This Week In Securities Litigation (Week ending September 28, 2018)
The Commission charged Tesla co-founder Elon Musk with fraud in a complaint filed this week. The complaint centers on the now infamous “funding secured” tweet regarding taking Tesla private, although the document also lays out the background to that action and subsequent activities. The filing follows a swift investigation, conducted in a matter of weeks. Currently the case is headed for litigation. While the DOJ requested documents from the company there is no indication about the status of the inquiry.
The Commission also filed two settled FCPA actions this week. One involved Brazilian oil and gas company Petrobras which also entered into a non-prosecution agreement with the DOJ. The other is a settled action the former CEO of Sciedad Quimica Y Minera De Chile, S.A.
Proposed rule amendments: The Commission proposed amendments to codify an existing temporary exemption for credit rating agencies relating to certain structured finance products as to the information provided and to harmonize the applicable rules (here).
Whistleblowers: The Commission awarded nearly $4 million to an overseas whistleblower whose tip resulted in opening an investigation that was successful due in part to the extensive assistance of the tipper.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 8 civil injunctive cases and 18 administrative proceedings, excluding 12j and tag-along proceedings.
False statement: SEC v. Musk, Civil Action No. 1:18-cv-8865 (S.D.N.Y. Filed Sept. 27, 2018) is an action which names as a defendant Elon Musk, the co-founder of Tesla, Inc. The action centers on a tweet by Mr. Musk made during the trading day on August 7, 2018 in which he stated “Am considering taking Tesla private at $420. Funding secured.” The statement was false and misleading, according to the complaint. Over the next three hours Mr. Musk is alleged to have made additional false statements on Twitter which include, according to the complaint, statements which said: “My hope is all current investors remain with Tesla even if we’re private . . Shareholders could either to [sic] sell at 420 or hold shares & go private . . . Investor support is confirmed. Only reason why this is not certain is that it’s contingent on shareholder vote.” In addition, the complaint details the statements made by Mr. Musk regarding short sellers, his pre-tweet discussing regarding taking the firm private, the reaction of the market to the August 7 statement and the reaction to his statements. The complaint alleges violations of Exchange Act section 10(b). The case is pending.
Offering fraud: SEC v. Atkinson, Civil Action No. 1:18-cv-23993 (S.D. Fla. Filed Sept. 27, 2018) names as defendants Timothy Atkinson, Jay Passerino, All In Publishing, LLC, William E. Barry, Berry Meadiaworks, LLC and Shmuel Pollen. Beginning in October 2013, and continuing for about the next three years, Defendants Jay Passerino and Timothy Atkinson, through their firm All In Publishing, conducted a number of marketing campaigns, soliciting investors to open and fund unregistered, off-exchange binary options trading accounts. Binary options are an instrument whose value is tied to that of another financial asset and which have been banned in some countries. The purchase of these instruments was promoted through videos and other presentations which were based on misrepresentations about the nature and risk of the investments. Over the period about 50,000 investors deposited funds totaling $12.5 million to fund binary option accounts. The complaint alleges violations of Securities Act sections 5 and 17(a) and Exchange Act sections 10(b) and 20(a). The case is pending. See also SEC v. Montano (M.D. Fla. Filed Sept. 27, 2018)(similar action against Ronald Montano, Travis Stephenson, Antonio Giacca and Michael Wright who are alleged to have participated in the scheme; the complaint allegs violations of Securities Act section 17(a) and Exchange Act section 10(b) and 20(a). This case is also pending); SEC v. Barrett (W.D. N.C. Filed Sept. 27, 2018)(similar action naming as Defendants Justin Barrett and Grayson Brookshire alleging violations of Securities Act sections 5 and 17(a) and Exchange Act section 10(b); the case is pending).
