SEC Charges Recidivist in Stock Manipulation Scheme

The Securities and Exchange Commission today charged Howard M. Appel with manipulating the stocks of three microcap companies while on supervised release following his criminal conviction for a prior securities fraud.

According to the SEC’s complaint, Appel orchestrated multiple schemes to manipulate the market for trading in shares of Virtual Piggy Inc., (VPIG), Red Mountain Resources Inc. (RDMP), and Rio Bravo Oil Inc. (RIOB), and concealed his activity by using overseas associates and nominee brokerage accounts.  The SEC’s complaint alleges that Appel secretly acquired ownership or control over sufficient shares of the companies so that he and his associates could manipulate their stocks through coordinated trading activity.  As alleged in the complaint, Appel kept tight control over the trading and engaged in matched trading with his associates.  In one instance, Appel allegedly sought to coordinate artificial bidding activity to prevent the price of RDMP from dropping, emailing instructions to his associates:  “Have ur guy for 12500 at .87 and another 7500 at .85 in case we get hit by selling today. (My guy above that bidding .87).”  In another example in the complaint, Appel sold 200,000 shares of RIOB to accounts controlled by one of his associates overseas in a series of matched trades that accounted for 80 percent of the reported volume on RIOB’s second day of trading.

“The charges here outline a scheme in which a repeat fraudster pocketed millions of dollars by manipulating the stock price of multiple microcap companies,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Despite his use of elaborate arrangements and foreign jurisdictions to disguise unlawful trading activity, we detected Appel’s fraud and obtained a bar against him to protect the investing public.”

The SEC’s complaint, which was filed in federal court in Pennsylvania, charges Appel with violating prohibitions against the anti-manipulation and antifraud provisions of the federal securities laws.  Appel has agreed to settle the SEC’s charges.  Appel will be barred from serving as an officer or director of a public company.  The court will determine monetary sanctions and other relief at a later date.

The U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced a parallel criminal action against Appel.

The SEC’s investigation was conducted in the New York office by Rhonda Jung, Melissa Coppola and Adam Grace under the supervision of Lara Shalov Mehraban.  The litigation will be led by Preethi Krishnamurthy and Ms. Jung.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.


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Daniel Gregus Named National Associate Director of Clearance and Settlement Examination Program

The Securities and Exchange Commission today announced that Daniel Gregus has been named National Associate Director of the Clearance and Settlement examination program in the agency’s Office of Compliance Inspections and Examinations (OCIE).  Mr. Gregus has successfully led this program in an acting role since October 2016.

Mr. Gregus is a 25-year veteran of the agency.  He has served as the Associate Regional Director for the Broker-Dealer Examination Program in the SEC’s Chicago office since June 2015 and will continue in that role while formally assuming this additional leadership position in OCIE.  He began his SEC career in the Enforcement Division in Chicago in 1993 and was later named Assistant Regional Director for Enforcement prior to joining the broker-dealer examination program in Chicago in 2007.   

“Dan has displayed an unwavering commitment to promoting and strengthening compliance at registrants for the benefit of our Main Street investors, and he is well-suited to take on this new role,” said OCIE Director Peter B. Driscoll.  “Clearing agencies serve a critical role in our market infrastructure and I believe that Dan’s expertise will help us to continue our risk-based oversight of these important entities.”

Mr. Gregus added, “I look forward to helping to ensure the safety of our markets by promoting and strengthening compliance at these entities, which are central to our market system and investors.  I am privileged to take over the leadership of such a talented exam team.” 

Mr. Gregus graduated with highest honors from the University of Illinois, where he was captain of the varsity football team and a three-time Academic All-American.  He graduated magna cum laude from the University of Illinois College of Law and spent seven years in private practice in Chicago before joining the SEC. 

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Kristin Snyder Named Deputy Director of OCIE

The Securities and Exchange Commission today announced that Kristin Snyder has been named Deputy Director of the agency’s Office of Compliance Inspections and Examinations (OCIE). 

Ms. Snyder has been with the SEC for 15 years.  She has served as the Co-National Associate Director of OCIE’s Investment Company/Investment Adviser examination program since August 2016 and as the Associate Regional Director for Examinations in the SEC’s San Francisco office since November 2011.  She will continue in both of these roles while also assuming this additional leadership role in OCIE.  As Deputy Director, Ms. Snyder will oversee many of the office’s strategic initiatives and serve as the regional advisor to OCIE Director Peter B. Driscoll.

“Kristin is held in universally high regard by her colleagues throughout the Commission,” said Chairman Jay Clayton.  “I greatly appreciate her willingness to take on this additional, important role.”

“Kristin is an incredibly talented leader in the examination program, successfully balancing multiple roles while always working to protect investors,” said Mr. Driscoll.  “Kristin’s early focus on emerging areas in our markets, such as electronic investment advice and digital assets, has served the investing public well.  She is committed to the advancement of the national examination program and has the respect of her colleagues across the agency.”    

Ms. Snyder said, “I am honored to serve in this new role and look forward to continuing to work closely with my incredibly talented colleagues as we serve the long-term interests of Main Street investors.  Together, we will continue to develop and implement impactful national initiatives to inform policy and protect investors.” 

Ms. Snyder joined the SEC in 2003 and spent eight years as a Branch Chief and a Senior Counsel in the San Francisco office’s enforcement program.  Prior to joining the SEC, Ms. Snyder practiced law at Sidley Austin Brown & Wood LLP in San Francisco.  She received her law degree from the University of California Hastings College of the Law and her bachelor’s degree from the University of California at Davis. 

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Jane Jarcho, Deputy Director of OCIE, to Retire From SEC

The Securities and Exchange Commission today announced that Jane Jarcho, Deputy Director of the Office of Compliance Inspections and Examinations (OCIE), will retire from the SEC at the end of August. 

Ms. Jarcho has served as OCIE’s Deputy Director since 2016, with responsibility for overseeing OCIE’s program areas, including Investment Adviser/Investment Company (IA/IC), Broker-Dealer and Exchange, FINRA and Securities Industry Oversight, and Clearance and Settlement.  Ms. Jarcho also has led the IA/IC examination program since 2013 and under her leadership, the number of IA/IC examinations increased by more than 100 percent.  Ms. Jarcho also led numerous targeted high-risk examination initiatives in areas including cybersecurity, internet and robo-advisers, alternative mutual funds, share class recommendations, retirement accounts, high-yield bond funds, 12b-1 fees and distribution costs, wrap fee accounts, and supervision of individuals with disciplinary history.  Additionally, Ms. Jarcho led the creation of the Private Funds Unit and has supervised the unit from its inception in 2014.

Ms. Jarcho is responsible for several significant and innovative changes in OCIE.  Ms. Jarcho was instrumental in the creation and development of OCIE’s electronic examination documentation and reporting system, which transitioned OCIE’s paper-based records to a web-based program.  As part of her efforts to increase the review of registered investment advisers, she also spearheaded projects to examine new and not recently examined investment advisers.  Additionally, under Ms. Jarcho’s leadership, OCIE issued an increased number of Risk Alerts to help promote compliance in the securities industry.  

