by T. GormanPosted on Posted in SECActions

The former President and CEO of a public company repeatedly charged personal expenses to the firm largely by falsifying documents and records. Although the executive admitted certain misdeeds to internal investigators retained by the company audit committee, when confronted by the SEC during its investigation he declined to testify. The firm settled internal control and proxy violation charges. In the Matter of Polycom, Inc., Adm. Proc. File No. 3-15464 (March 31, 2015). The former CEO is did not resolve fraud and other related charges. SEC v. Miller, Civil Action No. 3:15-cv-01461 (N.D. Cal. Filed March 31, 2015).

Andrew Miller was the President and CEO of Polycom, Inc. from May 2010 to July 19, 2013 when he resigned. He was also a member of the board of directors during a portion of that period. Prior to being President he served as Executive Vice President of Sales for the company, a seller of communications technology.

Beginning in January 2010 Mr. Miller submitted, or directed others to submit, to his firm requests for reimbursement of personal expenses. The submissions falsely claimed that the charges were for business expenses. In fact the charges were for personal items. Overall Polycom paid for about $190,000 of Mr. Miller’s personal expenses. The false charges included:

  • Over $80,000 for personal travel and entertainment;
  • About $15,000 for clothing, accessories and spa gift cards;
  • Over $10,000 for tickets to professional baseball and football games; and
  • Over $5,000 for plants and related services at his apartment.

Mr. Miller used a variety of devices to conceal these charges. Some were submitted as expense reports with false business descriptions. Others were charged to a company purchasing card and backed up with false descriptions and supporting documents. Still others, such as travel, were booked by Mr. Miller without any description of the purpose for the charges. One set of charges, totaling about $65,000 for travel by Mr. Miller and a friend and girlfriend to South Africa were purportedly to conduct site inspections for the CEO Circle program, an annual incentive trip offered by the company to top-performing sales people.

To obtain these reimbursements Mr. Miller circumvented the policies and procedures as well as the internal controls of the firm with, in many instances, false documents. He also signed financial reporting questionnaires which were false because they omitted the perks. As a director Mr. Miller solicited proxies from investors for the annual meetings in 2011, 2012 and 2013 which were false and misleading. Firm proxy statements omitted many of the perks he received. In addition, he signed and certified the firm’s annual reports which incorporated by reference the false proxy statements.

In January 2012 Mr. Miller sold about 80,000 shares of Polycom stock. The shares had been issued to him as part of his compensation.

In May 2013 the firm learned that Mr. Miller had been using company funds to pay for personal expenses, concealed with false records. The Audit Committee conducted an internal investigation. Mr. Miller confirmed to the committee in an interview with outside counsel that he had charged certain personal expenses to the company, that false business descriptions had been submitted to the Polycom and admitted his conduct was inappropriate.

The complaint alleges violations of Exchange Act Section 10(b), each subsection of Securities Act Section 17(a), and Exchange Act Sections 14(a), 13(a), 13(b)(2)(A) and 13(b)(5). The case is pending. See Lit. Rel. No. 23225 (March 31, 2015).

Polycom settled the administrative proceeding, agreeing to a series of undertakings regarding its future cooperation. It also consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). Polycom will pay a penalty of $750,000.

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by T. GormanPosted on Posted in SECActions

The SEC issued an Order which charged investment manager Lynn Tilton, known as the Diva of Distressed Debt according to news reports, and her entities with fraud. Specifically, the Order Instituting Proceedings issued by the SEC, claims that Ms. Tilton overvalued certain funds in a manner which was contrary to the authorizing documents and unknown to investors. This resulted in the payment of unnecessary management fees by investors and compromised their rights. In the Matter of Lynn Tilton, Adm. Proc. File No. 3-16462 (March 30, 2015).

Ms. Tilton has managed what are called the Patriarch entities for years. Those entities, named as Respondents, are: Patriarch Partners, LLC (Patriarch), Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC and Patriarch Partners XV, LLC. Each is indirectly owned by either Ms. Tilton or the manager and a trust for the benefit of her daughter. Ms. Tilton, the CEO of Patriarch, and their employees, run the business of the three other Patriarch Partners entities, each of which is a registered investment adviser and a collateral manager for the Zohar Funds.

The Zohar Funds are CLOs, a securitization vehicle in which a special purpose entity raises capital by issuing secured notes. Proceeds from the note sales are used to acquire a portfolio of commercial loans. The cash flow and other proceeds from the collateral are used to repay the investor note holders of the fund.

The collateral management agreement for each fund permitted the manager to select and manage the collateral held by the fund. The Zohar Funds invested in private, mid-sized distressed companies. The goal was to improve the operations of the distressed portfolio companies to pay off the debt and eventually make a profit. Two tiers of fees are paid. One, the Senior Collateral Management Fee, ties to assets. The other, the Subordinated Fee, is linked to valuation.

The indenture for each Zohar CLO contained certain numeric tests that must be met each month. Once ratio is the so-called Overcollateralization Ratio. It measures the cushion between the value of the collateral and the principal amount of the investor notes. If the specified ratios fall below certain levels, the investors control over the fund can increase and result in the early repayment of the principal. The indenture also requires the collateral manager to categorize each asset every month. The classification is included in a report of the trustee. Specific categories are included in the indentures.

Rather than following the dictates of the indenture, Ms. Tilton used her discretion to determine how an asset should be categorized. The valuation category of an asset was not lowered unless she approved. As a result few assets of the Zohar Funds were downgraded to the lower valuation categories.

If Ms. Tilton had used the methodology for categorization in the indentures the number of assets in the default investment category would have “looked very different,” according to the Order. Certain portfolio companies failed to pay as much as 90% of the interest owed to the Zohar Funds but were not downgraded. The failure to properly classify these assets resulted in the overpayment of almost $200 million in Subordinated Fees to Respondents.

Ms. Tilton’s discretionary approach was not disclosed to investors. Failing to disclose that approach created a significant conflict of interest. The assets also were not valued in accord with GAAP as represented in the financial statements.

The Order alleges willful violations of Advisers Act Sections 206(1), 206(2) and 206(4). The proceeding will be set for hearing.

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