This Week In Securities Litigation

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September 30th Madness dominated this week. The drive for stats was evident as the Commission stacked up cases like cord wood at a pace seldom seen. Twenty-two municipal bond actions were filed in one swoop; an insider trading case; a financial fraud action; an offering case; an FCPA action; and more, much more. All got tossed on the heap. The numbers increased; the penalty dollars spiraled upward. September 30th Madness was in full force.

When it ended 50 new actions had been brought in the final days leading up to the magic date. And, that does not even count the 12j proceedings and other tag along actions the Commission adds to its stats (see article below). If stats are the any measure of SEC Enforcement – and somebody obviously thinks that is true – September 30th Madness makes the program a success. Now that it is October, however, back to business as usual – policing the markets, not counting cases and dollars.

SEC

Remarks: Commissioner Kara M. Stein delivered remarks titled “Market Structure in the 21st Century: Brining Light to the Dark,” to the Securities Traders Association’s 82 Annual Market Structure Conference (Sept. 30, 2015). Her remarks focused on brining light to dark pools and the development of the consolidated audit trail (here).

Meeting: The Equity Mart Structure Advisory Committee will meet on October 27, 2015. The meeting is open to the public and will be webcast.

CFTC

Whistleblowers: The agency announced its second whistleblower award. This award was $290,000.

Remarks: Chairman Timothy Massard addressed the 3rd Annual OTC Derivatives Summit North America (September 29, 2015). His remarks included comments on the overhaul of clearinghouse oversight, oversight of major market players, margin for uncleared swaps, trading and harmonizing and standardizing reporting (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 13 civil injunctive cases and 41 administrative actions, excluding 12j and tag-along proceedings.

Pyramid scheme: SEC v. Chen, Civil Action No. CV 15-07425 (C.D. Cal. Unsealed Oct. 1, 2015) is an action which names as defendants Steve Chen, US Fine Investment Arts, Inc. and a series of other entities. According to the firm’s website, USFIA is a subsidiary of, and was founded by, US China Consultation Association which claims to be a joint venture of the U.S. and China governments. The firm claims to own several mines, including amber mines in the Dominican Republic and Argentina. Since April 2103 USFIA and Mr. Chen have raised about $32 million. Investors were told about the mines and informed of an upcoming IPO for the firm. They were also assured of significant profits. In fact the firm is a multi-level pyramid scheme and a fraud. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). A freeze order was issued by the Court which also appointed a temporary receiver. The case is pending.

Investment fund fraud: SEC v. Wells, Civil Action No. 1:15-cv-07738 (S.D.N.Y. Filed October 1, 2015) is an action which names as defendants William Wells and Promitor Capital Management LLC. Mr. Wells was registered with FINRA as an Investment Company Product/Variable Contracts Representative years ago. He owns the firm which manages a fund. Since 2009 the defendants have raised about $1.1 million from at least 30 investors. Those investors were assured that Mr. Wells is a registered investment adviser and that their funds would be invested in particular stocks through individual accounts. Those claims were false. No accounts were created and there were almost no investments. Portions of the investor funds were used to repay other investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending. Mr. Wells was also charged with securities and wire fraud by the Manhattan U.S. Attorney’s Office.

Independence: In the Matter of Grant Thornton India LLP, Adm. Proc. File No. 3-16879 (October 1, 2015); In the Matter of Grant Thornton Audit Pty Limited, Adm. Proc. File No. 3-16880 (October 1, 2015). GT India is a member firm of Grant Thornton International Ltd which operates in India. It is registered with the PCAOB. GT Audit is based in Australia and is also a member of the international firm and is registered with the PCAOB. Each matter results from the fact that two Grant Thornton Mauritius partners served on the board of directors of a Mauritius based subsidiary of their audit clients. Those partners performed prohibited non-audit services for that subsidiary. For GT India the violations occurred for the firm’s fiscal year ended March 31, 2013. For GT Audit, this impacted the audits for the fiscal years ended June 30, 2008, 2009, 2010 and 2011. Neither Respondent complied with Grant Thornton’s compliance control procedures. Each firm consented to the entry of a cease and desist order based on Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act and was censured. In addition, GT India will pay disgorgement of $128,905, prejudgment interest and a penalty of $50,000. GT Audit will pay disgorgement of $88,683, prejudgment interest and a penalty of $75,000.

