George Canellos and Andrew Ceresney, two former
colleagues in the Manhattan U.S. Attorney's Office, became the first
Co-Directors of the SEC's Enforcement Division. The Division also secured a
ruling this week which will permit its subpoena enforcement action against the
PRC based affiliate of Deloitte to move forward. The ruling may set the stage
for a precedent setting clash of U.S and PRC law on the question of whether
audit work papers for a U.S. registered issuer based in the PRC and audited by
a firm there are available to the SEC.
The Commission resolved an FCPA case this week in
conjunction with the DOJ. For the first time the SEC and the DOJ both entered
into non-prosecution agreements with the company. This is the first FCPA case
settled by the SEC with such an agreement. It is also the first FCPA case
resolved with two non-prosecution agreements. The Commission, in addition,
filed a settled financial fraud action and an insider trading case involving a
corporate executive. Finally, the PCAOB announced a new cooperation policy,
encouraging cooperation with its investigations.
Remarks: Commissioner Luis A.
Aguilar delivered remarks titled "Institutional Investors: Power and
Responsibility" to the Georgia State University Department of Finance CEAR
Workshop, Atlanta, Ga. (April 19, 2013). The remarks focused on the important
role institutional investors, particularly regarding good disclosure which can
aid a company, and in overall corporate governance (here).
Remarks: Chairman Gary Gensler
delivered remarks titled "Benchmark Interest Rates" at the London City Week
(April 22, 2013). His remarks focused on the challenges of transitioning from
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 3 civil injunctive actions and 2 administrative
proceeding (excluding tag-along-actions and 12(j) proceedings).
Investment fund fraud: SEC v. USA Real Estate
Fund I, Civil Action No. CV-13-157 (E.D. Wa. Filed April 24,
2013) is an action against the Fund and Daniel Peterson who controlled it.
Since 2010 Mr. Peterson is alleged to have soled interests in the Fund to at
least 21 investors raising over $400,000. Potential investors were told that
millions of dollars would be raised under the JOBS Act and reinvested in
Washington State real estate to aid the economic recovery. Potential rates of
return were projected to be 500% to as much as 1300% over ten years. In fact
the allegations were false. Mr. Peterson diverted the investor funds to his
personal use. The Commission's complaint alleges violations of Exchange Act
Section 10(b). The case is in litigation.
Loan loss reserves: In the Matter of Capital
One Financial Corporation, Adm. Proc. File No. 3015299 (April 24,
2013) is a proceeding which names as Respondents the company, Peter A. Schnall
and David A. Lagassa. Mr. Schnall was the Chief Risk Officer of Capital One
while Mr. LaGass was a Managing Vice President within the financial services
division. Beginning in October 2006 and continuing through the third quarter of
2007 Capital One's consumer lending business experienced significantly higher
charge-offs and delinquencies for its loans than it had forecast. By the second
quarter of 2007 its Capital One Auto Finance segment was experiencing higher
loss variances across all types of loans. The forecasting software ]projected
increasing losses due primarily to external factors. Rather than incorporating
the projected levels into the loss forecast for the segment, Capital One failed
to include any of the projection based on the external factors for the second
quarter and only part of it for the third quarter despite the fact that this was
an integral part of its procedures. As a result Capital One's consolidated
provision for loan and lease losses was understated by about 18% for the second
quarter and 9% for the third quarter of 2007. The Order alleges that Capital
One violated the books and records and internal control provision of the
federal securities laws as well as its own procedures. Messrs. Schnall and
LaGassa were the cause of those violations. To resolve the proceeding each
Respondent consented to the entry of a cease and desist order based on Exchange
Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Capital One also agreed to pay
a civil money penalty of $3.5 million. Respondents Schnall and LaGassa agreed
to pay, respectively, penalties of $85,000 and $50,000.
Unregistered securities: SEC v. Gibraltar
Global Securities, Inc., Civil Action No. 13 Civ 2575 (S.D.N.Y.
Filed April 18, 2013) is an action against the broker dealer and its owner and
president, Warren Davis. The complaint alleges that over a four year period
beginning in 2008 the Bahamas based broker dealer solicited U.S. customers
through its website looking to ultimately sell shares of thinly traded microcap
issuers. Once the shares were obtained they were resold through Gibraltar
accounts in the U.S. About $100 million of microcap shares were sold on behalf
of U.S. customers at commissions ranging from 2 to 3%. In addition, the
defendants participated in the unregistered offering of over 10 million shares
of Magnum d'Or. The complaint alleges violations of Securities Act Sections
5(a) and 5(c). The case is in litigation. See also Lit. Rel. No. 22683
(April 23, 2013). Previously, the Commission filed a related, settled case, SEC
v. Magnum D'Or Resources, Inc., Case No. 0:11-cv-60920 (S.D. Fla. Filed
April 29, 2011).
