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The Commission entered into another deferred prosecution agreement this week while filing four settled market crisis actions. The agency also brought an unusual insider trading case centered on selling shares in a secondary offering and an accounting action against a consulting firm that had to restate its financial statements.
The DOJ entered into a deferred prosecution agreement to resolve an FCPA case involving an aircraft services company, the second in that industry this year. In another criminal case a former high ranking official at McKinsey & Co. was sentenced to a term of probation after pleading guilty to insider trading charges and then testifying for the government in two high profile cases that ended with convictions.
Testimony: Robert Cook, Director, Division of Trading & Markets, testified before the Senate Committee on Agriculture, Nutrition & Forestry (July 17, 2012) regarding the continued implementation of Title VII of Dodd-Frank (here).
Speech: SEC Commissioner Troy Paredes addressed the Society of Corporate Secretaries & Governance Professionals, 66th National Conference on "The Shape of Things to Come." (July 13, 2012). In his remarks the Commissioner focused on key elements in the Commission's regulatory agenda (here).
Report: The SEC staff published its Final Report on Work Plan for Global Accounting Standards (July 13, 2012)(here).
SEC Enforcement: Filings and settlements
Statistics: This week the SEC filed 3 civil injunctive actions and 5 administrative proceeding (excluding tag-along and 12(j) actions).
Accounting: In the Matter of Huron Consulting Group, Inc., Adm. Proc. File No. 3-14958 (Filed July 19, 2012) is a settled proceeding which named as Respondents the firm, whose shares are traded on NASDAQ, Gary Burge, its former CFO and Wayne Liski, its controller. On August 17, 2009 the firm filed a Form 10K/A with restated its financial statements for the fiscal years 2006, 2007 and 2008. This reduced Huron's net income for the restated periods by about $56 million. The error occurred because after making certain acquisitions the selling shareholders received acquisition sales proceeds from Huron and subsequently redistributed a portion to other Huron employees and among themselves. Contrary to GAAP, Huron did not record compensation expenses for these payments. This resulted in an overstatement of revenue and incorrect on the financial statements. The Order found violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The Respondents resolved the proceeding. Each agreed to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Huron agreed to pay a penalty of $1 million. Mr. Burge agreed to pay disgorgement of $147,763.12 along with prejudgment interest and a penalty of $50,000 while Mr. Lipski will pay disgorgement of $12,750 along with prejudgment interest and a $50,000 penalty.
Insider trading: SEC v. Moshayedi (C.D. Cal. Filed July 19, 2012) is an action against Manouchehr Moshayedi, the CEO and chairman of the board of STEC, Inc., a computer storage device maker. The Defendant and his brother decided to sell a substantial portion of their company shares in a secondary offering set for August 3, 2009. This would permit them to take advantage of a price rise the month before which was spurred by large sales and the announcement of a unique supply contract with its largest customer. Shortly prior to the offering, Mr. Moshayedi learned that subsequent purchases would not be sufficient for the company to meet guidance and that the customer would never again make such purchases. The defendant then cut a side deal with the customer to buy $55 million in product which was far more than it needed, at a secret discount of $2 million. As a result the defendant and his brother each made about $133.9 million in the offering. Later when the secret deal was partially disclosed the stock price fell 38.9%. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.
Market crisis: SEC v. Mizuho securities USA, Inc., Civil Action No. 13-Civ-5550 (S.D.N.Y. Filed July 18, 2012); In the Matter of Delaware Asset Advisers, Adm. Proc. File No 3-14942 (July 18, 2012); In the Matter of Alexander V. Rekeda, Adm. Proc. File No. 3-14953 (July 18, 2012); In the Matter of Xavier Capdepon, Adm. Proc. No. 3-14954 (July 18, 2012). The Commission filed four settled market crisis actions centered on the sale of interests in a collateralized debt obligation known as Delphinus CDO 2007-1. It was structured by defendant Mizuho Securities USA, Inc. in mid-2007 and Respondent Delaware Asset Advisers served as the collateral manager. The actions allege that the ratings necessary for closing and marketing the notes were based on misrepresentations about the quality of the collateral.
