Former hedge fund giant SAC Capital was sentenced this week. This concluded one of the most prominent insider trading cases. Under the terms of the sentence SAC Capital will no longer accept public funds.
The DOJ and the SEC filed settled FCPA actions involving Hewlett-Packard and three of its subsidiaries. One subsidiary pleaded guilty to a multi-count information, a second entered into a deferred prosecution agreement while a third entered into a non-prosecution agreement. The parent company settled books and records and internal control charges with the Commission. Overall $108 million was paid to resolve the charges.
This week the SEC also filed actions involving financial fraud, investment fund fraud and false filings by a stock transfer agent firm and its principals. The Commission also brought a market manipulation case coupled with unregistered broker-dealer charges.
Remarks: Commissioner Kara Stein addressed the North American Securities Administrators Association 2014 Public Policy meeting (April 8, 2014). Her remarks covered the lifting of the general solicitation ban, the disclosure review and high speed trading (here).
Remarks: Commissioner Luis Aguilar addressed the North American Securities Administrators Association Annual NASAA/SEC meeting (April 8, 2014). His remarks reviewed the role of the states in Regulation A and the JOBS Act (here).
Whistleblowers: The Commission announced that the whistleblower who received the first award under the new program was paid an additional $150,000 since additional funds were recovered. That person has now been paid 30% of what was recovered for a total of $200,000.
Remarks: Commissioner Scott D. O’Malia delivered the Keynote address titled “If It’s Worth Fixing, it’s Worth Fixing Right” (April 7, 2014). His remarks covered the need for the agency to have an adequate technology budget, end-user energy traders and futurization (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 3 civil injunctive actions, DPAs, NPAs or reports and 6 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Investment fund fraud: In the Matter of Keiko Kawamura, Adm. Proc. File No. 3-15826 (April 8, 2014) is a proceeding alleging that Respondent engaged in two investment schemes. In the first, which took place from December 2011 through mid-2012, Ms. Kawamura raised about $200,000 from seven investors for a hedge fund she claimed to manage. While the funds were supposed to be invested, much of the money was misappropriated. The small portion invested was lost on option trades. The second was initiated through a website. There the Respondent provided monthly investment advice for a fee. She has garnered about $50,000 from 70 different subscribers. The Order alleges violations of Advisers Acct Sections 206(1), 206(2) and 206(4), Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.
False filings: In the Matter of Empire Stock Transfer, Inc., Adm. Proc. File No. 3-15827 (April 8, 2014) is a proceeding which names as Respondents the transfer agent and its president, Patrick Mokros. The Order alleges that filings made by the firm were materially false in two respects. First, they failed to disclose that Mr. Markos, the sole owner of the firm, financed its purchase by borrowing the funds from Marcus Luns who also played a significant role at the firm. Second, the registration forms failed to disclose the role of Matthew Blevins, retained in January 2007 to run the day-to-day operations. The Order alleges violations of Exchange Act Sections 17(a)(3) and 17A(c)(2). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. Respondents also agreed to pay, on a joint and several basis, a civil penalty of $50,000. In addition, the firm agreed to implement undertakings which include the retention of an independent consultant regarding its policies and procedures. The firm will adopt the recommendations of the consultant. See also In the Matter of Matthew J. Blevins, Adm. Proc. File No. 3-15820 (April 8, 2014)(proceeding against Mr. Blevins arising out of his role with Empire Stock Transfer discussed above; settled with the entry of a cease and desist order based on the same Exchange Act Sections as in Empire Stock and the payment of a $25,000 civil penalty).
