Annual Staff Reports on Credit Rating Agencies Show Improvements

Credit rating agencies under Securities and Exchange Commission oversight show improved compliance, increased information technology resources, and continued competition, according to two SEC staff reports released today on nationally recognized statistical rating organizations (NRSROs).

"NRSROs are continuing to display a greater awareness of their obligations as regulated entities," said Jessica S. Kane, Acting Director of the SEC's Office of Credit Ratings.  "The staff will continue to engage with the firms and monitor potential risks to promote compliance, strengthen governance, and ensure that NRSROs provide robust disclosure for the benefit of investors."

The annual exam report, required by the 2010 Dodd-Frank Act, summarizes the staff examinations of each NRSRO. The staff observed improvements in the firms' compliance monitoring and internal audit functions. The report notes that NRSROs have further refined their policies, procedures, and controls related to securities laws and rules. 

The annual report, mandated by the 2006 Credit Rating Agency Reform Act, discusses the state of competition, transparency, and conflicts of interest among NRSROs and identifies applicants for NRSRO registration. The staff notes that smaller NRSROs continue to actively compete with more established rating agencies, and some are specializing in particular rating categories and classes.

The following SEC staff contributed to the examinations and reports:  Diane Audino, Michael Bloise, David Bobillot, Sondra Boddie, Rita Bolger, Patrick Boyle, Aaron Byrd, Roseann Catania, Kristin Costello, Doreen Crawford, Scott Davey, Franco Destro, Jill Flory, Ilya Fradkin, William Garnett, Kenneth Godwin, Michael Gonzalez, Barry Huang, Julia Kiel, Russell Long, Chichita Nickens, David Nicolardi, Sam Nikoomanesh, Kevin O’Neill, Harriet Orol, Abraham Putney, Jeremiah Roberts, Mary Ryan, Cynthia Sargent, Charles Schiller, Andrew Smith, Alexa Strear, Warren Tong, Evelyn Tuntono, Chris Valtin, Kevin Vasel, Andrew Vita, and Michele Wilham.

SEC Press Release

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Commission Staff Provides Regulatory Guidance for Accounting Impacts of the Tax Cuts and Jobs Act

The Securities and Exchange Commission today announced publication of staff guidance for publicly traded companies, auditors, and others to help ensure timely public disclosures of the accounting impacts of the Tax Cuts and Jobs Act (the Act).  Specifically, the staff of the Office of the Chief Accountant and the Division of Corporation Finance issued the following interpretations:

• Staff Accounting Bulletin (SAB) No. 118 expresses views of the staff regarding application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act.
• Compliance and Disclosure Interpretation 110.02 expresses views of the staff regarding the applicability of  Item 2.06 of Form 8-K with respect to reporting the impact of a change in tax rate or tax laws pursuant to the Act.

Director of the Division of Corporation Finance Bill Hinman stated, "This guidance recognizes that investors demand and deserve high-quality information, while also recognizing that entities may face challenges in accounting for one of the most comprehensive changes to the U.S. federal tax code since 1986." 

Chief Accountant Wes Bricker added, "Allowing entities to take a reasonable period to measure and recognize the effects of the Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors."

The statements in Staff Accounting Bulletins and Compliance and Disclosure Interpretations are not rules, regulations, or statements of the Commission. They represent interpretations and practices followed by the SEC's Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure requirements of the federal securities laws. As such, the Commission has neither approved nor disapproved these interpretations.

The SEC staff encourages publicly traded companies, auditors, and others to consult with the staff for interpretative assistance with respect to SEC rules, forms, or generally accepted accounting principles.  Guidance for consulting is available for the Division of Corporation Finance at http://ift.tt/2u6AvQQ and for the Office of the Chief Accountant at http://ift.tt/2BXgK69.   

Fact Sheet

• The Tax Cuts and Jobs Act represents one of the most significant overhauls to the United States federal taxcode since 1986 and could have a significant impact on an entity's domestic and international tax consequences.
• ASC Topic 740 provides guidance addressing changes in tax laws or tax rates to be recognized in the financial reporting period that includes the enactment date, which is the date the Act is signed into law — i.e., Dec. 22, 2017.
• The magnitude of the changes in the Act may give rise to certain operational challenges and constraints for entities when complying with the requirements under ASC Topic 740 upon issuance of an entity's financial statements for the reporting period in which the Act is enacted.

New Guidance Contained in SAB 118

• The staff is issuing guidance in SAB 118 to address certain fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Act is enacted.
• Under the staff guidance in SAB 118, in the financial reporting period the Act is enacted, the income tax effects of the Act (i.e., only for those tax effects in which the accounting under ASC 740 is incomplete) would be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a "measurement period" until the accounting under ASC 740 is complete. The measurement period would be limited under the staff's guidance. 
• The staff's guidance would also describe supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in a timely manner.

New Guidance Contained in C&DI 110.02

• The staff is issuing guidance in C&DI 110.02 to clarify how registrants making use of the measurement period approach in SAB 118 will be expected to comply with their obligations under 2.06 of Form 8-K with respect to disclosure of material impairments of assets.

SEC Press Release

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Gerald Hodgkins, Associate Director of the SEC's Enforcement Division, to Leave the Agency After 20 Years of Service

The Securities and Exchange Commission today announced that Gerald W. Hodgkins, an Associate Director of the Division of Enforcement, will leave the agency at the end of this year for private practice.

During his tenure of two decades at the SEC, Mr. Hodgkins has overseen more than 100 enforcement actions covering the full breadth of the agency's jurisdiction, including issuer reporting and disclosure fraud, violations of the Foreign Corrupt Practices Act, and misconduct by entities regulated by the agency. Since being appointed as Associate Director in 2010, Mr. Hodgkins also has served as a founding member of the SEC's Claims Review Staff, which makes recommendations to the Commission concerning when and how much to award whistleblowers under the SEC's whistleblower program. He also has served as a member of the SEC's National Labor Management Forum.

"Jerry embodies what it means to be a dedicated public servant," said Stephanie Avakian, Co-Director of the SEC's Enforcement Division. "He will be missed terribly by all of us in the Enforcement Division, but most especially by the scores of lawyers he has mentored and supervised over the years."

"Jerry has been an insightful and innovative leader of the SEC's enforcement program, and his contributions will have lasting impact," said Steven Peikin, Co-Director of the SEC's Enforcement Division.

Mr. Hodgkins said, "I am grateful for the opportunity to have served U.S. investors for much of my professional career. It was a pleasure and privilege to work alongside the dedicated and talented staff at the SEC, whose commitment to public interest has never wavered."

Under Mr. Hodgkins' leadership, the SEC has brought enforcement actions addressing a wide variety of misconduct, including charges against:

• WorldCom, Inc., which agreed in 2003 to pay a $750 million civil penalty – the largest penalty in SEC history for issuer reporting and disclosure fraud – as well as against WorldCom's former CEO, Bernard J. Ebbers, CFO, Scott D. Sullivan, and controller David F. Myers;
• MRI International and Edwin Fujinaga, for conducting a massive Ponzi scheme targeting Japanese citizens and against whom the SEC obtained over $580 million in monetary remedies on summary judgment in a civil action filed in 2013;
• William W. McGuire, M.D., the former CEO and Chairman of UnitedHealth Group Inc., who agreed in 2007 to pay $468 million in what was the first and still largest settlement involving Section 304 of the Sarbanes-Oxley Act of 2002; and
• Daimler AG, which agreed in 2010 to pay more than $185 million to resolve parallel SEC and U.S. Department of Justice investigations related to its violations of the Foreign Corrupt Practices Act.

Mr. Hodgkins also spearheaded a settlement in 2008 with a large financial institution that provided 5,500 individual investors, small businesses, and small charities the opportunity to sell back up to $4.7 billion in auction rate securities (ARS) they purchased before the ARS market collapsed in February 2008.

Mr. Hodgkins, 52, joined the SEC in 1997. He became a Branch Chief in 1999, an Assistant Director in 2007, and an Associate Director in 2010. Before joining the SEC, he served as a law clerk to the late Honorable Charles R. Richey of the U.S. District Court for the District of Columbia. He also was a litigation associate in private practice in Washington, D.C.  He graduated from the University of Virginia School of Law and received his undergraduate degree from Tufts University.

