Merrill Lynch settled proceedings with the Commission, agreeing to pay a $13 million penalty for failing to have adequate AML procedures with regard to the variety of services it offers clients such as ATMs and money transfers. The Commission also brought three offering fraud cases, one of which raised over $1 billion, proceedings centered on failing to place advisory clients in the least expensive mutual fund shares or to disclose that monitoring fees would be accelerated under certain circumstance. Finally, a settled insider trading case was filed in which an insider tipped his long time friend.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 3 administrative proceeding, excluding 12j and tag-along proceedings.
Procedures – AML: In the Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., Adm. Proc. File No. 3-18318 (Dec. 21, 2017) is a proceeding which names the registered broker-dealer and investment adviser as a Respondent. In addition to its brokerage services the firm offers clients an array of services which include ATM cash deposits, wires, journal-entry transfers and checking which made it susceptible to money laundering. During a four year period beginning 2011 the firm did not maintain adequate AML procedures with respect to these services. The Order alleges violations of Exchange Act Section 17(a). To resolve the proceedings the firm took a number of remedial steps with regard to its procedures. It also 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 pay a penalty of $13 million.
Disclosure – accelerated monitoring fees: In the Matter of TPG Capital Advisors, LLC, Adm. Proc. File No. 3-18316 (Dec. 21, 2017) is a proceeding which names as a Respondent the registered investment adviser which acts as a private equity adviser. Over a two year period beginning in April 2013 when there was either a private sale or an IPO the firm accelerated its monitoring fees. The monitoring fees and the amounts were disclosed. Prior to the time of their investment however investors were not told that certain transactions would result in the acceleration of the fees. Since this is a conflict the adviser could not consent to the practice for the funds it advises. This resulted in a violation of Advisers Act Section 206(2) and 206(4). In resolving the matter the Commission considered the cooperation of the Respondent. To resolve the matter the adviser consented to the entry of a cease and desist order based on the Sections cited in the Order. It also agreed to pay disgorgement of $9,849,128.79 and prejudgment interest which will be paid into a disgorgement fund.
Disclosure – fund shares: In the Matter of Packerland Brokerage Services, Inc., Adm. Proc. File No. 3-18319 (Dec. 21, 2017) is a proceeding which names as Respondents Pakerland, a registered broker-dealer and investment adviser and Atlas Capital Management Corp, a registered investment adviser. In soliciting advisory clients to invest in mutual fund shares each adviser’s clients were put into shares that carried a 1% annual service fee when the same shares were available without the fee. Since Packerland was also a broker the fee was paid to the firm. The fee was not disclosed, although its Form ADV represented that all fees were disclosed. The firm also failed to have policies and procedures to ensure disclosure. Atlas failed to seek best execution for its clients from January 2012 through December 2015. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and 207. To resolve the proceedings Packerland consented to the entry of a cease and desist order based on each of the Sections cited in the Order and a censure. The firm will pay disgorgement of $432,949.80, prejudgment interest and a penalty of $80,000. Atlas also consented to the entry of a cease and desist order based on the Sections cited in the Order except Advisers Act Section 207, and to a censure. The firm will also pay a penalty of $80,000.
Offering fraud: SEC v. Shapiro, Civil Action No. 17-cv-24624 (SD Fl. Filed. Dec. 20, 2017) is an action which names as defendants Robert Shapior, Woodbridge Group of Companies, LLC and a number of related, controlled entities. The complaint alleges an offering fraud that began in about July 2012 and continued up to December 4, 2017 when the entities tumbled into bankruptcy. Over the period more than $1.22 billion was raised from over 8,400 investors who were essentially told that their funds would be loaned out at high interest rates. This permitted the companies to pay investors a good return, according to Mr. Shapiro. In fact much of the money was loaned to entities related to Mr. Shapior that had few assets. Over time returns were paid to investors from money raised from new investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c), and each subsection of 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 24020 (Dec. 21, 2017).
