by T. GormanPosted on Posted in SECActions

The SEC’s interpretation of the Dodd-Frank whistleblower provisions prevailed in a recent Second Circuit decision, creating a circuit split that could be heading for the Supreme Court. Specifically, the Circuit Court deferred to the SEC’s interpretation of the provisions under which whistleblowers are protected from retaliation, finding that even if the whistleblower has not reported to the SEC as required by the definition of “whistleblower,” the person is entitled to protection. Berman v. Neo@ogilvy LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015). Previously, the Fifth Circuit rejected the SEC’s interpretation. Asadi v. G.E. Energy (USA), LLC, 720 F. 3d 620 (5th Cir. 2013)(here).

The suit

Daniel Berman was the finance director of Neo@Ogilvy LLC from October 2010 to April 2013. He was responsible for its financial reporting and internal accounting procedures. The firm is a media agency that furnishes a range of digital and direct media services.

In January 2014 Mr. Berman filed suit against his former employer alleging that he was discharged in violation of the whistleblower protection of Dodd-Frank Section 21F and in breach of his employment contract. During the course of his employment the suit claims Mr. Berman discovered accounting fraud. The firm dismissed his allegations and terminated him in April 2013. In August of that year he reported his claims to the firm audit committee. In October he reported his findings to the SEC. Prior to that time the statute of limitations ran on one of his Sarbanes-Oxley claims.

The District Court granted a motion to dismiss. The court concluded that Mr. Berman was not entitled to protection under the statute in view of the definition of whistleblower in Section 21F(a)(6) which specifies that the person must have reported to the SEC.

The Second Circuit

The Circuit Court reversed. The question here revolves around the Dodd-Frank whistleblower provisions, added to the Exchange Act as Section 21F. Section 21F(b) provides incentives to would be whistleblowers by directing the SEC to pay awards to those who report violations of the securities laws to the agency that result in a successful enforcement action.

Section 21F(h)(1)(A) contains the retaliation protection provisions. In pertinent part that provision states that: “No employer may discharge, demote, suspend, threaten, harass . . . or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower – (i) in providing information to the Commission in accordance with this section; (ii) in initiating, testifying in, or assisting in any investigation . . . of the Commission . . . or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . . this chapter . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission.” Section 21F(a)(6) defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission . . .”

The Sarbanes-Oxley Act, which is cross–referenced in the Dodd-Frank provisions, contains a number of provisions regarding whistleblowers. For example, Section 307 requires the SEC to issue rules regarding attorney reporting of violations within a company. Section 301 requires the SEC to issue rules to direct national securities exchanges that would require issuer audit committees to establish internal procedures allowing employees to submit complaints regarding auditing matters. Section 806 precludes issuer retaliation against an employee who provides information concerning securities law violations to a federal regulatory agency or law enforcement agency, a member of Congress or “a person with supervisory authority over the employee.”

In 2011 the SEC issued rules implementing Section 21F. In 240.21F-2(a)(1) the Rule states that “You are a whistleblower if . . . you provide the Commission with information . . .” Subsection (b), titled “Prohibition against retaliation” provides that a person is a whistleblower if the person has a reasonable belief that the information being furnished relates to a violation of the securities laws and it is provided “in a manner described in Section 21F(h)(1)(A) of the Exchange Act . . . The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”

While this case was under submission the SEC, in August 2015, issued a release states that “an individuals’s [sic] status as a whistleblower does not depend on adherence to the reporting provisions specified in Exchange Act Rule 21F-9(a) but is determined solely by the terms of Exchange Act Rule 21F2(b)(1).” In effect the interpretation states that a person is entitled to protection under the anti-retaliation provisions even if that person did not first report the information to the SEC.

The issue here, according to the Court, is “whether the arguable tension between the definitional section of subsection 21F(a)(6) (whistleblower definition) and subdivision (iii) of subsection 21(F)(h)(1)(A) (anti-retaliation provisions) creates sufficient ambiguity as to the coverage of subsection (iii) to oblige us to give Chevron deference to the SEC’s rule.” The SEC argued that the determination in its rule is entitled to deference without citing the need for an ambiguity.

