This Week In Securities Litigation

by Dorsey & Whitney LLP
Contact

The Commission charged Tesla co-founder Elon Musk with fraud in a complaint filed this week. The complaint centers on the now infamous “funding secured” tweet regarding taking Tesla private, although the document also lays out the background to that action and subsequent activities. The filing follows a swift investigation, conducted in a matter of weeks. Currently the case is headed for litigation. While the DOJ requested documents from the company there is no indication about the status of the inquiry.

The Commission also filed two settled FCPA actions this week. One involved Brazilian oil and gas company Petrobras which also entered into a non-prosecution agreement with the DOJ. The other is a settled action the former CEO of Sciedad Quimica Y Minera De Chile, S.A.

SEC

Proposed rule amendments: The Commission proposed amendments to codify an existing temporary exemption for credit rating agencies relating to certain structured finance products as to the information provided and to harmonize the applicable rules (here).

Whistleblowers: The Commission awarded nearly $4 million to an overseas whistleblower whose tip resulted in opening an investigation that was successful due in part to the extensive assistance of the tipper.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 8 civil injunctive cases and 18 administrative proceedings, excluding 12j and tag-along proceedings.

False statement: SEC v. Musk, Civil Action No. 1:18-cv-8865 (S.D.N.Y. Filed Sept. 27, 2018) is an action which names as a defendant Elon Musk, the co-founder of Tesla, Inc. The action centers on a tweet by Mr. Musk lmade during the trading day on August 7, 2018 in which he stated “Am considering taking Tesla private at $420. Funding secured.” The statement was false and misleading, according to the complaint. Over the next three hours Mr. Musk is alleged to have made additional false statements on Twitter which include, according to the complaint, statements which said: “My hope is all current investors remain with Tesla even if we’re private . . Shareholders could either to [sic] sell at 420 or hold shares & go private . . . Investor support is confirmed. Only reason why this is not certain is that it’s contingent on shareholder vote.” In addition, the complaint details the statements made by Mr. Musk regarding short sellers, his pre-tweet discussing regarding taking the firm private, the reaction of the market to the August 7 statement and the reaction to his statements. The complaint alleges violations of Exchange Act section 10(b). The case is pending.

Offering fraud: SEC v. Atkinson, Civil Action No. 1:18-cv-23993 (S.D. Fla. Filed Sept. 27, 2018) names as defendants Timothy Atkinson, Jay Passerino, All In Publishing, LLC, William E. Barry, Berry Meadiaworks, LLC and Shmuel Pollen. Beginning in October 2013, and continuing for about the next three years, Defendants Jay Passerino and Timothy Atkinson, through their firm All In Publishing, conducted a number of marketing campaigns, soliciting investors to open and fund unregistered, off-exchange binary options trading accounts. Binary options are an instrument whose value is tied to that of another financial asset and which have been banned in some countries. The purchase of these instruments was promoted through videos and other presentations which were based on misrepresentations about the nature and risk of the investments. Over the period about 50,000 investors deposited funds totaling $12.5 million to fund binary option accounts. The complaint alleges violations of Securities Act sections 5 and 17(a) and Exchange Act sections 10(b) and 20(a). The case is pending. See also SEC v. Montano (M.D. Fla. Filed Sept. 27, 2018)(similar action against Ronald Montano, Travis Stephenson, Antonio Giacca and Michael Wright who are alleged to have participated in the scheme; the complaint allegs violations of Securities Act section 17(a) and Exchange Act section 10(b) and 20(a). This case is also pending); SEC v. Barrett (W.D. N.C. Filed Sept. 27, 2018)(similar action naming as Defendants Justin Barrett and Grayson Brookshire alleging violations of Securities Act sections 5 and 17(a) and Exchange Act section 10(b); the case is pending).

