Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge

The Securities and Exchange Commission announced today that Elon Musk, CEO and Chairman of Silicon Valley-based Tesla, Inc., has agreed to settle the securities fraud charge brought by the SEC against him last week.  The SEC also today charged Tesla with failing to have required disclosure controls and procedures relating to Musk’s tweets, a charge that Tesla has agreed to settle.  The settlements, which are subject to court approval, will result in comprehensive corporate governance and other reforms at Tesla—including Musk’s removal as Chairman of the Tesla board—and the payment by Musk and Tesla of financial penalties.

According to the SEC’s complaint against him, Musk tweeted on August 7, 2018 that he could take Tesla private at $420 per share — a substantial premium to its trading price at the time — that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.  The SEC’s complaint alleged that, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies.  Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.  According to the SEC’s complaint, Musk’s misleading tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

According to the SEC’s complaint against Tesla, despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings.  Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.

Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations.  Among other relief, the settlements require that:

• Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman.  Musk will be ineligible to be re-elected Chairman for three years;
• Tesla will appoint a total of two new independent directors to its board;
• Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
• Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process. 

“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. 

“As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms —including an obligation to oversee Musk’s communications with investors—and both will pay financial penalties,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”

The SEC’s investigation was conducted by Walker Newell, Brent Smyth, and Barrett Atwood and supervised by Steven Buchholz, Erin Schneider, and Jina Choi in the San Francisco Regional Office and Cheryl Crumpton in the SEC’s Home Office.

SEC Press Release

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Brokerage Firm to Exit Penny Stock Deposit Business and Pay Penalty for Repeatedly Failing to Report Suspicious Trading

The Securities and Exchange Commission today announced settled charges against clearing firm COR Clearing LLC for failing to report suspicious sales of penny stock shares totaling millions of dollars.  As part of the settlement, COR has agreed to exit a key penny stock clearing business by significantly limiting the sale of penny stocks deposited at COR. 

Broker-dealers are required to file Suspicious Activity Reports (SARs) for transactions suspected to involve fraud or with no apparent lawful purpose.  According to an SEC alert dated March 29, 2016, microcap securities are more susceptible to manipulation and it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies.  The SEC’s order finds that in 2016, COR ranked second among all broker-dealers in the total dollar value of sub-$1 penny stocks that it cleared, and from January 2015 to June 2016, COR cleared for sale a significant amount of penny stock on behalf of customers of its introducing broker-dealers.  The SEC finds that approximately 193 customer accounts deposited large blocks of low-priced securities, quickly sold these securities into the market, and then withdrew the cash proceeds.  The SEC further finds that in some instances the same customers engaged in this suspicious pattern with multiple securities.  According to the order, COR failed to file SARs with respect to a subset of the foregoing transactions and, as a result, violated the securities laws.

“SAR filings by both introducing and clearing brokers, especially those who transact in the microcap space, are critically important to the regulatory and law enforcement communities,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The penalty imposed and the limitation placed on COR’s business reflect how seriously we take the failure to file SARs in the face of numerous red flags.”

Without admitting or denying the SEC’s findings, COR agreed to a settlement that requires it to not sell penny stocks deposited at COR with certain narrow exceptions and pay an $800,000 penalty.  COR also consented to a censure and to cease and desist from similar violations in the future.

The SEC investigation was conducted by Jorge G. Tenreiro, Elizabeth Baier, Michael Fioribello, and Sandeep Satwalekar in the New York office with assistance from the Enforcement Division’s Bank Secrecy Act Review Group.  The case was supervised by Lara Shalov Mehraban.  The SEC’s examination that led to the enforcement action was conducted by Edward Janowsky, Stephen Bilezikjian, and Dennis Koval, and supervised by Steven Vitulano of the New York office.

SEC Press Release

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Credit Suisse Agrees to Pay $10 Million to Settle Charges Related to Handling of Retail Customer Orders

The Securities and Exchange Commission today announced that Credit Suisse Securities (USA) LLC has agreed to settle charges brought by the SEC and the Office of the New York Attorney General regarding material misrepresentations and omissions made in connection with its now-closed Retail Execution Services (RES) business’ handling of certain customer orders.  The settlements require Credit Suisse to pay $5 million to the SEC and $5 million to the NYAG for a total of $10 million.

According to the SEC’s order, Credit Suisse created the RES desk to execute orders for other broker-dealers that handle order flow on behalf of retail investors.  The SEC’s order finds that although RES promoted its access to dark pool liquidity to customers, the firm executed an exceedingly minimal number of held orders – orders that must be executed immediately at the current market price – in dark pools from September 2011 to December 2012.

The SEC’s order also finds that although Credit Suisse touted “robust” and “enhanced” price improvement on orders, RES’s computer code treated orders for which execution quality is required to be publicly reported differently from orders for which execution quality is not publicly reported.  The SEC’s order finds that from mid-2011 to March 2015, retail customers did not receive any price improvement from RES on their non-reportable orders, which Credit Suisse failed to disclose.  The SEC’s order also finds that for these non-reportable orders, RES disproportionately used a routing tactic that generally caused market impact and resulted in less favorable execution prices for customers, despite claiming to benefit RES’s customers.  The use of this routing tactic provided RES an opportunity to profit from its execution of the final portions of those customer orders internally.

“Market makers that handle retail orders must be transparent with their customers about how orders will be executed and how the market maker will profit from their customers’ trades,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The settlement holds Credit Suisse accountable for failing to accurately disclose important information about the nature and quality of its execution of trades for retail investors.”

The SEC’s order finds that Credit Suisse negligently violated Section 17(a)(2) of the Securities Act.  In addition to imposing the penalty, the SEC’s order censures Credit Suisse and requires that it cease and desist from further violations.  Credit Suisse consented to the SEC’s order without admitting or denying the findings.

The SEC’s investigation was conducted by Howard Kim, David Oliwenstein, and Steven G. Rawlings with assistance from Ilan Felix in the New York Regional Office’s Examination Program and Lei Yu of the Division of Economic and Risk Analysis.  The investigation was supervised by Lara Shalov Mehraban of the New York office and Joseph G. Sansone of the Market Abuse Unit.  The SEC appreciates the assistance of the NYAG.

SEC Press Release

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Charges LendingClub Asset Management and Former Executives With Misleading Investors and Breaching Fiduciary Duty

The Securities and Exchange Commission today charged San Francisco-based LendingClub Asset Management LLC (formerly known as LendingClub Advisors LLC) and its former president Renaud Laplanche with fraud for improperly using fund money to benefit LendingClub Corporation, LCA’s parent company that Laplanche founded and for which he served as CEO.  LCA and Laplanche along with Carrie Dolan, LCA’s former CFO, also were charged with improperly adjusting fund returns.

All three have agreed to settle the agency’s charges against them and will pay more than $4.2 million in combined penalties.  The SEC also barred Laplanche from the securities industry. 

According to the SEC’s order, LCA provides investment advisory services to several private funds that purchase loan interests offered by LendingClub Corporation, a publicly-traded online marketplace lending company.  LCA and Laplanche caused one of the private funds it managed to purchase interests in certain loans that were at risk of going unfunded, to benefit LendingClub, not the fund, in breach of LCA’s fiduciary duty.  The order also finds that LCA, Laplanche, and Dolan improperly adjusted monthly returns for this fund and other LCA-managed funds to improve the returns they reported to fund investors.

“Investment advisers have an obligation to put their clients’ interests ahead of their own,” said Daniel Michael, Chief of the SEC’s Complex Financial Instruments Unit.  “By using funds managed by LCA to benefit its parent company, LCA and Laplanche failed to do so.”

“Investors depend on fund advisers to give them the straight scoop on performance so they can make informed investment decisions,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.  “Advisers who adjust their valuation processes to boost results are in breach of their duties to investors.” 

The SEC’s order finds that LCA, Laplanche, and Dolan each violated the antifraud provisions of the Investment Advisers Act of 1940.  To settle the SEC’s charges, LCA, Laplanche and Dolan agreed to pay penalties of $4 million, $200,000, and $65,000, respectively.  Laplanche also agreed to a securities industry bar and investment company prohibition.  The SEC’s order permits Laplanche to apply for re-entry after three years.  LCA, Laplanche, and Dolan agreed to the entry of the SEC’s order without admitting or denying the findings.

