Tuesday, December 31, 2013

Compliance Outreach Program for Investment Companies and Investment Advisers

The Securities and Exchange Commission today announced the opening of registration for its compliance outreach program’s national seminar for investment companies and investment advisers.  The event is intended to help these firms’ Chief Compliance Officers (CCOs) and other senior personnel to enhance their compliance programs for the protection of investors.

The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and the Asset Management Unit of the Division of Enforcement jointly sponsor the compliance outreach program.  The national seminar will be held on January 30 at the SEC’s Washington, D.C., headquarters from 8:30 a.m. to 5:30 p.m. ET.  In-person attendance is limited to 500; a live webcast will be available at www.sec.gov

The seminar agenda is here.  Topics to be discussed include program priorities in 2014, private fund advisers, registered investment companies, valuation, and the role of the CCO.

“The compliance outreach program is an important part of the Commission’s initiative to share information about observed risks to assist firms in assessing and enhancing their compliance and control programs,” said OCIE Director Andrew Bowden.  “Past compliance outreach program events have been well attended and well received, and we look forward to a candid exchange of ideas with participants at our upcoming event.”

"Mutual funds and investment advisers are the pathways through which most Americans access the securities markets.  It is important that regulators take proactive steps such as sponsoring this seminar to work with the asset management industry to promote compliance and protect investors,” said Division of Investment Management Director Norm Champ.

Investment adviser and investment company senior officers may register online for the event here.  If registrations exceed capacity, investment company and investment adviser CCOs will be given priority on a first-registered basis.  Registration instructions also will be sent to SEC-registered advisers using the e-mail account on the adviser’s most recent Form ADV filing.  For more information, contact: ComplianceOutreach@sec.gov




Monday, December 30, 2013

New York-Based Brokerage Firm Charged for Ignoring Red Flags in Soft Dollar Scheme

The Securities and Exchange Commission today announced sanctions against a New York-based brokerage firm for ignoring red flags and paying more than $400,000 in soft dollars for expenses that an investment adviser had not properly disclosed to clients.

Soft dollars are credits or rebates from a brokerage firm on commissions that clients pay for trades executed in an investment adviser’s client accounts.  If appropriately disclosed, an investment adviser may use the soft dollar credits to pay for such expenses as brokerage and research services that benefit clients.

An SEC investigation found that Instinet LLC approved soft dollar payments to San Diego-based investment advisory firm J.S. Oliver Capital Management despite clear signs that the payments were improper.  The SEC’s Enforcement Division has separately charged J.S. Oliver and its president Ian Mausner for their alleged wrongdoing.

Instinet agreed to pay more than $800,000 to settle the SEC’s charges.

“Instinet repeatedly approved soft dollar payments despite clear warning signs that J.S. Oliver and Mausner were improperly using client funds for their benefit,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Brokers perform a crucial gatekeeper function in approving soft dollar payments, and they cannot turn a blind eye to red flags that investment advisers may be breaching their fiduciary duty to clients.”

According to the SEC’s order instituting settled administrative proceedings, among the red flags that Instinet ignored while approving soft dollar payments to J.S. Oliver from January 2009 to July 2010:

  • J.S. Oliver provided Instinet with inconsistent reasons for a payment of more than $329,000 to Mausner’s ex-wife under the guise of employee compensation.  The payment was actually related to the Mausners’ divorce.  Instinet approved the payment despite a purported employment agreement provided by J.S. Oliver that, while significantly altered, still failed to indicate that Mausner’s ex-wife had performed any work for J.S. Oliver after 2006.

  • After J.S. Oliver had submitted invoices to Instinet indicating a monthly rent of $10,000 for all of 2009, the firm requested soft dollars in July 2009 for a 50 percent increase in rent to $15,000 per month.  However, J.S. Oliver rented offices in Mausner’s home, and Instinet knew that Mausner owned the company to which the rent was paid.  The increased rent payments were inflated for Mausner’s personal benefit and not properly disclosed to J.S. Oliver clients.  Nevertheless, Instinet approved $65,000 in soft dollar payments for the rent increase over a period of 13 months.

  • J.S. Oliver again provided Instinet with inconsistent reasons for two requested soft dollar payments purportedly for Mausner’s travel expenses related to evaluating “potential investment opportunities.”  However, the expenses actually were for maintenance, taxes, and fees on Mausner’s personal timeshare in New York City.  Despite copies of timeshare bills that were clearly in Mausner’s name indicating the payments would be for his own financial benefit, Instinet approved the soft dollar payments totaling more than $40,000.
The SEC’s order finds that Instinet willfully aided, abetted, and caused J.S. Oliver’s violations of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Instinet agreed to pay a penalty of $375,000, disgorgement of $378,673.76, and prejudgment interest of $59,607.66.  The firm also must engage an independent compliance consultant to review its policies, procedures, and practices related to soft dollar payments.  Without admitting or denying the SEC’s findings, Instinet also consented to a censure and a cease-and-desist order.






Sunday, December 29, 2013

ConvergEx Subsidiaries Charged With Fraud

The Securities and Exchange Commission today announced fraud charges against three brokerage subsidiaries and two former employees of a global trading services provider that caused many institutional clients to pay substantially higher amounts than disclosed for the execution of trading orders.

These subsidiaries of ConvergEx Group agreed to pay more than $107 million and admit wrongdoing to settle the SEC’s charges.  The former employees, Jonathan Daspin and Thomas Lekargeren, also agreed to admit and settle the charges against them.

In a parallel action, the Department of Justice announced criminal charges against ConvergEx Group, a brokerage subsidiary, and the two former employees.  To resolve those charges, ConvergEx Group has agreed to pay $43.8 million in criminal penalties and restitution.

Customers with large orders typically rely on their brokers to execute orders on their behalf at the most favorable terms reasonably available.  Monitoring the execution quality and costs of these orders can be difficult even for the most sophisticated investors given the complex nature of the markets where brokers must choose from a variety of order types, routing strategies, and trading venues.

“Customers have a right to expect honesty from their brokers and accurate information in response to their inquiries,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement.  “These ConvergEx brokers misled their customers and failed to provide complete information about the costs they were charging.”

According to the SEC’s order instituting settled administrative proceedings, the ConvergEx brokerage firms represented to customers that they charge explicit commissions to execute equity trading orders.  However, they routinely routed orders, including orders for U.S. equities, to an offshore affiliate in Bermuda that executed them on a riskless basis and opportunistically boosted their profits by adding a mark-up or mark-down on the price of a security.  The offshore affiliate often consulted with the client-facing brokers to assess the risk of customer detection before taking the extra money on top of the disclosed commissions.  The mark-ups and mark-downs caused many customers to unknowingly pay more than double what they understood they were paying to have their orders executed.

“ConvergEx brokerages sent customer trades on an unnecessary journey through its offshore affiliate so they could take extra fees behind customers’ backs,” said Stephen L. Cohen, associate director of the SEC’s Division of Enforcement.  “Brokers who seek to enhance their bottom lines through deception about their compensation are violating the law and the trust of their customers.”

According to the SEC’s order, the ConvergEx brokerages involved in the scheme were G-Trade Services LLC, ConvergEx Global Markets Limited, and ConvergEx Execution Solutions LLC.  Their customers included funds managed on behalf of charities, religious organizations, retirement plans, universities, and governments.  The ConvergEx brokerages believed they would lose business if customers became aware of their mark-ups and mark-downs, so they engaged in specific acts to hide the scheme.  Typically, they only took mark-ups and mark-downs on top of the disclosed commissions in situations where they believed that the risk of detection was low.  They also made false and misleading statements to customers who inquired about their overall compensation, even providing certain customers with falsified trading data to cover up the fact that the offshore affiliate had taken mark-ups or mark-downs on their orders.  The practice of executing orders through the offshore affiliate was not adequately disclosed to customers and was inconsistent with ConvergEx’s advertised conflict-free agency model.  Using this practice, the ConvergEx brokers failed to seek best execution for their customers’ orders.

