As the holiday weekend which traditionally signals the
end of the summer approaches, the SEC settled with a defendant in a long
running financial fraud case, filed a settled insider trading case, brought
more investment fund cases and filed two more settled actions relating to the
financial fraud at Dell Inc. Perhaps the most noteworthy action is the Moody's
Section 21(a) Report giving a preview of the impact of Dodd-Frank on the
enforcement program.
SEC enforcement actions
Financial fraud: SEC v. Lucent Technologies,
Inc.,
Civil Action No. 04-2315 (D.N.J.) is a long running financial fraud case based
on improperly recording revenue since there were side deals and similar
arrangements which should have precluded recognition as discussed here.
Defendant, Nina Aversano, former President of North American Service Provider
Networks and former corporate officer of Lucent settled. Ms. Aversano consented
to the entry of a permanent injunction prohibiting her from aiding and abetting
future violations of the antifraud provisions of the federal securities laws
and from violating or aiding and abetting violations of the books and records,
internal controls, and reporting provisions. She also agreed to pay a civil
penalty of $100,000, not to seek or become an officer or director of a public
company for one year, to resign from an audit committee position she held and
to discontinue her relationship with the board of directors of New Jersey
Resources at the earlier of either her termination by the company or the end of
her term. See Litig. Rel. 21639 (Sept. 1, 2010).
Investment fund fraud: SEC v. Venetis,
Civil Action No. 10-cv-4493 (D.N.J. Filed Sept. 2, 2010) is an action against
investment adviser Sandra Venetis and her controlled entities, Systematic
Financial Services, Inc., Systematic Financial Associates, Inc. and Systematic
Financial Services, LLC. The complaint alleges that since 1997 the defendants
have raised at least $11 million from investors through the sale of promissory
notes. Investors were told that the notes were either backed by the FDIC and
paid six to eleven percent per year and were tax free or were backed by
Medicare reimbursement payments. The claims were false. The funds went to the
defendants. The complaint alleges violations of Securities Act Sections 5 and
17(a), Exchange Act Section 10(b) and Adviser Act Section 206. The defendants
settled, agreeing to all the relief sought in the complaint including permanent
injunctions, the payment of disgorgement and financial penalties, an asset
freeze and the appointment of an independent monitor. Defendants Venetis and
Systematic Financial also settled related administrative actions which will bar
Ms. Venetis from association with any investment adviser or broker or dealer
and revoke the registration of the firm. See Litig. Rel. 21641 (Sept. 2, 2010).
Insider trading: SEC v. Self,
Civil Action No. 10-cv-4430 (E.D. Pa. Filed Sept. 1, 2010) is an insider
trading action against James Self Jr., the executive director at Merck &
Co. , and Stephen Goldfield, an unemployed former hedge fund manager. Messrs.
Self and Goldfield were friends from the time both attended an executive MBA
program. On April 23, 2007 AstraZeneca acquired Medimmune, Inc. Prior to that
time, the company at which Mr. Self was employed, along with 22 others, was
approached by investment bankers representing Medimmune about a possible
acquisition. Mr. Self was on the team at his company which reviewed the
material non-public information about the deal. By mid-March 2007 Mr. Self
began furnishing his friend Stephen Goldfield inside information about the
deal. Mr. Goldfield, in turn, began buying options in Medimmune. When the deal
was announced, he sold his holdings yielding a profit of about $13.9 million.
To settle the case, each defendant consented to the entry
of a permanent injunction prohibiting future violations of Exchange Act Section
10(b). Mr. Self also agreed to pay a civil penalty of $50,000 based on his
financial condition. Mr. Goldfield agreed to disgorge his trading profits along
with prejudgment interest. Payment of all but $600,000 of that amount was
waived based on his financial condition. See Litig. Rel. 21638 (Sept. 1, 2010).
Investment fraud: SEC v. Halek Energy, LLC,
Civil Action No. 3:10-cv-01719-K (N.D. Tex. Aug. 31, 2010) names as defendants
Jason Halek, two companies he controls - Halek Energy, LLC and CBO Energy, Inc.