Delphinus was a $1.6 billion CDO composed of mezzanine collateral rated just above junk. The Mizuho group responsible for the CDO was headed by Respondent Alexander Rekeda and included Respondents Xavier Capdepon, who modeled the transaction for the rating agencies, and Gwen Snorteland, the transaction manager responsible for structuring and closing the deal. Respondent Wei (Alex) Wei was the portfolio manager on the deal at Delaware Assets. The offering memorandum and marketing materials for the notes issued by the CDO represented that certain specific ratings would be obtained from three credit rating agencies, a condition precedent to the closing and sale of the notes. Just before the expected closing, and after all of the collateral had been purchased, Standard & Poor's announced changes to its CDO rating criteria that would lower the ratings on much of the collateral. Accordingly, the Mizuho employees responsible for the transaction e-mailed multiple alternative portfolios to the rating agency known as dummy portfolios that were hypothetical assets. The rating agencies were not told however that the notes were superior in credit quality to the actual ones which had been acquired for the CDO. That fact was also not disclosed to investors. Overall the Mizuho made about $10 million in fees. The investor losses are not quantified in the court papers.
The Defendant and each Respondent settled with the Commission. In the civil injunctive action, Mizuho consented to the entry of a permanent injunction based Securities Act Sections 17(a)(2) and (3) and agreed to pay $10 million in disgorgement along with prejudgment interest and a $115 million penalty. In the proceeding involving Respondents Delaware Assets and Wei, each consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3). In addition, the firm will pay disgorgement of $2,228,372 along with prejudgment interest and a penalty equal to the amount of the disgorgement while Respondent Wei agreed to pay a penalty of $50,000 and to be suspended from associating with any investment adviser for six months. Respondents Capdepon and Snortland consented to the entry of a cease and desist order based on Securities Act Section 17(a). Each will also be barred from the securities business with a right to apply for reentry after one year. Mr. Capdepon agreed to pay a penalty of $125,000 while the penalty as to Ms. Snortland will be decided at a later date. Finally, Mr. Rekeda consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(2) and (3), agreed to be suspended from the securities business for one year and to pay a civil penalty of $125,000.
Deferred prosecution agreement: The Commission entered into a deferred prosecution agreement with the Amish Help Fund, an Ohio non-profit corporation. The company was formed in November 1995 by Amish elders to further their way of life. It funds loans by selling securities in the form of investment contracts. The fund currently has nearly 3,500 investor, more than 1,200 borrowers and about $125 million in mortgage receivables. It has never had a default and no investor has suffered a realized loss. However the offering memorandum had not been updated for 15 years. Accordingly, it was not only stale but false and misleading although there is no evidence of any harm to investors from this. When notified of the violations the Fund immediately cooperated, updated the prospectus, offered all existing investors the right of rescission, retained an independent certified public accountant to perform ongoing audits and registered its securities with the Ohio Division of Securities. It also consented to a cease and desist order with that agency. In view of its cooperation the Commission will refrain from filing an enforcement action and the Fund entered into a deferred prosecution agreement with a term of two years.
Disclosure: In the Matter of Centuar Management Co. LLC, Adm. Proc. File No. 3-14950 (July 17, 2012). Centuar is a registered investment adviser. Argent Classic Convertible Arbitrage Fund LP was formed by Centuar which was its only general partner. The fund was also the largest client managed by Centuar. From January 2006 thorough April 2009 Centaur caused Argent to loan it about $15 million in interest free loans. Those loans were inadequately disclosed by Argent as payroll receivables. This violated Adviser Act Sections 206(2) and 206(4). To resolve the proceeding Centaur consented to the entry of a cease and desist order based on the sections cited in the order and a censure. In addition, the firm agreed to pay disgorgement of $172,438 along with prejudgment interest and a penalty of $150,000.
Investment fund fraud: SEC v 3 Eagles Research & Development LLC, Civil Action No. 3:12-cv-01289 (D. Or. Filed July 17, 2012) is an action against the firm, Harry Proudfoot, its founder, Matthew Proudfoot, its manager, Laurie Proudfoot Vivilo, its executive director, and Dennis Bukantis, at one time its sales and marketing director. From about September 2009 to October 2011 3 Eagles raised about $2.7 million from approximately 140 investors through the sale of unregistered securities. Investors were told that the funds would be used to purchase mining equipment and conduct mining operations in two gravel pits in central Ohio and that gold production would begin in late 2010. In fact the funds were misappropriated to the personal use of the defendants. In the fall of 2011 after being served with a Commission investigative subpoena, the firm represented that sales had halted. The next month, however, Matthew Proudfoot began selling similar units to investors. Again the money was misappropriated. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation.
False statements: SEC v. Daifotis, No. 3:11-cv-00137 (D.D. CA. Filed Jan. 11, 2011). The Commission settled its market crisis based enforcement action against Kimon P. Daifotis, former CIO for the Schwab YieldPlus Fund. The complaint against Mr. Daifotis alleged violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Investment Company Act 34(b), claiming he and other defendants made a series of misstatement in connection with the operation of the YieldPlus Fund during 2007 and 2008. Those related to its safety and liquidity. Another allegation asserted that Mr. Daifotis aided and abetted violations of the fund's concentration policies. To resolve the case Mr. Daifotis consented to the entry of a permanent injunction which prohibits future violations of Securities Act Section 17(a)(2) and Section 34(b) of the Investment Company Act. As part of the settlement he also agreed to pay $250,000 in disgorgement, a $75,000 civil penalty and to be barred from the securities business in a related administrative proceeding with a right to apply for re-entry after three years.