Unregistered securities/broker: SEC v. JPool Ltd., Civil Action No. 1:180-cv-00224 (D.C. Filed Sept. 27, 2018) is an action which names as defendants JPool, known as 1Broker, based in the Marshall Islands, and its owner, Patrick Brunner. Since 2012 the Defendants have offered and sold securities based swaps to U.S. investors which were not registered. Brokerage accounts could only be funded with Bitcoin. The firm calls the instruments s CDFs or Contracts for a Difference. Since they are tied to the value of underlying securities, market indices or other financial assets they are securities based swaps which must be registered with the Commission and transacted on a national securities exchange. Neither defendant was registered. The complaint alleges violations of Securities Act section 5(e) and Exchange Act sections 6(1) and 15(a)(1). The case is pending.

Offering fraud: SEC v. Bramlette, Civil Action No. 2:18-cv-00761 (D. Ut. Filed Sept. 26, 2018) names as defendants James Bramlette, The Perorus Group, LLC, Anthony Hartman, Private Placement Capital Notes II, LLC, Stone Mountain Equities, LLC, Travis Kozlowski, Entelecus Fund, LLC and Aaron Wernli. The individual Defendants are long time business associates. Beginning in January 2014 they solicited investors centered around the Melrose Resort, a property on Daufuskie Island, South Carolina. About $10.8 million was raised from 60 investors to manage the property through the sale of notes. In raising capital for the decrepit resort its financial condition was misrepresented. Investors were not told, for example, that in November 2013 the lender foreclosed on the property. Defendants engaged in a cover-up scheme to keep investors from learning the true financial condition of the property. The scheme included Ponzi like payments. A portion of the investor money was misappropriated. The complaint alleges violations of each subsection of Securities Act section 17(a) and Exchange Act section 10(b). The case is pending. See Lit. Rel. No. 24289 (Sept. 27, 2018).

Misappropriation: SEC v. Kandelapas, Civil Action No. 18-cv-02637 (N.D. Ill.) is a previously filed action in which the Court entered a final judgment against Defendant Andrew J. Kandelapas, the former CEO of Wellness Center USA, Inc. The judgment enjoined Defendant from future violations of Securities Act section 17(a) and Exchange Act sections 10(b) and 15(a). It also bars him from serving as an officer or director of a public company and from participating in penny stock offerings. The amount of disgorgement, prejudgment interest and any penalty will be determined by the Court. See Lit. Rel. No. 24290 (Sept. 27, 2018).

Impermissible cross-trades: In the Matter of Putnam Investment Manage, LLC, Adm. Proc. File No. 3-18844 (Sept. 27, 2018) is a proceeding which names as Respondents the registered investment adviser and Zachary Harrison, a portfolio manager and RMBS trader at the firm. Over a four year period, beginning in April 2011, the firm was an investment adviser to a number of registered investment companies and other clients. During the period the advisory accounts determined they needed to sell positions in non-agency residential mortgage-backed securities. Mr. Harrison viewed the securities as desirable. Accordingly, he arranged to effect trades on behalf of the funds by selling the securities at the bid and then having others repurchase them at a price that averaged between the highest current independent bid and the lowest. By doing this he favored the buyers over the sellers, although all were advisory clients. The firm did not implement policies to prevent unlawful cross trading. The Order alleges violations of Investment Company Act sections 17(a)(1) and (2) and Advisers Act sections 206(2), 206(4) and 207. The firm cooperated with the investigation and undertook remedial acts. To resolve the proceedings the firm consented to the entry of a cease and desist order based on each provision cited in the Order. Mr. Harrison consented to the entry of a similar order based on the provisions of the Investment Company Act but only section 206(2) of the Advisers Act. The firm will pay a penalty of $1 million while Mr. Harrison will pay $50,000.

