The unblemished record of the Manhattan U.S. Attorney’s Office in insider trading cases came to an end this week with the acquittal of Rengan Rajaratnam, brother of the convicted Galleon Fund founder. This is the first loss following a string of victories in insider trading cases.
The SEC resolved its FCPA action against Nobel executives on the eve of trial, dropping most of the charges and with no monetary penalties. The SEC also settled its first municipal securities action under a new initiative, filed: a proceeding against the representative of an adviser and broker for failing to make disclosures when selling interests in a company; a settled proceeding against the audit firm of a PRC issuer; and brought a proceeding against an adviser and its owner who made misrepresentations to the board when obtaining an advisory contract.
Remarks: Commissioner Luis Aguilar addressed the Meeting of the Investor Advisory Committee, Washington, D.C. (July 10, 2014). His remarks focused on elder financial abuse (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, no civil injunctive actions, DPAs, NPAs or reports and 4 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Misrepresentations: In the Matter of Lawrence M. Labine, Adm. Proc. File No. 3-15967 (July 8, 2014) is a proceeding against the investment adviser representative and registered representative of an advisory and a broker. Over a period of about one year beginning in July 2008 Mr Labine sold interest in Domin-8 Enterprises Solutions, Inc. to his advisory and brokerage clients. In making those sales he failed to disclose that if the investments were not made the firm would fail, that he was the principal fundraiser for the firm and that he would receive compensation including warrants for company stock. The Order alleges violations of Advisers Act Sections 206(1) and 206(2) and Exchange Act Section 10(b). The proceeding will be set for hearing.
Scalping: SEC v. Babikian, Civil Action No. 14-cv-1740 (S.D.N.Y.) is a previously filed action against John Babikian who controlled two websites that touted penny stocks. In 2012 he used the sites to tout the shares of America West Resources, Inc. without disclosing that he held a large position in the shares. When the price spiked he sold his shares reaping over $1.9 million. Mr. Babikian settled with the Commission and the Court entered a final judgment against him prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the Court ordered him to pay disgorgement of $1,915,670, prejudgment interest and a civil penalty of $1,686,257. The order also contains a bar from participating in any offering of penny stocks and from recommending the purchase of any U.S. publicly traded or quoted stock without disclosing any plans or intentions he has for selling it within 14 days of the recommendation. See Lit. Rel. No. 23039 (July 8, 2014).
Municipal securities: In the Matter of Kings Canyon Joint Unified School District, Adm. Proc. File No. 3-15966 (July 8, 2014) is an action against the school district. In 2006 and 2007 the District made two securities offerings. Under Rule 15c2-12 the District executed Continuing Disclosure Certificates which obligated it to annually make available in state and national depositories certain financial information and operating data. The District also reviewed the Official Statements for the Municipal Offerings which includes a summary description of the provisions of the Continuing Disclosure Certificates. Between 2008 and 2010 the District failed to submit some of the disclosures required by the Continuing Disclosure Certificates. Subsequently, in November 2010 the District issued $6.8 million in municipal bonds. The Official Statement for the 2010 Offering, reviewed by the District, represented that over the last five years it had complied in all material respects with its continuing disclosure obligations. In fact it had not. The Order alleged violations of Securities Act Section 17(a)(2). I In the settlement the District agreed to certain undertakings which include an obligation to establish appropriate written policies and procedures and provide periodic training regarding the Rule 15c2-12 disclosures. The District also agreed to update any delinquent filings and certify compliance with these terms. The District also consented to the entry of a cease and desist order based on Securities Act Section 17(a)(2). Finally, it was ordered to comply with its undertakings.
Audit failure: In the Matter of Child Van Wagoner & Bradshaw, PllC, Adm. Proc. File No. 3-15965 (July 8, 2014) is a proceeding against the Utah based audit firm and two of its partners, Russell Anderson and Marty Van Wagoner, centered on its 2009 and 2010 engagements for Yuhe International, Inc., a company with its principal offices in the PRC. The audit firm serves as outside auditors for Yule in 2008. The next year the audit firm continued to work for Yuhe until late in the year. The company replaced the audit firm with another which had acquired the local Shanghai personnel used by the Child firm the prior year. The new firm, however, resigned in March 2010, noting in a Form 8-K that the company had engaged in a prohibited related party loan, had a material weakness in its procedures and could not properly close its books. At the time the firm had concluded much, but not all, of the field work for the 2009 engagement. Yuhe rehired the Child firm. At the time the 2009 Form 10-K was due on March 31, 2010. Russell Anderson was the engagement partner and Marty Van Wagoner served as the quality review partner. A senior manager at the firm obtained the work papers from the Child firm’s predecessor. Neither the firm nor Mr. Anderson participated in planning, conducting or supervising the prior firm’s work. After making what was at best was a cursory review of the work papers, and without conducting any significant procedures, an unqualified audit opinion was issued within three weeks of accepting the engagement. During the planning for the 2010 engagement the firm and Mr. Anderson determined that Yuhe lacked effective internal controls. The company also did not have experienced personal. Nevertheless, the audit firm performed a basic audit and failed to adjust or extend its procedures in view of these determinations. The audit firm also did not adequately supervise the foreign staff. Despite these deficiencies Mr. Van Wagoner provided his concurrence. An unqualified audit opinion was issued. In June 2010 Yuhe filed a Form S-3 Registration Statement with the Commission and raised over $27 million. The registration statement contained the Child firm’s unqualified audit opinion for 2009. The next year the audit firm learned that the company failed to make an acquisition in 2009 which it had touted in press releases and a Commission filing. In mid-June 2011 the audit firm resigned, noting that its 2010 audit opinion should no longer be relied on. The Order alleges violations of Exchange Act Sections 4C and 10A(a)(1) and (2) and Rule 102e of the Rules of Practice based on the failure of the firm to properly plan and conduct the two audit engagements. The action will be set for hearing.