Financial fraud: SEC v. CVS Caremark Corp., Civil Action No. 14-177 (D.R.I. Filed April 8, 2014) and In the Matter of Laird Daniels, CPA, Adm. Proc. File No. 3-15825 (April 8, 2014) are financial fraud actions centered on the two business segments of the company, its drug stores and pharmacy benefits manager or PBM as discussed in more detail here. First, in the Fall 2009 CVS filed a Prospectus Supplement for a $1.5 billion senior note offering. The supplements failed to disclose that the PBM segment of the business would lose significant amounts of business from the State of New Jersey, several large PBM contracts and as a result of the Medicare Part D bidding process. Second, the company changed the accounting for the acquisition of the Longs Drug Store chain which materially altered its results. This issue is central to the proceeding in which Mr. Daniels was named as a Respondent. The firm initially had a valuation done on a “continued use” basis in accord with its contractual obligations and later reversed that position. The reversal reduced the reported valuation for Longs tangible assets by $212 million with a corresponding increase in good will, compared to the January 2009 draft report prepared by the valuation expert firm CVS retained. CVS also made a one-time catch-up adjustment, reversing $49 million of depreciation taken from October 2008 through the end of June 2009, and did not take an additional $19 million of depreciation that would have otherwise been taken on the Longs properties for the period. The one time depreciation reversal increased third quarter 2009 EPS by about 2.4 cents. Despite the continued use premise, the drug store company completely wrote off all the personal property for about 430 of the 525 Long stores. This was contrary to GAAP since the adjustments failed: To reflect the expected future use of the Longs property as of the acquisition date; the information the firm had as of that date; and the firm did not account for the use by CVS of the assets to generate revenue after the acquisition date. This materially altered quarterly results.
Finally, statements made by the then CVS CFO during a November 5, 2009 earnings call were materially incorrect since they failed to state that the announced and favorable PBM retention rate – a key metric – was calculated using a different methodology and did not take into account the projected business loses. Investors also were not told that the announced EPS number was in part the result of a material change in accounting regarding the Longs acquisition. Both actions settled. CVS consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and each subsection of Securities Act Section 17(a). The firm also agreed to pay a $20 million penalty. See Lit. Rel. No. 22968 (April 8, 2014). Mr. Daniels, who was alleged to have violated Securities Act Sections 17(a)(2) & (3), consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(B) and 13(b)(2)(B) and Section 17(a). He will pay a penalty of $75,000. Mr. Daniels will be denied the privilege of appearing or practicing before the Commission as an accountant with the right to reapply after one year.
Investment fund fraud: SEC v. JCS Enterprises, Inc., Civil Action No. 14-civ-80468 (S.D. Fla. Filed April 7, 2014) is an action against JCS, T.B.T. Inc. and their respective principals Joseph Signore and Paul Schumack. The complaint alleges that since 2011 the defendants have raised nearly $40 million by inducing investors nationwide to purchase interests in ATM like machines which were supposed to be a Virtual Concierge, dispensing tickets to various events. Investors were told that they could earn returns ranging from 80% to 120% annually and up to 500% over the life of a three to four year investment contract. Sales would be through advertising. Investors were solicited through YouTube, e-mails and seminars. The claims were false. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). A freeze order was obtained on filing. A parallel criminal case has also been filed. See Lit. Rel. No. 22969 (April 8, 2014).
Investment fund fraud: SEC v. Sample, Civil Action No. 3:14-cv-1218 (April 4, 2014) is an action alleging that Mr. Sample, using his firm Lobo Volatility Fund, LLC, raised about $1 million from five investors based on claims that he would invest their money and trade on their behalf. Instead he diverted a significant portion of the investor funds to his use and lost the balance trading. To try and cover his losses he provided investors with false documents. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Mr. Sample consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint and to an order prohibiting him from soliciting or accepting funds from others for any unregistered securities offering. The Commission requested that the Court order the payment of disgorgement, prejudgment interest and impose civil penalties. See Lit. Rel. No. 22967 (April 7, 2014).