The SEC’s order finds that the ConvergEx brokerages violated Sections 10(b) and 15(c) of the Securities Exchange Act of 1934.  The ConvergEx brokerages admitted to the facts underlying the SEC’s charges and acknowledged that their conduct violated the federal securities laws.  The firms agreed to pay disgorgement and prejudgment interest totaling $87,424,429 and a penalty of $20 million.  In determining the penalty amount, the SEC considered ConvergEx’s substantial cooperation after the agency commenced its investigation.  The SEC also considered the company’s significant remedial measures, including the closure of the Bermuda affiliate and the discharge of a number of employees in management and other positions as it ended the practice of routing U.S. securities offshore for order handling.

Daspin and Lekargeren, who are providing cooperation in the SEC’s investigation, admitted to taking steps to conceal the practice of taking trading profits from customers.  Daspin agreed to pay a total of $1,111,550 in disgorgement and prejudgment interest, and Lekargeren agreed to pay a total of $117,042 in disgorgement and prejudgment interest.   The SEC considered their cooperation in determining the appropriate terms of settlement.

The SEC seeks to return the money collected in these settlements to harmed customers through a Fair Fund distribution.





Saturday, December 28, 2013

SEC Halts Texas-Based Oil and Gas Investment Scheme




Press Releases





SEC Halts Texas-Based Oil and Gas Investment Scheme




The Securities and Exchange Commission today announced charges and an emergency asset freeze against the perpetrators of a Texas-based Ponzi scheme involving purported investments in oil and gas projects.





The SEC alleges that Robert A. Helms and Janniece S. Kaelin, who work out of an office in Austin, misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests.  Despite representations that nearly all of the money they raised would be used to make oil and gas investments, Helms and Kaelin actually used only a fraction of the offering proceeds for that purpose.  Instead, the vast majority of investor funds were used to make Ponzi payments and cover various personal and business expenses.





“Helms and Kaelin pretended to be in the oil and gas business when they were really in the business of fattening their own wallets,” said David R. Woodcock, director of the SEC’s Fort Worth Regional Office.  “They lied to investors about the use of offering proceeds, spent investor funds on personal expenses, and made Ponzi payments to give investors the false impression that they were earning returns in a profitable venture.”





The SEC’s complaint unsealed late yesterday in U.S. District Court for the Western District of Texas also charges Deven Sellers of Arvada, Colo., and Roland Barrera of Costa Mesa, Calif., with illegally selling investments for Helms and Kaelin without being registered with the SEC.  They also allegedly misled investors about the sales commissions and referral fees they were receiving.





According to the SEC’s complaint, Helms and Kaelin began offering investments in 2011 through Vendetta Royalty Partners, a limited partnership that they control.  They have since attracted at least 80 investors in more than a dozen states while promising in offering documents that they would use more than 99 percent of the investment proceeds to acquire a lucrative portfolio of oil and gas royalty interests.  The offering documents were fraudulent as Helms and Kaelin invested only 10 percent of the proceeds, and the oil and gas projects in which they actually did invest generated only minuscule returns.





The SEC alleges that Helms and Kaelin directed Vendetta Royalty Partners to make approximately $5.9 million in so-called partnership income distributions to investors.  They used money from newer investors to make the distributions to earlier investors.  Helms and Kaelin created the illusion that Vendetta Royalty Partners was a profitable enterprise when, in fact, it was a fraudulent Ponzi scheme.  Some offering documents touted Helms to have extensive oil-and-gas experience, misrepresenting that he had “worked with various mineral companies over the last 10 years advising management on issues involving the acquisition and management of royalty interests, mineral properties and related legal and financial issues.”  In fact, Helms’s oil-and-gas experience came almost entirely from operating Vendetta Royalty Partners and its affiliated or predecessor companies.





The SEC alleges that Helms and Kaelin misled investors about other important matters besides their business background and industry reputation.  They failed to disclose the existence of litigation against them and companies they control.  They misrepresented the performance of the limited oil-and-gas royalty investments actually under their management.  And they failed to inform investors that Vendetta Royalty Partners was behind on its line of credit.  The company ultimately defaulted.





According to the SEC’s complaint, Helms and Kaelin along with Sellers and Barrera told potential investors that any commissions or finder’s fees would be small. However, Sellers and Barrera each received more than $200,000 in such fees on one investment alone. Sellers and Barrera regularly solicited investments without being registered as brokers.





At the SEC’s request, the court entered an order temporarily restraining the defendants from further violations of the federal securities laws, freezing their assets, prohibiting the destruction of documents, requiring them to provide an accounting, and authorizing expedited discovery.



The SEC’s complaint alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint further alleges that Sellers and Barrera acted as unregistered brokers in violation of Section 15(a) of the Exchange Act.  The complaint requests permanent injunctions and the disgorgement of ill-gotten gains plus prejudgment interest and penalties.





The SEC’s investigation was conducted by Chris Davis, Carol Hahn, and Joann Harris of the Fort Worth Regional Office.  The SEC’s litigation will be led by Timothy McCole.  The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Secret Service, and Texas State Securities Board.








Friday, December 27, 2013

SEC Announces Enforcement Results for FY 2013

The Securities and Exchange Commission today announced that the agency’s enforcement actions in fiscal year 2013 resulted in a record $3.4 billion in monetary sanctions ordered against wrongdoers.

The SEC filed 686 enforcement actions in the fiscal year that ended in September.  The $3.4 billion in disgorgement and penalties resulting from those actions is 10 percent higher than FY 2012 and 22 percent higher than FY 2011, when the SEC filed the most actions in agency history.

“A strong enforcement program helps produce financial markets that operate with integrity and transparency, and reassures investors that they can invest with confidence,” said Mary Jo White, Chair of the SEC.  “I am incredibly proud of the dedicated and talented women and men of the Enforcement Division.  Our results show that we are prepared to tackle the breadth and complexity of today’s securities markets.”

George S. Canellos, co-director of the SEC’s Division of Enforcement, said, “We are focused on addressing wrongdoing in all corners of the financial industry.  Going forward, we will continue to be aggressive but fair in our pursuit of those who violate the securities laws.”

Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement, added, “Numbers tell only a part of the story as we look to bring high-quality enforcement actions that make an impact across the market.  We are proud of the terrific results achieved by our hardworking and committed staff and pleased with the strong and robust pipeline of investigations they’ve developed for the year ahead.”

SEC Enforcement in Fiscal Year 2013

Market Structure and Exchanges The SEC brought several significant actions against stock exchanges and other market participants on issues relating to market structure and fair market access.  The SEC obtained its largest-ever penalty against an exchange when NASDAQ agreed to pay a $10 million penalty for its poor systems and decision-making during the Facebook IPO. FY 2013 also included the SEC’s first penalty against an exchange for violations relating to regulatory oversight when the agency charged the Chicago Board Options Exchange (CBOE) and an affiliate for various systemic breakdowns.

Gatekeepers The SEC is focused on holding accountable accountants, attorneys, and others who have special duties to ensure that the interests of investors are safeguarded.  Among actions against auditors, the SEC charged the Chinese affiliates of major accounting firms for refusing to produce documents related to China-based companies being investigated.  And the SEC charged trustees and directors for failing to uphold their responsibilities under the securities laws.

Insider Trading – Continuing its pursuit of those who unlawfully trade on material, nonpublic information, the SEC filed multiple actions alleging wrongdoing at S.A.C. Capital Advisors and its affiliates, including an action against Steven Cohen for failing to supervise two senior employees and prevent them from insider trading under his watch.

