The SEC’s apparent preference for administrative proceedings as a venue for its enforcement actions continues to draw criticism. H.R. 3798 is now pending in the House of Representatives. The bill is tilted the “Due Process Restoration Act of 2015.” It would give a Respondent in a cease and desist proceeding where a penalty may be imposed the right to have the SEC dismiss the action. The Commission could reinstitute the case in court.
The Commission filed actions this week based on: offering frauds; a failure to obtain best execution; the failure to disclose conflicts; not properly conducting an impairment analysis of assets; and the lack of proper procedures at a rating agency.
Remarks: Chair Mary Jo White delivered remarks titled “Building a Dynamic Framework for Offering Reform” as the Keynote address at the 47th Annual Securities Regulation Institute, New York City (October 28, 2015). Her remarks covered prior offering reforms, offerings under the JOBS Act and targeted regulatory adjustments in the future (here).
Testimony: David W. Grim, Director, Division of Investment Management, testified before the House subcommittee on Capital Markets and Government Sponsored Enterprises (October 23, 2015). His remarks reviewed recent initiatives by the Division (here).
Remarks: Commissioner J. Christopher Giancarlo delivered remarks titled “Top-Down Financial Market Regulation: Disease Mislabeled as Cure,” as the keynote address before the 2015 ISDA Annual Asia Pacific Conference (October 26, 2015). His remarks focused on constrains on liquidity, margin on uncleared swaps and algorithmic trading and cyber security (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 3 civil injunctive cases and 6 administrative actions, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Diverse Financial Corp., Civil Action No. 8:15-cv-01746 (C.D. Cal. Filed October 28, 2015) names as defendants the firm, its CEO Roy Dekel and its former President David Kandell. The three defendants are alleged to have raised about $3.29 million from 16 investors through the sale of promissory notes issued by DF Capital Partners, LLC, a bankrupt subsidiary of Diverse Financial. The funds were to be invested in premium finance lending – loans to pay premiums on the borrower’s life insurance policy — or short term cash type instruments but were diverted to pay for Diverse Financial’s operations. Mr. Dekel and Diverse Financial are also alleged to have misappropriated all of DF Capital’s investor funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 23396 (October 29, 2015).
Best execution: In the Matter of Hal S. Tunick, Adm. Proc. File No. 3-16931 (October 28, 2015); In the Matter of Patrick R. Burke, Adm. Proc. File No. 3-16930 (October 28, 2015). Messrs. Tunick and Burke were both registered representatives at now defunct Rochdale Securities. Each proceeding centers on failing to comply with the obligation to obtain best execution for clients in order to generate excess commissions. Mr. Tunick, for example, is alleged to have favored Proprietary Trader based in San Diego, California. In executing trades for customers of Rochdale, Mr. Tunick routinely favored PT in a way which generated extra commissions for him. He achieved this by contacting PT when he had a customer order and instructing that person to obtain the securities necessary to partially or completely fill the customer order. PT obtained the securities through another firm. PT then took the other side of the Rochdale customer order creating extra commission for Mr. Tunick. Unfortunately for the customer, the price paid was typically not the best available in the market. The Order in each action alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Each Respondent settled. Each consented to the entry of a cease and desist order based on the Sections cited in the Order. Each was barred from the securities business and from participating in a penny stock offering. Mr. Burke may apply for reinstatement after five years. Mr. Tunick will pay a civil penalty of $125, 000 while Mr. Burke will pay disgorgement of $6,300.00, prejudgment interest and a penalty of $50,000.
Insider trading: SEC v. Knight, Civil Action No. 2:11-cv-00973 (D. Ariz.) is a previously filed action against Ms. Knight, who previously settled, and Rebeca Norton. It alleged that the defendants traded on inside information in the securities of Choice Hotels. Previously, Ms. Norton settled and agreed to the entry of a permanent injunction based on Securities Act Section 17(a) and Exchange Act Section 10(b). The Court subsequently determined that a $25,000 penalty should be imposed and entered the final judgment. See Lit. Rel. No. 23395 (October 28, 2015).
Offering fraud: SEC v. Ascenery LLC, Civil Action No. 2:15-CV-01974 (D. Nev. Action No. 2:15-cv-01974 (D. Nev. October 13, 2015) is an action against the firm and its CEO, Joseph Gabaldon. It alleges that since 2014 the defendants have raised about $5 million from 90 investors through a fraudulent scheme on crowdfunding websites and their site. Potential investors were told that the funds would be used for oil and gas related expenses, that the investment was safe and offered outsized returns. The representations were false and much of the money has been diverted to the defendants. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
Misappropriation: In the Matter of Gary M. Arford, Adm. Proc. File No. 3-16932 (October 28, 2015). Mr. Arford was a sub-advisor to a fund. He caused it to invest $4 million in a firm that was supposed to build a hotel. After the commitment he took the firm’s undeveloped property and pledged it as collateral for personal debts. He also concealed facts about the use of Fund assets, portions of which he misappropriated. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). Respondent resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He is also barred from the securities business and from participating in any penny stock offering. In addition, Respondent will pay disgorgement of $4,226,684, prejudgment interest and a civil penalty of $150,000.