Here there is no absolute conflict between the SEC notification requirement in the definition of “whistleblower” and the absence of such a requirement in both subdivision (iii) of subsection 21F(h)(1)(A) of Dodd-Frank and the SOX provision incorporated in subdivision (iii) the Court found: “An employee who suffers retaliation after reporting wrongdoing simultaneously to his employer and to the SEC is eligible for Dodd-Frank remedies and those provided by Sarbanes-Oxley.” It is this point that persuaded the Asadi Court to hold that the SEC notification requirement must be observed. At the same time, “Applying the Commission reporting requirement to employees seeking Sarbanes-Oxley remedies pursuant to subdivision (iii) would leave that subdivision with an extremely limited scope . . .” the Court concluded. For example, there are categories of whistleblowers such as attorneys and auditors who cannot report to the SEC until after making internal reports.

Unfortunately reviewing the legislative history does not resolve the question, the Court found. What became subdivision (iii) of subsection 20F(h)(1)(A) was added to the statute during the conference. There is no real discussion of the provision in the conference report.

Other courts have split on the issue. The Fifth Circuit and some district courts have rejected the SEC’s interpretation based largely on the plain language of the provisions. On the other had, a significant number of district courts have adopted the SEC’s interpretation of the provisions.

Ultimately, the Court turned to what it called “the realities of the legislative process:” “When conferees are hastily trying to reconcile House and Senate bills, each of which number hundreds of pages, and someone succeeds in inserting a new provision like subdivision (iii) into subsection 21F(h)(1)(A), it is not at all surprising that no one noticed that the new subdivision and the definition of ‘whistleblower; do not fit together neatly.” This led the Court to conclude that “it is doubtful that the conferees who accepted the last-minute insertion of subdivision (iii) would have expected it to have the extremely limited scope it would have if it were restricted by the Commission reporting requirement . . .” To resolve this “ambiguity” the court deferred to the SEC.

Judge Dennis Jacobs dissented noting: “The majority and the Securities and Exchange Commission have altered a federal statute by deleting three words (“to the Commission”) from the definition of ‘whistleblower’ in the Dodd-Frank Act. No doubt, my colleagues in the majority, assisted by the SEC or not, could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them. I could try my hand at it. But our obligation is to apply congressional statutes as written. In this instance, the alteration creates a circuit split, and places us firmly on the wrong side of it . . .” Ultimately the interpretation advocated by the SEC and adopted by the majority reflects the “SEC’s territorial interest . . .”

Comment

The here, according to the Court, is one of Chevron deference. The resolution of that question begins, the Court said, by determining if there is a statutory ambiguity. If there is then if a regulatory agency such as the SEC adopts a reasonable interpretation of the statute it is entitled to deference. Stated differently, the Court cannot second guess the agency by adopting an alternate reasonable interpretation of the statute.

The majority decision here, however, is anything but Chevron. Page after page of the majority opinion wonders about stating and restating the issue to be decided while searching for an ambiguity. Ultimately none is found. Rather, the majority adds together what it claims would be an overly narrow reading of the statute if its text were applied as written by Congress with speculation about what happened in the conference committee that ultimately produced Dodd-Frank. This leads the majority to conclude it should defer to the SEC.

Speculation about the scope of a federal regulatory statute is not ambiguity. More speculation about what may or may not have happened in a conference committee is not ambiguity. Adding speculation to speculation equals more speculation. While the SEC’s views of what the scope of the Dodd-Frank whistleblower provisions may well have merit, that does not give the agency license to rewrite the plain language of the statute – even with the help of a compliance Circuit Court which seems to have forgotten that the interpretation of any statute begins with the statutory text. Ultimately this issue will now require resolution by the Supreme Court.

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by T. GormanPosted on Posted in SECActions

In a burst of post-Labor Day energy, the SEC filed a number of significant actions. Those include a series of actions arising out of the audit failure by BDO; actions centered on a financial fraud at an on-line lender; cases tied to the failure to disclose executive perks; a case in which senior traders overcharged clients of an international financial institution; and insider trading case involving a father and son; and an action in which an investment adviser used false publicity to attract clients.

