by T. GormanPosted on Posted in SECActions

This is the fifth part of an occasional series. The first is available here, the second here, the third here and the fourth here. The entire paper will be published by Securities Regulation Law Journal early next year.

The Congressional debates

The revelations from the Watergate hearings and the Commission’s investigations and enforcement actions sparked two years of Congressional hearings. Those revelations also spawned a widespread debate in the United States and abroad regarding the corporate conduct, the Commission’s actions and what, if anything, should be done.

In some quarters the revelations engendered reform efforts. “In the business community many companies initiated reform efforts, separate and apart from those organizations involved in the volunteer program. In a number of instances the disclosures “prompted outside directors to increase their involvement in and knowledge of corporate affairs. In many cases, these outside directors reportedly have been instrumental in initiating internal investigations and requiring more stringent auditing controls.” Id. at 44-45. The boards of directors at many companies issued orders directing that the kind of conduct identified in the Commission’s cases be halted. Id. Many companies adopted or reformed their corporate code of conduct. Many of those policies prohibit the use of corporate funds or assets for unlawful or improper purposes. A number of firms also included provisions regarding the documentation of payments. The new or revised policies were typically distributed to employees. SEC Report at 48-49.

The accounting profession also instituted reforms keyed to the type of conduct identified in the SEC’s actions. Many firms digested the Commission’s cases and related news articles, distributing the material throughout the firm. The major accounting firms instituted a series of specific steps which included: 1) Establishing procedures to ensure that information relating to questionable payments is brought to the attention of senior personnel; 2) Establishing policies to assure that questionable or sensitive transactions are brought to the attention of the board of directors, preferably the audit committee; 3) Preparing educational materials for clients which encourage the adoption of policies relating to ethics in business transactions; 4) Adopting policies that encouraged clients to voluntarily disclose information regarding questionable payments to the Commission; 5) Extending audit procedures in appropriate circumstances; and 6) Modifying representation letters to include statements about questionable or illegal payments. Id. at 52.

The Auditing Standards Executive Committee of the American Institute of Certified Public Accountants also considered reform and the SEC urged the Exchanges to consider new listing requirements. The former prepared an exposure draft on “Illegal Acts by Clients.” Id. at Exhibit C. As to the latter, SEC Chairman Roderick Hills wrote a letter to the Chairman of the New York Stock Exchange suggesting that the Exchange consider adopting a requirement that firms have an audit committee composed of independent directors as part of its listing standards. The Commission had been seeking to have boards establish an audit committee composed of independent directors since 1940. Letter of SEC Chairman Roderick Hills to William Batten dated May 11, 1976, discussed in SEC Report, Exhibit D.

Many were highly critical of the actions taken by the Commission. 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. Then SEC Chairman Roderick Hills summarized many of these points 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.’” Hills at Yale at 2.

Throughout the Congressional hearings there was a significant debate regarding how to address the question. Opinions ranged from doing nothing to drafting additional disclosure requirements or to criminalizing foreign bribery. The SEC considered its existing authority adequate. At the same time the Commission favored adding additional provisions focused on disclosure and internal controls. The agency did not advocate anti-bribery legislation as the topic was out of its traditional disclosure role and such a provision could be difficult to enforce. As Director Sporkin later noted: “we were a disclosure agency . . . Our concept was to get the information to the shareholders and let the shareholders make decisions on what they wanted to do.” Transcript at 14. It also sidestepped suggestions that the agency be given authority to bring criminal prosecutions as an unnecessary consideration at the time.

The Commission advanced proposed legislation to strengthen reporting requirements and internal controls. It had three key components: A prohibition against the falsification of corporate accounting records; a prohibition against making false statements to auditors; and a requirement that the company maintain a system of internal accounting controls. A draft bill reflected these points: 1) A proposed new Section 13(b) had two primary subcomponents: a) proposed 13(b)(2)(A) would require that every issuer “make and keep books, records and accounts, which accurately and fairly reflect the transactions and dispositions of the assets of the issuer. . .” ; b) A new proposed Section 13(b)(2)(B) would require every issuer to “devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurances that . . .” transactions were executed as authorized and in accord with GAAP; 2) A proposed Section 13(b)(3) would make it unlawful to falsify records required to be maintained, for an accounting purpose; and 3) A proposed new Section 13(b)(4) would prohibit the making of false statements to the auditors. SEC Report at 63-64.

