This Week In Securities Litigation (Week ending February 5, 2016)
This Week In Securities Litigation (Week ending February 5, 2016)
The Commission filed another group of settled actions under its initiative regarding municipal bond underwriters. This time a group of fourteen actions were filed. Each centered largely on claims that the underwriter failed to properly assess past performance by the issuer regarding required updates to the offering materials. Each was settled with a cease and desist order tied to Securities Act Section 17(a)(2) and a penalty of up to $500,000 depending on the facts of the particular case.
The agency also filed three settled actions centered on the operation of dark pools. Central to each case was the claim that subscribers would be protected from aggressive trading when in fact the safeguards were at best inconsistent. The SEC also filed three settled FCPA actions and a proceeding based on AML violations by a broker.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 1 civil injunctive case and 20 administrative proceeding, excluding 12j and tag-along proceedings.
AML: In the Matter of E.S. Financial Services, Inc., Adm. Proc. File No. 3-17099 (February 4, 2016) is a proceeding which names the broker dealer as a Respondent. The firm is a subsidiary of a Portuguese bank. Over a ten year period prior to 2013 the broker-dealer maintained an account for a Central American bank which initially was an affiliate. While the account was ostensibly for the bank only, in fact 13 entities which had accounts at the bank had subaccounts. The accounts were beneficially owned by 23 non-U.S. citizens who interfaced directly with the registered representatives at the broker. The broker failed to maintain the proper records as required by the PATRIOT Act. The Order alleges violations of Exchange Act Section 17(a). The account was used to effectuate about $23 million in securities transactions. To resolve the proceeding Respondent agreed to implement a series of undertakings which include the retention of a consultant and consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. The broker will also pay a penalty of $1 million.
Offering fraud: SEC v. American Growth Funding II, LLC, Civil Action No. 16-cv-00828(S.D.N.Y. Filed February 3, 2016) is an action which names as defendants American Growth; Portfolio Advisors Alliance, Inc., a registered broker dealer; Ralph Johnson, the managing member of the AGF entities; Howard Allen III, a registered representative and an indirect owner of PAA; and Kerri Wasserman, President of PAA. The complaint alleges that American Growth, which supposedly provides loans to businesses, raised about $8.6 million from 85 investors through the sale of its units under a private placement memo from early 2011 through the end of 2013 based on a series of misrepresentations. During the period the primary asset of American Growth was a loan from an affiliate that had greatly deteriorated in value and for which the likelihood of repayment was imperiled. Nevertheless, investors were promised 12% returns. 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. 23459 (February 3, 2016).
Municipal bonds: In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-17084 (February 2, 2016). Respondent is a registered broker-dealer, investment adviser and municipal advisor. It acted as either a senior or sole underwriter in a number of municipal securities offerings. In the offerings involved here Respondent essentially represented that the issuer had not failed to comply in all material respects with any prior continuing disclosure obligations. In fact that representation was incorrect. The Order alleged violations of Securities Act Section 17(a)(2). To resolve the proceeding Respondent, whose cooperation was considered by the SEC, agreed to implement a series of undertakings. Those included the retention of an Independent Consultant to review the firm’s policies and procedures regarding municipal securities underwriting due diligence. Essentially, Respondent will adopt the recommendations of the consultant. The firm also consented to the entry of a cease and desist order based on the Section cited in the Order and will pay a penalty of $500,000. This is one of 14 actions filed this week by the Commission under its Initiative for municipal underwriters. To date 72 underwriters have self-reported under the program.
Insider trading; SEC v. Dubovoy, Civil Action No. 2:15-cv-06076 (D.N.J.) is a previously filed action which initially named as defendants 32 persons and entities (later amended to 34) alleged to have been part of an international hacking-insider trading ring which included Concorde Bermuda Ltd. The complaint alleged that the defendants used press releases obtained by hacking news agencies to trade. Concorde is alleged to have made about $3.6 million. The SEC entered into a settlement with the entity, subject to court approval. Concord consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The firm will also pay $4.2 million in disgorgement. See Lit. Rel. No. 23458 (February 2, 2016).