SEC

Remarks: Commissioner Kara M. Stein delivered remarks titled “Accountants and Capital Markets in an Era of Digital Disruption” to the Institute of Chartered Accountants in England and Wales and BritishAmerican Business (Sept. 9, 2015). Her remarks included comments on making data useful to investors using different accounting standards, the use of structured data and enhancing audits (here).

CFTC

Remarks: Chairman Timothy G. Massad delivered the key note address to the Beer Institute Annual Meeting (Sept. 9, 2015). His remarks included a discussion of the new RED List (unregistered foreign entities thought to be soliciting in the U.S.), the aluminum market, finishing the rule writing, algorithmic trading and cybersecurity (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 7 civil injunctive cases and 19 administrative actions, excluding 12j and tag-along proceedings.

Fraudulent shell scheme: SEC v. Wey, Civil Action No. 15-7116 (S.D.N.Y. Filed Sept. 10, 2015) is an action which names as defendants Benjamin Wey, the principal of New York Global Group, also a defendant; Tianyi Wei, Benjamin’s sister; Michaela Way, Benjamin’s wife; Robert Newman, counsel to NYGG; William Uchimoto, an attorney retained for some of the involved entities; and Seref Dogan Erbek, a resident of Geneva, Switzerland who assisted with several nominees controlled by Mr. Wey and/or his family. The complaint alleges a scheme which traces to 2007 under which Mr. Wey and the other defendants assisted a number of firms with implementing reverse mergers to go public. As part of the scheme Mr. Wey, using a series of nominees, retained blocks of stock that were concealed. Officers of the new companies were required to hold their stock for a period of time which gave Mr. Wey control of the market where he could sell his shares. He also used his control to facilitate exchange listings for some issuers. The complaint alleges violations of Exchange Act Sections 10(b), 13(d), 16(a), 20(a), and 20(e) and Securities Act Sections 15(b) and 17(a). The case is in litigation. See Lit. Rel. No. 23342 (Sept. 10, 2015). A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.

Insider trading: SEC v. Kara, Civil Action No. 3:09-cv-1880 (N.D. Cal.) is a previously filed action against Maher Kara, a former director in Citigroup Global Markets’ investment banking division, Karim Bayyouk (brother-in-law of Mr. Salman), Mr. Bayyouk, Bassam Salman (brother of Mr. Kara’s wife). The action centered on trading based on inside information furnished by Mr. Kara. Mr. Kara previously pleaded guilty to securities fraud and conspiracy charges and was sentenced to three months home detention; Mr. Bayyouk was found guilty of obstruction and was sentenced to 18 months in prison and ordered to pay a fine of $5,100; and Mr. Salman was found guilty by a jury on one count of conspiracy and four counts of securities fraud and was sentenced to 36 months in prison and ordered to pay $1.2 million in restitution and forfeiture. His conviction was affirmed by the Ninth Circuit (here). Each settled with the SEC, consenting to the entry of permanent injunctions which prohibit future violations of Exchange Act Sections 10(b) and 14(e). See Lit. Rel. No. 23341 (Sept. 10, 2015).

Fraud/audit failure: SEC v. Pence, Case No. 1:15-cv-07077 (S.D.N.Y. Filed Sept. 9, 2015) is at the center of five actions. It names as a defendant Stephen Pence, the Chairman of General Employment Enterprises, Inc. or GEE. The related actions are: In the Matter of Salvatore J. Zizza, Adm. Proc. File No. 3-16799 (Sept. 9, 2015) and In the Matter of Ronald E. Heineman, Adm. Proc. File No. 3-16798 (Sept. 9, 2015) which name as Respondents, respectively, J. Zizza and Ronald Heineman, both at one time the CEO of GEE; In the Matter of BDO USA, LLP, Adm. Proc. File No. 3-16800 (Sept. 9, 2015) which names as a Respondent the audit firm; In the Matter of Sean C. Henaghan, CPA, Adm. Proc. File No. 3-16797 (Sept. 9, 2015) which names as Respondents five BDO auditors: Mr. Henaghan, the GEE engagement partner; John Rainis, the concurring reviewer; Leland Graul, the firm’s national director of accounting; James Gerace, the firm’s regional technical director; and Wendy Hambleton, BDO’s national SEC practice director.

