This was the period of admissions. The SEC secured admissions in three actions over the period beginning the week of Thanksgiving and continuing into the beginning of December. Cases filed during the period include: A proceeding naming Standard Bank for what is really an FCPA case but was charged as a disclosure action since the firm is not an issuer; audit failure actions against accounting firm Grant Thornton and two of its partners; a spoofing case; and a compliance action against a political intelligence firm for not having adequate compliance systems. The SEC also brought four offering fraud cases, an action based on false advertising, another centered on conflicts and one against an adviser for negligently charging expenses to clients.

SEC

Testimony: Andrew Ceresney, Director, Division of Enforcement, testified before the House Committee on the Judiciary regarding the Electronic Communications Privacy Act (December 1, 2015). In his testimony the Director opposed the proposed amendments to the Electronic Communications Privacy Act which would require enforcement officials to obtain a criminal warrant to secure certain electronic communications (here).

CFTC

Remarks: Commissioner J. Christopher Giancario delivered a lecture at Harvard Law School as part of its guest lecture series. The Commissioner addressed topics which include cyber threats, disruptive technology, government intervention, market liquidity and concentration and de-globalization (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 4 civil injunctive cases and 9 administrative proceeding, excluding 12j and tag-along proceedings.

Spoofing: In the Matter of Behruz Afshar, Adm. Proc. File No. 3-16978 (December 3, 2015) is a proceeding which names as Respondents three former broker-dealer employees, Mr. Afshar, Shahrayar Afshar and Richard Kenny. Also named in the Order are Fineline Trading Group LLC and Makino Capital LLC, both controlled by Mr. Behruz. The action centers on two schemes. First, Respondents caused their option trades to be mismarked, making about $2 million in benefits. Specifically, option exchanges label orders as “professional” – those who place over 390 orders per month in a quarter — or “customer.” The latter is designed to facilitate trading for non-professionals who receive lower fees and higher rebates. Respondents continually traded over the professional limit but alternated between the two firms and did not aggregate them as affiliates as required. This permitted them to mismark their options trades. Second, Respondents engaged in “spoofing.” This was done to take advantage of the maker-taker fees and resulted in $225,000 in ill-gotten rebates. Respondents implemented the scheme by initially placing all-or-none or AON orders which are not displayed and must be executed in full or not at all. They then placed small orders that were displayed to lure others to the market. These were not intended for execution. When others entered the market there were executions against the AON orders and the displayed orders were cancelled. The order alleges violations of each subsection of Securities Act Sections 17(a) and Exchange Act Sections 9(a)(2) and 10(b) and each subsection of Rule 10b-5. The proceeding will be set for hearing.

Audit failure: In the Matter of Grant Thornton, LLP, Adm. Proc. File No. 3-16976 (December 2, 2015); see also In the Matter of Melissa K. Koeppel, CPA, Adm. Proc. File No. 3-16977 (December 2, 2015). Respondents in the two proceedings are the audit firm and two of its engagement partners, Ms. Koeppel and Jeffrey Robinson. Only the audit firm was required to make admissions in connection with the settlement. Th One involved Assisted Living Concepts, Inc., a publicly traded senior living company, while the other centers on Broadwind Energy, Inc., an alternative energy company. The Assisted Living action is based on the acquisition of 200 senior living residences from Ventas, Inc., a publicly traded real estate investment trust. Simultaneous with the acquisition Assisted Living entered into a lease to operate those facilities. That lease required in part that Assisted Living demonstrate compliance on a quarterly basis with certain financial covenants and provide detailed financial data prepared in accordance with GAAP. There were also certain occupancy requirements. Violation of the covenants could result in default. When the occupancy requirements could not be met the firm falsified its accounting records to avoid default. Eventually the truth emerged but by that time the firm’s Forms 10-K for the years ending December 31, 2009, 2010 and 2011 reflected the fraud. In each year the Grant Thornton failed to identify the fraud despite a number of warning signs. As a result of the failed audits for each year investors were falsely told that Assisted Living was in compliance with the leave covenants. Broadwind centered on the failure to take impairment charges for a $76 million amortizable intangible asset and $26 million booked as good will in connection with an acquisition in 2007. When revenue dropped as the intangible assets deteriorated in value rather than taking an impairment charge the firm conducted an IPO to raise cash. The filings for that offering f included financial statements that were incorrect because they overstated the value of the intangible assets. Grant Thornton’s failure to exercise due professional care contributed to Broadwind improperly omitting from its financial statements the fact that it had sustained a $58 million impairment charge. That failure also contributed to the firm’s conducting a public offering in which the impairment charge was concealed. The Order as to the firm alleged violations of Exchange Act Section 13(a) and Rules 13a-1 and 13a-13. To resolve the action the firm admitted to the facts in the Order and that it violated the federal securities laws. The firm also agreed to a series of undertakings, including conducting a complete review and evaluation of certain quality controls and policies and procedures for audits and interim reviews. It consented to the entry of a cease and desist order based on the Sections and Rules cited in the Order as well as to a censure. The firm will also pay disgorgement of $1,305,396, prejudgment interest and a penalty of $3 million. The Order as to Ms. Koeppel alleged violations of Exchange Act Section 13(a) and Rules 13a-1 and 13a-13. The Order as to Mr. Robinson alleged violations of the same Section but only Rule 13a-1. To resolve the proceeding each engagement partner consented to the entry of a cease and desist order based on the Section and Rule or Rules cited in the Order as to them. Ms. Koeppel is also denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after five year. She will pay a penalty of $10,000. Mr. Robinson is denied the right to appear and practice before the Commission as an accountant with the right to apply for reinstatement after two years. He will pay a penalty of $2,500.

