SEC Names Gabriel Benincasa As Its First Chief Risk Officer

The Securities and Exchange Commission today announced that Gabriel Benincasa has been named the Commission’s first Chief Risk Officer.  This position was created by SEC Chairman Jay Clayton to strengthen the agency’s risk management and cybersecurity efforts.

As Chief Risk Officer, Mr. Benincasa will coordinate the SEC’s continued efforts to identify, monitor, and mitigate key risks facing the Commission.  Working within the SEC’s Office of the Chief Operating Officer, he will also serve as a key adviser on other matters related to enterprise risks and controls.  Julie Erhardt, who had been serving as Acting Chief Risk Officer while the SEC completed its recruitment efforts, will return to her role as Deputy Chief Accountant for Technology and Innovation in the Commission’s Office of the Chief Accountant.

“Establishing the Chief Risk Officer position at the SEC is an important step forward in our continuing efforts to strengthen the agency’s risk management program,” said Chairman Jay Clayton.  “Gabe is an experienced senior leader with deep risk, legal, compliance, and financial markets expertise.  I am certain we will benefit from his advice and insights.  I also want to thank Julie for giving us a running start on this initiative.”

“I look forward to working with Gabe to maintain a robust risk management program at the agency,” said Ken Johnson, the SEC’s Chief Operating Officer.  “Gabe’s strong background in risk management positions him well to help the SEC continue to evaluate a wide range of current and emerging challenges, whether related to our markets, cybersecurity, or our own operations.”

Mr. Benincasa added, “It is an honor to serve America’s investors and markets as the SEC’s first Chief Risk Officer.  I look forward to joining the team and building upon existing programs to help the agency tackle current and future challenges.”

Mr. Benincasa brings to the SEC significant experience in senior leadership roles in risk and compliance in the financial sector. He began his legal career as an attorney at Davis Polk & Wardwell before working for Morgan Stanley and other financial firms. He has served in roles including as Director of Enterprise Risk Management and Vice Chair of the Risk Control Committee for a financial services holding company; Deputy Global Head of Operational Risk Management for an investment bank; General Counsel and Chief Compliance Officer for an institutional asset management company; and Global Head of Compliance for a financial technology company.

Mr. Benincasa is an attorney and a Certified Public Accountant. He earned his J.D. from Fordham Law School and a Bachelor’s in Business Administration from Baruch College.

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SEC Modifies Timing for Filing Non-Public Form N-PORT Data to Align With Its Approach to Data Management and Cybersecurity

The Commission today modified the submission deadlines for registered investment companies filing non-public monthly reports on Form N-PORT. Form N-PORT is a new form for reporting both public and non-public fund portfolio holdings to the Commission in a structured data format.  As a result of today's changes, rather than filing non-public monthly reports with the Commission within 30 days after each month-end, funds will be required to maintain the relevant information in their records and file all three monthly reports with the Commission no later than 60 days after the end of each fiscal quarter.  The non-public monthly reports on Form N-PORT for the first and second months of the fiscal quarter will remain non-public and the monthly report for the third month will become publicly available upon filing (with the exception of certain specific data items), rather than being filed non-publicly no later than 30 days after the end of the fiscal quarter and being made public 60 days after the end of the fiscal quarter.  

Importantly, the amount and timing of the information on Form N-PORT that will be made available to the public will not change. 

As part of its approach to data management and cybersecurity, the Commission periodically assesses whether alternatives exist that would allow the Commission to fulfill its mission while reducing the sensitivity of the data that it collects.  The Commission has determined that allowing funds to report this monthly data at quarter end – while not changing the amount or substance of the data – will allow the Commission to fulfill its mission while reducing its cyber risk profile.  

"I applaud the staff’s efforts to evaluate our data needs and cybersecurity risk profile and believe this revised approach to the receipt of new, non-public monthly Form N-PORT data enables the Commission to receive and analyze this new data while meaningfully reducing the sensitivity of that data at the time it is transmitted to the Commission," said Chairman Jay Clayton. 

Filing Form N-PORT through the EDGAR system will begin in April 2019 for larger fund groups and in April 2020 for smaller fund groups.

SEC Press Release

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SEC Names Vanessa Countryman Acting Secretary

The Securities and Exchange Commission today announced that Vanessa Countryman has been named Acting Secretary.  Ms. Countryman will replace Brent Fields, who is stepping down as Secretary effective March 11, 2019, to accept a position in the Commission's Division of Investment Management.