Insider trading: SEC v. Khan, Civil Action No. 3:14-cv-02743 (N.D. Cal.) is a previously filed action naming as defendants Ranjan Mendonsa and Ammar Akbari along with Mr. Khan and Roshanlal Chaganial. The complaint alleged that Mr. Khan was routinely tipped by his friend, defendant Chaganlal, a director in the finance department of Ross Stores. Mr. Khan then traded ahead of company press releases and tipped others. Defendants Ranjan Mendonsa and Ammar Akbari settled with the SEC. Each consented to the entry of a permanent injunction based on Exchange Act Section 10(b). The final judgment against Mr. Mendonsa also requires him to pay $614,375 in disgorgement, penalties and prejudgment interest. Mr. Akbari will pay $2,202 in disgorgement and prejudgment interest. See Lit. Rel. No. 23374 (October 1, 2015).

Investment fund fraud: SEC v. Commodore Financial Corp., Civil Action No. 15 –cv- 01567 (C.D. Cal. Filed September 30, 2015) is an action which names as defendants the company, its CEO Christopher Schlegel, M&G Cap Services and Andres Calvo. The complaint alleges that the defendants raised about $7.5 million from at least 84 investors through the sale of fractional interest in oil and gas wells. While the money raised was supposed to go to the development of the wells in fact only about half was used for that purpose. In addition, defendants did not have the expertise claims and the properties were not about to pay returns as represented. 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. See Lit. Rel. No. 23376 (October 1, 2015).

Municipal bonds: In the Matter of Edward D. Jones & Co., L.P., Adm. Proc. File No. 3-16867 (September 30, 2015) is one of 22 actions brought under the Commission’s Municipalities Continuing Disclosure Cooperation Initiative. That initiative encouraged municipal bond underwriters to self-report violation in return for limits on possible penalties. The violations in this group of cases occurred from 2010 to 2014. During the period the underwriters used offering documents that contained materially false statements or omissions regarding the issuer’s compliance with its continuing disclosure obligations. Each firm consented to the entry of a cease and desist order and agreed to pay a civil penalty. A list of the firms involved is available here. The penalties ranged from a low of $20,000 to a high of $500,000. This is the second round of settlements under the initiative.

Manipulation: In the Matter of Edward T. Borg, Adm. Proc. File No. 3-16875 (September 30, 2015) is a proceeding which names as Respondents Mr. Borg, at one time the owner and a registered representative at All Funds, Inc., a broker-dealer established by his father, and Brian Mulkeen, the President, controller and COO of All Funds. Between 2003 and 2011 Mr. Borg is alleged to have manipulated the share price of All Funds repeatedly using matched orders, wash sales and other devices. He also encouraged many firm customers to buy the stock. At one point Mr. Borg and firm customers held about 55% of the shares. While customers made the required filings Mr. Borg did not until 2012. Before All Funds closed Mr. Borg moved many of his customers and himself to LPL Financial LLC where he continued his activities before being asked to leave. At that point many customers moved to TD Ameritrade. Although Mr. Borg was not employed there he convinced many of his customers to permit him to trade for them and was recorded on tape impersonating customers. Mr. Mulkeen was the COO of All Funds and failed to supervise Mr. Borg. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1), 10(b), 13(d) and 16(a). Mr. Borg resolved the action, agreeing to certain undertakings which preclude him from trading in stock except for personal accounts and which require he make the pertinent filings. He also consented to the entry of a cease and desist order based on the Sections cited in the Order. He is barred from the securities business and from participating in any penny stock offering. In addition, he will pay disgorgement of $145,727.50, prejudgment interest and a penalty of $1.3 million. Mr. Mulkeen also resolved the action, agreeing to be barred from the securities business and paying a penalty of $50,000.

Market structure: In the Matter of Latour Trading LLC, Adm. Proc. File No. 3016851 (September 30, 2015) is a proceeding naming the firm as a Respondent. Latour is a registered broker dealer which only engages in proprietary trading. It uses high speed trading. From October 2010 through August 2014 the firm sent about 12.6 million Intermarket Sweep Orders that did not comply with Reg NMS. The orders resulted from a coding change made by Latour’s parent without the firm’s knowledge or approval. That coding change resulted in an error in the software. In October 2010 the firm also made a series of changes to its ISO routing logic that resulted in sending ISOs to the market which at times did not comply with Reg NMS. The firm also failed to have adequate post-trade surveillance tools in place to detect its millions of non-complaint ISOs. Finally, the firm violated the market access rule and failed to have the required system of risk management controls and supervisory procedures in place or to take steps to establish that the ISOs sent to trading centers satisfied Reg NMS. The Order alleges violations of Exchange Act Section 15(c)(3) and Rule 15c3-5 and Rule 611(c) of Reg NMS. In resolving the action the Commission considered the remedial actions and cooperation of Respondent. The firm consented to the entry of a cease and desist order based on the Section and Rules cited in the Order. It also agreed to pay disgorgement of $2,784,875, prejudgment interest and a penalty of $5 million.

