As the Government fiscal year drew to a close the Commission continued to file cases at a rapid pace. By the close of business last week the agency filed all but one of the 16 actions listed below. Those included the now settled actions against Tesla and Elon Musk, negotiated Friday and Saturday morning when the resolution was announced.
In the agency filed cases against: Credit Swisse centered on trade executions; Walgreens and two of its executives based on false projections; a pharmaceutical company Salix and its CFO for financial fraud; a brokerage firm for not filing SARS; an investment adviser for cherry picking; and a recidivist medical technology firm for FCPA violations.
Remarks: Steven Peikin, Co-Director, Division of Enforcement delivered remarks titled Remedies and Relief in SEC Enforcement Actions at the PLI White Collar Crime 2018 program, New York, NY (Oct. 3, 2018). In his remarks the co-director reviewed the different types of remedies the agency can and does seek, stressing that it is the overall effectiveness of those remedies that is important, not the numbers of cases or the total amount of monetary orders secured (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 9 civil injunctive cases and 7 administrative proceedings, excluding 12j and tag-along proceedings.
Evading restrictions: SEC v. Knox, Civil Action No. 1:16-cv-12058 (D. Mass. Filed Oct. 2, 2018) is an action which names as defendants Roger Knox, a U.S. citizen residing in France, Wintercap S.A., a Swiss entity that claims to be an asset manager, and Michael Gastauer, a German citizen resident in Switzerland. The action centers on a $165 million fraud initiated in 2015 that continues up to day. Defendants Knox and Wintercap facilitated the sale of control shares by individuals who otherwise could not sell the shares absent registration or an exemption. To do this Defendant Knox initially took steps to conceal the shares, falsely certified to Wintercap that the stock was not part of a control block and then sold it through the international markets. Records were at times falsified. Defendant Michael Gastaner facilitated the flow of cash from the transactions, effectively laundering it through a series of accounts and channels, to complete the transactions. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act sections 10(b), 15(a), 15(b) and 20(e). The case is pending. The U.S. Attorney’s Office for the District of Massachusetts filed a parallel criminal action. See Lit. Rel. No. 24304 (Oct. 3, 2018).
Disclosure controls: SEC v. Tesla, Inc., Civil Action No. 1:18-cv-8947 (S.D.N.Y. Filed Sept. 29, 2018); SEC v. Musk, Civil Action Number 1:18-cv-8865 (S.D.N.Y. Filed Sept. 27, 2018). The Tesla complaint charges the electric car manufacturer with violations of Exchange Act rule 13a-15, alleging that the firm did not have disclosure controls or procedures regarding Mr. Musk’s use of Twitter to disseminate information about the company. The predicate for the charge is the November 5, 2013 filing of the firm stating that it intended to use Mr. Musk’s personal Twitter account as a mechanism for publically disseminating material information to the public. Since that date Mr. Musk has repeatedly used his Twitter account to disseminate material information about the firm. That has included publishing guidance about the firm’s financial metrics and other information. Over 22 million people follow Mr. Musk’s Twitter feed. On Tuesday, August 7, 2018, Mr. Musk published his statement revealing his thoughts on going public on Twitter just after mid-day. That statement was followed by additional tweets. < Subsequently, there was speculation by investors, stock analysts and journalists. While Tesla’s IR director responded to some inquiries, it wasclear that he was not prepared. Mr. Musk “did not routinely consult with anyone at Tesla before publishing Tesla related information via his Twitter account. The firm also did not have processes in place to ensure that the information published was accurate and complete,” according to the complaint. The action against Mr. Musk also centers on the mid-day August 7, 2018 nine word tweet regarding his thoughts about going private and “funding secured” as amplified by additional comments later that day. Mr. Musk had been “thinking” about taking the company private for over a year and a half, according to the chronology in the complaint and had a number of conversations with a sovereign wealth fund based on which he believed the financing could be obtained. He also had conversations with the Board of Directors which ultimately decided not to move forward with going private. The complaint is built on the theory that Mr. Musk knew, or was reckless in not knowing, that his statements regarding taking the company private on August 7 “did not have an adequate basis in fact. . . “ because he knew that: 1) he had not discussed a going private transaction at $420 per share with any potential funding source; 2) that he had “done noting” to investigate whether it would be possible for all current investors to remain” with a private company; 3) had not confirmed support with Tesla’s investors; and 4) had not “satisfied numerous additional contingencies . . .” The complaint alleges violations of Exchange Act section 10(b). The settlements stipulate that: 1) Mr. Musk step down as Tesla’s chairman and be replaced by an independent Chairman; 2) that Mr. Musk is not eligible to be Chairman for a period of three years; and 3) that the firm establish a new committee of independent directors and add controls and procedures to oversee Mr. Musk’s communications. The terms do not preclude Mr. Musk from serving as CEO of the firm. Finally, the firm and Mr. Musk will each pay a penalty of $20 million.