The SEC’s Enforcement Division determined not to recommend charges against LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation.  LCA also reimbursed approximately $1 million to investors who were adversely impacted by the improperly adjusted monthly returns.

The SEC’s investigation was conducted by Jason Casey and Amy Sumner of the Complex Financial Instruments Unit and Chrissy Filipp and Crystal Boodoo of the San Francisco Regional Office.  The case was supervised by Laura Metcalfe, Monique Winkler, and Erin Schneider.  The SEC appreciates the cooperation of the U.S. Department of Justice.

SEC Press Release

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SEC Charges Stryker A Second Time for FCPA Violations

The Securities and Exchange Commission today charged Stryker Corp. with violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA), the second time the SEC has brought an FCPA action against the Michigan-based medical device company.

Stryker agreed to settle the charges and pay a $7.8 million penalty.  The SEC’s order found that Stryker’s internal accounting controls were not sufficient to detect the risk of improper payments in sales of Stryker products in India, China, and Kuwait, and that Stryker’s India subsidiary failed to maintain complete and accurate books and records. 

“Stryker’s failures to implement sufficient internal accounting controls and keep accurate books and records are unacceptable, especially as this is not the first time the company has been charged for these types of violations,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The penalty ordered along with the imposition of a compliance consultant are appropriate and necessary.”

Without admitting or denying the SEC’s findings, Stryker consented to the entry of an order requiring the company to cease and desist from committing violations of the books and records and internal accounting controls provisions of the FCPA and pay a $7.8 million penalty.  In October 2013, Stryker settled charges of FCPA violations and was required to pay a $3.5 million penalty plus more than $7.5 million in disgorgement of ill-gotten gains and more than $2.2 million in interest.  Stryker also must now retain an independent compliance consultant to review and evaluate its internal controls, record-keeping, and anti-corruption policies and procedures relating to use of dealers, agents, distributors, sub-distributors, and other such third parties that sell on behalf of Stryker. 

The SEC’s investigation was conducted by William Martin, Brenda Wai Ming Chang, and Thomas P. Smith Jr. of the New York office and Devon A. Brown, Andrew Shirley, and Brian O. Quinn out of Washington D.C.   The case was supervised by Sanjay Wadhwa.

SEC Press Release

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SEC Charges Salix Pharmaceuticals and Former CFO With Lying About Distribution Channel

The Securities and Exchange Commission today charged Salix Pharmaceuticals Ltd. and its former CFO with repeatedly misleading analysts and investors about the company’s future prospects.  The former CFO, Adam Derbyshire, will pay more than $1 million to settle the charges. 

According to the SEC’s complaint, Salix and Derbyshire lied to analysts and investors during quarterly earnings calls by significantly understating the amount of Salix drugs that wholesaler customers held in inventory.  Salix had engaged in a long-standing practice of flooding the distribution channel by using incentives to induce customers to purchase more products, creating a short-term revenue bump but excess supply that imperiled future sales.  The complaint alleges that Salix and Derbyshire also failed to disclose in SEC reports that the practice had impacted earnings and presented a significant risk to Salix investors.  Salix is now a subsidiary of Bausch Health Companies, which was previously known as Valeant Pharmaceuticals International.  The alleged misconduct occurred prior to Salix’s acquisition by Valeant.

“The settlement with Salix reflects the company’s self-report to the Commission and its significant cooperation with the investigation,” said David Frohlich, Assistant Director in the SEC’s Enforcement Division.  “Salix’s proactive remediation included conducting an extensive internal investigation that led to Derbyshire’s resignation.”

To settle the charges, Salix agreed to be enjoined from future violations of the antifraud and corporate reporting provisions of the federal securities laws.  The proposed settlement is subject to district court approval.

Derbyshire agreed to a permanent injunction against violations of the antifraud provisions and from aiding and abetting violations of the corporate reporting provisions.  He also agreed to pay $558,534 in disgorgement and interest plus a penalty of $494,836, and to be barred for five years from serving as an officer or director of a public company.  The proposed settlement is subject to court approval.  Derbyshire separately agreed 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 Derbyshire to apply for reinstatement after five years.

The SEC’s investigation was conducted by Michelle Bougdanos and Nicholas Margida with assistance from James Smith, Christian Schultz, and Matthew Scarlato.  The case was supervised by David Frohlich.

SEC Press Release

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SEC Charges Walgreens and Two Former Executives With Misleading Investors About Forecasted Earnings Goal

The Securities and Exchange Commission today charged Walgreens Boots Alliance Inc., former CEO Gregory Wasson, and former CFO Wade Miquelon with misleading investors about increased risk that the company would miss a key financial goal announced when Walgreen Co. entered into a merger with Alliance Boots GmbH in 2012.  Walgreens agreed to pay a $34.5 million penalty to settle the SEC’s enforcement action.

According to the SEC’s order, Walgreens announced a two-step merger with Alliance Boots in June 2012, and at the same time projected that the combined entity would generate $9 billion to $9.5 billion in combined adjusted operating income in the 2016 fiscal year.  After completing the first step of the merger, Walgreens’ internal forecasts indicated that the risk of missing its 2016 projection had increasing significantly.  But Walgreens, Wasson, and Miquelon repeatedly publicly reaffirmed the projections without adequately disclosing the increased risk.  When Walgreens subsequently announced that it was moving forward with the second step of the merger in August 2014, it announced a new earnings per share goal that translated to an adjusted operating income projection of $7.2 billion for fiscal 2016, a 20 percent decline over its initial projection.  Walgreens’ stock price dropped 14.3% on the day of the announcement.

“Over multiple reporting periods, senior Walgreens executives misled investors about the company’s public financial goal,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “The penalty assessed against Walgreens is intended to punish and deter such conduct, which deprived investors of information necessary to make fully informed investment decisions.”

Melissa Hodgman, Associate Director of the SEC’s Enforcement Division, added, “As this case shows, we are committed to holding corporate executives accountable when they are in the best position to ensure that disclosures are accurate and not misleading.”

Without admitting or denying the findings, Walgreens, Wasson, and Miquelon consented to the entry of an SEC order finding that they violated the antifraud provision contained in Section 17(a)(2) of the Securities Act of 1933, which  prohibits the use of untrue statements or omissions in the offer or sale of securities.  The SEC’s order requires each of the respondents to cease and desist from further violations of that provision, and also requires Walgreens Boots Alliance to pay a $34.5 million penalty, and Wasson and Miquelon to each pay a $160,000 penalty.

The SEC’s investigation was conducted by W. Bradley Ney and D. Ashley Dolan and supervised by Melissa Robertson in the Washington, D.C. headquarters.

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.

Elon Musk Charged with Securities Fraud for Misleading Tweets

The Securities and Exchange Commission today charged Elon Musk, CEO and Chairman of Silicon Valley-based Tesla Inc., with securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private.
 
On August 7, 2018, Musk tweeted to his 22 million Twitter followers that he could take Tesla private at $420 per share (a substantial premium to its trading price at the time), that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.  The SEC’s complaint alleges that, in truth, Musk had not discussed specific deal terms with any potential financing partners, and he allegedly knew that the potential transaction was uncertain and subject to numerous contingencies. According to the SEC’s complaint, Musk’s tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

“Corporate officers hold positions of trust in our markets and have important responsibilities to shareholders,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly.”

“Taking care to provide truthful and accurate information is among a CEO’s most critical obligations,” added Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “That standard applies with equal force when the communications are made via social media or another non-traditional form.”

The SEC’s complaint, filed in federal district court in the Southern District of New York, alleges that Musk violated antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.

The SEC’s investigation, which is continuing, was conducted by Walker Newell, and Brent Smyth and supervised by Steven Buchholz, Erin Schneider, and Jina Choi in the San Francisco Regional Office.  The litigation will be led by Cheryl Crumpton and Barrett Atwood.


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 Bitcoin-Funded Securities Dealer and CEO

The Securities and Exchange Commission today filed charges against an international securities dealer and its Austria-based CEO for allegedly violating the federal securities laws in connection with security-based swaps funded with bitcoins.  