Unregistered securities/broker: SEC v. JPool Ltd., Civil Action No. 1:180-cv-00224 (D.C. Filed Sept. 27, 2018) is an action which names as defendants JPool, known as 1Broker, based in the Marshall Islands, and its owner, Patrick Brunner. Since 2012 the Defendants have offered and sold securities based swaps to U.S. investors which were not registered. Brokerage accounts could only be funded with Bitcoin. The firm calls the instruments s CDFs or Contracts for a Difference. Since they are tied to the value of underlying securities, market indices or other financial assets they are securities based swaps which must be registered with the Commission and transacted on a national securities exchange. Neither defendant was registered. The complaint alleges violations of Securities Act section 5(e) and Exchange Act sections 6(1) and 15(a)(1). The case is pending.
Offering fraud: SEC v. Bramlette, Civil Action No. 2:18-cv-00761 (D. Ut. Filed Sept. 26, 2018) names as defendants James Bramlette, The Perorus Group, LLC, Anthony Hartman, Private Placement Capital Notes II, LLC, Stone Mountain Equities, LLC, Travis Kozlowski, Entelecus Fund, LLC and Aaron Wernli. The individual Defendants are long time business associates. Beginning in January 2014 they solicited investors centered around the Melrose Resort, a property on Daufuskie Island, South Carolina. About $10.8 million was raised from 60 investors to manage the property through the sale of notes. In raising capital for the decrepit resort its financial condition was misrepresented. Investors were not told, for example, that in November 2013 the lender foreclosed on the property. Defendants engaged in a cover-up scheme to keep investors from learning the true financial condition of the property. The scheme included Ponzi like payments. A portion of the investor money was misappropriated. The complaint alleges violations of each subsection of Securities Act section 17(a) and Exchange Act section 10(b). The case is pending. See Lit. Rel. No. 24289 (Sept. 27, 2018).
Misappropriation: SEC v. Kandelapas, Civil Action No. 18-cv-02637 (N.D. Ill.) is a previously filed action in which the Court entered a final judgment against Defendant Andrew J. Kandelapas, the former CEO of Wellness Center USA, Inc. The judgment enjoined Defendant from future violations of Securities Act section 17(a) and Exchange Act sections 10(b) and 15(a). It also bars him from serving as an officer or director of a public company and from participating in penny stock offerings. The amount of disgorgement, prejudgment interest and any penalty will be determined by the Court. See Lit. Rel. No. 24290 (Sept. 27, 2018).
Impermissible cross-trades: In the Matter of Putnam Investment Manage, LLC, Adm. Proc. File No. 3-18844 (Sept. 27, 2018) is a proceeding which names as Respondents the registered investment adviser and Zachary Harrison, a portfolio manager and RMBS trader at the firm. Over a four year period, beginning in April 2011, the firm was an investment adviser to a number of registered investment companies and other clients. During the period the advisory accounts determined they needed to sell positions in non-agency residential mortgage-backed securities. Mr. Harrison viewed the securities as desirable. Accordingly, he arranged to effect trades on behalf of the funds by selling the securities at the bid and then having others repurchase them at a price that averaged between the highest current independent bid and the lowest. By doing this he favored the buyers over the sellers, although all were advisory clients. The firm did not implement policies to prevent unlawful cross trading. The Order alleges violations of Investment Company Act sections 17(a)(1) and (2) and Advisers Act sections 206(2), 206(4) and 207. The firm cooperated with the investigation and undertook remedial acts. To resolve the proceedings the firm consented to the entry of a cease and desist order based on each provision cited in the Order. Mr. Harrison consented to the entry of a similar order based on the provisions of the Investment Company Act but only section 206(2) of the Advisers Act. The firm will pay a penalty of $1 million while Mr. Harrison will pay $50,000.
