This Week In Securities Litigation (For the period Jan. 13 – 27, 2017)
During a two week period divided by the Inauguration, the Commission filed just under 40 actions. Chair Mary Jo White stepped down from her position at the agency after delivering her departing remarks at the New York Economic Club. In her remarks Chair White cautioned that the Commission must continue to be an independent agency to properly carry out its duties.
The actions brought by the SEC during this period included: proceedings against Morgan Stanley and Citi for overcharging clients as well as separate cases for against each firm for failing to disclose certain risks when marketing a product; a case against General Motors based on deficient internal controls; a fraud action against Orthofix and a separate case against the firm based on the FCPA; a disclosure action against Allegan centered on a failed tender offer; an FCPA case against two employees of hedge fund Och-Ziff; 10 pay-to-play cases against Pershing Square and others; and an FCPA action against Chilean mining giant Sciedad Quimica whose ADRs are listed on the NYSE for paying bribes in its own country.
Remarks: Chair Mary Jo White delivered remarks titled “The SEC after the Financial Crisis: Protecting Investors, Preserving Markets” to the Economic Club of New York (January 17, 2017). After reviewing improvements in enforcement and the asset management area Chair White emphasized the need for the agency to be independent to properly carry out its duties (here).
Securities Class Actions
Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review, by NERA (here) notes that in 2016 the highest number of securities class actions were filed since 2001. In 2016 there were 300 cases filed compared to 228 the year before and 2018 in 2014.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 7 civil injunctive case and 32 administrative proceedings, excluding 12j and tag-along proceedings.
Rule 105: In the Matter of Palestra Capital Management LLC, Adm. Proc. File No. 3-1715 (January 26, 2017). In March 2014 the investment adviser sold short a stock in a fund it manages and then repurchased it within five days. Palestra had profits from the transaction of $93,000. The Order alleges violations of Rule 105 of Regulation M of the Exchange Act. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Rule cited in the Order and to a censure. Palestra also agreed to pay disgorgement of $93,230,00, prejudgment interest and a penalty of $80,000.
Over-billing: In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3-17817 (January 26, 2017). Over a 15 year period the registered broker-dealer and investment adviser overcharged at least 60,000 advisory clients a total of about $18 million. The overcharges have been reimbursed to the extent they were identified. The firm also violated the books and records provisions of the Advisers Act by not maintaining client contracts – it has been unable to locate about 83,000 contracts. In addition, Citigroup Global failed to implement policies and procedures to prevent these violations of the Advisers Act. The Order alleges violations of Adviser Act Sectons 204(a), 206(2) and 206(4). To resolve the proceeding the firm agreed to certain undertakings which included notice to its clients. Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. Citigroup Global will pay a penalty of $14.3 million.
SARs: In the Matter of Windsor Street Capital, L.P, Adm. Proc. File No. 3-17813 (January 25, 2017). Windsor Street is a registered broker-dealer that does business as Myers Associates, L.P. Respondent John Telfer was the chief compliance and AML officer during the relevant period. Over a ten month period, beginning in January 2014, the broker-dealer sold hundreds of millions of shares of stock issued by several penny stock issuers. The customers were Raymond Barton and William Goode. None of the shares were registered with the Commission. While Messrs. Barton and Goode claimed that registration was not required, their analysis was based on incorrect facts. Myers Associates received about $120,000 in commissions from the sales. The broker and its chief compliance officer also failed to file SARs in connection with the transactions despite red flags about the trading as reflected in its AML program. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 17(a) and Rule 17a-8. The matter will be set for hearing. See also SEC v. Barton, Civil Action No. 2:17-cv-00403 (E.D.N.Y. Filed January 25, 2017)(manipulation action naming as defendants Raymond Barton, William Goode, Matthew Briggs, Kenneth Manzo and Justin Sindelman, alleging violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a); settled by Messrs. Barton, Goode and Briggs with consents to orders requiring them to pay disgorgement plus interest and penalties of over $8.7 million; Mr. Manzo admitted wrongdoing and will pay over $95,000; the action continues as to defendant Sindelman).