According to the SEC’s complaint, 1pool Ltd. a/k/a 1Broker, registered in the Republic of the Marshall Islands, and its CEO Patrick Brunner solicited investors from the United States and around the world to buy and sell security-based swaps.  Investors could open accounts by simply providing an email address and a user name – no additional information was required – and could only fund their account using bitcoins.  The SEC alleges that a Special Agent with the Federal Bureau of Investigation, acting in an undercover capacity, successfully purchased several security-based swaps on 1Broker’s platform from the U.S. despite not meeting the discretionary investment thresholds required by the federal securities laws.  The SEC also alleges that Brunner and 1Broker failed to transact its security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer. 

“The SEC protects U.S. investors across a variety of platforms, regardless of the type of currency used in their transactions,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “International companies that transact with U.S. investors cannot circumvent compliance with the federal securities laws by using cryptocurrency.”

The SEC’s complaint, filed in U.S. District Court for the District of Columbia, seeks permanent injunctions, disgorgement plus interest, and penalties.  In a parallel action, the Commodity Futures Trading Commission (CFTC) announced charges against 1Broker arising from similar conduct.  

The SEC’s investigation was conducted by David Hirsch and Morgan Ward Doran, and supervised by Scott Mascianica and Eric R. Werner of the SEC’s Fort Worth Regional Office.  The SEC’s litigation will be led by Chris Davis and supervised by B. David Fraser.  The Enforcement Division’s Cyber Unit assisted in the investigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Columbia, Department of Justice, Federal Bureau of Investigation, and the CFTC.

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.

Lacey Dingman, Chief Human Capital Officer and Director of Human Resources, to Leave SEC

The Securities and Exchange Commission today announced that Lacey Dingman, the Chief Human Capital Officer (CHCO) and Director of the Office of Human Resources (OHR), will leave the agency at the end of September.

As CHCO since 2012, Ms. Dingman has played a critical role in the development and success of the organization, which involved OHR realizing many significant accomplishments, including:

• Enhancement of the SEC's hiring processes and practices to ensure the placement of the right candidates in the right jobs, including decreasing the time-to-hire to an average of less than 90 days to meet critical staffing needs.
• Enrichment of the employee experience,as evidenced by results of the Federal Employee Viewpoint Survey where the SEC was recognized twice by the Partnership for Public Service as the most improved Agency and moved up an impressive 14 positions to rank #5 among comparable agencies in 2017.
• Expansion of the SEC's training and development offering for all employees, including a full complement of continuing professional education and certifications for the SEC's professional staff and enhanced opportunities for new, current, and emerging leaders – with McKinsey & Co. recognizing these efforts as a best practice for training the Senior Executive Service.
• Modernization of OHR's structure, policies, processes, and customer-service model, including implementing advanced technologies to automate OHR services. 
• Reforming the agency's talent management approach to cultivate a more diverse and inclusive culture. As a result of this work the SEC has been acknowledged for its work in supporting equality.

"Lacey has made an enormous contribution to the SEC, enacting a variety of important reforms to the agency's human capital management over the last six years," said SEC Chairman Jay Clayton. "Lacey's leadership of our Office of Human Resources has been exemplary and, as a result of her efforts, the Commission is better positioned to fulfill our critical mission."

"I want to express my deepest gratitude to all who have been so supportive of the work in OHR and of me personally over the years.  Without you, the organization would not be as strong and vibrant as it is," said Ms. Dingman. "I am so honored to have been a leader in this incredible organization and will watch with much excitement and anticipation as it continues to make strides in the area of human capital."

Ms. Dingman has earned several awards for her service, including the Chair's Award for Distinguished Leadership and Vision, in 2016, in recognition of achievements in developing strong teams and inspiring collaboration with internal colleagues, as well as with outside organizations. Before joining the SEC, she worked for the U.S. Commodity Futures Trading Commission and the National Futures Association. Ms. Dingman received her undergraduate degree from the University of Iowa.

With Ms. Dingman's departure, James “Jamey” McNamara will serve as the Acting Chief Human Capital Officer.

Mr. McNamara has served as Deputy Chief Human Capital Officer since July 2014. Prior to joining the Office of Human Resources, Mr. McNamara was the Managing Executive for the SEC's Division of Trading and Markets. He earlier served in several leadership roles in the SEC's Office of Financial Management and Division of Trading and Markets. Mr. McNamara began his federal career at the U.S. Department of Justice, where he held positions in human resources management and budget formulation in Justice Department's Civil Division. Mr. McNamara received his bachelor’s degree from Brown 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.

Online Marketers Charged With Conning Main Street Investors Through Rags-to-Riches Infomercials

The Securities and Exchange Commission today charged a group of internet marketers who allegedly created and disseminated elaborate rags-to-riches videos to trick retirees and other retail investors into opening brokerage accounts and trading high-risk securities known as binary options. 

According to the SEC’s complaints, investors were conned out of tens of millions of dollars through these marketing campaigns, which promised that investors would make large amounts of money by opening binary options accounts and using free or secret software systems to trade in them. The SEC alleges that the marketers were paid for each new brokerage account that investors opened and funded. According to the complaints, the marketers’ internet video advertisements, which were disseminated through spam emails, used actors to portray ordinary people who became millionaires by trading binary options. The videos staged fake demonstrations of supposed software users watching their account balances grow in real time. The SEC alleges that the software was simply a ruse to persuade investors to open accounts with the brokers.  

To help educate investors about the risks of internet marketing scams, the SEC’s Retail Strategy Task Force and Office of Investor Education and Advocacy created the first in a series of videos warning investors of the risks of providing personal information in response to online investment pitches, and have issued an Investor Alert about the use of affiliate marketing to generate interest in securities offerings. 

“As alleged in our complaints, thousands of retail investors were swindled out of tens of millions of dollars by watching elaborately produced rags-to-riches stories that falsely promised wealth at the push of a button,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “Those who use phony tactics to dupe investors out of their savings will be held accountable for false and misleading statements on the internet.”   

“Before you provide any of your valuable personal information to anyone, make sure you do your research and know exactly who it’s going to,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Be aware before you share, and protect yourself from professional fraudsters who may target you and your money for life.”

The SEC’s complaints charged 10 individuals and two companies involved in the fraudulent marketing campaigns. The SEC’s investigation is continuing.

The SEC’s complaints seek penalties, disgorgement of ill-gotten gains, and permanent injunctions against Timothy J. Atkinson, Ronald “Ronnie” Montano, Jay Passerino, Michael Wright, and All In Publishing LLC.  Justin Blake Barrett, William E. Berry and his company Berry Mediaworks, Grayson Brookshire, Antonio Giacca, Shmuel Pollen, and Travis Stephenson have agreed to settle the SEC’s charges.  Without admitting or denying the charges, they agreed to pay a combined total of $4.1 million in disgorgement and prejudgment interest.  Pollen has agreed to pay a $42,500 penalty.  The Commission did not assess a penalty on the other settling parties as a result of their cooperation.

The SEC’s investigation is being conducted by Jason Anthony, Michael Fuchs, and Deborah Maisel, and supervised by Jennifer Leete.  The SEC’s litigation against Atkinson, Passerino, Montano, Wright, and All In Publishing will be led by Kenneth Donnelly.  The SEC appreciates the assistance of the Commodity Futures Trading Commission, which filed parallel actions today.

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.

Petrobras Reaches Settlement With SEC for Misleading Investors

The Securities and Exchange Commission today charged Brazilian oil-and-gas company Petróleo Brasileiro S.A. with misleading U.S. investors by filing false financial statements that concealed a massive bribery and bid-rigging scheme at the company.  The U.S. Department of Justice also announced today a non-prosecution agreement with Petrobras.

The SEC’s order finds that senior Petrobras executives worked with Petrobras’s largest contractors and suppliers to inflate the cost of Petrobras’s infrastructure projects by billions of dollars.  The companies executing those projects paid billions in kickbacks to the Petrobras executives, who shared the illegal payments with Brazilian politicians who helped them obtain their high-level positions at Petrobras.  Petrobras erroneously recorded these payments as money spent to acquire and improve assets, resulting in an estimated $2.5 billion overstatement of assets.

The SEC’s order finds that Petrobras’s false and misleading filings included materially false and misleading statements to U.S. investors in a $10 billion stock offering completed in 2010.  The filings misrepresented Petrobras’s assets, infrastructure projects, the integrity of its management, and the nature of its relationships with its majority shareholder, the Brazilian government. 