For the past five years, Ms. Countryman has served as Chief Counsel in the Division of Economic and Risk Analysis (DERA), where she has actively participated in numerous significant rulemakings, ensuring the effective use of economic analysis across the agency. Between 2010 and 2012, Ms. Countryman served as Counsel to two SEC Commissioners, where she provided legal advice on regulatory and enforcement matters.

Within the SEC, the Office of the Secretary plays a central role in ensuring the effective processing of Commission business.  Office staff, among other things, review all documents submitted to the Commission, track documents submitted to the Commission, schedule Commission meetings in accordance with the Government in the Sunshine Act, maintain records of official Commission actions, and provide public notice of those actions on the SEC.gov website and in the Federal Register.

"I appreciate Vanessa's willingness to step into the role of Acting Secretary during this time," said SEC Chairman Jay Clayton. "Her deep knowledge of agency procedures and strong relationships with Commissioners and senior staff across the divisions and offices will help ensure the Commission continues to run smoothly."

Ms. Countryman added, "It is a great honor to be asked to serve in this role. I look forward to working with and supporting the Office of the Secretary's exceptional team to carry out the Commission's work on behalf of investors."

Prior to joining the SEC, Ms. Countryman practiced law at Gibson, Dunn & Crutcher LLP, representing clients in regulatory matters.

Ms. Countryman earned her J.D. from the University of Chicago.  She earned a Master's degree from Oxford University and a B.A. from Columbia University.

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Brent J. Fields Named Associate Director in the Division of Investment Management

The Securities and Exchange Commission today announced that Brent J. Fields has been named Associate Director of Disclosure Review and Accounting in the Division of Investment Management.

Mr. Fields is a 23-year SEC veteran who has served as Secretary of the Commission since 2014. As Secretary, he is responsible for leading the office in its central role of ensuring the effective processing of Commission business. Among the office’s responsibilities are the review of all SEC documents submitted to and approved by the Commission and the preparation and maintenance of the records of Commission actions, including dissemination of those actions to the public. 

In his new role, Mr. Fields will oversee the division’s disclosure and accounting review programs. He will be primarily responsible for the implementation of disclosure and accounting policy that impacts nearly 16,000 investment companies, including open-end, closed-end, exchange-traded funds, unit investment trusts, and business development companies.  

“During my time at the Commission, I have had the opportunity to see Brent’s dedication to the SEC and its mission firsthand,” said SEC Chairman Jay Clayton.  “Brent is a proven leader who engenders an environment of respect, purpose, and achievement. Our Main Street investors are fortunate to have an individual of his caliber leading an office that plays a key part in ensuring transparency in our capital markets.”

“We are excited to have Brent rejoin the Division,” said Dalia Blass, Director of the Division of Investment Management.  “Brent is a well-respected and talented leader.  His professional expertise as a lawyer and C.P.A., as well as his comprehensive experience with agency processes and procedures will help the Division continue to look out for the long term interests of Main Street investors.”

“I look forward to returning to the office where I began my investment company career, and working with the dedicated team in that office,” said Mr. Fields. “The disclosure and accounting staff perform a vital function, informing and protecting investors – particularly retail investors – and I am excited to return to that role.”

Before becoming Secretary, Mr. Fields held a variety of positions within the SEC. He first joined the agency’s Division of Enforcement in 1996 and moved to the Division of Investment Management later the following year where he held various leadership roles.  From 2002 to 2004, he served as a counsel to then-SEC Commissioner Paul S. Atkins. Mr. Fields has also served as an Assistant Director leading an office that reviews the disclosures of investment companies and as the Assistant Director leading a disclosure rulemaking office.  In those capacities he was instrumental in the implementation of the SEC’s mutual fund disclosure reform initiative, which included a new summary prospectus to give fund investors a concise, plain English description of the key information needed to make informed investment decisions.

Prior to joining the SEC, Mr. Fields worked as an associate at the law firm of Fulbright & Jaworski L.L.P. in Washington D.C.  After law school, Mr. Fields clerked for the Honorable Anthony A. Alaimo in the U.S. District Court for the Southern District of Georgia. 

Mr. Fields earned his J.D. cum laude from University of Georgia School of Law and his bachelor’s degree in accounting from Virginia Tech.
 