Cyber-security: In the Matter of Voya Financial Advisors, Inc., Adm. Proc. File No. 3-18840 (Sept. 26, 2018) names as a Respondent the registered broker-dealer and investment adviser. During a four year period, beginning in 2013, the firm gave access to customer and advisory client information through a proprietary web portal to certain contractors. In April 2016 a person or persons impersonating those contractors contacted the firm’s technical support line and requested a reset of three representatives’ passwords for the portal. The passwords were reset. Three hours later the firm learned about the impersonators and the reset. While it took steps to prevent the intruders from obtaining passwords and gaining access to the portal over the next several days they did not prevent the intruders from gaining access. The firm also failed to terminate the access of the intruders. To the contrary, they obtained access to the usernames and passwords to log into the portal and gain access to at least 5,600 customers and obtain documents regarding at least one customer. There were no customer losses. The firm violated the Safeguards rule – -intended to insure security for customer records – because its policies and procedures were not reasonably designed. Specifically, the policies and procedures with respect to resetting the passwords and then terminating access were not reasonably designed. In addition, the firm violated the Identify Theft Red Flags rule which requires the development and implementation of a written program to detect, prevent and mitigate identity theft. Specifically, the program was not reasonably designed to detect red flags, respond appropriately and ensure that the program was updated periodically. The Order alleges violations of Rule 30(a) of Regulation S-P and Rule 201 of Regulation S-ID. The firm undertook to engage a consultant to review its policies and procedures. To resolve the matter the firm consented to the entry of a cease and desist order based on the provisions cited in the Order and a censure. It will also pay a penalty of $1 million.

Offering fraud: SEC v. Skelley, Civil Action No. 1:18-cv-8803 (S.D.N.Y. Filed Sept. 26, 2018) is an action which names as defendants William Skelley and Sohin Shah. Defendants co-founded Innovational Funding LLC in 2012 and are officers of the firm. The next year the firm launched an on-line real estate portal. Investors were solicited using PPMs which claimed that they could become equity or debt holders in real estate projects across the U.S. The solicitations took place from October 2013 through June 2016. Investors were told their funds would be used to build the business. About $3.39 million was raised from 47 investors in 17 states. Investors were required to be accredited. Beginning in December 2015 Defendants also issued to five investors promissory notes convertible to capital or common stock. The notes were issued in the principal amount of $187,5000 with a 2% rate. In fact Defendants misappropriated over $1.1 million of the investor funds. The complaint alleges violations of each subsection of Securities Act section 17(a) and Exchange Act sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 24288 (Sept. 26, 2018).

Custody rule: In the Matter of Hudson Housing Capital, LLC, Adm. Proc. File No. 3-18837 (Sept. 25, 2018) is an action against the registered investment adviser. Over a five year period, beginning in 2012, the adviser failed to distribute audited financial statements to 32 funds it advises in accord with the Custody Rule. The Order alleges violations of Advisers Act section 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. The firm also agreed to pay a penalty of $65,000.

Unprofessional conduct/audit failure: In the Matter of Lichter, Yu and Associates, Inc., Adm. Proc. File No. 3-18838 (Sept. 25, 2018) names as Respondents the PCAOB registered audit firm and two of its owners, Lawrence Lichter and Peter Yu. The proceedings center on the FY 2015 audit of the financial statements of Code Rebel Corporation. Mr. Lichter was the engagement partner. Mr. Yu served as the engagement quality review partner. The financial statements represented that the firm had about $2.2 million in cash and cash equivalents, 77% of the firm’s current assets and about 80% of its cash and cash equivalents. In fact the funds had been misappropriated. In conducting the audit Respondents ignored a series of red flags to that effect. Those included that fact that: The money was not at an FCIC insured institution but supposedly at a family trust nominally managed by Jason Galanis, a person named in Commission enforcement actions and who had been indicted for securities fraud; the trust refused to return the money on request without 90 days notice; and the fact that Mr. Galanis supposedly had been named in an agreement that governed the trust—Code Rebel relationship. The Order alleges violations of Exchange Act sections 10A(a)(1) and 13(a) and Rule 13a-1 and Rule 2-02(b) of Regulation S-X. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections and rules cited in the Order. The individual Respondents are each denied the privilege of appearing and practicing before the Commission as an account with the right to apply for re-entry after five years.