The actions trace to early 2009 when Wilbur Huff, along with Messrs. Heinman, Zizza and an unnamed associate, discussed obtaining control of GEE. Mr. Huff was a convicted felon who pleaded guilty in the Western District of Kentucky while Mr. Pence was the USAO. The group acquired a number of entities that were rolled into GEE. Mr. Pence, acting through PSQ, LLC, became the face of the public company. GEE opened a checking account at The Park Avenue Bank where the president was Charles J. Antonucci, Sr., an associate of Mr. Huff. In July 2009 Mr. Huff had GEE transfer $2.3 million from its Park Avenue Bank account to Park Avenue Insurance, an entity owned by Mr. Antonucci. The $2.3 million represented most of the firm’s cash and a significant portion of its assets. In the fall of 2009 BDO began auditing GEE’s financial statements for the fiscal year ended September 30, 2009. During the audit the engagement team learned that a claimed $2.3 million CD was unaccounted for and there was no documentation. Then that amount was transferred back to the company through a series of entities by Mr. Huff. Management and various board members gave the auditors a series of conflicting explanations about the missing asset. BDO engagement partner Sean Henaghan and concurring partner John Rainis consulted with senior BDO partners. Those included James Gerace, Leland Graul and Wendy Hambleton. The audit firm then delivered a letter to GEE demanding an independent investigation directed by the audit committee. Days later, however, the firm withdrew the demand an issued an unqualified audit opinion. In 2010 Mr. Antonucci pleaded guilty in a criminal action which alleged that the $2.3 million CD did not exist. Nevertheless, the audit firm issued a clean opinion on the firm’s 2010 financial statements. SEC v. Pence alleges violations of Exchange Act Section 10(b). The action is in litigation. In the Matter of BDO alleges violations of Exchange Act Section 10A and 13(a). The firm resolved the action, admitting to the basic facts alleged in the Order. The firm will also implement a series of undertakings, consented to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure and will pay disgorgement of $536,000, prejudgment interest and a penalty of $1.5 million. Each BDO auditor named as a Respondent in In the Matter of Henaghan also settled. The Order alleged violations of Exchange Act Sections 10A and 13(a). Each Respondent consented to the entry of a cease and desist order based on those Sections. In addition, each auditor was denied the privilege of appearing and practicing before the Commission with a right to request reinstatement after: for Mr. Henaghan, three years; for Mr. Rainis, two year; and for Messrs. Grace and Graul, one year. Each Respondent will also pay a penalty: Mr. Henaghan: $30,000; Mr. Rainis $15,000; and Messrs. Gerace, Graul and Ms. Hambleton: $10,000. The Orders in In the Matter of Zizza and In the Matter of Heineman allege violations of Exchange Act Rule 13b2-2. Each Respondent consented to the entry of a cease and desist order based on that Rule. In addition, each man will pay a penalty of $150,000.

False advertising: In the Matter of Bennett Group Financial Services, LLC, Adm. Proc. File No. 3-16801 (Sept. 9, 2015) is a proceeding which names as Respondents the firm, a one-time registered investment adviser, and its founder, Dawn J. Bennett. The Order alleges that Ms. Bennett and the firm significantly overstated the assets under management to customers and others and misrepresented investment performance by touting results from a model rather than actual investment results. In part the misrepresentations were made by Ms. Bennett on her radio show. Additional misrepresentations were made during the staff investigation. The firm also failed to adopt and implement the required procedures. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The proceeding will be set for hearing.

