This week the SEC and the DOJ filed FCPA Actions against oil services company Weatherford International. The company became the newest member of the Top Ten FCPA Settlements group, paying about $252 million to resolve FCPA and export control charges.
SEC enforcement also brought a series of actions which in part included proceedings arising from its inspection program. Those actions involved false statements regarding the distribution of an analyst report, undisclosed principal transactions, unregistered sales of securities and investment fund fraud.
The CFTC continued to focus on manipulation cases. The agency filed another action centered on the attempted manipulation of futures contracts in the oil market.
Finally, the PCAOB announced the resolution of four disciplinary proceedings. The actions involved three firms and three individuals at each firm. The proceedings focused on the issuance of false audit opinions, a failure to conduct the necessary fraud detection procedures and a lack of independence.
Remarks, Commissioner Michael S. Pinwowar delivered remarks to the Los Angeles County Bar Association Securities Regulation Seminar, Los Angeles, Calif. (Nov. 22, 2013). The Commissioner’s remarks focused on viewing the work of the agency through its code of ethics (here).
Remarks: Commissioner Kara M. Stein delivered remarks to the American Bar Association Business Law Section’s Federal Regulation of Securities Committee Fall Meeting, Washington, D.C. (Nov. 22, 2013). The Commissioner’s remarks focused on recent rule making, the PCAOB and penalties (here).
SEC Enforcement – filed and settled actions
Weekly statistics: This week the Commission filed, or announced the filing of, 2 civil injunctive and district court actions, DPA or NPAs and 6 administrative proceedings (excluding follow-on actions and 12(j) proceedings).
Misrepresentation: In the Matter of Marie L. Huber, Adm. Proc. File No. 3-15629 (Nov. 27, 2013) is a proceeding which names as Respondents, Marie Huber, an analyst at Hedge Fund A, and Jess Jones, an analyst at Hedge Fund B. The proceeding centers on statements made regarding the cancer drug Provenge, a product of Dendreon Corporation. On April 29, 2010 the FDA approved the use of Provenge for late state prostate cancer. Ms. Huber did an analysis of the drug and concluded that it kills. She prepared a draft report which was shared with her fund, Mr. Jones and others. Ms. Huber then purchased out of the money Dendreon put options. Although she urged her employer to release the draft, the firm did not. Subsequently, the Responents prepared distributed the report to several hundred people including those in the medical and pharmaceutical industries. The report was distributed through a gmail account in the name of Jonathan White. It was signed by “A concerned physician, scientist and citizen.” Following distribution on the evening of July 14, 2010 the share price dropped, closing down on July 15 by 7.2%. That day Ms. Huber sold part of her option holdings but still suffered significant trading losses because most of her positions remained unsold or unexercised since they were so far out of the money. Ms. Huber later told her employer there had been a “leak” of the report. The Order claims that the signature on the e-mails was a false statement. It alleges a violation of Securities Act Section 17(a)(2). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, each Respondent will pay a fine of $25,000.
Undisclosed principal transactions: In the Matter of Tri-Star Advisors, Inc., Adm. Proc. File No. 3-15627 (Nov. 26, 2013) is a proceeding which names as Respondents the registered investment adviser, William Payne, its CFO and a 40% owner of an affiliated broker dealer, and Jon C. Vaughan, president of the adviser and a 20% owner of the affiliated broker. Over a two year period beginning in mid-2009 the adviser engaged in thousands of securities transactions with advisory clients on a principal basis through the affiliated broker dealer. The firm did not provide the proper disclosure or obtain consent from the clients. The firm collected about $1.9 million in gross sales credits from the broker although none were paid while the two individuals were paid about $1 million. The adviser also failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. The two individual Respondents caused the violations. The Order alleges violations of Advisers Act Section 206(4). The proceeding will be set for hearing.
Undisclosed principal transactions: In the matter of Parallax Investments, LLC, Adm. Proc. File No. 3-15636 (Nov. 26, 2013) is a proceeding which names as Respondents the registered investment adviser, its sole owner and manager, John Bott and Robert Falkenberg, its CCO. Over a two year period beginning in 2009 the firm engaged in thousands of principal transactions through an affiliated broker dealer with out providing the required disclosure or obtaining consent. The firm also failed to provide pooled investment vehicle investors with audited financial statements and to adopt, implement and annually review the required policies and procedures. The two individuals caused the violations by the firm. The Order alleges violations of Advisers Act Sections 206(3) and 206(4). The proceeding will be set for hearing.