Financial fraud: SEC v. Godwin, Civil Action No. 15-cv-01414 (C.D. Ill. Filed September 30, 2015) is an action naming as defendants ContinuityXSolution’s CEO, David Godwin, and CFO, Anthony Roth. The complaint alleges that the firm, a provider of internet services, reported revenue of over $27 million for the period April 2011 through September 2012. In fact it had virtually none. The defendants fabricated it through deals such as recruiting a straw buyer who was promised that they would not have to pay for the services. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a)(, 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23373 (Sept. 30, 2015); see also In the Matter of ContinuityXSolutions, Inc., Adm. Proc. File No. 3-16850 (Sept. 30, 2015)(Section 12j proceeding delisting the firm).

Disclosure: In the Matter of Focus Media Holding Limited, Adm. Proc. File No. 3-16852 (September 30, 2015) is a proceeding which names as Respondents the firm, a China based advertising company, and its founder and former chairman, Jason Jiang. The Order alleges that in 2010 an incentive based plan for executives was put in place under which 38% of Allyes Online Media Holdings Ltd., a subsidiary, was sold to Mr. Jiang and others for about $13.3 million. Not disclosed to shareholders was the fact that a hedge fund was bidding for the subsidiary. That firm was told to hold off. After the employee deal closed the hedge fund paid $124 million for the remaining 62%, implying an enterprise value of $200 million. The filings of the company failed to accurately reflect the transactions. Respondents contend they had no knowledge of the discussions between Allyes and the hedge fund. The Order, however, alleges that the Focus Media board did not receive accurate information and the public disclosures were false and misleading as a result of Respondents failure to head red flags about the transactions. Mr. Jiang was the largest beneficiary of the subsidiary deal. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceeding, Respondents consented to the entry of a cease and desist order based on the Section cited in the Order. The firm will pay a civil penalty of $34.6 million. Mr. Jiang will pay disgorgement of $9,690,000, prejudgment interest and a penalty equal to the amount of the disgorgement. A Fair Fund will be created.

Manipulation/supervision: In the Matter of James Goodland, Adm. Proc. File No. 3-16878 (September 30, 2015) names as Respondents the founder, president and COO of Securus Wealth Management, LLC, a registered investment adviser also named in the Order. From January 2010 through July 2013 the Order alleges that Mr. Goodland failed to supervise Howard Richards, an advisory representative associated with Securus. During that period Mr. Richards is alleged to have manipulated the share price of Gatekeeper USA, Inc., a start up entity traded in the gray market. The Order alleges violations of Advisers Act Section 206(4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Respondent Securus was also censured. Mr. Goodland was barred from the securities business in a supervisory capacity. He will also pay a civil money penalty of $30,000. See also In the Matter of Howard Richards, Adm. Proc. File No. 3-16877 (September 30, 2015)(proceeding based on the manipulation referenced above alleging violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2); Mr. Richards consented to the entry of a cease and desist order based on the Sections cited in the Order, is barred from the securities business and from participating in any penny stock offering and will pay disgorgement of $62,000, prejudgment interest and a penalty of $75,000). A Fair Fund will be established with the amounts paid from both proceedings.

Investment fraud: SEC v. Riel, Civil Action No. 5:15-cv-0116 (N.D.N.Y. Filed September 29, 2015) is an action which names as defendants Charles Reil and his firm, REinvest LLC. The defendants raised over $280,000 from five investors who purchased the securities of Reinvest. Those investors were told that the firm invested in high yield financial growth vehicles that would generate substantial returns. Instead, Mr. Reil misappropriated the funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 23371 (Sept. 30, 2015).

