Chinese affiliates of major audit firms and market
professionals were the focus of securities enforcement litigation this week.
Five PRC based affiliates of major international accounting firms were named as
Respondents in an administrative proceeding the Commission directed be filed
under Rule 102(e). The action potentially has far reaching consequences since
the PRC based affiliates of the audit giants could be precluded from appearing
and practicing before the Commission. Such a ruling could effectively deny
access to the U.S. capital markets for Chinese issuers.
The Commission also filed two insider trading cases
centered on market professionals. In one a market professional is alleged to
have been at the center of a ten person, years long insider trading ring. In another
the founder of an unregistered investment advisor used confidential information
obtained in a bidding process to engage in insider trading, according to the
allegations. Both cases are in litigation.
Remarks: Commissioner Luis
Aguilar addressed the AICPA Conference on Current SEC and PCAOB Developments,
Washington, D.C. (Dec. 3, 2012). His remarks included comments on the loss of
investor confidence, understanding capital formation, investor protection,
relying on the integrity of foreign audits, the role of the PCAOB and the
importance of internal controls (here).
Remarks: Norm Champ, Director,
Division of Investment Management, addressed the ALI CLE 2012 Conference on Investment
Adviser Regulation, New York City (Dec. 6, 2012). His comments reviewed the
work of the staff in a number of areas including Dodd-Frank, Form PF, the JOBS
Act and the use by Funds of derivatives. He also commented on future division
Remarks: Paul A. Beswick,
Acting Chief Accountant, addressed the 2012 AICPA National Conference on
Current SEC and PCAOB Developments, Washington, D.C. (Dec. 3, 2012). His
remarks included a discussion of international financial standards, three FASB
projects related to disclosures in financial statements, convergence and
auditor independence (here).
Remarks: Brian T. Croteau,
Deputy Chief Accountant, addressed the 2012 AICPA National Conference on
Current SEC and PCAOB Developments, Washington, D.C. (Dec. 3, 2012). His
remarks included a discussion of audit policy matters and initiatives, the use
of third party pricing service information, internal controls over financial
reporting and COSO's framework update project, the JOBS Act and Auditor and
Audit Committee interactions (here).
Joint statement: The
Office of International Affairs released a joint statement from leaders who
oversee the OTC derivatives markets in Australia, Brazil, the European Union,
Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the U.S. The
statement discusses coordination among regulators (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed four civil injunctive actions and one administrative
proceeding (excluding tag-along-actions and 12(j) actions).
Insider trading: SEC v. Femenia, Civil
Action No. 3:12 cv 803 (W.D. N.C. Filed Dec. 5, 2012) is an action against
Wells Fargo investment banking associate John W. Femenia, who is alleged to
have headed a 10 person insider trading ring. It included: Shawn Hegedus, a
registered representative and long time friend of Mr. Femenia who is alleged to
have been tipped by him; Aaron Wens and Matthew Musante, two other friends
alleged to have been tipped by Mr. Femena; Anthony Musante, father of Matthew,
also alleged to have been tipped by Mr. Femena; Danielle Laurenti, the
girlfriend of Mr. Hegedus who is alleged to have tipped her along with four of
his business colleagues, Roger Williams, James Hayes IV, and Kenneth Raby. The
case centers on four take-over transactions: The acquisition by GENCO
Distribution Systems of ATC Technology Corporation, announced on July 19, 2010;
the purchase by Rock-Tenn Company of Smurfit-Stone Containers Corporation
announced on January 23, 2011; the acquisition of K-Sea Transportation Partners
by Kirby Corporation, announced on March 13, 2011; and the purchase of The Shaw
Group by Chicago Bridge & Iron Company, announced on July 30, 2012. The
ring participats netted about $11 million in illegal profits, according to the
complaint. The complaint alleges violations of Exchange Act Section 10(b). The
case is in litigation.
SOX 106: In the Matter of BDO China Dahua CPA
Co., Ltd., Adm. Proc. File No. 3-15116 (Dec. 3, 2012) is
a proceeding against BDO China, Ernst & Young Hau Ming LLP, KPMG Huazhen
(Special General Partnership), Deloitte Touche Tohmatsu Certified Public
Accountants Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Ltd.
It is based on Rule 102(e)(1)(iii) and alleges violations
of Section 106 of the Sarbanes-Oxley Act of 2002, as amended by the Dodd-Frank
Act. That Section provides that a PCAOB registered firm that audits the
financial statements of a U.S. issuer consents to produce its work papers on
request by either the Board or the SEC. Here each Respondent, according to the
Order, is registered with the PCAOB, audited the financial statements of a PRC
based U.S. issuer and was requested by the agency to produce its work papers.
Each Respondent declined, at least in part, based on their understanding that
the law of the PRC precluded the production. The Order directs that a hearing
be held before an ALJ to hear evidence.
Insider trading: SEC v. Massoud, Civil
Action No. 3:12-cv-01691 (D.Ct. Filed Nov. 30, 2012) is an action that centers
on the auction for Patriot Capital Funding, Inc. which was acquired by debt
financier Prospect Capital Corporation in a deal announced on August 3, 2009.