Trade executions: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-18857 (Sept. 28, 2018). Credit Suisse operated a New York based wholesale market making business called Retail Execution Services or RES. It executed retail originated orders in equity securities from other broker-dealers. The operation received customer orders on either a held or not held basis. The former must be immediately executed at the prevailing market price. The latter allow for price and time discretion. The marketing for RES stressed quality executions, emphasizing its access to dark pool liquidity through its own venue and those of others. The firm did in fact frequently route not held orders through the dark pool venues. It did not, however, typically route held orders in this fashion. To the contrary, RES rarely executed these orders in the touted dark pool venues between September 2011 and December 2012. RES also did not handle its Rule 605 orders in accord with the representations in its marketing materials. Rule 605 requires that market centers such as RES publicly report certain aggregate order execution information on an aggregate basis with certain exceptions. RES received both Rule 605 eligible and non-605 eligible order flow. From mid-2011 through March 2015 RES treated many non-605 orders less favorably than Rule 605–eligible orders that were similar in other respects. What the firm failed to disclose was the fact that the non-605 orders were generally ineligible for price improvement by RES. Similarly, from February 2013 through March 2015 RES applied a market routing tactic which sent outsized non-605 orders to a lit venue rather that a dark pool. This tactic meant that the order generally had a greater market impact – price movement from execution – and therefore obtained a less favorable overall execution compared to those routed to a more liquid venue. The Order alleges violations of Securities Act section 17(a)(2). 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 will also pay a $5 million penalty.
False projections: In the Matter of Walgreens Boots Alliance, Inc., Adm. Proc. File No. 3-18850 (Sept. 28, 2018). Named as Respondents are: The firm, the product of a merger between Walgreen Co. and Alliance Boots, GmbH, a European pharmacy-led health and beauty firm in a two step merger announced on June 19, 2012; Gregory Wasson, the former CEO of Walgreens; and Wade Miquelon, the former CFO of the firm. When the merger was announced in June 2012 Walgreens announced 2016 goals that were composed of financial metrics the company planned to track going forward. Key was a projected Goal for FY16 EBITA of $9.0 to $9.5 billion. Walgreens intended to provide quarterly reaffirmations of the goals, if reasonable. The Goal was calculated using a “deal model” formulated by Walgreen’s M&A team and outside advisers. The model forecast baseline FY 16 EBIT of $9.9 billion with a “severe downside case” of about $9.3 billion. The firm derived the FY16 Goal after reducing the deal model’s baseline forecast by $900 million of corporate contingency to cover unexpected risks. The deal model used was based on the FY 2013-2015 long range plans or LRP for the Walgreens – Alliance Boots base businesses, along with an assumption for the synergies anticipated from the merger. Since neither company had long range plans going out to 2016, the model adopted growth assumptions to extrapolate out to 2016. At the time Walgreens was engaged in long range planning but had not obtained Board approval for a long range FY 2013-2015 plan to which it could apply the growth rates for 2016. The FY16 EBIT Goal was deliberately challenging. Internally it was referred to as “challenging, stretch goals.” Walgreens used the word “goals” in its proxy to describe “challenging yet achievable” targets. In October 2012 Walgreens’ Board approved its FY 2013-2015 LRP. Management also presented the Board with what it called a “Glide Path to Stated Goals.” It contained interim targets for fiscal years 2013, 2014 and 2015. Those interim goals built toward the ultimate 2016 goals. As the firm moved forward and developed its long range plans it repeatedly reaffirmed the FY16 EBIT Goal despite continued indications that it was not achievable. Yet until the third quarter 2014 the firm continued to reiterate the original projection, although it admitted reaching the goal was challenging. Ultimately at the firm’s June 2014 earnings call (the third quarter for the firm) the company withdrew its 2016 goals. Yet in quarterly discloses made in June 2013, October 2013, December 2013 and March 2014 the firm had reiterated the original projection despite having substantial information internally to the contrary. An announcement resetting those goals was made the next month. The stock price dropped 14.3% following the announcement. The Order alleges violations of Securities Act section 17(a)(2). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the section cited in the Order. The firm will pay a penalty of $34.5 million. Each executive will pay a penalty of $160,000.