SEC Press Release

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SEC Names S.P. Kothari as Chief Economist and Director of the Division of Economic and Risk Analysis

The Securities and Exchange Commission today announced that S.P. Kothari has been named Chief Economist and Director of the agency’s Division of Economic and Risk Analysis (DERA).  Dr. Chyhe Becker, who has served as DERA’s Acting Director while the SEC completed its search, will continue to serve both as Deputy Director and Associate Director of Litigation Economics.

Mr. Kothari joins the SEC from the Sloan School of Management at the Massachusetts Institute of Technology (MIT), where he is a professor of accounting and finance and recently ended a six-year term as Deputy Dean of MIT Sloan School of Management.

“S.P. brings with him wide-reaching insight from his decades spent as a leader in applying sophisticated research to the operation of our financial markets, including firsthand experience from his time in the private sector,” said SEC Chairman Jay Clayton.  “His leadership will guide DERA well in the research and analysis it provides in support of the Commission’s work on behalf of Main Street investors.  I also want to thank Chyhe for her exemplary leadership as Acting Director of the division over the last year.”

“I am delighted to welcome S.P. to DERA.  His warm and thoughtful leadership is an excellent fit for the division and will serve us well in our role in providing economic analysis to help the Commission fulfill its mission,” said Dr. Becker.

“I am honored to join the SEC’s team of dedicated economists, whose work is well-known and respected throughout the discipline,” said Mr. Kothari.  “I look forward to working with the staff and the Commission to explore the important economic issues affecting investors and our markets.”

Mr. Kothari has spent nearly two decades at MIT, both as a professor and as an administrator.  He has also been Co-Chair of the Board of Governors Asia School of Business, Kuala Lumpur, faculty director of the MIT-India Program, and editor of the academic publication Journal of Accounting & Economics.   In 2008, he served as global head of equity research for Barclays Global Investors, where he was responsible for research supporting the firm’s active equity strategies and for managing a team of approximately 50 PhDs based around the world.

Mr. Kothari earned his B.S in Engineering from the Birla Institute of Technology and Science and his MBA from the Indian Institute of Management.  He completed his PhD from the University of Iowa.

SEC Press Release

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SEC Halts South Florida Alternative Investments Scheme Targeting Retail Investors

The Securities and Exchange Commission today announced fraud charges and an asset freeze against the operators of a South Florida-based investment fund scheme, one of whom has a prior felony conviction and is on parole after nearly 20 years in prison.

The SEC filed an emergency action in federal district court against Castleberry Financial Services Group LLC, president T. Jonathon Turner, formerly known as Jon Barri Brothers, and CEO Norman M. Strell, alleging that in the past year they have defrauded investors out of $3.6 million. According to the SEC's complaint unsealed Feb. 25, 2019, Castleberry falsely represented to investors it had hundreds of millions of dollars in capital invested in local businesses and a portfolio of hundreds of investment properties. Castleberry claimed to offer high yields while protecting investors' principal by having it "fully insured and bonded" by CNA Financial Corp. and Chubb Group, when the insurance companies had no relationship with Castleberry and did not authorize it to use their logos in Castleberry's sales materials.

The SEC's complaint alleges that Turner and Strell misused investor funds to pay personal expenses and transferred other funds to businesses they controlled and to family members. The complaint also alleges that Castleberry falsely stated on its website and in promotional materials that Turner has extensive finance industry experience, a MBA degree, and a law degree, while concealing that Turner has been convicted of multiple fraud, theft, and forgery felonies and was imprisoned from 1998 until 2016.

"We received an investor tip during the partial government shutdown that provided critical evidence. The team then moved quickly to halt the alleged ongoing fraud," said Eric I. Bustillo, Director of the Miami Regional Office. "We encourage anyone that suspects potential investment fraud to report it to the SEC."

The Honorable Judge Robin L. Rosenberg of the U.S. District Court for the Southern District of Florida granted the SEC's request for a temporary restraining order and temporary asset freeze against the defendants, and issued an order directing the defendants to provide a sworn accounting.

The SEC's investigation, which is continuing, is being led by Eric E. Morales and Fernando Torres in the Miami Regional Office and supervised by Jason R. Berkowitz and Glenn S. Gordon. The SEC's litigation is being led by Alejandro O. Soto and Mr. Morales, under the supervision of Andrew O. Schiff. The SEC appreciates the assistance of Florida's Office of Financial Regulation.

SEC Press Release

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Giles Cohen Named Acting Chief Counsel, Office of the Chief Accountant

The Securities and Exchange Commission today announced that Giles Cohen has been named Acting Chief Counsel, Office of the Chief Accountant (OCA). 