The defendant is J. Joseph Massoud, the managing member of Compass Group
Management LLC, an unregistered investment company. In early 2009 Mr. Massoud
was contacted about bidding to acquire Patriot which was suffering liquidity
problems. Others were also contacted to bid. Each bidder was given access to
confidential information about the company located in a data room. During the
bidding process Mr. Massoud reached out to others and learned about their
bidding intentions. In mid-May 2009, Mr. Massosud began purchasing Patriot
shares, eventually acquiring 322,216 shares. Following the deal announcement
Mr. Massoud sold all of his shares, netting profits of $676,000. The
Commission's complaint alleges violations of Exchange Act Section 10(b). To
resolve the case Mr. Massoud consented to the entry of a permanent injunction
prohibiting future violations of the Section cited in the complaint. He also
agreed to disgorge his trading profits and pay prejudgment interest and a
penalty equal to his trading profits. Mr. Massound will also be barred from
serving as an officer or director, from the securities business and from
participating in any penny stock offering. See also Lit. Rel. No. 22553
(Nov. 30, 2012).
Insider trading: SEC v. Cornelsen, 12
CIV 8712 (S.D.N.Y. Filed Nov. 30, 2012) is an action against Brazilian citizen
and banker Igor Cornelsen and Bainbridge Group Inc., a controlled entity
through which he traded securities. Mr. Cornelsen became a customer of broker
Waldyr Da Silva Prado, then of Wells Fargo Advisers, LLC, in 2008. During that
time the broker learned from a client that Burger King Holdings, Inc, would be
acquired by affiliates of private equity Fund 3G Capital Partners, Ltd. in a
deal announced on September 2, 2010. On May 17 2010, the complaint alleges that
Mr. Prado sent an e-mail to Mr. Cornelsen in Portuguese which requested that he
call to obtain some information. A ten minute phone conversation that day was
followed by the purchase of 2,850 Burger King call options the next day. Over
the summer Mr. Cornelsen continued to trade Burger King options. In late August
the broker assured him in an e-mail that everything was under control When the
deal became public the two men exchanged e-mails. Mr. Cornelsen sold his
options, reaping profits of over $1.68 million. The Commission's complaint
alleges violations of Exchange Act Sections 10(b) and 14(e).
To resolve the case the defendants consented to the entry
of permanent injunctions prohibiting future violations of the Sections cited in
the complaint. They also agreed to disgorge the trading profits and pay
prejudgment interest. In addition, Mr. Cornelsen will pay a civil penalty of
$3,362,180. See also SEC v. Prado, Civil Action No. 12 CIV 7094
(S.D.N.Y. Filed Sept. 20, 2012).
Misappropriation: SEC v. China North East
Petroleum Holdings Limited, Civil Action No. 12-CV-8696
(S.D.N.Y. Filed Nov. 29, 2012) is an action against the company, its CEO and
president and former chairman, Wang Hongjun, its founder Ju Guizhi, and its
v.p. of corporate finance, Jiang Chao. The complaint alleges that the
defendants engaged in a series of transactions and undisclosed related party
transactions in which company funds were diverted to corporate insiders,
including a substantial portions of the money raised in an offering. The
complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections
10(b), 13(a), 13(b)(2)(A) & (B) and 13(b)(5). The case is in litigation.
Manipulation: SEC v. East Delta Resources
Corp., Civil Action No. CV 10-0310 (E.D.N.Y.) is an action
against the company and two brothers, Mayer Amsel and David Amsel. The complaint
alleged that the two individuals engaged in numerous wash sales of the company
stock, netting them over $1 million. Previously, the Commission prevailed on
the liability issues in a summary judgment motion. Following a hearing the
court entered a judgment which includes a permanent injunction based on
Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) and ordered
disgorgement in the amount of $936,780.46 and prejudgment interest. In
addition, Mayer Amsel was directed to pay a civil penalty of $445,000 while
David Amsel will pay $715,000. The judgment was entered October 18, 2012. See
also Lit. Rel. No. 22561 (Dec. 6, 2012).
Remarks: Commissioner Bart
Chilton addressed the Information Management Network, Global Indexing and Conference,
Phoenix, Az. (Dec. 4, 2012) in remarks titled: Trimming the Tree-Regulation and
Recovery. The Commissioner's remarks covers topics which included market
integrity, high speed trading and technology difficulties (here).
Alert: The SEC and FINRA
issued a new investor alert titled: Year-End Investment Considerations for
Individual Investors. It notes that investors should consider asset allocation,
evaluate if their investments require rebalancing, consider the tax impact and
evaluate the background of their investment professional (here).
Audit practice alert: The
regulator published a Staff Audit Practice Alert on Maintaining and Applying
Professional Skepticism in Audits.
Suitability: The Hong Kong
regulator issued a public reprimand to President Securities (Hong Kong) and
imposed a $2 million fine for failing to act in the best interests of its
clients in connection with accepting subscriptions in 2008 for Lehman Brothers
related structured products. The clients were referred by its parent and the
firm staff executed the account opening forms without contacting the clients or
fully informing them about key aspects of the investments.
False information: Finet
Group Ltd. and its former chairman, Yu Gang, were fined for providing false
information to the Stock Exchange. The company and its former chairman also
pleaded guilty to two summonses for failing to disclose the interest of the
current chairman in filings.
The Australian regulator fined BGC Partners (Australia)
Pty Ltd. $45,000 for withholding buy and sell order on the ASX 24 Market which
potentially precluded other participants from participating as counterparty to
Hurricane Sandy: As
we enjoy the holiday season please remember the victims of Sandy's destruction
with a donation to the Red Cross (here).
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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