SEC Press Release

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SEC Charges Operators of $1.2 Billion Ponzi Scheme Targeting Main Street Investors

The Securities and Exchange Commission today announced charges and an asset freeze against a group of unregistered funds and their owner who allegedly bilked thousands of retail investors, many of them seniors, in a $1.2 billion Ponzi scheme.

SEC investigators filed this action to prevent further dissipation of investor assets after obtaining court orders in September and November in subpoena enforcement actions that forced the unregistered companies to open their books.

According to the SEC’s complaint, unsealed today in federal court in Miami, Florida, Robert H. Shapiro and a group of unregistered investment companies called the Woodbridge Group of Companies LLC formerly headquartered in Boca Raton, Florida, defrauded more than 8,400 investors in unregistered Woodbridge funds. 

“We allege that through aggressive tactics, Woodbridge and Shapiro swindled seniors into a business model built on lies, which the SEC’s Miami Regional Office staff moved to halt,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“Our complaint alleges that Woodbridge’s business model was a sham,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money.”

“Our complaint further alleges that Shapiro used a web of layered companies to conceal his ownership interest in the purported third-party borrowers,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Shapiro used the scheme to line his pockets with millions of investor dollars.”

According to the SEC complaint, Woodbridge advertised its primary business as issuing loans to supposed third-party commercial property owners paying Woodbridge 11-15% annual interest for “hard money,” short-term financing.  In return, Woodbridge allegedly promised to pay investors 5-10 percent interest annually.  Woodbridge and Shapiro allegedly sought to avoid investors cashing out at the end of their terms and boasted in marketing materials that “clients keep coming back to [Woodbridge] because time and experience have proven results.  Over 90% national renewal rate!”  While Woodbridge claimed it made high-interest loans to third parties, the SEC’s complaint alleges that the vast majority of the borrowers were Shapiro-owned companies that had no income and never made interest payments on the loans.

The SEC complaint alleges that Shapiro and Woodbridge used investors’ money to pay other investors, and paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.”  Shapiro, of Sherman Oaks, California, is alleged to have diverted at least $21 million for his own benefit, including to charter planes, pay country club fees, and buy luxury vehicles and jewelry.  According to the complaint, the scheme collapsed in typical Ponzi fashion in early December as Woodbridge stopped paying investors and filed for Chapter 11 bankruptcy protection.

The Honorable Judge Marcia G. Cooke granted the SEC’s request for a temporary asset freeze against Shapiro and a group of his unregistered investment companies, and ordered them to provide an accounting of all money received from investors.

The SEC’s complaint charges Shapiro, Woodbridge, and certain affiliated companies with fraud and violations of the securities and broker-dealer registration provisions of the federal securities laws.  The SEC is seeking return of allegedly ill-gotten gains with interest and financial penalties. A court hearing has been scheduled for Dec. 29, 2017 on the SEC’s request to continue the asset freeze.  The SEC’s motion for the appointment of a receiver over Woodbridge and the related companies is pending.  

The SEC’s investigation, which is continuing, has been conducted by Scott A. Lowry, Linda S. Schmidt, Russell Koonin, Christine Nestor, and Mark Dee in the Miami Regional Office with assistance from Alistaire Bambach, David Baddley and Neal Jacobson.  The case has been supervised by Jason R. Berkowitz and Fernando Torres, and the litigation will be led by Mr. Koonin, Ms. Nestor, and Mr. Lowry.  The SEC appreciates the assistance of the Florida Office of Financial Regulation, California’s Department of Justice and Department of Business Oversight, the Colorado Division of Securities, and the Texas State Securities Board.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert to help seniors identify signs of investment fraud.  The SEC also strongly encourages investors to check the backgrounds of people selling them investments by using the agency’s investor.gov website to quickly identify whether they are registered professionals.

SEC Press Release

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Broker Charged With Giving Special Access to IPOs for Cash Kickbacks

The Securities and Exchange Commission today charged a Wall Street stockbroker with illegally accepting more than $1 million in undisclosed kickbacks for giving certain customers preferential access to lucrative IPOs, enabling them to reap major trading profits in the secondary markets.

The SEC alleges that Brian Hirsch subverted allocation policies and procedures at two brokerage firms where he worked on the wealth syndicate desk, making long-running arrangements with certain customers to give them larger allocations of coveted public offerings being marketed by the firms.  In most instances, the customers sold their stock into the market as soon as possible to turn a substantial profit at the expense of the firms’ other brokerage customers and the issuers’ interests in raising capital from long-term investors.

“Kickback schemes are pernicious and have no place in the securities markets,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “As alleged in our complaint, Hirsch lined his own pockets by secretly sharing in customer trading profits that he engineered in violation of his obligations to his employers.”

The SEC’s complaint also charges Hirsch’s customer Joseph Spera, who allegedly made approximately $4 million in trading profits on the offering allocations he received from Hirsch.  Spera allegedly paid Hirsch approximately $1 million in cash. 

The U.S. Attorney’s Office for the District of New Jersey has filed parallel criminal charges against Hirsch.

The SEC’s investigation, which is continuing, is being conducted by David Austin, Chevon Walker, Matthew Lambert, Stephen Johnson, and George Stepaniuk.  The litigation is being led by Todd Brody, and the case is being supervised by Mr. Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey and the Federal Bureau of Investigation.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Marc P. Berger Named Director of New York Regional Office

The Securities and Exchange Commission today announced that Marc P. Berger has been named Director of the New York Regional Office.  He will join the agency in January 2018.

Mr. Berger is presently global co-head of Ropes & Gray LLP’s Securities and Futures Enforcement Practice.  Before joining Ropes & Gray, Mr. Berger spent 12 years as an Assistant U.S. Attorney in the Southern District of New York, including serving as Chief of that office’s Securities and Commodities Fraud Task Force.  In that role, he supervised the investigation and prosecution of some of the nation’s highest profile financial and investment fraud cases, including the largest crackdown on hedge fund insider trading in U.S. history.  Mr. Berger also has significant experience conducting and investigating violations of the federal securities laws, as well as extensive trial and appellate experience.

Mr. Berger will lead a staff of more than 390 enforcement attorneys, accountants, investigators, and compliance examiners involved in the investigation and prosecution of enforcement actions and the performance of compliance inspections in the New York region.  The New York office has responsibility for the largest concentration of SEC-registered financial institutions, including more than 4,000 investment banks, investment advisers, broker-dealers, mutual funds, and hedge funds.

“We are thrilled that Marc will bring his substantial experience and judgment to the SEC as the leader of our New York office,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “I’m confident that Marc will help the Commission provide rigorous oversight of Wall Street and be a strong contributor to its overall mission of investor protection.”

“Marc has served with great distinction as a supervisor and prosecutor of securities and other white collar matters,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “He is well-known in the SEC’s New York office and throughout the securities bar as a strong and effective leader who has a keen mind and sound judgment.  We are very fortunate to have him join the SEC staff.”

“Marc is a proven leader who brings a wealth of expertise to this role,” said Peter B. Driscoll, Director of the SEC’s Office of Compliance Inspections and Examinations.  “From his experience in the U.S. Attorney’s Office to his securities practice, Marc has demonstrated leadership and outstanding legal skills.  I am delighted that he will be joining the dedicated examination team in New York.”

Mr. Berger added, “I am honored and excited to return to public service and join the SEC’s New York office.  As a federal prosecutor in New York, I had the privilege to work with many of the lawyers, accountants, and examiners in the New York office and see firsthand their talent and dedication.  I now look forward to joining their ranks and leading the office’s efforts to protect investors and maintain fair markets.”

Mr. Berger earned his bachelor’s degree with distinction from Cornell University in 1996 and his law degree from the University of Virginia School of Law in 1999.  Before joining the U.S. Attorney’s Office in Manhattan, he served as a law clerk for the Honorable Richard M. Berman of the U.S. District Court for the Southern District of New York and was an associate with Orrick, Herrington & Sutcliffe LLP in New York.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Names Kenneth A. Johnson as Chief Operating Officer

The Securities and Exchange Commission today announced that Kenneth A. Johnson has been named the agency's Chief Operating Officer (COO). Mr. Johnson has served as Acting COO since February 2017.