Mr. Cohen joined the SEC in 2005 as senior counsel in the Division of Enforcement, and later served as counsel in the Office of Commissioner Luis Aguilar. Mr. Cohen has served as OCA's Deputy Chief Counsel since May 2016.

"Giles is widely respected by his colleagues throughout the Commission for his steady and thoughtful counsel," said Chairman Jay Clayton. "I want to thank him for taking on this important role in support of the Commission and OCA."

"Giles has a deep knowledge of the U.S. financial reporting system, the oversight activities for the Financial Accounting Standards Board and the Public Company Accounting Oversight Board, the disqualification and reinstatement of accountants, and the other responsibilities of OCA," said SEC Chief Accountant Wes Bricker. "Giles is widely known and trusted throughout the Commission not only for his thoughtful counsel and insights to even the most challenging questions, but also for the generosity with which he shares his time and talents with his colleagues."

"I am excited and grateful for this opportunity to continue to work alongside the talented and dedicated staff in the Office of the Chief Accountant as we advance the Commission's mission, including the protection of investors, through the promotion of high quality financial reporting," said Mr. Cohen.   

Before joining the SEC, Mr. Cohen served as securities counsel at the law firm of WilmerHale, and prior to that as an attorney at the law firm of Davis Polk and Wardwell. Mr. Cohen received his law degree from the University of Pennsylvania Law School, where he was a comments editor on the University of Pennsylvania Law Review.  He received his B.A. in Government from Cornell University.

The Office of the Chief Accountant is responsible for accounting and auditing matters arising in the Commission’s administration of the federal securities laws, such as oversight activities of standard setting organizations and the PCAOB.

SEC Press Release

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SEC Names James P. McNamara as Chief Human Capital Officer

The Securities and Exchange Commission today announced that James P. McNamara has been named the agency’s Chief Human Capital Officer (CHCO) and Director of the Office of Human Resources (OHR).  Mr. McNamara has served as Acting CHCO since April 2018.  As CHCO, Mr. McNamara will manage the agency’s human resources programs and policies in areas such as leadership and employee development, recruitment and retention, labor relations, performance management, and compensation and benefits, and will continue to play a key role in driving efforts to sustain a high performing, highly engaged SEC workforce.

“I am very pleased to appoint Jamey as our Chief Human Capital Officer,” said SEC Chairman Jay Clayton.  “Jamey brings a breadth of experience and expertise that will greatly assist us in our continuous efforts to recruit, develop, and retain an effective and diverse team to accomplish the SEC’s mission. As Acting CHCO, he has demonstrated exceptional creativity and dedication to the SEC’s workforce.”

“The SEC’s exceptional workforce is our greatest asset, and Jamey’s role is critical for the success of the agency,” said Chief Operating Officer Kenneth A. Johnson.  “With Jamey’s deep knowledge of human capital management, understanding and concern for the needs of SEC employees, and strong business acumen, he is the right choice to lead the agency’s human capital initiatives.”

Mr. McNamara added, “I am greatly honored to have the opportunity to lead the talented team of professionals in OHR, and look forward to working together to provide outstanding human capital services to our team across the agency.”    

Mr. McNamara previously served as Deputy CHCO since 2014, where, among other duties, he provided leadership to the agency’s labor-management program and made critical contributions to a multi-year effort to improve organizational culture and employee engagement.  In 2016, he received the Chair’s “Leading for the Future Award” in recognition of his role in implementing a range of new programs focused on fostering strong leadership skills and developing a pipeline of potential managers and senior executives.

Prior to joining the Office of Human Resources, Mr. McNamara was the first Managing Executive for the SEC’s Division of Trading and Markets, where he provided operational support and advised senior leadership on human capital strategy, information technology, and process improvement initiatives.  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 the Justice Department’s Civil Division. 

Mr. McNamara received his bachelor’s degree from Brown University.

SEC Press Release

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SEC Charges Broker-Dealer and Transfer Agent in Microcap Shell Factory Fraud

The Securities and Exchange Commission today announced charges against a broker-dealer, a transfer agent, and three individuals for their roles in the creation of over a dozen undisclosed “blank check” companies from 2009 to 2014. 

