While the ink is drying on Dodd-Frank, Congress began
considering repealing at least one section which appears to have given the
Commission the authority to withhold a significant amount of material from FOIA
requests and perhaps other demands for documents. SEC enforcement settled one
of its significant market crisis cases, while bringing others centered on
financial fraud, insider trading and the FCPA. At the same time, DOJ continued
to target individuals in FCPA cases for which the length of sentences continue
to increase.
Market reform
Dodd-Frank: H.R. 5970 was introduced this week to
amend Section 9291 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act. Generally, that Section of the Act protects from disclosure any internal
compliance or audit records obtained by the Commission under the Section. Some
commentators claim the provision will permit the Commission to withhold a broad
array of materials from FOIA requests. The new bill, titled the SEC
Transparency Act of 2010, would repeal the provision.
SEC enforcement actions
Financial fraud: In the Matter of Navistar International
Corp., Adm. File No. 3-13994 (March 5, 2010) is a settled financial fraud action
against the company, Daniel Ustian, its chairman and CEO, Robert Lannert, vice
chairman and CFO, Thomas Akers, Jr., Director of Purchasing, James McIntosh,
V.P. of Finance for the Engineering Division, James Stanaway, Director of
Finance for the Engineering Division, Ernest Stinsa, replacement for Mr.
Stanaway and Michael Schultz, Plant Controller. The company is a manufacturer
of trucks and engines. From 2001 through 2005, the company overstated its
pre-tax income by about $137 million dollars. This resulted in a restatement in
2007. Approximately $58 million of the overstatement resulted from the
fraudulent handling of rebates at the Wisconsin foundry. The remaining $79
million was caused by improper accounting for certain warranty reserves and deferred
expenses. The Order states that the improper accounting did not result from a
scheme, but rather from poor internal controls.
To resolve the
proceeding, Messrs. Lannert and Ustian each undertook to repay their
incentive compensation in accord with the SOX clawback provision. This amounted
to $1,049,503 for Mr. Lannert and $1,320,000 for Mr. Ustian. In addition, Mr.
Lannert consented to the entry of a cease and desist order based on Exchange
Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Ustian consented to the
entry of a similar order, except it does not include Exchange Act Section
13(b)(2)(B). Mr. Lannert agreed to the entry of a C&D based on the same
sections as Mr. Ustian while Mr. McIntosh consented to the entry of an order
based on the same sections as Mr. Lannert. Messrs. Akers and Schultz agreed to
the entry of orders based on Securities Act Sections 17(a) and Exchange Act
Sections (10(b) and 13(b)(2)(A). Mr. Stinsa agreed to the entry of an order
based on Section 13(b)(2)(A).
The settlement included two civil actions. In SEC v.
McIntosh, Civil Action No. 10-cv-4903 (N.D. Ill. Filed Aug. 4, 2010)
penalties were ordered by consent as to Mr. Akers ($100,000), Mr. McIntosh ($150,000),
Mr. Stanaway ($50,000) and Mr. Stinsa ($25,000). A penalty was not imposed on
Mr. Schultz. The second action is SEC v. Schwetschenau, Civil Action No.
10-cv-4904 (N.D. Ill. Filed Aug. 4, 2010) which is against the former
controller of the company. In this case, the former controller consented to the
entry of an order which imposed a civil penalty of $37,500. See also Litig. Rel. 21616 (Aug. 5, 2010). In a related administrative
proceeding, he agreed to the entry of a cease and desist order based on
Exchange Act Sections 13(a) and 13(b)(2)(B) and to an order which prohibits him
from appearing and practicing before the Commission as an accountant with a
right to reapply after one year. In
the Matter of Mark T. Schwetschenau, Adm. File No. 3-13995 (Aug. 5,
2010).
False tender offer: SEC v. Al-Raya Investment Co.,
Civil Action No. 1:09-CV-6533 (S.D.N.Y. July 23, 2009) is an action against the
late Kuwaiti financial advisor Hazem Al-Braikan and Al-Raya Investment Company.
After filing an amended complaint which dismissed one defendant and substituted
another party as a relief defendant, the action settled. The case is based on
the SEC's claim, discussed
here, that Mr. Al-Braikan created a swirl of false rumors asserting that a
tender offer was being made by an Arabian Peninsula Group for Harman
International. Those rumors drove up the share price which permitted the
defendants to sell the interests they had amassed. Previously, they had used
the same technique to profit from a falsely fueled price rise in the shares of
Textron Inc. Mr. Al-Raya and others made profits of $6.2 million from the
hoaxes. To settle, Mr. Al-Braikan's estate consented to the entry of a
permanent injunction prohibiting future violations of Exchange Act Section
10(b) and agreed to disgorge $1,685,727.93 plus $894,093.22 which is the trading
profits of another. His employer also agreed to the entry of a fraud
injunction, to disgorge $1,209,707.49 and to pay a penalty of $300,000. Relief
defendant KAMCO agreed to disgorge $2,439,199.87. Overall, the Commission
obtained disgorgement of over $6.2 million. The settlements conclude this
action. See also Litig. Rel. 21613A (Aug. 5, 2010).