Investment risk: In the Matter of Ambassador Capital Management LLC, Adm. Proc. File No. 3-15625 (Nov. 26, 2013) is a proceeding naming as Respondents the registered investment adviser and its portfolio manager, Derek Oglesby. The adviser has about $1 billion in assets under management in 25 accounts. This proceeding centers on the operation of Ambassador Money Market fund, a series offered by Ambassador Funds. It arises out of an examination prompted by consist returns which exceeded its peer group and a downgrade by Moody’s. The Order alleges that the adviser repeatedly misled the board of the fund by withholding information about the credit risk of the portfolio securities. The information is important since a money market fund may only invest in securities determined by the board to present minimal credit risk. Misrepresentations were also made about the exposure of the fund to asset-backed commercial paper potentially affected by the Euro-zone crisis in 2011. In addition, Respondents caused the fund’s failure to comply with rules limiting the amount of risk that money market fund portfolios can have. They also caused the fund’s failure to implement adequate written compliance policies. The Order alleges violations of Advisers Act Sections 206(1) and (2) and Investment Company Act Sections 31(a), 34(b) and 35(d). The proceeding will be set for hearing.
Unregistered sales: In the Matter of Curt Cramer, Adm. Proc. File No. 3-15621 (Nov 25, 2013) is a proceeding which names as Respondents Mr. Kramer, sole officer of Mazuma Corporation, Mazuma Holding Corporation and Mazuma Funding Corporation. Each entity is also a Respondent. The Order centers on two transactions. One which began in 2006 and continued over four years involved the purchase and sold two billion shares of Laidlaw Energy Group, Inc. at steep discounts. While Respondents relied on Regulation D since the offering was not registered, this was an integrated offering in which the $1 million limit was exceeded. Respondents had profits of $126,963 over the limit. The second, which took place beginning in 2009 and continued to the next year, involved the purchase and sale of over 1 billion shares of Bederra Corporation acquired in 22 transactions with the firm’s transfer agent who had misappropriated them. There was no registration statement for the shares. The Order alleges violations of Securities Act Sections 5(a) and 5(c). The Respondents resolved the proceeding, each consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Mr. Kramer and Mazuma Holding will jointly and severally pay disgorgement of $934,404 along with prejudgment interest. Mr. Kramer, Mazuma Corporation, Mazuma Holding Corporation and Mazuma Funding will jointly and severally pay disgorgement of $126,963 along with prejudgment interest. Respondents will also pay civil penalties totaling $273,000 as follows: Mr. Kramer $13,000; Mazuma Corporation $65,000; Mazuma Holding $130,000; and Mazuma Funding $65,000.
Investment fund fraud: SEC v. Palladino, Civil Action No. 13-11024 (D. Mass.) is a previously filed action against Steven Palladino and his company Viking Financial Group, Inc. The action alleges that the defendants raised funds from 33 investors based on misrepresentations, falsely asserting that their money would be used to operate the business which supposedly made short-term, high interest loans secured by real estate. After briefing, the Court found that the Commission had established the violations and ordered the defendant to pay $9.8 million in disgorgement. The order also includes permanent injunctions prohibiting future violations of the antifraud provisions. The question of penalties will be considered later.
Misrepresentations/delinquent filings: SEC v. Merchant, Civil Action No. 1:13-cv-3879 (N.D. Ga. Filed Nov. 22, 2013) is an action filed against Charles Merchant and Southern USA Resources, Inc. Mr. Merchant was the CEO, CFO, president, secretary, treasurer and director of the company which supposedly is exploiting gold mining rights in Alabama. The complaint alleges that the firm failed to file its 2012 Form 10-K and its two most recent Forms 10Q. It also states that materially false reports were filed with the Commission regarding the value of company land and false certifications concerning its internal controls. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B). The defendants have filed consents to injunctive and certain other relief with the court. See Lit. Rel. No. 22878 (Nov. 25, 2013).
Misrepresentations/unregistered sales: In the Matter of Joseph Doxey, Adm. Proc. File No. 3-15619 (Nov. 22, 2013) is a proceeding which names as Respondents Joseph Doxey, a principal of Pure H20 Bio-technologies, Inc., and William Daniels, a principal of Observation Capital, LLC. In 2008 and 2009 Mr. Doxey drafted and caused Pure H20 to issue a series of six false and misleading press releases. Those releases stated that an independent product certification laboratory was expected to shortly issue certifications for a company product. In fact the claims were false. Mr. Doxey also misrepresented the facts to Mr. Daniels to induce him to purchase securities of the firm. Those securities were acquired in 12 separate transactions. No registration was in effect. Subsequently, Observation Capital, at the direction of Mr. Daniels, sold over 258 million of the shares generating $78,900.46 in illicit proceeds. The Order alleges violations of Securities Act Sections 5(a), 5(c) and each subdivision of Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.