Cherry picking: SEC v. Strategic Capital Management, LLC, Civil Action No. 1:17-cv-10125 (D. Mass. Filed January 25, 2017) is an action which names as defendants the registered investment adviser and its founder, Michael Breton. From 2010 through 2016 the defendants engaged in a cherry picking scheme, defrauding clients out of over $1 million. Specifically, they placed trades on the day of firm earning announcements through a master account and later allocated those trades based on the impact of the actual news release – profitable trades to personal accounts and the others to clients. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The defendants partially settled the action, consenting to an order prohibiting future misconduct and barring Mr. Breton firm the securities business. A parallel criminal action was filed by the U.S. Attorney’s Office for the District of Massachusetts. See Lit. Rel. No. 23727 (January 25, 2017).
Internal controls: SEC v. Sandoval, Civil Action No. 17-cv-20301 (S.D. Fla. Filed January 24, 2017) is an action which names as defendants Mathias Francisco Sandoval Herrera, Maria Cidre and Jose Antonio Miranda Gonzalez, respectively, the executive vice president of General Cable Corporation, a senior vice president of the firm and the senior vice president for Latin America. Beginning in early 2012 the defendants became aware of a potential overstatement of inventory as well as claims of inventory theft. Rather than disclosing the issues, the defendants covered them up and destroyed the related documents. Earlier the Commission brought an action against the firm tied to the same issues. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13b-5. Defendant Miranda consented to the entry of an order enjoining him from future violations of the Sections cited in the complaint with questions regarding the amount of an penalty and length of an officer/director bar to be determined at a later date. See Lit. Rel. No. 23726 (January 25, 2017).
Misappropriation: In the Matter of Jan E. Helen, Adm. Proc. File No. 3-17319 (January 24, 2017). Mr. Helen is the owner of Janco Properties, the manager and investment adviser to the Janco Energy Entities, a series of limited liability companies that invest in oil and gas securities. Between April 2014 and May 2015 Respondent misappropriated about $85,000 in investor funds from one of the Janco Energy Entities. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the matter, Respondent agreed to certain undertakings and consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he agreed to be barred from the securities business and from participating in any penny stock offering and to pay a civil penalty of $45,000.
Misappropriation: In the Matter of Geoffrey J. Block, Adm. Proc. File No. 3-17810 (January 24, 2017). Mr. Block is the managing member, and majority owner of, Crown Growth Partners LLC, the general partner of private investment fund Crown Advisers International, Ltd. He was also associated with a registered broker dealer. From 2012 to 2014 the Order alleges that Respondent took all, or virtually all, of four payments from a transaction which belonged to advisory clients. They totaled about $2.4 million. In two instances Mr. Block voluntarily returned the funds; in two instances he returned them after the staff identified the transactions. The Order alleges violations of Advisers Act Sections 206(1) and 206(2). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Respondent is also barred from the securities business and from participating in any penny stock offering with the right to apply for re-entry after three years. Mr. Block will pay a penalty of $100,000.
Disclosure: In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3-17808 (January 24, 2017); In the Matter of Morgan Stanley Smith Barney LLC, Adm. Proc. File No. 3-17809 (January 24, 2017). Citigroup Global Markets is a wholly owned, indirect subsidiary of Citigroup, Inc. The firm is a registered broker-dealer and investment adviser. Morgan Stanley Smith Barney is also a registered broker-dealer and investment adviser. Citigroup Global held a 49% ownership interest in Morgan Stanley Smith Barney. The Orders in each action are largely the same. These actions are based on a product marketed and traded by both firms called CitiFX Alpha family of strategies tied to the forex market. The product was marketed as a way for the investors to track the quantative trading models of Citigroup Global. In marketing the product the firms used a set of slides. The presentations reviewed past performance and risk metrics. Those metrics assumed a fully collateralized account, that is, one in which the collateral equaled the notional amount being traded. Those metrics also assumed that no mark-ups would be charged. Those assumptions were not detailed in the presentations. The investors who purchased the product had little to no forex trading experience and did not know about the assumptions. By failing to disclose the two assumptions Citigroup Global and Morgan Stanly Smith Barney omitted material information. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, each will pay disgorgement of $624,458.27, prejudgment interest and a civil penalty of $2,250,000.
