Chair Mary Jo White testified before Congress this week. Her testimony focused on the budget, reviewing the recent work of the agency.
The Commission brought a series of civil injunctive and administrative proceedings this week. One proceeding named three exchanges and a broker-dealer as Respondents. A group of five insider trading actions centered on a merger involving eBay, two insiders and a series of tippees. Others actions focused on investment fund fraud, offering fraud and an advanced fee scheme.
Testimony: SEC Chair Mary Jo White testified on Oversight of the SEC’s Agenda, Operations and FY 2015 Budget Request, before the House Committee on Financial Services (April 29, 2014)(here).
Financial fraud actions
Financial fraud actions: Cornerstone Research published a new report titled “Accounting Class Action Filings and Settlements 2013 Review and Analysis” (here). The number of accounting cases brought in 2013 compared to the prior years was essentially flat, according to the Report. Last year 47 cases were filed, up 1 from the prior year. As a percentage of the number of cases filed however, the number of accounting cases declined to 28% compared to 30% in 2012. Indeed, the 28% figure is the lowest in the last decade.
In contrast, for the second year in a row, the number of cases settled involving accounting issues increased. In 2013 44 cases were resolved compared to 38 in 2012 and 33 in 2011. The 44 cases settled involving accounting issues last year represents 66% of the overall total. That percentage has remained relatively constant over the decade, ranging from a low of 55% in 2004 to a high of 75% in 2008.
Traditionally, accounting cases have represented a significant portion of the total value of cases settled, according to Cornerstone. Yet last year, for the first time since the passage of SOX, the total value of accounting case settlements was lower than for other years. In 2013 the dollar value of the accounting cases settled was just 25% of the total amount of settlements. That is by far the lowest percentage in the last decade which the range ran from 73% to 97%. The 2013 settlements were, however, more evenly distributed over the various business sectors.
Recently the number of restatements by large firms increased, the Report notes. Correspondingly, the number of accounting cases involving restatements increased. Last year 40% of the accounting cases filed involved a restatement. That reflects an increase from the 37% in the prior year and is the largest percentage since 2008. In contrast, the number of settled cases involving accounting issues declined last year to 35%, compared to 47% in 2012. The 32% for last year represents the lowest number of settlements involving a restatement since 2008. This may reflect the fact that it takes about three years from filing to settlement for these actions, according to Cornerstone.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 5 civil injunctive actions, DPAs, NPAs or reports and 7 administrative proceedings (excluding follow-on and Section 12(j) proceedings).
Exchanges: In the Matter of New York Stock Exchange LLC, Adm. Proc. File No. 3-15860 (May 1, 2014) is a proceeding which names as Respondents exchanges NYSE, NYSE Arca, Inc. and NYSE MKT LLC f/k/a/ NYSE Amex LLC, and broker-dealer Archipelago Securities, LLC. The Order alleges a series of violations focused largely on either engaging in specific activity without having a properly promulgated Rule in place as required by Exchange Act Section 19(b)(1) or failing to follow its Rules, contrary to Exchange Act Section 19(g)(1). Those include: NYSE, Arca and Amex establishing and using an “error account” in which erroneous trades were handled without having an appropriate rule; ArcaSec’s failure to have policies and procedures which addressed the possible misuse of material non-public information available on its Global Trade Manager which showed the Respondent Exchanges’ entire depth of book including non-displayed liquidity; ArcaSec’s failure to provide timely notice to the Commission regarding its violation of the net capital rule; the NYSE’s providing co-location services – a service that permits a reduction in some latencies by placing servers in close proximity – without an effective exchange rule; NYSE’s operating a block exchange without complying with its rules; NYSE’s distributing closing order imbalance information in violation of the effective exchange rule; Arca’s failure to execute mid-point passive liquidity orders per the exchange rules; and Arca’s acceptance of mid-point passive liquidity orders with sub-penny limits, contrary to Regulation NMS. To resolve the proceeding the exchange Respondents agreed to implement a series of undertakings which include a requirement to retain a consultant who will prepare a report and make recommendations which will be adopted. In addition, Respondents NYSE, Arca and Amex consented to the entry of cease and desist orders based on Exchange Act Sections 19(b) and 19(g) and Rule 612(a) of Regulation NMS. Respondent ArcaSec consented to the entry of a cease and desist order based on Exchange Act Sections 15(c)(3), 15(g) and 17(a)(1). Respondents NYSE, Arca and Amex were also censured. Finally, Respondents NYSE, Arca, Amex and ArcaSec will pay, jointly and severally, a civil penalty of $4.5 million.