Offering fraud: SEC v. Matrix Capital Markets, LLC, Civil Action No. 16-cv-06395 (S.D.N.Y.) is a previously filed action against the company, Nicholas Mitsakos and Courtin Holt-Nguyen. The complaint alleged an offering fraud in which investors were induced to place their funds based on claims about a hypothetical portfolio of investments that supposedly paid returns ranging from 20% to as high as 66%. The claims were false. The court entered final judgments by consent against each of the defendants, enjoining them from future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Messrs. Matrix and Mitsakos were ordered to pay disgorgement of $861,163.62 and prejudgment interest which will be deemed satisfied by the payment of the restitution ordered in the parallel criminal action. The court also imposed and officer and director bar against Mr. Mitsakos and ordered Mr. Holt-Nguyen to pay a $25,000 civil penalty. In a separate administrative proceeding Mr. Mitsakos agreed to be barred from the securities business and from participating in any penny stock offering while Mr. Holt-Nguyen will be barred from the industry with a right to apply for reentry after three years. In the parallel criminal case Mr. Mitsakos was sentenced to serve 30 months in prison and ordered to pay $861,163.62 in restitution and $861,163.62 in restitution. See Lit. Rel. No. 24018 (Dec. 20, 2017).
Offering fraud: SEC v. Peters, Civil Action No. 5:17-cv-00633 (E.D.N.C. Filed Dec. 20, 2017) is an action which names as defendants, Stephen Peters, a former registered representative and his controlled entities, Visionquest Wealth Management, LLC, a registered investment adviser, Visionquest Capital, LLC and VQ Wealth, LLC. Beginning in April 2012 and continuing until June 30, 2017 Defendants raised about $10.1 million from sixty investors, primarily advisory clients, who were induced to purchase promissory notes. While the sales pitch varied, generally potential investors were told that the notes were guaranteed and that their money would be invested in revenue producing businesses. The claims were false; over $4 million was misappropriated by Mr. Peters. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(4). The case is pending. The U.S. Attorney’s Office for the Eastern District of North Carolina filed a parallel criminal action. See Lit. Rel. No. 240819 (Dec. 20, 2017).
Offering fraud: SEC v. Fossum, Civil Action No. 2:17-cv-01894 (W.D. Wash. Filed Dec. 19, 2017). Named as defendants are Ronald Fossum, Jr., the apparent mastermind of the alleged scheme, and Alonzo Cahoon, who was instrumental in one facet of the operations. Critical to the alleged scheme were six controlled entities that can be broken into two groups. Group one was the management entities. It included SMFG, Inc., Smart Money Secured Income Fund Manager, LLC, and Turnkey Investment Fund Manager, LLC. The second group, collectively called the SMFG Funds, was composed of Accelerated Asset Group, LLC, Smart Money Secured Income Fund, LLC and Turnkey Investment Fund, LLC. Neither of the Defendants and none of the entities were registered with the Commission. Both Defendants and SMFG, Smart Money Manager and Turnkey Manager are alleged to have acted as investment advisers.
The complaint centers on four offerings of securities to the public. Each involved Mr. Fossum and one or more of the entities. Overall about $20 million was raised from 100 investors. Significant portions of the investor funds were misappropriated while other portions were used to pay fees that were not authorized. In the end, the entities were placed in bankruptcy. It does not appear that they have sufficient funds to repay the investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a), Exchange Act Sections 10(b), 15(a) and 20(a) and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 24017 Dec. 20, 2017).
Kickbacks: SEC v. Hirsch, Civil Action No. 3:17-cv-13266 (D. N.J. Filed December 19, 2017) is an action which names as defendants Brian Hirsch and Joseph Spera. Mr. Hirsch was a registered representative at one brokerage firm from 2008 through 2015, working on the firm’s wealth syndicate desk. He continued in that position in 2016 when the desk was acquired by a second broker. Mr. Sera, a former day trader, was previously charged with insider trading by the Commission and pleaded guilty in a parallel criminal action. The complaint centers on a years long scheme in which Mr. Hirsch gave Defendant Spera preferential access to IPO’s and offerings being conducted by the brokers for whom he was employed in return for kickbacks, thereby defrauding his employer. He had a similar arrangement with Customer A. Overall Mr. Spera made about $4 million, $1 million of which was paid to Mr. Hirsch. Customer A paid Mr. Hirsch over $2000,000. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the District of New Jersey filed parallel criminal charges.