- and one of his salesmen, Christopher Wilbourn. The complaint alleges that
from June 2007 through September 2009 Mr. Halek and his two companies raised
about $22 million from approximately 300 investors selling investments in Texas
oil and gas projects. In soliciting these sales, Mr. Halek made material
misrepresentation about the risk, the use of investor funds and the returns.
The complaint alleges violations of Securities Act Sections 5 and 17(a) and
Exchange Act Section 10(b) by the defendants. It also alleges violations of
Exchange Act Section 15(a) by defendant Wilbourn. Each defendant consented to
the entry of a permanent injunction based on the sections cited in the
complaint. Mr. Halek has also agreed to pay a $50,000 civil penalty. The SEC is
pursuing disgorgement, prejudgment interest and a civil penalty against Mr. Wilbourn.
See Litig. Rel. 21637 (Sept. 1, 2010).
Money laundering procedures: In the Matter of
Pinnacle Capital Markets LLC, Adm. Proc. File No.
3-14026 (Sept. 1, 2010) names as respondents the broker and its president and
chief compliance officer Michael Paciorek. A related action was brought by the
Financial Crimes Enforcement Network or FinCEN. FinCEN Release, Sept. 1, 2010, available here.
Previously, FINRA sanctioned the firm for violations of its anti-money
laundering rules (discussed
here).
Pinnacle is a broker dealer with over 99% of its
customers outside the U.S. A large number of the corporate customer accounts
that are foreign entities also have omnibus accounts some of which have
sub-accounts for their own corporate or retail customers. Most of the firm's
regular and omnibus sub-account holders use direct access software to enter
trades in the U.S. markets through their computers. From 2003 through November
2009, Pinnacle failed to verify information for corporate accounts in accord
with its anti-money laundering procedures. It also failed to collect or verify
all identifying information for most of its omnibus sub-account holders. Mr.
Paciorek, as the firm's president and chief compliance officer, directed all of
the broker's actions with respect to its customer identification procedures and
the identification and verification of its customers. As a result of the
foregoing failures Pinnacle was found to have willfully violated Section 17(a)
of the Exchange Act and Rule 17a-8. Mr. Paciorek was the cause of those
violations.
Respondents resolved the matter by consenting to the
entry of a cease and desist order from committing or causing any violations and
any future violations of Section 17(a) and Rule 17a-8. The firm was also
censured and ordered to pay a $25,000 civil fine. FinCEN assessed a $50,000
fine against the firm. In February 2010 FINRA imposed a $300,000 fine on the
firm for violating its anti-money laundering rules based in part on the facts
detailed in the Commission's Order.
Rating error: Moody's
Investors Services, Inc. Report of Investigation Pursuant to Section 21(a) of
the Securities Exchange Act of 1934: Exchange Act Release No. 62802 (Aug. 31,
2010). The Report details the cover-up of a rating error by Moody's European
operations and the Commission decision not to bring an enforcement action
because of a question regarding its jurisdiction as discussed here. In
the summer of 2006, Moody's Investor Services, Inc. developed a new rating
methodology for constant proportion debt obligation notes or CPDOs. In
preparing and publishing the ratings the model was incorrectly set resulting in
a rating that was too high. Although the company discovered the error it chose
not to correct it, in part for reputational purposes, until it was disclosed in
an April 2007 Financial Times article. The Commission declined to bring an
enforcement action, noting that jurisdiction was questionable since the error
and decision not to disclose it occurred in Europe. At the same time, the
Release warns rating agencies that under Dodd-Frank the SEC has expanded
jurisdiction and rating agencies are required to maintain proper internal
controls and procedures.
Financial fraud: SEC v. Kamber,
Civil Action No. 1:07-CV-01867 (D.D.C. Filed Oct. 17, 2007) is one of a series
of actions arising out of a financial fraud at Centerpulse Ltd. This action
named as a defendant Richard Jon May, the former Group VP of Finance, Tax
Counsel and Treasurer of the U.S. subsidiary. The complaint alleged that Mr.