Failure to disclose: In the Matter of Larry C. Grossman, Adm. Proc. File No. 3-15617 (Nov. 20, 2013) is a previously filed proceeding naming as Respondents Larry Grossman and Gregory Adams. The two men were affiliated with registered investment adviser Sovereign International Asset Management, Inc. Mr. Grossman was the sole owner of Sovereign from the time of its formation in 2001 until October 2008 when he sold the firm and its affiliates to Mr. Adams. After the sale Mr. Grossman continued to be affiliated with the adviser until the firm was administratively dissolved in 2012. Sovereign had about $85 million in assets under management at its peak in 2008. Many of its investors were retirees. Shortly after forming Sovereign, Mr. Grossman met Nikolai Simon Battoo, the principal of BC Capital Group, S.A. and its affiliated companies and a defendant in another Commission action. In 2003 Mr. Grossman executed three referral agreements and one consulting contract on behalf of a Sovereign affiliate with funds and entities controlled or owned by Mr. Battoo. Under the three agreements referral fees were paid to Sovereign. The fourth called for the payment of fees directly to Mr. Grossman for consulting services. From August 2003 through October 2008 Mr. Grossman recommended to Sovereign clients that they invest almost exclusively in off-shore funds in the Battoo group without disclosing the full risks including the fact that they were cross-collateralized. Likewise, the fees paid were not properly disclosed. In 2008 when one of the Battoo funds suspended redemptions, Mr. Grossman failed to inform investors. Investors also were not told investors of other difficulties with the funds. Yet by 2010 Mr. Battoo refused to permit withdrawals from another fund. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 15(a) and Advisers Act Sections 206(1), 206(2), 206(3), 206(4) and 207. The proceeding will be set for hearing. Mr. Adams partially resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to be barred from the securities business. In addition, Mr. Adams agreed to pay disgorgement and a third tier civil penalty in amounts to be determined later.
Manipulation/broker registration: In the Matter of Visionary Trading LLC, Adm. Proc. File No. 3-15823 (April 4, 2014) is a proceeding which names as Respondents the firm; its four owners, Joseph Dondero, Eugene Giaquinto, Lee Heiss and Jason Mdevin; and Lightspeed Trading LLC, a registered broker dealer, along with its COO, Andrew Actman. Mr. Dondero, one of the owners of Visionary, is alleged to have engaged in manipulative trading in violation of Exchange Act Sections 9(a)(2) and 10(b). In 2009 he employed a manipulative practice known as “layering” or “spoofing.” Utilizing this technique Mr. Dondero obtained profits of $984,398. Other charges stem from an arrangement involving Visionary Trading. Beginning in May 2008, and continuing through November 2011, the firm’s owners and others engaged in day trading from its offices in New Jersey. Lightspeed was the broker. In connection with that trading two registered representatives of the firm shared their transaction based compensation with Visionary and its owners. Over the period Lightspeed retained about $330,000 in commissions but paid out approximately $474,407. With regard to the fee splitting arrangement the Order alleges that: 1) Visionary and its owners violated Exchange Act Section 15(a)(1); 2) that Lightspeed and Mr. Giaquinto aided and abetted and caused Visionary’s and its owner’s violations of Section 15(a)(1); 3) that Lightspeed failed to reasonably supervise Mr. Giaquinto; and 4) that Mr.Actman failed to reasonably supervise Mr. Giaquinto.
Each of the Respondents resolved the proceeding by consenting to the entry of a cease and desist order based on the Sections cited in the Order as to them. Lightspeed was also censured. In addition, Messrs. Giaquinto, Heiss and Medvin were barred from the securities business and from participating in any penny stock offering with a right to apply for reentry after two years. Mr. Dondero was also barred from the securities business and from participating in any penny stock offering. Mr. Actman was barred from association in a supervisory capacity in the securities business with a right to apply for reentry after one year. Lightspeed agreed to pay disgorgement of $330,000, prejudgment interest and a civil penalty of $100,000 plus agreed upon post-Order interest of $308.22. Respondents Giaquinto, Hess and Medvin will pay disgorgement of $118,601 plus prejudgment interest and a civil money penalty of $35,000 each. Respondent Dondero will pay disgorgement of $1,102,999.96, prejudgment interest and a civil penalty of $785,000. Mr. Actman will pay a civil money penalty of $10,000 plus agreed upon post-Order interest of $46.23.