Boiler room: SEC v. Porche, Civil Action No. SACV
10-01165 (C.D. Cal. Filed Aug. 4, 2010) names as defendants Joseph Porche,
Larry Crowder, Konrad Kafarski, Carlton Williams and Dale Engelhardt. The
complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Sections 10(b), 15(a) and 15(b)(6)(B)(i). According to the
complaint, Kingston Resources, Inc., under the direction of Messrs. Porche and
Crowder, was operated as a boiler room. Investors were told that commissions
would be limited to 10% when in fact they were 25% and that 80% of their
investment would be used to conduct a green energy business. In fact, much of
the money was diverted to Messrs. Porche and Crowder. Messrs. Crowder and
Engelhardt were previously enjoined by the SEC. The case is in litigation. See
also Litig. Rel. 21614 (Aug. 4, 2010).
Insider trading: SEC v. Flanagan, Civil Action No.
10-CV 4885 (N.D. Ill. Filed Aug. 4, 2010). Thomas P. Flanagan, a CPA and former
Vice Chairman of Deloitte in Chicago, and his son Patrick, settled insider
trading charges with the Commission as discussed here.
Thomas Flanagan, according to the SEC, traded on inside information he obtained
through his position at Deloitte on nine separate occasions between 2005 and
2008 in the securities of five different companies. Overall he made 71
purchases, most of which involved audit clients who made filings with the
Commission. He also tipped his son who traded. Thomas Flanagan had trading
profits of over $430,000 while his son had profits of about $57,000.
In the settlements, each defendant consented to the entry of
a permanent injunction prohibiting future violations of Exchange Act Sections
10(b) and 14(e). Thomas Flanagan also agreed to pay disgorgement and
prejudgment interest of $557,158 and a penalty of $493,884. Patrick Flanagan
agreed to pay disgorgement and prejudgment interest of $65,614 and a penalty of
$57,656.
A separate Rule 102(e) administrative proceeding named Thomas
Flanagan as a Respondent. The Order is based on the fact that by holding shares
in audit clients, the firm was not independent. Thus its audit reports, which
represented that the firm was in fact independent and which were filed with the
Commission, were false. To resolve the administrative proceeding, Thomas
Flanagan consented to the entry of an order denying him the privilege of
appearing or practicing before the Commission as an accountant. In the
Matter of Thomas P. Flanagan, C.P.A., Adm. Proc. File No. 3-13993 (Filed
Aug. 5, 2010).
Market crisis/disclosure: SEC v. Morrice, Case No. CV
09-01426 (C.D. Cal. Filed Dec. 12, 2009). The Commission settled this action
against three officers of the former number three sub-prime lender, New
Century. The claims against Brad Morrice, former CEO and co-founder, Patti
Dodge, former CFO and David Kenneally, former controller, as discussed here,
centered a disclosure fraud. The complaint alleges that defendants Morris and
Dodge failed to tell investors about the true status of the loan portfolio. As
the liquidity crisis unfolded during the second and third quarters of 2006,
accounting manipulations began. Reserves were drained which bolstered revenue,
but left the company in difficult straights when the demand for loan
repurchased increased beyond what could be funded. At the same time, the share
price was inflated.
To settle Mr. Morrice consented to the entry of a permanent
injunction prohibiting future violations of Securities Act Section 17(a) and
Exchange Act Sections 10(b) and 13(b)(5) as well as from aiding and abetting
violations of Section 13(a). He also agreed to disgorge $464,364 plus
prejudgments interest, to pay a civil penalty of $250,000 and to a five year
officer-director bar. Ms. Dodge consented to a similar injunction and agreed to
disgorge $379,808 plus prejudgment interest, to pay a civil penalty of $100,000
and to the entry of a five year officer-director bar. Mr. Kenneally consented
to the entry of a permanent injunction prohibiting future violations of
Exchange Act Sections 10(b), 13(b)(5) and from aiding and abetting violations
of Section 13(a). He also agreed to disgorge $126,676 along with prejudgment
interest and to the entry of a five year officer- director bar.
Misappropriation: SEC v. Froning, Civil Action No.
3:10-cv-1503 (N.D. Tex. Aug. 2, 2010) is an action against registered
representative Gregory Todd Froning. According to the complaint, over a four
year period beginning in 2005, Mr. Froning solicited fifteen individuals to
acquire certain rights in a defunct financial planning company he owned.
Investors were falsely told that the funds would be used to expand the business
when in fact the $800,000 raised was diverted to his personal use. Mr. Froning
partially settled the case by consenting to the entry of a permanent injunction
prohibiting future violations of Securities Act Section 17(a) and Exchange Act
Section 10(b). The court will determine the amount of any disgorgement and civil
penalty. Mr. Froning also consented to the entry of an order in an
administrative proceeding which will bar him from association with any broker,
dealer or investment adviser. See also Litig. Rel. 21610 (Aug/ 2, 2010).
