by T. GormanPosted on Posted in SECActions

Broken Windows is the enforcement strategy adopted by the SEC as part of its “prosecute every violation big and small” approach in an effort to create “omnipresence” – the feeling of a cop on every corner. It is supposed to deter all violations.

As part of effectuating this approach, the Commission has packaged cases into groups and announced them. For example, Rule 105 violations – a strict liability type of short selling Rule – was used to package together 23 cases into a single announcement (here). Operation “Broken Gate” was used to announce a group of audit failure cases (here). The custody rule, focused on the arrangements of market professionals for holding customer securities, was used as the predicate to announce another group of cases (here).

Yesterday the SEC announced the filing of a 34 proceedings. Each action focused on the failure to file ownership reports. Those included a Form 4, as required by Exchange Act Section 16(a), or a Schedule 13D or 13G, as required by Exchange Act Section 13. According to the Commission, quantitative analytics were used to identify the violators. The actions were brought against:

  • Thirteen individuals who were officers or directors of public companies, all but one of whom settled, agreeing to pay a penalty;
  • Five individuals who were beneficial owners of publically-traded companies who settled, agreeing to pay a fine;
  • Ten investment firms who settled beneficial ownership claims, agreed to pay a penalty; and
  • Six publically traded companies, charged with contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies, each of whom settled and agreed to pay a fine.

By now there should be no doubt that “broken windows” results in significant numbers of enforcement actions which will be counted in the end of the fiscal year statistics. There is also no doubt that these cases represent violations of the securities laws.

Whether filing enforcement actions such as these in groups is effective in creating a “cop on the beat” presence in the market place is more difficult to determine. Whether filing large numbers of cases based a strict liability short selling rule, or auditing proceedings that could (and perhaps should have) been brought by the PCAOB, or grouping together custody rule actions, or filing in bulk actions centered on strict liability filing requirement creates “omnipresence” remains to be seen. And, whether this approach constitutes effective enforcement is an open question. It seems doubtful, however, that rolling up large number of these kinds of cases will deter violations such as insider trading and financial statement fraud by issuers and their executives.

Tagged with: ,

by T. GormanPosted on Posted in SECActions

Building on an undercover sting operation, the SEC filed an enforcement action against two individuals and their controlled entity. They are alleged to have conducted a business which helped shareholders conceal their ownership and avoid their filing obligations. As a result of operating the business, however, the business men assumed the filing obligations of their clients, which they violated. SEC v. Bandfield, Civil Action No. 1:14-cv-05271 (E.D. N.Y. Filed September 9, 2014). Parallel criminal charges were brought by the U.S. Attorney’s Office for the Eastern District of New York.

Robert Bandfield, Andrew Godfrey and IPC Corporate Services LLC are named as defendants in the Commission’s action. Mr. Bandfield is a U.S. citizen while Mr. Godfrey is a citizen and resident of Belize. He manages IPC which is a limited liability company formed under the laws of Nevis.

IPC had a website which details its services. Those include providing offshore services for company formation, trust formation, licensed trustee services, nominees and others. One of those services involved concealing the true ownership of shares so that the owner does not have to file Exchange Act Section 13d reports.

The shareholder services provided by the company through which stock ownership can be concealed were explained in a series of recorded conversations with an undercover federal agent that began in 2013 and continued through early 2014. In those conversations Messrs. Bandfield and Godfrey explained that they had formed a number of Nevis and Belize entities. IPC uses Nevis LLCs to hold shares of Belize Companies in part because the law imposes significant barriers on regulators and others to determining the identity of individuals who are IPC clients and actually owned the shares of the companies.

Under the arrangements the IPC client does not legally own either the Belize Companies or the Nevis LLCs he selects. Rather, Mr. Banfield appoints a nominal owner who has 99% of the ownership of the Nevis LLCs. The remaining 1% is held by IPC. That interest is controlled by Mr. Bandfield. Control is maintained over the nominees through a series of mechanisms such as undated letters of resignation.

Each Nevis LLC assumed ownership of a portion of the client shareholdings, but never more than 5%. If the client owns more than 5% of an entity, the shareholdings are divided among two or more entities. Thus, if the holdings are sold through a broker dealer questions are avoided. Under this structure the IPC client cedes legal ownership and legal control of the shares to IPC. Any trading requests are given to Mr. Bandfield. IPC does not keep trading profits. Rather, it is paid a fee for its service.

Since IPC has legal control over the client shares, it must participate in various corporate events and services. Those transactions are conducted in the name of IPC.

Neither Bandfield nor IPC ever filed a Schedule 13D or Schedule 13G. Yet during the period IPC and Mr. Bandfield acquired beneficial ownership of 5% or more of the outstanding common stock of at least one issuer that was registered under Exchange Act Section 12 and whose shares carried voting rights. The Complaint alleges violations of Exchange Act Section 13d. The Commission’s case and the parallel criminal action are pending.

Tagged with: , ,