Unregistered brokers: SEC v. Zufelt, Civil
Action No. 2:10-cv-00574 (D. Utah) is a previously filed action against Anthony
C. Zufelt and others for operating a Ponzi scheme. Defendants Cache Decker and
David Decker, Jr. were alleged to have acted as unregistered brokers in selling
shares of Zufelt, Inc. from July 2006 through December 2006. On March 6, 2013
the court entered final judgments against the two Decker defendants prohibiting
future violations of Securities Act Sections 5, 17(a)(2) and 17(a)(3) and Exchange
Act Section 15(a). In addition, Cahce Decker is required to disgorge $43,000
along with prejudgment interest. A civil penalty was not imposed based on
financial condition. David Decker was ordered to pay disgorgement of $141,000
along with prejudgment interest and a civil penalty of $25,000. The case is
pending as to the other defendants. See also Lit. Rel. No. 22684 (April
Insider trading: SEC v. Begelman, Civil
Action No. 113-CV (S.D. Fla. Filed April 22, 2013) is an action against Mark
Begelman, the former chief operating officer of Office Depot. It centers on the
merger of Bluegreen Corporation and BFC Financial Corporation, announced on
November 14, 2011. An Executive of both companies was a longtime friend of Mr.
Begelman. The two men were members of the World Presidents' Organization or WPO
and a small group within that organization known as Forum 91. That group was
designed to give presidents of companies a confidential setting in which to
exchange ideas and receive advice about business and personal issues.
Accordingly, all discussions of the group were deemed confidential. At its
annual retreat in November 2011, Mr. Begelman learned about the deal from his
friend and, the next day purchased 25,000 shares of Bluegreen. Those shares
were sold the day of the deal announcement, yielding a profit of $14,949.34.
The complaint alleges violations of Exchange Act Section 10(b). To resolve the
case Mr. Begelman 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 to pay prejudgment interest and a civil
penalty equal to the amount of the trading profits. See also Lit. Rel.
No. 22682 (April 22, 2013).
False representations: SEC v. Woolf, Civil
Action No. 1:08 cv 235 (E.D. Va.) is a previously filed action against Linda
Woolf, Hand On Capital, Inc. and others. The complaint alleged that the
defendants sold a course called Teach Me To Trade in which they represented
that they had a successful trading record using the approach in the course. In
fact they did not. Ms. Woolf, who has filed for bankruptcy, and the company
settled with the Commission. The court entered by consent a permanent
injunction prohibiting future violations of Exchange Act Section 10(b). The
order also directs that Ms. Woolf pay a civil penalty of $225,000 and precludes
her and the company from receiving any profits from the sale of the course. See
also Lit. Rel. No. 22681 (April 19, 2013).
Compliance procedures: In the Matter of
Foxhall Capital Management, Inc., Adm. Proc. File No. 3-15293
(April 19 2013) names as Respondents the firm, a registered investment adviser,
and it majority owner and CEO, Paul Dietrich. The Order alleges that beginning
in January 2007, and continuing through early September 2009, the firm failed
to adopt and implement written compliance policies and procedures and keep
required records. The failure to have adequate procedures resulted in the
firm's failing to have an adequate interface between its primary broker dealer
and custodian's systems. As a result, at times customers placed trades without
having adequate cash in their accounts for the transaction. When this happened
the trades were reallocated to other clients within the same investment
portfolio but without regard whether the price increased or decreased from the
original trade date. Mr. Dietrich, as CCO, also failed to conduct a timely
annual review in 2007 of the firm's procedures. The firm had been instructed by
the inspection staff to cure these deficiencies but it did not. To resolve the
matter the Respondents consented to the entry of a cease and desist order based
on the Section cited in the Order which were Advisers Act Sections 204 and
206(4). Both Respondents were censured. In addition to implementing certain
remedial procedures, the firm was directed to pay disgorgement of $20,183,
prejudgment interest and a penalty of $100,000. Mr. Dietrich was directed to
pay a civil penalty of $25,000.
