SEC Enters Into Deferred Prosecution Agreement with Investment Fund

by Katten Muchin Rosenman LLP
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[authors: Emily Stern Joseph E. Gallo]

This week the Securities and Exchange Commission entered into Deferred Prosecution Agreement (DPA) with the Amish Helping Fund (the Fund), an Ohio non-profit corporation. This is only the second DPA that the SEC has reached since it announced its Cooperation Initiative over two years ago.

The Fund, is a religious-based organization with the purpose of raising funds to loan to Amish families to enable them to purchase real estate. From 1995 to June 2010, the Fund offered and sold investment contracts to about 3,500 investors in the Amish community. The SEC alleged that the Fund violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by failing to update the Fund’s offering memorandum since it was first prepared in 1995. Specifically, the memorandum failed to reflect changes in the history of operations of the Fund, the cash reserves of the Fund, the use of investor money, and the ability of investors to redeem their money. To date, no investor has suffered any realized losses in connection with the Fund’s misleading offering statement.

The DPA between the SEC and the Fund delays prosecution of any related action against the Fund for two years. During that deferred period, the Fund has the opportunity to correct any violations of securities laws and regulations. If the Fund fully complies with the terms of the DPA, the SEC has agreed not to file further enforcement actions arising from the Fund’s current alleged violations. As a condition of the DPA, the Fund was required to accept responsibility for the violations alleged by the SEC. The Fund also agreed to a broad range of remedial conditions that are outlined in the DPA, including fully cooperating with the SEC’s current investigation by providing non-privileged documents and other requested information, amending and updating its offering memorandum and offering investors a right of recission. In addition, the Fund will be subject to periodic audits from an independent accountant and must register all of the Fund’s past and new securities offerings with the Ohio Division of Securities.

The SEC's Cooperation Initiative is intended to allow companies who come forward with evidence of securities violations to avoid civil litigation. Insight into the Initiative, however, has been difficult due to the fact that the SEC has only previously published one other DPA. Despite the apparent limited use of the Cooperation Initiative, the SEC continues to tout the potential benefits. In connection with announcing the settlement with the Amish Fund, the director of the SEC’s Division of Enforcement, Robert Khuzami, emphasized: “Cooperation provides real and substantial benefits for companies that respond appropriately to the discovery of wrongdoing in their ranks....Here, the SEC acknowledged and rewarded [the Fund’s] cooperation because, among other things, it acted swiftly and completely in correcting the misleading statements provided to investors, agreeing to annual audits of the fund holding the securities, and implementing significant remedial measures to prevent future violations of the securities laws.”

SEC Announces Deferred Prosecution Agreement with Amish Fund, (July 17, 2012). 

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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