by T. GormanPosted on Posted in SECActions

Roderick Hills, who passed away at the end of last month, served as Chairman of the SEC through one if its most turbulent periods – the birth of the Foreign Corrupt Practices Act. When Mr. Hills became Chairman in 1975 the SEC had already initiated the first of what would become a series of illicit payment cases, having settled with American Ship Building and its then CEO.

In his first year of service, and throughout his term, the agency resolved a series of foreign payments cases with some of the largest corporations in the U.S. and their senior executives. Those settlements included Phillips Petroleum (1975), Northrop (1975), Gulf Oil (1975), Lockheed Aircraft (1976) and General Tire (1976). Each of the settlements reflected the fundamental values of the securities laws – accountability to the shareholders whose money was being used to make the illicit payments. Thus each settlement focused on improving corporate governance, accountability and transparency.

While the Commission’s foreign payments actions were successful many were highly critical of the investigations and cases. Some thought the cases should not have been brought. Others claimed that the sums involved were not material. Still others argued that since many of the transactions took place in foreign countries the issue was one of local law in the particular country. Even within the government there was debate with the State Department expressing concern regarding the implications of corporate payments on foreign policy while the Department of Defense, which assisted manufactures selling weapons systems, was actually involved in some of the conduct. Chairman Hills recounted some of the criticisms faced by the SEC in a speech delivered at Yale Law School in 1976:

· One commentator stated that the questionable payments cases were just another experiment doomed to fail, comparing the cases to prohibition: “’America’s unlamented noble experiment with prohibition in the 1920’s made more sense than this new crackdown. Back then, the do-good arguments for banning booze worked out as a bonanza for crime, corruption, and conspiracy. Now the SEC’s new experiment in righteousness is about to backfire too. It will register more laughter abroad than sales. Washington’s cleanup code for corporations under pressure to pay off abroad is reducing America to a role of ‘a pitiful, helpless giant’ . . .’”

· Another comment from a distinguished Washington lawyer and former SEC staff member noted: “‘What function remains for the SEC here? I submit; none. The Commission is plainly out of its ballpark . . . ‘”

· A state court judge wrote: “‘I read your bureaucratic blurb in the Wall Street Journal today (about foreign payment cases). You are out of your mind. Stockholders don’t give a good damn.’”

During the on-going Congressional hearings a series of proposals were debated that could impact the future of the agency. Those included one to give the SEC criminal authority and others focused on adding criminal bribery provisions but not the books and records and internal control provisions favored by the SEC.

Throughout the pubic criticism and Congressional debates the SEC continued with its investigations. The culminated was the Volunteer Program during which 450 companies self-reported, conducted extensive internal investigations, disclosed wrongful conduct and settled actions with the Commission, agreeing to significant remedies. The program did not offer issuers or those involved immunity from prosecution, or even promise “cooperation credit.” It did not require the company to consult with the SEC staff. Rather, it was an effort to spur corporate self-governance since the illicit or questionable payment cases graphically illuminated serious corporate self-governance issues. As Chairman Hills stated:

“It is apparent that our system of corporate self-regulation policed by independent auditors, directors and counsel and ultimately enforced by the SEC has broken down. Hundreds of millions of dollars have been siphoned out of corporate cash flow and spent out of slush funds with the knowledge of some members of top corporate management but without the knowledge of the outside directors, outside auditors and stockholders. No matter that it is only a score or so out of thousands, some are among the biggest and the most audited corporations in the world. If they can do it, who can’t?’ ”

The Volunteer Program, as well as the other foreign payments cases brought by the agency during the period, was a step toward repairing and strengthening corporate self-governance under the supervision not of the government but of the board of directors and its independent directors and outside auditors and counsel. It was that focus which sparked the initial inquiries. It was that continued focus through the tenure of Chairman Hills that made the cases a success and ultimately helped craft the FCPA by the end of his term in 1977.

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by T. GormanPosted on Posted in SECActions

Supreme Court Justices Scalia and Thomas indicated that the High Court may at some point consider a question regarding the application of insider trading law in criminal cases and the deference due, if any, to the interpretations of that body of law by the SEC. The statement was appended to the denial of certiorari in an insider trading case where the Second Circuit deferred to the SEC’s views.

The CFTC and the UK’s Financial Conduct Authority announced significant settlements with major banks regarding the manipulation of the forex markets. A noteworthy point was the comments of the CFTC that it lacked the resources to move forward further with the inquiry, echoing comments made when the agency settled the London Whale action.

SEC enforcement continued to emphasize the use of administrative proceedings. The agency filed its sixth insider trading action in that forum since September. In addition, the Commission brought actions centered on Rule 105, a misappropriation action, a SOX claw-back case, an investment fund fraud action and an action based on the sale of unregistered securities .