In his role as COO, Mr. Johnson oversees the SEC's operational and administrative functions, including the agency's Office of Human Resources; Office of Acquisitions; Office of Information Technology; Office of Strategic Initiatives; Office of Financial Management; and Office of Support Operations, which includes the agency's Freedom of Information Act, Records Management, and Facilities Management functions.

"Ken has done a terrific job leading the SEC's critical operational functions, which allow the agency to advance the long-term interests of investors," said Chairman Jay Clayton. "Since I joined the Commission, I have had the opportunity to observe firsthand the mutual respect evident between Ken and staff across the agency. I am confident that Ken, supported by his dedicated team in the COO's office, will achieve continuous improvements in SEC operations and maintain a strong control environment."  

Mr. Johnson added, "I am deeply thankful to Chairman Clayton for the opportunity to serve as COO, and to lead the dedicated professionals that provide operational support for everything the agency undertakes. Together, we will continue to advance initiatives that enable the SEC to be as effective as possible in looking out for investors across the country."

Mr. Johnson previously served as Chief Financial Officer since 2010, where he focused on improving the agency's financial controls and budget management. He first joined the SEC in 2003, in the role of Management Analyst and then Chief Management Analyst within the former Office of the Executive Director. Before joining the SEC, Mr. Johnson served as an analyst for the Congressional Budget Office.

Mr. Johnson earned his Masters in Public Policy from the Harvard Kennedy School of Government and his B.A. from Stanford University. 

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Warning on Cryptocurrencies and ICOs

SEC Chairman's comments on cryptocurrencies and initial coin offerings. Before jumping into an Initial Coin Offering, understand that no ICO has been registered with the SEC, and as of December 11, the SEC has not approved for listing or trading any exchange traded products relating to cryptocurrencies or assets related to such currencies.

The SEC has issued numerous alerts, and statements on ICOs. Read them.

And read his statement:

Statement on Cryptocurrencies and Initial Coin Offerings

If you have an issue with cryptocurrencies, visit New York Securities Lawyer Mark Astarita's web site, or call him at 212-509-6544

SEC Warning on Cryptocurrencies and Initial Coin Offerings

SEC Chairman's comments on cryptocurrencies and initial coin offerings. Before jumping into an Initial Coin Offering, understand that no ICO has been registered with the SEC, and as of December 11, the SEC has not approved for listing or trading any exchange traded products relating to cryptocurrencies or assets related to such currencies.

The SEC has issued numerous alerts, and statements on ICOs. Read them.

And read his statement:

Statement on Cryptocurrencies and Initial Coin Offerings

For more on cyptocurrencies, check The Securities Law Blog

Division of Trading and Markets Deputy Director Gary Barnett to Retire

The Securities and Exchange Commission today announced that Gary Barnett, Deputy Director in the Division of Trading and Markets, will retire from the agency at the end of the year.

Since January 2015, Mr. Barnett has overseen the division’s Office of Broker-Dealer Finances, Office of Derivatives Policy, Office of Trading Practices, its Volcker rule team, and its participation in various global regulatory initiatives.  In addition, he has been a member of the agency’s Cybersecurity Working Group and its Fintech Working Group and has been its senior most representative on multiagency groups including the Senior Supervisors Group and the Supervisors Roundtable on Governance Effectiveness.  In the course of his work for the agency, Mr. Barnett has provided vision and leadership in connection with advancing broker-dealer supervisory practices in the areas of capital, liquidity, margin, risk management, culture and conduct, governance effectiveness, new products, and outsourcing and vendor risk.  He also significantly contributed to the agency’s work on broker-dealer cybersecurity and fintech, including blockchain, big data and artificial intelligence.  He focused on the uses of fintech by regulators and the ways in which new technologies may affect the regulatory approach.  

“Gary has provided valuable leadership on a number of important rulemaking and policy initiatives and his dedication to promoting strong capital markets has served investors well,” said Chairman Jay Clayton.

“Gary has been an insightful and innovative leader of our broker-dealer supervisory efforts,” said Brett Redfearn, the Director of Trading and Markets.  “Gary has made invaluable contributions by proactively focusing attention and pursuing progress on a variety of emerging issues, from risk management to cybersecurity to fintech.”

Mr. Barnett said, "It has been a great honor to serve at the Commission.  I have been privileged to work with extremely talented and dedicated staff members and to contribute to the Commission's important work on a number of fronts."

Before Mr. Barnett joined the SEC in January 2015, he was the director of the Division of Swap Dealer and Intermediary Oversight at the CFTC from 2011.  Prior to joining the CFTC in 2011, he was a partner at Linklaters LLP in New York and head of its US derivatives and structured finance practice, and before that he was a partner at Shearman and Sterling LLP in New York and co-head of its structured finance and derivatives group.

Mr. Barnett earned his bachelor’s degree from the University of Tulsa, his J.D. from the University of Tulsa College of law and an LL.M. from New York University School of Law. He has been an adjunct professor in derivatives regulation at Cornell Law School, is co-chair of the Practising Law Institute’s annual programs on fundamental and advanced derivatives, and is a member of the New York, California and Oklahoma bars. 

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Appoints New Chairman and Board Members to PCAOB

The Securities and Exchange Commission today announced the appointment of William D. Duhnke III as Chairman and J. Robert Brown, Kathleen M. Hamm, James G. Kaiser, and Duane M. DesParte as Board members of the Public Company Accounting Oversight Board (PCAOB).

The Sarbanes-Oxley Act of 2002 established the PCAOB to oversee the audits of public companies and broker-dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB accomplishes these goals through registering public accounting firms, setting auditing standards, conducting inspections, and pursuing disciplinary actions. The PCAOB is subject to oversight by the SEC.

"Bill, Jay, Kathleen, Jim, and Duane bring substantial experience to the Board and a shared commitment to serve in the interests of our Main Street investors," said SEC Chairman Jay Clayton. "Their individual and collective talents position the PCAOB to execute its mission effectively in our local, national, and international markets."

SEC Chief Accountant Wes Bricker said, "We look forward to working with these new Board members in connection with furthering the PCAOB's central mission. The new Board members are well-qualified to lead the PCAOB as it carries out its critical role in promoting investor protection and strengthening audit quality."

Chairman Clayton added, "I would like to thank Jim Doty for his excellent leadership in serving as Chairman of the Board. I also would like to thank Steve Harris, Lew Ferguson and Jeanette Franzel for their dedicated service as members of the Board. They have achieved a great deal on behalf of our investors and the public, including, most recently, the adoption of a new auditor's reporting model which should provide investors with meaningful additional insight into auditor-audit committee communications."

New PCAOB Members

William D. Duhnke III, Chairman is currently the Staff Director and General Counsel to the U.S. Senate Committee on Rules and Administration. He previously served as Staff Director and General Counsel to the U.S. Senate Committee on Banking, Housing and Urban Affairs and the Committee on Appropriations. Prior to joining the Senate staff, Mr. Duhnke served in the U.S. Navy and the Commission on the Assignment of Women in the Armed Forces. He received a J.D. from Catholic University and a B.A. from the University of Wisconsin.

J. Robert Brown is currently a professor of law at the University of Denver, where he is Director of the Corporate and Commercial Law program and is the Lawrence W. Treece Professor of Corporate Governance. Prior to beginning his teaching career 25 years ago, he served on the staff of the SEC and worked in private practice. He has a Ph.D. and M.A. from Georgetown University, a J.D. from the University of Maryland, and a B.A. from the College of William and Mary.

Kathleen M. Hamm is currently the Global Leader of Securities and Fintech Solutions and Senior Strategic Advisor on Cyber Solutions at Promontory Financial Group. She previously worked at the U.S. Department of the Treasury, the American Stock Exchange, and the SEC. She received a LL.M from Georgetown University, a J.D. from Duke University, and a B.S. from the State University of New York at Buffalo.

James G. Kaiser is currently a partner and the Global Assurance Methodology & Transformation Leader at PricewaterhouseCoopers (PwC), where he leads the firm's efforts to drive innovation in auditing and has responsibility for the firm's adherence to international auditing standards. He has been with PwC for 38 years and has held numerous leadership roles with the firm. He received a MBA from the University of Pennsylvania and a B.S. from St. Joseph's University.