Insider trading: SEC v. McEnery, Civil Action No. 15-cv-04091 (N.D. Cal. Filed Sept. 9, 2015) is an action which names as defendants John McEnery III, his son, John McEnery IV, and a friend of the father, Michael Rawitser. It centers on the tender offer by GE Healthcare for Clarient, Inc., announced on October 22, 2010. Prior to the announcement McEnery III learned from a friend who worked at Clarient about the pending transaction. He misappropriated the information and tipped his son and long- time friend. The three men traded in advance of the announcement as did two other family members tipped by the father. Following the announcement the share price increased by 33%. Father and son had profits of over $50,000. The two other family members had profits of over $11,000. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Each defendant settled. The father agreed to pay disgorgement of $32,482, prejudgment interest and a penalty of $64,156; the son will pay disgorgement of $3,288, prejudgment interest and a penalty equal to the amount of disgorgement; and Mr. Rawitser agreed to pay disgorgement of $28,386, prejudgment interest and a penalty equal to the amount of the disgorgement.

Financial fraud: In the Matter of Bankrate, Inc., Adm. Proc. File No. 3-16786 (Sept. 8, 2015); In the Matter of Hyunjin Lerner, CPA, Adm. Proc. File No. 3-16787 (Sept. 8, 2015); SEC v. DiMaria, Civil Action No. 15-cv-07035 (S.D.N.Y. Filed Sept. 8, 2015). Bankrate is an internet based consumer banking and personal finance network. Mr. Lerner was the v.p. of finance for the firm. Edward DiMaria and his co-defendant Matthew Gamsey, were, respectively, the firm’s CFO and director of accounting. In 2012 when the second quarter results failed to meet analyst estimates Mr. DiMaria sought to increase the quarterly revenue. With the assistance of Messrs. Lerner and Gamsey, he instructed two divisions to book revenue without support. One did but the other only partly complied. Accordingly, additional unsupported revenue was booked in a third unit. In addition, certain expenses were also improperly reduced or not booked. The Order as to the company alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order. The firm will also pay a penalty of $15 million. The proceeding naming Mr. Lerner as a Respondent alleged violations of the same Sections as the action regarding the company and, in addition, Exchange Act Section 13(b)(5). Mr. Lerner resolved the action, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he is denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after five years. He will also pay disgorgement of $30,045, prejudgment interest and a penalty of $150,000. The district court action naming Messrs. DiMaria and Gamsey alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) as well as control person liability under Section 20(a). That action was not resolved and will proceed to litigation.

Misrepresentations: SEC v. Shapiro, Civil Action No. 1:15-cv-07045 (S.D.N.Y. Filed September 8, 2015). Defendants Ross Shapiro, Michael Gramins and Tyler Peters joined Nomura Securities International, Inc., a registered broker dealer, in August 2009 as senior traders on the RMBS desk. Nomura’s customers were funds that invested in RMBS. The market operates through relationships between customers who buy and sell the securities. Since the market for these securities is opaque – there is no exchange and determining the market price can be difficult — customers often seek pricing information from the brokers. It is not unusual for a customer’s view of the current market price for a security to come primarily from the broker. The defendants arranged trades between customers. For a period of about three years beginning in January 2010 Messrs. Shapiro, Gramins and Peters lied to customers about the price paid by Nomura for the security or the price it was going to pay. This permitted them to negotiate a higher price to the customers. In many cases the misrepresentations were made in electronic communications such as instant messages, emails and online chats. They also instructed junior traders to utilize this practice. By engaging in these practices the three defendants generated over $7 million in additional revenue for the firm. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 2334 (September 8, 2015).

