Monday, March 31, 2014

SEC Charges Two Men With Insider Trading on Confidential Information From Their Wives




Press Releases





SEC Charges Two Men With Insider Trading on Confidential Information From Their Wives




The Securities and Exchange Commission today announced two separate cases against men who profited by insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies. 





“Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.  “In those circumstances, family members have a duty to protect and safeguard that information, not to trade on it.”  





The SEC alleges that Tyrone Hawk of Los Gatos, Calif., violated a duty of trust by trading after he overheard work calls made by his wife, a finance manager at Oracle Corp., regarding her company’s plan to acquire Acme Packet Inc.  Hawk also had a conversation with his wife in which she informed him that there was a blackout window for trading Oracle securities because it was in the process of acquiring another company.  According to the SEC’s complaint, Hawk bought Acme Packet shares before the acquisition was announced in February 2013, and reaped approximately $150,000 by selling after the stock price rose 23 percent on the news. Without admitting or denying the allegations, Hawk agreed to pay more than $300,000 to settle the SEC’s charges.





In an unrelated case, the SEC alleges that Ching Hwa Chen of San Jose, Calif., profited from gleaning confidential information in mid-2012 that his wife’s employer, Informatica Corp., would miss its quarterly earnings target for the first time in 31 consecutive quarters.  During a drive to vacation in Reno, Nev., Chen overheard business calls by his wife, who previously advised Chen not to trade in Informatica securities under any circumstances.  However, after they returned from Reno, he established securities positions designed to make money if the stock price fell.  Informatica’s shares declined more than 27 percent after it announced the earnings miss, and Chen realized nearly $140,000 in profits. Without admitting or denying the allegations, Chen agreed to pay approximately $280,000 to settle the SEC’s charges.   





The SEC has brought other insider trading cases involving individuals who traded on material, nonpublic information misappropriated from spouses.  For example, last year the SEC charged a Houston man with insider trading ahead of a corporate acquisition based on confidential details that he gleaned from his wife, a partner at a large law firm that was consulted on the deal.  In 2011, the SEC charged an Illinois man who bought the stock of an acquisition target of a company where his wife was an executive despite her requests that he keep the merger information confidential.  In a different 2011 case, the SEC charged the spouse of a CEO with insider trading on confidential information that he misappropriated from her in advance of company news announcements.





The SEC’s investigations were conducted by Jennifer J. Lee and Kashya K. Shei and supervised by Jina L. Choi, Michael S. Dicke, and Erin E. Schneider in the San Francisco office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and Options Regulatory Surveillance Authority.










Friday, March 28, 2014

SEC Halts Pyramid Scheme Targeting Asian and Latino Communities

The Securities and Exchange Commission today announced charges and asset freezes against the operators of a worldwide pyramid scheme targeting Asian and Latino communities in the U.S. and abroad. 
Seal of the U.S. Securities and Exchange Commi...

The SEC alleges that three entities collectively operating under the business names WCM and WCM777 are posing as multi-level marketing companies in the business of selling third-party cloud computing services, which can include website hosting, data storage, and software support. The entities are based in California and Hong Kong and controlled by “Phil” Ming Xu, who is a resident of Temple City, California.
According to the SEC’s complaint filed in federal court in Los Angeles, WCM and WCM777 have raised more than $65 million since March 2013 by falsely promising tens of thousands of investors that the return on investment in the cloud services venture would be 100 percent or more in 100 days. Investors were told they would receive “points” for making investments or enrolling other investors. The points would be convertible into equity in initial public offerings of high-tech companies their money would help launch. However, rather than building out cloud services or incubating high-tech companies, Xu and the WCM entities used investor funds to make Ponzi payments of purported investment returns to some investors. They also spent investor money to purchase golf courses and other U.S.-based properties among other unauthorized expenditures.


The court has granted the SEC’s request for an asset freeze and the appointment of a temporary receiver over the assets of WCM, WCM777, and several other entities named as relief defendants for the purpose of recovering money from the scheme in their possession.

“Xu and his entities claimed they were using investor funds to build a strong cloud services company that would then ignite other high-tech companies and ultimately make their investors very wealthy,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “In reality, they were operating a pyramid scheme that preyed on investors in particular ethnic communities, leaving them with nothing left to show for their investment.”

According to the SEC’s complaint, WCM and WCM777 sell their products exclusively to investors and have no other apparent sources of revenue. Their offerings and operations depend almost entirely on the recruitment of new investors and purchases by existing investors to provide the money for returns. On its website, WCM777 specifically addressed the question “Is WCM777 a Ponzi Game?” by writing, “In summary, we are not a Ponzi game company. We are creating a new business model.”

The SEC alleges that Xu and his entities made various false claims to investors about purported partnerships with more than 700 major companies such as Siemens, Denny’s, and Goldman Sachs – in some instances falsely representing that they had permission to use their logos. Meantime, besides buying two golf courses with investor money, Xu and his entities also purchased a warehouse, vacant land, and several single family homes They also used investor funds to play the stock market and make other related investments through intermediary companies, such as an oil and gas offering. They also sent investor money to a rough diamond jewel merchant in Hong Kong and another unrelated company affiliated with Xu.

SEC’s complaint alleges that WCM, WCM777, and Xu violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint further alleges that Xu violated Section 20(a) of the Exchange Act. In addition to the asset freezes and appointment of a temporary receiver, the Honorable Christina A. Snyder also granted the SEC’s request for an order prohibiting the destruction of documents and requiring the defendants to provide accountings. A court hearing has been scheduled for April 10, 2014.

For more information about the dangers of potential investment scams involving pyramid schemes posing as multi-level marketing programs, see the SEC’s investor alert, which also is available in Chinese.

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If you have been damaged by this, or any other investment scheme, contact Sallah Astarita & Cox for a free consultation.


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Thursday, March 27, 2014

SEC Announces Fraud Charges Against Coal Company and CEO for False Disclosures About Management




Press Releases





SEC Announces Fraud Charges Against Coal Company and CEO for False Disclosures About Management




The Securities and Exchange Commission today announced fraud charges against a Seattle-headquartered coal company and its founder for making false disclosures about who was running the company.





The SEC’s Enforcement Division alleges that L&L Energy Inc., which has all of its operations in China and Taiwan, created the false appearance that the company had a professional management team in place when in reality Dickson Lee was single-handedly controlling the company’s operations.  An L&L Energy annual report falsely listed Lee’s brother as the CEO and a woman as the acting CFO in spite of the fact that she had rejected Lee’s offer to serve in the position the month before.  L&L Energy and Lee continued to misrepresent that they had an acting CFO in the next three quarterly reports.  Certifications required under the Sarbanes Oxley Act ostensibly bore the purported acting CFO’s electronic signature.  Lee and L&L Energy also allegedly misled NASDAQ to become listed on the exchange by falsely maintaining they had accurately made all of their required Sarbanes-Oxley certifications.





In a parallel action, a criminal indictment against Lee was unsealed today in federal court in Seattle.  The U.S. Attorney’s Office in the Western District of Washington is prosecuting the case.





“Lee and L&L Energy deceived the public by falsely representing that the company had a CFO, which is a critical gatekeeper in the management of public companies,” said Antonia Chion, associate director in the SEC’s Enforcement Division.  “The integrity of Sarbanes-Oxley certifications is critical, and executives who manipulate the process will be held accountable for their misdeeds.”





