This Week In Securities Litigation (Week ending July 15, 2016)

The SEC filed a settled FCPA action in which the employees in the China subsidiary of the firm designed and adopted a bribery scheme to circumvent the compliance procedures the company had installed as a result of an earlier FCPA case. An insider trading action, which centered on trading prior to three corporate acquisition transactions, named as defendants a KPMG partner and two former registered representatives.

The Commission continues to require admissions to resolve cases involving the failure of a broker-dealer to fully comply with its blue sheet obligations with its Citigroup settlement. In addition, actions were brought concerning undisclosed fees and Regulation M.

Finally, the agency announced the adoption of amendments to the Rules of Practice which govern administrative proceedings. The text of the amendments has not been released however.


Rules: The SEC announced the adoption of amendments to its Rules of Practice. The amendments will impact the length of the proceeding, provide for limited ability to take depositions, govern dispositive motions and impact the admission of evidence. The text of the rules have not been released.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 1 civil injunctive action and 5 administrative proceeding, excluding 12j and tag-along proceedings.

Fees: In the Matter of Riverfront Investment Group, Inc. File No. 3-17343 (July 14, 2016) names as a Respondent the registered investment adviser. Beginning in mid-2008 Riverfront served as a subadviser to advisory clients in a wrap fee program. Under that program subadivsers typically use a sponsor-designated broker-dealer to execute the subadviser’s trades for the clients. In 2009 Riverfront disclosed that it may trade away – use other brokers—in an effort to get best execution. The adviser, however, substantially increased the amount it was trading away in 2009, costing clients millions of dollars in additional transaction fees. This violated Advisers Act sections 207 and 204(a). To resolve the action Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The adviser will also pay a penalty of $300,000.

Offering fraud: In the Matter of RD Legal Capital, LLC, Adm. Proc. File No. 3-17342 (July 14, 2016) names as Respondents the registered investment adviser and Roni Dersovitz, its CEO and owner. Beginning in 2011 Respondents marketed two funds to investors based on representations that they invested in receivables backed by law firms relating to settled litigation. In fact the funds invested in an array of instruments which included unsettled cases and default judgments. Respondents also withdrew money from the funds using unreasonable assumptions which drained them of their liquidity. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section10(b). The proceeding will be set for hearing.

Blue sheets: In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3- 17338 (July 12, 2016). Citigroup, a registered broker dealer and FINRA member, modified its program for preparing blue sheets in 1998. Those modifications contained a coding error which caused the exclusion of certain transactions. The error was not discovered until April 2014. It was not reported to the Commission until January 27, 2015. By that time the firm had determined that the coding error impacted 3,528 submissions between May 1999 and April 2014 – 2,382 submissions to the Commission and 753 to FINRA. A total of 34,412 trades had been omitted. During the period the firm did not have in place a reasonable process to check the accuracy and completeness of the blue sheet submissions. The Order alleged violations of Exchange Act Section 17(a). To resolve the proceeding Citigroup admitted to the facts detailed in the Order and consented to the entry of a cease and desist order based on the Section cited in that Order. The firm also agreed to pay a penalty of $7 million.

Reg M: In the Matter of Bitcoin Investment Trust, Adm. Proc. File No. 3-17335 (July 11, 2016) names as Respondents Bitcoin Investment, a trust whose sole assets are bitcoins, and SecondaryMarket, a subsidiary of Digital Currency Group, Inc., which in turn is a subsidiary of Grayscale Investments, LLC, the sponsor of Bitcoin Investment, and a registered broker-dealer. Bitcoin Investment sells its shares under Reg. D through SecondaryMarket. Special selling efforts were made which included the use of a power point, a Facebook account, television appearances by executives, Twitter and an information sheet. The shares are illiquid. Bitcoin Investment announced a redemption program in March 2014. SecondaryMarket had the sole discretion to determine the number of shares that would be repurchased each month. In September 2014 the Commission notified SecondaryMarket of potential violations of Regulation M from the redemption program. The program was suspended. The Order alleges violations of Regulation M which is intended to prevent manipulative conduct in connection with an offering by persons with an interest in the outcome of that offering. Under the Regulation there is a restricted period which begins on the latter of five business days prior to the determination of the offering price or such time that a person becomes a distribution participant. It ends on the person’s completion of the distribution. Here during the period of April 2, 2014 through September 4, 2014 SecondaryMarket purchased 85,721 shares during the restricted period. To resolve the proceeding Respondent SecondaryMarket and Bitcoin Investment consented to cease and desist orders based on, respectively, Rule 101 (distribution participants) and 102 (issuers) of Regulation M. SecondaryMarket will pay disgorgement of $51,650.11 and prejudgment interest. The Commission considered the reliance on counsel of Respondents.