In its complaint, the SEC alleges that broker-dealer Spartan Securities Group, Ltd. and transfer agent Island Capital Management LLC, which does business as Island Stock Transfer, helped create and sell at least 19 purportedly legitimate public companies that were in fact shams.  To effectuate the scheme, the complaint alleges that Spartan Securities filed fraudulent applications with Financial Industry Regulatory Authority (FINRA) to publicly list the companies’ common stock and ultimately enable the shares to become free-trading and available to public investors.  The complaint also alleges that Spartan Securities’ principals, Carl E. Dilley and Micah J. Eldred, signed the false applications even though they knew or at least were reckless that the companies were fake and David D. Lopez failed to investigate red flags raised by FINRA or even familiarize himself with the companies.  The SEC further alleges that Island Stock Transfer and Dilley facilitated the public sale of the stock of at least 12 of the sham companies through the bulk issuance and transfer of the “free-trading” securities. 

“Broker-dealers are critical gatekeepers protecting the integrity of our markets, with obligations under our rules to fulfill that role,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “We allege, however, that Spartan Securities and three of its principals failed as gatekeepers by enabling multiple illicit supply chains of undisclosed blank check companies.”

The SEC alleges that the defendants violated provisions of the federal securities laws, including Exchange Act Rule 15c2-11, that prohibit fraudulent misconduct by registered broker dealers. 

Between 2015 and 2018, the SEC filed multiple enforcement actions in related schemes to sell “blank check” companies.  Broker-dealers that initiate or resume the publication of quotations in over-the-counter securities should be mindful of their obligations under the SEC rules, including Rule 15c2-11.  For further guidance on the scope of the relevant rules, including a discussion of red flags, please see the Appendix to Publication or Submission of Quotations Without Specified Information, 64 FR 11124, 11145 (March 8, 1999). 

The SEC’s investigation was conducted by Jeffrey Cook and supervised by Eric Busto and Glenn Gordon in the Miami Regional Office.  The SEC’s litigation will be led by Christine Nestor and Wilfredo Fernandez.

SEC Press Release

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Company Settles Unregistered ICO Charges After Self-Reporting to SEC

The Securities and Exchange Commission today charged Gladius Network LLC with conducting an unregistered initial coin offering (ICO), which the company self-reported to the SEC.  

According to the SEC’s order, Gladius conducted an ICO in late 2017, after the Commission had warned in its DAO Report of Investigation that ICOs can be securities offerings.  Gladius, a Washington, DC-based company, raised approximately $12.7 million in digital assets to finance its plan to develop a network for renting spare computer bandwidth to defend against cyberattacks and enhance delivery speed.  Gladius did not register its ICO under the federal securities laws, and the ICO did not qualify for an exemption from registration requirements. 

Gladius self-reported to the SEC’s Enforcement staff in the summer of 2018, expressed an interest in taking prompt remedial steps, and cooperated with the investigation.  The SEC did not impose a penalty because the company self-reported the conduct, agreed to compensate investors, and will register the tokens as a class of securities.  The case follows the Commission’s two recent ICO registration cases, in which companies agreed to pay penalties for similar registration violations and agreed to similar undertakings. 

“The SEC has been clear that companies must comply with the securities laws when issuing digital tokens that are securities,” said Robert A. Cohen, Chief of the SEC’s Cyber Unit.  “Today’s case shows the benefit of self-reporting and taking proactive steps to remediate unregistered offerings.”

Pursuant to the order, Gladius undertakes to return funds to those investors who purchased tokens in the ICO and request a return of funds, and register its tokens as securities pursuant to the Securities Exchange Act of 1934.  Gladius also will file required periodic reports with the Commission.  Gladius consented to the order without admitting or denying the findings.

The investigation was conducted by Laura K. D’Allaird and Marc E. Johnson of the Enforcement Division’s Cyber Unit and was supervised by Mr. Cohen.

SEC Press Release

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SEC Proposes to Expand “Test-the-Waters” Modernization Reform to All Issuers

The Securities and Exchange Commission voted to propose an expansion of a popular modernization reform that would permit investor views about potential offerings to be taken into account at an earlier stage in the process than is the case today. The new rule and related amendments would expand the "test-the-waters" accommodation—currently available to emerging growth companies or "EGCs"—to all issuers, including investment company issuers.  