Misappropriation: SEC v. Schmidt, Civil Action No. 18-cv-320 (S.D. Oh Filed Sept. 25, 2018) is an action which names as a Defendant John Schmidt, a registered representative at a brokerage firm. Over the years Mr. Schmidt built up a clientele. Some accounts suffered losses. Rather than tell those clients about the losses he sought to cover up the losses beginning in 2003 and continuing until 2017 by engaging in unauthorized transactions in other accounts and transferring the cash to the accounts with a short-fall. To facilitate the scheme he created false account and other documents. Over the period he misappropriated over $1.1 million. The complaint alleges violations of Exchange Act section 10(b) and Securities Act section 17(a). The case is pending. See Lit. Rel. No. 24287 (Sept. 25, 2018).

Pre-release ADRs: In the Matter of SG Americas Securities, LLC, Adm. Proc. File No. 3-18835 (Sept. 25, 2018) is a proceeding which names as a Respondent the registered broker-dealer which is a subsidiary of Society Generale S.A. It is the successor to Newedge S.A. This action centers on the failure of the firm to take reasonable steps to assure compliance with the requirements of pre-release ADR agreements. ADRs are backed by actual shares of the stock held at a depository. The purchaser of the ADR beneficially owns the shares. When new ARDs are issued a party, usually a broker, can obtain pre-release ADRs – that is, the ADR before the actual shares are deposited. In that instance a pre-release agreement is executed acknowledging the beneficial interest of the shareholder. Here, when obtaining pre-released ADRs from the Depositary and loaning them to customers or counterparties over a three year period beginning in June 2012 the firm failed to take reasonable steps to determine if the requisite number of shares was owned and custodied by the firm or its borrowers. Likewise, when the firm received pre-release ADRs over the same three year period it failed to take reasonable steps to assess if they were backed by ordinary shares. The firm also failed to implement reasonable procedures at its securities lending desk to assure compliance with the pre-release requirements. The order alleges violations of Securities Act section 17(a)(3). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the section cited in the order. Respondent also agreed to pay disgorgement of $486,672.14, prejudgment interest of $82,656.50 and a penalty of $250,000.

Kickbacks: SEC v. Rentzer, Civil Action No. 18-cv-14221 (D. N.J. Filed Sept. 24, 2018) is an action which names as a defendant Adam Rentzer, a stock trader who is also a former registered representative whose license has been suspended by the NYSE and several states. Beginning in 2013, and continuing through 2017, Mr. Rentzer entered into, and participated in, a quid pro quo relationship with his broker, Brian Hirsch first at one brokerage firm and then another. Under the arrangement Mr. Rentzer was permitted to participate in, or obtained increased allocations of, IPOs and other offerings. Defendant typically immediately sold his allocation and paid cash kickbacks to Mr. Hirsch. To further the scheme Mr. Hirsch made affirmative written representations to each brokerage firm stating he was not a party to a quid pro quo arrangement and had not received any prohibited gifts or cash. The scheme defrauded the two brokerage firms by circumventing their policies. Defendant made about $800,000 in trading profits. The complaint alleges violations of Exchange Act section 10(b). The case is pending. Previously, the Commission filed a similar action against Mr. Hirsch and another client. See Lit. Rel. No. 24286 (Sept. 24, 2018). See also U.S. v. Rentzer (S.D.N.Y.)(parallel criminal action in which Mr. Rentzer pleaded guilty to one count of violating the Travel Act based on the same facts; Mr. Hirsch previously pleaded guilty to the same charge and is scheduled to be sentenced on November 18, 2018).

SARs: In the Matter of TD Ameritrade, Inc., Adm. Proc. File No. 3-1829 (Sept. 24, 2018) is a proceeding which names the registered broker-dealer and investment adviser as a Respondent. Over a two year period, beginning in 2013, the firm terminated its business relationship with 111 independent investment advisers. Respondent concluded that the relationships presented unacceptable business, credit, operational, reputation, or regulatory risk to the firm or its customers. In some instances it filed SARs. In others it did not. The failure to file in certain instances resulted from a failure to consistently and appropriately refer terminated advisers to its AML department. The Order alleges violations of Exchange Act section 17(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited and to a censure. The firm will also pay a penalty of $500,000.

