As the nation moved toward its Independence Day Celebration, Chairman Clayton discussed factors which help drive settlements. Many of the points presented were not a surprise. Toward the end of the statement the Chairman noted that in many instances parties present an offer of settlement along with a request for waivers – a subject which has created some controversy in the past. Mr. Clayton then reviewed the procedures for moving forward in the event the offer was accepted but not the request for a waiver.
The Commission continued to focus on retail investors and offering fraud during the period. A series of cases highlighted the breath of these actions. One focused on an executive trying to save a floundering enterprise; another a management team manipulating the numbers while selling securities; and a third a simple con game in which the securities seller pocketed the cash. The common denominator, of course, is that in each instance the retail investors lost.
Statement on settlement: Chairman Jay Clayton issued a statement Regarding Offers of Settlement (July 3, 2019)(here). The statement discusses factors that can drive settlements: 1) The Commission is prepared to litigate if a timely and reasonable offer of settlement is not made; 2) the importance of promptly remedying harm to investors; 3) a desire for certainty; and 4) cost. The Chairman also noted that while it is generally appropriate to make an offer of settlement simultaneous with a request for a waiver, the “Commission has considered these matters almost exclusively on a segregated basis. When the settlement offer is accepted but the waiver request is not approved in whole or in part the “prospective defendant would need to promptly notify the staff (typically within a matter of five business days) of its agreement to move forward with the portion of the settlement offer that the Commission accepted.” If the defendant does not move forward the negotiated settlement terms may not be available, and a litigated proceeding may follow.
Proposal: SEC Proposes to Align Margin Requirements for Security Futures With Requirements for Similar Products (July 3, 2019)(here).
Discussion: The Division of Corporation Finance will host a roundtable discussion on July 18, 2019 regarding the impact of short-termism on the capital markets and if the reporting system should be modified to address these concerns (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 5 civil injunctive actions and 8 administrative proceedings this week, exclusive of 12j and tag-along actions.
Misrepresentations: In the Matter of The Parrish Group, LLC, Adm. Proc. File No. 3-19235 (July 2, 2019) names as Respondents the registered investment adviser and its founder and owner. The Order alleges that Respondents repeatedly misled prospective clients about the advisory. Specifically, they misstated metrics such as AMU, the number of clients and the number of employees. The Order alleges violations of Advisors Act Sections 206(1) and 206(2). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm was censured. In addition, Respondents will pay, jointly and several, a penalty of $184, 767.
Insider trading: In the Mater of Tory J. R. Schlkle, Adm. Proc. File No. 3-19234 (July 1, 2019) names as a Respondent an employee of Consulting Firm A, a world-wide enterprise. Genuine Parts Company and Essendant, Inc., both public companies, retained Consulting Firm A with respect to their potential merger. Mr. Schlkle was assigned to work on the transaction. Prior to the April 12, 2018 announcement date, he purchased 5,275 shares of Essendant. Respondent sold those shares after the deal announcement, realizing profits of $11,315. The Order alleges violations of Exchange Act Section 10(b). Respondent resolved the matter, consenting to the entry of a cease and desist order based on the section cited in the Order. He will also pay disgorgement of $12,193, prejudgment interest of $362.58 and a penalty equal to the amount of the disgorgement.
Auditor independence: In the Matter of Thomas Chang, CPA, Adm. Proc. File No. 3-19226 (July 1, 2019) names as a respondent, a 50% equity owner in KCCW Accountancy Corp. During the period of April 2016 through August 2018 the accounting firm had a direct business relationship with Entity A. Under the agreement KCCW paid a referral fee of 20% of the fees to Entity A. From 2016 through 2018 KCCW was retained to audit five public companies controlled by Entity A despite the business relationship. This violated the auditor independence rules, Section 2-01(c)(3). Mr. Chang engaged in improper professional conduct. A cease and desist order based on Rule 2-02(b) of Regulation S-X was entered as to Mr. Change. He was also denied the privilege of appearing and practicing before the Commission as an accountant with the right to re-apply after one year. Mr. Chang was directed to pay disgorgement of $13,000, prejudgment interest of $1,590.45 and a penalty equal to the amount of the disgorgement.
Undisclosed conflicts: In the Matter of Fieldstone Financial Management Group, LLC, Adm. Proc. File No. 3-19227 (July 1, 2019) names as Respondents the former registered investment adviser and Kristofor Behn, the founder of the advisory and its managing member. The Order alleges that over a two-year period, beginning in 2014, Respondents recommended that about 40 clients invest over $7 million in the securities of Aequitas Commercial Finance, LLC, a firm which was part of the Aequitas enterprise. In making these recommendations Respondents did not disclose that Aequitas had extended a $1.5 million and a $2 million line of credit under terms that created and incentive for the advisor and its principal to make the recommendation. In 2017 Mr. Bohn, through the advisor, also advised a client to purchase an interest in the advisor for $1 million to expand the business. Mr. Bohn did not disclose that about half of the sum would be used for his personal benefit. The Order alleges violations of Advisors Act Sections 206(1), 206(2) and 207, Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the proceedings Respondents each consented to the entry of a cease and desist order based on the sections cited in the Order. The firm was also censured. Mr. Bohn is barred from the securities business. In addition, Respondents will pay, on a joint and several basis, disgorgement of $984,778, prejudgment interest of $63,193 and a penalty of $275,000.