This enforcement action stems from the work of the SEC’s Cross-Border Working Group, which focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Cross-Border Working Group has contributed to the filing of fraud cases against more than 90 companies, executives, and auditors.  The securities of more than 60 companies have been deregistered.





The SEC separately issued a settled cease-and-desist order against L&L Energy’s former audit committee chair Shirley Kiang finding that she played a role in the company’s reporting violations by signing an annual report that she knew or should have known contained a false Sarbanes-Oxley certification by Lee.  Kiang, who neither admitted nor denied the charges, must permanently refrain from signing any public filing with the SEC that contains any certification required pursuant to Sarbanes-Oxley.





According to the SEC’s order against Lee and L&L Energy, the false representations began in the annual report for 2008 and continued with quarterly filings in 2009.  The purported acting CFO did not actually sign any public filings during this period or provide authorization for her signature to be placed on any filings.  After Lee was confronted by the purported acting CFO in mid-2009, he nonetheless continued to falsely represent to L&L Energy’s board of directors that the company had an acting CFO.  When L&L Energy filed its annual report for 2009, it contained a false Sarbanes-Oxley certification by Lee that all fraud involving management had been disclosed to the company’s auditors and audit committee.  Then, in connection with an application to gain listing on NASDAQ, Lee informed the exchange that L&L Energy had made all of its required Sarbanes-Oxley certifications – including during the period of the purported service of an acting CFO.  As a result, L&L Energy became listed on NASDAQ.   





The SEC’s order against Dickson Lee and L&L alleges that they violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  The order also alleges other violations of rules under the Exchange Act concerning Sarbanes-Oxley certifications, disclosure controls and procedures, and obtaining and retaining electronic signatures on filings.  The order seeks disgorgement and financial penalties against L&L Energy and Lee as well as an officer-and-director bar against Lee.  The order also seeks to prohibit Lee, who is a certified public accountant, from practicing before the SEC pursuant to Rule 102(e) of the Commission’s rules of practice. 





The SEC’s investigation, which is continuing, has been conducted by Joseph Griffin, Jennie Krasner, and Brad Mroski under the supervision of Ricky Sachar.  The SEC’s litigation will be led by Cheryl L. Crumpton.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Washington and the Federal Bureau of Investigation. 








Wednesday, March 26, 2014

Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform




Press Releases





Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform




The staff of the Securities and Exchange Commission today made available certain analyses of data and academic literature related to money market fund reform.  





The analyses, which were conducted by the staff of the SEC’s Division of Economic and Risk Analysis, are available for review and comment on the Commission’s website as part of the comment file for rule amendments proposed by the SEC in June 2013 regarding money market fund reform.





The analyses examine:






  • The spread between same-day buy and sell transaction prices for certain corporate bonds from Jan. 2, 2008 to Jan. 31, 2009.


  • The extent of government money market fund exposure to non-government securities.


  • Academic literature reviewing recent evidence on the availability of “safe assets” in the U.S. and global economies.


  • The extent various types of money market funds are holding in their portfolios guarantees and demand features from a single institution.





The SEC staff believes that the analyses have the potential to be informative for evaluating final rule amendments for the regulation of money market funds.  These analyses may supplement other information considered in connection with those final rule amendments, and the SEC staff is making these analyses available to allow the public to consider and comment on this supplemental information.  Comments on this supplemental information may be submitted to the comment file for rule amendments the SEC proposed in June 2013 regarding money market fund reform (File No. S7-03-13) and should be received by April 23, 2014.





Additional studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking.  A notification of the inclusion in the comment file of any such materials and an invitation for public comment will be made available on the Commission’s web page.  To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive by e-mail “Notifications Regarding the Money Market Fund Reform and Amendments to Form PF Rulemaking.”








Tuesday, March 25, 2014

SEC Names Jeffrey Boujoukos as Associate Regional Director in Philadelphia Office




Press Releases





SEC Names Jeffrey Boujoukos as Associate Regional Director in Philadelphia Office




The Securities and Exchange Commission today announced that G. Jeffrey Boujoukos has been named the associate regional director for enforcement in the Philadelphia office.





As the regional trial counsel since joining the SEC in 2009, Mr. Boujoukos has supervised the Philadelphia office’s trial unit.  He has litigated matters involving insider trading, Ponzi schemes, investment adviser fraud, and other securities laws violations.  Among the successful cases he prosecuted was a three-week trial last fall against a financial services company, subsidiary, and CEO accused of committing an offering fraud in the sale of millions of dollars of promissory notes and stock.  The jury returned a verdict finding them liable on all counts.





In his new role, Mr. Boujoukos will oversee the Philadelphia office’s enforcement efforts covering the Mid-Atlantic region.





“Jeff is a thoughtful lawyer and manager who can be counted on for sound advice,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “I am pleased that the enforcement program in Philadelphia will continue to benefit from his skills and experience.”





Sharon B. Binger, director of the Philadelphia Regional Office, added, “Jeff is the perfect person to guide our hardworking lawyers, and I am thrilled that he will bring his excellent judgment and intellect to this important role.”





Mr. Boujoukos said, “It has been a privilege to work with the talented attorneys and staff in the Philadelphia office.  I look forward to continuing to collaborate with staff to build on the office’s strong track record of protecting investors and enforcing the federal securities laws.”





Prior to joining the SEC staff, Mr. Boujoukos was an associate and later a partner in the litigation department of Morgan, Lewis & Bockius in Philadelphia.  He graduated from Lehigh University in 1989, and graduated with honors from Temple University School of Law in 1992.








Monday, March 24, 2014

SEC Announces Agenda, Panelists for Cybersecurity Roundtable




Press Releases





SEC Announces Agenda, Panelists for Cybersecurity Roundtable




The Securities and Exchange Commission today announced the agenda and panelists for its March 26 roundtable on the issues and challenges cybersecurity presents for market participants and public companies.



The roundtable, announced in February, will begin at 9:30 a.m. and will be divided into four panels.  Participants on the first panel will discuss the cybersecurity landscape.  The second panel will discuss cybersecurity disclosure issues faced by public companies.  Participants on the third panel will discuss the cybersecurity issues faced by exchanges and other key market systems.  On the final panel, participants will discuss how broker-dealers, investment advisers, and transfer agents address cybersecurity issues, including those involving identity theft and data protection. 



Agenda and Panelists



9:30 a.m.         Opening Remarks



9:40 a.m.         Panel 1:  Cybersecurity Landscape



Moderators:  Thomas Bayer, Chief Information Officer, Keith Higgins, Director, Division of Corporation Finance, James Burns, Deputy Director, Division of Trading and Markets



Panelists:




  • Cyrus Amir-Mokri, Assistant Secretary for Financial Institutions, Department of the Treasury


  • Mary E. Galligan, Director, Cyber Risk Services, Deloitte & Touche LLP


  • Craig Mundie, Member, President’s Council of Advisors on Science and Technology; Senior Advisor to the Chief Executive Officer, Microsoft Corporation


  • Javier Ortiz, Vice President, Strategy and Global Head of Government Affairs, TaaSera, Inc.


  • Andy Roth, Partner and Co-Chair, Global Privacy and Security Group, Dentons US LLP


  • Ari Schwartz, Acting Senior Director for Cybersecurity Programs, National Security Council, The White House


  • Adam Sedgewick, Senior Information Technology Policy Advisor, National Institute of Standards and Technology


  • Larry Zelvin, Director, National Cybersecurity and Communications Integration Center, U.S. Department of Homeland Security



10:40 a.m.       Panel 2:  Public Company Disclosure



Moderator:  Keith Higgins, Director, Division of Corporation Finance



Panelists:




  • Peter J. Beshar, Executive Vice President and General Counsel, Marsh & McLennan Companies, Inc.