Cyber-security: In the Matter of Voya Financial Advisors, Inc., Adm. Proc. File No. 3-18840 (Sept. 26, 2018) names as a Respondent the registered broker-dealer and investment adviser. During a four year period, beginning in 2013, the firm gave access to customer and advisory client information through a proprietary web portal to certain contractors. In April 2016 a person or persons impersonating those contractors contacted the firm’s technical support line and requested a reset of three representatives’ passwords for the portal. The passwords were reset. Three hours later the firm learned about the impersonators and the reset. While it took steps to prevent the intruders from obtaining passwords and gaining access to the portal over the next several days they did not prevent the intruders from gaining access. The firm also failed to terminate the access of the intruders. To the contrary, they obtained access to the usernames and passwords to log into the portal and gain access to at least 5,600 customers and obtain documents regarding at least one customer. There were no customer losses. The firm violated the Safeguards rule – -intended to insure security for customer records – because its policies and procedures were not reasonably designed. Specifically, the policies and procedures with respect to resetting the passwords and then terminating access were not reasonably designed. In addition, the firm violated the Identify Theft Red Flags rule which requires the development and implementation of a written program to detect, prevent and mitigate identity theft. Specifically, the program was not reasonably designed to detect red flags, respond appropriately and ensure that the program was updated periodically. The Order alleges violations of Rule 30(a) of Regulation S-P and Rule 201 of Regulation S-ID. The firm undertook to engage a consultant to review its policies and procedures. To resolve the matter the firm consented to the entry of a cease and desist order based on the provisions cited in the Order and a censure. It will also pay a penalty of $1 million.
Offering fraud: SEC v. Skelley, Civil Action No. 1:18-cv-8803 (S.D.N.Y. Filed Sept. 26, 2018) is an action which names as defendants William Skelley and Sohin Shah. Defendants co-founded Innovational Funding LLC in 2012 and are officers of the firm. The next year the firm launched an on-line real estate portal. Investors were solicited using PPMs which claimed that they could become equity or debt holders in real estate projects across the U.S. The solicitations took place from October 2013 through June 2016. Investors were told their funds would be used to build the business. About $3.39 million was raised from 47 investors in 17 states. Investors were required to be accredited. Beginning in December 2015 Defendants also issued to five investors promissory notes convertible to capital or common stock. The notes were issued in the principal amount of $187,5000 with a 2% rate. In fact Defendants misappropriated over $1.1 million of the investor funds. The complaint alleges violations of each subsection of Securities Act section 17(a) and Exchange Act sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 24288 (Sept. 26, 2018).
Custody rule: In the Matter of Hudson Housing Capital, LLC, Adm. Proc. File No. 3-18837 (Sept. 25, 2018) is an action against the registered investment adviser. Over a five year period, beginning in 2012, the adviser failed to distribute audited financial statements to 32 funds it advises in accord with the Custody Rule. The Order alleges violations of Advisers Act section 206(4) and the related rules. To resolve the proceedings 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 also agreed to pay a penalty of $65,000.
Unprofessional conduct/audit failure: In the Matter of Lichter, Yu and Associates, Inc., Adm. Proc. File No. 3-18838 (Sept. 25, 2018) names as Respondents the PCAOB registered audit firm and two of its owners, Lawrence Lichter and Peter Yu. The proceedings center on the FY 2015 audit of the financial statements of Code Rebel Corporation. Mr. Lichter was the engagement partner. Mr. Yu served as the engagement quality review partner. The financial statements represented that the firm had about $2.2 million in cash and cash equivalents, 77% of the firm’s current assets and about 80% of its cash and cash equivalents. In fact the funds had been misappropriated. In conducting the audit Respondents ignored a series of red flags to that effect. Those included that fact that: The money was not at an FCIC insured institution but supposedly at a family trust nominally managed by Jason Galanis, a person named in Commission enforcement actions and who had been indicted for securities fraud; the trust refused to return the money on request without 90 days notice; and the fact that Mr. Galanis supposedly had been named in an agreement that governed the trust—Code Rebel relationship. The Order alleges violations of Exchange Act sections 10A(a)(1) and 13(a) and Rule 13a-1 and Rule 2-02(b) of Regulation S-X. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections and rules cited in the Order. The individual Respondents are each denied the privilege of appearing and practicing before the Commission as an account with the right to apply for re-entry after five years.