Short selling: In the Matter of Jeffrey A. Wolfson, Adm. Proc. File No. 3-14726 (Filed Jan. 31, 2012)) is an proceeding against Jeffery Wolfson, his brother Robert and the firm where they were employed, Anchor Trading II, LLC. The Order alleged that the two brothers engaged in naked short selling by failing to locate shares involved in short sales and failing to close out the resulting failures to deliver. The order alleged violations of Reg SHO. To resolve the action the Respondents consented to the entry of a cease and desist order based on the pertinent Rules under Reg SHO and the firm was censured. In addition, Jeffrey Wolfson is required to pay disgorgement of $8,771,432 along with prejudgment interest and a $2.5 million penalty. He is suspended from the securities business for twelve months. His brother and Golden Anchor are required to pay $722,589 in disgorgement, prejudgment interest and a $200,00 civil penalty. He is suspended from the securities business for four months.
Nordam Group, Inc. is an matter in which the provider of aircraft maintenance services is alleged to have violated the FCPA by paying bribes to employees of airlines created, controlled and exclusively owned by the People's Republic of China. The bribes were paid directly and indirectly to secure business. The matter was resolve when the firm entered into a three year non-prosecution agreement, agreed to pay a $2 million criminal fine and to report for three years to the DOJ on the implementation of its compliance programs. The arrangement reflects the timely, voluntary and complete disclosure of the company and the fact that a fine over $2 million would jeopardize its continued viability, a fact verified by an independent accounting expert.
OECD Report: The new Report of the OECD Working Group on Bribery details its recent work while providing an overview of anti-bribery enforcement around the globe. The Anti-Bribery Convention came into force in 1999. Since the Convention came into force much has been accomplished as the basic statistics in the Report demonstrate. In this regard: 210 individuals and 90 entities have been criminally prosecuted in 14 states; 66 individuals have been sent to prison; 43 individuals and 92 entities have been sanctioned in criminal, administrative and civil cases for other offenses related to foreign bribery such as money laundering or accounting in four states; and approximately 300 investigations are on-going in 26 states that are parties to the Anti-Bribery Convention and criminal charges have been brought in 13 states against 158 individuals and 13 entities.
Since the Convention came into force 190 actions have been brought against individuals. This includes 22 plea agreements, 59 agreed sanctions and 39 settlements. Another 97 actions have been brought against business organizations, including 30 plea agreements and 48 deferred and non-prosecution agreements and 55 settlements. These actions were brought by: The United States: 97 against individuals which includes 22 plea agreements and 39 settlements and 79 against business organizations which includes 28 plea agreements, 48 deferred and non-prosecution agreements and 50 settlements; Hungary: 26 against individuals and none against business organizations; Korea: 16 against individuals and 4 against business organizations; Germany: 14 against individuals plus 59 agreed sanctions under the German criminal code and 3 against business organizations; France: 4 against individuals and none against business organization; and United Kingdom: 3 against individuals and 2 against business organization.
The OECD statistics are only for bribery actions. They do not include actions based solely on provisions such as the books and records and internal control provisions of the FCPA.
Insider trading; U.S. v Kuma, No. 10 cr 0013 (S.D.N.Y.) is an insider trading action in which Anil Kumar, a former senior partner at McKinsey & Co. pleaded guilty to one count of conspiracy and one count of securities fraud. He provided inside information to Raj Rajaratnam regarding corporate revenues and transactions of firm clients. He was sentenced to serve two years of probation. This was based on what the government termed his exceptional cooperation which included testifying at the trials of Mr. Rajaratnam and Rajat Gupta.
The SFC reprimanded Societe Generale for failing to have adequate internal controls in its Wealth Management Activities in the Hong Kong branch regarding certain fees and charges imposed in secondary market transactions for certain products. The firm has also agreed to reimburse the customers the full value, estimated to be $11 million. The fee was variable and in some cases excessive. It was not disclosed to customers. From the lack of controls the firm also failed to ensure that customers were treated fairly in transacting OTC products in the secondary market. Societe Generale has agreed, as a result, to engage an independent reviewer to determine who is eligible to be paid and to review the systems and procedures of the Wealth Management Unit.
For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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