Insider trading: SEC v. Avent, Civil Action No. 1:16-cv-02459 (N.D. Ga. Filed July 7, 2016). The action centers on trading in advance of three corporate take-overs: 1) The acquisition of Radiant Systems, Inc., by NCR Corporation, announced on August 24 2011; 2) the acquisition of Midas Incorporated, Inc., by TBC Corporation, announced on April 30, 2012; and 3) the acquisition of BrightPoint, Inc. by Ingram Micro Inc., announced on October 15, 2012. Named as defendants are: Thomas W. Avent Jr., a partner at KPMG, according to media reports, as well as a member of the bars of Mississippi, Washington, D.C. and New York; Raymond J. Pirrello Jr., a registered representative and supervisor at a Commission registered broker-dealer, identified in media reports as Garden State Securities Inc. in New Jersey; and Lawrence J. Penna, a former broker-dealer registered representative barred from the securities business in an earlier Commission enforcement action. Mr. Avent was the partner-in-charge of KPMG’s Mergers and Acquisitions Tax Practice for the Southeast Area, based in Atlanta. In that position he was charged with conducting due diligence on each of the three acquisitions involved here. Thus he had inside information about each deal. In each instance he tipped his broker who then tipped his friend. The Son of Mr. Penna then placed the trades. Overall Mr. Penna and his family are alleged to have made more than $111,000 in illicit insider-trading profits, portions of which went to Mr. Pirello who compensated Mr. Avent. The complaint alleges violations of Exchange Act Section 10(b) by Messrs. Avent and Pirrello. It also alleges violations of Exchange Act Section 14(e) by each of the three defendants. The case is in litigation. See Lit. Rel. No. 23593 (July 8, 2016).


In the Matter of Johnson Controls, Inc., Adm. Proc. File No. 3-17337 (July 11, 2016).

Johnson Controls acquired York International in 2005. At the time the firm was the subject of an FCPA investigation. Two years later York settled with the Commission in an action which alleged violations of the FCPA bribery, books and records and internal control provisions. The action centered on improper payments made at least in part through agents in China at shipyards to obtain and/or retain business. A monitor was installed. Following the merger York’s China operations were merged into China Marine.

Johnson Controls devoted additional resources to its compliance programs in the wake of the York action. Nevertheless, the bribery scheme at China Marine continued. The new employees circumvented the procedures installed and the steps taken to prevent a repetition of the wrongful conduct.

Despite a new manager and supervision by the Danish subsidiary, China Marine operated with little oversight. From 2007 through 2013 Johnson Marine obtained the benefit of about $11.8 million as a result of over $4.9 million in improper payments made through eleven problematic vendors.

Johnson Marine finally learned about the misconduct in December 2012 when it received the first of two anonymous hotline reports about certain employees in China Marine. The reports arrived shortly after China Marine’s managing director left the company. John Controls self-reported and undertook an extensive series of steps to cooperate with the Commission’s investigation detailed in the Order. The Order alleges violations of Exchange Act Section 13(b)(2)(A).

To resolve the action the firm consented to the entry of a cease and desist order based on the Section cited in the Order. Johnson Controls agreed to pay disgorgement of $11,800,000 and prejudgment interest. In addition, the firm will pay a penalty of $1,180,000 or 10% of the disgorgement. DOJ declined prosecution.


Inspections: The staff issued an inspection brief detailing the scope and objectives of the 2016 inspections of auditors of public companies (here).

Hong Kong

Remarks: Ashley Alder, CEO, Securities and Futures Commission, delivered the keynote remarks at the Hedge Fund Standards Board Institutional Investor Roundtable, June 22, 2016. In his remarks Mr. Alder discussed cybersecurity, Hong Kong as an asset management hub, conflicts of interest and insider dealing (here).


Bribery: The Serious Frauds Office entered into its second deferred prosecution agreement with an unnamed firm. The firm was charged with conspiracy to corrupt, conspiracy to bribe and failure to prevent bribery in connection with agreements to supply products in a number of foreign jurisdictions. Under the agreement the firm will pay £6,201,085 in disgorgement and a financial penalty £352,000. The disgorgement will be paid by the U.S. parent of the firm. The firm will also continue to cooperate with the SFO and to provide certain reports for twelve months.

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