Offering fraud: SEC v. Uresti, Civil Action No. 4:18-cv-1013 (WD. Tx. Filed Sept. 28, 2018) is an action which names as defendants, Carlos I. Uresti, an attorney and well known state senator and Stanley Bates, the founder, CEO and 51% owner of FWLL, LlC, a firm that purportedly bought and sold sand used in hydraulic fracking to extract oil and gas. Beginning in April 2014, and continuing for about one and a half years, Defendants raised over $11 million selling interests in FWLL. Mr. Bates made misrepresentations regarding the safety and use of the funds – much of the money was diverted to him. Attorney Uresti aided the selling effort, convincing one client–a mother for whom he had obtained a $900,000 personal injury settlement from the death of her two children in a car cash–to invest the settlement. He obtained a large commission and failed to tell her that he diverted a portion of her potential profits to himself. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act sections 10(b) and 15(a). The case is pending. In related criminal proceedings Mr. Uresti was found guilty by a federal jury on 11 counts including two counts of securities fraud. Mr. Bates pleaded guilty to eight felony counts, two of which were for securities fraud. Each Defendant was sentenced to serve 12 to 15 years in prison. Both Defendants were ordered to pay restitution in the amount of $6.3 million. See Lit. Rel. No. 24296 (Sept. 28, 2018).
SARs: In the Matter of COR Clearing, LLC, Adm. Proc. File No. 3-18851 (Sept. 28, 2018) is an action which names the registered broker-dealer as a Respondent. From January 2015 through June 2016 the broker cleared sales of low priced shares for customers of its introducing broker clients. In a number of instances the customer deposited a large block of low-priced shares, sold the stock and later withdrew the process from its accounts. In some instances the same customer engaged in this pattern of activity. For example, during the period one customer received about 24 physical deposits of large blocks of certain low priced securities and engaged in over 150 sales in the days immediately following the deposits for over 306 million shares of one security and over 273 million shares of that security within the time period. Nevertheless, the firm failed to file a SAR. The Order alleges violations of Exchange Act section 17(a). To resolve the proceedings the firm consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. Respondent was also directed to comply with certain undertakings regarding its procedures and pay a penalty of $800,000.
Revenue recognition: In the Matter of Mota Group, Inc., Adm. Proc. File No. 3-18856 (Sept. 28, 2018) is an action which names as Respondents the privately held firm which sells drones, toys and other consumer products, and Mota “Michael” Faro, the firm’s founder, Chairman, President and CEO. In October 2016 the firm’s Sales Director entered into an arrangement with a Distributor under which the Distributor could return any unsold portion of a Holiday Order that was valued at $500,000 or above. Since the Distributor had an unlimited right of return no revenue could be recognized until the amount of actual sales could be determined. Nevertheless, Respondents recognized about $545,481 or 15% above the actual sales and included that figure in an S-1 filed with the Commission for a $6.5 million offering. The incorrect amount appeared in five amendments to the S-1. While the firm did ask that the registration statement go effective, it was withdrawn the next day. The registration statement never became effective — Respondent withdraw it. The Order alleges violations of Securities Act section 17(a)(3). Each Respondent consented to the entry of a cease and desist order based on the section cited in the Order. The firm was ordered to comply with its undertaking not to file a registration statement and to pay a penalty of $10,000.
