The SEC requested comment on the development of a consolidated audit trail this week, a concept long discussed. The audit trail would enable regulators to track trading activity in the U.S. markets. Enforcement initiated proceedings which included two centered on the creation of a public company as a vehicle for manipulation, another focused on a failure to supervise and a financial action focused on false books and records.
Comment: The SEC is seeking comment on a proposed national market system plan to create a single, comprehensive database that would enable regulators to efficiently track all trading activity in the U.S. equity and options market – a so-called consolidate audit trail (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive actions and 2 administrative proceedings, excluding 12j and tag-along proceedings.
False registration: SEC v. Zwebner, Civil Action No. 16 CV 1013 (S.D. Cal. Filed April 26, 2016). Asher Zwebner, a citizen of Israel and the U.K., created a shell company later sold to a group which manipulated its shares (see case below), through a series of misrepresentations. The misrepresentations began in June 2010 when Crown Dynamics Corporation was incorporated in Delaware, supposedly by Amir Rehavi who in fact was a Zwebner nominee. They continued through the filing of an S-1 Registration statement. Although Mr. Zwebner controlled the entire process – even having the comments sent to him under another identity – his name never appeared. In September 2011 the registration statement became effect – Crown could and then did conduct an IPO. The IPO was a sham. Defendant Zwebner and his sons arranged for local friends to serve as supposed purchasers – that is, shills. A shareholder list of 40 IPO subscribers was created. The transfer agent issued the shares. Most of those on the IPO list never knew about the issuance of the shares. Control and the shares remained with the Defendant. Trading was also initiated through a series of false statements in the Form 211, required by FINRA for trading on the OTCBB. Yet FINRA authorized trading. Finally, the firm was sold to stock promoter Christopher Larson. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23526 (April 26, 2016).
Manipulation: SEC v. Zouvas, Civil Action No. 3:16-cv-998 (S.D. Cal. Filed April 25, 2016). This action centers on the manipulation of the share of Crown (background discussed above). Named as defendants are Luke Zouvas, and attorney; Cameron Robb, a business associate of defendant Larson; Christopher Larson, a CPA; James Schiprett, a nominee for defendant Larson; and Robert Jorgenson, also a nominee for defendant Larson. Although Mr. Larson acquired control of Crown, his name never appeared in any filings made with the SEC. Crown’s shares were transferred to nominees for Mr. Larson, including defendants Schiprett and Jorgenson. A call center was paid $400,000 by Mr. Larson to promote the shares and create the appearance of market interest. As the share price became inflated defendant Larson’s nominees dumped their shares. Most of the proceeds, which totaled at least $850,000, were wired to nominee accounts controlled by defendant Larson. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending.
Investment fund fraud: SEC v. Bliss, Civil Action No. 2:15-cv-00098 (D. Utah). In this previously filed action Roger Bliss operated a multimillion investment fraud scheme over a seven year period beginning in 2008. Unlike many investment schemes which claim to be based on proprietary trading techniques or which supposedly invest in exotic instruments, Mr. Bliss only invested in only one stock – Apple. Mr. Bliss claimed that he day-traded exclusively in Apple stock. He never had a losing day, according to his sales pitch. He also told potential investors that he had more than $300 million in assets under management. About $260 million was supposedly his capital. Returns were guaranteed – at least 100% and up to as much as 300%. Investors flocked in. In fact Mr. Bliss had lots of losing days. His brokerage records for the period January 2012 through the end of 2015 showed that he had losses of over $3.2 million. The scheme ended with Mr. Bliss pleading guilty to state securities fraud charges. He was ordered to pay over $20 million in restitution. He also pleaded guilty to charges of perjury and obstruction of justice for lying to the court in connection with a freeze order secured by the SEC in its case against him. He resolved the SEC’s action. There he consented to a judgment entered by the court which permanently enjoined him from future violations of the registration and antifraud provisions of the federal securities laws. In addition, the order directs that he pay almost $11 million in disgorgement which will be deemed satisfied at the conclusion of a court-appointed receivership. See Lit. Rel. No. 23524 (April 22, 2016).
Failure to supervise: In the Matter of James T. Budden, Adm. Proc. File No. 3-17234 (April 27, 2016) names as Respondents James Budden, the former President and co-owner of registered investment adviser Professional Investment Management, Inc., and Alexander Budden, also a co-owner of the firm and its former vice president and secretary. The firm provides third-party administration services and investment advisory services to about fifteen retirement plans. Douglas Cowgill, a former employee of the firm, and later an owner, concealed a shortfall at the firm of over $700,000 by sending false statements to clients. He resolved a Commission fraud action against him based on those facts. This action alleged failure to supervise, violations of the custody rule and a failure to have adequate supervisory provisions. The Order alleges violations of Advisers Act Sections 206(4). Each Respondent settled, consenting to the entry of a cease and desist order based on the Section cited in the Order. Each Respondent is barred from the securities business with a right to apply for reinstatement after three years for J. Budden and two for A. Budden. In addition, J. Budden will pay a penalty of $125,000 while A. Budden will pay $75,000.
Audit failure: In the Matter of David S. Hall, P.C., Adm. Proc. File No. 3-17228 (April 26, 2016) is a proceeding which names as Respondents: the audit firm, David Hall, the owner of the audit firm who later became CFO of DynaResources, Inc., whose external auditor was his firm; Michelle Helterbran Cochran, a CPO with the audit firm; and Susan Cisneros, an auditor with the firm. Respondents failed to conduct at least 16 audits and 35 quarterly reviews in accord with PCAOB standards. Specifically, they repeatedly failed to prepare adequate documentation; to conduct an engagement quality review; and participated in several engagements where they were not independent. The Order alleges violations of Rule 2-02(b)(1) of Regulation S-X, Exchange Act Section 13(a) and Rule 102(e) of the Rules of Practice. The matter will be set for hearing.
Books, records and controls: In the Matter of Cabela’s Incorporated, Adm. Proc. File No. 3-17227 (April 26, 2016). Respondent Cabela is a specialty retailer; Respondent Ralph Castner, CPA is the firm’s CFO. In January 2012 Cabela’s entered into a new intercompany agreement with its wholly-owned bank subsidiary, World’s Foremost Bank. The agreemet increased the amount the bank paid Cabela each quarter for the use of the company’s intellectual property and trademarks and for the cost of bank promotions relating to the Visa credit card that the bank issued. Contrary to GAAP, and its filings, Cabela failed to eliminate the intercompany promotions fee in preparing results on a quarterly and annual basis. This resulted in an understatement of merchandise costs and a corresponding understatement of financial services revenue on the firm’s consolidated income statement. That increased the profitability of the company and was referenced by the company in earnings releases and by analysts. The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to pay a civil penalty of $1 million.
Report: The regulator has issued its first cross-market report cards covering spoofing and layering. The reports went to member firms and provide a summary of the identified market activity along with trends in such trading. The reports are intended to be a preventive compliance measure that will parallel the regulator’s surveillance (here).