Municipal Securities – The SEC increased its attention to securities violations by municipalities and other participants in the market for securities of cities and other governmental issuers.

Financial Crisis Enforcement Actions With several more enforcement cases in FY 2013 against individuals and entities whose actions contributed to the financial crisis, the SEC has now filed enforcement actions against 169 individuals and entities arising from the financial crisis resulting in more than $3 billion in disgorgement, penalties, and other monetary relief for the benefit of harmed investors.  The individuals charged include 70 CEOs, CFOs, or other senior executives.

New Admissions Policy – The SEC changed its longstanding settlement policy and now requires admissions of misconduct in a discrete category of cases where heightened accountability and acceptance of responsibility by a defendant are appropriate and in the public interest.  The first settlements under the new policy came in actions against Philip A. Falcone and his firm Harbinger Capital Partners, and JPMorgan Chase & Co.

Going to Trial – The SEC continued to aggressively deploy litigation resources to maximize the deterrent impact of enforcement actions.  One successful example in FY 2013 is the favorable verdict obtained at trial against former Goldman Sachs Vice President Fabrice Tourre, who was found liable for his role in marketing a CDO.  The SEC also obtained a favorable decision after a lengthy trial against optionsXpress and two individuals for engaging in sham transactions to give the illusion of compliance with Reg SHO.


Whistleblower Tips – The SEC’s Office of the Whistleblower received 3,238 tips in the past year and paid more than $14 million to whistleblowers whose information substantially advanced enforcement actions.

New Forward-Looking Initiatives
  • New Task Forces – The Financial Reporting and Audit (FRAud) Task Force was created to improve the Enforcement Division’s ability to detect and prevent financial statement and other accounting frauds.  The new Microcap Task Force brings additional resources and analytical expertise to address fraud in the microcap markets and target gatekeepers.

  • Consolidated Short Selling Charges – The SEC will continue to conduct streamlined investigations to crack down on violators of Rule 105 of Regulation M.  The SEC recently announced actions against 23 firms that resulted in $14.4 million in monetary sanctions.

  • A Strong Pipeline – The Enforcement Division headed into the next fiscal year well positioned for significant achievements across its program, having opened 908 investigations last year (up 13 percent) and obtained 574 formal orders of investigation (up 20 percent).

  • Technology Improvements – The Enforcement Division significantly improved its analytical capabilities, including those for forensics analysis and for reviewing and analyzing high volumes of electronic documents.  A Center for Risk and Quantitative Analytics was created to coordinate and enhance risk identification, risk assessment, and data analytic activities. 

* * *


* In the future, certain categories of enforcement actions will be excluded from the fiscal year total.  Using that methodology in FY 2013 would have resulted in a count of 676 enforcement actions.




* * Additional data on the SEC’s FY 2013 enforcement results is available as part of the SEC’s Agency Financial Report.







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Thursday, December 26, 2013

SEC Issues Staff Report on Public Company Disclosure




Press Releases





SEC Issues Staff Report on Public Company Disclosure




The Securities and Exchange Commission today issued a staff report to Congress on its disclosure rules for U.S. public companies, as part of agency’s ongoing efforts to modernize and simplify disclosure requirements and reduce compliance costs for emerging growth companies.



The report, mandated by Congress in the 2012 Jumpstart Our Business Startups (JOBS) Act, offers an overview of the SEC’s Regulation S-K that governs public company disclosure, as well as the staff’s preliminary conclusions and recommendations.



“This report provides a framework for disclosure reform,” said SEC Chair Mary Jo White.  “As a next step, I have directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings.  We will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented. The ultimate objective is for the Commission to improve the disclosure regime for both companies and investors.”  



“Updating our rules is only one step – albeit an important one – in improving company disclosures,” said Keith F. Higgins, Director of the SEC’s Division of Corporation Finance.  “For their part, companies should examine how they can improve the quality and effectiveness of their disclosures and how our rules can be improved to facilitate clear and effective communications to investors.  Better disclosure benefits everyone in the marketplace, and we plan to work with companies and investors to achieve this common goal.”    



As part of this effort, the SEC’s Office of the Chief Accountant will coordinate with the Financial Accounting Standards Board to identify ways to improve the effectiveness of disclosures in corporate financial statements and to minimize duplication with other existing disclosure requirements.



Chair White added, “I look forward to working with the staff and market participants as we continue to refine the disclosure system to provide investors with the information they need to make informed investment and voting decisions.”








Wednesday, December 25, 2013

SEC Charges Investment Managers for Misconduct in CDO Collateral Selection Process

The Securities and Exchange Commission today charged the managing partners of a Charlotte, N.C.-based investment advisory firm for compromising their independent judgment and allowing a third party with its own interests to influence the portfolio selection process of a collateralized debt obligation (CDO) being offered to investors.

The investment managers have agreed to collectively pay more than $472,000 and exit the securities industry to settle the SEC’s charges.

According to the SEC’s order instituting settled administrative proceedings, disclosures to investors indicated that NIR Capital Management LLC was solely selecting the assets for Norma CDO I Ltd. as the designated collateral manager.  However, NIR’s Scott H. Shannon accepted assets chosen by hedge fund firm Magnetar Capital LLC for the Norma CDO’s portfolio, and Joseph G. Parish III allowed Magnetar to influence the selection of some other assets.  Shannon himself called at least one of the residential mortgage-backed securities (RMBS) ultimately included in the portfolio a “real stinker.”  Magnetar bought the equity in the CDO but also placed short bets on collateral in the CDO and therefore had an interest not necessarily aligned with potential long-term debt investors that relied on the CDO and its collateral to perform well.

The SEC also today announced charges against Merrill Lynch, which structured and marketed the Norma CDO.

“Shannon and Parish could not serve two masters,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “They allowed Magnetar to influence asset selection and abdicated their duty to pick only the assets they believed were best for their client.”

According to the SEC’s order, NIR initially was unaware when Magnatar purchased $472.5 million in long exposure to RMBS for the Norma CDO in August and September 2006 based on information that NIR provided to Magnetar that was preliminary and not intended as a basis for actual collateral selection.  By the time it learned about the purchases in November 2006, NIR already had purchased a substantial portion of the RMBS collateral.  Nevertheless, NIR used its own internal credit metrics to analyze the collateral that Magnetar purchased, and Shannon then sought to exclude some of the RMBS collateral that Magnetar had acquired and selected.  NIR, however, ultimately incorporated the collateral that Magnetar purchased in the closing portfolio.  Shannon explained to an NIR credit analyst that the final portfolio included a number of trades that NIR did not execute, and “this leaves us with several names we probably would not want...”

According to the SEC’s order, Parish allowed Magnetar to exercise so-called approval rights by permitting the firm to be involved in the process of selecting CDO assets acquired for the portfolio.  As a result, Parish knew that Magnetar was the short counterparty for much of the Norma CDO’s synthetic exposure to CDO securities.  NIR attested in the collateral management agreement with the Norma CDO that it would act in good faith and exercise reasonable care in selecting the portfolio.  However, the CDO and its debt investors knew nothing about NIR’s compromised decision-making with Magnetar involved in the collateral selection process.

Shannon and Parish consented to the SEC’s order finding that Shannon violated Sections 206(1) and (2) of the Investment Advisers Act of 1940 and Parish violated Section 206(2).  Shannon agreed to be barred from the securities industry for at least two years and must pay disgorgement and prejudgment interest of $140,662 and a penalty of $116,553.  Parish agreed to be suspended from the securities industry for at least 12 months and must pay disgorgement and prejudgment interest of $140,662 and a penalty of $75,000.  Without admitting or denying the SEC’s findings, Shannon and Parish consented to cease and desist from violating respective Sections of 206 of the Advisers Act.  They have agreed to dissolve the NIR business.

