This Week In Securities Litigation (Week ending Oct. 28, 2016)
The Commission, along with the DOJ, filed a settled FCPA action against aircraft manufacturer Embraer. The action centered on bribes paid in multiple countries to facilitate the sale of aircraft.
The agency also brought an insider trading action against a lawyer and corporate director who traded in the shares of an acquisition target during the board meeting in which the proposed transaction was discussed. In addition, the SEC brought actions centered on the overbilling of advisory clients, acting as an unregistered broker, an offering fraud and an audit failure.
Remarks: Chair Mary Jo White delivered the keynote address at the Evolving Structure of the U.S. Treasury Market Second Annual Conference titled Prioritizing Regulatory Enhancements for the U.S. Treasury Market. Her remarks reviewed a new FINRA proposed rule regarding information requirements for market participants and trading platforms (here).
Remarks: Commissioner Michael S. Piwowar delivered remarks at the 2016 Conference on Auditing and Capital Markets. He discussed the need for high quality economic analysis as part of the regulatory process (here).
Rules: The Commission adopted final rules to facilitate intrastate and regional Securities offerings (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During the last week the SEC filed 3 civil injunctive actions and 4 administrative proceedings, excluding 12j and tag-along proceedings.
Overbilling: SEC v. Broidy, Civil Action No. 1:16-cv-05960 (E.D.N.Y. Filed Oct. 27, 2016) is an action which names as defendants investment adviser Broidy Wealth Advisors, LLC and its principle, Marc D. Broidy. Over a five year period beginning in early 2011 Defendants overbilled advisory clients by about $643,000. Mr. Broidy covered up the overbilling scheme by altering the management fees reported on Form 1099 issued by brokerage firms before sending them to clients. In addition, over a period of about one year beginning in April 2015 Mr. Broidy misappropriated about $865,318 from trusts for which he served as trustee. Finally, Mr. Brody failed to advise clients that he was a board member of certain private companies for which he solicited investments from firm clients. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 23679 (Oct. 27, 2016). A parallel criminal action was brought by the U.S. Attorney’s Office for the Eastern District of New York.
Audit failure: In the Matter of BioElectronics Corp., Adm. Proc. File No 3-17104 (Oct. 27, 2016) names as a Respondent, among others, Robert P. Bedwell, CPA, who served as the engagement partner on the audit of the financial statements of BioElectronics Corp. for 2009 that were filed with the Commission on Form 10-K. Those financial statements improperly recorded revenue from two “bill and hold” transactions. The Order alleged violations of Rule 102(e) of the Commission’s Rules of Practice. To resolve the matter Respondent consented to the entry of an order denying him the privilege of appearing and practicing before the Commission with a right to apply for reentry after two years.
Unregistered broker: In the Matter of Henning-Carey Proprietary Trading, LLC, Adm. Proc. File No. 3-17643 (Oct. 27, 2016) is a proceeding which names as a Respondent the firm, which engages in proprietary trading. From September 2009 through October 2011 the firm served as a market maker for Trading Platform, buying and selling U.S. treasury securities for its own account. The firm received valuable consideration from Trading Platform’s operators in exchange for its market making activities. The firm failed, however, to register as a government securities dealer resulting in violations of Exchange Act Section 15(a). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. The firm will also pay a penalty of $110,000.
Unregistered securities: In the Matter of Curt Kramer, Adm. Proc. File No. 3-17647 (Oct. 27, 2016) is an action which names as Respondents Mr. Kramer, the owner of Respondent Hope Capital, Inc. From December 2008 through May 2009 Respondents sold about 113.5 million shares of Spongetech Delivery Systems, Inc. The sales yielded profits of $525,603. The shares were not registered. The Order alleges violations of Securities Act Sections 5(a) and 5(c). To resolve the matter Respondents consented to the entry of cease and desist orders based on the Sections cited in the order. Respondents will pay, jointly and severally, disgorgement of $525,603 along with prejudgment interest. Mr. Kramer will also pay a penalty of $100,000.
Offering fraud: In the Matter of Navagate, Inc., Adm. Proc. File No. 3-16228 (Oct. 21, 2016). The proceeding names as Respondents the firm, a seller of computer software and its founder and CEO Gregory Rorke. Over a two year period beginning in late 2009 Respondents, along with their placement agent, Middlebury Securities and one of its principals, Gregory Osborn, sold about $3.2 million in notes, personally guaranteed by Mr. Rorke. He did not, however, have the assets to back up the personal guarantee. Rather, virtually all of the purposed $6 million in liquid assets supposedly pledged as support actually belonged solely to Mr. Rorke’s wife. Other assets backing the guarantee were overstated and Mr. Rorke had a $1 million federal tax liability. These facts were not disclosed. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Rorke is also permanently barred from serving as an officer or director of a public company. Mr. Rorke previously pleaded guilty in a parallel criminal action.
