by T. GormanPosted on Posted in SECActions

James Tagliaferri, the former President of TAG Virgin Islands, a registered investment adviser, was found guilty by a jury of one count of investment adviser fraud, six counts of violating the Travel Act, one count of securities fraud and four counts of wire fraud. The jury was unable to reach a verdict on another two counts, one under the Travel Act and the other based on wire fraud. Sentencing is scheduled for November 7, 2014. U.S. v. Tagliaferri, No. 1:13-cr-0115 (S.D.N.Y. Verdict July 24, 2014).

TAG began business in the U.S. Virgin Islands in 2007. It offered investment advisory services. Mr. Tagliaferri had previously offered similar services through Taurus Advisory Group in Connecticut.

The charges centered on three schemes. First, beginning in the year the advisory opened, Mr. Tagliaferri began placing client funds in a company located in Garden City, New York that was engaged in horse-racing. At least $40 million in client funds were invested. Unknown to those clients, Mr. Tagliaferri was paid at least $1.6 million in undisclosed kickbacks to place the client funds with the company. To ensure that the fees were not listed on monthly custodial account statements furnished to clients, Mr. Tagliaferri routed the transactions through an attorney and then diverted the undisclosed fees from a trust account to a TAG account in the Virgin Islands that he controlled.

Second, client funds were used for improper purposes. Those included making payments to other clients who were demanding their funds and paying entities with which he was affiliated. Again the transactions were disguised by routing them through a circuitous path.

Third, Mr. Taglaiferri also caused clients to invest in what he called “sub-notes.” These were purportedly obligations of a company located in Pennsylvania. The notes were supposed to make payments to TAG clients based on promissory note agreements between the Pennsylvania Company and TAG. In fact the notes were fictitious.

The SEC filed a parallel action at about the time the criminal charges were brought. In the Matter of James S. Tagliaferri, Adm. Proc. File No. 3-15215 (February 21, 2013).

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by T. GormanPosted on Posted in SECActions

Entering into new, international markets may be good for developing business, but it also carries certain risks. This is particularly true in many countries where doing business may include making gifts, paying gratuities and even bribes. The difficulties can be compounded if adequate preparations are not undertaken, including bolstering internal controls and ensuring that adequate FCPA compliance procedures. Firearms manufacturer Smith & Wesson Holdings Company, learned this lesson the hard way. In the Matter of Smith & Wesson Holdings Corporation, Adm. Proc. File No. 3-15906 (July 28, 2014).

Smith & Wesson sought to break into international markets beginning in 2007. The goal was to increase sales. At the time the company did not have any international subsidiaries. It sought to conduct its international business directly through brokering agents.

In seeking business in international markets, the company focused on selling firearms to foreign law enforcement and military departments. In 2008, for example, the firm retained a third party agent in Pakistan to assist in dealing with sales to a local police department. The agent told the company it would have to provide guns worth over $11,000 to the police department to obtain a deal. Additional cash payment would also be required. The Vice President of International Sales and the Regional Director of International Sales authorized the gifts and payment. Ultimately Smith & Wesson sold 548 pistols to the Pakistani police for $210,980, yielding profits of $107,852.

The next year the company sought to secure a contract to sell firearms to a police department in Indonesia. A third party agent told the company that payments would have to be made under the guise of legitimate firearms lab testing costs. The inflated payments were authorized. No deal was consummated. The company also authorized improper payments through a third party agent in Nepal and Bangladesh. No contracts were obtained. Indeed, by the time the improper conduct surfaced, the company had only secured one contract.

Throughout the period Smith & Wesson had inadequate policies and procedures. Specifically, its internal controls were inadequate. The company did not perform any anti-corruption risk assessment and did virtually no due diligence on third party agents. The firm’s FCPA compliance procedures were also inadequate.

The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 12(b)(2)(B). The Commission acknowledged the cooperation of the firm which included conducting an internal investigation, terminating its entire international sales staff, terminating pending international transactions and re-evaluating the markets in which it was seeking business. The company also agreed to a series of undertakings which include reporting to the staff at six to twelve month intervals over two years on its remediation and compliance efforts. The firm will also submit a complete report of its remediation efforts to the staff and conduct follow-up reviews which incorporate the comments provided by the staff.

Smith & Wesson consented to the entry of a cease and desist order based on the Sections cited in the Order. It will pay disgorgement of $107,852, prejudgment interest and a civil penalty of $1,906,000.

The Department of Justice declined prosecution according to a recent company filing.

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