The Business Roundtable stated that it was opposed to the kind of conduct uncovered in the Commission’s investigations. At the same time it argued that existing authority was sufficient to deal with the questions. Accordingly, no additional legislation was required. Koehler at 949. Other commentators thought that the passage of anti-bribery laws would strengthen the position of U.S. corporations doing business abroad who could then resist requests for the payment of bribes and gratuities as illegal. Id. at 944.

Departments within the Government took divergent views. The Department of State strongly opposed U.S. corporations making such payments. Such acts could interfere with and weaken U.S. foreign policy. Id. at 965. For example, some thought that payments made by Lockheed Corporation in Italy and Japan may well have damaged U.S. relationships. Indeed, in August 1976 the former Prime Minister of Japan was indicted for accepting $1.7 million from Lockheed. The Netherlands was rocked by the Lockheed scandal. Id. at 941.

The State Department, however, opposed legislation that would directly prohibit and criminalize such actions when undertaken in foreign countries. Id. at 965. The Department also expressed concern that the disclosure of such transactions might make it more difficult for the U.S. Government to assist American firms in pursuit of their legitimate business interest with friendly government. Id. See also, Statement of the Chairman of the House Subcommittee on Int. Econ. Pol., 94th Cong. At 1-2 (1975) (Disclosure of these types of transactions could have ramifications not just for the country involved but also for the business enterprise in other countries. For example, the Republic of Peru expropriated the property of Gulf Corporation. Other Latin American countries were also considering expropriation legislation based on what the disclosures about corporate payments potentially impacting foreign elections).

The Department of Defense was in a difficult position. It produced a series of documents as well as witnesses. Later, Senator Proxmire, a leading proponent of the legislation that ultimately became the FCPA, summarized his views regarding the Defense Department noting: “One of the most disturbing aspects of this is the role the Defense Department has played, especially with respect to defense contractors who sold abroad. We have a document which indicates that at one point a top official in the Defense Department had counseled defense contractors on paying bribes and urged them to do so under circumstances where it was necessary.” Foreign and Corporate Bribes: Hearings Before the Senate Comm. On Banking, Housing and Urban Affairs, 94th Cong. 46 (1976) (statement of Senator William Proxmire, Chairman, Senate Committee on Banking, Housing and Urban Affairs at 110). The questionable payments by corporations also had ramifications under other statutes and government programs such as the Internal Revenue Code, the antitrust laws, the role of the Overseas Private Investment Corporation in overseas investments and the Civil Aeronautics Board. See Herlihy & Levine beginning at 595; Koehler at 950-61.

Over the two years that Congress debated the foreign payments issues approximately twenty different bills were introduced. Koehler at 980. By the second year, a rough consensus developed that some form of legislation was required. The critical question became the approach – disclosure or criminalization. The SEC favored the former, concluding that criminal anti-bribery provisions would prove difficult to enforce and unworkable. Others thought the disclosure approach would prove ineffective.

Two key legislative proposals emerged. In March 1976 Senator Proxmire introduced S,3133 in the Senate. It combined the two approaches using both disclosure and criminalization. S.3133 contained a criminal payment provision and disclosure requirements. The bill was unique since it included both approaches. In May 1976 Senator Church, another leading proponent of legislation, introduced S.3418. This bill used the disclosure approach for a variety of payments. In June 1976 Representative Solarz, another leader on this issue, introduced H.R. 1434. It essentially used the approach of Senator Church’s bill. Koehler at 985.

