Record payments and a potentially significant MOU were
the focus in securities enforcement litigation this week. French oil and gas
giant Total paid the DOJ and the SEC $398 million to settle FCPA charges, the
fourth largest sum paid in settlement of corruption charges. NASDAQ paid $10
million, the largest amount paid by an exchange to resolve a Commission
administrative proceeding centered on its botched Facebook IPO.
The PCAOB executed a potentially significant MOU with its
PRC counterparts which promises to make available the audit work papers for
Chinese based issuers. The agreement is the first step toward transparency for
Chinese based issuers. It also holds the promise of a future agreement on the
SOX mandated inspections and perhaps resolving the three pending Commission
actions focused on the question of work paper availability.
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 1 civil injunctive action and 2 administrative
proceedings (excluding follow-on actions and 12(j) proceedings).
Prior bar: SEC v. Grant, Civil
Action No. 1:11-CV-11538 (D. Mass.) is a previously filed action against John
Grant and others. The complaint alleges that Mr. Grant violated a Commission
bar from association with an investment adviser by associating with his son's
firm, Sage Advisory Group LLC, and acting as an investment adviser. The court
entered a final judgment by consent permanently enjoining Mr. Grant from
violating Advisers Act Sections 206(1) and (2). The order also directs him to
comply with the earlier bar. Mr. Grant, who is also an attorney, consented to
the entry of an order permanently suspending him from practicing before the
Commission as an attorney in a related follow-on proceeding. See also Lit.
Rel. No. 22708 (May 30, 2013).
False filing: SEC v. Medlink International, Civil
Action No. 12 Civ. 5325 (E.D.N.Y.) is a previously filed action against the
company, its CEO Aurelio Vuono and its CFO James Rose. The complaint alleged
that the defendants filed a false Form 10-K for the year ended December 31,
2010 because it contained a report representing that the audit of the financial
statements had been completed when it had not. It further alleged that Mr.
Vuono defrauded an investor when he took a check for securities based on a
promise that it would not be cashed until the person could cover it and then
later deposited it in a firm account against the express direction of the
investor. The defendants resolved the case and the court entered final
judgments of permanent injunction prohibiting future violations of Securities
Act Sections 17(a) and Exchange Act Sections 10(b) and 15(d). The court also
directed that each defendant disgorge, on a joint and several basis, the amount
of the investor check which was $149,473.50 along with prejudgment interest. In
addition, the court directed that each defendant pay a civil penalty. The
company was ordered to pay a penalty of $650,000, Mr. Vuono $130,000 and Mr.
Rose $130,000. A penny stock bar was also entered against the two individuals. See
also Lit. Rel. No. 22709 (May 30, 2013).
Exchanges: In the Matter of The NASDAQ Stock
Market, LLC, Adm. Proc. File No. 3-15339 (Filed May 29,
2013) is a proceeding which names as Respondents the Exchange and NASDAQ
Execution Services, LLC, its registered broker dealer. The Order centers on
errors surrounding the May 18, 2012 IPO for shares of Facebook. Specifically,
there were significant difficulties with the offering and the initiation of
trading because of a design limitation regarding the manner in which orders are
crossed or matched and the subsequent decisions of exchange officials. When it
was discovered that a design mechanism impacted the cross of buy and sell
orders, officials permitted the initiation of secondary trading without
determining the root cause of the difficulty. Eventually the difficulty caused
30,000 Facebook orders to remain stuck in the system for about two hours. The
errors also caused problems with trading in the shares of Zynga. In addition,
the Exchange violated its rules by assuming a short position in Facebook shares
of more than 3 million shares. Ultimately it realized a profit on that position
of $10.8 million. NES also failed to meet its capital requirements. The Order
alleges violations of Exchange Act Sections 15(c)(3), 19(g)(1), Regulation SHO
and Regulation NMS. To resolve the proceeding the Exchange will implement a
series of undertakings. In addition, NASDAQ consented to the entry of a cease
and desist order based on Exchange Act Section 19(g)(1), Regulation SHO,
Regulation NMS and certain Rules. It also agreed to pay a civil money fine of
$10 million, the largest against an exchange. NES consented to the entry of a
cease and desist order based on Section 15(c)(3).
Front running: SEC v. Bergin, Civil
Action No. 3:13 cv 1940 (N.D. Tx. Filed May 23, 2013) is an action against
Daniel Bergin, an equity trader at registered investment adviser Cushing MLP
Asset Management, L.P. The firm specializes in publicly traded energy
infrastructure MLPs, royalty trusts and other energy income investments.