Undisclosed perks: In the Matter of MusclePharm Corporation, Adm. Proc. File No. 3-16788 (Sept. 8, 2015); In the Matter of Brad J. Pyatt, Adm. Proc. File No. 3-16789 (Sept. 8, 2015); In the Matter of Lawrence S. Meer, CPA, Adm. Proc. File No. 3-16790 (Sept. 8, 2015); In the Matter of L. Gary Davis, CPA, Adm. Proc. File No. 3-16791 (Sept. 8, 2015); In the Matter of Donald W. Prosser, CPA, Adm. Proc. File No. 3-16792 (Sept. 8, 2015). MusclePharm is a manufacturer and marketer of sports nutrition products; Mr. Pyatt is the COB and CEO of the firm; Mr. Meer was the CFO for a period as was Mr. Davis; and Mr. Prosser was a member of the board and chair of the audit committee. The company grew significantly from 2010 through 2013. During that period the firm did not establish sufficient internal controls and keep proper books and records. This resulted in a series of accounting and disclosure failures that the board and senior management had reason to know about. Those included a failure to disclose: perquisite compensation, related party transactions, the bankruptcies of its executive officers and other items. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. For the firm and Mr. Pyatt those were: Securities Act Sections 5(a), 5(c), 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a); for Mr. Davis those were: Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(a); as to Mr. Meer those were the same Sections as for Mr. Davis and, in addition, Exchange Act Section 14(a); and as to Mr. Prosser those were the same Exchange Act Sections as for the firm and Mr. Pyatt. The firm also agreed to certain undertakings, including retaining a monitor for one year, and will pay a civil penalty of $750,000; Mr. Pyatt will pay a penalty of $150,000; Mr. Davis was denied the privilege of appearing and practicing before the Commission as an accountant with the right to request reinstatement after two years and will pay a $30,000 penalty; Mr. Meer was denied the privilege of appearing and practicing before the Commission as an accountant with the right to request reinstatement after three years while no penalty was imposed based on financial condition; and Mr. Prosser will pay a penalty of $30,000.

Unregistered securities: In the Matter of Ditto Holdings, Inc., Adm. Proc. File No. 3-16794 (Sept. 8, 2015); In the Matter of Marc S. Mandel, Adm. Proc. File No. 3-16796 (Sept. 8, 2015); In the Matter of Joseph J. Fox, Adm. Proc. File No. 3-16795 (Sept. 8, 2015). The Respondents are: the firm which owns a broker dealer subsidiary and claims to be a one of a kind social brokerage firm; Mr. Mandel, the President and CEO of Wall Street Radio, Inc. through which he hosts a daily financial talk radio show and distributes a financial newsletter; and Mr. Fox, the CEO of Ditto Trade, the brokerage subsidiary of Ditto Holdings. The Orders allege that from early 2009 through September 2013 Ditto Holdings raised about $10 million from over 200 investors from the sale of its shares. The firm, however, did not maintain a complete and accurate set of financial records for the period, did not regularly prepare financial statements and never had an audit performed on its financial statements. The offering documents for several of its offerings did not contain financial statements. During the period, Ditto Holdings advertised on Mr. Mandel’s radio show and paid him with stock options. Mr. Mandel also sent numerous emails to his news-letter subscribers regarding Ditto. About 28 of the subscribers to Mr. Mandel’s news-letters purchased 1.21 million shares of stock from Mr. Fox for a total of $1.25 million. There was no registration statement for those sales nor was an exemption available. Each Order alleges violations of Securities Act Sections 5(a) and 5(c). The Order as to Mr. Mandel also alleges violations of Exchange Act Section 15(a). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $50,000; Mr. Mandel also consented to the entry of a cease and desist order based on the Sections in the Order as to him. He is barred from the securities industry with a right to apply for reentry after two years. Mr. Mandel will pay disgorgement of $124,000 and prejudgment interest except that payment of all but $62,000 is waived and no penalty was imposed based on financial condition. Mr. Fox consented to the entry of a cease and desist order based on the Sections cited in the Order as to him. He will pay disgorgement of $125,210, prejudgment interest and a civil penalty of $75,000. A hearing will be held to determine if any additional non-financial remedies should be imposed.

False advertising: In the Matter of Mackensen & Co., Adm. Proc. File No. 3-16780 (September 3, 2015) is a proceeding which names as Respondents the registered investment adviser and Warren J. Mackensen, a registered financial planner and the sole owner of the firm. For a two year period beginning in 2010 Respondents solicited potential municipal clients with false advertising. Specifically, they claimed to have created model portfolios with actual historical performance demonstrating that they would generate superior returns. In fact the models were based on back testing and not actual returns. The firm also failed to adopt policies and procedures to preclude employees from presenting performance information that was in violation of the Advisers Act. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, they will pay a civil penalty of $100,000.

