This Week In Securities Litigation (Week ending September 7, 2018)
In a holiday shortened week the Commission continued to award whistleblowers, paying a total of $54 million to two individuals. One of the awards was for $39 million, the second largest in the history of the program.
The agency also continued to focus on retail investors. For example, an action was brought against a large investment adviser for false advertising – the materials for a new product failed to state that the results were based at least in part from back-testing. When actual results were tabulated from certain models they were significantly different than those in the advertisements.
Finally, the Commission filed another settled FCPA action. The case centered on a French pharmaceutical firm and three of its subsidiaries which operated in a number of jurisdictions. Each of the subsidiaries was involved in a years long bribery scheme using a variety of techniques.
Whistleblowers: The Commission awarded two whistleblowers a total of $54 million. One award was for $39 million, the second largest in the history of the program, while another was for $15 million.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 3 administrative proceedings, excluding 12j and tag-along proceedings.
EB-5 offering fraud: SEC v. Burstein, Civil Action No. 18-cv-23636 (S.D. Fla. Filed Sept. 6, 2018) is an action which names as a defendant Joel Burstein, formerly a registered representative at Raymond James brokerage firm. From the inception of the offering fraud involving Jay Peak ski resort in 2008, Mr. Berstein is alleged to have aided and abetted the fraud. The underlying fraud was based on misappropriating over $50 million in investor funds of the $350 million raised in an EB-5 offering. Much of the investor money flowed through accounts at Raymond James. Mr. Burstein is alleged to have substantially aided the fraud by facilitating the misappropriation of over $21 million of investor money used to acquire ownership of the Jay Peak resort. After that deal he helped mask the misappropriation of the investor funds. The complaint alleges violations of Securities Act section 17(a) and Exchange Act section 10(b). Mr. Burstein resolved the action, consenting to the entry of a permanent injunction based on the sections cited in the complaint and agreed to pay a penalty of $80 million. He also consented to the entry of an associational bar regarding the securities business. See Lit. Rel. No. 24259 (Sept. 6, 2018).
Financial fraud: In the Matter of Mark R. Graham, Adm. Proc. File No. 33218 (Sept. 6, 2018) is a proceeding which names as Respondents: Mr. Graham, President and owner of the two entity Respondents; Blue Capital Management, Inc., a registered investment adviser and a collateral manager; and Blue Alternative Asset Management L.L.C., a registered investment adviser that withdrew its registration in March 2015 but continued to render various services to Blue Capital Management and act as a collateral manager for certain series of the Cygnet 001 Master Trust. Over a two year period beginning in September 2015 various client accounts had declining assets values. Rather than disclose this fact Respondents took steps to conceal it which included making false statements and improperly redeeming investments from private funds they controlled. This created large losses for one trust client, brining the insurance company beneficiary of the trust to near collapse. Respondents also failed to disclose certain conflicts and to reasonably implement compliance policies and procedures. The Order alleges violations of Adviser Act sections 206(1), 206(2), 206(4) and 207. To resolve the proceedings Mr. Graham and Blue Capital Management each consented to the entry of a cease and desist order based on the sections cited in the Order. Blue Alternative Asset also consented to the entry of a case and desist order based on each section cited except 207. Mr. Graham is barred from the industry with a right to re-apply after 3 years while each entity is censured. Respondents will jointly and severally pay disgorgement of $1,853,988, prejudgment interest of $73,559 and a penalty of $600,000.
Manipulation: SEC v. In Ovations Holdings, Civil Action No. 18-cv-05026 (E.D.N.Y. Filed Sept. 5, 2018) is an action which names as defendants the firm, a microcap issuer that has claimed to be in different lines of business over the years, and Mark Goldberg, a former registered representative who has served as the firm’s CEO. Beginning in 2014, and continuing for about one year ,the firm issued false press releases. For example, on release claimed that the firm was obtaining the exclusive rights to market a sophisticated medical device. The claim was false. The complaint alleges violations of Exchange Act section 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action. See Lit. Rel. No. 24260 (Sept. 5, 2018).
Offering fraud: SEC v. Cone, Civil Action 3:18-cv-2349 (N.D. Tx. Filed Sept. 5, 2018) is an action which names as defendants Michael Cone and Greenview Investment Partners, L.P. Mr. Cohen, who previously pleaded guilty to felony charges and thus used an allies, controlled the firm. Over a period of several months, beginning in August 2017, Defendants raised over $3.3 million from investors in 26 states marketing unregistered shares in the firm which supposedly was in a cannabis related business. Defendants claimed that the firm had a management team with a 10 year track record, that it had invested profitably over $100 million and that investors would receive huge returns. The claims were false. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act section 10(b). The case is pending.
Offering fraud: SEC v. Goldman, Civil Action No. 2:18-cv-13550 (D.N.J. Filed Sept. 5, 2018) is an action which names as defendants Jeffrey Goldman and Christopher Eikenberry, each of whom has held multiple securities licenses over the years. The action centers on efforts to establish and operate the so-called Nonko Trading operation – an off-shore broker-dealer that was not register with the Commission and which is the subject of a partially settled enforcement action. Between 2011 and 2013 Defendants participated in a scheme which promised day traders generous terms and leverage but which in really did not permit them to actually trade. Rather, the trades were simulated with the operators pocketing most of the investor cash – essentially a variation of a Ponzi scheme. The complaint alleges violations of Securities Act section 17(a) and Exchange Act sections 10(b) and 15(a). The case is pending. The U.S. Attorney’s Office for the District of New Jersey announced parallel criminal proceedings.