Ms. Jarcho has been an active member of several OCIE committees, including co-chairing the Risk and Exam Process committee for several years and participating as a member of the Technology Committee.  Ms. Jarcho also served on the SEC committee drafting a Cyber Incident Playbook.

Ms. Jarcho has received several awards for her work at the SEC.  Recently, she received the Labor-Management award for her work with the NTEU in OCIE’s reorganization.  In 2015, she and others received the SEC’s Excellence in Information and Technology Award for their work on OCIE’s examination reporting system.  She also received awards for Supervisory Excellence and as a participant on several OCIE project teams.  Additionally, in 2015, Ms. Jarcho was named to Wealth Management’s “Ten to Watch” list for her role in significantly increasing the annual number of OCIE examinations.

Ms. Jarcho has spoken at numerous industry conferences and continuing education events as well as internationally in Hong Kong, Istanbul, London, Malaysia, Saudi Arabia, and Swaziland.

Prior to joining OCIE, Ms. Jarcho had a distinguished 18-year career in the SEC’s Division of Enforcement.  She began her career in the Enforcement Division in the Chicago Regional Office in 1990 and held several positions, including Assistant Regional Director and Trial Counsel.  She was involved in the original internet focused enforcement unit as well as in the market timing and late trading investigations.  Ms. Jarcho’s enforcement work covered a breadth of areas, including complex financial frauds, insider trading, offering frauds, market manipulation, broker-dealer supervision, and investment adviser and investment company violations.  She joined OCIE in 2008 as an Associate Regional Director for Examinations in the Chicago Regional Office, was named head of the IA/IC examination program in 2013, and in 2018, also served as Acting Regional Director of the SEC’s Chicago Regional Office.

“Jane has contributed to the Commission in countless ways, including bringing her broad experience and dedication to our National Examination Program and other OCIE initiatives that have meaningfully benefited retail investors and our markets,” said SEC Chairman Jay Clayton.  “Jane’s accomplishments are many and our investors will benefit from her efforts for years to come.”

“Jane has been a driving force in the protection of Main Street investors,” said OCIE Director Peter B. Driscoll.  “Jane’s passion for the SEC mission has been unparalleled and I, and many others, are so grateful to Jane for her mentorship over the years and we will miss her greatly.”

Ms. Jarcho said, “It has been an honor to work at the SEC for over 28 years with so many people dedicated to protecting investors.  OCIE is composed of so many diligent and hard-working public servants who work outside the spotlight and accomplish so much for the public.  I will miss the people and truly meaningful work that is accomplished each day.”

Ms. Jarcho has a bachelor’s degree from Middlebury College and a law degree from the University of Wisconsin Law School. 

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Elizabeth Baird and Christian Sabella Named Deputy Directors of the Division of Trading and Markets

The Securities and Exchange Commission today announced that Elizabeth Baird and Christian Sabella have been named Deputy Directors in the Division of Trading and Markets.  

Ms. Baird joins the SEC from Morgan, Lewis & Bockius LLP, where she was a partner in the firm's Washington, D.C. office and served as a leading adviser to businesses and investors in the fixed income, equities, and options markets. Prior to attending law school, Ms. Baird spent nearly a decade trading bonds. Ms. Baird earned her bachelor's degree from Brown University and her law degree from the Georgetown University Law Center.

Mr. Sabella has been an Associate Director in the division's Office of Clearance and Settlement since 2015, and played a key role in the development, implementation and oversight of financial market infrastructure policy initiatives, including standards for systemically important clearing agencies and shortening the standard settlement cycle. He joined the SEC in 2011 as a branch chief in the division's Office of Derivatives Policy and Trading Practices and later served as counsel to the director of the Division of Trading and Markets. Mr. Sabella earned his bachelor's degree from the University of Notre Dame and his law degree from the Georgetown University Law Center.    

"Lizzie and Christian bring a breadth of complimentary experience and perspectives that will help the Division and the agency continue to look out for the long term interests of Main Street investors," said Brett Redfearn, Director of the Division of Trading and Markets.  

"It's an honor to be invited to contribute my experience to ongoing work on initiatives that support the fair operation of our capital markets," said Ms. Baird. "I am excited to have the opportunity to work with the dedicated staff of Trading and Markets on issues that matter to investors."

"I am humbled and honored to take on this new role," said Mr. Sabella. "I am fortunate to work with talented and dedicated colleagues in the Division of Trading and Markets and throughout the SEC. I am excited to continue our shared goal of advancing the agency's mission and serving investors across the country."

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SEC Proposes Rules to Simplify and Streamline Disclosures in Certain Registered Debt Offerings

The Securities and Exchange Commission today voted to propose rule amendments to simplify and streamline the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. 

The proposed amendments to Rules 3-10 and 3-16 of Regulation S-X would focus disclosures on information that is material to investors given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens for registrants.  By reducing compliance burdens, the proposed amendments should further encourage issuers to register debt offerings, and thus provide investors with additional protections that are not present in unregistered offerings.       

“I have seen firsthand instances in which an issuer did not pursue SEC registration of a debt offering that included a subsidiary guarantee or pledge of affiliate securities as collateral because of the costs and, in particular, time burdens of these rules,” said Chairman Clayton.  “The proposed rules are intended to make the disclosures easier for investors to understand and to encourage these offerings to be conducted on a SEC-registered basis.”

The proposal will have a 60-day public comment period following its publication in the Federal Register.

# # #

FACT SHEET

Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities

July 24, 2018

The Securities and Exchange Commission today proposed amendments to the financial disclosure requirements in Rule 3-10 of Regulation S-X for guarantors and issuers of guaranteed securities registered or being registered, as well as the financial disclosure requirements in Rule 3-16 of Regulation S-X for affiliates whose securities collateralize securities registered or being registered.  If adopted, the proposed changes would amend both Rules 3-10 and 3-16 and relocate part of Rule 3-10 and all of Rule 3-16 to new Article 13 in Regulation S-X, which would comprise proposed Rules 13-01 and 13-02.

Background

Both Rules 3-10 and 3-16 affect disclosures made in connection with registered debt offerings and subsequent periodic reporting: 

• Rule 3-10 requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, but also provides several exceptions to that requirement.  These exceptions are typically available for individual subsidiaries of a parent company when certain conditions are met, including that the parent company provides certain disclosures in its consolidated financial statements.  If the conditions are met, separate financial statements of each qualifying subsidiary issuer and guarantor may be omitted.

• Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant.

Highlights

The proposed changes are intended to:

• focus disclosures on the information that is material given the specific facts and circumstances;

• make the disclosures easier to understand;

• reduce the cost of compliance for registrants and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protections they may not be provided in offerings conducted on an unregistered basis; and 

• facilitate, through lower costs and burdens of compliance, issuers’ flexibility to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, which may increase the number of registered offerings that include these credit enhancements and could result in a lower cost of capital and an increased level of investor protection.

