The Commission brought actions this week centered on the failure to properly conduct audits, an offering fraud and for acting as an unregistered broker. FINRA sanctioned eight firms for failing to adequately supervise the sale of a complex investment product.
Rules: In connection with the Commission’s proposed rules regarding the use of derivatives by registered funds and business development companies the staff made available additional economic analysis (here).
Remarks: Commissioner Kara M. Stein delivered the key note address to Big Data in Finance Conference (Oct. 28, 2016). Her remarks reviewed the challenge and opportunity of technology (here).
Remarks: Leslie R. Caldwell, Asst. Attorney General, delivered remarks at The George Washington University Law School Highlighting Foreign Corrupt Practices and Enforcement (Nov. 3, 2016). She reviewed recent FCPA cases, noted an emphasis on charging individuals and increased transparency in the charging process reflected by the pilot program and reviewed compliance (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During the last week the SEC filed 1 civil injunctive action and 5 administrative proceedings, excluding 12j and tag-along proceedings.
Hacked news releases: SEC v. Dubovoy, Civil Action No. 2:15-cv-06076 (D.N.J.) is a previously filed action which named as defendants, among others, Alexander Fedoseev and Roman Lavinskly. The action alleged that the defendants traded based of information obtained from hacked news releases. The two defendants resolved the matter, consenting to the entry of permanent injunctions based on Exchange Act Section 10(b) and Securities Act Section 17(a). The two defendants were ordered to pay, on a joint and several basis, $1.22 million in disgorgement, including all of their funds that have been subject to an asset freeze entered at the beginning of the case. To date the Commission has obtained settlements from 13 individuals in this case. See Lit. Rel. No. 23682 (Nov. 2, 2016).
Unregistered broker: In the Matter of Ronald D. Morley, Adm. Proc. File No. 3-17658 (Nov. 1, 2016) is a proceeding which names as Respondents Mr. Morley, who provides investment and retirement services, and his firm, The New Wealth, LLC. The Order alleges that over a six year period beginning in 2008 Respondents solicited and induced at least 130 investors in nine states to purchase preferred shares offered by Summit Trust Company. They were paid $3,113,204 in transaction based compensation. The Order alleges violations of Exchange Act Section 15(a). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Mr. Morley is also barred from the securities business and from participating in any penny stock offering. Within 35 days of an order lifting the stay in Respondent Morley’s Chapter 7 bankruptcy proceeding, or the termination of the stay, Mr. Morley owes, jointly and severally with his firm, disgorgement in the amount of the compensation they were paid along with prejudgment interest and a penalty of $150,000.
Offering fraud: In the Matter of Edward M. Daspin, Adm. Proc. File No. 3-16509 (Nov. 1, 2016). Respondents named in the proceeding, initially filed on April 23, 2015, were Edward Daspin, founder and control person of three related companies, Luigi Agostini, a director and COB of the companies and Lawrence Lux, CEO of the firms. Mr. Lux previously settled. Now. Mr. Agostini is settling. Beginning in December 2010, and continuing for another 18 months, about $2.47 million was raised from seven investors by Respondents. Mr. Daspin, the organizer of the scheme, targeted unemployed professional and solicited them for what was called a job interview. At the interview the executives were solicited to invest in Worldwide Mixed Martial Arts Sports, Inc. and an affiliate, WMMA Distribution Inc. (collectively the “Companies”), with a series of false statements made orally and in a PPM. Those false statements included a claim that the Companies were well funded and that he had skin in the game. Neither claim was true. In fact the Companies never generated any revenue and quickly burned through the investor funds. Respondents Agostini and Lux facilitated the scheme. They were presented to prospective investors as directors when in reality they deferred all decisions to Mr. Daspin. They also knew that the PPMs were inaccurate and that Mr. Daspin controlled the Companies, contrary to representations made to potential investors. The Companies met their demise when they produced a charity fundraising in El Paso, Texas in March 2012 which essentially failed. The Order alleged violations of Securities Act Sections 17(a)(2) and (3). The action was initially to be set for hearing. Mr. Agostini resolved the matter, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to pay disgorgement of $15,869.20, prejudgment interest and a penalty of $7,500.
False audit opinion: In the Matter of Domenick F. Consolo, CPA, Adm. Proc. File No. 3-17654 (Oct. 31, 2-16). Respondent Domenick Consolo is a partner in the PCAOB registered public accounting firm of O’Connor Davis, also a Respondent in the proceeding. The firm served as the outside auditors for the Town of Ramapo, New York and the Ramapo Local Development Corporation, established to engage in development projects for the town. Mr. Consolo served as the engagement partner on those audits for each fiscal year from 2009 through 2014. In each year the audit firm issued unqualified audit opinions on the financial statements of the town and the development corporation. Those financial statements were incorporated into municipal securities offering materials beginning in 2010 and continuing through 2015. The offerings raised about $300 million from investors. Beginning in fiscal year 2009 the town’s financial statements reflected a receivable of $3,080,000 in the General Fund for the sale of land known as the Hamlets. The receivable represented about 75% of the Town’s fiscal year 2009 General Fund balance. During the course of the audit Mr. Consolo learned that the sale had not been completed. Nevertheless, he permitted the receivable to remain on the books. The next year Mr. Consolo also permitted the receivable to remain on the books despite the fact that the sale had not been completed in December of 2010 as he had been informed. Without the receivable the General Fund would have had a negative balance in each year.
