The Commission brought a series of administrative proceedings this week and one civil injunctive action. The civil injunctive action was an insider trading case. The administrative proceedings centered on FCPA violations, the custody rule, churning, Rule 105, internal controls, a failure to comply with the auditor rotation rule and undisclosed related party transactions.
SEC
Remarks: Commissioner Kara Stein addressed the Los Angeles County Bar Association 47th Annual Securities Regulation Seminar (Oct 24, 2014). Her remarks focused on capital formation and overhauling the current system (here).
Remarks: Norm Champ, Director, Division of Investment Management, addressed the SIFMA Complex Products Forum, New York, New York (Oct. 29, 2014). His remarks focused on enhanced risk monitoring by the Division (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the SEC filed 1 civil injunctive action and 8 administrative proceedings, excluding 12j and tag-along-actions.
Investment fund fraud: SEC v. Coughlin, Civil Action No. 1:14-cv-00562 (S.D. Ind.) is a previously filed action which names as defendants Timothy Coughlin, OICU Ltd. and OICU Investment Corp. The complaint alleged that from June 2007 through December 2009 the defendants raised over $12.8 million from about 5,000 investors who thought they were purchasing an interest in a credit union. In fact the venture was a classic Ponzi scheme. The Court entered final judgments by consent against each defendant enjoining them from future violations of the antifraud provisions of the federal securities laws. The order also bars them from participating in the issuance, purchase, offer or sale of any security. A permanent officer and director bar was imposed on Mr. Coughlin. In addition, the two entities were ordered to jointly and severally pay disgorgement of $10,053,234 together with prejudgment interest and a penalty of $775,000. No financial penalties were imposed on Mr. Coughlin in view of the restitution order imposed in the parallel criminal case in which he pleaded guilty. Disgorgement orders were also entered against the relief defendants. See Lit. Rel. No. 23123 (October 30, 2014).
Custody rule: In the Matter of Sands Brothers Asset Management, LLC, Adm. Proc. File No. 3-16223 (October 29, 2014). Named as Respondents are the registered investment adviser, Steven Sands, Martin Sands and Christopher Kelly. Sands Brothers Asset provides investment advisory service to a number of pooled investment vehicles. Steven and Martin Sands are co-founders of the adviser. Attorney Kelly is the chief compliance and operating officer of the adviser. Previously, the adviser and two co-founders were named as Respondents in a Commission administrative proceeding charging violations of the custody rule. That proceeding was settled with the entry of a cease and desist order and the payment of a penalty. The two brothers have also been sanctioned by state regulators for securities law violations. From 2010 through 2012 Sand Brothers Asset continued to have custody of client assets. Yet the adviser did not submit to a surprise examination by an independent public accountant. The adviser did distribute its funds’ audited financial statements for fiscal years 2010 to 2012 but after the 120 time limit. The circumstances which caused the audits to be delayed were predictable and not unforeseeable. For example, for 2012 the auditors noted that there was a delay in receiving information from management regarding the valuation of assets. Steven and Martin Sands aided and abetted the violations since they were responsible for ensuring that compliance personnel had the authority to implement whatever procedures and policies were necessary to ensure that the adviser complied with the Advisers Act. Mr. Kelley, who was tasked in the compliance manual with ensuring compliance with the restrictions and requirements of the custody rule, knew that the audited financial statements were not being distributed on time. Yet at most he reminded people of the time deadline but failed to take any other steps. The Order alleges violations of the custody rule. The action will be set for hearing.
Churning: In the Matter of Eli D. Okman, Adm. Proc. File No 3-16218 (October 28, 2014) is a proceeding which names as a Respondent Eli Okman, now a retired Merrill Lynch account executive. From January 2010 through September 2011 he exercised de facto control over a customers account and churned it in violation of Securities Act Section 17(a). To resolve the proceeding Mr. Okman consented to the entry of a cease and desist order based on the Section cited in the Order. He was also suspended for a period of 12 months from the securities business and directed to pay disgorgement of $31,964, prejudgment interest and a penalty equal to the amount of the disgorgement. A fair fund will be established for the benefit of the customer.
Manipulation: SEC v. AutoChina International Limited, Civil Action No. 1:12-CV-10643 (D. Mass.) is a previously filed action against the company and Ge Dong, Victory First Limited, Rainbow Yield Limited, Yong Qi Li, Ai Xi Ji, Ye Wang, Zhong Wen Zhang, Li Xin Ma, Yong Li Li and Shu Ling Li. The Court entered a financial judgment by consent as to each defendant enjoining them from future violations of Securities Act Sections 9(a)(1), 9(a)(2) and Exchange Act Section 10(b). Each was ordered to pay a civil penalty of $150,000. The action was based on the manipulation of the AutoChina’s stock. See Lit. Rel. No. 23121 (Oct. 28, 2014).