Financial fraud: SEC v. Tangoe, Civil Action No. 3:18-cv-01479 (D.Ct. Filed Sept. 4, 2018) is an action which names as defendants the firm, formerly a public company that furnished telecommunications expense management services; Albert Subbloie, the former CEO; Gary Martino, the former CFO; Thomas Beach, the former v.p. of finance; and Donald Farias, the former senior v.p. of expense management operations. Over a two year period beginning in 2013 the firm, along with the named individual defendants, overstated revenue by about $40 million of $566 million during the period. This resulted from a variety of techniques which included improper revenue recognition, improperly recording a loan as revenue, recording revenue in the wrong period and not properly accounting for bad debt reserves. A restatement resulted. 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) & (B), 13(b)(5), 13b2-2 and 13a-14. The company and Messrs. Subbloie, Martino and Beach each agreed to settle the action and to pay a penalty in the amount of, respectively, $1.5 million, $100,000, $50,000, and $20,000. See Lit. Rel. No. 24255 (Sept. 4, 2018).
Advertising: In the Matter of Massachusetts Financial Services Company, Adm. Proc. File No. 318704 (August 31, 2018). Respondent has been a Commission registered adviser since 1982. In 2000 the advisory established a quantitative-based research department. Blended research strategies were subsequently developed. Those involve making investment decisions using both fundamental and quantitative research ratings by combining or blending portfolios of each type together coupled with an optimization process along with risk and other portfolio constraints to create a blended stock score. In 2003 the firm created an analysis internally known as “research proof.” It calculated annualized returns from February 1995 — the earliest point for which the firm had stored fundamental ratings –for six hypothetical baskets of stocks. In 2006 MFS began using the research proof analysis in advertisements. The charts compared annualized returns from February 1995 through the date of publication for research proof’s hypothetical baskets. The charts showed that the hypothetical portfolios of “buy” stocks at the fundamental quant intersection performed better than either the hypothetical portfolio stocks rated “buy” by the firm’s quantitative models or the hypothetical portfolio of stocks rated “buy” by the adviser’s fundamental research. The same was true on the sell side. Stated differently, the charts illustrated the point that over time blended stock ratings provided better return potential than either fundamental or quantitative ratings alone. What the charts did not state is that portions of the results were from back-testing and that if that were excluded the results would be significantly different. The adviser did not have policies and procedures designed to prevent inaccurate statements about the research proof chart. While certain firm personnel knew or understood some of the quantitative ratings were back-tested, others did not. Different groups of compliance personnel were used to review the blended research advertisements prepared for different audiences. That contributed to the advertisements describing the ratings in different terms. Accordingly, the firm failed to adopt and implement the appropriate policies and procedures. The Order alleges violations of Advisers Act sections 206(2) and 206(4). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. The adviser will also pay a penalty of $1.9 million.
In the Matter of Sarnofi, Adm. Proc. File No. 3-18708 (Sept. 4, 2018) names as a Respondent the French based pharmaceutical firm whose shares are registered with the Commission. From 2011 through 2015 representatives of the firm’s subsidiaries in three segments of the world furnished items value to officials in a number of countries to influence them and increase sales of Sarnofi products. The three subsidiaries involved are: Sanofi-Aventis Kazakhstan LLP, a firm organized in Kazakhstan; Sanofi-Aventis Liban S.A.L., a firm organized in Lebanon; and Sanofi Aventis Gulf FZE, a firm organized in the UAE. The scheme in which each subsidiary participated differed but all were predicated on inadequate internal controls.
First, in Kazakhstan from 2007 to 2011 senior managers of the subsidiary participated in a scheme to bribe foreign officials to influence the award of tenders at public institutions. The payments were made through a multi-step process in which the funds came from various arrangements involving several distributors who colluded with the senior managers to kick back funds to firm employees in Kazakhstan. Those funds were then used to pay bribes.
Second, in Levant (an area defined to include Jordan, Lebanon, Syria and the region of Palestine) the employees and agents of the subsidiary engaged in a series of schemes to pay bribes to foreign officials to increase sales. The schemes, conducted from 2011 to 2013, included sponsorships, gifts, donations, product samples, consulting arrangements and similar matters.
Third, in the Gulf (defined as including Bahrain, Kuwait, Qatar, Yemen, Oman and the UAE) through the local subsidiary sales managers and medical representatives of primary care business units engaged in a long-standing scheme to submit false travel and entertainment reimbursement claims. The illicit proceeds were distributed to health care professionals to increase product distribution.
The firm undertook a series of remedial steps although it did not self-report. Those included furnishing the staff with regular briefings and cooperation and a series of remedial steps. The company also agreed to undertakings which include continued cooperation, preparing a report on its improved controls, policies and procedures and conducting follow-up reviews.
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 company also agreed to pay disgorgement in the amount of $17,531,666, prejudgment interest of $2,674,479 and a penalty of $5 million.
Remarks: Charles Randell, Chair, Financial Conduct Authority, delivered remarks at the ICAEW Canary Warf Members’ Club (Sept. 6, 2018) titled “Ten Years After Lehman: How Accountants Can Make Finance Safer.” His remarks focused on the use of financial statements and the quality of those statements as the key building block to effective prudential regulation of firms (here).
Release: ESMA, the European Securities and Markets Authority, cautioned against new risks of high volatility in its latest Trends, Risks and Vulnerabilities Report. ESMA also re-iterated its concerns about cyber risk and Brexit risks for business operations.