Supreme Court

Insider trading; The Court declined to review the insider trading conviction in Whitman v. U.S., No. 14-28 (S.Ct. Order entered Nov. 10, 2014). Justice Scalia attached a statement to the order, joined by Justice Thomas. The issue addressed by the two Justices is: “ Does a court owe deference to an executive agency’s interpretation of a law that contemplates both criminal and administrative enforcement?” Here the Second Circuit gave deference to the SEC’s view on insider trading. The deference issue was not raised by Mr. Whitman. Justice Scalia concurred in not accepting the case because of the record. He concluded his statement by noting that “when a petition properly presenting the question comes before us, I will be receptive to granting it.”

CFTC

Remarks: Chairman Timothy Massad addressed the Swaps Execution Facilities Conference (November 12, 2014). His remarks reviewed the new regulatory framework, noted that the new regulations will take time to properly implement and that the agency is working to phase them in. The Chairman also stated that in some areas they are hindered because the agency does not have sufficient financial resources (here).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the SEC filed 1 civil injunctive action and 5 administrative proceedings, excluding 12j and tag-along-actions.

Rule 105: In the Matter of Pennington Capital Management LLC, Adm. Proc. File No. 3-16271 (November 12, 2014) is a proceeding which names as Respondents the unregistered investment adviser and its owner, Robert J. Evans. In April and May 2012 the Respondents purchased equity securities in two offerings from an underwriter or broker dealer participating in follow-on offerings after having sold the same securities short, reaping profits of $95,204.55. The Order alleges violations of Rule 105. To resolve the proceeding the respondents each consented to the entry of a cease and desist order based on the Rule. In addition, they agreed to disgorge their trading profits, pay prejudgment interest and a penalty of $65,000.

Insider trading: In the Matter of Michael S. Geist, Adm. Proc. File No. 3-16269 (November 12, 2014). Michael Geist is employed at ViaSat, Inc. as a Government Sales Manager. Brent Taylor, also named as a Respondent, is the former COO and Executive V.P of a subsidiary of Comtech. He left the firm in 2004 and is now employed at his firm, Rationa-3, LLC, which works on various government satellite communications contracts. This action centers on the award of a U.S. Army contract, Blue Force Traking-2, to ViaSat in 2010. The original Blue Force Tracking production contact was awarded to Comtech in the early 2000s. Mr. Taylor was employed at the firm during that time and was thus familiar with the contract. In December 2009 a request for proposal was officially solicited by the U.S. Army to produce the Blue Force Tracking-2. Mr. Grist had worked on gathering material for an information request regarding the solicitation. He had recruited Mr. Taylor to assist. Only ViaSat and Comtech submitted bids. Two days prior to the announcement of the award on July 21, 2010, the Army contracting officer for the program sent an e-mail to ViaSat informing the firm that it had been selected for the award. Mr. Geist learned about the e-mail, called Mr. Taylor and purchased put option contracts on Comtech stock and calls on ViaSat shares. The next day, July 20, Mr. Taylor returned the call of Mr. Geist. That evening Mr. Geist placed an order to sell the Comtech Telecom and ViaSat options he had purchased. On the morning of July 21 the Army’s Deputy General Manager on the program advised an engineer at a defense contractor for whom Mr. Taylor served as a subcontractor that ViaSat had won the contract. Mr. Taylor was informed. Later that day he sold shares of Comtech in his account. His wife did the same. He also sold shares in a second account. Later that morning Comtech Telecom announced that it had not obtained the award. Within fifteen minutes of the release, the stock dropped almost 28%. ViaSat’s shares rose modestly. The Taylor sell orders were executed just before the Comtech announcement, except for a portion of Mr. Taylor’s order at the second broker which was only partially executed prior to the press release. The sell orders placed the evening before by Mr. Geist were executed one minute after the press release. The Order alleges violations of Exchange Act Section 10(b). Both Respondents settled with the Commission, consenting to the entry of cease and desist orders based on the Section cited in the Order. In addition, Mr. Geist agreed to pay disgorgement of $27,303.85, prejudgment interest and a penalty in an amount equal to the disgorgement. Mr. Taylor agreed to pay disgorgement of $46,828.86, prejudgment and, within 120 days of the entry of the Order, disgorgement in the same amount along with post judgment interest. Mr. Taylor will also pay a penalty of $46,828.86. Each Respondent is prohibited from serving as an officer or director for a period of five years.

Clawback: In the Matter of Dr. L.S. Smith, Adm. Proc. File No. 3-16270 (November 12, 2014) is a proceeding against Dr. Smith, the former COB and CEO of DGSE Companies Inc. During his tenure there were fraudulent accounting entries at the firm. A restatement was required. The action does not allege that Dr. Smith was involved only that he is required to repay certain incentive compensation and stock sale profits under Section 304(a) of Sarbanes-Oxley. The proceeding was resolved with the entry of a cease and desist order based on the SOX Section. Respondent is required to reimburse the company a total of $106,250 and 59,738 shares of the firm’s stock.