Duane M. DesParte will soon retire as Senior Vice President and Corporate Controller of Exelon Corporation, where he has been employed for the past 14 years. He previously was an audit partner at Deloitte & Touche and, prior to that, Arthur Andersen. He received his B.S. in Accountancy from the University of Illinois at Urbana-Champaign—College of Business.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Biopharmaceutical Company With Failing to Properly Disclose Perks for Executives

The Securities and Exchange Commission today charged a biopharmaceutical company with committing a series of accounting controls and disclosure violations, including the failure to properly report as compensation millions of dollars in perks provided to its then-CEO and then-CFO.

According to the SEC, Tennessee-based Provectus lacked sufficient controls surrounding the reporting and disclosure of travel and entertainment expenses submitted by its executives.  The order further finds that Provectus’ former CEO, Dr. H. Craig Dees, obtained millions of dollars from the company using limited, fabricated, or non-existent expense documentation, and that these unauthorized perks and benefits were not disclosed to investors.  Provectus’ former CFO, Peter R. Culpepper, also allegedly obtained $199,194 in unauthorized and undisclosed perks and benefits.

The SEC separately charged Dees in federal district court in Knoxville, Tennessee, alleging that, while Dees was Provectus’ CEO, he treated the company “as his personal piggy bank.”  According to the complaint, Dees submitted hundreds of falsified records to Provectus to obtain $3.2 million in cash advances and reimbursements for business travel he never took.  Instead, he concealed the perks and used cash advances to pay for personal expenses such as cosmetic surgery for female friends, restaurant tips, and personal travel.

“Reimbursement of travel and entertainment expenses, and other perks paid to executives, can be material information, and companies must ensure that the perks they pay for executives are properly recorded and disclosed in public filings,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “Provectus failed to give its shareholders all of the relevant information about how its top executives were being compensated by the company.”

“The SEC’s settlement with Provectus – which does not include any penalty – takes into account the proactive remediation and cooperation by the company’s new leadership.  Provectus fired wrongdoers, took other steps to remedy its controls, and provided SEC staff with critical information regarding its former executives’ expense reimbursement abuses,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Provectus and Culpepper consented to separate orders, without admitting or denying the SEC’s findings.  They each agreed to cease-and-desist orders, and Culpepper agreed to pay $152,376 in disgorgement and interest, a civil penalty, and to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Culpepper to apply for reinstatement after three years.  The SEC’s complaint against Dees seeks an injunction, disgorgement plus interest, penalties, and an officer-and-director bar.  The SEC considered Provectus’ internal investigation regarding Dees and Culpepper, firing of Culpepper, cooperation in the staff’s investigation, as well as its implementation of new controls around reimbursement of travel and entertainment expenses, in determining to accept Provectus’ offer.

The SEC’s investigation was conducted by Brittany Hamelers, Christina McGill, Paul Harley, and Allen Genaldi, and supervised by Timothy N. England and Melissa R. Hodgman.  The SEC’s litigation against Dees will be led by Nicholas A. Pilgrim.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Stock Trader Charged in Insider Trading Ring

The Securities and Exchange Commission today charged a former day trader with making more than $1 million in illegal insider trading profits as part of a ring that allegedly stole confidential information from investment banks and clients so they could trade in advance of secondary stock offerings.

The SEC alleges that Joseph Spera schemed with former colleagues, posing as legitimate portfolio managers to induce investment bankers to bring them ''over the wall'' and share nonpublic details about upcoming secondary offerings while agreeing not to disclose the information to others or trade before the offerings were announced.  Spera and the others involved allegedly violated those agreements and tipped each other with confidential information that enabled them to trade for a profit ahead of public announcements.

The SEC and criminal authorities previously charged four others in the alleged insider trading ring in parallel actions.  In total, the alleged insider trading by Spera and the others generated approximately $5.5 million in illicit profits, including illegal trades they made based on nonpublic information they obtained ahead of a major announcement by a large pharmaceutical company.

''We unraveled many strands of this alleged insider trading scheme by following the chain of tips downstream to those who benefited unlawfully by trading on confidential information that was obtained under false pretenses,'' said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC's New York Regional Office.

The U.S. Attorney's Office for the District of New Jersey has filed a parallel criminal action against Spera, who agreed to plead guilty.  Spera’s childhood friend Paul Petrello and two others charged initially, Steven Costantin and Ronald Chernin, have pleaded guilty in the criminal actions and agreed to partial settlements in the SEC cases with potential monetary sanctions to be determined at a later date.  Litigation continues against the alleged ringleader of the scheme, Steven Fishoff, who recruited Spera into the fold along with Petrello.

The SEC's investigation, which is continuing, has been conducted by David Austin, Chevon Walker, Matthew Lambert, Stephen Johnson and George Stepaniuk.  The litigation is being led by Todd Brody, and the case is being supervised by Mr. Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney's Office for the District of New Jersey and the Federal Bureau of Investigation as well as the Financial Industry Regulatory Authority and the Options Regulatory Surveillance Authority.

SEC Press Release

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Company Halts ICO After SEC Raises Registration Concerns

A California-based company selling digital tokens to investors to raise capital for its blockchain-based food review service halted its initial coin offering (ICO) after being contacted by the Securities and Exchange Commission, and agreed to an order in which the Commission found that its conduct constituted unregistered securities offers and sales.

According to the SEC’s order, before any tokens were delivered to investors, Munchee Inc. refunded investor proceeds after the SEC intervened.  Munchee was seeking $15 million in capital to improve an existing iPhone app centered on restaurant meal reviews and create an “ecosystem” in which Munchee and others would buy and sell goods and services using the tokens.  The company communicated through its website, a white paper, and other means that it would use the proceeds to create the ecosystem, including eventually paying users in tokens for writing food reviews and selling both advertising to restaurants and “in-app” purchases to app users in exchange for tokens. 

According to the order, in the course of the offering, the company and other promoters emphasized that investors could expect that efforts by the company and others would lead to an increase in value of the tokens.  The company also emphasized it would take steps to create and support a secondary market for the tokens.  Because of these and other company activities, investors would have had a reasonable belief that their investment in tokens could generate a return on their investment.  As the SEC has said in the DAO Report of Investigation, a token can be a security based on the long-standing facts and circumstances test that includes assessing whether investors’ profits are to be derived from the managerial and entrepreneurial efforts of others.

“We will continue to scrutinize the market vigilantly for improper offerings that seek to sell securities to the general public without the required registration or exemption,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “In deciding not to impose a penalty, the Commission recognized that the company stopped the ICO quickly, immediately returned the proceeds before issuing tokens, and cooperated with the investigation.”

“Our primary focus remains investor protection and making sure that investors are being offered investment opportunities with all the information and disclosures required under the federal securities laws,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Munchee consented to the SEC’s cease-and-desist order without admitting or denying the findings.

The SEC’s new Cyber Unit is focused on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, brokerage account takeovers, hacking to obtain nonpublic information, and threats to trading platforms.  The SEC also has a Distributed Ledger Technology Working Group that focuses on various emerging applications of distributed ledger technology in the financial industry.

The SEC’s investigation was conducted by the Enforcement Division’s Cyber Unit and Complex Financial Instruments Unit, including Jeff Leasure, Brent Mitchell and James Murtha.  The case was supervised by Robert Cohen, Reid Muoio, and Valerie A. Szczepanik. 

The SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin in July 2017 to make investors aware of the potential risks of participating in initial coin offerings.

SEC Press Release

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SEC Modifies Approach to Form N-PORT Filing Requirements

In recognition of the importance of sound data security practices and protocols for sensitive, non-public information, the Securities and Exchange Commission today modified its approach to the pending requirement for registered investment companies to file Form N‑PORT electronically while the agency continues its previously announced review and uplift of its EDGAR and other systems.

For the first nine months after the Form N-PORT compliance date of June 1, 2018, larger fund groups will maintain the Form N-PORT information in their records and make it available to the Commission upon request in lieu of filing the form on EDGAR. Smaller fund groups will continue to benefit from a filing start date that is one year after larger fund groups begin filing the form.

In May 2017, Chairman Jay Clayton initiated an assessment of the Commission's cybersecurity risk profile and its approach to cybersecurity. The Chairman subsequently directed the staff to take a number of steps designed to assess and strengthen the Commission's cybersecurity risk profile. In connection with these ongoing efforts, the agency commenced a focused review and uplift of EDGAR and other systems. Form N-PORT uses the EDGAR system.