Investment fund fraud: In the Matter of Diego F. Hernandez, Adm. Proc. File No. 3-15518 (May 1, 2014) is a proceeding which names as Respondents Mr. Hernandez, who was a registered representative, and four entities he controls, Wealth Management Partners, LLC, Wealth Financial, Limited Liability Company, DFHR Investments, Inc., and HD Mile High Marketing, Inc. Beginning in mid-July 2011 Mr. Hernandez, through his entities, raised just under $1 million from 13 investors. He did so by meeting with each and assuring them that their funds would be placed in safe investments. In fact he used his entities to misappropriate their funds. The Order alleges willful violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). To resolve the proceeding Mr. Hernandez consented to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). HD Mile High consented to the entry of a similar cease and desist order except it did not include Section 15(a). Mr. Hernandez also agreed to the entry of an order barring him from the securities business and from participating in any penny stock offering. He also agreed to pay disgorgement of $710,000, prejudgment interest and, with HD Mile High, on a joint and several basis, to disgorge $121,000 along with prejudgment interest, and to pay a civil penalty of $710,000.
Investment fund fraud: SEC v. Bekkedam, Civil Action No. 14-cv-2488 (E.D. Pa. Filed April 30, 2014) is an action against Barry Bekkedam, the former owner, Chairman and CEO of Ballamor Capital Management, LLC. From April through October 2009 he fraudulently induced his advisory clients and others to invest about $100 million in a Ponzi scheme operated by Scott Rothestein who is now in prison. The transactions began with an arrangement involving George Levin, also a Rothstein investor who had been trying to raise capital from others for Rothstein since 2007. Mr. Levin’s investments with Mr. Rothstein were at risk. Messrs. Bekkedam and Levin entered into an arrangement to assist each other, first with Mr. Levin’s investments and later those of Mr. Bekkedam. They began by forming Banyon Fund to enable Mr. Bekkedam to raise funds from clients and others to be invested exclusively in the Rothstein scheme. A series of misrepresentations were made regarding the degree of due diligence completed when soliciting investors for the venture. The arrangements between the men and the conflicts were not disclosed. The complaint alleges violations of Securities Act Section 17(a)(2), Exchange Act section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 22983 (April 30, 2014).
Insider trading: SEC v. Saridakis, Civil Action 152397 (E.D. Pa. Filed April 25, 2014) is one of a group of settled insider trading cases centered on the merger of eBay, Inc. with GSIC Commerce, Inc., announced on March 28, 2011. The cases are based on tips furnished by insider Christopher Saridakis and those that trade based on information from another unidentified insider. Cases that trace to Mr. Saridakis include: In the Matter of Sunken A. Shah, Adm. Proc. File No. 3-15856 (Filed April 25, 2014); and In the Matter of Shimul A. Shah, Adm. Admin. Proc. File No. 3-15857 (April 25, 2014). Those in the second group are: In the Matter of Oden Gabay, Adm. Proc. File No. 3-15854 (April 25, 2014); and In the Matter of Aharon R. Yehuda, Adm. Proc. File No. 3-15855 (April 25, 2014). The Commission was substantially assisted in its investigation by an individual who entered into a non-prosecution agreement, the first with an individual.
The Saridakis group: At the end of January 2011 eBay began discussion regarding the possible acquisition of GSIC. During the course of the merger discussions in March 2011, and following his attendance at a key meeting with executives from both companies, Mr. Saridakis had a conversation with friend Suken Shah who is named as a Respondent in a separate administrative proceeding. Following the conversation Suken Shah began purchasing shares of GSIC. After the deal announcement he had trading profits of $9,838. Suken Shah also tipped his brother, Shimul Shah, and another person who traded and, also, tipped three others, one of whom traded. Shimul Shah, named in a separate administrative proceeding, traded and had profits of $11,209. The two unidentified individuals he tipped had profits totaling $34,680. Subsequently, Mr. Saridakis is alleged to have tipped his friend Jules Gardner, named as a defendant in the Saridakis case. In a text message Mr. Saridakis told his friend he should own shares in GSIC. Mr. Gardner purchased the shares. After the deal announcement he had trading profits of $259,054. Mr. Gardner also tipped two unidentified individuals who traded. They had trading profits which totaled $380,175.