As these bills were being introduced, President Gerald Ford issued a memorandum to various federal agencies establishing a “Task Force on Questionable Corporate Payments Abroad.” Gerald R. Ford, Memorandum Establishing the Task Force on Questionable Corporate Payments Abroad, available at http://www.presidency.ucsb.edu/ws/?pid=5772. The Task Force was chaired by Secretary of Commerce Elliott Richardson. Subsequently, the views of the Task Force were summarized in a June 1976 letter to Senator Proxmire from its Chairman. The letter rejected the combined disclosure-criminal approach adopted by the Proxmire bill: “There are two principal competing general legislative approaches – a disclosure approach or a criminal approach. While it is possible to design legislation – as indeed is the case with S.3133 – which requires disclosure of foreign payments and makes certain payments criminal under U.S. law, the Task Force has unanimously rejected this approach. The disclosure-plus criminalization scheme would, by its very ambition, be ineffective. The existence of criminal penalties for certain questionable payments would deter their disclosure and thus the positive value of the disclosure provisions would be reduced. In our opinion, the two approaches cannot be compatibly joined.” Letter from Secretary of Commerce Richardson to Senator Proxmire, quoted in Koehler at 989-91.

The Task Force also rejected the criminalization approach, noting that while it would “represent the most forceful possible rhetorical assertion by the President and the Congress” on the issue it would “be very difficult if not impossible [to enforce]. Successful prosecution of offenses would typically depend upon witnesses and information beyond the reach of U.S. judicial process. Other nations, rather than assisting in such prosecutions, might resist cooperation because of considerations of national preference or sovereignty. Other nations might be especially offended if we sought to apply criminal sanctions to foreign-incorporated and/or foreign-managed subsidiaries of American corporations. The Task Force has concluded that unless reasonably enforceable criminal sanctions were devised, the criminal approach would represent poor public policy.” Id.

The Task Force adopted the disclosure approach, although it recognized that this might increase the paper work burden on American business. This approach is preferable because it “would supplement current SEC disclosure . . . [and] would provide protection for U.S. businessmen from extortion and other improper pressures, since would-be extorters would have to be willing to risk the pressures which would result from disclosure of their actions to the U.S. public and to their own governments . . .” Letter from Elliot Richardson, U.S. Secretary of Commerce to Senator William Proxmire, Chairman, Senate Committee on Banking, Housing and Urban Affairs, quoted in Koehler at 990-91. Subsequently, President Ford issued new initiatives based on the Task Force report. Id. at 992.

With the election of President Carter and the opening of the 95th Congress after the 1976 election, the Task Force proposals lost force. Id. at 995. Subsequently, bills were introduced in the House and Senate which eventually, after modification in committee, became the FCPA. In February 1977 Representative Eckhardt introduced H.R. 3815. The bill used the criminalization approach based on the notion that the disclosure approach would be burdensome for business. In May 1977, Senator Proxmire introduced S.305 which was substantially similar to his earlier bill which had passed unanimously in the Senate during the prior legislative term. By November both bills had passed in their respective Chambers. Differences were reconciled in conference. Id. at 998.

The criminalization approach was adopted. As the Committee report stated: “The prevailing view was that the criminalization approach embodied in S.305 and H.R. 3815, along with supplemental books and records and internal control provisions that were agreed to in conference, represented the best legislative response to the foreign corporate payments problem.” Id.

Nevertheless, there continued to be strong minority views as noted in the House Report: “We support, without reservation, the goal of H.R. 3815, which is the elimination of foreign bribery. We are concerned, however, that the approach adopted by H.R. 3815 is not the most effective to eliminate questionable foreign payments [for the reasons stated by the Task Force] . . . We believe that adoption of the disclosure approach would, in no way, imply that payoffs would be condoned as long as they are disclosed. Rather, we believe that this approach would prove ultimately to be a much more effective deterrent . . . “ Quoted in Koehler at 998-99.