"Today's Commission action is a prudent step as we continue our work to uplift EDGAR and other systems and assess our data needs, including how and when we collect market-sensitive data," said Chairman Clayton. "An important component of today’s release is the requirement that larger fund groups maintain — and Commission staff have access to — the information required on Form N-PORT."

The Commission adopted Form N‑PORT to require registered investment companies to report enhanced information about their monthly portfolio holdings in a structured data format. Filing of Form N-PORT through the EDGAR system will begin in April 2019 for larger fund groups and in April 2020 for smaller fund groups. To ensure that investors do not lose access to important information, the Commission is requiring funds to continue filing public reports on existing Form N‑Q until they begin filing reports on Form N-PORT using EDGAR.  

SEC Press Release

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Daniel Michael Named Chief of Enforcement Division’s Complex Financial Instruments Unit

The Securities and Exchange Commission today announced that Daniel Michael has been named chief of the Enforcement Division’s Complex Financial Instruments Unit.

In his new role, Mr. Michael will lead a specialized unit of attorneys and industry experts who are located in offices across the country and investigate potential misconduct related to complex financial products and practices involving sophisticated market participants.

Mr. Michael joined the SEC in 2010, and has served as an assistant director based in the New York Regional Office since 2014.  He has played a key role in a number of significant enforcement actions, including charges against Merrill Lynch for violating the SEC’s Customer Protection Rule. 

“Dan is a perfect complement to the highly experienced CFI team, and as a strong leader, he will bring tremendous judgment and a deep appreciation for the ways in which complex products can be used to take advantage of investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

“Opaque and complex markets such as those policed by CFI provide many opportunities for new types of misconduct that harm retail investors, and Dan is committed to combating it in whatever form it takes,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

“I am honored to have the opportunity to work alongside the talented and dedicated members of the Complex Financial Instruments Unit,” said Mr. Michael.  “The unit has successfully identified and pursued fraud in some of the most challenging areas of the markets, and I look forward to building on the important work  the CFI team has done to protect investors from wrongdoing involving complex products and trading schemes.”

Among other significant enforcement actions under Mr. Michael’s purview have been the SEC’s charges against:

• JPMorgan Chase & Co., for misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses
   
• Bank of America Corporation, for violating internal controls and recordkeeping provisions of the federal securities laws after it assumed a large portfolio of structured notes and other financial instruments as part of its acquisition of Merrill Lynch
   
• Two Wall Street traders involved in a fraudulent “parking” scheme in which one temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus

Before joining the SEC, Mr. Michael worked in private practice in New York City and was a law clerk to U.S. District Judge Richard M. Berman of the U.S. District Court for the Southern District of New York.  He received his J.D. cum laude from Harvard Law School, and his B.A. magna cum laude from New York University.

SEC Press Release

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Broker Charged With Defrauding Investors

The Securities and Exchange Commission charged a registered representative in Pennsylvania with operating a long-running offering and investment advisory fraud.

The SEC’s complaint, filed in federal court in Philadelphia, alleges that Paul W. Smith raised approximately $2.35 million from approximately 30 investors – many of whom were his brokerage customers – by representing that he would invest their money in publicly traded securities through The Haverford Group, an outside partnership that Smith formed and did not disclose to his broker-dealer employers.  However, Smith allegedly made very few securities investments and instead largely used investors’ money to repay other investors and for his own personal use.

“As alleged in our complaint, Smith told investors that Haverford provided steady and dependable returns,” said Kelly L. Gibson, Associate Director of the SEC’s Philadelphia Regional Office.  “Those returns were a fiction.  Smith was misappropriating investors’ money and lying to cover his tracks.  This matter highlights the need for retail investors – and retirees and elderly individuals in particular – to remain skeptical of investments that sound too good to be true.”

Subject to court approval, Smith has agreed to settle the SEC’s action against him by consenting to an injunction against violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Smith has agreed to pay disgorgement and prejudgment interest of $362,858.45, which would be deemed satisfied upon the entry of an order in a parallel criminal proceeding requiring Smith to pay a greater amount in restitution.  Smith has agreed to plead guilty in the parallel criminal action brought by the U.S. Attorney’s Office for the Eastern District of Pennsylvania.

The SEC’s investigation was conducted by Norman P. Ostrove and Scott A. Thompson in the Philadelphia office with assistance from Jennifer C. Barry, and supervised by Ms. Gibson.  The examination that led to the investigation was conducted by Eric A. Elefante, Edward T. Flaherty, Ian M. Budzilowicz, Colleen D. Sigle, and Brian Carroll.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

FINRA Proposes New Procedure for Expungement of CRD Records

Comment Period Expires: February 5, 2018

FINRA seeks comment on establishing a roster of arbitrators with additional training and specific backgrounds or experience from which a panel would be selected to decide an associated person’s request for expungement of customer dispute information. The arbitrators from this roster would decide expungement requests where the underlying customer-initiated arbitration is not resolved on the merits or the associated person files a separate claim requesting expungement of customer dispute information. The Notice also proposes additional changes to the expungement process that would apply to all requests for expungement of customer dispute information.

This proposal is one in a series of regulatory initiatives that FINRA is considering related to the expungement process. For example, the FINRA Board of Governors has approved filing with the Securities and Exchange Commission (SEC) proposed amendments to the Codes of Arbitration Procedure for Customer and Industry Disputes (Codes) to make the best practices from the Notice to Arbitrators and Parties on Expanded Expungement Guidance (Guidance) rules that arbitrators must follow when considering expungement requests. In addition, FINRA staff has been working with the North American Securities Administrators Association (NASAA) on various expungement issues, including potential amendments to the existing regulatory review process.

The text of the proposed amendments can be found at www.finra.org/notices/17-42.

SEC Continues Crackdown on Brokers Defrauding Customers

The Securities and Exchange Commission today continued its crackdown on brokers who defraud customers, charging two New York-based brokers with making unsuitable trades that were costly for customers and lucrative for the brokers.  The case follows similar charges of excessive trading by brokers brought in January, April, and September.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Zachary S. Berkey of Centerreach, New York, and Daniel T. Fischer of Greenwich, Connecticut, conducted in-and-out trading that was almost certain to lose money for customers while yielding commissions for themselves.  According to the complaint, 10 customers of Four Points Capital Partners LLC, where Berkey and Fischer previously worked, lost a total of $573,867 while Berkey and Fischer received approximately $106,000 and $175,000, respectively, in commissions.

“We’re intensifying our focus on unscrupulous brokers and their harmful practices,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “As alleged in our complaint, Berkey and Fischer did grave harm to their customers by providing unsuitable recommendations and siphoning money in the form of high commissions and costs.”

According to the SEC’s complaint, since the customers incurred significant costs with every transaction and the securities were held briefly, the price of the securities had to rise significantly for customers to realize even a minimal profit.  The complaint also alleges that Berkey and Fischer churned customer accounts and concealed material information from their customers, namely that the costs associated with their recommendations, including commissions and fees, would almost certainly exceed any potential gains on the trades.  The complaint further alleges that Fischer engaged in unauthorized trading.

Without admitting or denying the SEC’s allegations, Fischer consented to a final judgment that permanently enjoins him from similar violations in the future and orders him to return his allegedly ill-gotten gains with interest and pay a $160,000 penalty.  The settlement is subject to court approval.  Fischer separately agreed to an SEC order barring him from the securities industry and penny stock trading.  The SEC’s litigation against Berkey will proceed in federal district court in Manhattan.

The SEC’s investigation was conducted by Hane L. Kim, Karen Lee, David Stoelting, and Gerald A. Gross.  The litigation will be led by Mr. Stoelting, Ms. Kim, and Ms. Lee.  The case is being supervised by Mr. Wadhwa.  The SEC examination that led to the investigation was conducted by Rosanne R. Smith, Terrence P. Bohan, William D. Ostrow, and Doreen Piccirillo.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Office of Montana State Auditor, Commissioner of Securities and Insurance.

*   *   *

SEC Investor Alert: Excessive Trading at Investors’ Expense

SEC Press Release

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Former Company Insider Earns More Than $4.1 Million for Whistleblower Tip

The Securities and Exchange Commission today announced an award of more than $4.1 million to a former company insider who alerted the agency to a widespread, multi-year securities law violation and continued to provide important information and assistance throughout the SEC’s investigation.  The whistleblower is the third awarded by the SEC in the past week.  