Unregistered broker: In the Matter of Jonathan E. Shoucair, Adm. Proc. File No. 3-19233 (July 1, 2019). The proceeding centers on the solicitation of investors by Mr. Shoucair for Jersey Consulting LLC and its principal, convicted felon Marc Andrew Tager. On April 2, 1998 a final judgment was entered against Mr. Shoucair, prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a). In February 2018 Mr. Tager was indicted for his role in connection with Jersey Consulting. That firm is a defendant in a Commission enforcement action. The Order alleges that Mr. Shoucair acted as an unregistered broker for Jersey Consulting. The Commission ordered the case set for hearing. See also In the Matter of Kenneth S. Gross, Adm. Proc. File No. 3-19232 (July 1, 2019)(acting as unregistered broker for Jersey Consulting; proceeding to be set for hearing).
Offering fraud: SEC v. Conwell, Civil Action No. 19-cv-4409 (N.D. Ill. Filed July 1, 2019) is an action which names as defendants: Thomas Conwell, previously enjoined by the Commission for fraud and sentenced to serve 48 months in prison after pleading guilty to wire fraud, bank fraud and obstructing a Commission investigation; and Kerry Hoffman, a registered representative. Over a two-year period, beginning in July 2015, Mr. Cornwell raised about $2.5 million through the sale of GT Media, Inc. shares to about 41 investors. Those investors were told that the firm would soon conduct a public offering and that he was not being compensated. Both statements were false. Between 2016 and 2018 he raised an additional $161,500 from about 16 investors by selling GT Media shares, portions of which he misappropriated. During the same period Mr. Hoffman sold about $500,000 of the firm’s stock and another $350,000 in GT Media convertible promissory notes to five advisory clients without disclosing his significant conflicts of interest stemming from the receipt of warrants, commissions and loans that were repaid with investor cash. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24526 (July 1, 2019); See also In the Matter of GT Media, Inc., Adm. Proc. File No. 3-19229 (July 1, 2019)(action against the firm; settled with the entry of a cease and desist order based on Securities Act Sections 5(a) and (c0 and the payment of a penalty of $173,436).
Offering fraud: SEC v. Webb, Civil Action No. 11-cv-7152 (N.D. Ill.) is a previously filed action which named as a defendant Gregory Webb, the Chairman and CEO of InfrAegis, Inc. and InfrAegis. The complaint alleged that Mr. Webb conducted a nationwide, fraudulent offering, in which he raised over $20 million from at least 395 investors. In a parallel criminal action he was found guilty by a jury on 9 of 11 counts and sentenced to serve nine years in prison and pay $9 million in restitution. The final judgment entered in the Commission’s action by consent enjoined Mr. Webb from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He was also ordered to pay a $50,000 penalty. See Lit. Rel. No. 24525 (July 1, 2019).
Offering fraud: SEC v. Sillerman, Civil Action No. 1:19-cv-6052 (S.D.N.Y. Filed June 28, 2019). The action names as defendant Robert F.X. Sillverman, the founder and CEO of on line publishing and entertainment firm Function(x), Inc. By 2017 the firm had become financially dependent on investor financing and loans from its founder. In early March 2017 the firm raised about $4.8 million in a public offering, although Mr. Sillverman falsely claimed the offering raised about $10 million, including $2 million from him. After the offering Mr. Sillverman directed the transfer of $500,000 of offering proceeds to his personal account, citing various conflicting reasons for the transfer. In April and May Defendant led another effort to raise additional capital for the firm, this time through a private placement of securities. To stimulate interest, Mr. Sillverman claimed two celebrities participated in the offering, referencing forged documents he created. He also told investors that he personally put $4 million into this second offering based on a round trip transaction of that sum he directed be made by wiring cash out of the firm account to his and then back. Later Mr. Sillverman wired an additional $1.4 million from the firm to himself. At least $550,000 of that sum exceeded any amount owed to him by the company. The complaint alleges violations of Exchange Act Sections 10(b), 13(a) and 13(b)(5) and Securities Act Section 17(a). To resolve the matter, Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint and to the entry of a permanent director-and-officer bar. He also agreed to pay a penalty of $175,000 pursuant to a Chapter 11 plan. The Commission previously suspended trading in the shares of the company. See Lit. Rel. No. 24524 (June 28, 2019).