Insider trading: SEC v. Brown, Civil Action No. 2:16-cv-04630 (D. Ariz. Filed Dec. 14, 2017). The action centers on the acquisition of International Rectifier Corporation by Infineon, announced on August 20, 2014. Defendant Lanny Brown was employed at International Rectifier, a power management technology and semi-conductor company. His friend of about nine year, Sean Fox, also a defendant, was interviewing for jobs. Prior to the deal announcement the executives at International Rectifier sought to maintain the confidentiality of the deal information. The project was code named and only six executives were on the team with which information was shared. Mr. Brown was not a member of the deal team. Nevertheless, he learned about the transaction through the course of his employment. After learning about the proposed transaction Mr. Brown told his friend. On several occasions when he heard about the transaction Mr. Brown again called Mr. Fox. While the two men had a joint securities trading account, they agreed to use Mr. Fox’s account to purchase the necessary securities. To facilitate the trading Mr. Brown furnished money from a personal bank account to his friend who combined it with his funds to trade. During the period leading up to the deal announcement Mr. Fox purchased International Rectifier options. When the deal was announced the share price increased over 47%. The two men had trading profits of $369,720. The next day Mr. Fox liquidated the options. Over a period of months Mr. Fox wrote nineteen checks totaling $148,160.48 to Mr. Brown’s minor stepchildren, minor and adult children, former son-in-law, contractors who were renovating Brown’s house and to pay other entities for services provided to his friend. In a number of instances Mr. Brown or his wife cashed the checks made out to the children. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action each defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. The Defendants also agreed to pay disgorgement in the amount of $369,720 along with prejudgment interest on a joint and several basis with a credit for amounts paid in the parallel criminal case. See Lit. Rel. No. 24015 (Dec. 14, 2017).
Offering fraud: U.S. v. Millender, No. 1:16-cr-239 (E.D. Va. Verdict, Dec. 18, 2017). Defendants in the case are Terry Millender and his wife Brenda. Mr. Millender is the former senior pastor of Victorious Life Church, Alexandria, Virginia. They controlled Micro-Enterprise Management Group or MEMG. The Virginia firm supposedly helped the poor in developing countries by providing short-term loans to start or expand a business by working with a network of established micro-finance institutions. The couple recruited investors by emphasizing the firm’s Christian mission and the use of the funds to help the poor. Potential investors were also promised guaranteed rates of return. Investments were touted as safe since they were backed by the assets of MEMG. In fact the representations made to investors were false. Eventually MEMG failed. The Pastor and his wife then began a new venture – Kingdom Commodities Unlimited or KCU. The firm claimed to specialize in brokering Nigerian oil deals. Again investors were lured with the promise of high rates of return. Again the investor funds were diverted to the personal use of the couple. Overall investors lost $2 million. Following trial a jury returned verdicts of guilty as to each defendant. Pastor Millender was found guilty on multiple counts of wire fraud and money laundering. Sentencing is set for March 30, 2018.
FCPA – Anti-corruption
U.S. v. Steven (S.D.N.Y. Dec. 21, 2017) names as a defendant Colin Steven, a U.K. citizen residing in the UAE. He was charged in an information with one count of violating the FCPA, one count of conspiracy to violate the FCPA, one count of wire fraud, one count of conspiracy to commit wire fraud, one count of money laundering one count of conspiracy to launder money and one count of making a false statement. Mr. Stevens, who was an executive with Embraer S.A., pleaded guilty to the information. The claims were based on a transaction that traces to 2006. Embraer was in negotiations with Saudi Arabia’s national oil company to sell aircraft. In 2009 and early 2010 Mr. Stevens agreed to pay a bribe of $1.5 million in exchange for a contract worth $93 million to purchase new rather than used aircraft. The bribe was channeled through a firm in South Africa and denominated as finders fees. The contract was awarded in 2010. Mr. Stevens also receive a portion of the bribe as a kickback. In October 2016 the company entered into a deferred prosecution agreement with the DOJ under which a $107 million penalty was paid as part of a $205 million global resolution with the Department the SEC and Brazilian authorities.
Control failures: The Securities and Futures Commission fined Standard Chartered Securities (Hong Kong) Limited $2.6 million for internal control failures related to short selling orders and breach of the Financial Resources Rules. Over a period of about 18 months, beginning in January 2014, there were 61 instances of short sales executed by 11 traders from different trading desks. In addition, the firm misinterpreted and breached the Financial Resources Rules resulting in a liquid capital deficit of $2 million. In assessing the fine the SFC considered the duration of the failures, the cooperation and the immediate steps to rectify the situation.