“Company insiders often have valuable information that can help the SEC halt an ongoing securities law violation and better protect investors,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “The breadth of the SEC’s whistleblower program is demonstrated by this case, where the whistleblower, a foreign national working outside of the United States, affirmatively stepped forward to shine a light on the wrongdoing.” 

The SEC’s whistleblower program has now awarded more than $179 million to 50 whistleblowers since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. 

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. 

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

For more information about the whistleblower program and how to report a tip, visit http://ift.tt/NFydSr.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Digital Display Advertising Firm, Executives Charged With Bilking Investors

The Securities and Exchange Commission today charged a Seattle-area outdoor digital signage advertising company and two of its senior executives with stealing more than $2 million from retail investors. 

According to the SEC’s complaint filed in U.S. District Court in Seattle, Digi Outdoor Media Inc.’s former chief executive officer, Donald MacCord Jr., and chief financial officer Shannon Doyle raised nearly $4.5 million in promissory notes by claiming they would use investor money to construct and install digital signs for commercial advertising around Washington, D.C.  Instead, the complaint alleges that MacCord and Doyle secretly diverted millions of dollars of investor money for their own personal use, including MacCord’s luxury cars, $20,000 per month rent on a Southern California mansion, nanny and housekeeping services, and private school tuition for his children, while Doyle diverted several hundred thousand dollars to his other unrelated businesses. 

The SEC’s complaint further alleges that MacCord and Doyle tried to hide their theft by creating fake invoices and sham loans to justify the money they took.  They then encouraged investors to convert their promissory notes to common stock, provided forged leases to Digi’s independent auditor, and filed false financial statements with the SEC in an attempt to take the company public rather than pay off their outstanding debt to their investors.   

“As alleged in our complaint, MacCord and Doyle went to great lengths to conceal their fraud by creating fake invoices, loans, and leases so they could use Digi as their personal piggy bank and bilk individual investors,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. 

In a separate action, the U.S. Attorney’s Office for the Northern District of California filed criminal charges against MacCord for conspiracy to commit wire fraud, submitting false writings to a government agency, obstruction of official proceedings, and destruction, alteration or falsification of records in federal investigations, and against Doyle for conspiracy to commit wire fraud and obstruction of official proceedings. 

The SEC’s complaint charges MacCord, Doyle, and Digi with violations of the anti-fraud provisions of the federal securities laws and seeks disgorgement of allegedly ill-gotten monetary gains plus interest and penalties, permanent injunctions, and officer-and-director and penny stock bars.

The SEC’s investigation was conducted by Justin M. Lichterman and Michael Foley of the San Francisco Office and supervised by Tracy Davis.  The litigation will be led by Robert Tashjian and Jason Habermeyer and supervised by Susan LaMarca.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of California, the FBI, and the Financial Industry Regulatory Authority.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Audit Firm Charged With Fraud Relating to Auditing of Penny Stock Companies

A California-based audit firm is being charged with conducting flawed audits and reviews of financial statements, which are critical sources of information for investors. 

The SEC’s Enforcement Division alleges that Anton & Chia LLP and its accountants ignored numerous indications of fraudulent financial reporting by three of the firm’s audit clients – microcap companies Accelera Innovations Inc., Premier Holding Corp., and CannaVEST Corp.  For example, Accelera’s public filings allegedly included revenue, assets, and liabilities from an entirely different company.  The Enforcement Division alleges that instead of standing in the way of Accelera’s fraud, Anton & Chia facilitated it. 

Accelera Innovations Inc., Premier Holding Corp., and CannaVEST Corp. have been charged with fraud by the SEC.  The Enforcement Division is alleging that certain conduct by Anton & Chia in connection with the audits was fraudulent, charging the firm with violations of Section 10(b) of the Securities Exchange Act.

Anton & Chia’s co-owners Gregory A. Wahl and Georgia Chung as well as former partner Michael Deutchman and former audit manager Tommy Shek are being charged along with the firm for their roles in the audits and/or interim reviews.  The case will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate. 

“Auditors are crucial gatekeepers whose careful oversight of financial statements helps ensure that public companies provide accurate information to investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

Steven Peikin, Co-Director of the SEC’s Enforcement Division, added, “As alleged in the order, Anton & Chia and its accountants left investors with false assurances that financial information for three microcap companies had been properly audited or reviewed.  They had the opportunity to stop multiple frauds in their tracks but failed to do so.”

Anton & Chia partner Richard J. Koch and former partner Rahuldev Gandhi settled SEC charges for their roles in the audits and interim reviews.  They each agreed to pay $15,000 penalties and be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  Gandhi is permitted to apply for possible reinstatement after three years and Koch can apply for possible reinstatement after two years.

The charges announced today are the product of multiple SEC investigations.  The investigations were conducted by Ariella O. Guardi, Christopher H. White, Pesach Glaser, Leslie Kazon, Bennett Ellenbogen, James Addison, Jennifer T. Calabrese, and Christopher Conte, and were supervised by Charles J. Kerstetter, Michael Paley, Rhoda Chang, and Victoria A. Levin.

The Enforcement Division’s litigation will be conducted by Alyssa A. Qualls, Steven C. Seeger, David J. VanHavermaat, Leslie Kazon, Ariella O. Guardi, and John E. Birkenheier.   

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Emergency Action Halts ICO Scam

The Securities and Exchange Commission today announced it obtained an emergency asset freeze to halt a fast-moving Initial Coin Offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.

The SEC filed charges against a recidivist Quebec securities law violator, Dominic Lacroix, and his company, PlexCorps. The Commission's complaint, filed in federal court in Brooklyn, New York, alleges that Lacroix and PlexCorps marketed and sold securities called PlexCoin on the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield a 1,354 percent profit in less than 29 days. The SEC also charged Lacroix's partner, Sabrina Paradis-Royer, in connection with the scheme.

Today's charges are the first filed by the SEC's new Cyber Unit. The unit was created in September to focus the Enforcement Division's cyber-related expertise on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking and threats to trading platforms.

"This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing," said Robert Cohen, Chief of the Cyber Unit. "We acted quickly to protect retail investors from this initial coin offering's false promises."

Based on its filing, the SEC obtained an emergency court order to freeze the assets of PlexCorps, Lacroix, and Paradis-Royer.

The SEC’s complaint charges Lacroix, Paradis-Royer and PlexCorps with violating the anti-fraud provisions, and Lacroix and PlexCorps with violating the registration provision, of the U.S. federal securities laws.  The complaint seeks permanent injunctions, disgorgement plus interest and penalties.  For Lacroix, the SEC also seeks an officer-and-director bar and a bar from offering digital securities against Lacroix and Paradis-Royer.

The Commission's investigation was conducted by Daphna A. Waxman, David H. Tutor, and Jorge G. Tenreiro of the New York Regional Office and the Cyber Unit, with assistance from the agency's Office of International Affairs. The case is being supervised by Valerie A. Szczepanik and Mr. Cohen. The Commission appreciates the assistance of Quebec's Autorité Des Marchés Financiers.

The SEC's Office of Investor Education and Advocacy issued an Investor Alert in August 2017 warning investors about scams of companies claiming to be engaging in initial coin offerings: http://ift.tt/2vllQ9O.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Charges Florida Penny Stock Operators With Defrauding Elderly Investors in Push to Crack Down on Repeat Offenders

The Securities and Exchange Commission today charged two individuals with defrauding elderly investors in a penny stock scheme involving Florida entertainment companies and their “Spongebuddy” product.  The charges are part of the Miami Regional Office’s Recidivist Initiative which has thus far resulted in enforcement actions against 23 individuals, nine of whom also have been charged by criminal authorities.

The SEC’s complaint, filed in U.S. District Court for the Southern District of Florida, charges Joseph A. Rubbo and Angela Beckcom Rubbo Monaco, both of Coral Springs, Florida, with defrauding investors through offerings by their companies VIP TV LLC, VIP Television Inc., and The Spongebuddy LLC.  Rubbo and Monaco are repeat offenders whose prior securities schemes resulted in criminal convictions against Rubbo and SEC injunctions against both Rubbo and Monaco.

The U.S. Attorney’s Office for the District of Colorado has filed parallel criminal charges against Rubbo, Monaco, Steven J. Dykes, and others relating to the scheme.