This proposal would allow all prospective issuers, not just EGCs, to gauge market interest in a possible initial public offering or other proposed registered securities offering by permitting discussions with certain investors prior to the filing of a registration statement. The proposed reform builds on a popular similar provision of the Jumpstart Our Business Startups Act (JOBS Act) that has been limited to EGCs. Generally, companies with more than $1 billion in annual revenues do not qualify as EGCs and, therefore, have not benefitted from JOBS Act provisions intended to foster capital formation in the public markets. The proposed rule follows action taken by the Division of Corporation Finance in 2017 to extend another EGC reform to all issuers: the ability to initially submit certain filings in draft, non-public form. As a result of that policy change, all issuers, not just EGCs, have been able to make non-public filings with the SEC as they begin the process of becoming a public company.  

"Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies," said SEC Chairman Jay Clayton. "I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering."

The proposed test-the-waters rule and related amendments are intended to provide increased flexibility to issuers with respect to their communications with institutional investors about contemplated registered securities offerings, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.  

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

***

FACT SHEET

Solicitations of Interest Prior to a Registered Public Offering

Feb. 19, 2019

Action

The Securities and Exchange Commission proposed a rule and related amendments under the Securities Act that would enable all issuers to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). The expanded test-the-waters provision, as proposed, would provide all issuers with appropriate flexibility in determining when to proceed with a registered public offering while maintaining investor protections. 

Background

In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which created Section 5(d) of the Securities Act. Section 5(d) permits an emerging growth company (EGC) and any person acting on its behalf to engage in oral or written communications with potential investors that are QIBs and IAIs before or after filing a registration statement to gauge such investors’ interest in a contemplated securities offering. The proposed rule will extend the "test-the-waters" provision to non-EGCs and thereby encourage more issuers to consider entering our public equity markets.

Highlights and the Proposal

Proposed Securities Act Rule 163B

Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.  

Under the proposed rule: 

• there would be no filing or legending requirements;
• test-the-waters communications may not conflict with material information in the related registration statement; and
• issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

What’s Next?

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

SEC Press Release

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SEC Files Charges in Elaborate Microcap Stock Fraud

The Securities and Exchange Commission today announced charges against four individuals and related businesses for their roles in two microcap frauds and unlawful securities offerings.  In sum, the alleged illegal transactions resulted in proceeds of more than $25 million.

According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock.  The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally.  The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public.  The complaint alleges that Marc Manuel, Magna Group’s former head of research and due diligence, personally negotiated and executed the sham transactions. 

The complaint also alleges that in November 2013, Magna Equities II, which also was wholly-owned by Sason, and Manuel, purchased another fake promissory note from Pallas Holdings.  Magna Equities II and the note’s issuer, NewLead Holdings Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement.  To obtain approval of the settlement, Sason and Magna Equities II falsely swore to the court that the fake promissory note was a bona fide debt of NewLead.  Kautilya “Tony” Sharma and Perian Salviola, who controlled Pallas Holdings, are alleged to also have participated in the scheme. 

“As alleged in our complaint, Magna Group and its co-defendants used fake debt instruments to unlawfully obtain shares in microcap companies, which they then dumped on unsuspecting retail investors,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “This action demonstrates the resolve of the SEC in pursuing fraudsters who use elaborate financing schemes to engage in securities fraud.”

The SEC’s investigation was conducted by Lee A. Greenwood, Philip A. Fortino, John O. Enright, Christopher Ferrante, Diego Brucculeri, and Sheldon L. Pollock of the New York office.  The SEC’s litigation will be handled by Messrs. Fortino, Greenwood, Enright, and Alexander M. Vasilescu.  The case is being supervised by Mr. Wadhwa. 

SEC Press Release

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SEC Charges Cognizant and Two Former Executives With FCPA Violations

Cognizant Technology Solutions Corporation has agreed to pay $25 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA), and two of the company’s former executives were charged for their roles in facilitating the payment of millions of dollars in a bribe to an Indian government official. 

The Securities and Exchange Commission’s complaint alleges that in 2014, a senior government official of the Indian state of Tamil Nadu demanded a $2 million bribe from the construction firm responsible for building Cognizant’s 2.7 million square foot campus in Chennai, India.  As alleged in the complaint, Cognizant’s President Gordon Coburn and Chief Legal Officer Steven E. Schwartz authorized the contractor to pay the bribe, and directed their subordinates to conceal the bribe by doctoring the contractor’s change orders.  The SEC also alleges that Cognizant authorized the construction firm to make two additional bribes totaling more than $1.6 million.  Cognizant allegedly used sham change order requests to conceal the payments it made to reimburse the firm.