Insider trading: In the Matter of Unal Patel, Adm. Proc. File No. 3-18858 (Sept. 28, 2018). Respondent Unal Patel is a CPA. He lived with his cousin, Respondent Amish Patel, a medical doctor. On February 23, 2016 Unal Patel received a telephone call from a close friend employed at The Southern Company. During the call he learned that Southern was about to acquire PowerSecure International, Inc. After the call Unal Patel told his cousin about the information. The next morning each Respondent purchased PowerSecure call options. At the end of that day Southern announced the deal in an all cash transaction. Subsequently, Unal Patel sold his options, realizing profits of $7,321. Amish Patel sold his options, realizing profits of $15,978. The Order alleges violations of Exchange Act section 10(b). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the section cited in the Order. Each Respondent also agreed to disgorge his trading profits and pay prejudgment interest – Unal Patel in the amount of $599.34 and Amish Patel in the amount of $1,511. 36. In addition, Unal Patel agreed to pay a penalty equal to twice the amount of his trading profits while Amish Patel will pay a penalty which equals his trading profits.
Offering fraud: SEC v. NL Technology, LLC, Civil Action No. 18 cv 2253 (S.D. CA. Filed Sept. 27, 2018) is an action which names as defendants the firm, Jonny Ngro, the owner of the firm, and Donato Baca, the sole proprietor of MR Media Inc., an internet marketing company. Over a four year period beginning in 2013 Defendants Ngo and Baca raised over $61 million from 350 investors who were told their funds would be invested in NL Technology. The firm supposedly had a wholesale electronics import business, purchasing bulk electronics abroad for resale in the U.S. Investors were told they would receive returns of 5% to 15% over periods as short as 45 days. In fact the operation was a Ponzi scheme and much of the money was diverted to the personal use of the individual defendants. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act section 10(b). Mr. Ngo and the firm settled with the Commission, consenting to the entry of final judgments based on the sections cited in the complaint. The final judgement against Mr. Ngo also prohibits him from soliciting, accepting, or depositing funds from any actual or prospective investors in connection with any offering of securities. He will pay disgorgement of $4.5 million, $245,726 in prejudgment interest and a $480,000 civil penalty. See Lit. Rel. No. 24293 (Sept. 28, 2018).
Pyramid scheme: SEC v. TelexFree, Inc., Civil Action No. 14-cv-11858 (D. Mass.) is a previously filed action against, among others, the firm and TelexFree, LLC. The underlying case involved the sale of interests in an offering fraud involving a pyramid scheme. In a related bankruptcy each firm admitted its involvement in the scheme. Here each Defendant reiterated its involvement in the scheme and consented to the entry of permanent injunctions prohibiting violations of Securities Act section 17(a) and Exchange Act section 10(b). The court entered the final judgment. See Lit. Rel. No. 24301 (Sept. 28, 2018).
Cherry picking scheme: SEC v. Bressman, Civil Action No. 1:18-cv-11925 (D. Mass. Filed Sept. 28, 2018) is an action against the registered representative who had been employed at a broker-dealer. Over a six year period beginning in 2012 Defendant used an omnibus account to allocate profitable trades to his account and those of his family. Unprofitable trades were allocated to customer accounts. Over the period he made about $700,000 in profits. The complaint alleges violations of Securities Act sections 17(a)(1) and (3) and Exchange Act section 10(b). The case is pending. The U.S. Attorney’s Office for the District of Massachusetts filed a parallel criminal case. See Lit. Rel. No. 24300 (Sept. 28, 218).