“Petrobras fraudulently raised billions of dollars from U.S. investors while its senior executives operated a massive, undisclosed bribery and corruption scheme,” said Steven Peikin, Co-Director of the SEC Enforcement Division.  “If an international company sells securities in the United States, it must provide truthful information about its business operations.”

In connection with the settlement of the SEC’s charges and the non-prosecution agreement with the Department of Justice, Petrobras has agreed to pay a total of $933 million in disgorgement and prejudgment interest and an $853 million penalty. These payments are subject to offsets for, respectively, certain payments it makes to investors in a related class-action settlement and penalties paid to law enforcement authorities in Brazil.  The SEC’s order also establishes a Fair Fund to distribute the penalty received by the SEC to harmed investors.

The SEC’s investigation is continuing and being conducted by Lance Jasper, Rhoda Chang, and Maria Rodriguez with assistance from Carlos Costa-Rodrigues.  The case is being supervised by Spencer Bendell.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section, the Federal Bureau of Investigation, the Brazilian Federal Prosecution Service, the Brazilian Federal Police, and Brazil’s Comissão de Valores Mobiliários.

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 Proposes Amendments to Codify Exemption to Credit Rating Agency Rule

The Securities and Exchange Commission today announced that it has voted to propose rule amendments to codify an existing temporary exemption for credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs). 

Rule 17g-5(a)(3) under the Securities Exchange Act established a program to provide information necessary to determine a structured finance product’s credit rating to NRSROs that were not hired by the issuer, sponsor, or underwriter of the structured finance product.  Prior to the compliance date for Rule 17g‑5(a)(3), the Commission granted a temporary conditional exemption to the rule for certain structured finance products issued by non-U.S. persons and offered and sold outside the United States.  The Commission subsequently extended this exemption.

The amendments proposed by the Commission today would codify the existing temporary exemption to Rule 17g-5(a)(3) and clarify the exemption’s conditions.  The proposed amendments would also clarify the conditions applicable to similar exemptions in Exchange Act Rules 17g-7(a) and 15Ga-2 so that the approach among these exemptions remains consistent.  Rule 17g-7(a) requires an NRSRO to disclose certain information when it publishes a rating action.  Rule 15Ga-2 requires an issuer or underwriter to disclose the findings and conclusions of any third-party due diligence report it obtains with respect to an asset-backed security that is to be rated by an NRSRO.

“Proposing permanent relief in this area is a common sense step,” said Chairman Jay Clayton.  “The relief applies to products that are issued by non-U.S. persons and are offered and sold outside of the United States, and is consistent with the approach taken by the Commission in other contexts.”

The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register.

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FACT SHEET

Action

The Commission today proposed amendments that would codify an existing exemption to Exchange Act Rule 17g-5(a)(3) relating to ratings of structured finance products.  The proposed amendments would also clarify that the exemptions to Exchange Act Rules 17g-5(a)(3), 17g-7(a), and 15Ga-2 apply only if all offers and sales of a security or money market instrument by any issuer, sponsor, or underwriter linked to the security or money market instrument will occur outside the United States.

Highlights

The proposed amendment to Rule 17g-5(a)(3) would add a new paragraph to the rule to provide that the rule will not apply to an NRSRO when issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed securities transaction, if:

• the issuer of the security or money market instrument is not a U.S. person (as defined in Securities Act Rule 902(k)); and

• the NRSRO has a reasonable basis to conclude that all offers and sales of the security or money market instrument by any issuer, sponsor, or underwriter linked to the security or money market instrument will occur outside the U.S. (as that phrase is used in Regulation S under the Securities Act).

The proposed amendments to Rules 17g-7(a) and 15Ga-2 would conform the conditions of the existing exemptions to such rules to the conditions of the proposed exemption to Rule 17g-5(a)(3).  The proposed amendment to Rule 17g-7(a) would also clarify that the application of the conditions to the exemption applies differently in the case of rated obligors than it does in the case of rated securities or money market instruments.

Background

In 2009, the Commission adopted amendments to Rule 17g-5 that established a program by which an NRSRO that is not hired by an issuer, sponsor, or underwriter of a security or money market instrument issued by an asset pool or as part of any asset-backed securities transaction is able to obtain the same information that the issuer, sponsor, or underwriter provides to an NRSRO hired to determine a credit rating for such security or money market instrument.  The rule requires an NRSRO to maintain on a password-protected website a list of each structured finance product for which it currently is in the process of determining an initial credit rating and to provide free and unlimited access to any NRSRO that, among other things, certifies it will access the website solely for the purpose of determining and monitoring credit ratings.  The rule also requires, among other things, an NRSRO to obtain from the applicable arranger a written representation that can reasonably be relied upon that the arranger will maintain on a password-protected website the information it provides to the NRSRO and will provide access to the website to any NRSRO that, among other things, certifies it will access the website solely for the purpose of determining and monitoring credit ratings.  Prior to the June 2, 2010 compliance date for Rule 17g-5(a)(3), the Commission granted a temporary conditional exemption to the rule for certain offshore transactions issued by non-U.S. persons.  Such exemption has been extended several times and remains in effect.

In 2014, the Commission adopted Rules 17g-7(a) and 15Ga-2.  Rule 17g-7(a) requires an NRSRO, when taking a rating action, to publish an information disclosure form containing specified information about the related credit rating.  Rule 15Ga-2 requires the issuer or underwriter of an asset-backed security that is to be rated by an NRSRO to furnish a form to the Commission containing the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter.  Both rules include an exemption from the disclosure requirements for securities offered and sold outside the U.S.

What’s Next

The Commission will seek public comment on the proposed amendments to Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 15Ga-2 for 30 days following publication in the Federal Register.

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SEC Charges Firm With Deficient Cybersecurity Procedures

The Securities and Exchange Commission today announced that a Des Moines-based broker-dealer and investment adviser has agreed to pay $1 million to settle charges related to its failures in cybersecurity policies and procedures surrounding a cyber intrusion that compromised personal information of thousands of customers.

The SEC charged Voya Financial Advisors Inc. (VFA) with violating the Safeguards Rule and the Identity Theft Red Flags Rule, which are designed to protect confidential customer information and protect customers from the risk of identity theft.  This is the first SEC enforcement action charging violations of the Identity Theft Red Flags Rule.

According to the SEC’s order, cyber intruders impersonated VFA contractors over a six-day period in 2016 by calling VFA’s support line and requesting that the contractors’ passwords be reset. The intruders used the new passwords to gain access to the personal information of 5,600 VFA customers.  The SEC’s order finds that the intruders then used the customer information to create new online customer profiles and obtain unauthorized access to account documents for three customers.  The order also finds that VFA’s failure to terminate the intruders’ access stemmed from weaknesses in its cybersecurity procedures, some of which had been exposed during prior similar fraudulent activity.  According to the order, VFA also failed to apply its procedures to the systems used by its independent contractors, who make up the largest part of VFA’s workforce.

“Customers entrust both their money and their personal information to their brokers and investment advisers,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division.  “VFA failed in its obligations when its deficiencies made it vulnerable to cyber intruders accessing the confidential information of thousands of its customers.”

“This case is a reminder to brokers and investment advisers that cybersecurity procedures must be reasonably designed to fit their specific business models,” said Robert A. Cohen, Chief of the SEC’s Cyber Unit.  “They also must review and update the procedures regularly to respond to changes in the risks they face.”

Without admitting or denying the SEC’s findings, VFA agreed to be censured and pay a $1 million penalty, and will retain an independent consultant to evaluate its policies and procedures for compliance with the Safeguards Rule and Identity Theft Red Flags Rule and related regulations.

The SEC’s investigation was conducted by Arsen Ablaev of the Cyber Unit and Paul Montoya in the Chicago Regional Office.  The case was supervised by Kathryn Pyszka in the Chicago Regional Office and Mr. Cohen.  The examination that led to the investigation was conducted by the Chicago Regional Office with the assistance of the National Examination Program.  The examination team included Kristine Baker, Stacey Gohl, Thu Bao Ta, David Mueller, Daniel Dewaal and Emilie Abate.