Cushing employs traders such as Mr. Bergin to place orders, and particularly
large ones, in advantageous market centers in a way which minimizes price
movements unfavorable to the client. In 2011 Mr. Bergin began using his wife's
brokerage account first at Fidelity Investments and later at Scottrade to trade
ahead of firm clients. For example, on August 15, 2011 he was directed to buy
85,000 shares of Targa Resources Corporation, symbol TRGP. About two minutes
after receiving the instruction in an email he began placing orders to acquire
a total of 15,000 shares of the security in his wife's Fidelity account. Once
his personal orders began executing, he placed the firm orders. Later that day
Mr. Bergin sold the shares of TRGP he purchased in his wife's account, reaping
a profit of $11,826.56. Mr. Bergin continued making similar trades throughout
the period. Overall he had profits of about $1.7 million from same day, illegal
trades. Mr. Bergin executed certifications assuring the firm that he had
disclosed all personal brokerage accounts and securities transactions, although
he had not. Similarly, in February 2013 he failed to disclose his wife's
account during an interview with the Commission's staff. The Commission's
complaint alleges violations of Exchange Act Section 10(b) and Investment
Company Act Section 17(j). The case is in litigation. See also Lit. Rel.
No. 22707 (May 24, 2013).
U.S. v. Total, S.A.,
Criminal No. 1:13 cr 239 (E.D. Va. Filed May 29, 2013); In the Matter of
Total, S.A., Adm. Proc. File No. 3-15338 (Filed May 29, 2013). French oil
and gas giant Total, S.A. paid $398 million to the DOJ and the SEC to resolve
FCPA charges. The actions stem from the efforts of the company to re-enter the
Iranian oil market. In 1995 Total negotiated a development contract with the
National Iranian Oil Company or NIOC, a government instrumentality, for the
development of the Sirri A and E oil and gas fields. Prior to executing the
agreement, Total met with an Iranian Official who had the ability to influence
the award of the contract. The firm and the official entered into a so-called
consulting arrangement which was used as a conduit for $16 million in corrupt
payments over the next two and one half years.
In 1997 the company entered into a second arrangement
with NIOC. This agreement was to develop phases 2 and 3 of the South Pars gas
field, a joint venture with a number of other multinational oil and gas
companies. As with the initial project, Total entered into a consulting
arrangement with the Iranian official. Over the next several years the company made
a series of payments under this agreement which totaled about $44 million. None
of the payments were properly recorded in the books and records of the company.
Total resolved the criminal charges by entering into a
deferred prosecution agreement under which it will pay a criminal fine of
$245.2 million, retain a monitor for three years, continue to enhance its
compliance systems and cooperate with enforcement officials. To resolve the SEC
administrative proceeding the company consented to the entry of a cease and
desist order based on Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B),
and pay disgorgement of $153 million and retain a consultant.
MOU: The PCAOB and the China
Securities Regulatory Commission or CSRC and the Ministry of Finance in China
or MoF executed a Memorandum of Understanding on Enforcement Cooperation.
Essentially, the agreement provides for the exchange of certain materials and
calls for the parties to render the "fullest assistance permissible to secure
compliance with the respective Laws and Regulations of the Authorities." Under
the Agreement the Board may now have access to the work papers relating to
Chinese based issuers for the first time. The parties have also agreed to
discuss the prospect of inspections.
Misappropriation: U.S. v. Hongjun (S.D.N.Y.)
is an action which names as defendants Wang Hogjun and Chao Jiang,
respectively, the former president and CEO and former vice president of
corporate finance of China North East Petroleum Holdings Limited. In 2009 the
company registered a shelf offering with the SEC, proposing to sell up to $40
million of common stock. Subsequently, the company made two separate offerings
under the registration statement. The funds were to be used for general
corporate purposes according to representations made to investors by the
defendants. In fact the defendants misappropriated about $1.2 million of the
proceeds for their own use. Mr. Jiang also testified falsely before the SEC.
The indictment contains one count of conspiracy and four counts of securities
fraud as to each defendant. Mr. Jiang is also charged with two counts of false
statements to the Commission. The case is pending. See also SEC v. China
North East Petroleum Holdings Limited, Civil Action No. 12 cv 7094 (S.D.N.Y.
Filed Sept. 20, 2012).
Unauthorized transactions: The
Securities and Futures Commission of Hong Kong banned Alex Chow Ho Kuen from
the securities business for life. He was a service manager of Hang Seng Bank
Limited. The action followed his conviction on criminal charges for conducting
unauthorized transactions in the accounts of his clients as well as
misappropriating their funds. The client funds were transferred to the account
of his sister. The losses are estimated to be about $5 million. Mr. Chow was
sentenced to serve 44 months in prison.
Court of First Instance dismissed an appeal by the FSC of the manipulation
charges against Liang Jiang, a fund manger. The FSC claimed that a pattern of
purchasing shares in two different companies on the last trading day of the
month was manipulative and artificially inflated the share price. Mr. Jiang
contended he was rebalancing the portfolio. The court found against the FSC and
the appeal of the agency was dismissed.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
email@example.com). Webcast nationally by the ABA and available in other
Dorsey & Whitney offices. For further information please click here.
For more commentary on developing securities
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