This Week In Securities Litigation (Week ending February 19, 2016)
The Commission filed two settled FCPA cases this week. On was resolved with the payment of almost $800 million to the SEC, DOJ and Dutch regulators where about $114 million in bribes were paid. The other centered on the payment of travel and entertainment expenses as well as gifts.
Nine additional defendants were added to the SEC’s newswire hacker insider trading case this week, bringing the total to 43 defendants. In addition, the Commission filed another financial fraud action and a proceeding against an analyst for publishing a recommendation that was inconsistent with his opinion.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 6 civil injunctive case and 4 administrative proceeding, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Zavodchiko (D.N.J.) is an action against nine additional defendants in the Commission’s hacked news release action. The initial complaint alleged that 34 defendants hacked two newswire services to obtain highly confidential, non-public information to be used by the group to trade securities (here). The action filed this week adds nine additional defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a) and (b). The case is pending. See Lit. Rel. No 23471 (February 18, 2016).
Manipulation: SEC v. Hamdan, Civil Action No. 2:13-cv-15006 (E.D.Mich.) is a previously filed action against Randy Hamdan and Oracle Consultants, LLC. The complaint alleged a pump-and-dump scheme. Both defendants settled with the Commission and the court entered final judgments of permanent injunction prohibiting future violations of the Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the defendants were directed to pay, on a joint and several basis, disgorgement of $29,216, prejudgment interest and a penalty of $150,000. See Lit. Rel. No. 23470 (February 17, 2016).
Investment fund fraud: SEC v. Valente, Civil Action No. 14-3974 (S.D.N.Y.) is a previously filed action against Scott Valente and his firm, the ELIV Group, LLC. The complaint alleged that defendants raised over $8 million from about 80 clients by falsely representing that their investments had consistent, positive returns when in fact they yielded losses. Much of the money was misappropriated. The defendants resolved the action and the court entered final judgments prohibiting future violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The court also directed Mr. Valente to pay disgorgement of $8,200,579.69 which was deemed paid by a criminal restitution order in the related criminal case. See Lit. Rel. No. 23472 (February 18, 2016).
Financial fraud: SEC v. Marrone Bio Innovations, Inc. (E.D. Cal. Filed February 17, 2016) is a financial fraud action centered on improper revenue recognition. The scheme traces to at least late 2012 when Hector Absi, at one point the COO, directed the firm’s sales organization to forecast sales for the next year that would double current year revenue. Company accounting policy called for the recognition of revenue on a “sell-in” basis. Under this standard the firm recognized revenue from a sale to a distributor rather than a final customer – if there were no contingencies. At the time Marrone did not give “buyer protection” – a standard in the industry that allowed a buyer to manage its economic risk by permitting the return of unsold product. Beginning in the first quarter of 2013, and continuing through the second quarter of 2014, Mr. Absi sought to accelerate revenue recognition and reach the revenue goal set by the company of $14 million or twice that of the prior year. He began offering company customers “buyer protection” and instructed the sales force to do the same. Mr. Absi took other steps to inflate the firm’s revenue. For example, for a sale which was delivered in April of 2013 he obtained a false confirm from the distributer stating that it had been delivered in the first quarter to advance the recognition of the revenue. For a third quarter 2013 transaction where the company did not have the correct product to fill the order, he caused the wrong product to be shipped so the revenue could be recognized despite the fact that it was returned later. To cover his actions he told the outside auditors the shipment was a “mistake” resulting in the first quarter 2014 financial report disclosing a “material weakness” in controls because of the mistake. In another instance where a sale was completed on the last day of the quarter but could not be shipped that day, Mr. Absi caused the bill of lading to be backdated so it appeared the product had been shipped in the quarter. In March 2014 the company announced its 2013 financial results. Revenue was $14.5 million. Mr. Absi touted the results on an investor conference call. Yet the results were due in part to his scheme – in the fourth quarter alone about half of the $6 million in revenue was from sales generated by the inventory protection scheme. After early 2014 revenue shore falls Mr. Absi left the firm. Following an email from a former employee the scheme was uncovered and a restatement resulted. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). The case is pending.