Insider trading: In the Matter of Donald P. Jones, CPA, Adm. Proc. File No. 3-17806 (January 23, 2017) is a proceeding centered on insider trading tied to the announcement on June 20, 2012 that Sun Healthcare Group, Inc. had entered into a definitive agreement to be acquired by Genesis Healthcare, Inc. In early April 2012 Mr. Jones obtained inside information about the deal from his close friend, accountant Shelly McGuire, who was working on the transaction. Respondent misappropriated the information and traded, obtaining illegal profits of $27,675. Another person he tipped had over $11,000 in profits. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. He was also denied the privilege of practicing or appearing before the Commission as an accountant. Mr. Jones agreed to pay disgorgement of $39,082, prejudgment interest and a penalty equal to the amount of the disgorgement. See also In the Matter of Shelly R. McGuire, CPA, Adm. Proc. File No. 3-17805 (January 23, 2017)(alleging that Ms. McGuire made a false statement to FINRA investigators by not identifying Donald Jones during its investigation of the trading; resolved with Respondent being denied right to practice before the Commission as accountant with right to apply for re-entry after one year).
Books and records: In the Matter of Overseas Shipholding Group, Inc., Adm. Proc. File No. 3-17807 (January 23, 2017) is a proceeding which names as Respondents the firm, now in bankruptcy but which at one time operated a fleet of vessels primarily engaged in the transportation of crude oil, and Myles Itkin, its former CFO. Beginning in 2000 the firm’s two foreign subsidiaries were, under the provisions of its credit agreements, jointly and severally liable for the obligations. The firm failed to recognize that under Section 956 of the Internal Revenue Code this meant that the amounts borrowed by the parent are “deemed dividends” and taxable to the parent. The firm failed to provide for the resulting tax liability. By 2011 the amount due totaled about $512 million or 17% of its total liabilities. When the firm discovered the oversight it filed for bankruptcy. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will pay a penalty of $5 million while Mr. Itkin will pay $75,000.
Offering fraud: SEC v. Edwards, Civil Action No. 2:17-cv-00393 (D. N.J. Filed January 20, 2017) is an action which names as defendants Dwayne Edwards, the owner of skilled nursing facilities, Todd Baker, a business associate of Mr. Edwards, and several LLCs used in the financings. For over one year, beginning in July 2014, Defendant Edwards, assisted by Mr. Barker, and using the limited liability entities named as defendants, conducted nine separate conduit municipal bond offerings, raising about $62 million. Each offering was for a particular unit; each specified Messrs. Edwards and Baker would not receive fees until the specific facility generated sufficient revenue to pay certain expenses. While the vast majority of the offering funds were used in accord with the offering documents, at least $3.9 million of the offering proceeds was comingled and portions were diverted to other projects or misappropriated. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The Court issued a freeze order on filing. Mr. Baker entered into a partial settlement with monetary sanctions to be determined at a later date. See Lit. Rel. No. 23725 (January 24, 2017).