Misappropriation: SEC v. Schmidt, Civil Action No. 18-cv-320 (S.D. Oh Filed Sept. 25, 2018) is an action which names as a Defendant John Schmidt, a registered representative at a brokerage firm. Over the years Mr. Schmidt built up a clientele. Some accounts suffered losses. Rather than tell those clients about the losses he sought to cover up the losses beginning in 2003 and continuing until 2017 by engaging in unauthorized transactions in other accounts and transferring the cash to the accounts with a short-fall. To facilitate the scheme he created false account and other documents. Over the period he misappropriated over $1.1 million. The complaint alleges violations of Exchange Act section 10(b) and Securities Act section 17(a). The case is pending. See Lit. Rel. No. 24287 (Sept. 25, 2018).
Pre-release ADRs: In the Matter of SG Americas Securities, LLC, Adm. Proc. File No. 3-18835 (Sept. 25, 2018) is a proceeding which names as a Respondent the registered broker-dealer which is a subsidiary of Society Generale S.A. It is the successor to Newedge S.A. This action centers on the failure of the firm to take reasonable steps to assure compliance with the requirements of pre-release ADR agreements. ADRs are backed by actual shares of the stock held at a depository. The purchaser of the ADR beneficially owns the shares. When new ARDs are issued a party, usually a broker, can obtain pre-release ADRs – that is, the ADR before the actual shares are deposited. In that instance a pre-release agreement is executed acknowledging the beneficial interest of the shareholder. Here, when obtaining pre-released ADRs from the Depositary and loaning them to customers or counterparties over a three year period beginning in June 2012 the firm failed to take reasonable steps to determine if the requisite number of shares was owned and custodied by the firm or its borrowers. Likewise, when the firm received pre-release ADRs over the same three year period it failed to take reasonable steps to assess if they were backed by ordinary shares. The firm also failed to implement reasonable procedures at its securities lending desk to assure compliance with the pre-release requirements. The order alleges violations of Securities Act section 17(a)(3). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the section cited in the order. Respondent also agreed to pay disgorgement of $486,672.14, prejudgment interest of $82,656.50 and a penalty of $250,000.
Kickbacks: SEC v. Rentzer, Civil Action No. 18-cv-14221 (D. N.J. Filed Sept. 24, 2018) is an action which names as a defendant Adam Rentzer, a stock trader who is also a former registered representative whose license has been suspended by the NYSE and several states. Beginning in 2013, and continuing through 2017, Mr. Rentzer entered into, and participated in, a quid pro quo relationship with his broker, Brian Hirsch first at one brokerage firm and then another. Under the arrangement Mr. Rentzer was permitted to participate in, or obtained increased allocations of, IPOs and other offerings. Defendant typically immediately sold his allocation and paid cash kickbacks to Mr. Hirsch. To further the scheme Mr. Hirsch made affirmative written representations to each brokerage firm stating he was not a party to a quid pro quo arrangement and had not received any prohibited gifts or cash. The scheme defrauded the two brokerage firms by circumventing their policies. Defendant made about $800,000 in trading profits. The complaint alleges violations of Exchange Act section 10(b). The case is pending. Previously, the Commission filed a similar action against Mr. Hirsch and another client. See Lit. Rel. No. 24286 (Sept. 24, 2018). See also U.S. v. Rentzer (S.D.N.Y.)(parallel criminal action in which Mr. Rentzer pleaded guilty to one count of violating the Travel Act based on the same facts; Mr. Hirsch previously pleaded guilty to the same charge and is scheduled to be sentenced on November 18, 2018).
SARs: In the Matter of TD Ameritrade, Inc., Adm. Proc. File No. 3-1829 (Sept. 24, 2018) is a proceeding which names the registered broker-dealer and investment adviser as a Respondent. Over a two year period, beginning in 2013, the firm terminated its business relationship with 111 independent investment advisers. Respondent concluded that the relationships presented unacceptable business, credit, operational, reputation, or regulatory risk to the firm or its customers. In some instances it filed SARs. In others it did not. The failure to file in certain instances resulted from a failure to consistently and appropriately refer terminated advisers to its AML department. The Order alleges violations of Exchange Act section 17(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited and to a censure. The firm will also pay a penalty of $500,000.