In December 1977 President Carter signed the bill into law. The journey was summarized by one leading commentator: “After more than two years of investigation, deliberation and consideration of the foreign corporate payments problem and the policy ramifications of such payments, and despite divergent views as to the problem and the difficult and complex issues presented, Congress completed its pioneering journey and passed the first law in the world governing domestic business conduct with foreign government officials in foreign markets.” Id. at 1002 (emphasis added).

Next: The concluding segment to the series

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by T. GormanPosted on Posted in SECActions

As the government fiscal year drew to a close, the SEC continued what appears to be an emerging trend of filing insider trading actions as administrative proceedings rather than civil injunctive actions in Federal Court. The Manhattan U.S. Attorney’s Office also got back on track, prevailing in a 13 day insider trading trial.

In addition to insider trading actions, the Commission brought cases relating to offering fraud; investment fund fraud; undisclosed conflicts; regulatory capital stemming from the market crisis; and failure to supervise.

SEC

Remarks: Chair Mary Jo White delivered remarks titled “The Challenge of Coverage, Accountability and Deterrence in Global Enforcement at the IOSCO 39th Annual Conference, Rio de Janiero (Oct. 1, 2014). Her remarks provided an overview of the enforcement division and efforts regarding international cooperation (here).

Remarks: Commissioner Michael S. Piwowar delivered remarks at the National Association of Plan Advisors D.C. Fly-In Forum (Sept. 30, 2014). His remarks centered on the standard of care for those who provide investment advice to retail investors (here).

Remarks: Mark J. Flannery, Chief Economist and Director, delivered remarks titled “The Commission’s Production and Use of Structured Data” at the Data Transparency Coalition’s Fall Policy Conference, Washington, D.C. (September 30, 2014). His remarks focused on the efforts of the Commission to make financial data available (here).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the SEC filed 7 civil injunctive action and 7 administrative proceedings, excluding 12j and tag-along-actions.

Offering fraud: In the Matter of Paul Edward “Ed” Lloyd, Jr., CPA, Adm. Proc. File No. 3-16182 (September 30, 2014) is a proceeding against Mr. Lloyd who is a tax preparer and has been a registered representative. In 2012 Mr. Lloyd sold interests to seventeen clients in what was supposed to be a tax advantaged real estate deal, raising about $632, 500. However, he only put $502,500 in the entity, misappropriating the remaining funds from three investors. Nevertheless, when he secured tax benefits for the deal they were allocated to seventeen clients. He sent the pertinent tax forms to the three investors whose money he had misappropriated. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The proceeding will be set for hearing.

Investment fund fraud: SEC v. Abdallah, Civil Action No. 1:14-cv-01155 (N.D. Ohio Filed September 30, 2014) is an action which names as defendants Thomas Abdallah, Kenneth Grant, KGTA Petroleum Ltd., Mark George, Jeffrey Gainer and Jerry Cicolani. Shares of KGTA were sold to the public by Messrs. Grant and Abdallah as interests in a firm that had earnings from buying and reselling crude oil and refined fuel products. The representations were false. In fact the operation was a Ponzi scheme. The investor funds were supposedly safeguarded by attorney Mark George who would act as an escrow agent. Mr. George never instituted the appropriate procedures. Defendants Gainer and Cicolani are registered representatives who aided the distribution. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending. See Lit. Rel. No. 23097 (September 30, 2014).

Misappropriation: SEC v. Wright, Civil Action No. 1:14-cv-01896 (M.D. Pa. Filed September 30, 2014) is an action against former registered representative Dennis Wright. He defrauded about 28 customers out of $1.5 million by convincing them to redeem securities in their accounts by falsely claiming he would reinvest the funds and obtain a higher yield. Instead he misappropriated the money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Parallel criminal charges were also brought. Mr. Wright settled with the SEC by consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement, which will be deemed satisfied by the entry of a restitution order, and to be barred from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 23100 (September 30, 2014).