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SEC Charges Former CEO of Chilean-Based Chemical and Mining Company With FCPA Violations

The Securities and Exchange Commission today announced that the former CEO of Chilean-based chemical and mining company Sociedad Química y Minera de Chile, S.A. (SQM) has agreed to pay $125,000 to resolve charges that he violated the Foreign Corrupt Practices Act (FCPA).

According to the SEC’s order, over the course of seven years, SQM’s then-CEO Patricio Contesse González caused SQM to make nearly $15 million in improper payments to Chilean political figures and others connected to them.  Last year, SQM paid $30 million to settle parallel civil and criminal charges against the company.

The SEC’s order against Contesse finds that he directed and authorized these improper payments through a discretionary CEO account.  The payments were supported by fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.  Contesse caused the related false accounting entries in SQM’s books and records and also lied to SQM’s independent auditor and signed false certifications in SQM’s filings.

“Corporate culture starts at the top, and when misconduct is directed by the highest level of management it is critical that they are held accountable for their conduct,” said Charles E. Cain, Chief of the SEC Enforcement Division’s FCPA Unit.

Contesse agreed to the settlement without admitting or denying the findings in the SEC’s order.

The SEC’s investigation was conducted by William B. McKean, Tanya G. Beard and Laurie J. Abbott.

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SG Americas Securities Charged for Improper Handling of ADRs

The Securities and Exchange Commission today announced that SG Americas Securities LLC will pay more than $800,000 to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs), predominantly by its predecessor entity.

In its order against SG Americas, a registered broker-dealer and subsidiary of Paris-based Société Générale S.A., the SEC found that the misconduct of predecessor entity Newedge USA LLC allowed pre-released ADRs to be issued that were not backed by the appropriate number of ordinary shares.  This is the fifth action against a depository bank or broker for abusive pre-release practices resulting from the SEC’s ongoing investigation into abuses involving pre-released ADRs.  Such practices have the potential to artificially inflate the total number of a foreign issuer’s tradeable securities, diluting existing shareholders’ equity.  In addition, some of the pre-released ADRs were used for short selling that may not otherwise have occurred, which could suppress the price of the issuer’s securities.  Information about ADRs is available in an SEC Investor Bulletin.

The SEC found that Newedge improperly provided thousands of pre-released ADRs over a more than three-year period when neither the broker nor its customers had the requisite shares.    

“The SEC continues to hold accountable those parties that abused the ADR markets,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “U.S. investors who invest in foreign companies through ADRs have a right to expect that issuances of those ADRs are properly backed by foreign shares.”

The SEC’s order finds that SG Americas violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel.  Without admitting or denying the SEC’s findings, SG Americas agreed to return more than $480,000 of alleged ill-gotten gains plus $82,000 in prejudgment interest and a $250,000 penalty, more than $800,000 in total.  The SEC’s order acknowledges the firm’s cooperation in the investigation and remedial acts.

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

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SEC Staff to Host Roundtable on Market Data and Market Access

The Securities and Exchange Commission announced today that its Division of Trading and Markets will host a two-day roundtable on October 25 and 26 on market data and market access.  The roundtable agenda is below.

The roundtable will be held at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and will be open to the public and webcast live on the Commission’s website. 

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Agenda

Day One – Assessing Current Market Data Products, Market Access Services, and Their Associated Fees

10:30 a.m.                   Opening Statements

10:45 a.m.                   Panel One – Overview of Current Landscape for Market Data Products and Market Access Services

Panel One will discuss the evolution in recent years of market data products and market access services, both those provided by the central securities information processors (SIPs) and those provided directly by national securities exchanges (Exchanges).  Has the evolution of SIP and Exchange products and services affected the ability of market participants to obtain the data and access needed to trade effectively in today’s market structure?

12:15 p.m.                   Lunch

1:00 p.m.                     Staff Presentation

1:15 p.m.                     Panel Two – SIP Core Data Products and Exchange Top-Of-Book Data Products     

Panel Two will focus on the extent to which SIP data products meet the needs of all or most market participants in today’s market structure.  What are the differences, such as latencies and data content, between the SIP data products and Exchange proprietary products?  What works well and does anything need to be improved with respect to SIP data products?

2:45 p.m.                     Break

3:00 p.m.                     Panel Three – Exchange Depth-Of-Book Data Products and Market Access Services

Panel Three will focus on those Exchange proprietary data products and access services that offer the most content and the lowest latencies. 

4:30 p.m.                     End of Day One

Day Two – Assessing Potential Steps to Improve Market Data Products and Market Access Services

9:00 a.m.                     Panel Four – Elements of the Core Data Infrastructure              

Panel Four will focus on potential steps to modernize the infrastructure for providing the market data products (Core Data) and market access services (Core Access) that market participants need to trade effectively in today’s market structure (collectively, the Core Data Infrastructure).  Should Exchanges disseminate Core Data directly from their respective data centers as a means to minimize geographic latencies?  If data vendors and market participants could obtain direct access to Core Data, would the current SIP model with a central plan processor be improved if there were multiple data aggregators?

10:30 a.m.                   Break

10:45 a.m.                   Panel Five – Governance of Core Data Infrastructure

Panel Five will focus on potential steps to improve the governance of the Core Data Infrastructure.  Issues for discussion may include confidentiality policies, use of executive sessions, conflicts of interest, and voting structure.

12:15 p.m.                   Lunch

1:15 p.m.                     Panel Six – Funding of Core Data Infrastructure

Panel Six will focus on potential steps to assure that a modernized Core Data Infrastructure is appropriately funded and that the associated fees and revenues are fair, reasonable, and not unreasonably discriminatory. 

2:45 p.m.                     Break

3:00 p.m.                     Panel Seven – Public Transparency

Panel Seven will conclude the Roundtable by focusing on the information available to the public about data products and access services, including their associated fees, revenues, costs, and respective latencies. 

4:30 p.m.                     End of Program

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SEC Awards Almost $4 Million to Overseas Whistleblower

The Securities and Exchange Commission today announced that it has awarded nearly $4 million to an overseas whistleblower whose tip led it to open an investigation and whose extensive assistance helped it bring a successful enforcement action. 

“Whistleblowers, whether they are located in the U.S. or abroad, provide a valuable service to investors and help us stop wrongdoing,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “This award recognizes the continued, important assistance provided by the whistleblower throughout the course of the investigation.” 

The SEC has now awarded over $326 million to 59 individuals since issuing its first award in 2012.  In that time, more than $1.7 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received by whistleblowers.

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.  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.

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 www.sec.gov/whistleblower.

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SEC Charges Unregistered Sales of Securities Issued Under EB-5 Immigrant Investor Program

The Securities and Exchange Commission today announced that an Illinois-based regional center, its CEO, and 37 affiliated limited partnerships have agreed to settle charges related to securities issued under the EB-5 Immigrant Investor Program, which provides foreigners who invest in the U.S. a potential path to becoming a U.S. resident.

According to the SEC’s order, from 2011 to 2015, 37 entities affiliated with CMB Export LLC offered EB-5 securities in the form of limited partnership interests without registering them with the SEC and without a valid exemption from registration.  The order also found that CMB Export, at the direction of its CEO Patrick Hogan, paid transaction-based compensation to U.S. individuals and entities for soliciting foreign investors to purchase these securities.  In 2015, CMB and Hogan began developing and implementing a compliance program to ensure compliance with the federal securities laws.

“All securities, including EB-5 securities, must comply with registration provisions, which are essential to protecting investors,” said Melissa R. Hodgman, Associate Director of the Division of Enforcement.  “In the EB-5 industry, strong compliance policies can help ensure that companies meet their registration obligations under the federal securities laws.” 

CMB Export and Hogan neither admitted nor denied the findings in the SEC’s order, which requires them to cease and desist from further violations of the broker-dealer registration requirements of the federal securities laws.  The CMB limited partnerships neither admitted nor denied the findings in the SEC’s order, which requires them to cease and desist from further violations of registration provisions of the federal securities laws.  The order also requires CMB Export to pay a $5.15 million penalty, Hogan to pay a penalty of $515,000, and each of the 37 CMB limited partnerships to pay a penalty of $160,000, for total monetary relief of $11.585 million.