Whistleblowers: In the Matter of HomeStreet, Inc., Adm. Proc. File No. 3-17801 (January 19, 2017). HomeStreet, a diversified financial services company, conducted an IPO in 2012. Its shares are traded on NASDAQ. Respondent Darrell van Amen served as CIO from 2012 through the present. From 2006 through 2008 the firm originated about 20 fixed rate commercial loans. The firm also entered into interest rate swaps as a hedge. GAAP – ASC 815 – requires that issuers entering into such hedges make a periodic assessment regarding the effectiveness of the hedges by calculating an effectiveness ratio. While the firm calculated this ratio each year, when it was not met essentially plug numbers were inserted to establish compliance. Certain employees involved in altering the inputs reported the actions to the Human Resources department. Executive A was also informed. Ultimately this lead to an internal inquiry that concluded Mr. van Amen did not act with any intent to deceive but the effectiveness tests were incorrect. That fact was disclose in a Form 10-Q filed on November 13, 2014. When the staff made a voluntary document request keyed to the input issue in April 2015 the company tried to assess if it was the result of a whistleblower. The staff contacted Executive A who had resigned from the firm. He retained counsel who submitted invoices. Although Executive A repeatedly told the firm prior to his departure that he was not a whistleblower, before paying the invoice the attorney was asked the same question multiple times –was his client the whistleblower. The attorney repeatedly refused to answer and at one point cited Rule 21F-17. Eventually the firm paid the invoice. By taking these actions HomeStreet acted to impede whistleblowers, according to the Order. At the time HomeStreet also had a provision in its severance agreements which required employees to wave any payment for being a whistleblower. This also undermines the purpose of Exchange Act Section 21F and Rule 21F-17(a), the Order states. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) and Rule 21F-17 regarding whistleblowers. The company took remedial steps to strengthen its internal controls and agreed to contact former employees who had signed a severance agreement that contains a whistleblower payment provision and inform them that it is no longer applicable. To resolve the case HomeStreet consented to the entry of a cease and desist order based on the Exchange Act Sections and the Rule cite in the Order. The firm will also pay a penalty of $500,000. Mr. Van Amen resolved the action, consenting to the entry of a cease and desist order based only on the Exchange Act Sections cited in the Order. He will pay a penalty of $20,000.
Internal controls: In the Matter of General Motors Company, Adm. Proc. File No. 3-17797 (January 18, 2017). The case centers on the failure of GM’s internal controls to alert the firm to a potential loss contingency regarding a February 2014 recall of over 600,000 vehicles to repair a defective ignition switch. GM had a multi-step process for assessing the prospect of a recall. In 2012, under those procedures, if the loss was considered probably and estimable it was placed on the Emerging Issues List and the steps required by ASC 450 which governs loss contingencies were taken. On the other hand, if a loss contingency is reasonably possible and estimable, there must be consideration of whether disclosure is necessary. GM did not have a procedure for making this determination. In assessing the defective switch issue which resulted in a recall in 2014, from 2012 when the question was first assessed to the time of the recall there was no disclosure because the firm did not have a procedure to effectively deal with the second part of ASC 450. The Order alleges violations of Exchange Act Section 13(b)(2)(B), prior to the 2014 revision to the firm’s policies. General Motors resolved the issue, consenting to the entry of a cease and desist order based on the Section cited in the Order. The firm will pay a penalty of $1 million.
Financial fraud: In the Matter of Orthofix International N.V., Adm. Proc. File No. 3-17791 (January 18, 2017). This proceeding against the medical device company centers on the improper recognition of revenue from 2011 to mid-2013. Specifically, the firm materially overstated its revenue during the period, primarily in its Spine segment, although it extended to other areas. In transactions with its largest international distributor the firm entered into contingent sales and recognized revenue for product sales when the product could not be resolved because of a delay in providing a required associated product. The company also improperly accounted for certain transactions by treating some price discounts as expenses rather than a reduction to revenue. Orthofix restated its financial statements for the year end 2010, each period during 2011 and 2012 and the first quarter of 2013. The Order alleges violations of Exchange Act Sections 17(a)(2) and (3) and Securities Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order. It also agreed to pay a penalty of $8,250,000. The Commission considered the remedial acts of the firm, including its enhancement of internal controls, the restructuring of the finance group and its cooperation. See also In the Matter of Brian McCollum, Adm. Proc. File No. 3-17793 (January 18, 2017) (proceeding against CFO of the firm; settled with cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and payment of penalty of $35,000 and SOX clawback of $40,885); In the Matter of Kenneth Mack, Adm. Proc. File No. 3-17794 (January 18, 2017)(Respondents were Mr. Mack, v.p. of global sales for international, and Bryan McMillan, Spine segment president; settled with a cease and desist order on same basis as above and payment of a penalty by Mr. Mack of $25,000); In the Matter of Jeffrey Hammel, CPA, Adm. Proc. File No. 3-17792 (January 18, 2017)(proceeding against CFO of Spine segment; settled with cease and desist order on same basis as above; denial of right to appear before the Commission with re-entry after 2 years and payment of $20,000 penalty).