Undisclosed conflicts: SEC v. Wealth Strategy Partners, LC, Civil Action No. 14-cv-02427 (Filed September 25, 2014) is an action which names as defendants: the firm and its principal, Harvey Altholtz; and Stevens Resource Group, LLC and its principal, George Stevens as defendants. The complaint alleges that the defendants engaged in two fraudulent offerings of securities for two investment funds, raising $30.8 million from over 143 investors between 2007 and 2009. Investors were not told that for one fund its assets could be used to guarantee certain loans of the Altholtz family and that the family made loans to both managed funds in violation of their operating agreements. Defendants Wealth Strategy and Altholtz also gave the Altholtz family trust, an investor in one fund, preferential treatment regarding redemptions over other investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(d). The case is pending. See Lit. Rel. No. 23098 (September 30, 2014).

Insider trading: In the Matter of Filip Szymik, Adm. Proc. File No. 3-16183 (September 30, 2014); In the Matter of Jordan Peixoto, Adm. Proc. File No. 3-16184 (September 30, 2014). Filip Szymik’ roommate and boyhood friend is an Analyst at Pershing Square Management, L.P, a hedge fund lead by well-known activist investor William Ackman. Beginning in September 2012 he was part of an investment team assigned to research Herbalife. Though that position he learned that Pershing had concluded the company was an illegal pyramid scheme, a position it planned to disclose at a conference on December 20, 2012. Prior to December 19, 2012 the Analyst disclosed to his friend and roommate that he was working on Herbalife. He also told Mr. Szymik that the firm had a negative view which would be disclosed on December 20. One of Mr. Szymik’s close friends is Jordan Peixoto, a research analyst at Deloitte. Prior to December 19, 2012 Mr. Szymik told his friend about Herbalife, the position of Pershing Square and the pending presentation. Mr. Peixoto knew that his friend’s roommate was an analyst at Pershing Square and that the work was confidential. Nevertheless, just before 2:00 p.m. on December 19, 2012 he purchased Herbalife options. Shortly after those purchases, CNBC reported that Pershing had acquired a significant short position in Herbalife and was making a presentation the next day. Following the CNBC report, and the Pershing presentation on December 20, 2012, Herbalife stock declined by 39%. By the close of the market on December 21 Mr. Peixoto’s options had increased in value to about $339,421. He asked his brokers to let them expire worthless. One refused, giving him a profit of $47,100. Each Order alleges violations of Exchange Act Section 10(b). Mr. Szymik settled with the Commission, consenting to the entry of a cease and desist order based on the Section cited in the Order. He also agreed to pay a civil penalty of $47,100. Mr. Peizoto did not resolve his action. It will be set for hearing.

Insider trading: In the Matter of George T. Bolan, Jr., Adm. Proc. File No. 3-16178 (September 29, 2014). George Bolan was a research analyst in health care at Wells Fargo. Respondent Joseph Ruggieri was a senior trader of health care stocks in Wells Fargo’s trading department in New York from August 2009 to April 2011. He was also a registered representative, executing customer transactions and placing principal trades on behalf of Wells Fargo. Messrs. Bolan and Ruggieri are friends. Mr. Bolan was a well-respected analyst in the areas he covered. Institutional Investor publications named him “Best up and Comer” in 2010. Between April 2010 and March 2011 Mr. Bolan published eight ratings changes or initiations of coverage with an outperform or underperform rating. Mr. Ruggieri traded in advance of six of them, according to the Order. In each instance the Order alleges that the Mr. Bolan, after completing his assessment of the firm, and before the publication of the report, “communicated, in words or substance, material nonpublic information . . .” to Mr. Ruggieri. In some instances the Order alleges that after Mr. Bohan’s supervisor signed off on the report there was a phone call between the two men. In each instance Mr. Ruggieri traded in advance of the public distribution of the report. Following the publication of the six reports the volume and/or the stock price increased or decreased, depending on the rating. Overall Mr. Ruggieri had over $117,000 in trading profits. Mr. Bolan is alleged to have benefited from the illegal tipping because of the friendship between the two men and from the recommendation that assisted him in obtaining a promotion. In addition, Order alleges that Mr. Bolan tipped Trader A in one instance in May 2010 who traded profitably. Trader A was a friend of Mr. Bolan who has since passed away. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.