May and others overstated income for the third quarter of 2002 by improperly
deferring a significant expense. Fourth quarter income was also overstated from
not increasing a reserve to cover about $18 million in liabilities and using
anticipated refund credits to offset $5 million in expenses. To resolve the
case Mr. May consented to the entry of a permanent injunction prohibiting
future violations of Exchange Act Sections 13(b)(5) and from aiding and
abetting violations of Sections 13(a), 13(b)(2)(A) & (B) and the elated
rules. He also agreed to pay disgorgement of $10,519 along with prejudgment
interest. In settling the case, the SEC dropped its Section 10(b) claim and the
request for an officer director bar and civil penalty. See Litig. Rel. 21636 (Aug. 31, 2010).
Financial fraud: SEC v. Scahdeva
(E.D. Wis. Filed August 31, 2010) is an action against Sujata Scahdeva, former
principal accounting officer, secretary and vice president of finance at Koss
Corporation and Julie Mulvaney, a senior accountant at the company. The
complaint alleges a years long scheme during with defendant Sachdeva stole over
$30 million from the company. The theft was covered up by preparing material
false accounting books and records with the aid of co-defendant Mulvaney. The
company restated its financial statement for fiscal years 2008, 2009 and the
first quarter of fiscal 2010 following the discovery of the fraud. The
Commission's case is in litigation. See Litig. Rel. 21640 (Sept. 1, 2010). In a related criminal
case Sujata Scahdeva pleaded guilty to six counts of wire fraud.
Failure to supervise: In
the Matter of David V. Siegel, Adm. Proc. File No.
3-13787 (Aug. 31, 2010) is an action against David Siegel for failure to
supervise Gary Gross while he was employed at Axiom Capital Management.
According to the Order, Mr. Gross was hired in December 2002 when the firm
established a branch in Boca Raton, Florida. Mr. Siegel was subsequently hired
to manage the branch. The state of Florida required that Mr. Gross be under
strict supervision because of customer complaints. Nevertheless, from early
2005 through April 2006 Mr. Gross sold millions of dollars of PIPEs to
customers. Those customers were elderly, retired and risk adverse - that is,
PIPEs were not suitable investments for them. During this period, Mr. Siegel
failed to reasonably supervise Mr. Gross or comply with Axiom's written
supervisory procedures. Mr. Gross violated Securities Act Section 17(a) and
Exchange Act Section 10(b). Mr. Siegel failed to reasonably supervise Mr. Gross
within the meaning of Exchange Act Section 15(b)(4)(E) and Advisers Act Section
203. To resolve the matter, Mr. Siegel consented to the entry of an order which
bars him from associating with any broker, dealer or investment adviser and
requires him to disgorge $10,600 along with prejudgment interest. He was also ordered
to pay a civil penalty in the amount of $15,000.
Financial fraud: SEC v. Davis,
Case No. 1:10-cv-01464 (D.D.C. Filed Aug. 2, 2010); SEC v. Imhoff, Case
No. 1:10-cv-01465 (D.D.C. Filed Aug. 27, 2010) are settled financial fraud
cases against two former Dell Inc. employees. The former names as a defendant
Robert W. Davis, Dell's V.P. of Corporate Finance and Chief Accounting Officer.
The latter names as a defendant Randall Imhoff, its Finance Director for Global
I/T. The two complaints, although not identical, essentially detail a scheme to
improperly boost revenues and meet street expectations beginning as early as
2001 and continuing through at least 2005. According to the complaints, discussed here,
the two men improperly used various reserves to managing earnings.
Mr. Davis settled with the Commission, consenting to the
entry of a permanent injunction prohibiting future violations of Securities Act
Sections 17(a)(1) & (2), Exchange Act Section 13(b)(5) and from aiding and
abetting violations of Exchange Act Sections 13(a) and 13(b)(2)(A) & (B).
He also agreed to disgorge $19,080 along with prejudgment interest and pay a
civil fine of $175,000 and, in a related administrative proceeding, will be barred
from appearing or practicing before the Commission as an accountant with a
right to apply for reinstatement after five years. Mr. Imhoff consented to the
entry of a permanent injunction prohibiting future violations of Exchange Act
Section 13(b)(5) and from aiding and abetting violations of Sections 13(a) and
13(b)(2)(A) &(B). He also agreed to disgorge $12,852 along with prejudgment
interest and to pay a civil fine of $25,000. In a related administrative
proceeding he will consent to the entry of an order barring him from appearing
or practicing before the Commission as an accountant with a right to apply for
reinstatement after three years.
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