Insider trading: U.S. v. SAC Capital Advisors LP, No. 13-cr-00541 (S.D.N.Y.) is the insider trading action against the once giant hedge fund. Previously, the firms pleaded guilty to the five count information. The Court imposed a sentence that includes a criminal fine of $900 million, a five year term of probation for each company, a condition that the SAC Hedge Fund terminate its investment advisory business and an requirement that the defendants and any successor entities employ compliance procedures necessary to identify and prevent insider trading. The defendants are required to retain an independent compliance consultant who will review, revise and report to the Government on those compliance procedures. Previously, the SAC Capital Hedge Fund was directed to pay $1.184 billion financial penalty in addition to the $616 million paid to the SEC.
Investment fund fraud: U.S. v. Colangelo (S.D.N.Y.) is an action against Stephen Colangelo. It alleged that he operated two investment fund frauds which resulted in $3.5 million in investor losses. In one he solicited funds for the Brickell Fund. Investors were told he would take a very small management fee and receive a percentage of the profits. In the other he solicited investments for a group of companies collectively called the Business Ventures. It was supposed to invest the funds in various businesses. In fact he misappropriated much of the money. Previously, he pleaded guilty to two counts of securities fraud and two counts of wire fraud. He was sentenced to serve 87 months in prison followed by three years of supervised release and pay restitution of $3.5 million.
Hewlett-Packard: The Russian, Polish and Mexican subsidiaries of Hewlett-Packard Company resolved criminal FCPA charges with the Department of Justice while the parent corporation settled with the SEC. ZAO Hewlett-Packard A.O., or HP Russia, made payments through its agents to retain a multi-million dollar contract with the federal prosecutors office. The payments were channeled through shell companies. In Poland agents and employees of Hewlett-Packard Polska, Sp.Z.o.o., or HP Poland furnished cash and gifts to government officials to obtain contracts with the national police agency. In Mexico Hewlett-Packard Mexico S.D. R.L. de C.V., or HP Mexico made improper payments to a third party in connection with a sale of software to Pemex. Overall the firm earned about $29 million on the contacts.
To resolve the action with the DOJ HP Russia agreed to plead guilty to a criminal information alleging conspiracy and violations of the FCPA bribery provisions. U.S. v. ZAO Hewlett-Packard A.O., Case No. CR 14 201 (N.D. Cal.). HP Poland resolved FCPA accounting violations by entering into a deferred prosecution agreement while HP Mexico, entered into a non-prosecution agreement. U.S. v. Hewlett-Packard Polska, SP.Zo.o., Case No. 14 202 (N.D. Cal.). In total the three entities agreed to pay $76,760,224 in criminal penalties and forfeiture.
Hewlett-Packard Company, the parent of HP Russia, Poland and Mexico, resolved SEC FCPA books and records and internal control provision charges with the Commission. The firm consented to the entry of a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). HP also agreed to pay disgorgement of $29 million and prejudgment interest. A portion of the firm’s disgorgement obligation will be satisfied by the payment of $2,527,750 in forfeiture as part of HP Mexico’s resolution with the DOJ. The parent company also agreed to report to the Commission staff periodically, but not less than once each year, for three years on the status of its remedial efforts and the implementation of compliance measures. In addition, the company will report any credible evidence not previously reported of questionable or corrupt payments or transfers of property interests. In sum, the three subsidiaries paid over $108 million to resolve the charges. In the Matter of Hewlett-Packard Company, Adm. Proc. File No. 3-15832 (April 9, 2014). The actions are discussed in detail here.
Pilot program: The Securities and Futures Commission has approved in principle the development of a pilot program to establishing mutual stock market access between Mainland China and Hong Kong. The program will operate between the Shanghai Stock Exchange and the Stock Exchange of Hong Kong Ltd., China Securities Depository and Clearing Corporaton Ltd and Hong Kong Securities Clearing Company Limited. This will permit investors to trade eligible shares listed on each exchange. The Shanghai-Hong Kong Stock Connect, as the project is called, is an important step in the opening of the China capital Markets according to the SFC.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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