Investment fund fraud: SEC v. Mathe (S.D. Fla. Filed September 29, 2014) is an action against Erick Mathe and Ashif Jiwa. Mr. Mathe was the CEO and largest shareholder of Vision Broadcast. Mr. Jiwa was employed by the company as a consultant. Over a period of three years beginning in August 2007 the two men sold interest in the firm to about 100 investors, raising about $5.7 million. The firm was supposed to be an early-stage operational start-up television network and production company. Investors were told that Michael Jordan was going to invest in the firm and that a large institutional investor was also putting in funds. In fact those statements and others were misrepresentations. Much of the investor money went to the defendants. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal case was brought by the U.S. Attorney’s Office for the Eastern District of Pennsylvania. See Lit. Rel. No. 23094 (September 29, 2014).

Failure to supervise: In the Matter of Rothman Securities, Inc., Adm. Proc. File No. 3-16180 (September 29, 2014) is a proceeding which names as Respondents the firm, a registered broker-dealer, and its founder, owner, president and director of the firm, Theodore Rothman. From 2006 through 2011 Mr. Rothman’s son David, while working at the firm, issued false account statements to several clients. When the fraud was discovered David tried to conceal the activity by paying the investors himself. When he could no longer do so, he misappropriated money from two firm client trust accounts. David pleaded guilty to criminal charges and is a defendant in an SEC enforcement action based on that activity. This action is for failure to supervise David. It alleges that several red flags were missed during the period and that Mr. Rothman failed to review incoming and outgoing correspondence and periodically review account statements as required by firm procedures. If he had reviewed customer account statements and cover letters to customers regarding their account values the misrepresentations to customers regarding account values and the subsequent misappropriation the fraud would have been detected. The Order alleges violations of Exchange Act Section 15(b). To resolve the proceeding the firm consented to the entry of a censure while Mr. Rothman consented to the entry of an order barring him from serving in a supervisory capacity in the securities business. He also agreed to pay a civil penalty of $40,000.

Financial fraud: SEC v. China Valves Technology, Inc., Civil Action No. 1:14-cv-01630 (D. D.C. Filed September 29, 2014) is an action against the company, its Chairman and former CEO, Siping Fang, its former CEO, Jianbao Wang and its CFO, Renrui, Tang. The complaint alleges two schemes which resulted in falsifying the books. The first involves the acquisition of a firm which had been involved in an FCPA investigation. To conceal that fact and payments made, certain facts regarding the acquisition were concealed. Second, to conceal the fact that a product was acquired to reverse engineer, and because of intellectual property concerns, the payments for it were intentionally disguised. The complaint alleges violations of Exchange Act Sections 10(b), as well as Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). An order was also issued in a related administrative proceeding to determine if the firm’s registration should be revoked. The case is pending. See Lit. Rel. No. 23096 (September 29, 2014).

Investment fund fraud: SEC v. Ferguson, Civil Action No. 3:14-cv-04188 (N.D. Cal. Filed September 29, 2014) is an action against Michael Ferguson and his company, Transactions Unlimited. The defendants did business as ATM Plus. Since 2005 they solicited investors for the business which operated ATM machines. It claimed to have lucrative agreements to brand ATMs for several major distributors. Over the period of the scheme at least $12 million was raised from about 160 investors. Representations regarding the business and its success were false. Larger sums were repaid to investors than the business made – that is, investor funds were used to pay other investors. The complaint alleges violations of the antifraud and registration provisions. The case is pending. A parallel action was filed by the Santa Clara County District Attorney’s Office. See Lit. Rel. No. 23095 (September 29, 2014).