Investment fund fraud: SEC v. Aronson, Civil Action No. 23331 (S.D.N.Y.) is a previously filed action against Eric Aronson, Vincent Buonauro, Robert Kondratick, Fredric Aaron, PermaPave Industries, LLC, PermaPave USA Corp. and other related entities. The complaint alleged that over a four year period beginning in 2006 PermaPave Industries and its affiliates raised over $26 million from the sale of promissory notes to over 140 investors who were told they would be repaid from the sale of permeable paving stones for which there was a large demand. In fact there was not. Recently, the court granted the SEC’s motion for monitory relief, concluding that the entity defendants were a “vehicle for fraud” and that: Mr. Aronson must pay $18, 248,270 in disgorgement and prejudgment interest and a civil penalty of $1,385,816; Mr. Aaron must pay $1,822,861 in disgorgement and prejudgment interest and a $250,000 civil penalty. Mr. Buonauro must pay $12,623,860 in disgorgement and prejudgment interest and a penalty of $10,000. See also Lit. Rel. No. 23331 (Sept. 2, 2015).

Failure to supervise: In the Matter of Janet L. Waters, Adm. Proc. File No. 3-16777 (September 2, 2015). Ms. Waters was the COO of A. L. Waters Capital, LLC and a registered representative at the firm from April 2005 through early March 2012. At that point FINRA permanently barred her from association with any member for failing to provide documents, information and testimony required in its investigation. This proceeding is based on her failure to reasonably supervise Arnett L. Waters with a view to preventing and detecting his violations of the antifraud provisions between 2009 and 2012. During that period Mr. Waters operated a fraudulent scheme through which he raised at least $839,000 from a number of investors by misappropriating those funds rather than investing them as promised. The Commission entered an order barring Respondent from the securities business. No penalty was ordered based on financial condition.

Exchange fees: In the Matter of Taberna Capital, Adm. Proc. File No. 3-16776 (September 2, 2015) is a proceeding which names as Respondents: the then registered investment adviser, an indirect subsidiary of registered real estate investment trust RAIT; Michael Fralin, an attorney and the firm’s vice president and later managing director; and Raphael Licht, an attorney and the COO of RAIT for a period and later its Chief Administrative officer. Taberna was established in 2003 for the purpose of managing a series of CDOs. In 2006 the firm was acquired by RAIT. The CDOs invested largely in real estate in the form of trust preferred securities. Beginning in 2008 Taberna was approached about restructuring those securities. Beginning in 2009, and continuing through 2012, Taberna retained about $15 million in Exchange Fees generated in connection with the restructuring transactions which should have gone to the CDOs. Not only was retention of the fees improper, but it also created a conflict of interest which was not disclosed — it created an incentive for the firm to engage in the restructuring transactions. The individual Respondents played key roles in the transactions. The Order alleges violations of Exchange Act Section 15(a) and Advisers Act Sections 206(1), 206(2), 206(4) and 207. To resolve the matter the firm agreed to implement a series of undertakings which include posting the Order on its website and certifying compliance every six months for a period of three years. It also consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay disgorgement of $13 million, prejudgment interest and a penalty of $6.5 million. Messrs. Falin and Licht each consented to the entry of a cease and desist order based on Advisers Act Sections 206(2) and 207. Each man was also barred from the securities business with a right to apply for reentry after, respectively, five years and two years. Both men were also denied the privilege of appearing and practicing before the Commission as attorneys with a right to apply for reinstatement after, respectively, five years and two years. Messrs. Falin and Licht were also ordered to pay civil penalties in the amount of, respectively, $100,000 and $75,000.