FCPA
SEC v. Summers, Civil Action No. 4:10-cv-02286 (S.D.
Tex. Filed Aug. 5, 2010) names as a defendant Joe Summers, the former country
manager for Venezuela for Pride International. From 2003 through 2005 Mr.
Summers, according to the complaint, authorized the payment of $384,000 to
third parties with the understanding the money was going to state officials to
help obtain three oil drilling contracts. Mr. Summers settled the action by
consenting to the entry of a permanent injunction prohibiting future violations
of Exchange Act Sections 30A and 13(b)(5). He also agreed to pay a civil
penalty of $25,000. See also Litig. Rel. 21617 (Aug. 5, 2010).
SEC v. Turner, Civil Action No. 1:10-cv-01309 (D.D.C.
Filed Aug. 5, 2010) is a settled FCPA action against two former Innospec, Inc.,
executives, David Turner and Ousama Naaman. Mr. Turner was the business
director, while Mr. Naaman was the agent for the company in Iraq. According to
the SEC's complaint, beginning in 2000 and continuing through 2008 $6.3 million
in bribes were paid and another $2.8 million were promised to Iraqi ministers
and officials and Indonesian officials to secure contracts worth $176 million.
Beginning in 2001 and continuing for the next eight years, the company paid
bribes to Iraqi officials to sell the chemical Tetra Ethyl Lean ("TEL") in the
country. The payments began under the U.N. Oil For Food Program and continued
after it ended. The payments were set at 10% of the contract value. In
addition, from 2000 through 2005 the company paid bribes in Indonesia equal to
about $2.8 million to sell the same product. At one point Mr. Turner directed
the payment of a bribe to ensure that a field test for the product of a
competitor would fail. He also lied to the auditors when they began questioning
certain entries related to the payments.
To settle the case each defendant consented to the entry of
a permanent injunction prohibiting future violations of Sections 30A, 13(b)(5)
and from aiding and abetting violations of 30A, 13(b)(2)(A) and 13(b)(2)(B).
Mr. Turner also agreed to disgorge $40,000 along with prejudgment interest. No
penalty was assessed against him because of his cooperation. Mr. Naaman agreed
to disgorge over $810,000 and to pay prejudgment interest along with a penalty
of $438,000 which will be satisfied by payment of a criminal fine in a related
criminal action previously brought by the Department of Justice and discussed here. See
also Litig. Rel. 21615 (Aug. 5, 2010).
U.S. v. Elkin, Case No. 4:10 CR 00015 (W.D. Va. Filed
Aug 3, 2010) names as a defendant Bobby Jay Elkin Jr. Mr. Elkin is a former
executive of tobacco company Dimon Inc., now called Alliance Once
International. He pleaded guilty to a one count information alleging conspiracy
to violate the FCPA. In entering the plea, he admitted making cash payments to
officials of the Kyrgyz tobacco authority to obtain export licenses and gain
access to the government owned tobacco processing facilities. About $2.6
million in payments were made between 1996 and 2004. The payments were based on
the number of kilograms of Kyrgyz tobacco Mr. Elkin's employer purchased and
processed for export. Other bribes were paid to secure the ability to purchase
tobacco from growers in the municipalities while still others were paid to the
Kyrgyz Tax Inspection Police so that business could continue. The date for
sentencing has not been set. Mr. Elkin previously settled with the SEC as discussed here.
U.S. v. Diaz, Case No. 09-20345 (S.D. Fla. April 22,
2009) is a case against Juan Diaz. He previously pleaded guilty to conspiracy
to make corrupt payments to foreign government officials. The purpose was to
secure business for three telecommunications enterprises from the Republic of
Haiti's state owned telecommunications company as discussed here.
Mr. Diaz is alleged to have paid or concealed over $1 million in bribes to
former Haitian government officials while serving as an intermediary for the
three entities. For his role in the scheme, Mr. Diaz was sentenced to 57 months
in prison and ordered to serve three years release following completion of the
prison term. He was also ordered to pay $73,824 in restitution and to forfeit
$1,028,851.
Program: The Vanishing Line Between Civil And
Criminal Securities Fraud: Sunday August 8, 2010, 10:30 a.m. at the ABA
Annual Convention, San Francisco, California. Co-chairs: Thomas O. Gorman and
Frank C. Razzano. Panelists include: Hon. Cormac Carney, U.S. Dist. Court (C.D.
CA), Greg Anders, Deputy Asst. AG, Criminal Division, DOJ; Michael Dicke,
Associate Director - Enforcement, SEC, San Francisco; Ellen Podgar, Professor
of Law, Stetson Univ. and Cheryl Evans, Special Counsel, National Chamber Law
Reform Project.
For more cutting edge commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
Gorman.