Manipulation: SEC v. Hand, Civil Action No. 1:15-cv-14109 (D. Mass.) is a previously filed action which named as defendants Jehu Hand and Antonio Katz. The complaint alleged a pump-and-dump manipulation scheme. The court entered a final judgment against Mr. Katz, enjoining him from future violations of Securities Act sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act section 10(b). The order also directs the payment of disgorgement in the amount of $9,900 deemed satisfied by the order of restitution in the parallel criminal case in which Mr. Katz pleaded guilty and was directed to serve 36 months of probation and pay restitution of $1 million. The court’s order also contained a penny stock bar. See Lit Rel. No. 24299 (Sept. 28, 2018).
Manipulation: SEC v Ronk, Civil Action No. 1:18-cv-08908 (S.D.N.Y. Filed Sept. 28 2018) is an action which names as a defendant Mr. Ronk who has worked for a number of broker-dealers and has a website that promotes stock. The case is based on two largely parallel promotions of stock. The first involved Casablanca Mining Ltd. and Gepco, Ltd. which Defendant promoted from May 2012 to September 2014 using a series of false statements. During the same period he also manipulated the shares of each firm. The second, which took place over the same period, involved false statements made to prospective investors regarding the privately held shares of WealthMakers, Ltd., a firm founded by Mr. Ronk. The complaint alleges violations of Securities Act sections 17(a) and Exchange Act section 10(b). The case is pending. See Lit. Rel. No. 24297 (Sept. 28, 2018).
Financial fraud: SEC v. Salix Pharmaceuticals, Ltd., Civil Action No. 1:18-cv-008886 (S.D.N.Y. Filed Sept. 28, 2018) is an action which names as a defendant the pharmaceutical firm. Over a two year period beginning in 2013 the firm and its CFO repeatedly misrepresented the firm’s financial position in earnings calls. Specifically, Salix employed a practice of “overselling demand.” Using this approach the firm flooded the market with key drugs. This created a bump in revenue in the short term. Since eventually there was an oversupply of product in the market it reduced future demand. Eventually, in the first quarter of 2014 the demand began to decline. The scheme was uncovered in the third quarter when confidential due diligence in connection with a possible acquisition was being conducted. The share price dropped 34% when the scheme was disclosed. The complaint alleges violations of Securities Act section 17(a)(2) and Exchange Act sections 10(b) and 13(a). To resolve the action the firm consented to the entry of a final injunction prohibiting future violations of the sections cited in the complaint. The settlement reflects the fact that the firm self-reported and rendered significant cooperation to the staff during its investigation. See also SEC v. Derbyshire, Civil Action No. 1:18-cv-08891 (S.D.N.Y. Filed Sept. 28, 2018)(action against former CFO Adam Derbyshire based on same facts and violations; settled with the entry of a permanent injunction based on the sections cited in the complaint and the payment of $558,534 in disgorgement and prejudgment interest, a penalty of $494,836 and the entry of a bar from serving as an officer or director for five years). See Lit. Rel. No. 24302 (Oct. 1, 2018).
False ADV statements: SEC v. Goldsky Asset Management, LLC, Civil Action No. 18 Civ. 8870 (S.D.N.Y. Filed Sept. 28, 2018) is an action against the registered investment adviser and its sole owner and manager, Kenneth Grace of New South Wales, Australia. Beginning in 2016 and continuing through 2018 Defendants made false statements in their Forms ADV regarding: 1) the amount of assets under management by claiming that it ranged from $5 million to more than $100 million when in fact it was zero; and 2) the firm’s returns, claiming that it had earned 19.45% annual returns, 70.33% monthly returns since inception and 25.30% returns for the year ended September 30, 2017 when it fact it had no investment activity. The complaint alleges violations of each subsection of Securities Act section 17(a) and Advisers Act sections 206(4) and 207. The case is pending. See Lit. Rel. No. 24291 (Sept. 28, 2018).