The SEC’s investigation was conducted by Steven Rawlings, Tony Frouge, Sharon Bryant, Kapil Agrawal, Douglas Smith, Howard Fischer, and Daniel Walfish with assistance from Gerald Gross and Joshua Pater of the New York Regional Office.  They were assisted by examiners Edward Moy, Luis Casais, and Thomas Shupe in the New York office.

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Tuesday, December 24, 2013

SEC Names Sebastian Gomez Abero to Head Office of Small Business Policy in the Division of Corporation Finance

The Securities and Exchange Commission today announced that it has named Sebastian Gomez Abero as chief of the Office of Small Business Policy.  The appointment is effective immediately.

Mr. Gomez previously was a special counsel in the Office of Chief Counsel of the SEC’s Division of Corporation Finance, where he played a key role in drafting proposed rules to implement the crowdfunding provisions of the Jumpstart Our Business Startups (JOBS) Act.  He succeeds Gerald J. Laporte, who retired in July after heading the Office of Small Business Policy for more than a decade.

“I am very pleased that Sebastian Gomez will serve as the chief of the Office of Small Business Policy in our division,” said Keith Higgins, Director of the Division of Corporation Finance.  “This is an exciting time for the office as it promotes capital formation for small businesses while protecting investors.  Sebastian’s energy and leadership will serve us well as we further the Commission’s mission.”

The SEC’s Office of Small Business Policy assists companies seeking to raise capital through exempt or smaller registered offerings, and participates in and reviews SEC rulemaking and other actions that may affect small businesses.  The office coordinates the annual SEC Government-Business Forum on Small Business Capital Formation, provides support to the SEC Advisory Committee on Small and Emerging Companies, and acts as the division’s liaison to the Small Business Administration and to state securities regulators on corporate finance issues.

“I am honored and excited for the opportunity to lead our Office of Small Business Policy.  I look forward to working with the dedicated and talented professionals in the office as we further the Commission’s policies that impact small businesses and their investors,” Mr. Gomez said.

Mr. Gomez joined the SEC in August 2007 as a staff attorney in the division’s Office of Health Care and Insurance and served as a special counsel in the division’s Office of Financial Services from April 2011 to April 2012.  He also assisted with the SEC’s Life Settlements Task Force and with a team that provided technical assistance on derivatives as Congress drafted the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Before coming to the SEC, Mr. Gomez was an attorney at the law firm of Hogan & Hartson LLP.  He holds a B.S. in computer science from Bridgewater College and received his law degree from Northwestern University Law School.

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Monday, December 23, 2013

SEC Charges Archer-Daniels-Midland Company With FCPA Violations

Seal of the U.S. Securities and Exchange Commi...
The Securities and Exchange Commission today charged global food processor Archer-Daniels-Midland Company (ADM) for failing to prevent illicit payments made by foreign subsidiaries to Ukrainian government officials in violation of the Foreign Corrupt Practices Act (FCPA).

An SEC investigation found that ADM’s subsidiaries in Germany and Ukraine paid $21 million in bribes through intermediaries to secure the release of value-added tax (VAT) refunds.  The payments were then concealed by improperly recording the transactions in accounting records as insurance premiums and other purported business expenses.  ADM had insufficient anti-bribery compliance controls and made approximately $33 million in illegal profits as a result of the bribery by its subsidiaries.

ADM, which is based in Decatur, Ill., has agreed to pay more than $36 million to settle the SEC’s charges.  In a parallel action, the U.S. Department of Justice today announced a non-prosecution agreement with ADM and criminal charges against an ADM subsidiary that has agreed to pay $17.8 million in criminal fines.

“ADM’s lackluster anti-bribery controls enabled its subsidiaries to get preferential refund treatment by paying off foreign government officials,” said Gerald Hodgkins, an associate director in the SEC’s Division of Enforcement.  “Companies with worldwide operations must ensure their compliance is vigilant across the globe and their transactions are recorded truthfully.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of Illinois, the bribery occurred from 2002 to 2008.  Ukraine imposed a 20 percent VAT on goods purchased in its country.  If the goods were exported, the exporter could apply for a refund of the VAT already paid to the government on those goods.  However, at times the Ukrainian government delayed paying VAT refunds it owed or did not make any refund payments at all.  On these occasions, the outstanding amount of VAT refunds owed to ADM’s Ukraine affiliate reached as high as $46 million.

The SEC alleges that in order to obtain the VAT refunds that the Ukraine government was withholding, ADM’s subsidiaries in Germany and Ukraine devised several schemes to bribe Ukraine government officials to release the money.  The bribes paid were generally 18 to 20 percent of the corresponding VAT refunds.  For example, the subsidiaries artificially inflated commodities contracts with a Ukrainian shipping company to provide bribe payments to government officials.  In another scheme, the subsidiaries created phony insurance contracts with an insurance company that included false premiums passed on to Ukraine government officials.  The misconduct went unchecked by ADM for several years because of its deficient and decentralized system of FCPA oversight over subsidiaries in Germany and Ukraine.

The SEC’s complaint charges ADM with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.  ADM consented to the entry of a final judgment ordering the company to pay disgorgement of $33,342,012 plus prejudgment interest of $3,125,354.  The final judgment also permanently enjoins ADM from violating those sections of the Exchange Act, and requires the company to report on its FCPA compliance efforts for a three-year period.  The settlement is subject to court approval.  The SEC took into account ADM’s cooperation and significant remedial measures, including self-reporting the matter, implementing a comprehensive new compliance program throughout its operations, and terminating employees involved in the misconduct.





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Sunday, December 22, 2013

SEC Proposes Rules to Increase Access to Capital for Smaller Companies

The Securities and Exchange Commission today voted to propose rules intended to increase access to capital for smaller companies.

The SEC’s proposal would build upon Regulation A, which is an existing exemption from registration for small offerings of securities up to $5 million within a 12-month period.  The updated exemption would enable companies to offer and sell up to $50 million of securities within a 12-month period.

The rules are mandated by Title IV of the Jumpstart Our Business Startup (JOBS) Act.

“This proposal is intended to help increase access of smaller companies to capital,” said SEC Chair Mary Jo White.  “In shaping this proposal, we sought to develop an effective, workable path to raising capital that, very importantly, also builds in necessary investor protections.”

The SEC’s proposal will undergo a 60-day public comment period after it is published in the Federal Register.





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Saturday, December 21, 2013

SEC Charges Woman and Stepson for Involvement in ZeekRewards Ponzi and Pyramid Scheme




Press Releases





SEC Charges Woman and Stepson for Involvement in ZeekRewards Ponzi and Pyramid Scheme




The Securities and Exchange Commission today announced charges against a woman and her stepson for their involvement in a North Carolina-based Ponzi and pyramid scheme that the agency shut down last year.





The SEC alleges that Dawn Wright-Olivares and Daniel Olivares, who each now live in Arkansas, provided operational support, marketing, and computer expertise to sustain ZeekRewards.com, which offered and sold securities in the form of “premium subscriptions” and “VIP bids” for penny auctions.  While the website conveyed the impression that the significant payouts to investors meant the company was extremely profitable, the payouts actually bore no relation to the company’s net profits.  Approximately 98 percent of total revenues for ZeekRewards – and correspondingly the share of purported net profits paid to investors – were comprised of funds received from new investors rather than legitimate retail sales.





Wright-Olivares and Olivares have agreed to settle the SEC’s charges.  In a parallel action, the U.S. Attorney’s Office for the Western District of North Carolina today announced criminal charges against the pair.





“Wright-Olivares was a marketing and operational mastermind behind the scheme and Olivares was the chief architect of the computer databases they used,” said Stephen Cohen, an associate director in the SEC’s Division of Enforcement.  “After they learned ZeekRewards was under investigation by law enforcement, they accepted substantial sums of money from the scheme while keeping investors in the dark about its imminent collapse.”





