by T. GormanPosted on Posted in SECActions

The SEC announced another new initiative. It is known as the “Distribution-in-Guise Initiative.” This initiative focuses on preserving the assets of mutual funds for its shareholders, apparently by ensuring that fund managers and advisers do not improperly use the asserts. The first case, settled on filing, was brought against an investment adviser and its underwriter/distributor subsidiary. In the Matter of First Eagle Investment Management, LLC, Adm. Proc. File No. 3-16823 (Sept. 21, 2015).

Respondent First Eagle Investment Management is a registered investment adviser. FEF Distributions, LLC, also a Respondent, is a registered broker-dealer which is a wholly owned subsidiary of First Eagle. The firm serves as the principal underwriter and distributor for its parent.

FEF entered into agreements with financial intermediaries for select distribution and shareholder services. Here there were two agreements with Intermediary 1 and an additional agreement with Intermediary 2. With Intermediary 1 the firm entered into the agreements in June 2000. One agreement, titled Financial Services, was for what are called sub-TA service. Those services include maintaining separate records for each customer in an omnibus account for each fund, transmitting purchase and redemption orders and similar services. Sub-TA services are traditionally paid from fund assets.

The second agreement, titled Selected Dealer Agreement, provided that Intermediary 1 would become a selected dealer for the distribution of fund shares. Under Investment Company Act Section 12(b) fees for these services can only be paid from a Rule 12b-1 plan approved by the fund Board. Nevertheless, from January 1, 2008 through March 31, 2014 First Eagle and FEF caused fees under this agreement totaling $24.6 million to be paid from fund assets.

In December 2007 FEF entered into a Correspondent Marketing Program Participation Agreement with Intermediary 2. The Funds had been paying Intermediary 2 for similar services from fund assets since 2005. The services provided under this agreement included providing email distribution lists of correspondent broker-dealer that requested sales and marketing concepts, marketing the funds on its internal website, inviting the funds to participate in special marketing promotions and similar items. First Eagle and FED caused the funds to pay about $290,000 to Intermediary 2 under the agreement from January 1, 2008 through March 31, 2014.

First Eagle periodically reported to the board regarding the payment of fees. The fees described above were reported to the board as being sub-TA fees. In 2008 a review by independent counsel confirmed this fact which was also reported to the board. At the same time the funds’ prospectus disclosure stated that distribution expenses, to the extent the are not covered by Rule 12b-1 plans, were paid by FEF or its affiliates. The Order alleges violations of Advisers Act Section 206(2) and Investment Company Act Section 12(b).

To resolve the case, Respondent FEF will implement a series of undertakings which include the retention of an independent compliance consultant. The firms also undertook remedial efforts and cooperated with the staff investigation which was acknowledged.

First Eagle consented to the entry of a cease and desist order based on Advisers Act Section 206(2) and Section 12(b) of the Investment Company Act along with a censure. The firm will also pay disgorgement of $24,907,354 along with prejudgment interest. FEF consented to the entry of a cease and desist order based on Investment Company Act Section 12(b). Respondents will pay, on a joint and several basis, a penalty of $12.5 million. Within 10 days Respondents will deposit $39,747,879.75 into a distribution fund which will reimburse shareholders.

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

Microcap fraud is a key part of the broken windows enforcement approach. One of the more significant actions brought in this regard is In the Matter of John Briner, Esq., Adm. Proc. File No. 3-16339 (Jan. 15, 2015). There the Order named as Respondents two attorneys, Mr. Briner and Diane Balmy; two audit firms, De Joya Griffith, LLC and M&K CPAs, PLLC; and seven CPAs – Arthur De Joya, Jason Griffith, Chris Whetman, Philip Zhang, Matt Manis, Jon Ridenour and Ben Ortego.