Finally, unidentified members of Mr. Saridakis’ family also became aware of the pending transaction based on conversations with him. Those persons traded, making profits totaling $41,060 after the deal announcement. During a FINRA inquiry Mr. Saridakis failed to identify Suken Shah. The complaint against Messrs. Saridakis and Gardner alleges violations of Exchange Act Section 10(b). The Orders in the administrative proceedings are based on the same Section.
To resolve the civil injunctive action Mr. Saridakis consented to the entry of an officer director bar and agreed to pay a penalty of $664,822 which is twice the amount of his tippees’ profits. He was also named as a defendant in a parallel criminal case. Mr. Gardner agreed to cooperate with the agency as well as to disgorge his trading profits of $259,054. Suken Shah agreed to resolve the administrative proceeding in which he was named, consenting to the entry of a cease and desist order based on Exchange Act Section 10(b). Suken Shah also agreed to an undertaking to cooperate in future proceedings and to pay disgorgement of $10,446, prejudgment interest and a penalty of $65,965. His penalty is three times the amount of his and his tippees’ trading profits. The Commission considered the undertaking in determining to accept the settlement. Mr. Shah’s brother, Shimul, settled on similar terms, agreeing to cooperate and to the entry of a cease and desist order based on the same Section. He also agreed to pay disgorgement of $11,209.22, prejudgment interest and a civil penalty of $22,418.44. His penalty is twice the amount of his trading profits. The Commission considered the undertaking in determining to accept the offer.
The individual who entered into the non-prosecution agreement with the SEC agreed to disgorge his trading profits of $31,777 along with prejudgment interest. The Commission entered into the agreement based on his early and extraordinary cooperation.
Second group: Two administrative proceedings were initiated, naming as Respondents individuals who are alleged to have ultimately obtained inside information from the wife of an unidentified insider. In these proceedings Oded Gabay is alleged to have learned about the proposed merger shortly before its announcement. The information came from his wife who obtained it in confidence from the wife of an insider. Mr. Gabay traded and tipped an unidentified friend who traded. After the deal announcement, Mr. Gahay’s profits were $23,615 while those of his friend were $20,739.75. Mr. Gabay settled with the Commission, agreeing to cooperate and to pay disgorgement of $23,615 along with prejudgment interest and a civil penalty of $22,177. His penalty was reduced to half the total of his profits and those of Mr. Yehuda based on cooperation. Mr. Gaby also told his friend Aharon Yehuda, named as a Respondent in a separate administrative proceeding, about the transaction. Mr. Yehada traded and, after the deal announcement, had profits of $20,739.75. He resolved the proceeding, agreeing to an undertaking to cooperate and to the entry of a cease and desist order based on Exchange Act Section 10(b). Mr. Yehuda also agreed to pay disgorgement of $20,739.75 along with prejudgment interest and a civil penalty of $20,739.75.
Investment fund fraud: In the Matter of Stanley Jonathan Fortenberry, Adm. Proc. File No. 3-15858 (April 28, 2014) is a proceeding which names the unregistered fund adviser as a Respondent. Mr. Fortenberry is the general partner of Premier Investment Fund L.P., a pooled investment vehicle. In March 2010 Mr. Fortenberry contacted a prominent manager of country music talent and offered to raise money for the Manager’s new entertainment and social media Company and a Social Media Website. Without the consent of the Manager, Mr. Fortenberry then created offering materials that he claimed were tied to a business plan for Country Music Website. Investors were solicited with a number of materially false and misleading statements including specious claims of 12% returns and that each investor would be paid $35,000 per month for life. Over time Mr. Fortenberry essentially looted the fund and now little if anything is left for investors. The Order alleges willful violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The proceeding will be set for hearing.