Pyramid schemes are a type of investment scam often pitched as a legitimate business opportunity in the form of multi-level marketing programs. According to the SEC’s complaint filed in federal court in Charlotte, N.C., the ZeekRewards scheme raised more than $850 million from approximately one million investors worldwide.





The SEC alleges that Wright-Olivares served as the chief operating officer for much of the existence of ZeekRewards.  She helped develop the program and its key features, marketed it to investors, and managed some of its operations.  She also helped design and implement features that concealed the fraud.  Olivares managed the electronic operations that tracked all investments and managed payouts to investors.  Together, Wright-Olivares and Olivares helped perpetuate the illusion of a successful retail business.





The SEC’s complaint charges Wright-Olivares with violating the registration and antifraud provisions of Sections 5 and 17 of the Securities Act, and Section 10 of the Exchange Act and Rule 10b-5.  The complaint charges Olivares with violating Section 17 of the Securities Act and Section 10 of the Exchange Act and Rule 10b-5.  To settle the SEC’s charges, Wright-Olivares agreed to pay at least $8,184,064.94 and Olivares agreed to pay at least $3,272,934.58 – amounts that represent the entirety of their ill-gotten gains plus prejudgment interest.  Payments will be made as part of the parallel criminal proceeding in which additional financial penalties could be imposed in a restitution order.





The SEC’s investigation, which is continuing, has been conducted by Brian Privor, Alfred Tierney, and John Bowers.  The SEC appreciates the assistance of the U.S. Attorney’s Office of the Western District of North Carolina and the U.S. Secret Service.








Friday, December 20, 2013

Agencies Issue Final Rules Implementing the Volcker Rule




Press Releases





Agencies Issue Final Rules Implementing the Volcker Rule




Five federal agencies on Tuesday issued final rules developed jointly to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Volcker Rule”). 



The final rules prohibit insured depository institutions and companies affiliated with insured depository institutions (“banking entities”) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account.  The final rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds. 



Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds.  The final rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.



The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities conducted.  Banking entities with significant trading operations will be required to establish a detailed compliance program and their CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rule.  Independent testing and analysis of an institution’s compliance program will also be required.  The final rules reduce the burden on smaller, less-complex institutions by limiting their compliance and reporting requirements.  Additionally, a banking entity that does not engage in covered trading activities will not need to establish a compliance program.



The Federal Reserve Board announced on Tuesday that banking organizations covered by section 619 will be required to fully conform their activities and investments by July 21, 2015.





# # #



FACT SHEET-FINAL RULES TO IMPLEMENT THE “VOLCKER RULE”



Five financial regulatory agencies today adopted final rules implementing a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule.  The final rules generally would prohibit banking entities from:




  • engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account.


  • owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as ‘covered funds.’



As required by section 619 of the Dodd-Frank Act, the final rules, adopted under the Bank Holding Company Act, provide exemptions for certain activities, including market making, underwriting, hedging, trading in certain government obligations, and organizing and offering a hedge fund or private equity fund, among others.  Like the Dodd-Frank Act, the final rules limit these exemptions if they involve a material conflict of interest; a material exposure to high-risk assets or trading strategies; or a threat to the safety and soundness of the banking entity or to U.S. financial stability.



The five agencies -- the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission -- proposed the same common rules in 2011 and 2012.  Those proposals generated more than 18,000 comment letters.



The Final Rules



The final rules provide key definitions and identify characteristics of prohibited and permitted activities and investments.



Proprietary Trading Prohibition The final rules prohibit proprietary trading by banking entities. As required by the Dodd-Frank Act, the final rules include exemptions for:



Underwriting: This exemption requires that a banking entity act as an underwriter for a distribution of securities (including both public and private offerings) and that the trading desk’s underwriting position be related to that distribution.  Consistent with the Dodd-Frank Act, the underwriting position must be designed not to exceed the reasonably expected near-term demands of customers.



Market making-related activities:  Under this exemption, a trading desk is required to routinely stand ready to purchase and sell one or more types of financial instruments.  The trading desk’s inventory in these types of financial instruments would have to be designed not to exceed, on an ongoing basis, the reasonably expected near-term demands of customers based on such things as historical demand and consideration of market factors. A market-making desk may hedge the risks of its market-making activity under this exemption, provided it is acting in accordance with certain risk-management procedures required under the final rules.   



Risk-mitigating hedging:  This exemption would apply to hedging activity that is designed to reduce, and demonstrably reduces or significantly mitigates, specific, identifiable risks of individual or aggregated positions of the banking entity.  The banking entity would also be required to conduct an analysis (including correlation analysis) supporting its hedging strategy, and the effectiveness of hedges must be monitored and recalibrated as necessary on an ongoing basis.  The final rules also require banking entities to document, contemporaneously with the transaction, the hedging rationale for certain transactions that present heightened compliance risks.



Trading in certain government obligations: The final rules permit a banking entity to continue to engage in proprietary trading in U.S. government, agency, state, and municipal obligations.  They also permit, in more limited circumstances, proprietary trading in the obligations of a foreign sovereign or its political subdivisions. 



Certain trading activities of foreign banking entities:  The final rules generally do not prohibit trading by foreign banking entities, provided the trading decisions and principal risks of the foreign banking entity occur and are held outside of the United States.  Such transactions may involve U.S. entities only under certain circumstances.  Specifically, an exempt transaction may occur a) with the foreign operations of U.S. entities; b) in cleared transactions with an unaffiliated market intermediary acting as principal; or c) in cleared transactions through an unaffiliated market intermediary acting as agent, conducted anonymously on an exchange or similar trading facility.



Other permitted activities: The final rules exempt, provided certain requirements are met, trading on behalf of a customer in a fiduciary capacity or in riskless principal trades and activities of an insurance company for its general or separate account.



Clarifying exclusionsThe final rules clarify which activities are not considered proprietary trading, provided certain requirements are met, including trading solely as an agent, broker, or custodian; through a deferred compensation or similar plan; to satisfy a debt previously contracted; under certain repurchase and securities lending agreements; for liquidity management in accordance with a documented liquidity plan; in connection with certain clearing activities; or to satisfy certain existing legal obligations.



Covered Fund Prohibitions The final rules prohibit banking entities from owning and sponsoring hedge funds and private equity funds, referred to as “covered funds.”  Under the final rules, the definition of covered funds encompasses any issuer that would be an investment company under the Investment Company Act if it were not otherwise excluded by two provisions of that Act, section 3(c)(1) or 3(c)(7).  The final rules also include in the definition of covered funds certain foreign funds and commodity pools, but defined in a more limited manner than under the proposed rule. 



Exclusions: The final rules exclude from the definition of covered fund certain entities with more general corporate purposes such as wholly-owned subsidiaries, joint ventures, and acquisition vehicles, as well as SEC-registered investment companies and business development companies. Other exclusions apply to certain foreign funds publicly offered abroad, loan securitizations, insurance company separate accounts, and small business investment company and public welfare investments.



Permitted activities: As provided by the Dodd-Frank Act, the final rules permit a banking entity, subject to appropriate conditions, to invest in or sponsor a covered fund in connection with:  organizing and offering the covered fund; underwriting or market making-related activities; certain types of risk-mitigating hedging activities; activities that occur solely outside of the United States and insurance company activities.



Clarifying Exclusions:  The final rules clarify that, provided certain requirements are met, a banking entity is not engaging in prohibited covered fund activities or investments when it acts on behalf of customers as an agent, broker, custodian, or trustee or similar fiduciary capacity; through a deferred compensation or similar plan; or in the ordinary course of collecting a debt previously contracted.



