase shares of GSIC stock, gifting him the information. Mr. Rodriguez knew that his mentor and Executive A were friends, that the executive was a GSI insider and had invited Mr. Munakash to the Super Bowl. Messrs. Munakash, Winters and Rodriguez purchased shares of GSI stock. Mr. Winters also purchased shares for two discretionary accounts he managed while Mr. Rodriguez tipped a close relative who traded. Subsequently, Messrs. Munakash and Rodriguez exchanged text messages. The next day both purchased additional shares of GSIC stock. On the morning of March 28, eBay and GSIC announced the acquisition. All of the defendants immediately sold their shares. The complaint alleges violations of Exchange Act Section 10(b). It is pending. See Lit. Rel. No. 23460 (February 8, 2016).

Unregistered securities: In the Matter of BioElectronics Corp., Adm. Proc. File No. 3-17104 (February 5, 2016) is a proceeding which names as Respondents BioElectronics, a firm which makes medical devices; IBEX, LLC, managed by Kelly Whelan; St. John’s LLC, controlled by Patricia Whelan, wife of Andrew Whelan; Andrew Whelan, President and CEO of BioElectronics; Kelly Whelan CPA, daughter of Andrew Whelan; and Robert Bedwell, CPA, engagement partner for the audits of BioElectronics. The Order alleges that BioElectronics improperly recognized revenue from two “bill and hold” transactions. Revenue rose 47% as a result. From August 2009 through late last year its affiliates, IBEX and St. John’s then sold millions of what were claimed to be unrestricted shares of the firm. The funds were loaned back to BioElectronics. There was no registration statement in effect. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The proceeding will be set for hearing.

Insider trading: SEC v. Hamilton, Civil Action No. 3: 16-cv-00192 (D. Conn. Filed February 5, 2016). Dennis Hamilton, a CPA, has served as the vice president of tax since 2009 at Harman International Industries, Inc. Mr. Hamilton has been deeply involved in the preparation of Harman’s earnings announcements throughout his years at the firm. On October 18, 2013 Mr. Hamilton received a draft of Harman’s Form 10-Q for the first quarter of fiscal 2014. Sales were up 17% according to the draft. Two days after receiving the draft earnings, Mr. Hamilton purchased 17,000 shares of Harman stock at a purchase price of $1.2 million in a joint account he had with his wife. The date was October 30, 2013. The share closing price was $72.02. Before the market open the next day Harmon announced its earnings. The share price jumped, closing at $81.02 – up 12% increase. Mr. Hamilton liquidated his position, yielding trading profits of $131,958.62. The Commission’s complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the District of Connecticut brought a parallel criminal action. Both cases are pending.

Hong Kong

Unauthorized transactions: The Securities and Futures Commission banned Chow Chi Keung, a licensed representative, from the securities business for life. An investigation found that he forged client signatures and conducted unauthorized transactions in client accounts.

U.K.

Cooperation: The Financial Conduct Authority fined Achilles Macris, the former head of CIO International for JPMorgan Chase Bank, N.A., £792,900 for failing to be open and co-operative with the Authority. Mr. Marcus was instructed to halt trading in a synthetic portfolio and report in on it. When press articles appeared regarding the London Whale he reported in. At the time there were concerns regarding the status of the portfolio which he failed to report. The penalty here was discounted for settlement at an early stage and for a substantial change. Otherwise it would have been £1,132,747.

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