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Money market funds were the focus this week at the Commission. The agency issued proposed regulations for comment which may revise the operations of the widely used investment vehicles. The action follows a failed effort last year to propose new regulations and a warning from the FSOC that it may step-in if the SEC continued to dawdle on this important question.
SEC Enforcement centered on offering fraud actions. Once case filed by the SEC involved thirty- five offerings that the complaint claims were actually one, integrated. A second centered on a series of offerings made by a small business owner. family owned business. The Commission settled another offering fraud case where the shares were used in microcap manipulations. In a variation, the Commission, in parallel with the CFTC, filed an action against a foreign broker to halt the unregistered sale of binary options in the U.S.
The agency also filed cases centered on the failure of internal accounting controls and insider trading. The latter names an individual as a defendant. Yet the allegations mimic the Commission's "suspicious trading" actions - the trading is large and well timed before a take-over announcement but the source of the inside information is unknown.
Money market funds: The Commission issued proposed rules for comment regarding money market funds. The release contain two alternatives, either or both of which may ultimately be adopted. Under one, net asset value or NAV would float for a limited group. Under the other, funds would continue with the current stable NAV but would hve to "gate" the fund if certain thresholds are crossed (here).
Trading suspension: The Commission issued an order suspending trading for 61 companies in the over-the-counter market. This is the second largest trading suspension in agency history. It is part of what is called "Operation Shell Expel."
Remarks: Commissioner Elisse B.. Walter addressed the SEC Historical Society Annual Meeting, Washington, D.C. (June 6, 2013). Her remarks focused on ways the agency is leveraging its scarce assets to increase investor protection (here).
Remarks: Commissioner Elisse B. Walter, Keynote Luncheon Speech, 32nd Annual SEC and Financial Reporting Institute Conference, Pasadena CA. (May 30, 2013). The Commissioner addressed the need for accounting which reflects the substance of the transaction and priorities for the PCAOB (here).
Remarks: Paul Beswick, Chief Accountant, Remarks at the 32nd Annual SEC and Financial Reporting Institute Conference, Pasadena, CA. (May 30, 2013). His remarks focused on the evolving international accounting standards and the PCAOB (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 6 civil injunctive action and 2 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Insider trading: SEC v. Rungruangnavarat, Civil Action No. 13 cv 4172 (N.D. Ill. Filed June 5, 2013) is an action against Badin Rungruavgnavart, a 30 year old employee of a plastics company in Bangkok. It centers on the announcement that Shuanghui, a Chinese company, would acquire Smithfield Foods, Inc., made on May 29, 2013. Between May 21 and 28, 2013, the defendant purchased 1,300 out-of-the money July 29 Smithfieled call options; 1,7000 out-of-the-money July 30 Smithfield call options; 955 July Smithfield single-stock future contracts; 1,625 September Smithfield single-stock futures contracts and 100 shares of Smithfield common stock. The options cost less than $100,000. The futures required that $1.34 million be posted as margin. All of the trades were made in an account at Interactive Brokers, opened shortly before the first transaction. The complaint alleges, based on information and belief, that the defendant possessed inside information. It speculates that the source may have been "a Facebook friend who is a former employee of the company where Rungruangnavarat works, and who is associate director at the Thai investment bank that advised Chareon on its contemplated Smithfield bid." The complaint alleges violations of Exchange Act Section 10(b). A freeze order was obtained over the account which has over $3.2 million in unrealized gains. The case is pending.
Unregistered offering: SEC v. Banc De Binary Ltd., Case No. 2:13-cv-00993 (D. Nev. Filed June 5, 2013) is an action against the firm which is based in the Republic of Cyprus. The firm is subject to securities regulators in that jurisdiction and holds reciprocal licenses in several other EU countries. It has never registered with the SEC. The firm has, since 2010, been selling binary options to U.S. residents. The securities are options whose payout is contingent on the future value of an underlying asset. For example, if the underlying asset increases in value, the purchaser profits. If it does not, the purchaser receives nothing. The firm has been soliciting for the product through a website, YouTube videos, e-mail and other internet based advertising. The securities are not registered. The firm is not a registered broker-dealer. The complaint alleges violations of Securities Act Section 5 and Exchange Act Section 15(a). The case is pending. The CFTC brought a parallel action. Both agencies have issued investor alerts regarding binary options.