Compliance Requirements The final rules provide compliance requirements that vary based on the size of the banking entity and the amount of activities conducted, reducing the burden on smaller, less complex entities.  Banking entities that do not engage in activities covered by the final rules would have no compliance program requirements.



Compliance program:  The final rules generally would require banking entities to establish an internal compliance program reasonably designed to ensure and monitor compliance with the final rules.  Larger banking entities would have to establish a more detailed compliance program, including a required CEO attestation; smaller entities engaged in modest activities would be subject to a simplified compliance regime.  Banking entities that do not engage in any activity subject to the final rules, other than trading in exempt government and municipal obligations, are not required to establish a compliance program. 



Documentation: The final rules require the banking entities to maintain documentation so that the agencies can monitor their activities for instances of evasion. 



Metrics reporting: The final rules require banking entities with significant trading operations to report certain quantitative measurements designed to monitor certain trading activities.  The reporting requirements would be phased in based on the type and size of the firm’s trading activities.



What’s Next?



The final rules become effective April 1, 2014.   The Federal Reserve Board has extended the conformance period until July 21, 2015.  Beginning June 30, 2014, banking entities with $50 billion or more in consolidated trading assets and liabilities will be required to report quantitative measurements. Banking entities with at least $25 billion, but less than $50 billion, in consolidated trading assets and liabilities will become subject to this requirement on April 30, 2016.  Those with at least $10 billion, but less than $25 billion, in consolidated trading assets and liabilities will become subject to the requirement on Dec. 31, 2016.  The agencies will review the data collected prior to Sept. 30, 2015, and revise the collection requirement as appropriate.


















Thursday, December 19, 2013

SEC Charges Perpetrators of Prime Bank Schemes in Las Vegas and Switzerland




Press Releases





SEC Charges Perpetrators of Prime Bank Schemes in Las Vegas and Switzerland




The Securities and Exchange Commission today announced fraud charges against a company named with an acronym for “Make A Lot Of Money” that is behind a pair of advance fee schemes guaranteeing astronomical returns to investors in purported prime bank transactions and overseas debt instruments.





The SEC alleges that Swiss-based Malom Group AG and several individuals conducted the schemes from Las Vegas and Zurich.  They raised $11 million from U.S. investors by using a series of lies and forged documents to steer them into seemingly successful foreign trading programs that were nothing more than vehicles to steal money.  Advance fee frauds solicit investors to make upfront payments before purported deals can go through, and perpetrators fool investors with official-sounding terminology to add an air of legitimacy to the investment programs.  Many transactions offered by Malom Group bore hallmarks of prime bank frauds, which tout the supposed use of well-known overseas banks to attract investors. 





The SEC alleges that Malom Group charged fees to investors for bogus services, and the individuals pulling the strings distributed investor funds among themselves for personal use.  They further lied to investors who later inquired about the progress of the transactions, lulling them with excuses about why they have yet to receive investment returns or refunds.





“Under the guise of a name insinuating they would make a lot of money for investors, the individuals behind this scheme sought nothing more than to make a lot of money for themselves,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.  “They peddled agreements and transactions filled with technical-sounding jargon that was as meaningless as their promises to investors.”





In a parallel action, the U.S. Department of Justice today announced criminal charges against the same six individuals charged in the SEC’s complaint:






  • Anthony B. Brandel of Las Vegas, who served as Malom Group’s main point of contact with U.S. investors – explaining the investments, collecting investor funds, and lulling investors about the status of the transactions.  His Las Vegas company M.Y. Consultants also is charged in the SEC’s complaint.


  • Sean P. Finn of Whitefish, Mont., who recruited U.S. investors through his Wyoming-based company M. Dwyer LLC, which also is charged in the SEC’s complaint.


  • Hans-Jürg Lips of Switzerland, who has been described as the Malom Group’s president or chairman of the board of directors.


  • Joseph N. Micelli of Las Vegas, who has been described as Malom Group’s compliance officer. 


  • Martin U. Schläpfer of Switzerland, who has been described as Malom Group’s chief executive officer, managing director, and legal counsel.


  • James C. Warras of Waterford, Wisc., who has been described as Malom Group’s executive vice president.





According to the SEC’ s complaint filed in U.S. District Court for the District of Nevada, the schemes occurred from 2009 to 2011 and the lulling of investors continued into 2013.  None of the transactions in securities offered or sold were registered with the SEC or eligible for an exemption.  In the first scheme, they offered “joint venture” agreements that purportedly allowed investors to “use” Malom Group’s financial resources in exchange for an upfront fee.  The agreements required the investors to propose investment transactions for Malom Group to enter into with third parties in order to generate returns for the company and the investor.  Malom Group supplied investors with forged bank statements and “proof of funds” letters to give the false impression that the company had the millions of dollars needed for the transactions.  Before investors paid their upfront fees, the Malom Group executives and promoters typically knew at least the basic details of the proposed trading programs, in some cases actually providing the trading program for investors to propose.  But after receiving the upfront fees from investors, Malom Group proceeded to reject every proposed transaction and misappropriate investor funds to further the scheme and line the perpetrators’ pockets. 





According to the SEC’s complaint, the second scheme falsely promised investors that Malom Group would generate funding by creating structured notes that would be listed on “Western European” exchanges.  After inducing investors to pay an “underwriting fee” and making personal and corporate guarantees of repayment, Malom Group reneged on the guarantees of repayment and failed to issue any structured notes.  Again the perpetrators behind the scheme quickly distributed investor funds among themselves.





The SEC’s complaint alleges that Malom Group, Schläpfer, Lips, Warras, and Micelli violated the antifraud and securities registration provisions of the federal securities laws, and Brandel, Finn, M.Y. Consultants, and M. Dwyer LLC violated the antifraud and securities and broker-dealer registration provisions.  The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.





The SEC’s investigation was conducted by Stephen Simpson and Angela Sierra, and the SEC’s litigation will be led by Mr. Simpson.  The SEC appreciates the assistance of the Department of Justice, Federal Bureau of Investigation, and State Attorney’s Office for the Canton of Zurich, Switzerland.








Wednesday, December 18, 2013

SEC Charges Another Tipper in Galleon Insider Trading Scheme




Press Releases





SEC Charges Another Tipper in Galleon Insider Trading Scheme




The Securities and Exchange Commission today charged a former employee at a Silicon Valley-based semiconductor company for his role tipping nonpublic information used in connection with Raj Rajaratnam’s massive insider trading scheme.





The SEC alleges that Sam Miri, who worked in the communications division at Marvell Technology Group, tipped confidential information about the company’s financial performance to former Galleon Management portfolio manager Ali Far.  He used the nonpublic information provided by Miri to trade Marvell securities on behalf of hedge funds that he founded after leaving Galleon.  Far and Spherix Capital, who were among those earlier charged by the SEC in the Galleon matter, earned hundreds of thousands of dollars in illicit profits based on Miri’s tips.  In exchange for the illegal tips, Far arranged four quarterly payments to Miri totaling approximately $10,000.





Miri, who lives in Palo Alto, Calif., has agreed to settle the SEC’s charges by paying more than $60,000 and being barred from serving as an officer or director of a public company.





“Miri finds himself playing the role of defendant because he chose to violate his duty to protect his employer’s confidential information by selling it to a hedge fund manager in exchange for quarterly payments,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “A total of 35 firms and individuals have now been held accountable for their varying roles in the Galleon scheme.”