The SEC’s investigation was conducted by Heather A. Powell, Sarah M. Hall, and D. Ashley Dolan and supervised by Melissa A. Robertson of the SEC’s Washington D.C. office.  The SEC appreciates the assistance of U.S. Citizenship and Immigration Services.

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Public Companies Charged With Failing to Comply With Quarterly Reporting Obligations

The Securities and Exchange Commission today announced charges against five public companies for failing to provide financial statements that were reviewed by their independent external auditor when they filed quarterly reports with the Commission on Form 10-Q.

Regulation S-X provides that interim financial statements must be subject to a review conducted by an independent external auditor prior to the statements being included in quarterly reports filed with the Commission.  This requirement helps to ensure that investors are provided timely, accurate, and reliable interim financial information on a periodic basis.

According to the SEC’s orders, each of the five companies filed one or more Forms 10-Q with interim financial statements where a review was not conducted prior to filing, as required by Regulation S-X.  These actions are the Commission’s first enforcement proceedings against an issuer for violating the Regulation S-X interim review requirement and resulted from a review of filings, staff comment letters and other metrics that indicated potential violations.  Each company agreed to settle the SEC’s charges, and the agency assessed a total of $250,000 in penalties.

“The Commission’s reporting rules are designed to help ensure that investors are provided timely access to reliable interim financial information about public companies in quarterly reports,” said Anita B. Bandy, an Associate Director in the SEC’s Enforcement Division. “Our data-driven investigative techniques led us to identify these companies, who had deprived investors of the benefit of the external auditor’s involvement by including financial statements in Forms 10-Q that had not been reviewed in accordance with Regulation S-X.”

The SEC’s orders find that the companies violated their reporting obligations under the Securities Exchange Act of 1934 by failing to comply with Regulation S-X.  Without admitting or denying the findings, the five companies agreed to a cease and desist order that made the following findings and requires payment of the following penalties:

• Cardiff Lexington Corporation – Filed one Form 10-Q with unreviewed financial statements.  The Florida-based company agreed to pay a penalty of $25,000.
• Cool Technologies Inc. – Filed three Forms 10-Q with unreviewed financial statements.  The Florida-based company agreed to pay a penalty of $75,000.
• Dasan Zhone Solutions Inc. – Filed two Forms 10-Q with unreviewed financial statements.  The California-based company agreed to pay a penalty of $50,000.
• First Hartford Corporation – Filed two Forms 10-Q with unreviewed financial statements.  The Connecticut-based company agreed to pay a penalty of $50,000.
• Infrax Systems Inc. – Filed two Forms 10-Q with unreviewed financial statements.  The Florida-based company agreed to pay a penalty of $50,000.

The SEC’s investigation, which is continuing, has been conducted by Kendra Kinnaird and Kristin Dieter and supervised by Fuad Rana.  The SEC appreciates the assistance of the Public Company Accounting Oversight Board. 

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SEC Staff to Host Nov. 15 Roundtable on the Proxy Process

The Securities and Exchange Commission today announced that its staff will host a roundtable on Nov. 15 to hear investor, issuer, and other market participant views about the proxy process and rules.

The proxy process is central to investors’ participation in corporate governance at U.S. public companies.  The roundtable will focus on key aspects of the U.S. proxy system, including proxy voting mechanics and technology, the shareholder proposal process, and the role and regulation of proxy advisory firms.  Chairman Jay Clayton previously announced that the staff would hold a roundtable on the proxy process in light of changes in the marketplace since the Commission issued a 2010 concept release soliciting feedback on the proxy system. 

The roundtable will be held at the SEC’s headquarters at 100 F Street, NE, Washington, DC, and will be open to the public and webcast live on the SEC’s website.  Further details on the agenda and participants will be forthcoming.

Members of the public who wish to provide their views on the proxy process and related SEC rules, either in advance of or after the roundtable, may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the roundtable and posted on the SEC’s website.  All comments received will be posted without change.  Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions.  You should submit only information that you wish to make publicly available.

Electronic Comments:

Use the SEC's Internet submission form or send an email to rule-comments@sec.gov.

Paper Comments:

Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. 

All submissions should refer to File Number 4-725, and the file number should be included on the subject line if email is used.

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Business Services Company and Former CFO Charged With Accounting Fraud

The Securities and Exchange Commission today charged the former chief financial officer of Barrett Business Services Inc. for his role in an accounting fraud involving BBSI’s workers’ compensation expenses. The SEC also charged BBSI in the accounting fraud and charged the company’s former controller for his role in improperly approving certain of the CFO’s accounting entries. Both BBSI and the former controller agreed to settle the Commission’s charges against them.  

The SEC’s complaint against BBSI’s former CFO James D. Miller, filed in federal district court in the Western District of Washington, alleges that Miller manipulated BBSI’s accounting records to hide the fact that its workers’ compensation expense was increasing relative to its revenue. According to the complaint, Miller took steps to conceal from BBSI’s independent auditor a third-party actuarial report concluding that BBSI needed to add tens of millions of dollars to its workers’ compensation liability. BBSI’s stock dropped 32 percent when the Vancouver, Washington-based firm announced it needed to restate its financial results to reflect increased workers’ compensation expenses.

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington today announced criminal charges against Miller.

“Investors depend on public company executives to be up front about their company’s financial condition, not to use accounting gimmicks to hide worrisome trends,” said Erin E. Schneider, Associate Director of the SEC’s San Francisco Regional Office. “As alleged in our complaint, Miller betrayed the trust placed in him by the company and its investors by engaging in a number of accounting shenanigans designed to manipulate BBSI’s financial results.”     

The SEC today instituted a settled administrative proceeding against BBSI for violations of the antifraud, books and records, internal accounting controls, and reporting provisions of the federal securities laws, and former Controller Mark Cannon for books and records violations. Without admitting or denying the SEC’s findings, BBSI agreed to pay a $1.5 million civil penalty and Cannon agreed to pay a $20,000 civil penalty and to be suspended from appearing and practicing before the Commission as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Cannon to apply for reinstatement after one year.  

BBSI CEO Michael Elich, who was not charged by the SEC, has reimbursed the company for $20,800 in cash bonuses he received during the period of the alleged accounting violations.  

The SEC’s investigation was conducted by Rahul Kolhatkar, Michael Foley, Chrissy Filipp, and Jason H. Lee, and the case was supervised by Monique Winkler and Jennifer Lee of the San Francisco Regional Office. The litigation against Miller will be led by Suzy LaMarca and Mr. Kolhatkar. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Washington and the Federal Bureau of Investigation.

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Pamela C. Dyson, Chief Information Officer, to Leave SEC

The Securities and Exchange Commission today announced that Pamela C. Dyson plans to leave the SEC to serve as executive vice president, head of the Technology Group, and Chief Information Officer (CIO) at the Federal Reserve Bank of New York.

Ms. Dyson joined the SEC in 2010, progressing through several positions of increasing responsibility in the Office of Information Technology (OIT). She became CIO in February 2015 after serving as Acting CIO for several months. During her time as CIO, she delivered the SEC’s 2018-2020 IT Strategic Plan, established the SEC’s core cloud capability in Amazon Web Services as well as its ongoing governance, created the IT Strategy and Innovation program to lead the SEC’s digital transformation efforts, and worked to develop and support the ongoing agency-wide cyber uplift program.

“Pam’s leadership and experience have been critical to maintaining the information technology capabilities we need to fulfill our mission while ensuring we address ever-evolving cyber threats,” said SEC Chairman Jay Clayton. “I thank her immensely for her service to the Commission and to America’s investors.”

“All of us at the Commission are deeply indebted to Pam for the hard work and dedication she has brought to her work as CIO,” said SEC Chief Operating Officer Kenneth Johnson. “We will continue to benefit from the important advances she brought to our technological systems and cybersecurity.”

“It has been an absolute honor to contribute to the important mission of this wonderful agency in its service to the citizens of America,” said Ms. Dyson. “I am equally grateful to have served alongside such a dedicated team of professionals across the Commission, and I am proud of the work we accomplished together.”

Ms. Dyson began her SEC career as Assistant Director for Enterprise Operations.  In that capacity, she managed day-to-day operations such as IT infrastructure and all enterprise operations for the SEC’s headquarters and its 11 regional offices. Before joining the SEC staff, Ms. Dyson was the Deputy CIO for the U.S. International Trade Commission.