Financial fraud: SEC v. Fisher, Civil Action No. 07-cv-4483 (N.D. Ill.) is a previously filed action against, among others, Kathleen Halloran and George Behrens, respectively, the former CFO and Treasurer of Nicor, Inc. The complaint alleged that the defendants had materially overstated the firm’s revenues under a performance based rate program. The overstatement resulted from making or authorizing false and misleading statements about the performance of the company in multiple filings, according to the allegations. The Commission alleged violations of Securities Act Sections 17(a)(2) and (3). Ms. Halloran and Mr. Behrens settled the claims, consenting to the entry of judgments which require them to pay, respectively, $177,064.06 as disgorgement along with prejudgment interest, and $87,980 as disgorgement also with prejudgment interest. The Commission dropped claims against each settling defendant based on Securities Act Section 17(a)(1) and Exchange Act Sections 10(b) and 13(a). See also Lit. Rel. No. 22715 (June 5, 2013).
Offering fraud: SEC v. Laidlaw Energy Group, Inc., Civil Action No. 13 Civ. 3837 (S.D.N.Y. Filed June 5, 2013) is an action against the company and Michael Bartoszek.
Between August 2006 and January 2010 Laidlaw sold approximately 2 billion shares to a group called the Purchasing Entities in 35 unregistered offerings for $1,259,550 in cash. No registration statement was in effect and a claimed exemption under Rule 504(b)(1)(iii) was not available because the offerings, when integrated, exceeded the $1 million limit of the Rule. The Purchasing Entities almost immediately resold the shares acquired from in the secondary market. Mr. Bartoszek knew that this was the intent of the Purchasing Entities. In two three month periods between December 2009 and June 2011 Mr. Bartoszek sold shares of the company which, in total, constituted over 1% of the float. At the time of the transactions Laidlaw was not a reporting company and, according to the complaint, the market price did not reflect the true condition of the company. This resulted from the fact that the periodic press releases and internet postings of the firm rarely disclosed any negative facts. Thus the share price reflected the positive information released by the company. The complaint alleges registration violations and insider trading, citing Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22714 (June 5, 2013).
Reg M: In the Matter of UBS O'Connor, LLC, Adm. Proc. File No. 3-15437 (Filed June 3, 2013) is a proceeding in which the Respondent is a registered investment adviser and a wholly owned subsidiary of UBS AG, a Swiss banking corporation. The Order alleges that over a two and one half year period beginning in January 2009 the firm violated Rule 105 of Regulation M sixteen times. During that period the firm shorted securities in the issuers within five days of the pricing of firm commitment public offerings. It later purchased equity securities in the offerings. Overall the firm had profits from those transactions of $2,168,473. In addition, the firm obtained an impermissible benefit of $1,619,116 for the funds from the remaining shares purchased in firm commitment public offerings. During the inquiry the adviser revised its policies and procedures to comply with the Regulation. To resolve the proceeding the firm consented to the entry of a cease and desist order based on Rule 105 of Regulation M and the entry of a censure. The Respondent will also pay disgorgement of $3,787,590, prejudgment interest and a civil penalty of $1,140,000.