Bar order: SEC v. Moore, Civil Action No. 2:15-cv-01865 (D. Nev. Filed Sept. 29, 2015) is an action naming Michael Moore as a defendant. Previously, Mr. Moore was permanently suspended from appearing and practicing before the Commission as an accountant by an SEC order. He was also barred from associating with a PCAOB registered accounting firm by an order of the Board. Mr. Moore is alleged to have violated the SEC order in connection with the audits of two issues and the PCAOB directive by his work for one company. The complaint seeks a permanent injunction. See Lit. Rel. No. 23371 (Sept. 30, 2015).

Improper lending: In the Matter of UBS Financial Services Incorporated of Puerto Rico, Adm. Proc. File No. 3-16846 (September 29, 2015). When the bond market collapsed in Puerto Rico many clients at UBS Financial Services Incorporated of Puerto Rico had significant losses. Many had purchased shares of UBS PR closed-end funds or CEFs. UBSPR had been selling shares of these funds for years. Indeed, the firm offered customers a number of CEFs and had served as the primary underwriter for 23 CEFs. The often highly leveraged securities are not eligible for margin and are not registered with the SEC. A number of the customers had purchased the CEFs with funds acquired from lines of credit obtained from BUSA, an FDIC insured Utah based bank affiliated with UBS. The acquisitions, which violated UBSPR policies, was orchestrated by long time registered representative Jose Ramirez, who was supervised by branch manager Ramiro Colon. The firm failed to supervise the broker who was charged with fraud, according to the Order. The Order alleges violations of Exchange Act Section 15(b). To resolve the matter the firm 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 disgorgement of $1,188,149.41, prejudgment interest and a penalty of $13,637,653.62. See also In the Matter of Ramiro L. Colon, III, Adm. Proc. File No. 3-16847 (September 29, 2015)(action against branch manager for failure to supervise resolved with an order suspending him from any supervisory position or from participating in a penny stock offering for 12 months and imposing a penalty of $25,000); SEC v. Ramirez, Civil Action No. 3:15-cv-02365 (D. P.R. Filed September 29, 2015)(action alleging violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) against the broker; it is in litigation). See Lit. Rel. No. 23369 (Sept. 29, 2015). In addition, see FINRA Press Release (Sept. 29, 2015)(regulator fined UBSPR $7.5 million for supervisory failures).

Self- dealing: SEC v. Weiss, Civil Action No. 1:15-cv-13460 (D. Mass. Filed September 29, 2015) is an action against Lee Weiss and his controlled entity Family Endowment Partners, L.P. Mr. Weiss is a registered representative affiliated with a broker-dealer and FEP is a registered investment adviser. The complaint alleges a series of self-dealing transactions in which the defendants defrauded investors. First, between 2010 and 2012 they caused advised funds to put more than $40 million in a French company through illiquid loan agreements without disclosing the multiple conflicts of interest Mr. Weiss had with the company. Those include his personal investment in the firm’s parent. Second, during the same period defendants advised five FEP clients to put about $8.25 million into notes or shares of companies under Mr. Weiss’ ownership or control without disclosing that the money would be used primarily to pay millions of dollars in delinquent debt and business expenses of FEP or that the notes might never be repaid. Third, in late 2011 defendants advised four FEP clients to invest $5 million in a consumer loan portfolio managed by a specialty finance company. Defendants did not disclose that Mr. Weiss would profit from the investments through a sham structure he created. Mr. Weiss also arranged for the investors to be paid half of the 18% return offered by the financing company while pocketing the difference. Finally, FEP Fund I was managed in a manner that is inconsistent with its investment strategy. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(3), 206(4) and 204(b)(5). The case is pending. See Lit. Rel. No. 23370 (Sept. 29, 2015).

Insider trading: In the Matter of Christopher Mire, Adm. Proc. File No. 3-16849 (September 29, 2015) is an action centered on the January 13, 2014 announcement that IberiaBank Corp. would acquire Teche Holding Company. Prior to the announcement, Mr. Mire leared about the deal from his ex-wife and then companion. She was an assistant to Teche’s senior vice president and COO. Although she instructed him not to trade he purchased 140 shares of IberiaBank stock before the deal announcement. Following the announcement he had profits of $2,128.21. The Order alleges violations of Exchange Act Section 10(b). Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and agreed to disgorge his trading profits, pay prejudgment interest and a penalty equal to the amount of the disgorgement. See also In the Matter of Eddie R. Leblanc, Adm. Proc. File No. 3-16848 (Sept. 29, 2015)(settled action against an employee of a Teche subsidiary who learned about the deal from the CEO of the firm and purchased shares yielding $15,045.72 in illegal trading profits; settled with a consent to a cease and desist order based on Exchange Act Section 10(b), disgorgement of the trading profits and the payment of prejudgment interest and a penalty equal to the trading profits. A three year officer/director bar was imposed).