“Bribery to further corporate goals is an illusory path to long-term success.  While always the wrong choice, it is particularly egregious when senior executives chart that course for those they lead, as our complaint alleges here.  We are committed to holding them accountable for their actions,” said Charles E. Cain, Chief of the SEC Enforcement Division’s FCPA Unit.

The SEC charged Coburn and Schwartz with violating anti-bribery, books and records, and internal accounting controls provisions of the federal securities laws.  The SEC is seeking permanent injunctions, monetary penalties, and officer-and-director bars against Coburn and Schwartz.

The SEC’s order as to Cognizant found that the company violated Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, which are anti-bribery, books and records, and internal accounting controls provisions of the federal securities laws.  Without admitting or denying the allegations, the company agreed to pay disgorgement and prejudgment interest of approximately $19 million and a penalty of $6 million.

The Department of Justice and the U.S. Attorney’s Office for the District of New Jersey today announced the indictment of Coburn and Schwartz on criminal charges of violating and conspiring to violate the FCPA’s anti-bribery and accounting provisions.

The SEC’s investigation was conducted by Michael K. Catoe, Paul W. Sharratt, and M. Shahriar Masud of the FCPA Unit under the supervision of Robert I. Dodge.  The litigation will be led by John Bowers.  The SEC appreciates the assistance of the Justice Department’s Fraud Section, the U.S. Attorney’s Office for the District of New Jersey, and the Federal Bureau of Investigation.

SEC Press Release

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SEC Extends Comment Period for Rulemaking Proposal Regarding Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts

The Securities and Exchange Commission today announced that it is extending for one month the comment period on the proposed rulemaking to amend rules and forms to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts that was published in the Federal Register on November 30, 2018 (Release Nos. 33-10569; 34-84508; IC-33286). 

The public comment period for the proposed rulemaking “Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts,” Release Nos. 33-10569; 34-84508; IC-33286 (Oct. 30, 2018) will now end on March 15, 2019. The scope and comment process for this release remains as stated in the original Federal Register notice of November 30, 2018.   

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 Former Senior Attorney at Apple With Insider Trading

The Securities and Exchange Commission today filed insider trading charges against a former senior attorney at Apple whose duties included executing the company’s insider trading compliance efforts.    

The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.  Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided.  The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws.  As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements. 

“Levoff’s alleged exploitation of his access to Apple’s financial information was particularly egregious given his responsibility for implementing the company’s insider trading compliance policy,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement.  “The SEC is committed to pursuing insiders who breach their duties to investors.”  

The SEC’s complaint, filed in federal district court in Newark, New Jersey, charges Levoff with fraud and is seeking the return of his ill-gotten trading profits plus interest, penalties, a permanent injunction, and an officer-and-director bar.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges.

The SEC’s investigation, which is continuing, has been conducted by Pei Chung and Elizabeth Doisy.  The case has been supervised by Deborah A. Tarasevich and Ms. Chion.  The litigation will be led by Daniel Maher and Cheryl Crumpton.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC Press Release

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

Deloitte Japan Charged With Violating Auditor Independence Rules

The Securities and Exchange Commission today announced that Deloitte Touche Tohmatsu LLC (Deloitte Japan) will pay $2 million to settle charges that it issued audit reports for an audit client at a time when dozens of its employees maintained bank accounts with the client’s subsidiary.  According to the SEC’s order, the accounts had balances that exceeded depositary insurance limits in violation of the SEC audit independence rules.  Deloitte Japan’s former CEO Futomichi Amano and former reputation and risk leader and director of independence Yuji Itagaki settled related charges.

Under the SEC’s rules, accountants are not considered to be independent if they maintain bank accounts with an audit client with balances greater than FDIC or similar depositary insurance limits.  According to the SEC’s order, Deloitte Japan knew but failed to adequately disclose that Amano maintained bank account balances with the audit client’s subsidiary bank that compromised his independence.  A subsequent investigation by the firm revealed that 88 other Deloitte Japan employees had financial relationships with the audit client that compromised their independence as well.  The SEC’s order also found that Deloitte Japan’s system of quality controls did not provide reasonable assurances that the firm and its auditors were independent from audit clients.  For example, the SEC’s order found that Deloitte Japan failed to adequately staff and supervise its Office of Independence and caused certain independence violations by making deposits to partners’ bank accounts that exceeded the deposit insurance limits.

