This Week in Securities Litigation (Week ending November 15, 2013)
The SEC entered into its first deferred prosecution agreement with an individual this week. The agreement is with a former accountant at a hedge fund who reported an on-going fraud and furnished the SEC with significant evidence that resulted in an enforcement action and a guilty plea in a parallel criminal case. Under the agreement the accountant is required to make admissions, pay disgorgement and was effectively enjoined and barred from the investment and advisory business for the five year term of the deal.
An investment fund fraud action which victimized largely NHL hockey players was unsealed in the Eastern District of New York. The victims invested in a series of fraudulent schemes and lost millions of dollars.
SEC Enforcement – filed and settled actions
Weekly statistics: This week the Commission filed, or announced the filing of, 1 civil injunctive action, DPA or NPA and no administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Deferred prosecution agreement: The SEC entered into its first deferred prosecution agreement with an individual. The agreement is with Scott Herckis, former administrator to hedge fund Heppelwhite Fund LP. The agreement recognizes his timely and significant contributions to the Commission’s efforts to halt an on-going fraud at the hedge fund where he was once employed.
The underlying case centered on a fraud by Berton Hochfield, sole shareholder and manager of Hochfeld Capital Management, LLC. The fund initially had about 25 investors and $6 million under management. Mr. Mr. Herckis was retained as the accountant. Over time he learned that Mr. Hochfield made a number of withdrawals from the capital account of the firm which left it with a negative balance. He also understood that the NAV he calculated was not the same as the one given to the prime broker. After discovering a $1.5 million discrepancy he resigned and shortly thereafter reported the case to the authorities. The Commission filed an enforcement action, securing an injunction and freeze order. SEC v. Hochfeld, Civil Action No. 12-cv-8202 (S.D.N.Y.). Mr. Hochfeld pleaded guilty to criminal charges. U.S. v. Hochfeld, No. 13-CR-0021 (S.D.N.Y.).
Mr. Herckis entered into a deferred prosecution agreement with the Commission. It has a term of five years and requires him to: Admit the facts regarding the underlying violations as detailed in the agreement; not violate Federal or state securities laws;not serve in any capacity with an investment company or an investment adviser; pay disgorgement in the amount of $48,000 along with prejudgment interest; and continue to cooperate with the Commission.
Investment fund fraud: U.S. v. Kenner, No. 13-CR-607 (E.D.N.Y. Unsealed Nov. 13, 2013) charges financial adviser Phillip Kenner and former professional race car driver Tommy Hormovitis with conspiracy, conspiracy to commit money laundering and wire fraud. The case is based on a series of investment fund frauds. Mr. Kenner, at one time a licensed financial adviser in Boston, founded his firm in 2003 based on contacts he made in the National Hockey League through his college roommate who became a professional hockey player. Beginning at about the time he opened his firm Mr. Kenner, with assistance from Mr. Hormovitis, convinced a number of players, and sometimes others, to invest in a land deal in Hawaii, a prepaid debt card business, a litigation settlement fund and a New York land deal. In each instance the victims’ money was diverted largely to the use of the defendants. Overall the investors lost about $15 million. The case is pending.
BrokerCheck: The regulator announced that it has released an enhanced version of BrokerCheck. The new version allows investors to more quickly access the professional background of investment professionals.
Market manipulation: The Australian Securities and Investments Commission announced that Thai Quo Tang was sentenced on two counts of market manipulation after being convicted. The manipulation was based on creating a false or misleading appearance in the market place with regard to the shares of Tissue Therapies Ltd, a biological technology company. Mr. Tang used 11 separate accounts in his thirteen month manipulation. The court acknowledged the seriousness of the offence and entered a sentence of two years in prison on each count, to be served concurrently. The court further directed that Mr. Tang be released after 4 months after posting a recognizance of $5,000 and on condition of his good behavior for a period of three years.
Unlicensed advice: Gordon Mui Kwong Yin was sentenced to serve three months in prison for giving advice online regarding the purchase of futures without a license. Beginning in November 2009, and continuing for the next several months, Mr. Mui offered trading advice through a website. He received about $128,7000 in subscription fees from 113 clients. Previously, he pleaded guilty. The court also directed that he pay the investigative costs of the Securities and Futures Commission.
False statements: The SFC announced that former PMI Group Ltd. director Ivy Chan Shui Sheung had been acquitted of charges of furnishing false or misleading information to the Stock Exchange. The charges stem from a request to the company for information by the Exchange about a 139% increase in its share in late February 2008. The company reported that there were no events requiring disclosure. In fact the company had made an acquisition which should have been disclosed. The company pleaded guilty and was fined $60,000. The court found the director not guilty because she and the board relied on the secretary who stated that disclosure was not required. Accordingly, the required criminal intent was not present.
European Securities and Markets Authority
Accounting priorities: The ESMA published its financial statements’ enforcement priorities for 2013. Items of focus include: Impairment of non-financial assets; measurement and disclosure of post-employment benefit obligations; fair value measurement and disclosure; disclosures related to significant accounting policies, judgments and estimates; and measurement of financial instruments and disclosure of related risk.
These priorities were identified to ensure that the “IFRS recognition, measurement and disclosure principles are consistently applied across the EEA.” National authorities may also focus on other areas.
Remarks: Martin Wheatley, Chief Executive of the FCA, addressed the CFA European Investment Conference. His remarks focused on competing on integrity (here).