Internal controls: In the Matter of Primoris Services Corporation, Adm. Proc. File No. 3-18816 (Sept. 21, 2018). Primoris is a holding company that furnishes a wide range of construction, fabrication, maintenance and engineering services to utilities, municipalities and other firms. Much of its work is done on a percentage-of-completion basis. The firm identified this method of accounting as a significant accounting policy in its Form 10-K. Nevertheless, the company did not have written policies or procedures describing how contingencies should be estimated at the beginning of a project. It also did not have written policies directing how the in-progress adjustments should be made or specifying how the estimates should be adjusted as the project continued. Equally problematic was the firm’s failure to sufficiently document its process for evaluating risks contained in the initial estimate. The firm’s processes suffered from the same deficiency for in-progress adjustments – they were not adequately documented. These deficiencies resulted in difficulties. In March 2015 the firm learned that it had three accounting errors related to contingencies in one segment of its business. Those errors resulted in a failure to reduce contingent cost expectations and recognize revenue and profits in the appropriated quarter. Accordingly, the firm’s ability to make and keep accurate books and records regarding contingencies was impaired. Primoris conducted an internal investigation of its contingency accounting practices in 2014. A number of emails were discovered involving division executives, project controls managers and others. Those emails referenced “cushion,” “cookie jars,” and “sandbagging” regarding contingencies for projects in the division. In assessing these issues the firm evaluated the specific errors but did not consider the potential for error or the overall environment. Here Primoris failed to comply with section 13(b)(2) and to maintain adequate documentation. The firm failed to properly address the question of material weakness and the prospect of a reasonable possibility of a material misstatement. The firm also failed to maintain the proper documentation. The Order alleges violations of Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm will pay a penalty of $200,000.

False financial metric: In the Matter of Heartland Payment Systems, LLC, Adm. Proc. File No 3-18819 (Sept. 21, 2018). Heartland Payment Systems, founded by Robert Carr, also a Respondent, sells credit card processing services to retail merchants. An internal sales force conducts sales. Those sales persons are compensated with bonuses for newly signed merchants. They also receive residual payments based on actual merchant profitability on a monthly basis. The signing bonuses are based on a metric Heartland calls “new gross margin installed.” The firm defines this metric as “the expected annual gross profit from a merchant contract after deducting processing and servicing costs associated with that revenue.” The aggregate of the new gross margin installed metrics paid to sales persons was referred to by the company and Mr. Carr as NMI. That metric was viewed as being a forward looking growth indicator because of its composition – new business and new sales. It was frequently cited in quarterly earnings calls by the firm for that reason. For example, NMI was cited in the earnings releases and/or calls for the third quarter of 2013, the fourth quarter of 2014 and the second quarter of 2015. Analysts such as Wells Fargo Securities cited the metric when discussing trends at the company while others referenced it when assessing investment strategies. Beginning in 2013 however, the firm altered the metric without disclosing that fact. This materially altered it. The additions to NMI made it appear that the forward looking growth of the firm was materially accelerating at a more rapid rate than the original metric would have reflected. The order alleges violations of Securities Act sections 17(a)(2) and 17(a)(3). To resolve the matter the firm consented to the entry of a cease and desist order based on Securities Act sections 17(a)(2) and 17(a)(3) while Mr. Car consented to a similar order based only on subsection 17(a)(2). The firm will pay a penalty of $2.16 million while Mr. Car will pay a penalty of $120,000. In determining to accept the offer of settlement the Commission considered the fact that Heartland merged with Global Payments in 2016 and that firm meaningfully cooperated with the staff during the investigation.