Offering fraud: In the Matter of Pankajkumar Srivastava, Adm. Proc. File No. 3-16267 (September 29, 2015) is a proceeding which names as Respondents Mr. Srivastava and Nataraj Kavuri, both residents of India. Both are involved in software and web design. The Order alleges that Respondents engaged in a pooled offering through a website beginning in April 2013. Investors were offered three alternative investments depending on the amount of the investment. Each had a guaranteed high yield return. The investments had “the hallmark of a typical highly suspicious offering called a high-yield investment program,” the Order claims. The Order alleges violations of Securities Act Sections 17(a)(1) and (3). To resolve the proceeding Respondents agreed to an undertaking not to sell securities in the U.S. In addition, they consented to the entry of a cease and desist order based on Securities Act Section 17(a). No penalty was assessed based on financial condition.

Inaccurate records: In the Matter of Hyperdynamics Corporation, Adm. Proc. File No. 3-16843 (September 29, 2015). The Order alleges that the firm failed to accurately record certain payments made by its subsidiary in the Republic of Guinea. Initially those payments were recorded as lobbying and public relation expenses without adequate evidence. Later it was determined they came from a company controlled by an employee but they were not recorded as related party transactions. The firm also has inadequate internal controls. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The Commission considered the remedial actions of the firm which included retaining an in-house attorney, increasing its accounting staff and revisions to its procedures. The firm resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the company will pay a civil penalty of $75,000.

Insider trading: SEC v. Spallina, Civil Action No. 15-cv-7118 (D.N.J. Filed September 28, 2015). The case centers on the acquisition of Pharmasset Inc. by Gilead Sciences Inc. Named as defendants are Robert Spallina, a partner in the law firm of Spallina and Tescher, P.A.; Thomas Palermo, a registered representative in a brokerage firm; Brian Markowitz, a securities trader who is the neighbor of Mr. Spallina and also one of his clients; Steven Rosen, a CPA; and Donald Teascher, also a partner in Spallina and Trescher. In early September 2011 Gilead made an initial offer to acquire Pharmasset. Subsequently, Gilead agreed to be acquired if the share price increased to $137 per share. The firms agreed. On November 21, 2011 a joint press release announcing the tender offer was issued. In early November Pharmasset Board Member met with his personal legal, tax and estate planning team in his office. Those present included Messrs. Spallina, Tescher, Rosen, a financial adviser and another accountant. During the one hour meeting the transaction to acquire Pharmasset was discussed since Board Member held a sizable block of stock. Within hours of the meeting Messrs. Spallina, Tescher and Rosen purchased Pharmasset securities. Later Mr. Spallina tipped his long-time friend Thomas Palermo. In a separate discussion Mr. Spallina tipped Brian Markowitz. Both traded. Following the deal announcement each defendant sold his shares. Collectively the five men had profits of $234,186. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the charges each defendant agreed to pay disgorgement, prejudgment interest and a penalty. In each instance the penalty equals the disgorgement. Mr. Spallina will pay $39,156; Mr. Tescher $9,937; Mr. Rosen $27,634; Mr. Palermo $124,529; and Mr. Markowitz $32,9321. See Lit. Rel. No. 23368 (Sept. 28, 2015).