Pyramid scheme: SEC v. eAdGear, Inc., Civil Action No. 14-cv-04294 (N.D. Cal.) is a previously filed action which named as defendants eAdGear Holdings Limited, eAdGear, Inc., Charles Wang, Francis Yuen and Quian Zhang. The complaint alleged an international pyramid scheme which raised over $129 million from investors. The defendants resolved the matter. Each defendant consented to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Section 10(b). In addition, the two companies will pay disgorgement of $21 million, prejudgment interest and a penalty of $1 million; Messrs. Wang and Zhang will pay disgorgement of $2,019,000 and prejudgment interest while Mr. Zhang will pay a penalty of $200,000; Messrs. Yuen and Chan will pay disgorgement of $1,571,000 and prejudgment interest and Messrs. Wang, Yuen and Zhang will be barred from serving as an officer or director and are enjoined from participating in the issuance, offer or sale of any securities from any issuer under the control of anyone in this action. See Lit. Rel. No. 23457 (February 1, 2016).
Dark pools: In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-17077 (January 31, 2016). Barclays Capital Inc. is a registered broker-dealer. Since 2008 the firm has operated LX, an ATS that operates under Regulation ATS. The proceeding focuses largely on protections subscribers were told the venue provided from aggressive traders but which in fact did not work as represented. Key to those protections was LX product Liquidity Profiling. Available only to subscribers, it was touted as a protector from predatory trading. In fact the tools claimed to have been regularly used by LX to protect subscribers were not. Liquidity Profiling also evaluated the manner in which venue subscribers traded, according to Barclays, ranking them by how aggressive they were so subscribers could block trading with those assigned to certain categories. What subscribers were not told was that Barclays used overrides to move certain subscribers from more aggressive to less aggressive categories. That resulted in some subscribers interacting with those in the most aggressive categories. Finally, LX represented that it had direct feeds from major exchanges to calculate NBBO. In fact it did not have one from the NYSE. The Order alleged violations of: Securities Act Section 17(a)(2), Exchange Act Section 15(c)(3) and the related rules and Rules 301(b)(2) and 301(b)(10) of Regulation ATS. As part of the resolution of the proceeding, the firm agreed to implement a series of undertakings regarding the recommendations of the third-party consultant and its procedures and controls. Barclays also consented to the entry of a cease and desist order, based on admitting the facts in the Order and that the firm violated the securities laws, and on each of the Sections cited in the Order. The firm will pay a $35 million penalty.
Dark pools: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-17079 (January 31, 2016). Credit Suisse Securities is a registered broker dealer and investment adviser. It operated an ATS and ECN known as Light Pool. The proceeding centered on a product called “Alpha Formula/Scorecard.” Effectively this was another system that was designed to identify “opportunistic” traders. In fact the product was not implemented when Light Pool began trading in NMS stocks in June 2011 and the representations regarding it were not accurate. The venue also “backed away” from orders. The Order alleged violations of Securities Act Section 17(a)(2), Rule 301(b)(2) of Regulations ATS, and Rule 602(b) of Regulation NMS. To resolve this proceeding Respondent consented to the entry of a cease and desist order based on the Section and rules cited in the Order, to a censure and to pay a penalty of $10 million.
Dark pools: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-17078 (January 31, 2016). This proceeding centered on an ATS operated as a dark pool that was a private execution venue, Crossfinder. For approximately a two year period Crossfinder accepted and ranked orders in increments smaller than one-cent – it accepted and prioritized sub-penny orders. This violated Rule 612 of Regulation NMS. Crossfinder also made misrepresentations regarding a proprietary methodology called “alpha scoring” that placed order flow from subscribers into various categories and was intended to address concerns regarding high frequency trades. Confidential subscriber information also was not adequately protected and the venue unreasonably limited several functionalities in an unfair or discriminatory manner. The Order alleged violations of Securities Act Section 17(a)(2), Rule 301(b)(2), Rule 301(b)(5)(ii)(B), Rule 301(b)(5)(ii)(D) and Rule 301(b)(10) of Regulation ATS, and Rule 612 of Regulation NMS which prohibits sub-penny pricing. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on Sections cited in the Order. The firm also agreed to pay disgorgement of $20,675, 510.52, prejudgment interest and a penalty of $20 million.