  • David Burg, Global and U.S. Advisor Cyber Security Leader, PricewaterhouseCoopers LLP


  • Roberta Karmel, Centennial Professor of Law, Brooklyn Law School


  • Jonas Kron, Senior Vice President, Director of Shareholder Advocacy, Trillium Asset Management LLC


  • Douglas Meal, Partner, Ropes & Gray LLP


  • Leslie T. Thornton, Vice President and General Counsel, WGL Holdings, Inc. and Washington Gas Light Company



11:40 a.m.       Break



12:45 p.m.       Panel 3:  Market Systems



Moderator:  James Burns, Deputy Director, Division of Trading and Markets



Panelists:




  • Mark G. Clancy, Managing Director and Corporate Information Security Officer, The Depository Trust and Clearing Corporation (DTCC)


  • Mark Graff, Chief Information Security Officer, NASDAQ OMX


  • Todd Furney, Vice President, Systems Security, Chicago Board Options Exchange


  • Katheryn Rosen, Deputy Assistant Secretary, Office of Financial Institutions Policy, Department of the Treasury


  • Thomas Sinnott, Managing Director, Global Information Security, CME Group


  • Aaron Weissenfluh, Chief Information Security Officer, BATS Global Markets, Inc.



1:45 p.m.         Panel 4:  Broker-Dealers, Investment Advisers, and Transfer Agents



Moderators:   David Grim, Deputy Director, Division of Investment Management, James Burns, Deputy Director, Division of Trading and Markets, Andrew Bowden, Director, Office of Compliance Inspections and Examinations



Panelists:




  • John Denning, Senior Vice President, Operational Policy Integration, Development & Strategy, Bank of America/Merrill Lynch


  • Jimmie H. Lenz, Senior Vice President, Chief Risk and Credit Officer, Wells Fargo Advisors LLC


  • Mark R. Manley, Senior Vice President, Deputy General Counsel, and Chief Compliance Officer, AllianceBernstein L.P.


  • Marcus Prendergast, Director and Corporate Information Security Officer, ITG


  • Karl Schimmeck,  Managing Director, Financial Services Operations, Securities Industry and Financial Markets Association


  • Daniel M. Sibears, Executive Vice President, Regulatory Operations/Shared Services, FINRA


  • John Reed Stark, Managing Director, Stroz Friedberg


  • Craig Thomas, Chief Information Security Officer, Computershare


  • David G. Tittsworth, Executive Director and Executive Vice President, Investment Adviser Association



2:45 p.m.         Closing Remarks



3:00 p.m.         Roundtable concludes



The roundtable will be held at the SEC’s headquarters in Washington D.C., and is open to the public on a first-come, first-served basis.  The event also will be webcast live on the SEC website and archived for later viewing.



Members of the public are welcome to submit comments on the topics to be addressed at the roundtable.  Comments may be submitted electronically or on paper; please use one method only.  Any comments submitted will become part of the public record of the roundtable and posted on the SEC’s website.



Electronic submissions:



Use the SEC’s Internet submissions form or send an e-mail to rule-comments@sec.gov



Paper submissions:



Send paper submissions in triplicate to the Office of the Secretary, Securities and Exchange Commission, 100 F Street N.E., Washington, D.C. 20549-1090.



All submissions should refer to File Number 4-673 and the file number should be included on the subject line if e-mail is used.
















Wednesday, March 19, 2014

SEC Charges Stockbroker and Law Firm Managing Clerk in $5.6 Million Insider Trading Scheme




Press Releases





SEC Charges Stockbroker and Law Firm Managing Clerk in $5.6 Million Insider Trading Scheme




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Chart of Trading Profits
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The Securities and Exchange Commission today charged a stockbroker and a managing clerk at a law firm with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.





The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme.  Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system.  Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal.  The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol.  After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.  The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information.  Metro also personally traded in advance of at least two deals.





In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Metro, who lives in Katonah, N.Y., and Eydelman, who lives in Colts Neck, N.J.  





“Law firms are sanctuaries for the confidential treatment of client information, and this scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.  “We are continuing to combat serial insider trading schemes, particularly by law firm employees and other professionals who are entrusted with extremely sensitive market-moving information.”





According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the insider trading scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks.  When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt.  Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked.  As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius.  Eydelman expressed similar concern about Sirius’ struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm.  Following the public announcement of the deal, whose news coverage noted that Simpson Thacher acted as legal counsel to Sirius, Eydelman acknowledged to the middleman, “Nice trade.”  The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a “thank you” for the information.  Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro’s behalf based on confidential information that he planned to pass him in the future. 





According to the SEC’s complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities.  Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction.  Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired.  Metro also conveyed the approximate price of the transaction and the approximate announcement date.  The middleman then communicated to Eydelman that they should meet.  Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction.  Eydelman watched the middleman chew or eat the tip to destroy the evidence.  Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.





The SEC alleges that Eydelman then returned to his office and typically gathered research about the target company.  He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense.  The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.





“People often try to cover their insider trading tracks by using middlemen, destroying evidence, and creating phony documents.  They should learn that sham cover stories simply don’t work and won’t deter us from finding their schemes,” said Robert A. Cohen, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit. 





According to the SEC’s complaint, Eydelman also traded on inside information in the accounts of more than 50 of his brokerage customers.  Eydelman earned substantial commissions as a result of this trading, and received bonuses from his employers based on his performance driven in large part by the profits garnered through the insider trading scheme.  The middleman’s agreement with Metro resulted in more than $168,000 being apportioned to Metro as his share of profits from the insider trading scheme in addition to his profits from personally trading in advance of at least two transactions.





The SEC’s complaint charges Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933.  The complaint seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.





The SEC’s investigation, which is continuing, has been conducted by Jason Burt and Carolyn Welshhans in the Market Abuse Unit.  John Rymas, Mathew Wong, Daniel Koster, and Leigh Barrett assisted with the investigation.  The case was supervised by Mr. Hawke and Mr. Cohen.  The SEC’s litigation will be led by Stephan Schlegelmilch and Bridget Fitzpatrick.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.








Tuesday, March 18, 2014

SEC and FINRA to Hold Regional Compliance Outreach Programs for Broker-Dealers




Press Releases





SEC and FINRA to Hold Regional Compliance Outreach Programs for Broker-Dealers




The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) today announced the opening of registration for the regional compliance outreach programs for broker-dealers that will take place in Denver, Los Angeles, Chicago, Miami, Philadelphia, and New York, beginning in the spring.



The SEC's Office of Compliance Inspections and Examinations, in coordination with the SEC's Division of Trading and Markets, is partnering with FINRA to sponsor the programs.  Similar to the 2013 national compliance outreach program for broker-dealers, the regional programs will provide professionals at broker-dealers with a forum for discussions with regulators about risk management, regulatory issues, and compliance practices.



“These regional programs supplement our national compliance outreach program for broker-dealers by allowing critical regional interaction between staff from the SEC and FINRA and personnel from registered broker-dealer firms operating in the region.  This local collaboration is an important aspect of our overall outreach efforts,” said Kevin Goodman, national associate director of the SEC's broker-dealer examination program.