Offering fraud: SEC v. Thomas, Civil Action No. 19-cv-1132 (D. Nev. Filed June 28, 2019). Named as defendants in the action are: Johnny Thomas, CEO and a director from 2010 through 2015; Robert Potts, President and COO from early 2013 through March 2016; Jonathan Woodward, CFO from May 2013 through August 2015; and John Francis, V.P. of Corporate Development and Investor Relations from Fall 2010 through September 2015. Over a year long period, beginning in March 2014, the firm pursued a business opportunity which had the prospect of transforming the company, according to the executive team Defendants. Specifically, Blue Earth had a business opportunity centered on the construction, ownership and operation of “combined heat and power (CHP) plants for a large North American processor of beef, pork, poultry, and lamb.” The firm’s executive team claimed that the never-profitable firm would be transformed, generating over $75 million per year with earnings of $20 million or more for ten years by the project. Those prospects were tied to critical foundation building elements that included the execution of contracts with the meat processing company for multiple sites. Those agreements would require at least $120 million for construction alone. In repeated presentations to investors, the executive team claimed that “it acquired CHP projects from another company and had contracts with the meat processing company to construct and operate CHP plants. The firm also reported assets of over $44 million on its balance sheet that supposedly reflected those CHP projects. At the same time the firm reported equipment orders for plants not yet approved by the meat processing company and stated it was making progress payments. None of these representations were true. Ultimately the firm was not able to implement many of the key foundation elements necessary for the project. Blue Earth tumbled into bankruptcy. 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)-5 and 16(a). The case is pending. See Lit. Rel. No. 24522 (June 28, 2019). See also In the Matter of R. Gordon Jones, C.P.A. Adm. Proc. File No. 3-19224 (June 28, 2019)(An accounting consultant to the company who is alleged to have participated in the violations; resolved with a cease and desist order based on Exchange Act Sections 13(a) 13(b)(2)(A) &(B) and 13(b)(5), the denial of the privilege of appearing and practicing before the Commission as an accountant and the imposition of a $70,000 penalty); In the Matter of S. Jeffrey Jones, CPA, Adm. Proc. File No. 3-19225 (June 28, 2019)(engagement partner on audits by external firm alleged to have engaged in unprofessional conduct by failing to conduct audits in accord with PCAOB standards; resolved with the entry of an order denying Respondent the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after two years).
Offering fraud: SEC v. Rinfret, Civil Action No. 19-cv- 6037 (S.D.N.Y. Filed June 28, 2019) centered on a very different kind of business transaction. Here, Defendant Paul Andrews Rinfret, who had been associated with a number of broker-dealer from 1989 to 2005, allegedly sought only to line his own bank account – no failing or struggling business was involved. Over a five-year period, beginning in late 2013, Defendant Rinfret is alleged to have defrauded at least five investors out of about $19.5 million. The investors purchased limited partnership interests in Plandome LLC, a firm that supposedly traded futures contracts. Investors were told that their funds would be used to day-trade S&P 500 futures contracts using an extremely successful strategy that generated triple-digit returns as high as 362%. Indeed, Plandome supposedly never lost money and had about $25 million in AUM. In fact, the firm did little futures trading. Much of the investor money was misappropriated by Mr. Rinfret. In 2019 the scheme collapsed. When confronted by two investors Mr. Rinfret “told them that he had lost all of Plandome’s money trading and that the proprietary algorithm [that supposedly guided trading] had never worked. Rinfret also admitted that he had sent falsified account statements to investors each month.” The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24521 (June 28, 2019).
Excessive trading: The regulator fined Summit Brokerage Services, Inc., $880,000 for supervisory failures. The amount includes $558,000 in restitution for customers whose accounts were excessively traded over a five-year period beginning in 2012. The firm, which has over 700 registered representatives, failed to review certain automated trade alerts related to its registered representative regarding trading. FINRA also found that from June 2015 through March 2018 the firm failed to reasonably supervise the use of the consolidated reports by its representative. Yet the regulator has issued Regulatory Notices regarding the use of these reports and the potential for incorrect communications.
MOU: The Ministry of Finance of the People’s Republic of China, the China Securities Regulatory Commission or CSRC and the Securities and Futures Commission or SFC entered into an MOU regarding obtaining audit working papers from audits of Hong Kong-listed Mainland companies. The cooperation agreement will facilitate the SFC’s access to audit work papers created by Hong Kong accounting firms and their audits kept in the Mainland when conducting investigations into Mainland based issuers or listed firms and their related entities or persons. The agreement is a “further refinement and perfection of existing cooperative arrangements for securities regulation between the two sides,” according to the release.
Report: The Monetary Authority of Singapore announced its 2018/2019 Annual Report which reviews significant initiatives for the period (here).