In the Matter of SciClone Pharmaceuticals, Inc., Adm. Proc. File No. 3-17101 (February 4, 2016) is a proceeding which names the pharmaceutical firm as a Respondent. The Order alleges that over a five year period beginning in 2007 the firm, while conducting business in China, repeatedly gave money, gifts and other things of value to foreign officials, including healthcare professionals employed at state-owned hospitals, to secure business. The transactions were incorrectly recorded in the books and records of the firm as expenses. SciClose also failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). The company undertook remedial efforts, improving its systems. It also agreed to undertakings which include reporting to the staff over a three year period. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The company will also pay disgorgement of $9,426,000, and prejudgment interest as well as a civil penalty of $2.5 million.
In the Matter of Ignacio Cueto Plaza, Adm. Proc. File No. 3-17100 (February 4, 2016) is a proceeding which names Mr. Cueto, the CEO of LAN Airlines S.A., as a Respondent. In 2006 and 2007 Mr. Cueto authorized the payment of $1.15 million to a third party consultant in Argentina in connection with an attempt by the airlines to settle a labor dispute. Mr. Cueto understood there was some possibility that a portion of the funds would be passed to officials in Argentina. The payments were improperly booked. Mr. Cueto is now subject to enhanced compliance procedures since the firm was acquired. He also takes anti-corruption training. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he was directed to pay a penalty of $75,000.
In the Matter of SAP SE, Adm. Proc. File No. 3-17080 (February 1, 2016). SAP SE is a European Union corporation based in Waldorf, Germany whose ADSs are registered with the SEC and traded on the NYSE. The firm operates through 272 subsidiaries, selling software licenses. It serves customers in 188 countries using 11,500 partners. From 2008 through early 2014 Vincente Garcia served as Vice-President of Global and Strategic Accounts. He was responsible for sales in Latin America. Technically Mr. Garcia was employed by a subsidiary but was frequently presented as an SAP employee. This tended to blur his reporting lines. Mr. Garcia learned through a business associate in 2009 that there were opportunities for the sale of software to the government of Panama. The associate, a lobbyist in Panama, claimed to have an existing relationship with the newly elected government. To secure the business bribes would have to be paid to three government officials.
There was a potential for business at the Panamanian social security agency. Mr. Garcia and others finalized an arrangement with the social security agency through a local partner using their bribery plan. That plan was implemented by causing SAP to sell the software to the local partner at an 82% discount. The partner could then mark it up and pay the bribes from the increased price. Mr. Garcia was able to arrange for the discount through his knowledge of how the firm provided them. Thus the social security agency awarded a contract to the local partner who had purchased software at an 82% discount, marked it up in the sale to the agency and used the profits to create a slush fund to pay bribes. The contract was awarded in January 2011 to the local partner on a bid of $14.5 million for software he had acquired for $2.1 million. Between June 2012 and December 2013 the Panamanian government awarded three additional contracts that included SAP products valued at about $13.5 million. The contracts were the result of the same bribe scheme. The contracts generated revenues of about $3.7 million for SAP.
The Order alleges violations of Exchange Act Sections 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 disgorgement of $3.7 million and prejudgment interest. A penalty was not imposed based on extensive cooperation, although the firm did not self-report.
Insider trading: The Australian Securities Investment Commission charged Steven Noske with insider trading in connection with the purchase of 750,000 shares of WestSide Corporation Ltd. shares through a trading account of another in February 2012. As a result he had a notional profit of $182, 430.
Insider trading: The ASIC initiated an action against Hochtief Aktiengesellschaft, alleging insider trading. Specifically, the firm is alleged to have acquired a block of Leighton Holdings Limited on January 29, 2014 while in possession of inside information about the 2013 financial results of the firm which had yet to be released.
Take-overs: The Securities and Futures Commission censured Goldman Sachs (Asia) LLC for breaches of the Code on Takeovers and Mergers while acting as a financial advisor to Wing Hang Bank in relation to a voluntary general offer for the bank. During the time Goldman Sachs executed 111 trades in the securities of the bank without making the requisite dealing disclosures. No prior consent was obtained for 26 of the trades. The firm also failed to comply with the restrictions on issue and distribution of research reports regarding the bank.