FINRA senior vice president for member relations and education Chip Jones added, “FINRA views these programs as unique learning opportunities because they provide compliance professionals across the country with the opportunity to interact with FINRA and SEC staff.  These outreach programs also provide us with an opportunity to listen to the firms regarding their day-to-day compliance initiatives.”



“The compliance outreach program is an important part of the Commission’s and FINRA’s initiative to share information with the industry about observed deficiencies and control weaknesses and to assist firms in assessing and enhancing their compliance,” said Andrew Bowden, director of the SEC’s National Examination Program. “We look forward to a candid exchange of information and ideas with participants.” 



There is no cost to attend the regional programs.  Registration is open to all risk, audit, legal, and compliance professionals employed by broker-dealers, with limited seating available on a first-come, first-served basis.



For additional details and to register for one of the 2014 regional compliance outreach programs for broker-dealers, visit the SEC website or the FINRA website.










Monday, March 17, 2014

SEC Charges Lions Gate With Disclosure Failures While Preventing Hostile Takeover




Press Releases





SEC Charges Lions Gate With Disclosure Failures While Preventing Hostile Takeover




The Securities and Exchange Commission today charged motion picture company Lions Gate Entertainment Corp. with failing to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid.





Lions Gate agreed to pay $7.5 million and admit wrongdoing to settle the SEC’s charges.





According to the SEC’s order instituting settled administrative proceedings, Lions Gate’s management participated in a set of extraordinary corporate transactions in 2010 that put millions of newly issued company shares in the hands of a management-friendly director.  A purpose of the maneuver was to defeat a hostile tender offer by a large shareholder who had been locked in a battle for control of the company for at least a year.  However, Lions Gate failed to reveal that the move was part of a defensive strategy to solidify incumbent management’s control, instead stating in SEC filings that the transactions were part of a previously announced plan to reduce debt.  In fact, the company had made no such prior announcement.  Lions Gate also represented that the transactions were not “prearranged” with the management-friendly director, and failed to disclose the extent to which it planned and enabled the transactions with the expectation that the director would get the shares.





“Lions Gate withheld material information just as its shareholders were faced with a critical decision about the future of the company,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Full and fair disclosure is crucial in tender offers given that  shareholders rely heavily on corporate insiders to make informed decisions, especially in the midst of tender offer battles.” 





According to the SEC’s order, the large shareholder had made several tender offers and acquired more than 37 percent of Lions Gate’s outstanding stock.  For its part, Lions Gate management believed that allowing the shareholder to control the company was not in the best interest of Lions Gate or its shareholders.  The company engaged in an active campaign to discourage shareholders from tendering their stock to the shareholder, and vigorously looked for a management ally to purchase available shares of Lions Gate stock.  Lions Gate went on to establish the basic framework for an extraordinary three-part set of transactions that would begin by exchanging $100 million in notes from a holder for new notes convertible to stock at a more favorable conversion rate.  The note holder would then sell the notes to the management-friendly director at a premium, and the director would then immediately convert the notes to shares. 





According to the SEC’s order, the Lions Gate board of directors approved the transactions at a midnight board meeting on July 20, 2010, while facing an imminent tender offer from the large shareholder.  Completed in hours, these transactions allowed the friendly director to obtain control of approximately nine percent of the company’s outstanding stock, effectively blocking the takeover bid. 





The SEC’s order finds that Lions Gate then failed to meet its disclosure obligations.  First, Lions Gate stated in a July 20 press release and 8-K filing that the transactions were done to reduce the company’s debt, and failed to disclose the effort to foil the takeover bid.  Furthermore, Lions Gate management knew that a large, direct sale of stock from the company to the friendly director would have required prior approval from its shareholders under a New York Stock Exchange (NYSE) rule.  After the transactions, NYSE contacted Lions Gate to inquire whether the transactions violated the NYSE rule requiring shareholder approval.  In response to the NYSE inquiry, Lions Gate said it would disclose additional information.  In its subsequent tender offer filings made to the SEC in September, Lions Gate represented that the note exchange was not part of a prearranged plan to get shares to the management-friendly director.





Among the facts admitted by Lions Gate, reflecting the extent to which the company planned and enabled the transactions, include:






  • Lions Gate did not announce a plan to reduce total debt prior to issuing the press release on July 20, 2010.


  • Lions Gate amended its insider trading policy at the midnight board meeting to allow the friendly director to immediately convert the notes to stock.


  • Lions Gate approved the friendly director’s last-minute request to change the conversion price.


  • Lions Gate allowed the friendly director to review the new note terms, term sheet, and exchange agreement before they were provided to the note holder.


  • Lions Gate failed to include other required information in its tender offer filings, including the fact that the friendly director converted the notes at favorable price resulting in the director owning a near 9 percent interest in Lions Gate.





The SEC’s order finds that Lions Gate violated Sections 13(a) and 14(d) of the Securities Exchange Act of 1934 and Rules 12b-20 13a-11, and 14d-9.  In addition to the financial penalty, the order requires Lions Gate to cease and desist from future violations. 





The SEC’s investigation was conducted by Nicholas A. Brady with assistance from Jeffrey T. Infelise.  The case was supervised by Anita B. Bandy and Moira T. Roberts.








Sunday, March 16, 2014

SEC Charges CR Intrinsic Analyst with Insider Trading




Press Releases





SEC Charges CR Intrinsic Analyst with Insider Trading




The Securities and Exchange Commission today charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies. 



The SEC alleges that Ronald N. Dennis got illegal tips from two friends who were fellow hedge fund analysts.  They provided him confidential details about impending announcements at Dell Inc. and Foundry Networks.  Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by S.A.C. Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses. 



Dennis, who lives in Fort Worth, Texas, has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges.



“Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “His actions have cost him the privilege of working in the hedge fund industry ever again.”



According to the SEC’s complaint filed in federal court in Manhattan, Dennis received illegal tips about Dell’s financial performance from Jesse Tortora, who was then an analyst at Diamondback Capital.  Tortora and Diamondback were charged in 2012 along with several other hedge fund managers and analysts as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.  Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm.  The SEC charged Teeple and two others last year for insider trading in Foundry stock.



The SEC alleges that Dennis caused CR Intrinsic and S.A.C. Capital to trade Dell securities based on nonpublic information in advance of at least two quarterly earnings announcements in 2008 and 2009.  Dennis obtained confidential details from Tortora, who had obtained the information from a friend who communicated with a Dell insider.  Dennis enabled hedge funds managed by CR Intrinsic and S.A.C. Capital to generate approximately $3.2 million in profits and avoided losses in Dell stock.  Within minutes after one of the Dell announcements, Tortora sent an instant message to Dennis saying “your welcome.”  Dennis responded “you da man!!! I owe you.” 



The SEC’s complaint also alleges Dennis was informed by Teeple in July 2008 about Foundry’s impending acquisition by another technology company.  Shortly after receiving the inside information, Dennis caused a CR Intrinsic hedge fund to purchase Foundry stock and generate approximately $550,000 in profits when the news became public.   



The SEC’s complaint charges Dennis with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  Dennis has agreed to pay $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty.  Without admitting or denying the allegations, Dennis also has agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.  He would then be barred from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent in a related administrative proceeding.



The SEC’s investigation, which is continuing, has been conducted by Michael Holland, Daniel Marcus, and Joseph Sansone of the Enforcement Division’s Market Abuse Unit in New York and Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office.  The case has been supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.