Proposed Amendments to Rule 3-10

Under the proposed amendments, Rule 3-10 would continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees.  Similar to the existing rule, the proposed rule would provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements.  Proposed Rule 13-01, contained in new Article 13 of Regulation S-X, would specify the disclosure requirements for the accompanying proposed disclosures.  The proposed amendments would:

• replace the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;

• replace condensed consolidating financial information, as specified in existing Rule 3-10, with certain proposed financial and non-financial disclosures.  The proposed financial disclosures would consist of summarized financial information, as defined in Rule 1-02(bb)(1) of Regulation S-X, of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented.  The proposed non-financial disclosures, among other matters, would expand the qualitative disclosures about the guarantees and the issuers and guarantors, as well as require disclosure of additional information that would be material to holders of the guaranteed security;

• permit the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement covering the offer and sale of the subject securities and any related prospectus, and in certain Exchange Act reports filed shortly thereafter;

• require that the proposed disclosures be included in the footnotes to the parent company’s consolidated financial statements for annual and quarterly reports beginning with the annual report for the fiscal year during which the first bona fide sale of the subject securities is completed; and

• require the proposed financial and non-financial disclosures for as long as the issuers and guarantors have an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding.

Proposed Amendments to Rule 3-16

The proposed amendments to the disclosure requirements in Rule 3-16 would be amended and relocated to proposed Rule 13-02, in new Article 13 of Regulation S-X.  Among other things, the proposed amendments would:

• replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security;

• permit the proposed financial and non-financial disclosures to be located in filings in the same manner as described above for the disclosures related to guarantors and guaranteed securities; and

• replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial to holders of the collateralized security.

What’s Next?

The proposal will be subject to a 60-day public comment period.

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SEC Detects Silicon Valley Executive’s Insider Trading

The Securities and Exchange Commission today announced that a senior executive at a Silicon Valley fiber optics company has agreed to settle charges that he made nearly $200,000 in illicit profits by trading on inside information in advance of three disappointing earnings announcements by the company.

The case stems from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns such as improbably successful trading in advance of earnings announcements over time.  Enhanced detection capabilities enabled SEC enforcement staff to identify the unusual trading activity.

The SEC’s order finds that Yao Li, as Vice President of Technology at Alliance Fiber Optic Products, Inc. (AFOP), learned during regular meetings with AFOP’s senior executives that the company was likely going to miss its revenue guidance in three different quarters during 2014 and 2015.  According to the SEC’s order, Li traded on this inside information by short selling AFOP shares for profits as well as selling AFOP shares he already owned to avoid losses before these announcements. 

According to the SEC's order, AFOP specifically prohibited its employees from engaging in short selling.  A short sale is a type of trade used to profit when a trader expects a stock’s price to decline.    

“Our agency’s ever-evolving data analytics enabled us to detect Li’s otherwise inconspicuous trading as an overall pattern to profit off multiple earnings announcements,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

Without admitting or denying the SEC’s findings, Li agreed to cease and desist from further 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, and he must pay disgorgement of $196,203, prejudgment interest of $23,062, and a $196,203 penalty for a total of $415,468.  Li also agreed to be prohibited from acting as an officer or director of a public company for a period of five years.

The SEC’s investigation was conducted by Matthew Meyerhofer and supervised by Jennifer J. Lee in the San Francisco Regional Office with assistance from John Rymas of the Enforcement Division’s Market Abuse Unit.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Options Regulatory Surveillance Authority.

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SEC Charges Failed Fyre Festival Founder and Others With $27.4 Million Offering Fraud

The Securities and Exchange Commission today announced that New York entrepreneur William Z. (Billy) McFarland, two companies he founded, a former senior executive, and a former contractor agreed to settle charges arising out of an extensive, multi-year offering fraud that raised at least $27.4 million from over 100 investors. 

The SEC’s complaint alleges that McFarland fraudulently induced investments into his companies Fyre Media, Inc., Fyre Festival LLC, and Magnises, Inc., including in connection with McFarland’s failed venture to host a “once-in-a-lifetime” music festival in the Bahamas. With substantial assistance from Grant H. Margolin, his Chief Marketing Officer, and Daniel Simon, an independent contractor to his companies, McFarland induced investors to entrust him with tens of millions of dollars by fraudulently inflating key operational, financial metrics and successes of his companies, as well as his own personal success – including by giving investors a doctored brokerage account statement purporting to show personal stock holdings of over $2.5 million when, in reality, the account held shares worth under $1,500.  McFarland used investor funds to bankroll a lavish lifestyle including living in a Manhattan penthouse apartment, partying with celebrities, and traveling by private plane and chauffeured luxury cars. 

“McFarland gained the trust of investors by falsely portraying himself as a skilled entrepreneur running a series of successful media companies.  But this false picture of business success was built on fake brokerage statements and stolen investor funds,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division.

The SEC’s complaint, which was filed in federal court in Manhattan, charges McFarland, Margolin, Simon, Fyre Media, and Magnises with violating the antifraud provisions of the federal securities laws.  McFarland has admitted the SEC’s allegations against him, agreed to a permanent officer-and-director bar, and agreed to disgorgement of $27.4 million, to be deemed satisfied by the forfeiture order entered in McFarland’s sentencing in a related criminal case.  Margolin, Simon, Fyre Media, and Magnises agreed to the settlement without admitting or denying the charges.  Margolin has agreed to a 7-year director-and-officer bar and must pay a $35,000 penalty, and Simon has agreed to a 3-year director-and-officer bar and must pay over $15,000 in disgorgement and penalty.  The settlements are subject to court approval.

The SEC’s investigation was conducted by James Bresnicky, Benjamin Brutlag, and Sarah Lamoree, with assistance from Sarah Heaton Concannon, and was supervised by J. Lee Buck II and Ms. Hodgman.  The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of New York.

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SEC Charges Mizuho Securities for Failure to Safeguard Customer Information

The Securities and Exchange Commission today charged Mizuho Securities USA LLC for its failure to safeguard information pertaining to stock buybacks by its issuer customers.  Mizuho failed to maintain and enforce policies and procedures aimed at preventing the misuse of material nonpublic information, including maintaining effective information barriers between different trading desks and requiring employees to keep client information confidential.  Mizuho agreed to settle the charges and will pay a $1.25 million penalty.

According to the SEC’s order, during a two-year period, Mizuho traders regularly disclosed material nonpublic customer buyback information to other traders and Mizuho’s hedge fund clients.  That information included the identity of the party placing the order, the order size, limit price, and indications that the orders were buyback orders. Such information was routinely communicated across trading desks, notwithstanding that during the relevant period Mizuho executed over 99.8 percent of all buyback orders by using algorithms, rather than through trader-negotiated open market trades. 

“Confidential information concerning issuer stock buybacks can be material to institutional investors, particularly when such trading comprises a significant portion of the daily trading volume in the stock being repurchased,” said Antonia Chion, Associate Director of the SEC Division of Enforcement.  “Broker-dealers must be attentive to their responsibilities to maintain and enforce policies and procedures to prevent the misuse of such information.”