According to the SEC’s complaint, Rubbo and Monaco raised at least $5.4 million from 11 primarily elderly investors to fund the growth of their entertainment business and develop the Spongebuddy, a sponge-like glove purportedly to be sold in stores. 

The SEC’s complaint alleges that Rubbo and Monaco controlled the companies and hired Dykes to cold call investors and pitch investments in VIP.  For example, Dykes allegedly told an investor that the Starz cable channel and Pandora Radio were both interested in buying VIP and would “roll-up” VIP into these entities.  The investor also was allegedly told that the Spongebuddy would be featured on the television show “Shark Tank” and marketed on QVC.  Contrary to alleged representations that investor money would be used to benefit the VIP companies, Rubbo and Monaco misappropriated more than $2.6 million in investor funds to pay themselves and their relatives as well as undisclosed sales commissions to Dykes.  The complaint also alleges they paid for personal expenses such as the down payment on a luxury vehicle, credit card bills, unrelated construction work and to finance a business operation for a Monaco family member.

“As alleged in our complaint, Rubbo and Monaco defrauded investors by stealing millions of dollars from elderly investors which they spent on themselves and their family members instead of investing in their businesses,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “Both Rubbo and Monaco were caught through the efforts of the Miami Regional Office’s Recidivist Initiative, which is part of our ongoing focus to rid the markets of repeat securities law violators.”

During the time of the alleged scheme, neither Rubbo, Monaco, nor Dykes were registered with the Commission.  The SEC encourages all investors to check the background of people selling investments by using the search tool on Investor.gov to quickly identify whether the sellers are registered professionals.

The SEC’s complaint charges Rubbo and Monaco with violating the antifraud provisions of the federal securities laws.  The SEC also charged Dykes with violating the broker-dealer registration provisions, and Rubbo and Monaco with aiding and abetting violations by Dykes.  The SEC is seeking the return of the defendants’ allegedly ill-gotten gains with interest, monetary penalties, a permanent injunction, and other relief.

The SEC’s investigation, which is continuing, is being conducted by Linda S. Schmidt and Lina M. Fernandez in the Miami Regional Office.  The case is being supervised by Jason R. Berkowitz and the SEC’s litigation is being led by Christine Nestor.  The SEC appreciates the assistance of Florida’s Office of Financial Regulation.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Division of Corporation Finance Chief Accountant Mark Kronforst to Leave SEC

The Securities and Exchange Commission today announced that Mark Kronforst, Chief Accountant of the SEC’s Division of Corporation Finance, plans to leave the SEC in early January after 13 years of public service with the investor protection agency.

Mr. Kronforst has served as Chief Accountant since October 2013.  He leads the Division’s Office of Chief Accountant in providing technical accounting and reporting support to the Division’s disclosure review program, and oversees the Division’s administration of the Commission’s reporting rules for public companies’ disclosure of financial information to investors. He also serves in a leading role in the Division’s ongoing efforts to make disclosure more effective for investors and encourage capital formation.  

“Mark has been a trusted advisor to multiple Directors during his distinguished career at the SEC. Through his leadership and boundless enthusiasm for the SEC’s mission and the Division’s work, he has made significant contributions to investor protection and capital formation,” said William Hinman, Director of the Division of Corporation Finance.

Mr. Kronforst said, “It has been a privilege to work in the Division for nearly 14 years alongside so many talented staff members and I am very proud of what we have accomplished together. I am confident that the office will continue providing high-quality expertise and support to the Division and will excel in their efforts to enhance capital formation and protect investors.”

Prior to his role as Chief Accountant, Mr. Kronforst served in other capacities within the Division, including Associate Director in Disclosure Operations and Deputy Chief Accountant. Before joining the SEC in 2004, Mr. Kronforst was the Director of Financial Reporting for Solectron Corporation and an audit senior manager at KPMG LLP. Mr. Kronforst received his Bachelor of Accounting degree from the University of Minnesota-Duluth and is a certified public accountant.

Upon Mr. Kronforst’s departure, Kyle Moffatt, Associate Director in Disclosure Operations, will become the Division’s acting Chief Accountant. Prior to his role as Associate Director, Mr. Moffatt served in several other Division positions, including Associate Director of the Disclosure Standards Office and as Associate Chief Accountant in the Division’s Office of Chief Accountant. Mr. Moffatt joined the SEC’s Division of Corporation Finance in 2000 as a Professional Accounting Fellow. Before joining the Division, Mr. Moffatt was an audit manager with Ernst & Young LLP. He is a graduate of the University of Maryland at College Park and is a certified public accountant.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

More Than $16 Million Awarded to Two Whistleblowers

The Securities and Exchange Commission today announced awards of more than $8 million each to two whistleblowers whose critical information and continuing assistance helped the agency bring the successful underlying enforcement action.

With this case, SEC enforcement actions involving whistleblower awards have now resulted in more than $1 billion in financial remedies ordered against wrongdoers.

The first whistleblower alerted SEC enforcement staff of the particular misconduct that would become the focus of the staff’s investigation and the cornerstone of the agency’s subsequent enforcement action.  The second whistleblower provided additional significant information and ongoing cooperation to the staff during the investigation that saved a substantial amount of time and agency resources.   

“Whistleblowers have played a crucial role in the progression of many investigations and the success of enforcement actions since the inception of the whistleblower program,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “The value of whistleblowers can be seen in the more than $1 billion in financial remedies ordered against wrongdoers based on actionable information from whistleblowers, including more than $671 in disgorgement of ill-gotten gains, much of which has been or is scheduled to be returned to harmed investors.” 

The SEC’s whistleblower program has now awarded more than $175 million to 49 whistleblowers since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. 

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. 

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

For more information about the whistleblower program and how to report a tip, visit http://ift.tt/NFydSr.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Ratifies Appointment of Administrative Law Judges

The Securities and Exchange Commission today announced that it has ratified its prior appointment of Chief Administrative Law Judge Brenda Murray and Administrative Law Judges Carol Fox Foelak, Cameron Elliot, James E. Grimes, and Jason S. Patil.

On Nov. 29, 2017, the Office of Solicitor General submitted a brief in the Supreme Court in Raymond J. Lucia and Raymond J. Lucia Companies Inc. v. Securities and Exchange Commission (No. 17-130) asking the Court to decide whether the Commission’s ALJs are inferior officers who must be appointed consistent with the Appointments Clause of the Constitution. The Solicitor General’s brief takes the position that the Commission’s ALJs are inferior officers.   By ratifying the appointment of its ALJs, the Commission has resolved any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause. The Commission Order also directs the ALJs to review their actions in all open administrative proceedings to determine whether to ratify those actions.

SEC Order: http://ift.tt/2ipc699

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

UBS Quits the Recruiting Protocol

It looks like the Protocol for Broker Recruiting,  the agreement which put an end to expensive suits between brokers and firms, is falling apart. Having represented firms and brokers in those injunctive actions, and in the ensuing arbitrators, I know first hand that those suits are expensive, and very often, a waste of time and money.

Which is part of the reason that the Broker Recruiting Protocol was created. A copy of the Protocol is available on line, but in essence, the wire houses agreed that subject to certain limitations, a broker could leave a firm and contact his clients. That agreement removed most litigation from the broker transition process, to the benefit of firms, brokers, and most importantly, clients. After its creation in

However, last month, Morgan Stanley announced it was withdrawing from the protocol. Today, just a few hours ago, UBS announced that it is withdrawing as well.

In the announcement, the firm claimed that its priority was for current advisers to increase productivity and not recruiting adviser from its competitors.

Morgan Stanley made a similar claim, but that response only tells part of the story. If UBS is to be believed, it is going to cut back on recruiting, and therefore is not as concerned about being sued for recruiting a broker from another firm. However, the reality is that by leaving the PRotocol, UBS and Morgan Stanley are making it harder for their brokers to leave. It has little to do with UBS cutting back on recruiting. Without the Protocol,  there is nothing to stop UBS or Morgan Stanley from suing a broker who leaves,  and tying him up in litigation while he tries to change firms.

It will be interesting to see how this shakes out down the road. It seems to me that a broker who moved to UBS or Morgan Stanley has an argument that he went there relying on the representation that the firm was part of the Protocol, knowing that he would not have a litigation issue should he decide to leave.

We will see how that plays out.