According to the SEC’s complaint filed in federal court in Manhattan, Miri tipped Far in May 2008 with inside information about Marvell’s plans to announce a permanent chief financial officer after a string of interim chief financial officers.  With an earnings announcement scheduled for later that month, Miri also revealed confidential information about Marvell’s sales revenue and profitability as well as projections of future earnings potential.  In the days leading up to the announcement, Spherix Capital hedge funds purchased approximately 300,000 shares of Marvell common stock.  When the stock climbed more than 20 percent after Marvell announced its quarterly financial results and new CFO on May 29, Far’s hedge funds reaped approximately $680,000 in ill-gotten gains.





The SEC’s complaint charges Miri with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Miri agreed to pay $10,000 in disgorgement, $1,842.90 in prejudgment interest, and a $50,000 penalty.  Miri also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the charges, Miri agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.





The SEC’s investigation, which is continuing, has been conducted by John Henderson, Diego Brucculeri, and James D’Avino of the New York Regional Office.  The case has been supervised by Joseph Sansone of the Market Abuse Unit and Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.








Tuesday, December 17, 2013

SEC Announces First Deferred Prosecution Agreement With Individual




Press Releases





SEC Announces First Deferred Prosecution Agreement With Individual




The Securities and Exchange Commission today announced a deferred prosecution agreement with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.





Deferred prosecution agreements (DPAs) encourage individuals and companies to provide the SEC with forthcoming information about misconduct and assist with a subsequent investigation.  In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.





According to the SEC’s DPA with Scott Herckis – the agency’s first with an individual – he served as administrator for Connecticut-based Heppelwhite Fund LP, which was founded and managed by Berton M. Hochfeld.  With voluntary and significant cooperation from Herckis, the SEC filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the hedge fund and overstating its performance to investors.  The SEC’s action halted the fraud and froze the hedge fund’s assets and Hochfeld’s personal assets, which are now being used to compensate defrauded investors.  Last month, a federal court judge approved a $6 million distribution to harmed Heppelwhite investors.





“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency.”





According to the DPA, Herckis served as the fund’s administrator from December 2010 to September 2012, when he resigned and contacted government authorities with his concerns about Hochfeld’s conduct and certain discrepancies in Heppelwhite’s accounting records.  Herckis voluntarily produced voluminous documents and described to the SEC how Hochfeld was able to perpetrate his fraud.  As a result, the SEC was able to file the emergency action within weeks.





Under the terms of the DPA, which states that Herckis aided and abetted Hochfeld’s securities law violations, Herckis must comply with certain prohibitions and undertakings.  Herckis cannot serve as a fund administrator or otherwise provide any services to any hedge fund for a period of five years, and he also cannot associate with any broker, dealer, investment adviser, or registered investment company.  The DPA requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator, which will be added to the Fair Fund that has been created to help compensate Heppelwhite investors.  A second round of distributions from the Fair Fund is expected after additional money is collected for harmed investors through the sale of Hochfeld’s personal assets, including a collection of antiques he paid for with stolen funds.





The SEC’s investigation was conducted by Brian Vann, Stacy Fresch, and Brian O. Quinn.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.








Monday, December 16, 2013

SEC Charges Fifth Third Bancorp and Former CFO for Improper Accounting of Substantial Loan Losses During Financial Crisis




Press Releases





SEC Charges Fifth Third Bancorp and Former CFO for Improper Accounting of Substantial Loan Losses During Financial Crisis




The Securities and Exchange Commission today charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.





Fifth Third agreed to pay $6.5 million to settle the SEC’s charges, and Daniel Poston agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.





According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.  Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans.  Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as “held for sale” and value them at fair value.  Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent.  Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans. 





“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.” 





According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans.  Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required.  Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.





“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.





Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.  Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.





The SEC’s investigation was conducted by Beth Groves, Paul Harley, Jonathan Jacobs, and Jim Blenko.  The SEC appreciates the assistance of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).








Sunday, December 15, 2013

SEC Charges New York-Based Audit Firm and Four Accountants for Failures in Audits of China-Based Companies




Press Releases





SEC Charges New York-Based Audit Firm and Four Accountants for Failures in Audits of China-Based Companies




The Securities and Exchange Commission today announced sanctions against a New York-based audit firm, its founder, two other partners, and an audit manager for their roles in the failed audits of three China-based companies publicly traded in the U.S.





An SEC investigation found that Sherb & Co. LLP and its auditors falsely represented in audit reports that they had conducted the audits in accordance with U.S. auditing standards when it fact they were riddled with failures and improper professional conduct.  One of the companies they audited – China Sky One Medical Inc. – has since been charged by the SEC with financial fraud.





To settle the SEC’s charges, the firm and the four auditors agreed to be barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC.  The firm agreed to pay a $75,000 penalty.





“Auditors are critical gatekeepers in the financial reporting process, but Sherb & Co. and its auditors failed to live up to their professional obligations in multiple audits during a five-year period,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement.





According to the SEC’s order instituting settled administrative proceedings, the flawed audits involved China Sky One Medical, China Education Alliance Inc., and Wowjoint Holdings Ltd.  The individuals responsible for the audits were the firm’s founder Steven J. Sherb, fellow partners Christopher A. Valleau and Mark Mycio, and audit manager Steven N. Epstein.  They failed to properly plan and execute the audits, and they did not obtain sufficient competent evidential matters concerning sales, revenue, or bank balances.  They ignored clear red flags and failed to exercise professional skepticism and due care.  They also failed to maintain complete audit work papers.





According to the SEC’s order, Sherb engaged in improper professional conduct as the concurring partner for the China Sky audit and as concurring partner and engagement quality review (EQR) partner for the Wowjoint audits.  Valleau engaged in improper professional conduct as the engagement partner for the China Sky audit and four of five Wowjoint audits, and as the EQR for the China Education audit.  Mycio engaged in improper professional conduct as the engagement partner for the China Education audit and one of the Wowjoint audits.  Epstein engaged in improper professional conduct as the senior audit manager on the China Sky audit, China Education audit, and four of five Wowjoint audits. 





The SEC order finds that Sherb & Co., Sherb, Valleau, Mycio, and Epstein violated Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and Section 4(C) of the Securities Exchange Act of 1934.  The SEC’s order also finds that Sherb & Co. and Mycio violated Exchange Act Section 10A(b)(1).  Sherb & Co. and Mycio are ordered to cease and desist from committing or causing any violations of Section 10A(b)(1) of the Exchange Act.  Sherb, Valleau, and Mycio are prohibited from practicing before the SEC as an accountant for at least five years, and Epstein is barred for at least three years.





The SEC’s investigation has been conducted by Rhoda Chang, Junling Ma, C. Dabney O’Riordan, Kam Lee, Osman Handoo, Yuri Zelinsky, Neil Welch, and Gregory Faragasso.








Saturday, December 14, 2013

SEC Charges Miami-Based Trader With Insider Trading and Short Selling Violations




Press Releases





SEC Charges Miami-Based Trader With Insider Trading and Short Selling Violations




The Securities and Exchange Commission today charged a Miami-based trader with insider trading in the stock of a Chinese company and conducting illegal short sales in the securities of three other companies.





The SEC alleges that Charles Raymond Langston III learned confidential information in advance of a public announcement that significantly decreased the value of AutoChina International’s stock.  Langston was solicited by placement agents to invest in a secondary offering of AutoChina stock.  Despite agreeing to keep information confidential and not trade on it, he promptly sold short 29,000 shares of AutoChina stock in advance of the company’s public announcement that it had completed the secondary offering.  To avoid detection, Langston made the trades through an entity he owned using a different broker and different account than he used to purchase shares in AutoChina’s initial offering.  Langston made $193,108 in illegal profits by trading on the inside information.





“Langston agreed to keep confidential the information he learned from AutoChina’s placement agent and abstain from trading on it.  Yet he chose to place personal greed ahead of the integrity of the securities markets,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.