The SEC’s order finds that Mizuho willfully violated Section 15(g) of the Securities Exchange Act of 1934.  Without admitting or denying the SEC’s findings, Mizuho consented to the order imposing a $1.25 million penalty, a censure, and ordering it to cease and desist from committing or causing any future violations.  

The SEC’s investigation was conducted by Drew M. Dorman, Greg Hillson, and Kevin Gershfeld.  The case was supervised by Yuri B. Zelinsky and Ms. Chion.  Assisting in the investigation were Chyhe Becker and Cathy Niden in the SEC’s Division of Economic and Risk Analysis and Sarah Heaton Concannon in the Enforcement Division’s Trial Unit.

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Julie Lutz, Regional Director of the Denver Regional Office, to Leave SEC After More Than 40 Years Serving Investors

The Securities and Exchange Commission today announced that Julie K. Lutz, the Regional Director of the SEC’s Denver Regional Office, will leave the agency at the end of this month after more than 40 years of service.

Ms. Lutz has served at the helm of the SEC’s Denver office since November 2013, overseeing the agency’s enforcement and examinations in a seven-state region.  Before her appointment to regional director, Ms. Lutz supervised the enforcement program in the Denver office as an associate director, and managed the Denver trial unit as regional trial counsel.  She joined the SEC staff in 1977 and worked in San Francisco and Washington D.C. before moving to the Denver office in 1996.

“For the last 40 years, Julie has worked hard every day to serve America’s investors, particularly Main Street investors across the West and Midwest,” said Chairman Jay Clayton.  “Julie has been and will remain a role model for all of us at the Commission.”

“Julie has been a dedicated public servant who has contributed greatly to the SEC’s mission,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “Under Julie’s leadership, the Denver office has led many creative and high-impact actions that have protected investors and our markets.”

“Julie leaves behind a legacy of accomplishments in Denver,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “Her experience, long-term perspective, and willingness to provide counsel to all who seek her advice have tremendously benefited the agency and the Denver office.”

“Julie has maintained an unwavering focus on the protection of investors throughout her career, and we will miss her thoughtfulness and leadership in the national examination program,” said Peter B. Driscoll, Director of the SEC’s Office of Compliance Inspections and Examinations.

Ms. Lutz added, “It has been a privilege to work at the SEC, most recently alongside the talented and dedicated staff of the DRO.  I have been very fortunate to work on behalf of public investors on varied and challenging enforcement cases, and with a robust and effective examination program. I look forward to following the Denver office’s continuing achievements in the years to come.”

During Ms. Lutz’s tenure, the SEC’s Denver office has been involved in dozens of enforcement matters involving a variety of securities law violations, including charges against: 

• Bankrate Inc. and three former executives for defrauding investors by manipulating the company’s financial results to meet analyst expectations
• Trinity Capital Corporation and five current or former executives for allegedly making material misstatements to investors concerning its provision for loan losses and its allowance for loan and lease losses in its quarterly and annual filings with the SEC during 2010, 2011, and the first two quarters of 2012
• AgFeed Industries Inc. and its top executives for allegedly conducting a massive accounting fraud on investors in which they repeatedly reported fake revenues from their China operations in order to meet financial targets and prop up the stock price
• Alpine Securities Corp. related to its alleged practice of clearing transactions for microcap stocks that were used in manipulative schemes to harm retail investors
• Two traders in China and Hong Kong, who agreed to pay more than $920,000 to settle insider trading allegations
• MusclePharm Corp., three executives and the former audit committee chair for their involvment in a series of accounting and disclosure violations.
• Osiris Therapeutics and four former top executives with misleading investors by prioritizing revenue growth over lawful accounting.
•  Two Israeli traders who allegedly used brokerage accounts in the U.S. to reap nearly $5 million in trading profits in advance of the March 13, 2017, announcement that Intel Corp. had agreed to acquire Israel-based Mobileye N.V.

Also during Ms. Lutz’s tenure, the examination program in the Denver office designed and executed several highly effective examination initiatives, including one focused on mutual fund share class selection that contributed to the office’s Asset Management Unit leading a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors.  In addition, the number of examinations conducted by Denver examination staff nearly doubled and resulted in significant enforcement actions. 

SEC Press Release

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Deutsche Bank to Pay Nearly $75 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that two U.S.-based subsidiaries of Deutsche Bank AG will pay nearly $75 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

The case stems from a continuing SEC investigation into abuses involving pre-released ADRs.  In proceedings against Deutsche Bank Trust Co. Americas (DBTCA), a depositary bank, and Deutsche Bank Securities Inc. (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank.  The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. Information about ADRs is available in an SEC Investor Bulletin.

In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a more than five-year period when neither the broker nor its customers had the requisite shares.  The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.

Last year, the SEC announced settled charges against brokers ITG Inc. and Banca IMI Securities Corp., which at times obtained pre-released ADRs from DBTCA and other depositaries and lent them to other brokers, including DBSI.  The SEC also charged a former managing director and head of operations at broker-dealer ITG for failing to supervise personnel on ITG’s securities lending desk who improperly handled pre-released ADRs.

“The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division.  “Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders.”

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Our charges against DBTCA and DBSI show that entities can’t just rely on representations from other professionals when they have doubts about their validity.  The charges also highlight the importance of supervising employees who use counterparties to engage in suspect transactions.”

Without admitting or denying the SEC’s findings, DBTCA agreed to return more than $44.4 million of alleged ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total.  DBSI, also without admitting or denying the SEC’s findings, agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty.  The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.

The SEC’s continuing industry-wide investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, Philip Fortino, Joseph Ceglio, Richard Hong, and Adam Grace of the New York Regional Office and supervised by Mr. Wadhwa. 

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 Investment Adviser and CEO With Misleading Retail Investors

The Securities and Exchange Commission today charged a Connecticut-based investment advisory firm and its chief executive officer with putting $19 million of investor money, including elderly investors’ retirement savings and pension plans, in risky investments and secretly pocketing hefty commissions from those investments. 

The SEC’s complaint alleges that Temenos Advisory Inc. and George L. Taylor steered advisory clients and other investors, including senior citizens and individuals approaching retirement, into four risky, illiquid private offerings.  While Temenos and Taylor charged advisory fees for unbiased financial advice, they allegedly concealed from their clients the high commissions they were pocketing from these risky and unsuitable investment recommendations, including cash and ownership stakes in the private companies they recommended, and fraudulently misled clients about the risks and prospects of the investments.  The SEC also alleges that Temenos and Taylor grossly overbilled some of their advisory clients.

“Investment advisers must put clients’ interests ahead of their own,” said Paul Levenson, Director of the SEC’s Boston Regional Office.  “Temenos violated that duty by placing clients in risky private placements while downplaying the risk of those investments and concealing the financial conflicts that motivated the recommendations.”

The SEC’s complaint, filed in federal court in Connecticut, charges the defendants with violating the anti-fraud and registration provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.