Related actions include: SEC v Absi (E.D. Cal. Filed February 17, 2016)(action is pending); In the Matter of Julieta Favela Barcenas, Adm. Proc. File No. 3-17121 (February 17, 2016)( action based on the financial fraud against the firm customer relations manager; settled with a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and 13(b)(5); no penalty was imposed based on cooperation); In the Matter of Donald J. Glidewell, CPA, Adm. Proc. File No. 3-17120 (February 17, 216)(action against CFO; resolved with a cease and desist order based on SOX Section 304 and an order to reimburse the firm $11,789). The U.S. Attorney for the Eastern District of California announced mail, wire and securities fraud charges against Mr. Absi. Those charges are pending.
Analyst recommendation: In the Matter of Charles P. Grom, Adm. Proc. File No. 3-17119 (February 17, 2016) is a proceeding which names as a Respondent, Mr. Grom, formerly a managing director and senior equity research analyst at Deutsche Bank Securities, Inc. Mr. Grom put out a research report on Big Lots, Inc. dated March 29, 2012. He rated the stock a BUY. In fact that recommendation was inconsistent with his personal view that the stock should be downgraded, an action he declined to take in an effort to maintain a relationship with management at Big Lots. This violated Regulation AC, the analyst certification requirement. To resolve the proceeding Mr. Grom consented to the entry of a cease and desist order based on Rule 501 of Regulation AC of the Exchange Act. He was also suspended from the securities business and from participating in any penny stock offering for a period of 12 months. In addition, he will pay a penalty of $100,000.
Unregistered securities: SEC v. PV Enterprises, Inc., Civil Acton No. 1:16-cv-20542 (S.D. Fla. Filed February 16, 2016) is an action which names as defendants PV Enterprises, Inc., Panaglotis Villiotis, Virtual Sourcing, Inc., Norman Birmingham, Mario Faraone and Sweet Challenge, LLC. The action centers on the sale of unregistered securities. Specifically, PVEC and Virtual sold debt liabilities to a Finance Company which then brought collection actions against the two firms. The actions were settled by asking a state court to permit payment in shares that would be exempt from registration under Securities Act Section 3(a)(10). Misrepresentations were made to the court to secure the ruling. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 23468 (February 16, 2016).
Unauthorized trading: SEC v. Lawrence, Civil Action No. 3:16-cv-426 (N.D. Tx. Filed February 16, 2016) is an action against the investment adviser. Mr. Lawrence defrauded at least 18 advisory clients by making misrepresentations to them and engaging in unauthorized trading, loosing about $2 million in client funds. He also obtained over $480, 000 from investors based on representations that he would trade securities for their benefit. In fact he misappropriated most of the funds. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The action was settled with a consent to the entry of an order prohibiting future violations of the Sections cited in the complaint and an order directing the payment of disgorgement in the amount of $480,700 along with prejudgment interest. Those amounts are deemed satisfied by the entry of criminal restitution and forfeiture orders in a related case in which Mr. Lawrence pleaded guilty to fraud charges and was sentenced to serve 36 months in prison and directed to pay $1,454,384.48 in restitution and to forfeit $126,074.10. See Lit. Rel. No. 23467 (February 16, 2016).
Obstruction: U.S. v. Moore (S.D.N.Y.) is a previously filed action against Charles Moore, formerly the Chief Executive Officer of Crucible Capital, Inc., a registered broker dealer. Mr. Moore previously pleaded guilty to having provided false invoices to the SEC during a regulatory exam. The action was taken in order to make it appear that the firm had the amount of net capital represented in its FOCUS report. This week Mr. Moore as sentenced to serve six months in prison.
SEC v. Vimpelcom Ltd. (S.D.N.Y. Filed February 18, 2016) is an FCPA action resolved by the DOJ, the SEC and the Public Prosecution Service of the Netherlands or the Openbaar Ministrie, known as the OM, with total payments of $795,326,398.40.
MimpelCom is organized under the laws of Bermuda but was based in Moscow, Russia until 2010 when it moved to Amsterdam, the Netherlands. Its shares are traded on NASDAQ. The firm is a global provider of telecommunications services. Unitel LLC is a wholly-owned subsidiary that provides mobile telecommunication services in Uzbekistan. The subsidiary entered that market in 2006 through mergers.