Internal controls: In the Matter of Primoris Services Corporation, Adm. Proc. File No. 3-18816 (Sept. 21, 2018). Primoris is a holding company that furnishes a wide range of construction, fabrication, maintenance and engineering services to utilities, municipalities and other firms. Much of its work is done on a percentage-of-completion basis. The firm identified this method of accounting as a significant accounting policy in its Form 10-K. Nevertheless, the company did not have written policies or procedures describing how contingencies should be estimated at the beginning of a project. It also did not have written policies directing how the in-progress adjustments should be made or specifying how the estimates should be adjusted as the project continued. Equally problematic was the firm’s failure to sufficiently document its process for evaluating risks contained in the initial estimate. The firm’s processes suffered from the same deficiency for in-progress adjustments – they were not adequately documented. These deficiencies resulted in difficulties. In March 2015 the firm learned that it had three accounting errors related to contingencies in one segment of its business. Those errors resulted in a failure to reduce contingent cost expectations and recognize revenue and profits in the appropriated quarter. Accordingly, the firm’s ability to make and keep accurate books and records regarding contingencies was impaired. Primoris conducted an internal investigation of its contingency accounting practices in 2014. A number of emails were discovered involving division executives, project controls managers and others. Those emails referenced “cushion,” “cookie jars,” and “sandbagging” regarding contingencies for projects in the division. In assessing these issues the firm evaluated the specific errors but did not consider the potential for error or the overall environment. Here Primoris failed to comply with section 13(b)(2) and to maintain adequate documentation. The firm failed to properly address the question of material weakness and the prospect of a reasonable possibility of a material misstatement. The firm also failed to maintain the proper documentation. The Order alleges violations of Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm will pay a penalty of $200,000.
False financial metric: In the Matter of Heartland Payment Systems, LLC, Adm. Proc. File No 3-18819 (Sept. 21, 2018). Heartland Payment Systems, founded by Robert Carr, also a Respondent, sells credit card processing services to retail merchants. An internal sales force conducts sales. Those sales persons are compensated with bonuses for newly signed merchants. They also receive residual payments based on actual merchant profitability on a monthly basis. The signing bonuses are based on a metric Heartland calls “new gross margin installed.” The firm defines this metric as “the expected annual gross profit from a merchant contract after deducting processing and servicing costs associated with that revenue.” The aggregate of the new gross margin installed metrics paid to sales persons was referred to by the company and Mr. Carr as NMI. That metric was viewed as being a forward looking growth indicator because of its composition – new business and new sales. It was frequently cited in quarterly earnings calls by the firm for that reason. For example, NMI was cited in the earnings releases and/or calls for the third quarter of 2013, the fourth quarter of 2014 and the second quarter of 2015. Analysts such as Wells Fargo Securities cited the metric when discussing trends at the company while others referenced it when assessing investment strategies. Beginning in 2013 however, the firm altered the metric without disclosing that fact. This materially altered it. The additions to NMI made it appear that the forward looking growth of the firm was materially accelerating at a more rapid rate than the original metric would have reflected. The order alleges violations of Securities Act sections 17(a)(2) and 17(a)(3). To resolve the matter the firm consented to the entry of a cease and desist order based on Securities Act sections 17(a)(2) and 17(a)(3) while Mr. Car consented to a similar order based only on subsection 17(a)(2). The firm will pay a penalty of $2.16 million while Mr. Car will pay a penalty of $120,000. In determining to accept the offer of settlement the Commission considered the fact that Heartland merged with Global Payments in 2016 and that firm meaningfully cooperated with the staff during the investigation.