Investment fund fraud: In the Matter of Pakajkumar Srivastava, Adm. Proc. File No. 3-16267 (November 12, 2014) is a proceeding which names as Respondents Mr. Srivastava, a resident of Mumbai and an internet marketer, and Nataraj Kavuri, a resident of Hyderabad, India, employed at a software company. Beginning in April 2013 Respondents operated a website called “profits paradise.” Through that website they solicited investments in a pooled fund that supposedly invested in stocks, forex and commodities. Three investment programs were offered. All guaranteed what were called huge profits. The risks were promised to be minimal. The offering was structured in such a manner that under certain conditions investors could never recover their principal investments. The offering has all the hallmark of a type of highly suspicious offering called a high-yield investment program, according to the Order. In addition to the website, investors were solicited through Facebook, You Tube and other social media. The Respondents disguised their identities, according to the Order which alleges violations of Securities Act Sections 17(a)(1) and (3). The matter will be set for hearing.

Unregistered securities: In the Matter of Eureeca Capital SPC, Adm. Proc. File No. 3-146265 (November 10, 2014). Eureeca Capital, a Cayman Islands company, operates an online, securities-based crowd-funding platform. Through the platform issuers are connected with investors to raise funds in exchange for equity. The securities offered are from non-U.S. based issuers. The site also specifies that the securities are not being offered to U.S. persons. However, the firm did not have any compliance procedures designed to prevent U.S. persons from registering. As of May 2014 about 50 U.S. persons were registered on the site, according to the Order. In 2013 Eureeca accepted funds from three U.S. persons for offerings. Each investor provided verification of citizenship and residence. While Eureeca did not take steps to verify that the investors were accredited, two of the U.S. investors certified to that fact in e-mail prior to the offerings. The three U.S. persons invested about $20,000 in four separate offerings through the website. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). To resolve the proceeding, Eureeca consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the firm agreed to pay a civil penalty of $25,000. In resolving the proceeding, the Commission considered the prompt voluntary cooperation of the company and its remedial actions.

Misappropriation: SEC v. Johnson, Civil Action No. 1:14-cv-08825 (N.D. Ill. Filed Nov. 5, 2014) is an action against Eric Johnson, an investment adviser affiliated with a broker-dealer. Since 2004 Mr. Johnson has misappropriated over $1million in client funds by forging their signatures on wire transfers. He admitted this to the staff. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The court granted a request for injunctive relief, an asset freeze and other emergency relief. The action is pending and the investigation is continuing. See Lit. Rel. No. 23130 (Nov. 12, 2014).

CFTC

Manipulation: The agency fined five banks over $1.4 billion for attempted manipulation of the forex markets. Specifically, the following firms were sanctioned: Citibank and JPMorgan, $310 million each; RBS and UBS $290 million each; and HSBC $275 million. Cease and desist orders were entered and each bank is required to implement certain remedial steps regarding internal controls and procedures and the supervision of traders.

Criminal cases

Investment fund fraud: U.S. v. Shavers (S.D.N.Y.) is a case in which Trendon Shavers was arrested and charged with operating a Ponzi scheme. Specifically, beginning in September 2011 he raised about $4.5 million or 764,000 Bitcoin through Bitcoin Savings and Trust on the promise that investors would receive interest of 7% per week. Profits were supposed to come from an arbitrage strategy and Mr. Shavers personally guaranteed any losses. In fact the operation was a Ponzi scheme.

Australia

Investment fund fraud: The Australian Securities and Investment Commission charged Mrs. & Mrs. Douglas Johnson with 70 offenses, including fraud and attempting to pervert the course of justice, in connection with the operation of a Ponzi scheme. Specifically, in connection with Nominees (USA) Pty Ltd and Small Business Management Pty Ltd the couple raised about $1.5 million from investors that was to be used for property developments in the U.S. Rather than invest the funds as promised, the couple used the money for their own purposes.

Hong Kong

Exchange connect: The Securities and Futures Commission and the China Securities Regulatory Commission approved the launch of the Shanghai-Hong Kong connect pilot scheme. Trading will commence through the connect on November 17, 2014. This will establish mutual stock market access between Hong Kong and the Mainland. The two regulators also entered into an MOU, strengthening cross-boarder regulatory and enforcement cooperation.

UK

Manipulation: The Financial Conduct Authority imposed £1.1 billion in fines on five banks and is implementing an industry-wide remediation program tied to the manipulation of the forex market. Specifically, the following fines were imposed: Citibank £225,575,000; HSBC £216,363,000; JPMorgan £222,166,000; RBS £217,000,000; and UBS £233,814,000. These firms were found to be the worst offenders. The remediation program will address the root causes of the difficulty.

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