Ms. Dyson received her Bachelor of Science degree from the University of Maryland in College Park.

Upon Ms. Dyson’s departure, Charles Riddle, the SEC’s Chief Technology Officer, will become the Acting Chief Information Officer.

Mr. Riddle joined the SEC in 2016 from the U.S. Government Publishing Office, where he served as Chief Information Officer beginning in 2011. He worked at the U.S. Department of Agriculture from 2005 to 2011 in several positions relating to information technology including Chief Technology Officer at USDA’s Food Safety Inspection Service. Prior to his government service, Mr. Riddle worked in the private sector at Booz Allen Hamilton and several organizations involved in telecommunications, including BetterWorld Telecom, Cable & Wireless, and NETtel Communications. He received his MBA from Johns Hopkins University and his BA from George Mason University.

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Christopher Hetner, Senior Advisor to the Chairman for Cybersecurity Policy, to Leave the Agency

The Securities and Exchange Commission today announced that Christopher R. Hetner, Senior Advisor to Chairman Jay Clayton for Cybersecurity Policy, plans to leave the agency. Mr. Hetner will remain in the Chairman's Office during the identification of and transition to his successor.    

Mr. Hetner previously served as Senior Advisor for Cybersecurity Policy for former Chair Mary Jo White and former Acting Chairman Michael Piwowar. Mr. Hetner helped to establish the position in 2016 to better coordinate cybersecurity policy efforts across federal financial regulators, enhance the SEC's ability to assess cyber-related market risks and improve the SEC's cybersecurity posture. In this role, Mr. Hetner has led efforts across SEC Divisions and Offices to manage cybersecurity priorities, strengthen cyber incident response planning and enhance threat intelligence capabilities. 

Mr. Hetner has served as SEC staff representative to the U.S. Treasury's Financial Banking Information Infrastructure Committee (FBIIC). In this capacity, Mr. Hetner provided leadership on enhancing coordination and cooperation among federal financial regulators through, among other things, expanding efforts to harmonize cybersecurity regulations, respond to cyber-attacks and enhance market-wide cyber threat assessments. Mr. Hetner has also served as SEC representative to the G-7 Cyber Expert Group.  

"The rapid evolution of technology and markets in the U.S. and globally continues to present both opportunities and challenges for regulators and market participants," said Chairman Jay Clayton. "During his time at the SEC, Chris has worked diligently to enhance the agency's cybersecurity capabilities and improve cybersecurity coordination among the financial regulatory community in the U.S. and abroad."   

Mr. Hetner said, "It has been an honor to work with so many professionals here at the SEC and across the U.S. government, industry and international regulatory community, who are all committed to protecting markets and investors. The implementation of fundamental and strategic improvements across the SEC will enhance its capabilities to protect market participants and the agency from cybersecurity threats." 

Prior to his current role as a Senior Advisor for Cybersecurity Policy, Mr. Hetner served as the Cybersecurity Leader for the Technology Control Program in the SEC's Office of Compliance Inspections and Examinations (OCIE). Mr. Hetner played an important role in leading the implementation of cyber event monitoring capabilities for Regulation SCI entities, leading industry outreach on cybersecurity topics, enhancing OCIE's cybersecurity examination procedures, and establishing cyber risk assessments for the agency’s Broker Dealer Large Firm Monitoring Program. He also served as a liaison in OCIE to the Division of Enforcement. 

Prior to joining the SEC, Mr. Hetner spent 20 years in a variety of senior cybersecurity and technology risk management roles in the private sector. More recently, Mr. Hetner led Ernst and Young's Wealth and Asset Management Cybersecurity practice, served as Global Chief Information Security Officer at GE Capital and led global information security programs as Senior Vice President in Citigroup’s Institutional Client Group.  

Mr. Hetner holds industry-leading certifications including the CISSP (Certified Information Systems Security Professional), NSA INFOSEC (National Security Agency Information Security) Assessment Certification, and CISM (Certified Information Security Manager). Mr. Hetner earned his M.S. in Information Assurance from Norwich University and his B.S in Security Management from The City University of New York’s John Jay College of Criminal Justice.

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SEC Provides Regulatory Relief and Assistance for Hurricane Victims

The Securities and Exchange Commission today announced that it is providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents, municipal advisors and others affected by Hurricane Florence.  The loss of property, power, transportation, and mail delivery due to the hurricane poses challenges for some individuals and entities that are required to provide information to the SEC and shareholders.  

To address compliance issues caused by Hurricane Florence, the Commission issued an order that conditionally exempts affected persons from certain requirements of the federal securities laws for periods following the weather event.  

The Commission also adopted interim final temporary rules that extend the filing deadlines for specified reports and forms that companies must file pursuant to Regulation Crowdfunding and Regulation A. 

* * *

ADDITIONAL INFORMATION

In connection with the Commission relief, issued in the order and interim final temporary rules, the Commission staff will take the following no-action positions with respect to affected parties’ obligations under the Exchange Act, the Securities Act, and the Investment Advisers Act:

• For purposes of eligibility to use Form S-3 (and for well-known seasoned issuer status, which is based in part on Form S-3 eligibility), a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements during the relief period if it was current and timely as of the first day of the relief period. After the relief period, a company will continue to be considered current and timely if it files any required report on or before Oct. 29, 2018.

• For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the exemptive order will be considered current in its Exchange Act filing requirements during the relief period if it was current as of the first day of the relief period.  After the relief period, a company will continue to be considered current if it files any required report on or before Oct. 29, 2018.

• Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the order will be considered to have a due date of Oct. 29, 2018.  As such, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the due date.

• During the period from Sept. 14, 2018 to Oct. 26, 2018, a registered open-end investment company and a registered unit investment trust will be considered to have satisfied the requirements of Section 5(b)(2) of the Securities Act to deliver a summary or a statutory prospectus, as applicable, to an investor, provided that: (1) the sale of shares to the investor was not an initial purchase by the investor of shares of the company or unit investment trust; (2) the investor’s mailing address for delivery, as listed in the records of the company or unit investment trust, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricane Florence, of the type or class customarily used by the company or unit investment trust, to deliver summary or statutory prospectuses; and (3) the company, or unit investment trust, or other person promptly delivers the summary or statutory prospectus, as applicable either (a) if requested by the investor, or (b) by the earlier (i) of Oct. 29, 2018 or (ii) the resumption of the applicable mail service.
• A registered investment adviser will be considered to have satisfied Form ADV filing requirements under Section 204(a) of the Advisers Act and Rule 204-1 thereunder, if:  (1) the registrant’s Form ADV filing deadline falls within the period from Sept. 14, 2018 to Oct. 26, 2018; (2) the registrant was or is not able to meet its filing deadline due to Hurricane Florence; and (3) the registrant makes the required Form ADV filing by Oct. 29, 2018.  
• During the period from Sept. 14, 2018 to Oct. 26, 2018, a registered investment adviser will be considered to have satisfied the requirements of Section 204 of the Advisers Act and Rule 204-3(b) thereunder to deliver the written disclosure statements required thereunder to its advisory client, provided that:  (1) the client’s mailing address for delivery, as listed in the records of the investment adviser, has a ZIP code for which the common carrier has suspended mail service, as a result of Hurricane Florence, of the type or class customarily used by the adviser to deliver written disclosure statements; and (2) the investment adviser or other person promptly delivers the written disclosure statement either (a) if requested by the client, or (b) at the earlier of (i) Oct. 29, 2018 or (ii) the resumption of the applicable mail service.

Some companies and other affected persons may require additional or different assistance in their efforts to comply with the requirements of the federal securities laws and therefore are encouraged to contact Commission staff.  The Commission staff will address these and any disclosure-related issues on a case-by-case basis in light of their fact-specific nature. 

SEC Press Release

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SEC Shuts Down $345 Million Fraud and Obtains Asset Freeze

The Securities and Exchange Commission today announced it has obtained a court order halting an ongoing Ponzi-like scheme that raised more than $345 million from over 230 investors across the U.S. The SEC also obtained an emergency asset freeze and the appointment of a receiver.