Disclosure: In the Matter of Allergan, Inc., Adm. Proc. File No. 3-17790 (January 17, 2017). Allergan, Inc. was the wholly-owned, indirect subsidiary of Allergan plc, and Irish company who’s shares were traded on the NYSE. The action centers on the firm’s failure to disclose its negotiations with other firms after the announcement of a tender offer. Specifically, in June 2014 the firm disclosed on Schedule 14D-9 that the price being offered by Valeant Pharmaceuticals International Inc. and others in a tender offer was inadequate. Although the firm subsequently entered into other negotiations it failed to disclose them as required. In October the firm entered into negotiations with Actavis plc. Despite urging by the Corp. Fin. to disclose the discussions since rumors were circulating in the market, the firm did not until an agreement was reached, although the it did acknowledge an approach by another party and that may lead to negotiations. The Order alleges violations of Exchange Act Section 14(d) and Rule 14d-9. The company resolved the proceeding, consenting to the entry of a cease and desist order and agreeing to pay a penalty of $15 million. In resolving the case the firm admitted to the facts in the Order and that its conduct violated the federal securities laws.
Pay-to-play: On January 17, 2017 the Commission filed 10 settled actions involving investment advisory firms. The actions were based on the payment of political contributions to a candidate who could influence the adviser selection process for a public pension fund or appoint someone with such influence. The firms failed to wait the two year cooling off period after the payment. The actions were based on Advisers Act Section 206. Each firm consented to the entry of a cease and desist order based on that Section, a censure and paid a penalty that ranged from a low of $35,000 to a maximum of $100,000. See, e.g. In the Matter of Adams Capital Management, Inc., Adm. Proc. File No. 3-17785 (January 17, 2017)(paid a penalty of $45,000); In the Matter of Pershing Square Capital Management, L.P., Adm. Proc. File No. 3-17779 (January 17, 2017)(penalty of $75,000).
EB-5 Fraud: SEC v. San Francisco Regional Center, LLC, Civil Action No. 3:17-cv-00223 (N.D. Cal. Filed January 17, 2017) is an action which names as defendants the firm and a number of related entities, all controlled by defendant Thomas Henderson. Beginning in 2010 the defendants raised at least $107 million from 201 investors who were solicited to invest in one of seven EB-5 business projects. Each investor invested $500,000 plus other fees. In each instance the investor money was for a specific project. Instead, Mr. Henderson comingled the funds and diverted a significant amount of the investor capital to his personal use. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 23721 (January 18, 2017).
Whistleblowers: In the Matter of BlackRock, Inc., Adm. Proc. File No. 3-17786 (January 17, 2017). BlackRock, whose shares are listed on the NYSE, has historically entered into voluntary separation agreements with many of its departing employees. After the Commission adopted Exchange Act Rule 21F-17 the firm revised its form of separation agreement. The revision provided that the departing employee agreed to waive their right of recovery for incentive fees paid for reporting misconduct under Dodd-Frank in exchange for monetary separation payments and other consideration from BlackRock. The new provision did not prohibit departing employees from reporting to the Commission or any other government agency regarding possible violations of law. Prior to being contacted by the staff in this matter BlackRock voluntarily revised its separation agreement. That was undertaken as part of a periodic review and update of its agreements, conducted in March 2016. The revision dropped the waiver language. By that date, however, 1,067 separation agreements had been executed that contained the waiver language. In resolving this matter BlackRock took remedial actions which included yearly mandatory training. Employees were also furnished with a link to a document entitled “Global Policy for Reporting Illegal or Unethical Conduct.” That document summarizes several of the rights employees have under the Commission’s Whistleblower Program. The firm also agreed to an undertaking pursuant to which it will make reasonable efforts to contact each former employee who executed a separation agreement that contained the waiver provision and provide them with a link to the document cited above. The Order alleges violations of Exchange Act Rule 21F-17. To resolve this action BlackRock consented to the entry of a cease and desist order based on the Rule cited in the Order. The firm will pay a penalty of $340,000.