Saturday, March 15, 2014

SEC Announces Charges Against Brokers, Adviser, and Others Involved in Variable Annuities Scheme to Profit From Terminally Ill




Press Releases





SEC Announces Charges Against Brokers, Adviser, and Others Involved in Variable Annuities Scheme to Profit From Terminally Ill




The Securities and Exchange Commission today announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.





Variable annuities are designed to serve as long-term investment vehicles, typically to provide income at retirement.  Common features are a death benefit paid to the annuity’s beneficiary (typically a spouse or child) if the annuitant dies, and a bonus credit that the annuity issuer adds to the contract value based on a specified percentage of purchase payments.  The SEC Enforcement Division alleges that Michael A. Horowitz, a broker who lives in Los Angeles, developed an illicit strategy to exploit these benefits.  He recruited others to help him obtain personal health and identifying information of terminally ill patients in southern California and Chicago.  Anticipating they would soon die, Horowitz sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and he designated the patients as annuitants whose death would trigger a benefit payout.  Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains.  When the annuitants died, the investors collected death benefit payouts. 





The SEC Enforcement Division alleges that Horowitz enlisted another broker Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities.  They falsified various broker-dealer forms used by firms to conduct investment suitability reviews.  As a result of the fraudulent practices used in the scheme, some insurance companies unwittingly issued variable annuities that they would not otherwise have sold.  Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.





Agreeing to settle the SEC’s charges are four non-brokers and a New York-based investment advisory firm recruited into the scheme.  Also agreeing to settlements are two other brokers who are charged with causing books-and-records violations related to annuities sold through the scheme.  A combined total of more than $4.5 million will be paid in the settlements.  The SEC’s litigation continues against Horowitz and Cohen.





“This was a calculated fraud exploiting terminally ill patients,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Michael Horowitz and others stole their most private information for personal monetary gain.”





According to the SEC’s orders instituting administrative proceedings, the scheme began in 2007 and continued into 2008.  Horowitz agreed to compensate Harold Ten of Los Angeles and Menachem “Mark” Berger of Chicago for identifying terminally ill patients to be used as annuitants.  Berger, in turn, recruited Debra Flowers of Chicago into the scheme and compensated her directly.  Through the use of a purported charity and other forms of deception, Ten, Berger, and Flowers obtained confidential health data about patients for Horowitz. 





According to the SEC’s orders, after selling millions of dollars in variable annuities to individual investors, Horowitz still desired to generate greater capital into the scheme.  Searching for a large source of financing, he began pitching his scheme to institutional investors.  A pooled investment vehicle and its adviser BDL Manager LLC were created in late 2007 in order to facilitate institutional investment in variable annuities through the use of nominees.  Commodities trader Howard Feder, who lives in Woodmere, N.Y., became each firm’s sole principal.  Feder and BDL Manager fraudulently secured broker-dealer approvals of more than $56 million in annuities sold through Horowitz’s scheme.  Feder furnished the brokers with blank forms signed by the nominees enabling the brokers to complete the forms with false statements indicating that the nominees did not intend to access their investments for many years.  Feder understood that the purpose of Horowitz’s scheme was to designate terminally ill patients as annuitants in the expectation that their deaths would result in short-term lucrative payouts.  BDL Group received more than $1.5 million in proceeds from its investment in the annuities.





The order against Horowitz and Cohen alleges that they willfully violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and they willfully aided and abetted and caused violations of the Exchange Act’s books-and-records provisions.  Horowitz also acted as an unregistered broker.





Ten, Berger, Flowers, Feder, and BDL Manager consented to SEC orders finding that they willfully violated Section 10(b) of the Exchange Act and Rule 10b-5.  They neither admitted nor denied the findings and agreed to cease and desist from future violations.  The individuals agreed to securities industry or penny stock bars as well as the following monetary sanctions: 




  • Ten agreed to pay disgorgement of $181,147.64, prejudgment interest of $20,858.80, and a penalty of $90,000.


  • Berger agreed to pay disgorgement of $119,000, prejudgment interest of $11,579.61, and a penalty of $100,000.


  • Feder agreed to pay a penalty of $130,000.


  • BDL Manager agreed to pay disgorgement of $1,550,565.55, prejudgment interest of $196,608.97, and a penalty of $1,550,565.55.





The SEC’s order against Richard Horowitz and Marc Firestone finds that they negligently allowed point-of-sale forms for 12 annuities in the scheme to be submitted to their firm with inaccurately overstated answers to the form’s question asking how soon the customer intended to access his or her investment.  These inaccurate answers led to each annuity’s issuance, and Horowitz and Firestone were each paid commissions. 





Richard Horowitz and Firestone consented to the order finding that they caused their firm to violate Section 17(a) of the Exchange Act and Rule 17a-3.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing future violations of those provisions as well as the following monetary sanctions:




  • Horowitz agreed to pay disgorgement of $292,767.89, prejudgment interest of $36,512.20, and a penalty of $40,800.


  • Firestone agreed to pay disgorgement of $127,853.20, prejudgment interest of $17,140.89, and a penalty of $40,800. 





The SEC’s investigation was conducted by Marilyn Ampolsk, Peter Haggerty, Jeremiah Williams, and Anthony Kelly of the Enforcement Division’s Asset Management Unit along with Christopher Mathews and J. Lee Buck II.  The SEC’s litigation will be led by Dean M. Conway.










Friday, March 14, 2014

SEC Proposes Rules for Systemically Important and Security-Based Swap Clearing Agencies




Press Releases





SEC Proposes Rules for Systemically Important and Security-Based Swap Clearing Agencies




The Securities and Exchange Commission voted today to propose new rules to enhance the oversight of clearing agencies that are deemed to be systemically important or that are involved in complex transactions, such as security-based swaps.



“Clearing agencies that have been designated as systemically important or that clear security-based swaps are a backbone of the U.S. financial markets,” said SEC Chair Mary Jo White.  “The enhanced regulatory regime proposed today reflects the importance of effective regulation of these entities.”



A securities clearing agency generally acts as a middleman between the parties to a securities transaction, performing a range of services important for the effective operation of the securities markets.  These services include, for example, ensuring that funds and securities are correctly transferred between parties and, in some cases, assuming the risks of a party defaulting on a transaction by acting as a “central counterparty.”



The Dodd-Frank Wall Street Reform and Consumer Protection Act called for an enhanced regulatory framework for certain clearing agencies.  The SEC’s proposal would apply to SEC-registered clearing agencies that have been designated as systemically important by the Financial Stability Oversight Council or that take part in more complex transactions, such as clearing security-based swaps.



Clearing agencies covered by the proposed rules would be subject to new requirements regarding their financial risk management, operations, governance, and disclosures to market participants and the public.  The proposal also would establish procedures for the Commission to apply the new requirements to additional clearing agencies.



The public will have 60 days to comment on the proposed rules after their publication in the Federal Register.





###



FACT SHEET



Enhanced Regulatory Framework for Covered Clearing Agencies



SEC Open Meeting



March 12, 2014





Background



A securities clearing agency generally acts as a middleman between the parties to a securities transaction, performing a range of services important for the effective operation of the securities markets.  These services include, for example, ensuring that funds and securities are correctly transferred between parties and, in some cases, assuming the risks of a party defaulting on a transaction by acting as a “central counterparty.”



The SEC has overseen clearing agencies since 1975, when Congress provided the SEC with broad authority to write rules governing clearing agencies under Section 17A of the Securities Exchange Act of 1934.



Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced the SEC’s authority to adopt rules addressing risk management standards for clearing agencies that have been designated systemically important by the Financial Stability Oversight Council (FSOC).  When a clearing agency is so designated, the SEC may become its “supervisory agency.”  In 2012, FSOC designated six registered clearing agencies as systemically important. 



The SEC serves as the supervisory agency for four of those clearing agencies, and the CFTC serves as the supervisory agency for the remaining two.



In addition, Title VII of the Dodd-Frank Act also amended the Exchange Act to grant the SEC authority to write rules for registered clearing agencies that clear security-based swaps.



In 2012, the SEC adopted Rule 17Ad-22 under the Exchange Act, which established standards for the risk management and operation of registered clearing agencies.  The SEC’s proposal would build on Rule 17Ad-22 by subjecting certain clearing agencies to enhanced policies and procedures requirements concerning risk management, operations, governance, and disclosure. 



Scope of the Proposal




The SEC’s proposal would create more robust requirements for “covered clearing agencies,” which would include:




  • Clearing agencies designated systemically important by FSOC, for which the SEC acts as the supervisory agency under Title VIII


  • Clearing agencies that provide central counterparty services for security-based swaps or are otherwise involved in activities with a more complex risk profile, unless they have been designated systemically important by FSOC and their supervisory agency under Title VIII is the CFTC


  • Clearing agencies that the Commission determine to be covered clearing agencies.  Proposed Rule 17Ab2-2 would provide a framework for making such determinations.



The SEC’s proposal would create two tiers of regulations under Rule 17Ad-22: (1) enhanced rules for covered clearing agencies under Rule 17Ad-22(e); and (2) the existing rules for all other registered clearing agencies under Rule 17Ad-22(d).  The two tiers would provide flexibility for new entrants that might seek to operate as registered clearing agencies while applying enhanced requirements to those clearing agencies that raise systemic risk concerns due to, among other things, their size, systemic importance, global reach, or the risks inherent in the products they clear.



Overview of Proposed Requirements



Under proposed Rule 17Ad-22(e), a covered clearing agency would be required to establish, implement, maintain and enforce policies and procedures reasonably designed to address certain aspects of its risk management and operation:




  • General organization (including legal basis, governance and comprehensive risk management framework)


  • Financial risk management (including credit risk, collateral, margin, and liquidity risk)


  • Settlement (including settlement finality, money settlements and physical deliveries)


  • Central securities depositories and settlement systems


  • Default management (including default rules and procedures and segregation and portability)


  • Business and operational risk management (including general business risk, custody and investment risks and operational risk)


  • Access (including access and participation requirements, tiered participation arrangements and links)


  • Efficiency (including efficiency and effectiveness and communication procedures and standards)


  • Transparency



While many of these requirements would reflect enhancements of the SEC’s existing oversight program for registered clearing agencies, several requirements would be newly specified in light of the nature and extent of the activities of covered clearing agencies. 



The significant new requirements in proposed Rule 17Ad-22(e) would be:



Governance and Comprehensive Risk Management




  • Proposed Rule 17Ad-22(e)(2) would require policies and procedures establishing qualifications of members of boards of directors and senior management of covered clearing agencies.


  • Proposed Rule 17Ad-22(e)(3) would require policies and procedures designed to ensure that risk management and internal audit personnel have sufficient authority, resources, independence from management, and access to the board to fulfill their functions effectively. The proposed rule would also require policies and procedures providing for an independent audit committee.



Financial Risk Management




  • Liquidity Risk – Proposed Rule 17Ad-22(e)(7) would require policies and procedures to address holding “qualifying liquid resources” sufficient to withstand the default of the participant family that would generate the largest aggregate payment obligation in extreme but plausible market conditions.  Such resources could include (1) cash, (2) assets readily available and convertible into cash through prearranged funding arrangements, and (3) other assets readily available and eligible for pledging to a central bank (when the covered clearing agency has access to routine credit at a relevant central bank). A covered clearing agency would also be required to have specified policies and procedures to test the sufficiency of its qualifying liquid resources.  


  • Credit Risk – Proposed Rule 17Ad-22(e)(4) would require policies and procedures regarding daily stress testing, monthly review and annual validation of credit risk models. 


  • Margin – Proposed Rule 17Ad-22(e)(6) would require policies and procedures regarding marking positions to market, collecting margin at least daily, and conducting daily backtesting, monthly sensitivity analyses, and annual model validation.


  • Collateral – Proposed Rule 17Ad-22(e)(5) would require policies and procedures regarding setting and enforcing appropriately conservative haircuts and concentration limits and subjecting them to annual review. 



General Business Risk




  • Proposed Rule 17Ad-22(e)(15) would require a covered clearing agency to have policies and procedures that provide for holding liquid net assets funded by equity equal to at least six months of current operating expenses so that the covered clearing agency can continue operations during a recovery or wind-down.  The proposed rule also would require policies and procedures to maintain a viable plan – approved by the board of directors and updated at least annually – for raising additional equity should its equity fall close to or below the amount required.



Commission Determinations under Proposed Rule 17Ab2-2



Proposed Rule 17Ab2-2 would provide the Commission with procedures to make three kinds of determinations regarding registered clearing agencies:




  • Whether a registered clearing agency should be considered a covered clearing agency


  • Whether a covered clearing agency meets the definition of “systemically important in multiple jurisdictions”


  • Whether the activities of a clearing agency providing CCP services have a more complex risk profile



The SEC’s proposal contemplates allowing such determinations to occur either at the Commission’s own initiative or upon request by either a clearing agency or one of its members.



In each case, the SEC would publish notice of its intention to consider such determinations, together with a brief statement of the grounds under consideration, and provide at least a 30-day public comment period prior to any determination.  The Commission also may provide a clearing agency the opportunity for a hearing in connection with the proposed determination. 



What’s Next



The Commission will seek public comment on the proposed rules for 60 days following publication in the Federal Register.  The Commission will then review the comments and determine whether to adopt final rules.














Thursday, March 13, 2014

SEC Obtains Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme




Press Releases





SEC Obtains Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme




The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against a promoter behind a platform of affiliated microcap stock promotion websites.



The SEC alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively “APS,” to commit a brand of securities fraud known as “scalping.”  The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ).  What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank.  The APS emails immediately triggered massive increases in America West’s share price and trading volume, which Babikian exploited by unloading shares of America West’s stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.



According to documents filed simultaneously with the SEC’s complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies.  He was seeking to wire the proceeds offshore.  The Honorable Paul A. Crotty granted the SEC’s emergency request to preserve these assets by issuing an asset freeze order. 



“The Enforcement Division, including its Microcap Fraud Task Force, is intensely focused on the scourge of microcap fraud and is aggressively working to root out microcap fraudsters who make their living by preying on unwitting investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.



“By obtaining today’s emergency asset freeze, we have thwarted Babikian’s attempts to liquidate and expatriate assets that should be used to return his ill-gotten gains and pay appropriate penalties,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement in Washington, D.C. 



According to the SEC’s complaint, America West’s stock was both low-priced and thinly traded prior to Babikian’s mass dissemination of the APS e-mails promoting it.  America West’s trading volume in 2011 averaged approximately 15,400 shares per day.  There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent.  However, in the immediate aftermath of Babikian’s e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West’s share price hit an all-time high.  Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.



The court’s order, among other things, freezes Babikian’s assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery.  Pursuant to the order, the SEC has taken immediate action to freeze Babikian’s U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.