Rule 105: In the Matter of Thrasos Tommy Petrou, Adm. Proc. File No. 3-16217 (October 27, 2014) is a proceeding which names the professional trader as a Respondent. Mr. Petrou has served as a trader for a number of entities. From mid-December 2009 through mid-January 2009, while trading for his account, as well as those of two unregistered entities, he purchased offering shares from an underwriter or broker participating in a follow-on or secondary offering after having sold short during the restricted period twenty times. The Order alleges violations of Rule 105 of Regulation M. The proceeding will be set for hearing.
Internal controls: In the Matter of Great Lakes Dredge & Dock Corporation, Adm. Proc. File No. 3-16215 (October 27, 2014) is a proceeding naming the firm as a Respondent. Great Lakes has two operating divisions, a dredging segment responsible for most of the firm’s revenue and a demolition segment. In the second and third quarters of 2012 the firm overstated revenue in the demolition segment by recording revenue for pending change orders without having sufficient proof of customer acceptance of theose changes. As a result, revenue was overstated during the year-end audit. This resulted from a material weakness in internal controls. The company discovered the issue and announced a restatement. To resolve the proceeding the company consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay a penalty of $150,000. The Commission considered the remedial acts of the company and its substantial cooperation.
Insider trading: SEC v. Slawson, Civil Action No. 1:14-cv-3421 (N.D. Ga. Filed October 24, 2014). Stephen Slawson is the co-founder and manager of hedge fund TCMP3 Partners L.P. In eight instances, beginning in 2006 and continuing through 2010, he is alleged to have traded on inside information which traces back to a Carter’s, Inc. and generated over $500,000 in illicit trading profits or losses avoided. Typically the information came to him from Dennis Rosenberg, a research analyst retained by the hedge fund. Mr. Rosenberg obtained the inside information obtained from Eric Martin, a Carter’s vice president of investor relations before he was terminated in March 2009. Mr. Martin is currently serving a two year prison term after pleading guilty to one of eleven counts in an indictment charging him with securities fraud. Subsequently, the information came from Richard Posey, a Carter’s vice president of operations who furnished it to Mr. Martin who then tipped Mr. Rosenberg who then tipped Mr. Slawson. During his employment Mr. Martin tipped analysts such as Mr. Rosenberg who covered the company to develop his relationship with them. Mr. Slawson “knew or should have known that Rosenberg’s source at Carter’s was disclosing the information in violation of a fiduciary or similar duty of trust and confidence,” according to the complaint. Following the termination of Mr. Martin, he obtained inside information from Mr. Posey which he then transmitted to Mr. Rosenberg and ultimately to Mr. Slawson in two instances and on another occasion, directly to the hedge fund manager. Mr. Posey furnished the information to Mr. Martin “by virtue of their close friendship and Posey’s desire to enhance his reputation.” The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office filed parallel criminal charges. Both cases are pending. See Lit. Rel. No. 23118 (October 24, 2014).
Pump and dump: SEC v. Recycle Tech Inc., Civil Action No. 12-cv-21656 (S.D. Fla.) is a previously filed action centered on a market manipulation scheme. Defendants Anthony Thompson, OTC Solutions LLC, Jay Fung, Ryan Gonzales and Pudong LLC all settled the action. The Court entered final judgments permanently enjoining each settling defendant from future violations of Securities Act Sections 5(a) and 5(c), and Exchange Act Section 10(b). In addition, Messrs. Thompson, Fung and Pudong and OTC are enjoined from future violations of Securities Act Section 17(a). The final judgment against Mr. Gonzalez is also based on Exchange Act Section 13(a). The Court also entered penny stock bars against Messrs. Thompson, Fung and Gonzales. Mr. Gonzales is bared from serving as an officer and director of a public company. In addition, Mr. Thompson and OTC are jointly and severally liable for disgorgement in the amount of $349,504.61 and prejudgment interest. Messrs. Fung and Pudong are jointly and severally liable for disgorgement in the amount of $456,457 along with prejudgment interest. Messrs. Thompson and Fung are required to each pay civil penalties of $120,000. Mr. Gonzalez was not ordered to pay a penalty based on financial position. See Lit. Rel. No. 23117 (Oct. 24, 2014).