Financial fraud: In the Matter of Trinity Capital Corporation, Adm. Proc. File No. 3-16837 (Sept. 28, 2015) is one of four actions arising out of the financial fraud at Trinity Capital Corporation, a holding company for Los Alamos National Bank of Los Alamos, New Mexico. Other actions name: CEO William Enloe, Chief Credit Officer Jill Cook, senior lending officer Mark Pierce, CFO Daniel Bartholomew and V.P. of internal audit Karl Hjelvik. In 2010 the bank was under a supervisory agreement. It also had a portfolio of delinquent loans. Messrs. Enloe and Pierce, in conjunction with Ms. Cook, engaged in a scheme which significantly improved the operating results of the bank by not identifying loans were it was probable the bank would be unable to collect – the losses were not recognized. Specifically, in some instances documents were drafted to avoid triggering a review of the troubled loans; in others the impairment of the collateral was ignored; and in other instances appraisals that indicated a lower value were ignored. In some cases documents were prepared which concealed the true condition of the loan. As a result of the fraud in its 2010 annual filing the loan loss provisions were significantly understated as were impaired loans. Reported pre-tax income of $1.9 million should have been a pre-tax loss of $5.4 million. The Order as to the bank alleged violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(B. The bank resolved the action, consenting 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 $1.5 million. See also In the Matter of William C. Enloe, Adm. Proc. File No. 3-16838 (Sept. 28, 2015)(CEO settled, consenting to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) and agreeing to pay a penalty of $250,000); In the Matter of Daniel R. Bartholomew, Adm. Proc. File No. 3-16839 (Sept. 28, 2015)(naming the former CFO and v. p. of internal auditing Karl I. Hjelvik; both settled, consenting to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B); following the conclusion of the case against Ms. Cook and Mr. Pierce, a hearing will be held in this case regarding possible penalties); SEC v. Cook, Civil Action No. 15-cv-00864 (D. N.M. Filed Sept. 28, 2015)( names as defendants former COO Jill Cook and former senior lending officer Mark Pierce; the complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2) and 13(b)(5); the case is pending). See Lit. Rel. No. 23367 (Sept. 28, 2015).

Blue sheets: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-16835 (Sept. 28, 2015) is a proceeding alleging that the firm furnished the SEC with inaccurate blue sheet information. Specifically, from January 2012 to January 2014 the firm furnished the Commission with inaccurate trading information by omitting over 553,400 reportable trades. The error resulted from certain technological and human errors. Changes have been made to correct the situation. The Order alleges violations of Exchange Act Section 17(a). The firm resolved the matter, admitting to the basic facts, and consenting to the entry of a cease and desist order based on the Section cited in the Order as well as a censure. The firm will also pay a penalty of $4,250,000. The SEC considered the remedial efforts and the cooperation of the firm in determining to accept the offer of settlement.

Offerings: In the Matter of Steven J. Muehler, Adm. Proc. File No. 3-16836 (September 28, 2015) is an action which names as Respondents Mr. Muehler, Alternative Securities Markets Group and Blue Coast Securities Corp. Beginning in August 2013 Respondents offered services to investors which included structuring and preparing securities offerings and moving filings through the Commission’s offering processes. To solicit clients Respondents claimed to have extensive experience in the area. The claim was false. Despite not being a registered broker dealer, Respondents signed up about 30 clients. The Order alleges violations Exchange Act Sections 10(b) and 15(a). The proceeding will be set for hearing.

Fraudulent offering: SEC v. Mahabub, Civil Action No. 1:15-cv-02118 (D. Colo. Filed September 25, 2015) is an action which names as defendants Taj Mahabub, GenAudio, Inc. and Astounding Holdings, Inc. Each firm is a private entity controlled by Mr. Mahabub who is the founder and CEO of GenAudio. That firm claims to have in development three dimensional audio. Astounding Holdings is the successor to GenAudio. Beginning in late 2009 Defendants marketed shares of GenAudio to the public, representing that the firm was valued at about $1 billion and was going to be acquired by Apple. In reality Mr. Mahabub had discussions with mid-level Apple employees and nothing more. Nevertheless, about $6.8 million was raised from the public. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 23363 (Sept. 25, 2015).

Financial fraud: SEC v. Garthright, Civil Action No. 23361 (S.D. Fla. Filed September 25, 2015) centers on a financial fraud at SMF Energy Corporation. The defendants are: CEO and Chairman, Richard Gathright; Senior Vice President and CFO, Michael Shore; CAO and Vice President of Finance and Accounting, Laura Messengaugh; and Senior Vice President of Marketing and Sales, Robert Beard. SMF’s primary business was commercial mobile-fueling and lubricant distribution. In 2004 SNF created a billing practice called Incremental Volumetric Allowance or Incremental Allowance — the IA. The IA, applied initially to select customers, resulted in charging the customer for fuel that was delivered and, in addition, a surcharge for fuel that was not actually delivered. Initially, the charge was 4%. Over time it reached 33%. In late 2011 Mr. Gathright left SMF. He was replaced by Steven Goldberg, a long-time director and chair of the audit committee. Mr. Goldberg was provided with materials regarding the IA and tables showing its impact by Defendant Shore. Mr. Goldberg was advised by counsel that the practice was improper. He advised the board of directors. Counsel for the board agreed that the charge was improper. The IA practice ended in March 2012. A press release was issued stating that the firm was changing its pricing structure and reducing sales and revenue projections. SMF filed for bankruptcy in April 2012. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23361(Sept. 25, 2015).