Internal controls: SEC v. PACCAR Inc., Civil Action No. 2:13-cv-00953 (W.D. Wash. Filed June 3, 2013) is a proceeding against the firm and its related finance entity. It is based on three separate errors in the financial reporting of the company, each of which traces to deficiencies in the internal accounting controls of the firm. The errors occurred in the period 2008 through the third quarter of 2012. The first concerned segment reporting. In its Form 10-K for the period ended December 31, 2009 PACCAR did not separately report income before taxes from truck sales and aftermarket part sales. GAAP, and the applicable Commission rules, require an issuer to report select information about reportable segments separately. Although internally the company treated the truck and parts sales portions of the business as essentially segments, they failed to report them as such. Accordingly, investors only saw that the combined truck and parts segment made a profit rather than the fact that truck sales generated a loss which was eclipsed by the profits from part sales. Second, PACCAR and its related finance company, defendant PACCAR Financial Corporation, understated impaired receivables and the associated specific reserve in the financial statement notes to the 2009 Form10-K, according to the complaint, by a significant amount. Likewise, the company failed to disclose the impairment of leases to its two largest past due customers by about 65%. Finally, the company overstated the amount of (a) retail loans and direct financing leases originated and (b) collections on retail loans and direct financing leases in its consolidated Statement of Cash Flows for the quarters ended June 30, 2009 and September 30, 2009 by equal amounts. The complaint alleged violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company resolved the action, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. It also agreed to pay a civil monetary penalty of $225,000. The settlement takes into account the remedial actions of the company.
Offering fraud/manipulation: SEC v. Rubin, Civil Action No. SACV 11-1466 (C.D. Cal.) is a previously filed action against Thomas Rubin and Christopher Scott, respectively, the CEO and CFO of broker dealer Westcap Securities, Inc. and others. The complaint alleged that the two men and others engaged in a continuous scheme to conduct unlawful unregistered offerings and/or manipulate the shares of four microcap stocks. This week the Commission announced that the court had entered final judgments by consent as to Messrs. Rubin and Scott as well as defendants BGLR Enterprises, LLC and E-Info Solutions, LLC. The judgments against the two men impose permanent injunctions prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). In addition, a penny stock bar was ordered against each man, 10 years for Mr. Rubin and 5 years for Mr. Scott. Defendant Scott will also be required to pay disgorgement of $112,000, prejudgment interest and a civil penalty of $75,000. The court has not determined what financial remedies may be imposed against Mr. Rubin. The court also entered, permanent injunctions prohibiting future violations of Securities Act Sections 5(a) and (c) as to each entity defendant and, respectively, a 10 year and 5 year penny stock bars as to BGLR Enterprises and E-Info Solutions. See also Lit. Rel. No. 22713 (June 3, 32013).
Investment fund fraud: SEC v. Gist, Civil Action No. 1:13-CV-01833 (N.D. GA. Filed May 31, 2013) is an action against attorney Robert Gist and his firm Gist, Kennedy & Associates, Inc. The complaint alleges that since 2003 Mr. Gist has raised about $5.4 million from 32 individuals based on promises that he would invest their funds in a conservative manner. In fact he used the money for personal expenses and to fund a company he controlled. Investors were periodically furnished with fictitious account statements. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a). The defendants resolved the proceeding, consenting to the entry of a permanent injunction prohibiting future violations. As to the company the injunction is based on Exchange Act Section 10(b). As to Mr. Gist it is based on both Sections cited in the complaint. The order also requires that the defendants, on a joint and several basis, pay $5.4 million in disgorgement, prejudgment interest and penalties. See also Lit. Rel. No. 22710 (May 31, 2013).
Offering fraud: In the matter of Scuderi Group, Inc., Adm. Proc. File No. 3-15344 (Filed May 30, 2013) is a proceeding against the firm and its President and CFO, Salvatore Scuderi. The Group has been in the business of developing a new internal combustion engine design. The firm funded its operations from individual investors and investment clubs, raising about $80 million in six offerings which sold what were called "preferred units" to about 415 investors. While Respondents claimed that the offerings were exempt from registration, in fact they did not qualify under Section 4(2) or Regulation D Rule 504 because they exceeded the investor limits, failed to provide investors with audited financial statements and effectively engaged in a plan to evade the registration statements. The offering materials furnished to potential investors also misstated the use which would be made of the funds. Specifically, about $3.2 million, representing just over 4% of the investor funds, were used for personal purposes and undocumented loans to family members, contrary to representations in the offering materials. To resolve the proceeding, Respondents agreed to implement undertakings which require them to inform investors of this proceeding and document the loans. They also consented to the entry of a cease and desist order based on Securities Act Sections 5(a), 5(c) and 17(a)(2). Mr. Scuderi agreed to pay a civil money penalty of $100,000.