Conflicts: In the Matter of Ophrys, LLC, Adm. Proc. File No. 3-18815 (Sept. 21, 2018). Ophrys is a registered investment adviser. The firm manages 32 funds of regulated assets. Its primary business is advising funds that invest in portfolios of defaulted consumer receivables. In this regard in manages Candica, LLC, Lutea, LLC, Oak Harbor Capital V, LLC or OHCV, Oak Harbor Capital X, LLC or OHCX, Pallida, LLC and Vanda, LLC. Since its clients are not typically qualified debt buyers for purposes of acquiring portfolios of defaulted consumer debt, the adviser, in some instances, acquires the portfolio directly or through a subsidiary and later makes the debt available to one of the managed funds. As manager the firm is paid a management fee and an additional fee when it makes efforts to collect on receivables. It also typically is paid a carried interest equal to a percentage of all collections on the receivables net of expenses. In three recent transactions the firm failed to identify the capacity in which it was acting in accord with the provisions of the Advisers Act. The first transaction took place in 2012. There Candice owned portfolios of consumer receivables. The portfolios were acquired with a loan secured by an interest in the receivables. Under the terms of the arrangement Ophrys would obtain a fee based on the percentage of the collections in addition to the advisory fee. In December 2012 Ophrys caused Candica to sell a portion of the portfolio to Vanda, financed in part with capital contributions from OHCV. Ophrys was paid a fee related to the transfer of the interest. This constituted an agency transaction under Advisers Act section 206(3) since Ophrys acted as a broker. Nevertheless, the adviser failed to provide adequate written notice that it was acting as an agent on the transaction or to obtain consent. Respondent entered into a similar arrangement in November 2013. There Ophrys caused OHCX to invest in Candica by purchasing securities issued by that firm. The deal was funded in part by contributions from OHCX. Again, this was an agency transaction because Respondent acted as a broker on behalf of Candica. Yet Respondent failed to obtain OHCX’s consent to the transaction. In a third transaction Respondent failed to provide notice that it was acting as a principal. In December 2014 Ophrys acquired indirectly consumer receivables from Lutea. The securities were then sold to Pallida, another advisory client. The transaction was funded by a loan from OHCX to Pallida and secured by a security interest. Since Respondent was the adviser of Pallida and OHCX it was required to provide written disclosure of its role as principal and obtain consent. The adviser did not comply with this requirement. The Order alleges violations of Adviser Act section 206(3). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. In addition, Ophrys will pay a penalty of $500,000.

Unregistered broker/securities/EB-5: In the Matter of CMB Export, LLC, Adm. Proc. File No. 3-18825 (Sept. 21, 2018) names as Respondents the firm, a federally designated regional center for the EB-5 program, whose investment vehicles are limited partnership interests; the firm also serves as the general partner for 37 affiliated limited partnerships named as Respondents. Patrick Hogan, the CEO and Manager of CMB Export, is named as a Respondent. Over a four year period beginning in 2011, CMB Export and Mr. Hogan entered into agreements with and paid unregistered brokers to market, the limited partnership interests in connection with, the EB-5 program which offers a path to citizenship to foreign nationals who invest a designated amount of capital in creating a certain number of jobs in the U.S. During the same period certain of the limited partnerships affiliated with CMB Export offered and sold limited partnership interests in connection with the program. Those who solicited investors were paid transaction based compensation but were not registered brokers. The securities offered were not registered with the Commission or exempt. The Order alleges violations of Securities Act sections 5(a) and 5(c) and Exchange Act section 15(a)(1). Respondents engaged in meaningful remediation and cooperation with the investigation, creating a compliance program to ensure compliance with the securities laws in the future. To resolve the proceedings CMB Export and Mr. Hogan consented to the entry of a cease and desist order based on Exchange Act section 15(a) while the limited partnerships affiliated with CMB Export consented to the entry of a similar order but based on the Securities Act sections cited in the Order. CMB Export will pay a penalty of $5.15 million. Mr. Hogan will pay a penalty of $515,000. Each of the 37 CMB limited partnerships will pay a penalty of $160,000 for a total of $11.585 million.

Failure to file reviewed interim financial statements: In the Matter of Cardiff Lexington Corporation, Adm. Proc. File No. 3-18820 (Sept. 21, 2018) is one of five actions brought by the Commission against issuers who failed to file interim financial statements that had been reviewed. Each Order alleges violations of Exchange Act sections 13(a), Rule 13a-13 and Rule 8-03, Regulation S-X. To resolve the proceedings each issuer consented to the entry of a cease and desist order based on the cited sections. Each also agreed to pay a penalty as follows: Cardiff Lexington Corporation, $25,000; Cool Technologies Inc., $75,000; Dasan Zhone Solutions Inc., $50,000; First Hartford Corporation, $50,000; Infrax Systems Inc., $50,000. (The amount of the penalty is a function of the number of incorrect interim filings made with 1 yielding a $25,000 penalty).