Investment fund fraud: SEC v. Louks, Civil Action No. 15-cv-3456 (D. Minn. Filed September 1, 2015) is an action which names as defendants James M. Louks, the founder and president of defendant FiberPoP Solutions, Inc., a firm which was claimed to furnish investors with a range of financing opportunities. Beginning in 2003, and continuing until the present, the defendants raised about $4.3 million from 90 investors. Those investors were told that their funds would be used in a series of different investment opportunities. Many appeared to be prime bank fraud schemes. In fact none of those opportunities have ever materialized. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants consented to the entry of an order barring them from raising additional investor funds during the investigation.

Audit failure: In the Matter of Johnson Lambert LLP, Adm. Proc. File No. 3-16773 (August 31, 2015) is a proceeding which names as Respondents the audit firm and Bradley Dieriex, a partner in the firm. The proceeding is based on audits for the fiscal years ended December 31, 2009 and 2010 of the financial statements of Maven Assurance Limited. The prior auditors had issued qualified opinions because of an inability to obtain sufficient audit evidence regarding the existence and valuation of certain investments which constituted the major assets of the firm. They also noted that the company had inadequate processes to value the investments. Nevertheless, Respondents assembled a team not experienced in these areas and, despite the same limitations encountered by the prior audit team, issued unqualified audit opinions. Those opinions were not in accord with GAAP. The Order alleges that Respondents engaged in improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii). To resolve the proceeding the firm agreed to certain undertakings which include the retention of a consultant and not accepting new public company clients for a period of one year. In addition, the firm agreed to the entry of a censure. Mr. Dieriex will be denied the privilege of appearing or practicing before the Commission as an accountant but after three years he may request that the agency consider reinstatement.

Offering fraud: SEC v. Schulman, Civil Action No. 0:15-cv-61861 (S.D. Fla. Filed Sept. 3, 2015) is an action which names as defendants Manny Shulman and David Hirschman. The complaint alleges that the Form S-1 registration statement for Caribbean Pacific, declared effective, failed to properly disclose the role of the Mr. Sculman, a securities fraud recidivist and the role of William Reilly, also a securities fraud recidivist and disbarred attorney. Although two others were listed in the registration statement as officers and directors of the company, Messrs. Shulman and Reilly actually controlled it. In addition, during the summer of 2012 Mr. Shulman sold unregistered shares in the company, telling investors that the firm would be used in a reverse merger with another entity. Rather than use investor funds for expenses and business development the funds were diverted to personal use. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 23337 (Sept. 8, 2015).

FCPA

Foreign officials: U.S. v. Mikerin, Cr. No. TDC -14-0529 (D.Md.). Vadim Mikerin, a resident of Maryland, was the Director of the Pan American Department of JSC Techsnabexport, or TENEX, from 2004 through 2010. He was also president of TENAM Corporation from late 2010 through October 2014. TENAX was a wholly owned subsidiary of the Russian Federation’s agency responsible for state property management. TENEX was a wholly owned subsidiary of another entity that was owned by the State Atomic Energy Corporation or ROSATOM. TENAX was the sole supplier and exporter of Russian Federation uranium and uranium enrichment services to nuclear power companies worldwide, according to the plea agreement. TENAX and TENAM were instrumentalities of the Russian Federation.

Transportation Logistics International, a Maryland based firm that is a domestic concern, contacted with TENEX to transport uranium from Russia to the United States from 1996 through 2013. This was part of a U.S. program to remove unsecured nuclear weapons from the former Soviet Union for cash. Daren Condrey, a principal of Transportation Logistics, conspired with Mr. Mikerin and others over a ten year period beginning in 2004 to pay $2.1 million to Mr. Mikerin, according to the court papers. The money was funneled through a series of offshore shell companies in connection with the transportation contracts. The payments were concealed through the use of consulting agreements which used code words. In pleading guilty to conspiracy to commit money laundering Mr. Mikerin admitted that the payments were made as part of a corrupt scheme to obtain unfair business advantage. He has agreed to the entry of a forfeiture money judgment in the amount of $2,126,622. He will be sentenced on December 8, 2015.

PCAOB

Inspections: The staff issued its first Inspection Brief setting forth the objectives and scope of the 2015 interim inspection program for auditors of broker dealers (here).

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