Manipulation: SEC v. Catapano, Civil Action No. 11 Civ. 1476 (E.D.N.Y.) is a previously filed action which named as defendants Joseph Catapano and Michael Piervinanzi. It alleges a fraudulent broker bribery scheme designed to manipulate the shares of Euro Solar Parks, Inc. The court entered final judgments against each defendant prohibiting future violations of Exchange Act Sections 9(a)(1) and 10(b) and Securities Act Section 17(a). In addition, the two men are jointly and severally liable for the payment of disgorgement in the amount of $31,000 and prejudgment interest. Defendant Catapano will pay a penalty of $44,000 while Mr. Piervinanzi will pay $10,425. See Lit. Rel. No. 23392 (October 26, 2015).
Disclosure/conflicts: In the Matter of National Asset Management, Inc., Adm. Proc. File No. 3-16925 (October 26, 2015). National Asset is a registered investment adviser with about $1.3 billion under management. The Order alleges that the firm failed to disclose to advisory clients over 21,000 principal transactions with an affiliated broker-dealer, failed to disclose the disciplinary history of several associated persons, did not enforce its code of ethics as to directors and others and failed to implement proper procedures. The Order alleges violations of Advisers Act Sections 204, 204A, 206(3), 206(4) and 207. Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm will also implement a series of undertakings including the retention of an independent consultant and will pay a penalty of $200,000.
Asset impairment: In the Matter of The St. Joe Company, Adm. Proc. File No. 3-16927 (October 27, 2015). Respondents, in addition to the firm, are: Wm. Britton Greene, COO; William S. McCalmont, CFO; Janna Connolly, CPA, CAO; J. Brian Salter, CPA, Manager of Finance; and Phillip B. Jones, CPA, Director of Accounting. St. Joe is a Florida based developer of residential and commercial real estate. Virtually all of the firm’s assets, income and revenue were tied to real estate and thus must be evaluated for impairment charges when there are appropriate circumstances as here. First, from the beginning of 2009 through the second quarter of 2010 the firm’s impairment testing failed to include all cash outflows. This resulted in not taking impairments on projects of $55 million in Q1 2009, and $19 million in Q4 2009. Second, with regard to the Victoria Park project and testing for impairment in Q3 2009, the firm failed to consider the likelihood of selling the project in bulk by the end of 2009 as approved by a firm committee. If the proper testing had been done Victoria Park would have been impaired by at least $55 million. Third, Respondents Greene, McCalmont, Connolly and Slater failed to review, or effectively cause a review, of St. Joe’s accounting for prior periods and identify the errors made despite reasons to initiate such a review. The firm also improperly applied updated assumptions to its models when doing testing for certain periods which caused it to not take about $15 million in impairments. Fourth, with respect to the Windmark Beach II project, the firm’s largest real estate development in terms of capital expenditures, St. Joe adopted unreasonable values for the property which resulted in not taking a charge of least $80 million for Q4. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and (b) and 13(b)(5). To resolve the proceedings Respondents St. Joe, Greene, McCalmont, Connolly and Salter consented to the entry of a cease and desist orders based on Sections 17(a)(2) and (3). Respondent Jones consented to a similar order based on Section 17(a)(2). The order as to each Respondent was also based on each Exchange Act Section cited in the Order except Section 13(b)(5) which was only cited in the orders as to the four individual Respondents. The firm will pay a penalty of $2,750,000. Respondent Greene will pay $400,000 in disgorgement along with prejudgment interest and a penalty of $120,000; Respondent McCalmont will pay disgorgement of $180,000, prejudgment interest and a penalty of $120,000; Respondent Connolly will pay disgorgement of $60,000, prejudgment interest and a penalty of $70,000; and Respondent Salter will pay a civil penalty of $25,000. Respondents McCalmont, Connolly, Slater and Jones are each denied the privilege of appearing and practicing before the Commission with the right to apply for reinstatement after three years except for Respondents Jones and McCalmont who may apply after two years. The SEC considered the cooperation and remedial efforts of Respondents.