Auditor rotation: In the Matter of Berman & Company, P.A., Adm. Proc. File No. 3-16212 (October 24, 2014) is a proceeding which names as Respondents, the Florida audit firm, which is registered with the PCAOB, and its owner, Elliot Berman. For five years Mr. Berman served as the engagement partner on the audits of Client. For the next year Mr. Berman assigned a firm employee to serve as the lead partner. The employee was not a CPA registered with the state of Florida or with the PCAOB. In addition, Mr. Berman performed a number of the services that would typically be done by the lead partner. The Order alleges that the Respondents violated Exchange Act Section 10A(j), Rule 2-02 of Reg. S-X, caused Client to violate Exchange Act Section 13(a) and engaged in unprofessional conduct within the meaning of Rule 102(e)(1)(ii). To resolve the proceeding Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, Mr. Berman is denied the privilege of appearing or practicing before the Commission as an accountant. Respondents will jointly and severally pay a penalty of $15,000. The proceeding is part of Operation Broken Gate.
Undisclosed guarantees: In the Matter of James J. Dalton, Jr., Adm. Proc. File No. 3-16214 (October 24, 2014) is a proceeding with names Mr. Dalton, the founder of SecureAlert, Inc. as a Respondent. In 2007 and 2008 the company failed to disclose personal guarantees and material related-party transactions by Mr. Dalton and another officer. The transactions were undertaken in one instance to induce a customer to purchase product and in another to avoid having defective product returned. This resulted in false filings being made with the SEC. Mr. Dalton also made misrepresentations in response to a Corp Fin comment letter. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to the payment of a penalty of $65,000. A related proceeding based on the same core conduct names David Derrick, Sr., the founder of SecureAlert as a Respondent. It alleges willful violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case will be set for hearing. In the Matter of David G. Derrick, Sr., Adm. Proc. File No. 3-16213 (October 24, 2014).
FCPA
In the Matter of Layne Christensen Company, Adm. Proc. File No. 3-16216 (October 27, 2014). Layne Christensen is a global water management, construction and drilling company. From 2005 through 2010 Layne Christensen, through subsidiaries in Africa and Australia, is alleged to have paid over $1 million in improper payments to foreign officials in the Republic of Mali, the Republic of Guinea, Burkina Faso, the United Republic of Tanzania and the Democratic Republic of the Congo. The payments were made to secure favorable tax treatment, customs clearance for drilling equipment, work permits for expatriates, relief from inspection by immigration and labor officials and to avoid penalties for delinquent payment of taxes and customs duties and the failure to register immigrant workers. Between 2005 and 2009 Layne Christensen paid about $768,000 in bribes to foreign officials in Mali, Guinea and the Democratic Republic of the Congo through subsidiaries to reduce tax liability and penalties, saving about $3.2 million. The company made additional improper payments, this time in 2007 and 2009, to customs officials to avoid paying customs duties and obtain clearance for the import and export of its equipment. The payments were made in Burkina Faso and the Democratic Republic of the Congo through subsidiaries. The Order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). The proceeding was resolved with the company consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the firm agreed to pay disgorgement of $3,893,472.42, prejudgment interest and a penalty of $375,000. The amount of the penalty reflects the self-reporting and extensive cooperation and remediation efforts of the company.
Criminal cases
Insider trading: U.S. v. Post, Case No. 1:14-cr-00715(S.D.N.Y.) is an action against David Post, who was tipped by his friend, a financial analyst at a pharmaceutical company. The SEC recently amended its complaint against the analyst to add Mr. Post as a defendant (here). Mr. Post pleaded guilty to one count of conspiracy to commit securities fraud and three counts of securities fraud. Sentencing is scheduled for February 6, 2015.
FINRA
Reg. SHO: The regulator censured Merrill Lynch Professional Clearing Corp. and find the firm $3.5 million for failing to take action to close-out certain fail-to-deliver positions from September 2008 through July 2012 . The firm also did not have adequate systems and procedures in place to address the issue. Its supervisory systems and procedures were inadequate and improperly permitted the firm to allocate fail-to-close positions to the firm’s broker-dealer clients based solely on each client’s short position without regard to which clients caused or contributed to the situation.
Hong Kong
Improper conduct: The Securities and Futures Commission suspended Ho Siu Po, a registered representative of DBS Vickers Ltd., for seven months. The suspension is based on his disregard of firm policies which included operating accounts on a discretionary basis and accepting cash from a client, both of which are prohibited.
MOU: The SFC entered into a memorandum of understanding with the China Securities Regulatory Commission. It calls for cooperation regarding enforcement, the sharing of information and data, establishes a process for joint investigations and ensures that enforcement actions in both jurisdictions operate to protect the investing public.