Improper transactions by adviser: In the Matter of Lendingclub Asset Management, LLC, Adm. Proc. File No. 33259 (Sept. 28, 2018) names as respondents the registered investment adviser, Renaud LaPlanche and Carrie Dolan, respectively the CEO and CFO. LendingClub provides investment advisory services to several private funds that purchase loan interests offered by LendingClub Corporation a publicly traded online marketplace lending company. From December 2015 through April 2016 the adviser caused one of the advised funds to purchase loans that were at risk of expiring unfunded on the LendingClub platform. That would have deprived Lending Club of revenue it could otherwise earn. The interests were purchased for the benefit of the adviser. The purchases were also inconsistent with the allocation procedures specified in its Form ADV and Lending Club’s private placement memorandum for the fund involved. In resolving the action the Commission considered the firm’s extensive remediation. The Order alleges violations of Advisers Act sections 204(a), 206(1), 206(2), 206(4) and 207. To resolve the proceedings the adviser and Respondent Laplanche consented to the entry of a cease and desist order based on each of the sections cited in the Order. The firm is also censured. Respondent Dolan consented to the entry of a cease and desist order but only based on sections 206(2) and 206(4) and a censure. Respondent Laplanche is barred from the securities business. The firm will pay a penalty of $4 million; Mr. Laplanche will pay a penalty of $200,000; and Ms. Dolan will pay a penalty of $65,000.
In the Matter of Stryker Corporation, Adm. Proc. File No. 3-18853 (Adm. Proc. File No. 3-18853 (Sept. 28, 2018) is a proceeding which names the Michigan based medical technology firm as a Respondent. The firm previously settled an FCPA action with the Commission.
This action is based on the failure of the firm’s subsidiaries in India, China and Kuwait to comply with the company anti-corruption policies and procedures and internal controls. First, in India over a five year period beginning in 2010 the firm’s wholly owned subsidiary failed to keep and maintain any documentation for 27% of the transactions tested in a forensic review that targeted the firm’s high-risk and compliance sensitive accounts. During the period the subsidiaries dealers regularly issued “inflated invoices” upon the request of certain private hospitals. The hospitals profited from the practice by passing on the high prices while securing the orthopedic products at lower prices negotiate with the Stryker subsidiary. The firm failed to implement a system of internal controls to prevent the practices.
In China, where the firm also operates through a wholly owned subsidiary, from 2015 through 2017 at least 21 sub-distributors of Stryker’s Sonopet product were not vetted, approved, or trained in accord with firm policies. At times firm employees worked directly with these unauthorized sub-distributors and at other times the records were falsified to conceal that fact. The use of these unauthorized sub-distributed increased the risk that the firm’s internal anti-corruption policies would be circumvented.
Finally in Kuwait, Supply Chain Services B.V., a wholly owned subsidiary of Stryker based in the Netherlands from an office in Dubai sold orthopedic products to the Kuwait Ministry of Health. Over a two year period beginning in 2015 the primary distributer used submitted over $32,000 in improper “per diem” payments to attend Stryker events when the firm had directly paid the costs for lodging meals and transportation for the individuals While the firm had in place policies and procedures regarding anti-corruption it failed to properly implement them. The Order alleges violations of Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B). In resolving the matter Stryker undertook a series of remedial efforts. The firm consented to the entry of a cease and desist order based on the sections cited in the Order. It also agreed to pay a penalty of $7.8 million and to implement certain undertakings which include the retention of an Independent Consultant.
FinTech: The agency entered into a cooperative arrangement with the Australian Securities and Investment Commission regarding TinTech. Specifically, the two agencies entered into an arrangement to cooperate and support innovation through each other’s financial technology initiatives. The ASIC has an Innovation Hub, launched in 2015, that helps fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence. The CFTC launched LabCFTC in May 2017 which is aimed at facilitating market-enhancing FinTech innovation that may influence policy development.
FinTech: The Australian Securities and Investment Commission announced an agreement with the Luxembourg Commission de Surveillance du Secteur Financier or CSSF which provides a framework to understanding financial innovation in each jurisdiction. The agreement is consistent with the long time approach of the CSSF, which views innovation as essential to the development of financial services, and the ASIC view that fintechs are playing a vital role in refashioning financial services and the capital markets.