Misappropriation: SEC v. Woodley, Civil Action No. 4:15-cv-2767 (S.D. Tx. Filed September 22, 2015) is an action which names as a defendant Eldrick Woodley, d.b.a. Woodley & Co. Wealth Strategies. Mr. Moodbley, an investment adviser, is alleged to have misappropriated about $147,000 from his clients by furnishing the custodian of the accounts with invoices for services and transactions that were fraudulent. The complaint alleges violations of Advisers Act Sections 206(1) and (2). The action is pending. See Lit. Rel. No. 23366 (Sept. 28, 2015).

FCPA

Andres Truppel, a former Siemens AG employee, pleaded guilty to one count of conspiring to violate the FCPA’s anti-bribery, internal controls and books and records provisions and to commit wire fraud. Mr. Truppel was employed by Siemens AG from 1997 to 2004. From 1996 to 2002 he was the CFO of Siemens Argentina, a subsidiary. In 1994 the government of Argentina issued a tender for bids for a national identity card project, valued at $1 billion. Mr. Truppel caused his firm to pay $100 million in bribes to secure the project. Later when it was prematurely dropped he caused the firm to institute a sham arbitration in Washington, D.C. over the payments while continuing to pay bribes to maintain the secrecy. Ultimately he caused the firm to settle the proceeding, paying $8.8 million. Charges against other individuals in the indictment are pending.

SEC v. Hitachi, Ltd., Civil Action No. 1:15-cv-01573 (D.D.C. Filed September 28, 2015). Hitachi’s subsidiary, Hitachi Power Europe gmbH or HPE, was an international supplier of boilers for power stations. The subsidiary and its parent began planning to enter the South African power market in 2003. At the time Eskom Holdings SOC Ltd., the largest government owned and operated utility in the country, was planning to build new power stations. Two years later Hitachi Power Africa (Pty) or HPA was formed to establish a local presence. To secure a place in the market, 25% of is shares were sold to Chancellor House Pty (Ltd), owned by Chancellor House Trust. The firm was an alter ego for the African National Conference or ANC, the ruling political party. A shareholder agreement recorded the terms of the arrangement. A success fee was agreed in a side deal.

In May 2006 Eskom invited Hitachi and others to tender for work on building a power station. The next year Eskom invited tenders for a second station. Eventually both were awarded to HPA. At the time of the first tender the initial news article appeared reporting that Chancellor House was the alter ego of the ANC. The claim was reiterated in subsequent articles.

After the award of the contracts, HPA paid fees of $1,123,382, incorrectly recorded as “consulting fees.” Its books and records were rolled up into those of the parent and filed with the Commission. The success of the power plant projects entitled Chancellor House to a share of future profits as a 25% shareholder. In March 2010 HPA declared a dividend of about $7,032,680 for the shareholders based on 2009 profits. Chancellor House was due a dividend of about $1,758,170. That entry was reflected in HPA’s books and records which were consolidated into those of its parent and filed with the Commission. In February 2014 HPE repurchased the Chancellor House shares for about $4.4 million. The complaint alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).

To resolve the matter the Hitachi consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. The company also agreed to pay a civil penalty of $19 million.

PCAOB

Inspections: The Board staff issued its Inspection Brief Details Objectives for registered auditors. In general it focuses on auditing internal control over financial reporting, assessing and responding to risks of material misstatement and auditing accounting estimates (here).

New Articles

Insider trading: Yesha Yadav, Insider Trading and Market Structure, Vanderbilt Univ. L.S. Working Paper No. 15-22. The paper discusses the impact algorithmic trading on insider trading [available on SSRN].

Insider trading: J. Kelly Strader, (Re)Conceptualizing Insider Trading, 80 Brookline L.R. 1 ((2015). The paper discusses the impact of Newman [available on SSRN].

SEC Stats: Urska Velikonja, Reporting Agency Performance: Behind the SEC’s Enforcement Statistics, 101 Cornell L. Rev. 1 (forthcoming 2016). The paper discusses the SEC’s inflation of its enforcement statistics [available on SSRN].

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

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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.

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