In 2013 senior management at the audit firm learned that the financial statements of the town and the Development Corporation were under investigation by the FBI, the Manhattan U.S. Attorney and the SEC. The inquiries centered on the receivable for the land sale. Despite learning of the investigations the audit firm issue unqualified audit reports on the Town’s financial statements for the fiscal years 2012 – 2014 which contained the receivable. The firm also issued unqualified audit reports on the financial statements of the Development Corporation for the same fiscal years. Those financial statements listed the Hamlets property as an asset. The Order alleged violations of Exchange Act Section 10(b) and Securities Act Sections 17(a)(2) and (3). To resolve the proceeding the firm agreed to a series of undertakings including: an agreement not to serve as the engagement partner or engagement quality control reviewer in connection with a municipal audit for five years; to conduct a review regarding the adequacy of their quality control procedures; and to retain an independent consultant. The firm also consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and to a censure. It will pay disgorgement of $355,600, prejudgment interest and a penalty of $100,000. Mr. Consolo consented to the entry of a cease and desist order based on Exchange Act Section 10(b), is denied the privilege of appearing or practicing before the Commission and will comply with an undertaking not to serve as the engagement partner or quality control reviewer on a municipal audit for five years. He will pay a penalty of $75,000.
False audit opinion: In the Matter of Adrian D. Beamish, CPA, Adm. Proc. File No. 3-17651 (Oct. 31, 2016). Respondent Adrian Beamish is a partner in the audit firm of PricewaterhouseCoopers. The audit firm issued unqualified opinions on the financial statements of Burrill Life Sciences Capital Fund III, L.P, for the years 2009 – 2012. The fund is a $385 million venture capital fund. Mr. Beamish was the engagement partner on each of the audits. The Fund is a member of a cluster of related entities founded by Steven Burrill. Beginning in 2007 Mr. Burril and his affiliated businesses, including an exempt reporting adviser and other funds, experienced cash flow difficulties. By mid 2008 Mr. Burrill began taking routine advances on management fees. By year end 2009 Mr. Beamish was aware that over $4.9 million in advances had been taken. By the end of the next year that sum had increased to over $9.2 million while by the end of 2011 it was over $13.3 million. In each instance the fees were characterized as advances on management fees. Little disclosure was provided despite the fact that the transactions were related party transactions. In each year Mr. Burrill gave little scrutiny to the transactions. Indeed, despite the rapidly growing balances, and the fact that in 2012 the advances exceeded any potential future management fees the Fund might owe, Mr. Burrill authorized the issuance of an unqualified audit opinion. The Order alleges violations of Rule 102(e)(1)(ii). The proceeding will be set for hearing.
Supervision: The regulator fined eight firms more than $6 million for supervisory failures related to variable annuity L-shares. Those shares are complex investment products that combine insurance and security features designed for short term investment. The firms sanctions were: VOYA Financial Advisors, Inc., Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, First Allied Securities, Inc., Summit Brokerage Services, Inc., VSR Financial Services, Inc., Kestra Investment Services, LLC and FTB Advisors, Inc.
Manipulation: U.S. v. Mitchell, Case No. 1:16-cr-00234 (E.D.N.Y.) is an action which named as defendants Jared Mitchell and Maroof Miymana and charges conspiracy to commit securities fraud, conspiracy to commit wire fraud, securities fraud, money laundering and making a false statement centered. The charges center on the manipulation of the share price for ForceField Energy, Inc. Mr. Mitchell is an investor relations professional. Ms. Miyana is a registered representative at a brokerage firm. From January 2009 through April 2015 the defendants manipulated the share price of ForceField, a provider of LED lighting products. The manipulation was implemented through the use of a number of nominees who created the appearance in the market of actual trading and kickbacks paid to brokers to facilitate the scheme. The two defendants pleaded guilty to securities fraud and are awaiting sentencing.
Unauthorized trading; The Securities and Futures Commission banned Lawrence Lai from the securities business for ten year. Mr. Lai is a former registered representative of UOB Kay Hian (Hong Kong) Limited and UOB Kay Hian Futures (Hong Kong) Limited. The SFC’s investigation centered on trading of the Nikkei Futures contracts through an account at the firm following a tsunami that stuck Japan in March 2011. At that time Mr. Lai made false statements, engaged in unauthorized trading in a client account, misled his employer regarding the risk of the transactions and acted against the best interests of the client.
Insider dealing: Mark Lytteton, formerly an equity portfolio manager at BlackRock, pleaded guilty to insider dealing in the shares of EnCore Oil Plc between October 1 and 13, 2011 and Cairn Energy Plc between Nov. 4, 2011 and December 17, 2011. He obtained the information from conversations with colleagues or working on the deals.