Manipulation: SEC v. Galanis, Civil Action No. 1:15-cv-07547 (S.D.N.Y.) is a previously filed action which named as defendants Jason Galanis, John Galanis, Derek Galanis, Jared Galanis, Gary Hirst and Gavin Hamels. Defendants are alleged to have participated in a scheme to issue $72 million of unregistered shares of an issuer to a Galanis family friend in Kosovo and then bribe an investment adviser to purchase the shares for clients. The scheme yielded $20 million in illegal profits. Each defendant previously either pleaded or been found guilty in parallel criminal actions. Each has now settled with the Commission as follows: Derek Galanis, consent to the entry of a permanent injunction based on Securities Act sections 5 and 17(a) and Exchange Act section 10(b) and the payment of disgorgement which is deemed satisfied by the restitution order in the parallel criminal case; John Galanis, on essentially the same terms; Jared Galanis consented to the entry of a permanent injunction based on Securities Act section 5 and the payment of disgorgement of $207,500 plus prejudgment interest of $37,699; Mr. Hirst consented to the entry of a permanent injunction based on Securities Act section 5 and Exchange Act section 10(b) and the entry of a bar prohibiting him from serving as an officer or director of an issuer; and Mr. Hamels consented to the entry of a permanent injunction based on Exchange Act sections 9(a)(1) and 10(b) and Advisers Act sections 206(1) and 206(2). An association bar was also imposed in an administrative proceeding. See Lit. Rel. No. 24283 (Sept. 21, 2018).

Manipulation: SEC v. Hope Advisors, LLC, Civil Action No. 1:16-cv-1752 (N.D. Ga.) is a previously filed action against the firm and its principal, Karen Burton. It was based on a scheme in which Defendants managed two hedge funds and claimed that their only compensation was an incentive fee based on profits earned. Defendants engaged in a number of trades that were designed to inflate the profits and postpone losses. As a result over $50 million in losses in the two funds were avoided while Defendants earned millions of dollars in fees. The Court entered final judgments by consent against the firm and Ms. Burton prohibiting future violations of Advisers Act sections 206(1), 206(2) and 206(4). In addition, Defendants were ordered to pay disgorgement of $1,237,235 and a penalty of $250,000. See Lit. Rel. No. 24285 (Sept. 21, 2018).

CFTC

Spoofing: In the Matter of Mizuho Bank, Ltd., CFTC Docket No. 18-38 (Sept. 21, 2018) is an action against the internal bank charging it with spoofing on the CME and CBOT. Specifically, one of the firm’s traders repeatedly placed orders with the intent to cancel them on each exchange for futures contracts based on US. Treasury notes and Eurodollars. The trades were placed on a trading platform through its Singapore office. The firm agreed to the entry of a cease and desist order based on the CEA spoofing statute and to the payment of a $250,000 penalty.

Criminal cases

Offering fraud: U.S. v. Scronic, No. 7:18-cr-00043 (S.D.N.Y.) is an action in which former hedge fund manager Michael Scronic was sentenced to serve 96 months in prison, serve three years of supervised release and pay restitution of $22,026,427. The charges were based on the fact that Defendant raised over $22 million from 45 investors in Scronic Macro fund over a seven year period beginning in 2020. While he told investors his fund was profitable, in reality it lost money every quarter but one. Defendant also misappropriated portions of the investor funds. See also SEC v. Sonic, Civil Action No. :17-cv-5625 (S.D.N.Y.).