The SEC’s investigation, which is continuing, has been led by Andrew R. McFall, John P. Lucas, Robert W. Nesbitt and supervised by J. Lee Buck II.  The case will be litigated by Matthew P. Cohen and Michael J. Roessner.  The SEC appreciates the assistance of the Quebec Autorité des Marchés Financiers, Financial Industry Regulatory Authority, and OTC Markets Group Inc.










Wednesday, March 12, 2014

SEC Charges Jefferies LLC With Failing to Supervise Its Mortgage-Backed Securities Desk During Financial Crisis




Press Releases





SEC Charges Jefferies LLC With Failing to Supervise Its Mortgage-Backed Securities Desk During Financial Crisis




The Securities and Exchange Commission today charged global investment bank and brokerage firm Jefferies LLC with failing to supervise employees on its mortgage-backed securities desk who were lying to customers about pricing.





An SEC investigation found that Jefferies representatives including Jesse Litvak, who the SEC charged with securities fraud last year, lied to customers about the prices that the firm paid for certain mortgage-backed securities, thus misleading them about the true amount of profits being earned by the firm in its trading.  Jefferies’ policy required supervisors to review the electronic communications of traders and salespeople in order to flag any untrue or misleading information provided customers.  However, the policy was not implemented in a way to detect misrepresentations about price. 





Jefferies agreed to pay $25 million to settle the SEC’s charges as well as a parallel action announced today by the U.S. Attorney's Office for the District of Connecticut.  In a related criminal trial, Litvak was convicted last week of multiple counts of securities fraud and other charges.





“Had Jefferies better targeted its supervision to the risks faced by its mortgage-backed securities desk, many of the misstatements made by its employees could have been caught,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Other firms trading instruments like mortgage-backed securities should take note of the consequences of failing to do so, and should take this opportunity to tailor their own supervision.”





Paul Levenson, director of the SEC’s Boston Regional Office, added, “Reviewing employees’ communications is a critical part of a brokerage firm’s supervisory responsibilities. This is particularly true when it concerns complex products like mortgage-backed securities in which customers have limited visibility into prices.”





According to the SEC’s order instituting settled administrative proceedings, the supervisory failures occurred on numerous occasions from 2009 to 2011.  Jefferies failed to provide direction or tools to supervisors on the mortgage-backed securities desk to meaningfully review communications to customers by Litvak and others about the price that Jefferies paid for mortgage-backed securities.  Jefferies supervisors failed to check traders’ communications against actual pricing information, making it difficult to detect misrepresentations to customers.  Supervisors on the mortgage-backed securities desk also did not review communications with customers that took place in Bloomberg group chats, where Jefferies traders and salespeople lied about pricing.  





The SEC’s order finds that Jefferies failed to reasonably supervise Litvak and other representatives on its mortgage-backed securities desk as required by Section 15(b)(4)(E) of the Securities and Exchange Act of 1934.  Jefferies agreed to settle the charges by making payments to customers totaling more than $11 million, which represents not just the ill-gotten gains of $4.2 million but the full amount of profits earned by the firm on these trades.  Jefferies also agreed to pay a $4.2 million penalty to the SEC and an additional $9.8 million as part of a non-prosecution agreement with the U.S. Attorney’s office.  The firm must retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.





The SEC’s investigation, which is continuing, has been conducted by Kerry Dakin of the Enforcement Division’s Complex Financial Instruments Unit as well as James Goldman, Rachel Hershfang, Rua Kelly, Kathleen Shields, and Kevin Kelcourse of the Boston Regional Office.    The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).








Tuesday, March 11, 2014

SEC Charges Animal Feed Company and Top Executives in China and U.S. With Accounting Fraud




Press Releases





SEC Charges Animal Feed Company and Top Executives in China and U.S. With Accounting Fraud




The Securities and Exchange Commission today charged an animal feed company and top executives with conducting a massive accounting fraud in which they repeatedly reported fake revenues from their China operations in order to meet financial targets and prop up the stock price.





The SEC alleges that four executives in China orchestrated the scheme at AgFeed Industries Inc., which was based in China and publicly traded in the U.S. before merging with a U.S. company in September 2010 and spreading its operations between the two countries.  With the bulk of its hog production operations in China, the executives used a variety of methods to inflate revenue from 2008 to mid-2011, including fake invoices for the sale of feed and purported sales of hogs that didn’t really exist.  They later tried to cover up their actions by saying the fake hogs died.  Because fatter hogs bring higher market prices, they also inflated the weights of actual hogs sold and correspondingly inflated the sales revenues for those hogs.  





The SEC also charged a company executive and a company director in the U.S. with scheming to avoid or delay disclosure of the accounting fraud once they learned about it in 2011 while engaged in efforts to raise capital for expansion and acquisitions.  The director, K. Ivan (Van) Gothner, was chair of AgFeed’s audit committee.  He sought advice from a former director and company advisor who responded in e-mail communications that there was “not just smoke but fire” and recommended that AgFeed hire professional investigators guided by outside legal counsel.  However, Gothner ignored the recommendation and internalized the situation while false financial reporting continued.





The SEC also reached a settlement with another U.S.-based company executive and a cooperation agreement with a different executive in the U.S.  The eight executives involved in the SEC’s case are no longer at AgFeed, which is headquartered in Hendersonville, Tenn., and has filed for bankruptcy.





“AgFeed’s accounting misdeeds started in China, and U.S. executives failed to properly investigate and disclose them to investors,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “This is a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”





The SEC’s complaint filed in U.S. District Court for the Middle District of Tennessee charges executive chairman Songyan Li, CEO Junhong Xiong, CFO Selina Jin, and controller Shaobo Ouyang as the management in China behind the scheme, which began in 2008 after AgFeed acquired 29 Chinese farms for its new hog production division.  The inflated numbers that included sales of fake hogs and bloated weights of actual hogs were recorded in a fake “outside” set of books that the company provided to its outside auditors.  The “inside” real set of books contained accurate, lower revenue numbers that were hidden from auditors.  Li, Xiong, Jin, and Ouyang caused AgFeed to report false revenues of approximately $239 million.





According to the SEC’s complaint, U.S. management learned of the accounting fraud by early June 2011, but failed to take adequate steps to investigate and disclose it to investors.  Gothner and the CFO who replaced Jin after the merger, Edward J. Pazdro, specifically learned that AgFeed’s China operations kept two sets of accounting books and that Ouyang had admitted to the fraud.  Gothner and Pazdro even obtained a partial copy of the two sets of books as well as a memo from AgFeed’s in-house counsel from China that concluded – based on witness accounts and documentary evidence – that the company was involved in a widespread accounting fraud.  The memo noted that two sets of accounting books were maintained “in order to make AgFeed’s revenue and net income look better.”  The memo concluded that Xiong and Jin had directed the accounting fraud, and Xiong had ordered the destruction of the second set of books.





The SEC alleges that instead of fulfilling their responsibilities as the company’s stewards of financial reporting, Gothner and Pazdro failed to conduct or prompt the company to conduct any further meaningful investigation into the misconduct.  Not only did they fail to disclose the fraud to investors or law enforcement, but Gothner and Pazdro instead engaged in efforts to spin off the company’s feed division and raise capital for expansion and acquisitions that would enable profits for AgFeed and them personally.  Even as additional red flags arose in June and July 2011, they failed to take appropriate actions.  They misled AgFeed’s outside auditor and caused the company to issue false and misleading press releases and SEC filings.