Regulatory capital: In the Matter of Bank of America Corporation, Adm. Proc. File No. 3-16177 (September 29, 2014) is a proceeding in which Bank of America was charged with violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Those violations are the result of not properly calculating its regulatory capital since 2009. In the acquisition of Merrill in 2009 the Bank acquired Notes with a par value of $52.5 billion. The notes had a fair value at the time which was below par stemming from a decline in Merrill’s creditworthiness. Thus, in accord with GAAP, Bank of America booked the notes at fair value which was a $5.9 billion discount to par. At the same time the Bank assumed the liability at par. In calculating regulatory capital Bank of America was required to include the realized losses that were recognized in GAAP equity. Yet in calculating regulatory capital from the time of the acquisition until 2013, the Bank failed to include the losses. As more notes matured, or were repurchased by Bank of America, additional losses resulted. Failing to book those losses resulted in overstatements of its regulatory capital. During the period 15 Form 10-Qs contained an overstatement of regulatory capital. In addition, 5 Form 10-K Filings contained overstatements. In April 2014 the Bank discovered the flaw in its process and issued a press release announcing a downward revision to its disclosed regulatory capital amounts and rations. A Form 8-K was also filed. The firm self-reported, instituted remedial steps and developed improved documentation and spreadsheet controls and enhanced internal controls. Bank of America resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. It also agreed to pay a civil penalty of $7,650,000.

Investment fund fraud: In the Matter of Kenneth C. Meissner, Adm. Proc. File No. 3-16175 (September 25, 2014) is a proceeding which names as Respondents Mr. Meissner, James Scott and Mark Tomich – three insurance brokers. This proceeding centers on a fraudulent investment scheme run by Gary Snisky from mid-2011 through early 2013. During that period $4.3 million was raised from 40 investors in eight states by selling memberships in Arete, LLC and other controlled entities. Mr. Snisky recruited insurance agents to solicit prospective investors who were promised no-risk, profitable alternatives to traditional annuities by offering interests in government agency bonds. In fact Mr. Snisky never invested in any bonds. Rather, he misappropriated the funds. The Respondents here acted as salesmen for Mr. Snisky. They sold securities without being registered brokers in violation of Exchange Act Section 15(a). The action will be set for hearing.

Investment fund fraud: SEC v. eAGear, Inc. Civil Action No. 14-cv-04294 (N.D. Cal. Filed September 24, 2014) is an action in which the defendants are eAdGear, an internet company; eAdGgear Holdins Ltd.; Charles S. Wang; Francis Yuen; and Qian Cathy Zhang. Mr. Wang is the founder and CEO of eAdGear Holdings, Mr. Yuen is the founder and CFO and COO of eAdGear Holdings and eAdGear; Ms. Zhang is a defacto officer of both companies. eAdGear is represented to be a successful internet marketing and advertising company. The firm supposedly increases page rankings for customer websites on search engines. Investors have the opportunity to profit in two ways. First, each investor account is credited daily with a share of the revenues generated from the collective efforts of the members. Second, investors are credited with a portion of the money generated from the referral of new investors who purchase a package for a fee. Investors are told that they have the potential for very significant returns. The defendants have sold investors about $129 million in so-called memberships or business packages in eAdGear.com over the last four years. Although eAdGear claims to generate millions of dollars in revenues from its internet marketing business, in fact it has no such business, according to the complaint. Revenue was generated from the sale of memberships and then misappropriated by the defendants. eAdGear is tottering on the brink of collapse. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and liability under Exchange Act Section 20(a). The case is pending.

Criminal cases

Insider trading: U.S. v. Riley, No. 1:13-cr-00339 (S.D.N.Y.) is an action against David Riley, the former Chief Information Officer of Foundry Networks, Inc. Following a 13 day trial he was found guilty on one count of conspiracy and two counts of securities fraud tied to a $27 million insider trading scheme. The case centered on tips related to foundry’s acquisition by Brocade Communications and the firm’s first quarter 2008 earnings that were furnished to Matthew Teeple, a former analyst for hedge fund Artis Capital Management, L.P. Sentencing is scheduled for February 6, 2015.

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