Conflicts: In the Matter of Ophrys, LLC, Adm. Proc. File No. 3-18815 (Sept. 21, 2018). Ophrys is a registered investment adviser. The firm manages 32 funds of regulated assets. Its primary business is advising funds that invest in portfolios of defaulted consumer receivables. In this regard in manages Candica, LLC, Lutea, LLC, Oak Harbor Capital V, LLC or OHCV, Oak Harbor Capital X, LLC or OHCX, Pallida, LLC and Vanda, LLC. Since its clients are not typically qualified debt buyers for purposes of acquiring portfolios of defaulted consumer debt, the adviser, in some instances, acquires the portfolio directly or through a subsidiary and later makes the debt available to one of the managed funds. As manager the firm is paid a management fee and an additional fee when it makes efforts to collect on receivables. It also typically is paid a carried interest equal to a percentage of all collections on the receivables net of expenses. In three recent transactions the firm failed to identify the capacity in which it was acting in accord with the provisions of the Advisers Act. The first transaction took place in 2012. There Candice owned portfolios of consumer receivables. The portfolios were acquired with a loan secured by an interest in the receivables. Under the terms of the arrangement Ophrys would obtain a fee based on the percentage of the collections in addition to the advisory fee. In December 2012 Ophrys caused Candica to sell a portion of the portfolio to Vanda, financed in part with capital contributions from OHCV. Ophrys was paid a fee related to the transfer of the interest. This constituted an agency transaction under Advisers Act section 206(3) since Ophrys acted as a broker. Nevertheless, the adviser failed to provide adequate written notice that it was acting as an agent on the transaction or to obtain consent. Respondent entered into a similar arrangement in November 2013. There Ophrys caused OHCX to invest in Candica by purchasing securities issued by that firm. The deal was funded in part by contributions from OHCX. Again, this was an agency transaction because Respondent acted as a broker on behalf of Candica. Yet Respondent failed to obtain OHCX’s consent to the transaction. In a third transaction Respondent failed to provide notice that it was acting as a principal. In December 2014 Ophrys acquired indirectly consumer receivables from Lutea. The securities were then sold to Pallida, another advisory client. The transaction was funded by a loan from OHCX to Pallida and secured by a security interest. Since Respondent was the adviser of Pallida and OHCX it was required to provide written disclosure of its role as principal and obtain consent. The adviser did not comply with this requirement. The Order alleges violations of Adviser Act section 206(3). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. In addition, Ophrys will pay a penalty of $500,000.
Unregistered broker/securities/EB-5: In the Matter of CMB Export, LLC, Adm. Proc. File No. 3-18825 (Sept. 21, 2018) names as Respondents the firm, a federally designated regional center for the EB-5 program, whose investment vehicles are limited partnership interests; the firm also serves as the general partner for 37 affiliated limited partnerships named as Respondents. Patrick Hogan, the CEO and Manager of CMB Export, is named as a Respondent. Over a four year period beginning in 2011, CMB Export and Mr. Hogan entered into agreements with and paid unregistered brokers to market, the limited partnership interests in connection with, the EB-5 program which offers a path to citizenship to foreign nationals who invest a designated amount of capital in creating a certain number of jobs in the U.S. During the same period certain of the limited partnerships affiliated with CMB Export offered and sold limited partnership interests in connection with the program. Those who solicited investors were paid transaction based compensation but were not registered brokers. The securities offered were not registered with the Commission or exempt. The Order alleges violations of Securities Act sections 5(a) and 5(c) and Exchange Act section 15(a)(1). Respondents engaged in meaningful remediation and cooperation with the investigation, creating a compliance program to ensure compliance with the securities laws in the future. To resolve the proceedings CMB Export and Mr. Hogan consented to the entry of a cease and desist order based on Exchange Act section 15(a) while the limited partnerships affiliated with CMB Export consented to the entry of a similar order but based on the Securities Act sections cited in the Order. CMB Export will pay a penalty of $5.15 million. Mr. Hogan will pay a penalty of $515,000. Each of the 37 CMB limited partnerships will pay a penalty of $160,000 for a total of $11.585 million.
Failure to file reviewed interim financial statements: In the Matter of Cardiff Lexington Corporation, Adm. Proc. File No. 3-18820 (Sept. 21, 2018) is one of five actions brought by the Commission against issuers who failed to file interim financial statements that had been reviewed. Each Order alleges violations of Exchange Act sections 13(a), Rule 13a-13 and Rule 8-03, Regulation S-X. To resolve the proceedings each issuer consented to the entry of a cease and desist order based on the cited sections. Each also agreed to pay a penalty as follows: Cardiff Lexington Corporation, $25,000; Cool Technologies Inc., $75,000; Dasan Zhone Solutions Inc., $50,000; First Hartford Corporation, $50,000; Infrax Systems Inc., $50,000. (The amount of the penalty is a function of the number of incorrect interim filings made with 1 yielding a $25,000 penalty).