The case is being handled by Dawn Edick, Marc Jones, Rua Kelly, Patrick Noone, and Amy Gwiazda.  The SEC examination that led to the investigation was conducted by Maria Viana, Kenneth Leung, and Mayeti Gametchu of the Boston office.

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 Adopts Rules to Enhance Transparency and Oversight of Alternative Trading Systems

The Securities and Exchange Commission today announced it has voted to adopt amendments to Regulation ATS to enhance operational transparency and regulatory oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange.

“I applaud the staff’s retrospective review of our regulation of ATSs.  I agree that promoting greater transparency in order interaction, matching, and execution will help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives,” said SEC Chairman Jay Clayton.

Certain ATSs will be required to file detailed public disclosures on new Form ATS-N.  These disclosures are designed to allow market participants to assess potential conflicts of interest and risks of information leakage arising from the ATS-related activities of the ATS’s broker-dealer operator and its affiliates.  The disclosures will also inform market participants about how the ATS operates, including order types and market data used on the ATS, fees, the ATS’s execution and priority procedures, and any procedures to segment orders on the ATS.

Forms ATS-N will be made publicly available on the Commission’s website via the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

The amendments also provide a process for the Commission to review Form ATS-N filings and, after notice and opportunity for hearing and upon certain findings, declare a Form ATS-N ineffective.  
In addition, all ATSs will be required to have written safeguards and procedures to protect subscribers’ confidential trading information.

 

*   *   *

FACT SHEET

SEC Open Meeting
July 18, 2018

Action

The Securities and Exchange Commission adopted new Form ATS-N and amendments to Regulation ATS and Exchange Act Rule 3a1-1 to enhance transparency and oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange (NMS Stock ATSs).  The amendments will require NMS Stock ATSs to publicly disclose detailed information about their operations and the ATS-related activities of their broker-dealer operators.  

Highlights of the Adopted Amendments

Detailed Disclosure of the Operations of NMS Stock ATSs

Form ATS-N will require an NMS Stock ATS to publicly disclose on Form ATS-N information about its manner of operations and the ATS-related activities of the broker-dealer that operates the ATS (“broker-dealer operator”) and its affiliates.  These public disclosures will allow market participants to understand how their orders will interact, match, and execute in the NMS Stock ATS.  The disclosures will also inform market participants about differences that may exist in the treatment of subscribers and the broker-dealer operator (and its affiliates) on the ATS, and allow them to assess potential conflicts of interest and risks of information leakage.  The enhanced disclosures are also designed to enable market participants to compare an NMS Stock ATS to other trading venues and better evaluate the ATS as a potential destination for their orders.

Specifically, Form ATS-N will require an NMS Stock ATS to disclose information regarding:

•    Information about its broker-dealer operator, including identifying information and ownership.

•    ATS-related activities of its broker-dealer operator, and the broker-dealer operator’s affiliates, including:
 
o    the trading activities of the broker-dealer operator and its affiliates on the ATS;
o    whether subscribers to the ATS can opt out from interacting with orders and trading interest of the broker dealer operator and its affiliates; 
o    arrangements between the broker-dealer operator or its affiliates and trading centers to access the ATS services;
o    products and services offered to ATS subscribers by the broker-dealer operator and its affiliates;
o    the activities of service providers to the broker-dealer operator and its affiliates; and
o    safeguards and procedures established to protect the confidential trading information of subscribers.

•    The manner of operations of the NMS Stock ATS, including:  

o    types of subscribers, the criteria for eligibility for ATS services, and conditions for excluding subscribers from ATS services;
o    means of entry for orders and trading interest;
o    connectivity and co-location procedures;
o    order types, attributes, and order size requirements and procedures;
o    use of and terms and conditions governing conditional orders and indications of interest;
o    hours of operation, opening, reopening, and closing processes, and procedures for trading outside of regular trading hours; 
o    trading services, facilities, and rules of the ATS;
o    arrangements with any subscriber or the broker-dealer operator to provide liquidity;
o    segmentation of orders and trading interest and the provision of notice regarding segmentation; 
o    counter-party selection;
o    display of orders and other trading interest; 
o    outbound routing from the ATS; 
o    fees;
o    procedures for stopping or suspending trading;
o    procedures regarding trade reporting, clearance, and settlement;
o    sources and uses of market data;
o    as applicable, information about an NMS Stock ATS’s obligations related to order display and execution access pursuant to Rule 301(b)(3) of Regulation ATS and fair access pursuant to Rule 301(b)(5) of Regulation ATS; and
o    aggregate platform-wide order flow and execution statistics provided by the NMS Stock ATS to one or more subscribers.

Public Availability of Form ATS-N

The Commission, through the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, will make public an NMS Stock ATS’s Form ATS-N when it becomes effective, as well as amendments to an effective Form ATS-N.  In addition, each NMS Stock ATS will be required to make public on its website a direct URL hyperlink to the Commission’s website where these documents are located.

Commission Review of Form ATS-N Filings

The amendments to Regulation ATS establish a process for the Commission to review Form ATS-N filings.  Among other things:

•    An NMS Stock ATS’s initial Form ATS-N will become effective, unless declared ineffective, upon the earlier of:  (1) the completion of the Commission’s review and publication via posting on the Commission’s website, or (2) the expiration of the Commission review period, or, if applicable, the end of the extended review period.

•    An NMS Stock ATS will be required to file amendments to its Form ATS-N, which includes filing of material amendments.  Material amendments must be filed 30 calendar days prior to the implementation of the change and are made public upon the expiration of the 30 calendar day period, although a brief summary of the change will be made public upon filing.   

•    The amendments to Regulation ATS will provide a process for the Commission to review all Form ATS-N filings and, after notice and opportunity for hearing, and upon certain findings, declare, by order, an NMS Stock ATS’s Form ATS-N ineffective.

Safeguards and Procedures for Protecting Subscriber’s Confidential Trading Information

The amendments to Regulation ATS will require all ATSs to have and maintain written safeguards and procedures to protect the confidential trading information of their subscribers, and written procedures to ensure that those safeguards and procedures are followed.

Background

In 1998, the Commission adopted Regulation ATS, which established a new regulatory framework designed to encourage market innovation, while ensuring basic investor protections.  It gave securities markets a choice to register as a national securities exchange, or operate as an alternative trading system.

Since the adoption of Regulation ATS, the equity markets have evolved substantially and ATSs have become a significant source of liquidity in NMS stocks, accounting for approximately 11.4 percent of total share trading volume (11.5 percent of total dollar volume) in NMS stocks.  NMS Stock ATSs have grown in complexity and sophistication, and some NMS Stock ATSs now offer features similar to registered national securities exchanges, which applicable laws and regulations require to be transparent trading venues.  

Despite the important role of NMS Stock ATSs in the U.S. equity markets, prior to these amendments to Regulation ATS, inconsistent information was available to market participants about NMS Stock ATS’s manner of operations and the relationship between NMS Stock ATSs and the other business interests of their broker-dealer operators.  