Misrepresentations: In the Matter of Chariot Advisors, LLC, Adm. Proc. File No. 3-2014 (July 3, 2014) is a proceeding which names as Respondents Chariot Advisors, a registered investment adviser, and Elliot Shifman, its sole owner from September 2008 through the end of June 2009. In late 2008 Mr. Shifman approached Northern Lights Variable Trust, a registered open-ended management investment company, with a request that it create the Chariot Fund as a series with Chariot Advisors as the new fund’s advisor. In response to a request for additional information, Mr. Shifman prepared a presentation for the Board, detailing the proposal. The presentation represented in part that the new fund would be “a currency overlay product” and would use a trading algorithm similar to one in use by another party. The new fund would thus be a “byproduct of extensive research of recent changes in FX market structure due to the adaption of algorithmic and high frequency trading” the presentation claimed. The representations were reiterated by Mr. Shifman at a Board meeting. Those representations were repeated at a subsequent meeting. Eventually the proposal was adopted and on July 15, 2009 Chariot Fund launched. The offering documents reiterated the material from the board presentations with certain adjustments. The new fund operated for two months, conducting currency trading using technical analysis. It did not use an algorithm because one had never been acquired or contracted for by either Respondent. The Order alleges violations of Section 15(c) of the Investment Company Act. It also alleges violations of Investment Company Act Section 34(b) and Advisers Act Sections 206(2) and 206(4). Respondents resolved the proceeding. Chariot Advisors consented to the entry of a cease and desist order based on Section 34(b) of the Investment Company Act. Mr. Shifman consented to the entry of a cease and desist order based on Section 206(2) of the Advisers Act and Sections 15(c) and 34(b) of the Investment Company Act. Mr. Shifman also agreed to the entry of an order suspending him from the securities business or participating in any penny stock offering for a period of twelve months. He will pay a penalty of $50,000.
SEC v. Jackson, Civil Action No. 4:12-cv-00563 (S.D. Tx. Filed Feb. 24, 2012) named as defendants Mark Jackson, former CEO of Noble Corporation and James Ruehlen, current Director and Division Manager of the firm’s subsidiary in Nigeria. The charges arise from a sweep of the oil services industry in late 2010. At that time Noble Corporation was charged with FCPA violations. The firm entered into a non-prosecution agreement with the Department of Justice and settled with the SEC. Messrs. Jackson and Ruehlen were involved with arrangements to keep certain drilling equipment in Nigeria, according to the complaint. Specifically, they were alleged to have arranged and facilitated the payment of bribes to induce Nigerian customs officials to grant new permits and extend others to keep their equipment in the country and avoid other duties. Mr. Jackson was also alleged to have approved the bribe payments and concealed them from the audit committee and auditors. Mr. Ruehlen prepared false documents for the bribes, according to the charging papers. The complaint naming Messrs. Jackson and Ruehlen alleges violations of Exchange Act Sections 30A, 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and Rule 13a – 14, false certifications. The relief sought included injunctions and financial penalties. To resolve the case the Mr. Jackson agreed to the entry of an injunction based on Exchange Action Sections 13(b)(2)(A) and 20(a). Mr. Ruehlen consented to the entry of an injunction based on Exchange Act Section 13(b)(2)(A). All other charges were dropped. No monetary penalties were ordered.
Failure to see red flags: In the Matter of Randall A. Stone, CPA, PCAOB Board Release No. 105-2014-007 (July 7, 2014) is a disciplinary proceeding against the former PricewaterhouseCoopers LLP partner arising out of his audit for ArthroCare in 2007. During that engagement Mr. Stone ignores indications of improper revenue recognition such as unusual pricing and payment terms, quarter end sales spikes and evidence that the company may have funded a client’s purchases through monthly service fee payments. He also consented to the inclusion of the firm’s previously issued 2007 audit report in a Form S-8 without completing a reasonable subsequent events investigation. At the time he agreed to the inclusion Mr. Stone was aware that there were revenue recognition questions regarding his client and one large customer that were under review by the audit firm.
AML: Ping An of China Securities was fined $6 million for failing to establish anti-money laundering internal control procedures, provide training to the staff and follow appropriate procedures to protect client assets. The firm also failed to report suspicious transactions in a timely manner.
Concealed securities trading: The Securities and Futures Commission banned Fa Kwan Lun, a registered representative, from the securities business for twelve months. The action was taken because he concealed his personal securities trading by using his mother-in-laws brokerage account. He also transferred money for four clients through his personal bank account. These actions call into question his fitness for the business, the regulator found.
For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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