The SEC’s complaint filed in federal court in Miami further alleges that Langston and two of his companies, Guarantee Reinsurance and CRL Management, violated Rule 105 of Regulation M, which prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering.  The rule addresses illegal short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.  The SEC alleges that Langston through Guarantee Reinsurance and CRL Management made short sales in advance of separate secondary offerings by Wells Fargo, Mitsubishi UFJ Financial Group, and Alcoa.  He purchased shares in the same offerings.  Langston and his companies’ violations of Rule 105 resulted in unlawful gains of more than $1.3 million. 





“During restricted periods, Langston and his companies executed short sales that gamed the system and resulted in illegal profits,” said Glenn S. Gordon, associate director for enforcement in the SEC’s Miami Regional Office.  “The SEC is resolutely committed to pursuing those who violate Rule 105.”





Langston has agreed to settle the insider trading charges by paying disgorgement of $193,108, prejudgment interest of $22,204, and a penalty of $193,108.  Langston and the two companies also agreed to be enjoined for the short selling violations with monetary sanctions to be determined by the court at a later date.  Langston neither admits nor denies the allegations that he violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Rule 105 of Regulation M of the Exchange Act.





The SEC’s case against Langston and his companies was investigated by Andre J. Zamorano and Kathleen Strandell in the Miami office, and supervised by Thierry Olivier Desmet.  The SEC’s litigation is being led by Christopher E. Martin.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.





In September, the SEC announced enforcement actions against 23 firms for Rule 105 violations as a part of a crackdown on potential stock manipulation in advance of stock offerings.  The SEC’s National Examination Program simultaneously issued a risk alert that highlights risks to firms from non-compliance with Rule 105.








Friday, December 13, 2013

SEC Announces Agenda and Panelists for Small Business Forum




Press Releases





SEC Announces Agenda and Panelists for Small Business Forum




The Securities and Exchange Commission today announced the agenda and panelists for next week’s Government-Business Forum on Small Business Capital Formation.





The November 21 event will begin at 9 a.m. and include two morning panel discussions.  The first panel will focus on evolving practices in the new world of Regulation D exempt offerings. The second panel will focus on what might be next for small business and markets once the JOBS Act is fully implemented.





In the afternoon session, breakout groups will develop recommendations on a variety of issues related to small business capital formation.





The small business forum, held annually at the agency’s Washington D.C. headquarters, is open to the public and will be webcast live at www.sec.gov.  The webcast will not include the afternoon breakout group sessions, but they will be open to the public and accessible by phone.  Anyone wishing to participate in a breakout group session either in person or by phone must pre-register online by November 15.  More information is available on the small business forum webpage.





*  *  *





Agenda and Panelists





9 a.m.    



Call to Order - Mauri L. Osheroff, Associate Director, SEC Division of Corporation Finance



Introduction of Chair - Keith F. Higgins, Director, SEC Division of Corporation Finance



Opening Remarks - SEC Chair Mary Jo White







9:20 a.m.        



Panel Discussion: Evolving Practices in New World of Regulation D Offerings



           Moderators:




  • Keith F. Higgins, Director, SEC Division of Corporation Finance


  • Gregory C. Yadley, Partner at Shumaker, Loop & Kendrick in Tampa, Fla.



    Panelists:




  • Christopher Mirabile, Board Member at Angel Capital Association and Co-Managing Director, LaunchPad Venture Group in Boston.


  • John H. Chory, Partner at Latham & Watkins in Boston


  • Troy Foster, Partner at Wilson, Sonsini, Goodrich & Rosati in Palo Alto, Calif.


  • Rick A. Fleming, Deputy General Counsel at North American Securities    Administrators Association in Washington, D.C.







10:45 a.m.      



Break







11:05 a.m.      



Panel Discussion: Crystal Ball: Now That You Raised the Money, What’s Next for the Company and the Markets?



Moderators:




  • Keith F. Higgins, Director, SEC Division of Corporation Finance


  • David M. Lynn, Partner at Morrison & Foerster in Washington D.C.



Panelists:




  • Kim Wales, Founder and CEO at Wales Capital in New York


  • Douglas S. Ellenoff, Partner at Ellenoff, Grossman & Schole in New York


  • John D. Hogoboom, Partner at Lowenstein Sandler in Roseland, N.J.


  • Annemarie Tierney, Executive Vice President of Legal Affairs and General Counsel at SecondMarket in New York







12:30 p.m.      



Lunch break







2 p.m.             



Breakout Groups assemble to develop recommendations




  • Securities-Based Crowdfunding Offerings Breakout Group

    Moderator: Douglas S. Ellenoff         




  • Exempt Securities Offerings Breakout Group

    Moderator: Gregory C. Yadley




  • Securities Regulation of Smaller Public Companies Breakout Group

    Moderator: Spencer G. Feldman, Partner at Olshan Frome Wolosky in New York







3:15 p.m.        



Break (with opportunity to change breakout groups)







3:30 p.m.        



Breakout Groups continue







4:30 p.m.        



Break to reconvene for Plenary Session







4:45 p.m.        



Plenary Session to Develop Next Steps


Moderators: Mauri L. Osheroff and Gregory C. Yadley







5:30 p.m.        



Networking reception



          








Thursday, December 12, 2013

SEC Announces Charges Against Two Houston-Based Firms for Engaging in Thousands of Undisclosed Principal Transactions




Press Releases





SEC Announces Charges Against Two Houston-Based Firms for Engaging in Thousands of Undisclosed Principal Transactions




The Securities and Exchange Commission today announced charges against two Houston-based investment advisory firms and three executives for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients. 





One of the firms — along with its chief compliance officer — also is charged with violations of the “custody rule” that requires firms to meet certain standards when maintaining custody of client funds or securities.





In a principal transaction, an investment adviser acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They must also obtain the client’s consent.





The SEC’s Enforcement Division alleges that investment advisers Parallax Investments LLC and Tri-Star Advisors engaged in thousands of securities transactions with their clients on a principal basis through their affiliated brokerage firm without making the required disclosures to clients or obtaining their consent beforehand.  Parallax’s owner John P. Bott II and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were collectively paid more than $2 million in connection with these trades.





“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.





According to the SEC’s orders instituting administrative proceedings, Bott initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients.  In each transaction, Parallax’s affiliated brokerage firm Tri-Star Financial used its inventory account to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.  Bott received nearly half of the $1.9 million in sales credits collected by Tri-Star Financial on these transactions. 





According to the SEC’s orders, Payne and Vaughan initiated and executed more than 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Tri-Star Advisor clients.  Tri-Star Financial similarly used its inventory account to purchase mortgage-backed bonds for Tri-Star Advisor clients and then transferred the bonds to the applicable client accounts.  Payne and Vaughan together received nearly half of the $1.9 million in gross sales credits collected by the brokerage firm on these transactions. 





The SEC’s Enforcement Division further alleges that Parallax failed to comply with the custody rule that requires firms to undergo certain procedures to safeguard and account for client assets.  Parallax served as an adviser to a private fund Parallax Capital Partners LP.  The custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.  Although Parallax obtained an audit of PCP in 2010, it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time. 





According to the SEC’s orders, Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied.  Even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB, they retained him to perform the 2010 audit and issue financial statements to investors. 





According to the SEC’s orders, Parallax allegedly violated the principal transaction, custody, and compliance provisions of the Investment Advisers Act of 1940, and Bott allegedly aided, abetted, and caused the violations.  Falkenberg allegedly aided, abetted, and caused Parallax’s custody and compliance violations.  Tri-Star Advisors allegedly violated the principal transaction and compliance provisions of the Advisers Act, and Payne and Vaughan allegedly caused the violations.





The SEC’s investigation was conducted by R. Joann Harris and Asset Management Unit member Barbara L. Gunn of the Fort Worth Regional Office.  The SEC’s litigation will be led by Jennifer Brandt.