What’s Next?

The amendments will be published on the Commission’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register.  An NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019 will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019.  As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N.
 

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 Adopts Final Rules and Solicits Public Comment on Ways to Modernize Offerings Pursuant to Compensatory Arrangements

The Securities and Exchange Commission today issued final rules to amend Securities Act Rule 701, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements.  As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the amendment increases from $5 million to $10 million the threshold in excess of which the issuer is required to deliver additional disclosures to investors.  

In addition, the Commission is soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.

“The rule as amended, and the concept release, are responsive to the fact that the American economy is rapidly evolving, including through the development of both new compensatory instruments and novel worker relationships – often referred to as the ‘gig economy.’  We must do all we can to ensure our regulatory framework reflects changes in our marketplace, including our labor markets,” said SEC Chairman Jay Clayton.  

The public comment period will remain open for 60 days following publication of the concept release in the Federal Register.

*   *   *

FACT SHEET

SEC Open Meeting 
July 18, 2018

Action

Adopting Release

As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Commission adopted final rules to revise Rule 701(e) to increase from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors.  

Concept Release

In addition, the Commission issued a Concept Release seeking public comment on ways to modernize compensatory securities offerings and sales. 

Equity compensation can be an important component of the employment relationship.  In addition to preserving cash for the company’s operations, equity compensation can align the incentives of employees with the success of the enterprise and facilitate recruitment and retention.  Securities Act Rule 701 allows non-reporting companies to sell securities to their employees without the need to register the offer and sale of such securities.  Securities Act Form S-8 provides a simplified registration form for companies to use to issue securities pursuant to employee stock purchase plans.  The Commission is soliciting comment on possible ways to update the requirements of Rule 701 and Form S-8, consistent with investor protection.  The Concept Release solicits comment on:

•    “Gig economy” relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption;  

•    Whether the Commission should further revise the disclosure content and timing requirements of Rule 701(e); and

•    Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.

What’s Next?

The revision to Rule 701(e) will become effective on the date the Adopting Release is published in the Federal Register.

The Concept Release will be posted on the Commission’s website and published in the Federal Register.  The comment period will remain open for 60 days after publication in the Federal Register.  
 

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 BGC Financial for Failure to Preserve Documents and Maintain Accurate Books and Records

The Securities and Exchange Commission today announced that New York-based broker-dealer BGC Financial has agreed to pay a $1.25 million penalty to settle charges that it failed to preserve audio files sought by the SEC and inaccurately recorded travel, entertainment, and other expenses.

The SEC’s order finds that after receiving document requests in 2014 from the SEC’s Division of Enforcement, BGC deleted audio files for the recorded telephone lines of eight brokers that were responsive to the document requests.  According to the order, the department responsible for maintaining voice recordings was unaware of the SEC’s request and deleted the files in keeping with the firm’s policy of not maintaining them after one year. 

The SEC order also finds that BGC failed to maintain books and records that accurately recorded compensation, travel, entertainment, and gifts.  BGC provided a high performing broker with season tickets for a New York-area sports team that cost more than $600,000 per year, and failed to record the payments for the tickets as compensation in its general ledger.  BGC also reimbursed this same broker for more than $100,000 of expenses associated with an international trip for his birthday and other foreign travel that lacked a sufficiently documented business purpose.  BGC inaccurately recorded these items in its books and records as selling and promotion.  BGC also reimbursed a different broker for thousands of dollars of personal expenses spent on his birthday party, his bachelor party, and two separate trips to Las Vegas for his friends’ bachelor parties.  

“The federal securities laws require broker-dealers to maintain accurate books and records and promptly provide records requested by SEC staff,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The failure to preserve and produce responsive documents undermines the Commission’s ability to provide effective oversight of registrants and to carry out its mission to protect investors.”

The SEC order finds that BGC violated books and records provisions of the federal securities laws and related SEC rules.  Without admitting or denying the SEC’s findings, BGC agreed to a cease-and-desist order, a censure, and a $1.25 million penalty.

The SEC’s investigation was conducted by Shannon Keyes, Christopher Dunnigan, Kenneth Gottlieb, and Charles D. Riely of the New York Regional Office and supervised by Sanjay Wadhwa.  

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 Oil Company CEO, Board Member With Hiding Personal Loans

The Securities and Exchange Commission today charged the former CEO of Energy XXI Ltd. with hiding more than $10 million in personal loans that he obtained from company vendors and a candidate for Energy XXI’s board.  At the time of the alleged misconduct, Energy XXI was NASDAQ-listed and one of the largest oil and gas producers on the Gulf of Mexico shelf.  

According to the SEC’s complaint, CEO John D. Schiller Jr. maintained an extravagant lifestyle by using a highly leveraged margin account secured by his Energy XXI stock.  The complaint alleges that in 2014, when faced with significant margin calls, Schiller extracted more than $7.5 million in undisclosed personal loans from company vendors in exchange for business contracts with Energy XXI.  

Schiller also is alleged to have obtained a $3 million loan from Norman Louie, a portfolio manager at Energy XXI’s largest shareholder Mount Kellett Capital Management LP.  Louie was appointed to Energy XXI’s board just weeks later.  The SEC alleges that Schiller did not disclose the vendor loans or the Louie loan to Energy XXI.

“Executives of public companies have a duty to act in the best interests of investors,” said Anita B. Bandy, an Assistant Director in the SEC’s Division of Enforcement.  “Secret backroom deals for the benefit of corporate insiders violate those duties and deprive investors of important information.”      

The complaint also alleges Schiller received undisclosed compensation and perks in the form of lavish social events, first-class travel, a shopping spree, donations to Schiller-preferred charities, legal expenses for personal matters, and an office bar stocked with high-end liquor and cigars.  As a result, Energy XXI failed to report at least $1 million in excess compensation in its executive compensation disclosures over a five-year period.  

Schiller consented, without admitting or denying the SEC’s charges, to a permanent injunction that enjoins him from violating anti-fraud and reporting provisions of the federal securities laws, imposes a $180,000 penalty, and bars him from serving as an officer or director of a public company for five years.
 
The SEC also charged Louie for his role in hiding his loan to Schiller, and Mount Kellett is charged with failing to disclose its activist plan to place Louie on Energy XXI’s board.  Louie and Mount Kellett consented, without admitting or denying the findings, to an SEC order that they cease and desist from committing or causing any violations or any future violations of certain reporting and disclosure provisions of the federal securities laws.  Louie must pay a $100,000 penalty and Mount Kellett, which is an SEC-registered investment adviser, must pay a $160,000 penalty.  

The SEC’s investigation, which is continuing, has been conducted by Nicholas A. Brady and Asset Management Unit member Janene M. Smith with assistance from litigation counsel Charles D. Stodghill.  The case has been supervised by Ms. Bandy.  
 

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 Files Charges in Busted Microcap Schemes

Last weeks the SEC announced that it has charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.

According to the SEC’s complaint,a stock promoter Gannon Giguiere took control of a purported medical device company. Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share. Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness.

According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.” According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.

