The Supreme Court heard argument this week on a case
which may have a significant impact on the SEC's enforcement program. It
focuses on when the five year statute of limitations begins regarding the
imposition of a penalty. The Commission also brought two new market crisis
cases, one against three former bank executives and the other against two
auditors of another financial institution.
Finally, the Director of the SEC's Enforcement Division
confirmed recent rumors, announcing that he will leave the agency shortly. Mr.
Khuzahmi has not disclosed his future plans.
Resignation of Enforcement Director: SEC
Enforcement Director Robert Khuzami officially resigned yesterday, a move which
has been widely rumored in the press in recent weeks. Mr. Khuzami served as
Enforcement Director for nearly four years, compiling a record of leadership
and achievement beginning with the largest reorganization of the Enforcement
Division in history and culminating in the filing of record setting numbers of
actions over the last two years.
Statute of limitations: Gabelli v. SEC, No.
11-1274 is an action in which the Court heard argument on the question of when
the five year statute of limitations begins for imposing a penalty in
government actions under Section 2442 of Title 28. The arguments centered on
the Petitioner - defendant's claim that since the statute uses the word
"accrue" in reference to the commencement of the time clock, the five years
begins when there is a cause of action. The Commission countered, claiming that
the clock begins for a cause of action for fraud when it is discovered or
reasonably could have been discovered. Much of the questioning from the Court
focused on the fact that a discovery rule has never been invoked in a criminal
case - and this is a government enforcement action seeking to impose a penalty
- and the fact that until recently such rule has not been advocated by the
government in the 200 year history of the statute. A decision is expected later
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 2 civil injunctive actions and 1 administrative
proceeding (excluding tag-along-actions and 12(j) actions).
Misrepresentations: SEC v. Kapur, Civil
Action No. 11-CIV-8094 (S.D.N.Y. Filed Nov. 10, 2011) is an action against fund
manager Chetan Kupur and his firm, ThinkStrategy Capital Management. This week
the court entered orders in the partially settled action directing that the
defendants jointly and severally pay disgorgement of $3,988,195.59 and civil
penalties of $1 million. The complaint alleged that over a period of years the
defendants misrepresented the performance of two funds they managed.
Market crisis: SEC v. Woodard, Civil
Action No. 2:13cv16 (E.D. Va. Filed Jan. 9, 2013) is an action against
Commonwealth Bankshares Board Chairman, President and CEO Edward Woodard, Jr.,
Secretary and CFO Cynthia Sabol, and E.V.P. and Commercial Loan officer Stephen
Fields. The action centers on a market crisis related financial fraud. From its
inception through about 2006 the bank grew and was largely profitable.
Implementing a growth plan, it expanded into construction and development loans
as the market for such projects in its local area deteriorated. Nevertheless,
during much of 2008, 2009 and into 2010 Commonwealth and its executives touted
the quality of its assets, underwriting and credit monitoring processes. This
was reiterated in filings with the Commission. Those claims were false,
according to the Commission's complaint. The picture of financial success
reflected in statements and filings was achieved primarily by materially
understating on its balance sheet the allowance for loan and lease losses or
the ALLL and, at the same time, materially underreporting non-performing loans
and its other real estate owned or OREO. Beginning in 2008 the bank understated
its ALLL by about 17% to 25% with a corresponding understatement to its
reported loss before taxes of about 64%. Likewise the bank understated its OREO
in two quarters by about 19% to 20% with a corresponding understatement of its
reported pre-tax loss in the first quarter of 2010 of about 35% and an
underreporting of its total non-performing loans throughout the entire period
of at least 30%. The complaint alleges violations of Securities Act Section
17(a) and Exchange Act Sections 10(b), 13(a) and 13(b)(5). The case is in
litigation. See also Lit. Rel. No. 3437 (Jan. 9, 2013).
Audit failure: In the Matter of John J.
Aesoph, CPA, Adm. Proc. File No. 3-15168 (Jan. 9, 2013) is
a proceeding against KPMG audit partner John Aesoph and senior manager Darren
Bennett. Respondents audited TierOne Bank, the executives of which are the
subject of a prior Commission enforcement action. At year end 2008 Respondents
identified as an area of high risk for the audit TierOne's loan losses.
Nevertheless, when auditing the allowance for loan and lease losses or the
ALLL, the auditors failed to gather sufficient competent evidential matter with
regard to the valuations assigned by management. Many of the loans were valued
with reference to their underlying collateral. Respondents largely accepted the
claims of management with respect to the value of that collateral despite the
fact that they were often based on stale appraisals. The auditors also failed
to adequately test the controls over the management valuation process. As a
result the Order alleges a failure to comply with key PCAOB standards and
improper professional conduct in violation of Rule 102(e)(1)(ii). The
proceeding will be set for hearing.
Financial fraud: SEC v. Spongetech Delivery
Systems, Inc., Civil Action No. 10-cv-2031 (E.D.N.Y. Filed
May 5, 2010) is a financial fraud action in which the Commission settled with
two principles of the company, CEO Michael Metter and CFO Steven Moskowitz. The
complaint centered on claims that the two officers, along with others,
essentially conducted a pump and dump operation with respect to the shares of
their now bankrupt company. Each former officer consented to the entry of a
permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a) and
Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 15(d). Under
the orders entered by the Court each man will also be barred from serving as an
officer or director of a public company and from engaging in any penny stock
offering. The Court will determine the amount of the disgorgement and penalty
to be paid by each defendant at a later date. In the parallel criminal case Mr.
Moskowitz pleaded guilty to securities fraud. Charges are pending against Mr.
Metter. See also Lit. Rel. No. 22586 (Jan. 4, 2013).
Investment fraud: SEC v. Nekekim Corporation,
Case No. 1:13-cv-00010 (E.D. Calif. Filed Jan. 3, 2013). The complaint claims
that Nekekim and its CEO, president and director, Kenneth W. Carlton, defrauded
investors in the U.S. and other countries over an eleven year period beginning
in 2001 by selling them interests in a gold mine based on misrepresentations.
Investors were told that the mine had a special "complex ore" at its Nevada
site which is worth at least $1.7 billion, according to an analysis made by a
physicist. In fact, the "physicist" had no scientific training, according to
the SEC's complaint, and utilized unconventional methods. Investors were not
told that the labs' reliability had been questioned by geologists and a
government study. Likewise, they were not told that other firms suggested
Nekekim's mine actually had little gold. The Commission's complaint alleges
violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act
Section 10(b). Both defendants settled with the Commission, consenting to the
entry of permanent injunctions prohibiting future violations of the Sections
cited in the complaint. The company also agreed to disclose these sanctions in
any offering of securities made in the next three years. Mr. Carlton agreed, in
addition to the injunction, to pay a $50,000 penalty and to an order
prohibiting him from selling securities for Nekekim or managing the company.
regulator issued a request for voluntary interim Form for Funding Portals for
prospective crowdfunding portals under the JOBS Act. Currently FINRA and the
SEC are engaging in an open dialogue regarding the implementation of the
corwdfunding provisions of the Act.
Year in review: The
regulator issued a release reviewing its activities over the last year,
highlighting its referrals of high profile insider trading actions as and
actions brought involving complex products, conflicts and disclosure issues and
disciplinary proceedings. The release also discussed FINRA's investor
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
For more information about LexisNexis
products and solutions connect with us through our corporate site.