Investment fraud: U.S. v. Hampton, Case
No. 13 Crim 301 (S.D.N.Y.). Fund manager Thomas Hampton pleaded guilty to one
count of commodity fraud. Previously, he was the Managing Director of Hampton
Capital which invested in exchange traded funds or ETFs. Hampton Capital's
strategy was to use specially designed computer software to trade ETFs based on
pricing inefficiencies. Mr. Hampton bought and sold various securities and
futures contacts on behalf of the fund to implement the strategy. When the fund
began to suffer losses rather than tell investors the truth Mr. Hampton chose
to deceive them. Specifically, as early as April 2011 rather than admit there
were losses and risk withdrawals, Mr. Hampton began creating false statements
which represented to investors that the fund had positive returns, not the
losses that in fact were incurred. This encouraged investors to leave their
capital in the fund and, in some instances, add to it. As the trading losses
continued investors eventually lost millions of dollars. The date for
sentencing has not been set.
Ralph Lauren Corporation: The
company settled FCPA charges with the DOJ and the SEC under non-prosecution
agreements. For the SEC, this was first non-prosecution agreement.
The case stems from actions taken by Ralph Lauren's
indirect, wholly-owned, subsidiary in Argentina. Under the terms of the DOJ
non-prosecution agreement Ralph Lauren agreed to pay a penalty of $882,000.
Under the terms of the SEC agreement the company agreed to pay disgorgement of
$593,000 and prejudgment interest.
The charges trace to the actions a Ralph Lauren
subsidiary in Argentina beginning in 2003 and continuing for the next five
years. During that period the subsidiary retained a customs broker to assist
with clearing its merchandise. The General Manager of the subsidiary approved
the payment of bribes to permit clearance of items without the necessary paper
work, of prohibited goods and to avoid inspections. The bribes were paid by
falsifying the books and records.
Ralph Lauren leaned about the conduct in 2010 when
implementing a new FCPA policy after employees reviewed it and informed company
officials. The company terminated its custom broker and took a series of
remedial steps including ending its retail operations in Argentina. Ralph
Lauren also cooperated with enforcement officials. It self-reported, produced
all documents, voluntarily furnished translations of documents, made witnesses
available for interview and conducted a world- wide risk assessment.
The Board Issued a Policy Statement on Extraordinary
Cooperation in connection with its investigations. Such cooperation can result
in a reduction in charges and/or sanctions or no disciplinary action in
exceptional instances. Extraordinary cooperation is voluntary and timely, going
beyond compliance with legal or regulatory obligations, according to the Board.
Examples include self-reporting, remedial or corrective action to reduce the
potential for a reoccurrence and substantial assistance in Board investigation.
In some instances the cooperation may be acknowledged in the papers.
Financial Conduct Authority (UK) fined EFG Private Bank Ltd. £4.2
million for failing to take reasonable steps to establish and maintain
effective anti-money laundering controls for high risk customers. The failings
went on for a period of three years.
Insider trading: The
Australian Securities and Investment Commission announced that Colin Hebbard,
formerly a broker at Citigroup, was sentenced. Previously he pleaded guilty to
an insider trading charged based on the fact that he tipped another broker
about a possible takeover of Vision systems Limited. The plea was accepted by
the court and Mr. Hebbard was fined $20,000.
Securities and Futures Commission of Hong Kong announced that Lee Lan Chong
pleaded guilty to market manipulation. The charge was based on his actions
during a pre-opening session in relation to the Callable Bull Bear Contract,
linked to a market index. Prior to the open he placed contradictory buy and
sell orders for the contract enabling the final equilibrium price to be fixed
at a higher price than at the end of the prior session. Less than two seconds
before the end of the trading period he placed a bid order for one million
contracts which pushed up the indicative equilibrium price by over 25% compared
to the prior day's final equilibrium price. This gave him a notional profit of
$66,870. He was sentenced to serve one month in prison and pay a fine of
SFC instituted proceeding against Yeung Chung Lung, founder and former chairman
of First Natural Foods Holdings Ltd. The papers allege the embezzlement of $84
million of corporate assets and false accounting entries. The case is pending.
Internal controls: The
SFC reprimanded Sun Hung Kai Investment Services Ltd., and fined the firm $1.5
million for internal control failures. Specifically, on
September 8, 2011 the firm received an order for 25,000 shares of China Life at
$18.82. The account executive erroneously imputed the order as 2,500,018,000
shares. The system automatically split the order into 834 orders for execution.
The system did not have a limit on how many parts an order cold be split into
and there was a lack of segregation between the maker and checker. Fortunately,
the account executive realized the error and was able to cancel 97% of the
order. The cooperation of the company was credited.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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