The SEC’s complaint also charges three others who began laying the groundwork for a pump-and-dump scheme involving a purported digital media company. The SEC alleges that Kevin Gillespie, Annetta Budhu, and Andrew Hackett entered into a number of sham stock and debt issuances, and Hackett wound up communicating with someone he believed to be a participant in the scheme who in reality was an undercover FBI agent.

“As alleged in our complaint, these stock traders hijacked companies and manipulated the market to enrich themselves at the expense of the investing public. Law enforcement is committed to rooting out microcap fraud and exposing it no matter how encrypted or complex such schemes may be,” said Marc P. Berger, Director of the SEC’s New York Office.

SEC Files Charges in Busted Microcap Schemes

The Securities and Exchange Commission has charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.

According to the SEC’s complaint filed in federal court in southern California on July 6, stock promoter Gannon Giguiere took control of a purported medical device company.  Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share.  Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness.  According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.”  According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.

The SEC’s complaint also charges three others who began laying the groundwork for a pump-and-dump scheme involving a purported digital media company.  The SEC alleges that Kevin Gillespie, Annetta Budhu, and Andrew Hackett entered into a number of sham stock and debt issuances, and Hackett wound up communicating with someone he believed to be a participant in the scheme who in reality was an undercover FBI agent.

“As alleged in our complaint, these stock traders hijacked companies and manipulated the market to enrich themselves at the expense of the investing public.  Law enforcement is committed to rooting out microcap fraud and exposing it no matter how encrypted or complex such schemes may be,” said Marc P. Berger, Director of the SEC’s New York Office. 

The U.S. Attorney’s Office for the Southern District of California today announced criminal charges.

The SEC’s investigation, which is continuing, has been conducted by John O. Enright, Joseph P. Ceglio, Diego Brucculeri, and Sheldon L. Pollock of the New York office.  The SEC’s litigation will be handled by Messrs. Enright and Ceglio.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the FBI, U.S. Attorney’s Office for the Southern District of California, and 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.

SEC Issues Agenda for July 16 Meeting of the Fixed Income Market Structure Advisory Committee

The Securities and Exchange Commission today released the agenda for the July 16 meeting of the Fixed Income Market Structure Advisory Committee.  The Commission established the advisory committee to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.

The meeting will be held at the SEC’s headquarters at 100 F Street, NE, Washington, DC, and is open to the public.  The meeting will be webcast live on the SEC’s website and archived on the website for later viewing.

Members of the public who wish to provide their views on the matters to be considered by the Fixed Income Market Structure Advisory Committee may submit comments either electronically or on paper, as described below.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

[sec:ruling_comment]

 

#  #  #

 

SEC Fixed Income Market Structure Advisory Committee

Agenda

July 16, 2018

 

9:30 a.m.          Remarks by Commissioners; Division of Trading and Markets Director Brett Redfearn; and Committee Chairman Michael Heaney 

10:00 a.m.        Pre-Trade Transparency under MiFID II

• Neil Hamburger, JP Morgan Chase
• Miranda Morad, MarketAxess
• Michael Surowiecki, PIMCO
• Mark Yallop, FICC Markets Standards Board

11:00 a.m.        Break  

11:15 a.m.        Current State of Pre-Trade Transparency in the U.S. Corporate Bond Market

• Jon Klein, Bank of America Merrill Lynch
• Ben Macdonald, Bloomberg
• Tim Morbelli, Alliance Bernstein
• Steve Shaw, BondSavvy
• Thomas Urano, Sage Advisory Services
•  Chris White, Viable Markets and BondCliQ

12:30 p.m.       Lunch Break

1:30 p.m.         Current State of Pre-Trade Transparency in the U.S. Municipal Securities Market

• Bernard Costello, Morgan Stanley
• Ric Edelman, Edelman Financial Services
• Chris Ferreri, Hartfield, Titus and Donnelly
• Ben Smelser, Breckinridge Capital Advisors
• David Umeda, Charles Schwab
• Ron Valinoti, Triangle Park Capital Markets Data

2:45 p.m.         Break

 

3:00 p.m.         Electronic Trading Venue Regulation – Draft Recommendation

• Horace Carter, Raymond James
• Doug Friedman, Tradeweb
• Ben Macdonald, Bloomberg
• Rick McVey, MarketAxess
• Alex Sedgwick, T. Rowe Price
• Bill Vulpis, ICE BondPoint

4:15 p.m.         ETFs and Bond Funds Subcommittee Update

4:45 p.m.         Adjournment

SEC Press Release

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SEC Files Additional Charges in Fitbit Stock Manipulation Scheme

The Securities and Exchange Commission today filed fraud charges against a second defendant in connection with a scheme to manipulate the price of Fitbit securities through false regulatory filings.  

According to the SEC's complaint, Mark E. Burns purchased Fitbit call options just minutes before he and his co-conspirator, Robert W. Murray, filed a fake tender offer on the SEC's EDGAR system purporting to acquire Fitbit's shares at a substantial premium. The SEC charged Murray last year and he recently was sentenced to prison in a parallel criminal case. The false tender offer was made in the name of ABM Capital LTD – a nonexistent company for which the defendants created an EDGAR account.  Fitbit's stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Burns sold all of his options for a 350 percent profit of approximately $13,000.    

"We allege that Burns and Murray tried to camouflage their identities and their affiliation with an EDGAR account by using disguised IP and e-mail addresses," said Robert A. Cohen, Chief of the Cyber Unit. "Despite their sophisticated efforts to avoid detection, we stopped their alleged abuse of our filing system and charged them with being responsible for this manipulation." 

The SEC's complaint charges Burns with violating antifraud provisions of the federal securities laws. Murray has agreed to settle the SEC's charges against him. The settlement is subject to court approval. 

The SEC's investigation was conducted by David W. Snyder and Assunta Vivolo of the Cyber Unit, with the assistance of Patrick A. McCluskey of the Market Abuse Unit. The case was supervised by Joseph G. Sansone, Kelly L. Gibson, and Mr. Cohen. The litigation will be led by Jennifer C. Barry and Julia C. Green of the Philadelphia Regional Office. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York and the U.S. Postal Inspection Service.

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.

Former CEO and CFO of ITT Barred and Ordered to Pay Penalties

The Securities and Exchange Commission today announced settlements with two former senior executives of ITT Educational Services Inc., which the SEC charged hid its true financial condition from investors.  This resolution successfully concludes the SEC’s case, which was scheduled to begin trial on July 9.

Former CEO Kevin Modany and former CFO Daniel Fitzpatrick are barred from holding senior positions at public companies and ordered to pay penalties in the settlements filed in federal court in Indiana.

“Holding individuals accountable – particularly senior executives – is a critical focus of our enforcement program,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “These settlements, entered into on the eve of trial after years of litigation, reflect our commitment to this accountability.”