Offering fraud: SEC v. Guardian Oil & Gas, Inc., Civil Action No. 3:14-cv-01533 (N.D. Tx. Filed April 25, 2014) is an action against the company, Guardian Oil & Natural Gas, Inc. and the principal, Rick Mullins. It alleges that over about three years, beginning in mid-2010, the defendants raised about $6.5 million from investors through the fraudulent sale of limited partnership interests in oil and gas programs. While investors were told their finds would be used solely for a specific program, in fact funds were diverted to other purposes and projects and used to pay expenses for other programs. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 22979 (April 28, 2014).
Investment fund fraud: SEC v. American Pension Services, Inc., Civil Action No. 2:14-cv-00309 (D. Utah Filed April 24, 2014) names as defendants the firm and its founder, president and CEO, Curtis DeYoung. Mr. DeYoung is alleged to have squandered over $22 million in investor funds on high risk investments. He was able to do this, beginning as early as 2005, by targeting customers with retirement accounts holding non-traditional assets typically not available through traditional 401(k) retirement plans. Mr. DeYoung is alleged to have used forged letters and signatures to invest on behalf of customers in various high risk investments. He concealed his losses with other false documents. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). A freeze order was obtained at the time of filing. The case is pending. See Lit. rel. No. 22982 (April 30, 2014).
Advanced fee fraud: SEC v. Erwin, Civil Action No. 2;14-cv-623 (D. Nev. April 23, 2014) is an action against James Erwin and his company, Las Vegas-based Joint Venture Solutions, Inc. This action is related to SEC v. Malom Group AG filed in December 2013. The case centers on an advance fee fraud in which between 2009 and 2011 Mr. Erwin, through Joint Venture Solutions, promoted investments in Malom (“Make A Lot of Money”), offered securities in that entity to investors and served as an intermediary between investors and the entity. Five investors were induced to pay Malom $2.5 million to enter into agreements through which they ultimately lost all their funds. The scheme is described in greater detail here. The complaint alleges violations of Securities Act Section 5 and Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 22978 (April 28, 2014).
Investment fund fraud: U.S. v. Greenwood, Case No. 1:09-mj-00502 (S.D.N.Y. Filed July 24, 2009) is an action in which investment manager and WG Trading Company, LP and WG Trading Investors principal, Stephen Walsh, pleaded guilty to two counts of securities fraud. In entering the plea Mr. Walsh agreed to forfeit $50,743,779 which represents the amount he misappropriated and by which he personally profited from the fraud. The plea was based on an investment fund fraud that took place over a three year period beginning in early 2009. During the period Mr. Walsh and his confederate, Paul Greenwood, are alleged to have raised about $7.6 billion from investors. Those investors were told that their funds would be placed in a “veritable money-making machine.” That machine was supposedly an investment program called “equity index arbitrage.” The program was represented to be a conservative trading strategy which had out-performed the S&P 500 index for over 10 years. The pitch was so successful that several institutional investors, pension plans and charitable and university investment funds put billions of dollars in the program. The investment program was not nearly as successful as the investment pitch. In fact Messrs. Walsh and Greenwood misappropriated hundreds of millions of dollars of investor funds, diverting the money to their personal use. The date for sentencing has not been set. See also SEC v. WG Trading, Investors, L.P., Civil Action No. 1:09-cv-01750 (S.D.N.Y. Filed Feb. 25, 2009); CFTC v. Walsh, Civil Action No. 1:09-cv-01749 (S.D.N.Y. Filed Feb. 25, 2009).
Money laundering: The Serious Frauds Office announced the opening of a money laundering investigation arising from suspicions of corruption in Ukraine. Approximately $23 million in assets have been placed under restraint using the Proceeds of Crime Act. The SFO declined to release more details at this time.
Supervision: The Financial Conduct Authority banned John Christopher Hughes, formerly of UBS, for failure to supervise. Specifically, in the first nine months of 2011 he failed to adequately supervise Kweku Mawuli Abdoboli who lost $2.3 billion through unauthorized trading. While he was aware of the activities of the trader and that the profits for the trading desk were being manipulated, he failed to take the proper steps.