An SEC complaint unsealed yesterday alleges that Kevin B. Merrill, Jay B. Ledford and Cameron Jezierski attracted investors to their scheme by promising significant profits from the purchase and resale of consumer debt portfolios. But in fact, the defendants were allegedly using a web of lies, fabricated documents, and forged signatures in an elaborate scheme to entice investors and perpetuate the fraud. Rather than direct investor funds to the acquisition and servicing of debt portfolios as promised, the defendants allegedly used the funds to make Ponzi-like payments to earlier investors. The SEC also alleges that Merrill and Ledford stole at least $85 million of the investor funds to maintain lavish lifestyles, spending millions of dollars on luxury items, including $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club.  

"The defendants touted their purported investment expertise to siphon millions of dollars from unsuspecting investors," said Stephanie Avakian, Co-Director of the SEC's Division of Enforcement. "We filed this action on an emergency basis to put a stop to this fraud and protect investors from further harm."

"We allege that the defendants engaged in a brazen fraud, deceiving investors to perpetuate their wrongdoing and line their pockets with ill-gotten gains," said Kelly L. Gibson, Associate Regional Director of the SEC's Philadelphia Regional Office. "Investors should be warned that low-risk, high-return investments that never lose should be a red flag."

In a parallel action, the U.S. Attorney's Office for the District of Maryland today announced criminal charges against Merrill, Ledford, and Jezierski.

The SEC's complaint, filed on Sept. 13 in federal district court in Maryland, charges Merrill, Ledford, and Jezierski, along with their entities, Global Credit Recovery, LLC, Delmarva Capital, LLC, Rhino Capital Holdings, LLC, Rhino Capital Group, LLC, DeVille Asset Management LTD, and Riverwalk Financial Corporation, with violations of the antifraud provisions of the federal securities laws. The court granted the SEC's request for an asset freeze, temporary restraining order, and the appointment of a receiver. The SEC seeks disgorgement of allegedly ill-gotten gains and prejudgment interest, and financial penalties against the defendants.

The SEC's continuing investigation is being conducted by Norman P. Ostrove, Dustin E. Ruta, and Scott A. Thompson in the Philadelphia Regional Office and supervised by Ms. Gibson. The SEC's litigation is being led by Julia C. Green, Mark R. Sylvester, and Jennifer C. Barry. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of Maryland 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 Staff to Host Roundtable on Regulatory Approaches to Combating Retail Investor Fraud

The Securities and Exchange Commission announced today that its Division of Trading and Markets will host a roundtable on Sept. 26 on combating retail investor fraud. The Commission staff is interested in views from a broad range of market participants, regulators and industry experts concerning potential steps that might be taken to enhance the ability of regulators, broker-dealers and others to combat retail investor fraud. 

The roundtable will be held at the SEC's headquarters at 100 F Street, N.E., Washington, D.C. and will begin at 9:30 a.m. ET. The roundtable will be open to the public and webcast live on the Commission’s website. Information on the agenda and participants will be issued shortly.

Members of the public who wish to provide their views on the topic may submit comments electronically or on paper. Please submit comments using one method only. Information that is submitted will become part of the public record of the roundtable and posted on the Commission's website. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

Electronic Comments:

Use the Commission's Internet comment form or send an e-mail to rule-comments@sec.gov. Please include File Number 265-31 on the subject line.

Paper Comments:

Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-31, and the file number should be included on the subject line if email is used.

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.

Biopharmaceutical Company, Executives Charged With Misleading Investors About Cancer Drug

The Securities and Exchange Commission today announced that a Boulder, Colorado-based biopharmaceutical company, its CEO, and its former CFO will pay more than $20 million in penalties to settle charges of misleading investors about the company’s developmental lung cancer drug. 

The SEC’s complaint filed in federal court in Denver alleges that over a four-month period starting in July 2015, Clovis Oncology Inc. and CEO Patrick Mahaffy misled investors about how well Clovis’ flagship lung cancer drug worked compared to another drug. According to the complaint, the company’s investor presentations, press releases, and SEC filings stated that the drug was effective 60 percent of the time, far higher than suggested by actual results available internally. Clovis raised approximately $298 million in a public stock offering in July 2015, and saw its stock price collapse in November 2015 after disclosing that the effectiveness rate was actually 28 percent. The company stopped development on the drug in May 2016.

“Biopharma companies cannot mislead investors about efficacy results,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “As we allege here, the data available to Clovis and its executives should have alerted them to the inaccuracy of the claims about the effectiveness of its developmental drug.”

According to the SEC’s complaint, in evaluating Clovis’ stock, investors closely followed prospects for its lung cancer drug rociletinib, or Roci, and an important driver was its “efficacy,” or how well the drug worked. In May 2015, Clovis disclosed in an investor presentation that Roci’s efficacy was 60 percent, meaning that in 60 percent of patients Roci caused targeted tumors to shrink. The complaint alleges that soon after, certain data provided to Mahaffy and Erle Mast, the company’s CFO at that time, showed that Roci’s efficacy rate was substantially lower and by early July 2015, Mahaffy and Mast learned that the efficacy for Roci at that time was 42 percent. Clovis continued referring to the 60 percent efficacy figure, including in the solicitation materials for the July 2015 offering and afterward. In November 2015, after Clovis disclosed the true efficacy using the methodology required by the U.S. Food and Drug Administration, its stock price dropped approximately 70 percent.

The SEC’s complaint charges Clovis with violating Section 17(a)(2) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934. The complaint charges Mahaffy with violating Section 17(a)(2) and aiding and abetting Clovis’ violations of Section 13(a). The complaint charges Mast with aiding and abetting Clovis’ federal securities laws violations. The defendants agreed to the settlements without admitting or denying the allegations and the settlements are subject to court approval. Clovis agreed to a $20 million penalty. Mahaffy agreed to a $250,000 penalty. Mast agreed to pay a $100,000 penalty and to provide disgorgement and prejudgment interest of $454,145, attributable to selling Clovis stock during the relevant period at inflated prices. The SEC plans to seek the creation of a Fair Fund for distribution of the penalties to harmed investors.

The SEC’s investigation was conducted by Michael Cates and Kim Greer and supervised by Ian Karpel and Kurt Gottschall in the Denver Regional Office.  

SEC Press Release

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SeaWorld and Former CEO to Pay More Than $5 Million to Settle Fraud Charges

The Securities and Exchange Commission today announced that SeaWorld Entertainment Inc. and its former CEO have agreed to pay more than $5 million to settle fraud charges for misleading investors about the impact the documentary film Blackfish had on the company’s reputation and business. SeaWorld’s former vice president of communications also agreed to settle a fraud charge for his role in misleading SeaWorld’s investors.

Blackfish criticized SeaWorld’s treatment of its orcas (killer whales) and received significant media attention as the film became more widely distributed in the latter half of 2013. The SEC’s complaint alleges that from approximately December 2013 through August 2014, SeaWorld and former CEO James Atchison made untrue and misleading statements or omissions in SEC filings, earnings releases and calls, and other statements to the press regarding Blackfish’s impact on the company’s reputation and business. According to the SEC’s complaint, on Aug. 13, 2014, when SeaWorld for the first time acknowledged that its declining attendance was partially caused by negative publicity, SeaWorld’s stock price fell, causing significant losses to shareholders.

“This case underscores the need for a company to provide investors with timely and accurate information that has an adverse impact on its business. SeaWorld described its reputation as one of its ‘most important assets,’ but it failed to evaluate and disclose the adverse impact Blackfish had on its business in a timely manner,” said Steven Peikin, Co-Director of the SEC Enforcement Division.   

The SEC’s complaint, filed in federal court in New York, charges SeaWorld and Atchison with violating antifraud provisions of the federal securities laws and charges SeaWorld with reporting violations. SeaWorld and Atchison have agreed to settle the SEC’s charges without admitting or denying the allegations, with SeaWorld paying a $4 million penalty and Atchison paying over $1 million in penalty and disgorgement.  

SeaWorld’s former vice president of communications, Frederick D. Jacobs, agreed to settle a fraud charge and to pay disgorgement and prejudgment interest of approximately $100,000. He was not assessed a penalty, reflecting his substantial assistance in the SEC’s investigation. All of the settlements are subject to court approval.

The SEC’s investigation was conducted by James Lyman and Lee Robinson and supervised by Ian Karpel and Kurt Gottschall of the Denver 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.