Financial fraud: U.S. v. DiMaria, No. 1:17-cr-20898 (S.D.Fla.) is an action against Edward DiMaria, the former CFO of publically traded Bankrate Inc. He was sentenced this week to serve 10 years in prison based on a complex accounting fraud. Previously, Mr. DiMaria pleaded guilty to one count of conspiracy to make false statements to a public company’s accountants, falsify the firm’s books and commit securities fraud and one count of conspiracy to make false statements to the SEC. Mr. DiMaria admitted that between 2010 and 2014 he engaged in a complex financial fraud to falsify the books of the company by maintaining a cookie jar reserve, improperly classifying certain expenses and lying to the SEC. The scheme caused more than $25 million in losses for shareholders. The sentence includes a term of three years of supervised release and the payment of restitution in the amount of $21,234,214. Previously, another bank official pleaded guilty in connection with the scheme.

Anti-corruption/FCPA cases

In the Matter of Petroleo Brasileiro S.A. – Petrobras, Adm. Proc. File No. 3-18843 (Sept. 27, 2018) is an action which names as a Respondent the Brazilian government controlled oil and gas firm. Over a nine year period beginning in 2003 the firm engaged in a large expansion of the infrastructure for producing oil and gas. During the period a number of former senior firm executives and others conspired to inflate the costs of the projects by billions of dollars. In return the companies involved in those projects paid huge kickbacks that typically represented 1% to 3% of the transaction. The funds went to the former executives. The overcharges resulted in false books and records being filed with the Commission – Petrobras’ ADRs were traded in the U.S. The firm failed to detect the fraud. The Order alleges violations of Securities Act sections 17(a)(2) and (3) and Exchange Act sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay disgorgement of $711,000,000, prejudgment interest of $222,473,797. That obligation is reduced and deemed satisfied by the amount of any payment to the Settlement Fund for a related class action. The firm will also pay a penalty within one year of the date of the Order in the amount of $853,200,000 in accord with the related DOJ non-prosecution agreement. Respondent also receives a credit up to $682,560,000 for any payment made to the Brazilian authorities in accord with the DOJ agreement and $85,320,000 of any payment made in connection with paragraph 43 of the DOJ agreement.

The firm entered into a non-prosecution agreement with the DOJ, agreeing to pay a criminal penalty of $853.2 million. That reflects a 25% discount off the low end of the applicable Sentencing Guidelines fine range for the firm’s full cooperation and remediation. The firm did not self-report. There were unique factors here, however, including that fact that the company is resolving matters with the Brazilian authorities and that it was defrauded by its former employees thus harming the shareholders.

In the Matter of Patricio Contesse Gonzalez, Adm. Proc. File No. 3-18839 (Sept. 25, 2018) names as Respondent the CEO of Sciedad Quimica Y Minera De Chile, S.A. or SQM, a multinational mining and chemical firm based in Santiago, Chile. Its ADRs are listed on the NYSE. Between 2008 and 2015, according to the SEC’s Order, the firm made about $14.75 million in improper payments to Chilean politicians, political candidates and individuals connected to them. The payments were made from a discretionary account made available to the office of the CEO by the firm. Generally, the payments were based on fictitious documents from persons associated with those who received them. Respondent personally caused the fictitious documents to be created and thus the firm’s inaccurate books and records. The company did not have adequate internal controls, according to the Order. As CEO Respondent was responsible for the deficiencies, executed false certifications and failed to disclose the improper payments to the firm’s auditors. The Order alleges violations of sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the matter Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to the payment of a penalty in the amount of $125,000.

See also In the Matter of Sciedad Quimica Y Minera De Chile, S.A., Adm. Proc. File No. 3-17774 (January 13, 2017). The firm resolved FCPA charges based on the facts above, consenting to the entry of a cease and desist order based on Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B). The firm also agreed to implement certain undertakings which, among other things, require the retention of an independent monitor, and to pay a penalty in the amount of $15 million. Criminal FCPA charges were resolved with the DOJ. The firm entered into a deferred prosecution agreement. The underlying complaint alleges one count of failing to implement internal controls and one count of falsifying its books and records. The agreement is based on the admissions of the company. The firm will pay a criminal penalty of $15,487,500. A monitor will be appointed, although the firm took remedial steps, in view of the size of the company and its risk profile. The monitor will be in place for two years.

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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.