Attempted manipulation: In the Matter of Daniel Shak, CFTC Docket No. 14-03 (Nov. 25, 2013) is a proceeding which named as Respondent Daniel Shak who is a registered broker, an associated person of a Commodity Pool Operator or CPO and a member of the NYMEX. It also names his firm, SHK Management, LLC, a CPO. The Order alleges that on two trading days in 2008 Respondents attempted to manipulate the closing price of West Texas Intermediate or WTI futures contacts, driving the closing price higher to benefit a relates short position. Each time the action was taken to enhance the profits of a net short position know as Trading At Settlement or TAS.
Respondents, in one instance, accumulated a large net short TAS position which prices at -10 to +10 ticks of the settlement price, of 3,457 prompt-month WTI contracts. In the last three minutes before the close Respondents began aggressively trading in the opposite direction, accounting for almost 30% of the purchases. This drove prices higher, benefiting their TAS position. Respondents essentially repeated this strategy on a subsequent trading day. The Order alleges an attempted manipulation, violations of the applicable position limits and that Mr. Shak, under CEA Section 13(b), is responsible for the actions of his company. It charges violations of Sections 6(c), 6(d) and 9(a)(2) of the Act and the applicable speculative position limits. To resolve the proceeding Respondents consented to the entry of cease and desist orders based on the Sections cited in the Order. They also agreed to pay, jointly and severally, $400,000 as a civil penalty. SHK’s registration as a commodity pool operator and Mr. Shak’s as an associated person were suspended for two years and both are prohibited from trading in any instrument relating to crude oil futures contracts for two years.
Swiss based Weatherford International Ltd and its subsidiaries resolved FCPA charges with the DOJ and SEC and also settled export control charges, paying a total of $252 million. The bribery charges are based on three schemes. The first involved a joint venture established by Weatherford subsidiary Weatherford Services in Angola with two local entities in 2005. The two local entities principals’ included foreign officials. The venture was used solely as a conduit for millions of dollars of payments by the Weatherford subsidiary to the foreign officials controlling them, according to the court papers. In exchange for the payments, Weatherford Services obtained lucrative contracts and information about the pricing of competitors.
The second scheme involved the bribery in Africa of a foreign official by employees of Weatherford Services. The purpose of the payments was to secure the renewal of an oil services contract. The payments were made through a freight forwarding agent, according to the court papers. The payment made was concealed by the creation of sham purchase orders and similar records crafted by the forwarding agent. The contract was renewed in 2006. The third scheme involved payments in the Middle East from 2005 through 2011 by employees of Weatherford Oil Tools Middle East Limited or WOTME. In this scheme what were claimed to be volume discounts to a distributor who supplied company products to a government owned national oil company were actually used to create a slush fund. That fund was used to make payments to the national oil company. During the period WOTME paid about $15 million to the distributor.
To resolve the FCPA charges with the DOJ, the company entered into a deferred prosecution agreement. It requires the payment of an $87.2 million criminal penalty and the retention of a monitor for 18 months. The underlying criminal information contains one count of violating the internal controls provisions of the FCPA. In addition, Weatherford Services agreed to plead guilty to violating the anti-bribery provisions.
The SEC’s complaint alleged violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). SEC v. Weatherford International, Ltd., Civil Action No. 4:13-CV-03500 (S.D. Tex. Filed Nov. 26, 2013). To resolve the charges the company agreed to pay $90,984,844 in disgorgement, prejudgment interest and a $1.875 million civil penalty assessed in part for a lack of cooperation during the investigation. $31,646,907 of the payment will be satisfied by the agreement of the company to pay an equal amount to the USAO. See Lit. Rel. No. 22880 (Nov. 26, 2013).
Finally, in a separate mater, from 1998 through 2007, the company and certain subsidiaries violated various U.S. export control and sanctions laws. During the period they exported or re-exported oil and gas drilling equipment to sanctioned countries Cuba, Iran, Sudan and Syria. These charges were resolved with the payment of $100 million, a deferred prosecution agreement and two guilty pleas.
Investment fund fraud: U.S. v. Burke (E.D. Va.) is a case in which Stephen Burke pleaded guilty to one count of mail fraud based on a $1.2 million investment scheme. Specifically, beginning in 2008 and continuing until January 2013, Mr. Burke raised about $1.2 million from investors by inducing them to invest in a series of fraudulent schemes. In part Mr. Burke represented that he was an investment professional which was false while not disclosing that in fact he is a convicted felon. Sentencing is scheduled for February 20, 2014.