From 2006 through 2012 the company offered and paid bribes through a business partner to a government official in Uzbekistan. During the period at least $114 million in improper payments were made to obtain and retain business which generated more than $2.5 billion in revenues for the company.
Typically the payments were made through sham contracts. In some instances they were also channeled through charitable contributions. The Commission’s complaint alleged violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the Commission’s action the company consented to the entry of an order prohibiting future violations of the Sections cited in the complaint. The company also agreed to retain an independent monitor and to pay disgorgement and prejudgment interest of $167.5 million.
To resolve the criminal charges with the DOJ Unitel pleaded guilty to a one-count criminal information which charged the company with a conspiracy to violate the anti-bribery provisions of the FCPA. The parent corporation entered into a deferred prosecution agreement. The criminal information charged conspiracy to violate the anti-bribery and books and records provisions of the FCPA as well as the internal control provisions. The firm agreed to pay a criminal penalty of $230,163,199.20, including a $40 million criminal forfeiture. As part of the agreement the company will implement rigorous internal controls and retain a compliance monitor for three years. The penalty reflected a 45% reduction off the bottom of the Sentencing Guideline range which reflected the cooperation of the company once the investigation began as well as the fact that the firm did not self-report. The DOJ also instituted related forfeiture actions, seeking $850 million.
Finally, the company paid a criminal penalty to the OM of $230,163,199.20 along with disgorgement and prejudgment interest equal to the amount paid to the SEC.
In the Matter of PTC Inc., Adm. Proc. File No. 3-17118 (February 16, 2016) centers on the use of travel, entertainment and gifts to secure business in violation of the FCPA.
PTC designs, manufactures and sells Product Lifecycle Management System software. The parent company exercised substantial control over its China subsidiary (one in Hong Kong, one in Shanghai) which is at the center of this action. The China subsidiary routinely hired third parties it called business partners. Those firm were used to find deals, many of which involved Chinese SOE. During contract negotiations with SOEs, Chinese government officials and the business partner often requested that they be furnished with overseas “training.” Frequently that training involved a one day visit to the firm’s headquarters which was either preceded or followed by significant travel and entertainment of the officials by firm employees. That travel included items such as trips to New York City, Washington, D.C., Los Angeles and Honolulu. Leisure activities, sight seeing and other activities were included in the trips which at times lasted for several days. The trips were frequently paid out of the commissions of the business partner.
From 2009 through 2011 the China subsidiary sales staff also provided at least $274,313 in gifts and entertainment directly to Chinese government officials. The value of the gifts ranged from $50 to $600 in violation of the firm’s corporate governance and internal controls policies. Overall from 2006 through 2011 the Chinese subsidiary provided improper payments totaling $1.5 million while earning about $11.85 million in profits from sales contracts with SOEs whose officials received the improper payments.
In 2011 the firm discovered the improper payments. It promptly conducted an internal investigation and, upon completion, self reported the results to the Commission. The firm also took a number of remedial steps including terminating the senior staff members at its China subsidiary who were involved in the improper conduct and other steps. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter with the SEC, the firm consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay disgorgement of $11,858,000 along with prejudgment interest. A penalty was not imposed in view of the terms of the settlement with the DOJ. At the same time an employee of the China subsidiary entered into a deferred prosecution agreement with an individual. To resolve criminal charges with the DOJ, PTC entered into a non-prosecution agreement. The firm also agreed to pay a $14.54 million penalty.
Program: The Second Annual Dorsey Enforcement Forum will be held on Wednesday February 24, 2016 beginning at 1:00 p.m. Three panels of experts will discuss: 1) Trends in SEC enforcement; 2) FERC and CFTC market manipulation actions; and 3) Current developments in Financial Services Regulatory Enforcement. The program will be video cast, webcast and live in Washington, D.C. at the Willard Office building, 1455 Pennsylvania Ave. Lunch will be available beginning at noon; open bar at the conclusion of the program. No charge but registration is required (here) or if attending in person by emailing my assistant at Romodan.Hanan@dorsey.com