SEC Announces Agenda for December 7 Investor Advisory Committee Meeting

The Securities and Exchange Commission today announced the agenda for the December 7 meeting of its Investor Advisory Committee. The meeting will begin at 9:30 a.m. in the Multipurpose Room at SEC headquarters at 100 F Street, N.E., Washington, D.C. and is open to the public.  The meeting will be webcast live and archived on the committee’s website for later viewing.

The committee will hold two panel discussions with outside speakers:  a morning session on retail investor protections and transparency in municipal and corporate bond markets, and an afternoon session on retail investor disclosures and best practices.  In addition, the committee will discuss three other topics: cybersecurity risk disclosures, dual-class share structures, and an IAC subcommittee recommendation regarding electronic delivery of information to retail investors and development of a summary disclosure document of investment company shareholder reports.

The Investor Advisory Committee was established under Section 911 of the Dodd-Frank Act to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace.  The Dodd-Frank Act authorizes the committee to submit findings and recommendations to the Commission.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Long Island Town and Former Top Official Charged With Defrauding Municipal Investors

The Securities and Exchange Commission today charged Oyster Bay, New York, and its former top elected official with defrauding investors in the town’s municipal securities offerings by hiding the existence and potential financial impact of side deals with a businessman who owned and operated restaurants and concession stands at several town facilities.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Oyster Bay agreed several years ago to indirectly guarantee four separate private loans to the vendor totaling more than $20 million.  The agreement to indirectly guarantee the debts allegedly stemmed from the concessionaire’s longstanding close relationship with then-town supervisor John Venditto and other officials that involved gifts, bribes, kickbacks, and political support. 

The SEC’s complaint alleges that Oyster Bay and Venditto deliberately concealed the indirect loan guarantees when they should have been disclosed in connection with the town’s 26 securities offerings from August 2010 to December 2015.  According to the complaint, this information was material to current and prospective investors due to the potential impact on the town’s finances.  For example, in one scenario outlined in the SEC’s complaint, the town could have been required to make a termination payment of approximately $16 million (approximately 16 percent of the town’s operating budget) within 60 days had the vendor defaulted on the loans. 

“As alleged in our complaint, Oyster Bay and its most senior elected official concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor.  Investors were deprived of information they needed to understand the town’s true financial condition as they made investment decisions,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today filed a superseding indictment that included securities fraud charges against Venditto.

The SEC’s complaint charges Oyster Bay with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Venditto is charged with violations of Section 17(a)(1) and (a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.  He also is charged with liability under Section 20(a) of the Exchange Act as a controlling person for the violations by the town, and with aiding and abetting violations.

The SEC’s continuing investigation is being conducted by the SEC’s New York office and the Enforcement Division’s Public Finance Abuse Unit, including Alison R. Levine, Ladan F. Stewart, Charles Riely, Creighton L. Papier, Joseph Chimienti, and Jonathan Wilcox.  The SEC’s litigation will be led by Alexander M. Vasilescu, Ms. Levine, and Ms. Stewart.  The case is being supervised by Mr. Wadhwa, LeeAnn Ghazil Gaunt, and Mark R. Zehner.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Names Paul G. Cellupica as Deputy Director of the Division of Investment Management

The Securities and Exchange Commission announced today that Paul G. Cellupica has been named Deputy Director of the agency's Division of Investment Management.

Mr. Cellupica will oversee a number of the division's strategic, rulemaking, and industry engagement initiatives. He will also serve as a senior advisor to the Director, Dalia Blass.

"Paul's extensive experience and knowledge of investor needs, and understanding of how the Commission and its staff operate, will be tremendous assets to the agency during a critical period of change and evolution in the investment management industry," said Ms. Blass. "He is committed to advancing the SEC's regulatory priorities in a thoughtful and strategic way, in order to promote the long-term interests of investors."

"It's a privilege to return to the Commission at a time of great importance for the country's millions of investors who look to mutual funds and other investment products to help them prepare for retirement and other financial needs," said Mr. Cellupica. "I am honored and excited to have the opportunity to work with Dalia and all of the other dedicated and talented professionals in the Division of Investment Management and across the agency."

Mr. Cellupica most recently was Managing Director and General Counsel for Securities Law at Teachers Insurance and Annuity Association of America (TIAA), where his responsibilities included legal support for the TIAA-CREF mutual fund complex. Prior to that he was Chief Counsel for the Americas at MetLife, Inc., where he had responsibility for legal support of MetLife's financial services businesses in the U.S. and Latin America.

Mr. Cellupica served with the SEC between 1996 and 2004 in a number of capacities in the Division of Investment Management and the Division of Enforcement, including as Assistant Director in the Division of Investment Management from 2001 to 2004. He received the SEC's Martha Platt Award in 2002 in recognition of his exceptional dedication, excellence and integrity, and the Law and Policy Award in 2003.

Mr. Cellupica received a B.A. magna cum laude from Harvard College and a J.D. cum laude from Harvard Law School. He served as a law clerk for Judge David Nelson of the U.S. Court of Appeals for the Sixth Circuit.

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Announces Agenda and Panelists for the 36th Annual Small Business Forum

The Securities and Exchange Commission today announced the agenda and panelists for the 36th Annual Government-Business Forum on Small Business Capital Formation.

The November 30 event will begin at 9 a.m. Central Standard Time (10 a.m. Eastern Standard Time) with opening remarks from the SEC Chairman and Commissioners followed by a morning panel discussion that will explore how capital formation options are working for small businesses.  Panelists will include representatives of Texas-based small businesses and advisors to the small business community.

Following the morning panel discussion, attendees will work in groups to formulate specific policy recommendations.  These breakout groups will develop recommendations on a variety of issues related to small business capital formation, including exempt securities offerings and smaller registered offerings.

As the Commission previously announced, this year’s annual small business forum is being hosted in partnership with the Herb Kelleher Center for Entrepreneurship, Growth, and Renewal at the McCombs School of Business at The University of Texas at Austin.  It will be held in the AT&T Executive Education and Conference Center on the campus of The University of Texas at Austin at 1900 University Avenue.  The forum will be open to the public and the opening remarks and morning panel discussion will be webcast live at www.sec.gov.  The webcast will not include the breakout group sessions, but those sessions will be open to the public and accessible by phone to anyone who pre-registers online by November 27, 2017.  More information, including forum materials, will be made available on the small business forum webpage.

2017 SEC Government-Business Forum on Small Business Capital Formation

AT&T Executive Education and Conference Center

On the campus of The University of Texas at Austin

1900 University Avenue

Austin, TX  78705

November 30, 2017

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Agenda

9:00 a.m.	Call to Order Sebastian Gomez Abero, Chief, Office of Small Business Policy, SEC Division of Corporation Finance Opening Remarks Jay Hartzell, Dean, McCombs School of Business, The University of Texas at Austin Introductions of Chairman and Commissioners William H. Hinman, Director, SEC Division of Corporation Finance Remarks Chairman Jay Clayton Commissioner Kara M. Stein Commissioner Michael S. Piwowar
9:30 a.m.	How Capital Formation Options Are Working for Small Businesses, Including Small Businesses in Texas Moderators: William H. Hinman, Director, SEC Division of Corporation Finance Sebastian Gomez Abero, Chief, Office of Small Business Policy, SEC Division of Corporation Finance Panelists: Mark Elenowitz, Founder and CEO, TriPoint Global Equities Jan Goetgeluk, CEO, Virtuix Youngro Lee, CEO, NextSeed Antonio Madrid, Co-Founder, The Native Catherine V. Mott, CEO, BlueTree Capital Group Michael S. Pieciak, Commissioner of the Vermont Department of Financial Regulation Annemarie Tierney, Vice President and Head of Strategy and New Markets, NASDAQ Private Market Paul R. Tobias, Partner, Vinson & Elkins, L.L.P.
11:00 a.m.	Break
11:10 a.m.	Breakout Groups Assemble to Develop Recommendations Exempt Securities Offerings (including Micro-Offerings) Smaller Registered and Regulation A Securities Offerings
12:30 pm.	Lunch Break
2:00 p.m.	Breakout Groups Assemble to Develop Recommendations
3:30 p.m.	Break
3:45 p.m.	Plenary Session to Develop Next Steps
4:30 p.m.	Networking Reception

SEC Press Release

--- If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.