Proposal: The Board announced that at its open meeting on December 4, 2013 it will consider a proposal that would require the disclosure in the auditor’s report of the engagement partner and certain other participants in the audit. The Board will also address proposed rules regarding oversight of the audits of brokers and dealers required by Dodd-Frank.
Disciplinary actions: The Board announced settled disciplinary actions against three audit firms and three individuals associated with the firms:
In the Matter of Harris F. Rattray, CPAs, PCAOB Release No. 105-2013-009 (Nov. 21, 2013) is a proceeding against the firm and its sole owner, Harris Rattray. The Board revoked the firm’s registration and permanently barred Mr. Rattray. The Respondents were censured. The Board found that the Respondents violated the antifraud provisions of the Exchange Act by falsely stating in three audit opinions that the audits had been conducted in accord with PCAOB standards. Respondents also failed to include procedures to provide reasonable assurance of detecting illegal acts and to otherwise plan and conduct the audit.
In the Matter of Hood & Associates CPAs, P.C., PCAOB Release No. 105-20130012 (Nov. 21, 2013) is a proceeding against the firm and its sole partner Rick Freeman. The Board revoked the firm’s registration with a right to reapply after three years and imposed a $10,000 civil monetary penalty. Mr. Freeman was permanently barred from associating with a registered firm. The Respondents were censured. The firm violated the antifraud provisions of the Exchange Act by falsely stating that it had conducted the audits for three issuers in accord with Board standards. Mr. Freeman directly and substantially contributed to the violation. The Respondents also failed to adequately plan and conduct the engagements. In addition, Respondents violated the independent standards by having Mr. Freeman serve as lead audit partner on two engagements for more than five consecutive years. The firm also failed to have a required engagement quality review performed on any of the audits or to comply with Board quality control standards.
In the Matter of Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, PCAOB Release No. 105-2013-010 (Nov. 21, 2013) and In the matter of David T Svoboda, CPA, PCAOB Release No. 105-2013-011 (Nov. 21, 2013) are proceedings against, respectively, the firm and a former partner, David Svoboda. The Board revoked the firm’s registration with a right to reapply after two years and imposed a $10,000 civil monetary penalty. Mr. Svoboda was barred from associating with a registered firm with a right to reapply after three years. The Respondents were censured. The Board determined that the firm violated its quality control standards and that Mr. Svoboda substantially contributed. The Board also concluded that the firm and Mr. Svoboda violated PCAOB standards in connection with the engagements for two issuers based in the PRC. A significant part of the firm’s audit work was conducted by PRC based staff which the firm and Mr. Svoboda failed to adequately plan, supervise and review. In addition, there were violations of the independence provisions of the securities laws since the Respondents prepared the consolidation and financial statements that formed the basis for those filed with the SEC by the issuers. Mr. Svoboda failed to cooperate with Board inspectors and violated the audit documentation standards by improperly causing the creation or alteration of audit documentation after receiving notice of an inspection.
Takeover Code: The Securities and Futures Commission imposed sanctions on Daqing Dairy Holdings Ltd., its executive director Wang De Lin and the firm’s only independent director, Stephen Chaing Chi Kin for violations of the Takeover Code. Specifically, a “cold shoulder order” was entered denying Mr. Wang direct or indirect access to the Hong Kong securities markets for 24 months. The firm and both directors were censured. The violation occurred when it was announced that Radiant State Limited had acquired a stake of 52.16% in the company. The firm then failed to provide shareholders with the required offering circular which deprived them and the markets of valuable information needed to make an investment decision in response to the tender of Radiant. The sanctions reflect the respective roles of the participants.
Money transfers: The SFC suspended Stephen Cho Yu Wan for three years and reprimanded his wife, Ju You Li and imposed a penalty on her of $100,000 in connection with a series of client fund transactions. Specifically, the two permitted on shore money changers to route funds through their personal bank accounts. In some instances funds were parked for a period and at times Mr. Yu was paid a fee. Their respective securities firms had no knowledge of the transactions. The dealings added an extra layer to the transactions, making it difficult to know the source of the funds. Frequently, neither registered representative knew the client. Ms. Li received a lower penalty in view of her lesser role and the overall impact on the family.
Client funds: The Financial Conduct Authority fined SEI Investments £900,200 for client money breaches. Specifically, the firm failed to maintain the proper books and records to account for, and separate, client and firm funds over a five year period beginning in 2007. While there was no actual loss, the FCA considered this a serious breach of the rules. The fine was reduced by 30% based on an agreement to settle at an early stage.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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