Unregistered broker: SEC v. Charlet, Civil Action No. 3:17-cv-00139 (N.D. Tx. Filed January 13, 2017) is an action naming as defendants Robin Charlet, Steven Sparks, Gregory Tuthill and Kirk Porter. Each of the defendants is affiliated with XO Marketing Solutions, Inc. and is the subject of a state securities commission action. The case centers on the efforts over a two year period beginning in September 2010 of Couch Oil & Gas, Inc. and Charles Couch, a Texas oil and gas operator to sell interests in the Couch Oil Permian-Black Shale-Fifty Nine Well Program and its Radial Nine Well Program. Through the offerings about $10 million was raised from over 200 investors in 21 states. The securities were not sold to accredited investors. In May 2016 the Commission obtained a final judgment against Mr. Couch and his firm, permanently enjoining them from violating the securities laws and from selling shares to others. The order also requires the payment of disgorgement, prejudgment interest and penalties totaling $7.3 million. Here the defendants were involved with the selling of the unregistered shares using misleading information from Mr. Couch and his firm. The defendants were not registered with the Commission or FINRA. The complaint alleges violations of Exchange Act Section 15(a) and Securities Act Sections 5(a) and 5(c). Mr. Porter has agreed to settle this action by consenting to the entry of a permanent injunction and agreeing to pay $323,508.91 in disgorgement with prejudgment interest and a $25,000 penalty. See Lit. Rel. No. 23720 (January 13, 2017).
Misleading orders: In the Matter of Citadel Securities LLC, Adm. Proc. File No. 2-17772 (January 13, 2017). Citadel is a registered broker dealer. The firm has a business unit known as Citadel Execution Services which handles orders by either internalizing or routing them. It receives a number of large orders for retail brokers. This proceeding centers on the definition of market order given to retail brokers and the way orders are actually filled. CES furnished written disclosures to certain of its retail broker-dealer clients which described a market order as one to buy or sell at the best offer currently available in the market place. That definition was misleading, according to the Order. In fact the firm had two internal strategies linked to its algorithmic strategies. One was FastFill and the other and the other was SmartProvide. Neither actually filled the order in the manner described in the market order definition, making that description misleading The Order alleges violations of Securities Act Section 17(a)(2). To resolve the action Respondent consented to the entry of a cease and desist order based on the Section cited in the order and to a censure. The firm will also pay disgorgement of $5.2 million, prejudgment interest and a penalty of $16 million.
Overbilling: In the Matter of Morgan Stanley Smith Barney, LLC, Adm. Proc. File No. 3-17773 (January 13, 2017). Between 2002 and 2016 the subsidiary of Morgan Stanly, a registered broker-dealer and investment adviser, inadvertently overcharged more than 149,000 advisory client accounts by $16,169, 215 in advisory fees, primarily due to coding errors in its billing systems and processes. The firm also violated the custody rule relating to the annual surprise custody exam and the books and records provisions of the Adviser Act with respect to the maintenance of client contracts. The firm’s compliance procedures were not reasonably designed to prevent these violations of the Advisers Act, according to the Order. To resolve the proceeding the firm agreed to a series of undertakings focused on remediating the issues and furnishing notice to customers. It also consented to the entry of a cease and desist order based on Advisers Act Sections 204(a), 206(2) and 206(4) and a censure. The firm will pay a civil money penalty of $13 million.
Unregistered securities: SEC v. Mulholland, Civil Action No. 23719 (E.D.N.Y.) is a previously filed action against Gregg Mulholland who was alleged to have sold over 83 million unregistered penny stock shares he accumulated through 10 different offshore front companies. The Court entered a final judgment of permanent injunction against Mr. Mulholland prohibiting future violations of Securities Act Sections 5(a) and 5(c). The order also imposed conduct based injunctions and requires the payment of disgorgement and prejudgment interest of $24,659,355.57. That amount will be deemed satisfied by the restitution expected to be ordered in the parallel criminal action. There the defendant pleaded guilty to money laundering conspiracy charges. He also consented to an order barring him from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 23719 (January 13, 2017).