Investment fund fraud: SEC v. Summit Trust Co., Civil Action No. 15-cv-05843 (E.D. Pa. October 27, 2015) is an action which names as defendants: the Nevada chartered trust company; Rampart Fund LP, a private fund managed by defendants Kevin Brown and his father George; Trust Counselors Network, Inc., a non-profit charitable organization; and Brown Investment Advisors, Inc., a state registered adviser. The case centers on three fraudulent schemes. In the first, between 2008 and 2014, the Browns raised over $13 million from over 150 investors selling Summit Trust preferred stock and misappropriated most of the funds. In the second, between 2008 and 2013, the Browns, using Rampart and Brown Investment Advisors, Inc., raised about $7.9 million from over 100 investors through the sale of Rampart notes while failing to tell investors the firm defaulted on its primary obligation and used their funds to pay other obligations. In the third, from 2004 through 2015 the Browns used Trust Counselors to raise over $12 million from 70 investors for a real estate planning product but part of the funds went to losses on speculative investments while part were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a), Exchange Act Sections 10(b) and 15(a), Adviser Act Sections 206(1),(2),(3) and (4) and Investment Company Act Section 7(a). The defendants resolved the case. Kevin and George Brown each consented to the entry of permanent injunctions based on each Section cited in the complaint. In addition, Kevin Brown will pay disgorgement of $1.3 million, prejudgment interest and a penalty, jointly and severally, with Brown Investment, additional disgorgement of about $1.3 million along with prejudgment interest and a penalty of $2.9 million. George Brown will pay $278,000 in disgorgement and prejudgment interest, jointly and severally, with Brown Investment, additional disgorgement of about $1.3 million with prejudgment interest and a civil penalty of $1.8 million. Summit Trust is enjoined based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). In addition, the firm will pay disgorgement of $16.5 million and prejudgment interest but no penalty based on financial condition. Trust Counselors is enjoined based on the same Sections as Summit except not Exchange Act Section 15(a). The firm will also pay disgorgement of $9.2 million and prejudgment interest but no penalty based on financial condition. Brown Investment and Rampart Capital are enjoined based on Securities Act Section 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and each Advisers Act Section cited in the complaint and Investment Company Act Section 7(a). The firm will also pay disgorgement of $1.3 million, prejudgment interest and a penalty of $1.8 million which was waived based on financial condition. See Lit. Rel. No. 23393 (October 27, 2015).
Procedures: In the Matter of DBRS, Inc., Adm. Proc. File No. 3-16922 (October 26, 2015). DBRS has been a registered NRSRO since 2007. The firm publishes methodologies for its surveillance of outstanding U.S. RMBS ratings. In 2008 the firm published its Surveillance Methodology. It was modified the next year. Under the disclosed methodology the firm stated that analysts would conduct surveillance regarding each outstanding RMBS and re-securitized real estate mortgage investment conduits or Re-REMIC using a three step process. In addition, a surveillance committee would review the ratings monthly according to the procedures and assumptions would be updated periodically to reflect market trends and disclosed on the firm’s website prior to their use. The firm did not follow its disclosed process. In July 2009 the firm updated most of its loss severity assumptions for the mortgage pool types and vintages that constituted the collateral for RMBS and Re-REMICs. Although the firm had represented that updates would be disclosed they were not. The Order alleges violations of Exchange Act Sections 15E(b)(1)(failing to update NRSRO application), 15E(b)(2)((failing to list material changes in annual NRSRO certification), 15E(c)(3)(A)(internal controls), 15E(d)(1)(E)(failure to maintain adequate resources) and 17(a)(books and records). To resolve the proceeding the firm agreed to implement a series of undertakings including the retention of an independent consultant who was assigned specific duties. DBRS also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay disgorgement of $2,742,000, prejudgment interest and a penalty of $2,925, 000.
Insider trading: SEC v. Eydelman (D.N.J. Filed March 19, 2014) is a previously file action against Broker Vladimir Eydelman of Oppenheimer & Co., Steven Metro, a clerk at Simpson Thatcher and mortgage broker Frank Tamayo, a law school class mate of Mr. Metro. Beginning in February 2009 the group traded on inside information 13 times, garnering $5.6 million in illicit insider trading profits. The scheme was implemented so that Mr. Metro misappropriated the information and Mr. Tamayo transmitted it to Mr. Eydelman who placed the the trades. Mr. Eydelman settled with the Commission. He consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). In addition, he agreed to disgorge $1,236,657 in trading profits which will be deemed satisfied by the entry of orders of forfeiture or restitution in the parallel criminal case. In that action Mr. Eydelman pleaded guilty. He also agreed to pay a civil penalty equal to the trading profits and prejudgment interest. See Lit. Rel. No. 23391 (October 23, 2015).
U.S. v. Bennett (S.D.N.Y.) is an action in which Charles Bennett, a corporate lawyer with a New York City law firm, pleaded guilty to securities and wire fraud charges. The indictment alleges that from 2008 through 2014 Mr. Bennett solicited about $5 million from 30 investors which was to be put into what he claimed was an exclusive investment fund in which he also had money. In fact it was a Ponzi scheme.
Mutual fund fees: The regulator directed Edward D. Jones & Co., Stifel Nicolaaus & Co., Janney Montgomery Scott, LLC, AXA Advisors, LLC and Stephens Inc. to pay a total of $18 million in restitution, including interest, to affected customers for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts. This is the second group of these actions.
Report: The Australian Securities Investment Commission published a report on high frequency trading and dark pool liquidity (here).
Remarks: CEO Ashley Adler, Securities and Futures Commission, delivered the Keynote Address at the 2015 ISDA Annual Asia Pacific Conference (October 26, 2015). His remarks focused on the new framework for OTC derivatives, progress on reforms and cross boarder regulation (here).
For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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