Manipulation: SEC v. Galanis, Civil Action No. 1:15-cv-07547 (S.D.N.Y.) is a previously filed action which named as defendants Jason Galanis, John Galanis, Derek Galanis, Jared Galanis, Gary Hirst and Gavin Hamels. Defendants are alleged to have participated in a scheme to issue $72 million of unregistered shares of an issuer to a Galanis family friend in Kosovo and then bribe an investment adviser to purchase the shares for clients. The scheme yielded $20 million in illegal profits. Each defendant previously either pleaded or been found guilty in parallel criminal actions. Each has now settled with the Commission as follows: Derek Galanis, consent to the entry of a permanent injunction based on Securities Act sections 5 and 17(a) and Exchange Act section 10(b) and the payment of disgorgement which is deemed satisfied by the restitution order in the parallel criminal case; John Galanis, on essentially the same terms; Jared Galanis consented to the entry of a permanent injunction based on Securities Act section 5 and the payment of disgorgement of $207,500 plus prejudgment interest of $37,699; Mr. Hirst consented to the entry of a permanent injunction based on Securities Act section 5 and Exchange Act section 10(b) and the entry of a bar prohibiting him from serving as an officer or director of an issuer; and Mr. Hamels consented to the entry of a permanent injunction based on Exchange Act sections 9(a)(1) and 10(b) and Advisers Act sections 206(1) and 206(2). An association bar was also imposed in an administrative proceeding. See Lit. Rel. No. 24283 (Sept. 21, 2018).
Manipulation: SEC v. Hope Advisors, LLC, Civil Action No. 1:16-cv-1752 (N.D. Ga.) is a previously filed action against the firm and its principal, Karen Burton. It was based on a scheme in which Defendants managed two hedge funds and claimed that their only compensation was an incentive fee based on profits earned. Defendants engaged in a number of trades that were designed to inflate the profits and postpone losses. As a result over $50 million in losses in the two funds were avoided while Defendants earned millions of dollars in fees. The Court entered final judgments by consent against the firm and Ms. Burton prohibiting future violations of Advisers Act sections 206(1), 206(2) and 206(4). In addition, Defendants were ordered to pay disgorgement of $1,237,235 and a penalty of $250,000. See Lit. Rel. No. 24285 (Sept. 21, 2018).
Spoofing: In the Matter of Mizuho Bank, Ltd., CFTC Docket No. 18-38 (Sept. 21, 2018) is an action against the internal bank charging it with spoofing on the CME and CBOT. Specifically, one of the firm’s traders repeatedly placed orders with the intent to cancel them on each exchange for futures contracts based on US. Treasury notes and Eurodollars. The trades were placed on a trading platform through its Singapore office. The firm agreed to the entry of a cease and desist order based on the CEA spoofing statute and to the payment of a $250,000 penalty.
Offering fraud: U.S. v. Scronic, No. 7:18-cr-00043 (S.D.N.Y.) is an action in which former hedge fund manager Michael Scronic was sentenced to serve 96 months in prison, serve three years of supervised release and pay restitution of $22,026,427. The charges were based on the fact that Defendant raised over $22 million from 45 investors in Scronic Macro fund over a seven year period beginning in 2020. While he told investors his fund was profitable, in reality it lost money every quarter but one. Defendant also misappropriated portions of the investor funds. See also SEC v. Sonic, Civil Action No. :17-cv-5625 (S.D.N.Y.).