SEC v Cohen, Civil Action No. 1:17-cv-00430 (E.D. N.Y. Filed January 26, 2017) is an action which names as defendants Michael Cohen and Vaja Baros, respectively, the head of Och-Ziff Capital Management LLC’s European office and an analyst employed by the firm. Och-Ziff is an alternative asset manager or hedge fund. Beginning in 2007, and continuing for the next five years, defendants directed and arranged for the firm to pay millions of dollars in bribes to government officials on the continent of Africa through intermediaries. The purpose was to secure special opportunities, preferential treatment and special access for the firm in pursuit of its business in Africa. The complaint alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13b-5 as well as Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending.
In the Matter of Orthofix International N.V., Adm. Proc. File No. 3-17800 (January 18, 2017) alleges violations of the books, records and internal control provisions of the FCPA by the firm. In 2011 and 2012 the firm repeatedly made payments to doctors employed at government owned hospitals through the firm’s Brazilian subsidiary to induce the physicians to purchase products. The improper payments were incorrectly recorded in the books and records of the firm. Orthofix had illicit profits of over $2.9 million as a result of the payments. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding the firm agreed to implement a series of undertakings which include the retention of an independent consultant. In addition, Orthofix consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will pay disgorgement of $2,928,000, prejudgment interest and a penalty equal to the amount of the disgorgement.
In 2012 the firm settled FCPA actions with the Commission and the DOJ. With the Commission the company resolved a civil injunctive action base on payments in Mexico. The action was based on books and records and internal control violations. The company entered into a deferred prosecution agreement with the DOJ. As part of its on-going reporting obligations the company reported the matter in the present case.
Rolls-Royce plc. (January 17, 2017). This action centers on a years long scheme in which the firm paid bribes in a number of countries around the world. The settlement involves the DOJ, the U.K. Serious Frauds Office and the Brazilian Ministerio Publico Federal. The DOJ resolution is based on a deferred prosecution agreement. In the underlying complaint, filed in the Southern District of Ohio, the firm was charged with conspiring to violate the anti-bribery provisions of the FCPA. Polls-Royce is alleged to have paid $35 million in bribes through third parties to foreign officials in Thailand, Brazil, Azerbaijan, Angola and Iraq. In the DOJ settlement the company agreed to pay a criminal penalty of $195,496.88, subject to a credit of about $25,579.17 for settlement payments to Brazilian authorities. With the U.K. SFO the firm also entered into a deferred prosecution agreement. The conduct involved bribes in China, India, Indonesia, Malaysia, Nigeria, Russia and Thailand between 1998 and 2013. The firm agreed to pay a penalty of about $604,808.39. In Brazil the firm will pay a penalty equal to the credit it obtained in the DOJ settlement because the underlying conduct in each case overlapped. The total paid by the firm to resolve all three proceedings is over $800 million.
In the Matter of Sciedad Quimica Y Minera De Chile, S.A., Adm. Proc. File No. 3-17774 (January 13, 2017). Respondent is a multinational mining and chemical firm based in Santiago, Chile. Its ADRs are listed on the NYSE. Between 2008 and 2015, according to the SEC’s Order, the firm made about $14.75 million in improper payments to Chilean politicians, political candidates and individuals connected to them. Generally, the payments were based on fictitious documents from persons associated with those who received them. The company did not have adequate internal controls, according to the Order. Violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) are alleged. To resolve the case the firm agreed to implement certain undertakings which, among other things, require the retention of an independent monitor. The firm 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 in the amount of $15 million.
The firm also resolved criminal charges with the DOJ, entering into a deferred prosecution agreement. The underlying complaint alleges one count of failing to implement internal controls and one count of falsifying its books and records. The agreement is based on the admissions of the company. In addition, the company will pay a criminal penalty of $15,487,500. A monitor will be appointed, although the firm took remedial steps, in view of the size of the company and its risk profile. The monitor will be in place for two years.