The action is an out-growth of stop order proceeding brought in January by the Commission based on a series of sham offerings for mining companies. The scheme was orchestrated by suspended attorney, John Briner, who recruited figureheads Stuart Carnie, Charles Irizarry, and Wayne Middleton to pose as the heads of the entities. Each of the offerings was alleged to be a sham. The audit firms and their auditors claimed to have audited the financial statements of the firms when in fact they did not. The Order alleges violations of Securities Act Section 17(a) by the attorneys and unprofessional conduct by the audit firms and auditors. While the proceeding was initially set for hearing, now the charges have been resolved as to each Respondent except Ms. Balmy:

Mr. Briner: consented to the entry of a cease and desist order based on Securities Act Section 17(a). He is also barred from participating in any penny stock offering and is suspended from appearing and practicing before the Commission as an attorney. In addition, he will pay $20,000 in disgorgement, prejudgment interest and a penalty of $50,000.

De Joya Griffith, LLC: consented to the entry of a cease and desist order based on each subsection of Securities Act Section 17(a). The firm is denied the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after five years. The firm will pay disgorgement of $37,500, prejudgment interest and a penalty of $18,750.

M&K CPAS PLLC: consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). The firm was also censured and agreed to certain undertakings which include not accepting new clients for a period of twelve months and retaining an independent consultant. The firm will also pay disgorgement of $49,500, prejudgment interest and a penalty of $50,000.

Arthur De Joya, CPA: consented to the entry of a cease and desist order based on each subsection of Securities Act Section 17(a). Mr. De Joya is denied the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years. He will also pay a penalty of $15,000.

Jason Griffith, CPA: consented to the entry of a cease and desist order based on each subsection of Securities Act Section 17(a). He is denied the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years will also pay a penalty of $15,000.

Philip Zhang, CPA: consented to the entry of a cease and desist order based on each subsection of Securities Act Section 17(a). He is also denied the privilege of appearing or practicing before the Commission as an accountant with a right to apply for reinstatement after five years. In addition, Mr. Zhang will pay a civil penalty of $25,000.

Matt Manis, CPA: consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). He is also denied the privilege of appearing or practicing before the Commission as an accountant and will pay a penalty of $20,000.

Jon Ridenour, CPA: consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). He is also denied the privilege of appearing or practicing before the Commission as an accountant and will pay a penalty of $15,000.

Ben Ortego, CPA: consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). Mr. Ortego is also denied the privilege of appearing or practicing before the Commission with the right to apply for reinstatement after three years. He will also pay a penalty of $50,000.

Chris Whetman, CPA: was dismissed from this action but settled with the Commission in a related proceeding. In the Matter of Christopher D. Whetman, CPA, Adm. Proc. File No. 3-16821 (Sept. 18, 2015). To resolve this proceeding, based on his audits of Idle Media, Inc. he consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). Mr. Whetman is also denied the privilege of appearing or practicing before the Commission with the right to apply for reinstatement after five years. He will also pay a penalty of $15,000.

See also In the Matter of Wayne Middleton, Adm. Proc. File No. 3-16342 (Jan. 15, 2015); In the Matter of Charles Irizarry, Adm. Proc. File No. 3-16341 (Jan. 15, 2015); and In the Matter of Stuart Cranie, Adm. Proc. File No. 3-16340 (Jan. 15, 2015). These actions center on claims that the named Respondent served as a figurehead for the corporations at the behest of Mr. Briner. Each alleged violations of Securities Act Section 17(a). In each the Respondent settled, consenting to the entry of a cease and desist order, and agreed to pay disgorgement, prejudgment interest and a penalty. Each Respondent also agreed to the entry of an order barring him from serving as an officer or director and from participating in any penny stock offering. Mr. Middleton will pay disgorgement of $4,000, prejudgment interest and a penalty of $8,000; Mr. Irizarry will pay disgorgement of $6,000, prejudgment interest and a penalty of $12,000; and Mr. Carnie will pay disgorgement of $6,000, prejudgment interest and a penalty of $12,000.

Tagged with: , , , , ,