The SEC charged both Modany and Fitzpatrick in 2015, alleging they fraudulently concealed the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed.  ITT previously settled fraud charges based on the same alleged conduct.  Modany and Fitzpatrick settled to the SEC’s claims charging them as control persons for ITT’s fraud and other violations.  The court’s judgments, entered today:

• Barred each of them from serving as officers and directors of public companies for five years
• Ordered Modany and Fitzpatrick to pay penalties of $200,000 and $100,000, respectively
• Enjoined each of them from controlling persons who violate antifraud and periodic reporting provisions of the federal securities laws

Modany and Fitzpatrick also have agreed to be suspended from appearing and practicing before the SEC as accountants.  Pursuant to their agreement, they will be permitted to apply for reinstatement after five years.

Modany and Fitzpatrick agreed to the settlements without admitting or denying the allegations in the SEC’s complaint.

The litigation was conducted by Polly Atkinson, Zachary Carlyle, and Nicholas Heinke with assistance from Nicole Nesvig.  The case was supervised by Gregory Kasper, Kurt Gottschall, and Daniel Michael.
 

SEC Press Release

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SEC Charges Credit Suisse With FCPA Violations

The Securities and Exchange Commission today announced that Credit Suisse Group AG will pay approximately $30 million to resolve SEC charges that it obtained investment banking business in the Asia-Pacific region by corruptly influencing foreign officials in violation of Foreign Corrupt Practices Act (FCPA).  

Credit Suisse also agreed to pay a $47 million criminal penalty to the U.S. Department of Justice.

According to the SEC’s order, several senior Credit Suisse managers in the Asia-Pacific region sought to win business by hiring and promoting individuals connected to government officials as part of a quid pro quo arrangement.  While this practice bypassed the firm’s normal hiring process, employees in other Credit Suisse subsidiaries and affiliates were aware of it and in some instances approved these “relationship hires” or “referral hires.”  The SEC’s order found that in a seven-year period, Credit Suisse hired more than 100 employees at the request of foreign government officials, resulting in millions of dollars of business revenue.

“Bribery can take many forms, including granting employment to friends and relatives of government officials.  Credit Suisse’s practice of engaging in these hiring practices violated the law, and it is now being held to account for having done so,” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit.
 
The SEC’s order finds that Credit Suisse violated the anti-bribery and internal accounting controls provisions of the Securities Exchange Act of 1934.  Credit Suisse agreed to pay disgorgement of $24.9 million plus $4.8 million in interest to settle the SEC’s case.  

The SEC’s investigation was conducted by Eric Heining and Paul G. Block of the FCPA Unit and Rory Alex and Alfred Day of the Boston Regional Office.  The SEC appreciates the assistance of the Fraud Section of the Department of Justice, 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 Charges KBR for Inflating Key Performance Metric

The Securities and Exchange Commission today charged global engineering and construction company KBR Inc. for inflating a key performance metric known as work in backlog.  KBR agreed to pay a $2.5 million penalty to settle the SEC’s charges.

According to the Commission’s order, KBR’s public disclosures of its work in “backlog” were important to investors because the metric represented the amount of revenue that KBR expected to receive in the future from firm orders under awarded contracts.  The SEC found that in the second quarter of 2012, KBR included $459 million in its publicly disclosed backlog for one of seven contracts it entered into to complete pipe fabrication and modular assembly contracts in Canada, even though KBR had not received -- and the counterparty was not obligated to provide -- any orders under the contract.  By including the full $459 million in its disclosures, KBR violated its internal reporting policies and misled investors by overstating its work in backlog.  KBR continued to overstate its backlog for almost two years.  The Commission also found that KBR failed to make accurate and reliable estimates of the costs to complete the seven Canadian contracts -- cost estimates the company used to improperly recognize revenue on the contracts.   KBR’s internal accounting controls were also not properly designed to identify or prevent errors in the estimates of costs to complete.  As a result, KBR restated earnings in its consolidated financial statements for the fiscal year ended December 31, 2013 and its unaudited consolidated financial statements for the third quarter of 2013.  The restated earnings resulted in charges of $156 million.   

“Non-financial statement metrics such as backlog can provide additional insight to investors regarding a company’s performance,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.  “To the extent that companies use these kinds of metrics, they must ensure they are accurate and not misleading.” 

Without admitting or denying the allegations, KBR consented to the SEC’s order finding of books and records, internal accounting controls, financial reporting, and other securities law violations, and agreed to pay a $2.5 million penalty.

The SEC’s investigation was conducted by Keefe Bernstein, Julia Huseman, and Carol Stumbaugh of the Fort Worth Regional Office.  The case was supervised by Barbara Gunn and Eric Werner.  The SEC appreciates the assistance of the Alberta Securities 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.

SEC Charges Attorney and Law Firm Business Manager With Illegal Sales of UBI Blockchain Internet Stock

The Securities and Exchange Commission today charged two men alleged to have profited from illegal sales of stock of a company claiming to have a blockchain-related business.

According to the SEC’s complaint, attorney T.J. Jesky and his law firm’s business affairs manager, Mark F. DeStefano, made approximately $1.4 million by selling shares in UBI Blockchain Internet Ltd. over a 10-day period from Dec. 26, 2017 to Jan. 5, 2018.  The sales stopped when the SEC temporarily suspended trading in UBI Blockchain stock earlier this year due to concerns about the accuracy of assertions in its SEC filings and unusual and unexplained market activity.

“This case is a prime example of why the SEC has warned retail investors to be cautious before buying stock in companies that suddenly claim to have a blockchain business,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit.  “This case involved both a trading suspension and people holding restricted shares who attempted to profit from the dramatic price increase with illegal stock sales that violated the registration statement.”
 
The SEC’s complaint alleges that Jesky, and DeStefano, both residents of Nevada, received 72,000 restricted shares of UBI Blockchain stock in October 2017 and were permitted to sell the shares at a fixed price of $3.70 per share under the registration statement.  Instead, the complaint alleges that Jesky and DeStefano unlawfully sold the shares at much higher market prices – ranging from $21.12 to $48.40 – when UBI Blockchain’s stock experienced an unusual price spike.  

The SEC’s Office of Investor Education and Advocacy has issued an Investor Bulletin on initial coin offerings and a mock ICO website to educate investors.  Additional information about ICOs is available on Investor.gov and SEC.gov/ICO.

The SEC’s complaint, filed in federal court in New York, charges Jesky and DeStefano with violating the registration provisions of the federal securities laws.  Without admitting or denying the allegations in the SEC’s complaint, Jesky and DeStefano agreed to return approximately $1.4 million of allegedly ill-gotten gains, pay $188,682 in penalties, and be subject to permanent injunctions.  The settlement is subject to the court’s approval.

The SEC’s investigation, which is ongoing, is being coordinated by the Microcap Fraud Task Force and the Cyber Unit and is being conducted by Michael D. Paley, Kevin P. McGrath, Tracy E. Sivitz, John P. Lucas, and Ricky Tong.  The matter is being supervised by Lara S. Mehraban and Mr. Cohen.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, the Mexican Comisión Nacional Bancaria y de Valores, and the Panamanian Superintendencia del Mercado de Valores.
 

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.