“Auditor independence is critical to the integrity of the financial reporting process,” said Melissa Hodgman, Associate Director of the SEC’s Division of Enforcement.  “The auditor independence rules addressing bank account balances that exceed deposit insurance limits are clear, and audit firms must devote adequate resources to ensuring the independence of the firm and its personnel.”

The SEC’s order finds that Deloitte Japan violated the auditor independence provisions of the federal securities laws and that Amano and Itagaki caused those violations.  The order also finds that Deloitte Japan, Amano, and Itagaki caused the audit client to violate its reporting obligations, and that all respondents engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice by virtue of their violations of the auditor independence requirements.

Deloitte Japan, Amano, and Itagaki consented to the SEC’s order without admitting or denying the findings and were ordered to cease-and-desist from future violations.  Deloitte Japan agreed to pay $2 million in monetary sanctions and be censured.  Amano and Itagaki agreed to be suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Amano and Itagaki to apply for reinstatement after two years and one year, respectively.  In determining to accept Deloitte Japan’s offer of settlement, the SEC considered remedial acts promptly undertaken by Deloitte Japan and cooperation afforded the SEC staff.

The SEC’s investigation was conducted by James Bresnicky and Sarah Lamoree, and supervised by J. Lee Buck II and Ms. Hodgman.

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 Founder of Online Gaming Company Defrauding Investors

The Securities and Exchange Commission today charged Robert Alexander with fraudulently raising approximately $9 million from more than 50 individuals by selling investments in Kizzang LLC, a purported online gaming business.

According to the SEC's complaint, among other misrepresentations, Alexander told investors that they would make a minimum of 10 times their investment, Alexander had personally invested millions of dollars in Kizzang, Alexander had made a $50 million charitable donation, and that he had led the creation of a prominent video game. Rather than using investor funds for Kizzang's business, Alexander stole at least $1.3 million, including spending more than $450,000 on gambling sprees. Alexander also used investor funds to finance his daily living and other personal expenses, including credit card bills, shopping and entertainment, and expenses for his daughter, including culinary school tuition and luxury car payments.

"As alleged in our complaint, Alexander promoted Kizzang as an opportunity for investors to profit from the early success of a technology start-up," said Carolyn Welshhans, Associate Director in the SEC's Division of Enforcement. "In reality, Alexander brazenly converted investor proceeds for his personal use, sometimes within days of receiving investor funds."

The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, charges Alexander and Kizzang with violating the anti-fraud provisions of the Securities Act and Exchange Act and seeks permanent injunctions, civil monetary penalties, and disgorgement of ill-gotten monetary gains plus interest.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Alexander.

The SEC's investigation was conducted by Cecilia B. Connor and Andrew Elliott, and supervised by Ms. Welshhans and Amy L. Friedman, with assistance from Janet Yang. The SEC's litigation will be handled by Martin Healey. 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.

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.

Elizabeth McFadden Named Deputy General Counsel

The Securities and Exchange Commission today announced that Elizabeth McFadden has been named Deputy General Counsel for General Law and Management of the agency.

The Deputy General Counsel for General Law and Management provides daily oversight into representation of the Commission, its members and employees in litigation and advises the Commission and Divisions and Offices within the Commission with respect to general law responsibilities, personnel management and budget. The Deputy General Counsel for General Law and Management also serves as Managing Executive for the Office of the General Counsel.

Ms. McFadden comes to the SEC after over 15 years at the U.S. Department of Education. Since 2011, she has served as Deputy General Counsel at the department, where she advised the agency's senior leadership on complex legal issues, including the interpretation of Federal statutes and regulations, litigation strategy, agency policy, operations and procedures. At the Department of Education she focused on procurement, labor and employment law, FOIA and interagency agreements, among other areas. Prior to joining the Department of Education in 2003, Ms. McFadden practiced law at Dow Lohnes, first as an associate in 1991 and beginning in 2000 as a partner, where she represented private and public corporations on a wide range of legal matters including regulatory compliance, business transactions, rulemaking and litigation.

"We are excited to have Elizabeth join us at the Commission," said General Counsel Robert Stebbins. "I am confident that given her extensive experience and legal expertise, the Commission and its employees will greatly benefit from her legal counsel."

"I am grateful for the opportunity to join the dedicated team at the Commission," said Ms. McFadden. "I look forward to working with them toward advancing the SEC's mission for American investors and markets."

Ms. McFadden earned a J.D. from the University of Virginia School of Law and a B.A.summa cum laude from Trinity Washington University in Political Science.

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.