Offering fraud: SEC v. Detroit Memorial Partners, LLC, Civil Action No. 1:13-cv-01817 (N. D. Ga. Filed May 30, 2013). Mr. Morrow and his company are alleged to have raised just under $25 million from investors who purchased either notes or what were called equity interests in Detroit Memorial Partners. In 2007 Mr. Morrow decided to bid for 28 cemeteries in Michigan that were in receivership. To implement the plan he formed Detroit Memorial. Initially, Mr. Morrow raised investment funds from a wealthy business man whose wife was a client of his long time business associate, Angelo Alleca and his firm, Summit Wealth Management, Inc. Mr. Allecca and his firm are defendants in another Commission enforcement action centered on a claimed Ponzi scheme. Later Mr. Alleca and others at Summit sold about $9.5 million of Detroit Memorial promissory notes. The notes were unregistered and by early January 2009 Mr. Allecia lost much of the proceeds in risky investments, according to the complaint. Mr. Allecia sole more unregistered notes. The offering materials contained a series of misrepresentations. In 2012 another offering of Detroit Memorial unregistered notes was made to 18 investors who purchased about $1.3 million in notes. Again, the offering materials contained misrepresentations. Finally, Detroit Memorial raised an additional $4.5 million from four investors in return for a combined 61% equity interest in the entity. Mr. Morrow told some investors that the company was debt free - a misrepresentation since it had substantial debt from the note offerings. The complaint alleges violations of Securities Act Sections 5(a) and 5(c), each subsection of Section 17(a) and Exchange Act Section 10(b). The case is in litigation.
Suitability: Fines were imposed, and restitution ordered paid, by Wells Fargo Advisors, LLC and Merrill Lynch, Pierce, Fenner & Smith Inc., (successor for Banc of America Investment Services) for customer losses incurred from the sale of floating-rate bank loan funds. Those instruments are mutual funds that typically invest in a portfolio of secured senior loans made to entities whose credit quality is below investment grade. The funds are subject to significant risk and can be illiquid. Each firm recommended these instruments to customers for whom they were not suitable. Accordingly, Wells Fargo will pay a fine of $1.25 million and reimburse about $2 million in losses to 239 customers. Merrill Lynch will pay a fine of $900,000 and reimburse about $1.1 million in losses to 214 customers.
Investment fund fraud: U.S. v. Scott (E.D.N.Y.) is an action charging wire fraud conspiracy against Frederick Scott, the founder and CEO of ACI Capital Group LLC. The firm is a registered investment adviser. Mr. Scott engaged in two fraudulent schemes. In one he induced investors to wire funds to the firm based on the promise of a high rate of return from short-term financing from businesses associated with the adviser. In the other he promised favorable loans in return for the payment of a fee. In fact, Mr. Scott misappropriated the investor funds, according to the court papers. Mr. Scott was arraigned earlier this week. The case is pending.
The UK Financial Conduct Authority fined Sesame Limited £6,031,200 for failing to: a) ensure that investment advice was suitable and b) not having systems and controls that govern oversight of representatives. Specifically, from July 2005 through June 2009 the firm advised 426 customers to invest in Keydata life settlement products. That advice did not correspond to the investment objective of the clients. The firm also failed from July 2010 to September 2012 to take reasonable care to organize and control it affairs responsibly and effectively and failed to improve its oversight of representatives.
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 firstname.lastname@example.org). Webcast nationally by the ABA and available in other Dorsey & Whitney offices. For further information please click here.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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