“Officers and directors have an obligation to exercise diligence and ensure that their financial reporting is accurate,” said Julie Lutz, director of the SEC’s Denver Regional Office.  “Despite learning about false and misleading financial information, AgFeed executives failed to come clean with investors or law enforcement.”





The SEC’s complaint charges AgFeed, Xiong, Li, Jin, Ouyang, Gothner, and Pazdro with violating or aiding and abetting violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Xiong, Li, Jin, Ouyang, Gothner, and Pazdro also are charged with making false statements to AgFeed’s outside auditors.  The SEC’s complaint seeks disgorgement of ill-gotten gains plus prejudgment interest as well as financial penalties and officer-and-director bars.  The SEC also seeks to suspend Jin, Ouyang, and Pazdro from practicing as accountants on behalf of any publicly-traded company or other entity regulated by the SEC.





AgFeed’s former chairman and interim CEO John A. Stadler separately consented to an SEC order barring him from acting as an officer or director and requiring him to pay a $100,000 penalty and cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder.  He neither admitted nor denied the findings in the order.





AgFeed’s former CFO Clayton T. Marshall, who replaced Pazdro, entered into a cooperation agreement with the SEC.  The terms of his settlement reflect his assistance in the SEC’s investigation and anticipated cooperation in the pending court action.  Marshall agreed to be suspended from practicing as an accountant on behalf of any publicly-traded company or other entity regulated by the SEC for a period of at least five years.  Without admitting or denying the findings, he consented to an SEC order requiring him to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder.  Whether a financial penalty should be imposed against Marshall will be determined at a later date.





AgFeed consented to an SEC order pursuant to Section 12(j) of the Exchange Act that revokes the registration of each class of its securities.  The SEC’s case against AgFeed in federal court is continuing.





The SEC’s investigation was conducted by Michael Cates, Rachael Clarke, Donna Walker, and Ian Karpel of the Denver Regional Office.  The SEC’s litigation will be led by Nancy Gegenheimer and Gregory Kasper.










Monday, March 10, 2014

SEC Launches Enforcement Cooperation Initiative for Municipal Issuers and Underwriters




Press Releases





SEC Launches Enforcement Cooperation Initiative for Municipal Issuers and Underwriters




The Securities and Exchange Commission today announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.





“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative.  Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”





Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.





Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data.  The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.





“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”





The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement.  For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings. 





Eligibility for the MCDC Initiative is explained in a detailed announcement by the Enforcement Division.  Issuers and underwriters must self-report by completing a questionnaire and submitting it via e-mail or by fax or mail no later than Sept. 10, 2014.





The MCDC Initiative is being led by Peter K.M. Chan, an assistant director in the Municipal Securities and Public Pensions Unit and the Chicago Regional Office.








Friday, March 07, 2014

SEC Charges Five Executives and Finance Professionals Behind Fraudulent Bond Offering by International Law Firm




Press Releases





SEC Charges Five Executives and Finance Professionals Behind Fraudulent Bond Offering by International Law Firm




The Securities and Exchange Commission today charged five executives and finance professionals with facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, the international law firm where they worked.





The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the economic recession and steep costs from a merger.  Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey & LeBoeuf’s leading financial professionals combed through its financial statements line by line and devised ways to artificially inflate income and distort financial performance.  Dewey & LeBoeuf then resorted to the bond markets to raise significant amounts of cash through a private offering that seized on the phony financial numbers.





“Investors were led to believe they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Dewey & LeBoeuf’s senior-most finance personnel used a grab bag of accounting gimmicks to create that illusion, and top executives green-lighted the decision to sell $150 million in bonds to investors as a desperate grasp for cash on the basis of blatantly falsified financial results.” 





The SEC’s complaint filed in federal court in Manhattan charges the following executives at Dewey & LeBoeuf, which is no longer in business: chairman Steven Davis, executive director Stephen DiCarmine, chief financial officer Joel Sanders, finance director Frank Canellas, and controller Tom Mullikin.





In a parallel action, the Manhattan District Attorney’s Office today announced criminal charges against Davis, DiCarmine, and Sanders.





According to the SEC’s complaint, the roots of the fraud date back to late 2008 when senior financial officers began to conjure up fake revenue by manipulating various entries in Dewey & LeBoeuf’s internal accounting system.  The firm’s profitability was inflated by approximately $36 million (15 percent) in its 2008 financial results through this use of accounting tricks.  For example, compensation for certain personnel was falsely reclassified as an equity distribution in the amount of $13.8 million when they in fact those personnel had no equity in the firm.  The improper accounting also reversed millions of dollars of uncollectible disbursements, mischaracterized millions of dollars of credit card debt owed by the firm as bogus disbursements owed by clients, and inaccurately accounted for significant lease obligations held by the firm.  





The SEC alleges that   Dewey & LeBoeuf finance executives continued using these and other fraudulent techniques to prepare its 2009 financial statements, which were misstated by $23 million.  The culture of accounting fraud was so prevalent at the firm that Canellas sent Sanders an e-mail with a schedule containing a list of suggested cost savings to the budget.  Among them was a $7.5 million line item reduction entitled “Accounting Tricks.”





According to the SEC’s complaint, Sanders acknowledged in separate e-mail communications, “I don’t want to cook the books anymore. We need to stop doing that.”  But he and other finance personnel continued to banter about ways to create fake income.  For example, in the midst of a mad scramble at year-end 2008 to meet obligations to bank lenders, Sanders boasted to DiCarmine in an e-mail, “We came up with a big one: Reclass the disbursements.”  DiCarmine responded, “You always do in the last hours. That’s why we get the extra 10 or 20% bonus. Tell [Sanders’ wife], stick with me! We’ll buy a ski house next.”  DiCarmine later e-mailed Sanders, “You certainly cheered the Chairman up. I could use a dose.”  Sanders answered, “I think we made the covenants and I’m shooting for 60%.”  He cryptically added, “Don’t even ask – you don’t want to know.”





The SEC alleges that Dewey & LeBoeuf didn’t want investors in the bond offering to know either.  The firm continued using and concealing improper accounting practices well after the offering closed in April 2010.  The note purchase agreement governing the bond offering required Dewey & LeBoeuf to provide investors and lenders with quarterly certifications.  The quarterly certifications made by the firm were all fraudulent.





“As Dewey & LeBoeuf’s revenue was falling and the firm was struggling to meet commitments, its top executives and finance professionals brazenly looked for ways to create fake income and retain their lucrative salaries and bonuses,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  





The SEC’s complaint alleges that Davis violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  The complaint alleges that DiCarmine, Sanders, Canellas, and Mullikin violated Section 17(a) of the Securities Act and aided and abetted Dewey LeBoeuf’s and Davis’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) pursuant to Section 20(e) of the Exchange Act.  The SEC is seeking disgorgement and financial penalties as well as permanent injunctions against all five defendants, and officer and director bars against Davis, DiCarmine, and Sanders.  The SEC also will separately seek to prohibit Davis and DiCarmine from practicing as lawyers on behalf of any publicly traded company or other entity regulated by the SEC.





The SEC's investigation, which is continuing, has been conducted by William Finkel, Joseph Ceglio, Christopher Mele, and Michael Osnato.  The case has been supervised by Sanjay Wadhwa.  The litigation will be led by Howard Fischer.  The SEC appreciates the assistance of the Manhattan District Attorney’s Office and the Federal Bureau of Investigation.