Insider trading: SEC v. Cope, Civil Action No. 3:16-cv-02764 (M.D. Tenn. Filed October 21, 2016). The action centers on the acquisition of Avenue Financial Holdings, Inc. by Pinnacle Financial Partners, Inc., announced on January 28, 2016 and closed on July 1, 2016. Defendant James Cope, a name partner in a Tennessee law firm, had served on the board for years. Pinnacle Financial is a bank holding company based in Nashville, Tennessee as is Avenue Financial. Pinnacle’s policies and procedures precluded directors and others from trading on material, non-public information. Avenue Financial had been discussed by the board as a potential acquisition target. On January 5, 2016 Pinnacle held its January Executive Committee meeting, attended by Mr. Cope and others. Pinnacle’s CFO, Harold Carpenter, planned an extensive discussion of the possible merger at the meeting. Materials on the proposal were distributed to Committee members prior to the meeting through a secure portal. During the two hour meeting details of the potential deal were reviewed. “Several” of the Committee members believed they were precluded from trading in Avenue Financial shares. During the meeting Mr. Cope began purchasing shares of Avenue Financial. Specifically, during the meeting he purchased 6,179 shares of Avenue Financial through his account at TD Ameritrade. As management moved the deal forward to conclusion he purchased additional shares. Following the deal announcement Mr. Cope had trading profits of $56,302. The complaint alleges violations of Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 23675 (October 21, 2016). The U.S. Attorney’s Office for the Middle District of Tennessee filed a parallel criminal action.
SEC v. Embraer, S.A., Civil Action No. 0:16-cv-62501 (S.D. Fla. Filed Oct. 24, 2016). Embraer is the world’s largest manufacturer of mid-sized commercial jets. Its North American Office is in Fort Lauderdale, Florida. The manufacture’s ADRs are listed on the NYSE. Beginning in August 2008, and continuing over the next three years, the firm paid bribes to government officials in the Dominican Republic, Saudi Arabia and Mozambique. The bribes, paid to facilitate aircraft sales, totaled over $83 million. Bribes were also paid in India.
In the Dominical Republic the firm paid about $3.52 million to an official of the government to obtain a defense contract valued at about $96.4 million. Company employees negotiated directly with representatives of the Dominican Air Force and, in particular, a colonel with close ties to the Secretary of the Air Force. It was agreed that the commission would be spread over three agents. Each had an agreement. No legitimate services were rendered under the agreements. The government approved the purchases but firm policy required approval from the legal department. To circumvent that requirement an arrangement was made with a fourth agent, another sham agreement was arranged, and eventually payment was made through New York with the assistance of a legal department official.
The firm made similar payments in Saudi Arabia beginning in 2009 to effectuate the sale of $93 million of aircraft. Arrangements were made to channel the payment through a South African company. The same legal department official involved in the Dominican Republic deal participated in the approval. By year end 2010 the deal was finalized and the payment made. The commission was falsely recorded as a sales commission.
In 2008 the aircraft manufacturer also negotiated a deal to sell two commercial aircraft to a state-owned commercial airline in Mozambique. The firm agreed to pay $400,0000 per aircraft to facilitate a sale. Those payments were booked as sales commissions.
Finally, the firm entered into a contract to sell three specialized military aircraft to the Indian Air Force for a total contract price of $208 million in 2008. Embraer paid an Indian national as a Consultant to assist with the deal. The fees were channeled through a UK firm since India law prohibited the use of commercial agents. Ultimately $5.76 million was approved by firm officials and paid through a New York bank to effectuate the deal.
Embraer resolved all charges with the DOJ, the SEC and the Brazilian and Saudi Arabian authorities. With the DOJ, the firm entered into a three year deferred prosecution agreement, made admissions and agreed to the imposition of a monitor. Embraer also agreed to pay a penalty of $107 million. The agreement reflects the cooperation of the firm following the receipt of an SEC subpoena and its incomplete remediation since not everyone involved was terminated. To resolve the SEC action, Embraer consented to the entry of an injunction based Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B), the Sections cited in its complaint. See Lit. Rel. No. 23675 (Oct. 21, 2016). The firm will also pay disgorgement of $83.8 million and $14.4 million in prejudgment interest. In addition, the agreement provides for a $20 million credit as to the disgorgement for payments made to the Brazilian authorities. The Brazilian authorities charged 11 individuals while Saudi Arabian authorities charged two individuals stemming from their involvement in the transactions.
Report: The Australian Securities and Investment Commission released a report on the charging of advice fees without providing advice by major financial institutions. The report details instance where customers were charged a fee to receive ongoing advice services but were not provided with the service (here).
Remarks: Hannah von Dadelszen, Joint Head of Fraud, Serious Fraud Office, delivered remarks at the TRACE Global Anti-Bribery In-House Network Conference on the SFO’s Current Direction and Enforcement Priorities. His remarks reviewed the current work of the office, its international aspects and the use of deferred prosecution agreements (here).
Program: Key Issues in SEC Enforcement, an ABA Webcast on Friday Oct. 28, 2016 (here).