Financial fraud: U.S. v. DiMaria, No. 1:17-cr-20898 (S.D.Fla.) is an action against Edward DiMaria, the former CFO of publically traded Bankrate Inc. He was sentenced this week to serve 10 years in prison based on a complex accounting fraud. Previously, Mr. DiMaria pleaded guilty to one count of conspiracy to make false statements to a public company’s accountants, falsify the firm’s books and commit securities fraud and one count of conspiracy to make false statements to the SEC. Mr. DiMaria admitted that between 2010 and 2014 he engaged in a complex financial fraud to falsify the books of the company by maintaining a cookie jar reserve, improperly classifying certain expenses and lying to the SEC. The scheme caused more than $25 million in losses for shareholders. The sentence includes a term of three years of supervised release and the payment of restitution in the amount of $21,234,214. Previously, another bank official pleaded guilty in connection with the scheme.
In the Matter of Petroleo Brasileiro S.A. – Petrobras, Adm. Proc. File No. 3-18843 (Sept. 27, 2018) is an action which names as a Respondent the Brazilian government controlled oil and gas firm. Over a nine year period beginning in 2003 the firm engaged in a large expansion of the infrastructure for producing oil and gas. During the period a number of former senior firm executives and others conspired to inflate the costs of the projects by billions of dollars. In return the companies involved in those projects paid huge kickbacks that typically represented 1% to 3% of the transaction. The funds went to the former executives. The overcharges resulted in false books and records being filed with the Commission – Petrobras’ ADRs were traded in the U.S. The firm failed to detect the fraud. The Order alleges violations of Securities Act sections 17(a)(2) and (3) and Exchange Act sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay disgorgement of $711,000,000, prejudgment interest of $222,473,797. That obligation is reduced and deemed satisfied by the amount of any payment to the Settlement Fund for a related class action. The firm will also pay a penalty within one year of the date of the Order in the amount of $853,200,000 in accord with the related DOJ non-prosecution agreement. Respondent also receives a credit up to $682,560,000 for any payment made to the Brazilian authorities in accord with the DOJ agreement and $85,320,000 of any payment made in connection with paragraph 43 of the DOJ agreement.
The firm entered into a non-prosecution agreement with the DOJ, agreeing to pay a criminal penalty of $853.2 million. That reflects a 25% discount off the low end of the applicable Sentencing Guidelines fine range for the firm’s full cooperation and remediation. The firm did not self-report. There were unique factors here, however, including that fact that the company is resolving matters with the Brazilian authorities and that it was defrauded by its former employees thus harming the shareholders.
In the Matter of Patricio Contesse Gonzalez, Adm. Proc. File No. 3-18839 (Sept. 25, 2018) names as Respondent the CEO of Sciedad Quimica Y Minera De Chile, S.A. or SQM, a multinational mining and chemical firm based in Santiago, Chile. Its ADRs are listed on the NYSE. Between 2008 and 2015, according to the SEC’s Order, the firm made about $14.75 million in improper payments to Chilean politicians, political candidates and individuals connected to them. The payments were made from a discretionary account made available to the office of the CEO by the firm. Generally, the payments were based on fictitious documents from persons associated with those who received them. Respondent personally caused the fictitious documents to be created and thus the firm’s inaccurate books and records. The company did not have adequate internal controls, according to the Order. As CEO Respondent was responsible for the deficiencies, executed false certifications and failed to disclose the improper payments to the firm’s auditors. The Order alleges violations of sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the matter Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to the payment of a penalty in the amount of $125,000.
See also In the Matter of Sciedad Quimica Y Minera De Chile, S.A., Adm. Proc. File No. 3-17774 (January 13, 2017). The firm resolved FCPA charges based on the facts above, consenting to the entry of a cease and desist order based on Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B). The firm also agreed to implement certain undertakings which, among other things, require the retention of an independent monitor, and to pay a penalty in the amount of $15 million. Criminal FCPA charges were resolved with the DOJ. The firm entered into a deferred prosecution agreement. The underlying complaint alleges one count of failing to implement internal controls and one count of falsifying its books and records. The agreement is based on the admissions of the company. The firm will pay a criminal penalty of $15,487,500. A monitor will be appointed, although the firm took remedial steps, in view of the size of the company and its risk profile. The monitor will be in place for two years.