Offering fraud: SEC v. Gara, Civil Action No. 3:15-cv-01760 (D. Conn. Filed Dec. 1, 2015). The defendants in this action are Homero Joshua Garza, founder and CEO of GAW Miners, LLC. He also owned and controlled ZenMiner. Both companies are named as defendants. It centers on “mining” for virtual currency which is a function of special computers which solve complex equations and, if they do so first, secure additional virtual currency. The defendants sold Hashlets, the right to acquire profits from a slice of the computing power that solves the equations. Investors snapped up the Haslets. Over about four months, beginning in mid-August 2014, in excess of 10,000 investors purchased units which ranged in price from $10 to $50. GAW Miners and ZenMiner raised at least $19 million. However, misrepresentations were made to sell the interests and, importantly, the defendants did not have near the computing power for all the interests sold. Returns to investors thus came not from profits but other investor payments. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23415 (December 1, 2015).

Disclosure: In the Matter of Standard Bank PLC, Adm. Proc. File No. 3-16973 (November 30, 2015). Respondent Standard Bank is the London-based international investment bank subsidiary of Standard Bank Group Ltd. of South Africa. It provides various banking products and services in Tanzania. The Government of Tanzania tried to raise funds for infrastructure projects in the international bond market from 2011 through early 2013. It failed. Standard and its affiliate proposed to raise capital for the projects through a private placement of securities in the U.S. under Regulation S. In February 2012 the firms understood the offering would proceed. Before the appropriate documents were executed, however, the Minister of Finance was replaced. Eventually the new Minister agreed to proceed. The new proposal called for a fee of 2.4%, in contrast to the original deal which specified a 1.4% fee split between Standard and its affiliate. The additional fee was to be paid to a party called Local Partner, later identified as Enterprise Growth Market Advisors Limited. In November the Government of Tanzania, through the Minister of Finance, executed a Mandate Letter for the deal. The offering went forward and the fee to Local Partner, which was not disclosed, was paid from the proceeds. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. It also agreed to admit the facts in the action brought by the Serious Frauds Office (Standard Bank Plc., No. U20150854, Southwark Crown Court, U.K.) and to pay disgorgement of $8.4 million. That obligation will be satisfied by paying the amount in the U.K. action, or to the extent not paid there, in the SEC action. In addition, the firm will pay a penalty of $4.2 million.

Advertising: In the Matter of Alpha Fiduciary, Inc., Adm. Proc. File No. 3-16974 (November 30, 2015) names as Respondents Alpha Fiduciary, a registered investment adviser, and its majority owner Arthur Dogline. From August 2010 to March 2013 Respondents distributed to clients advertising regarding its Global Tactical Multi Asset Class Strategies. It claimed returns of up to 58.62%. The advertising referenced certain hypothetical testing but was imprecise and did not specifically inform investors the results were based on back-testing. The firm also failed to implement written compliance policies and procedures to prevent employees from using advertising that violates the Advisers Act. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the matter the firm agreed to a series of undertakings which include the retention of a consultant, furnishing customers a corrected ADV and making available certain disclosures to prospective clients for one year. Each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of a censure. In addition, they will pay a penalty of $250,000. See also In the Matter of Michael L. Shea, Adm. Proc. File No. 3-16975 (November 30, 2015)(Mr. Shea was the vice president and business development director of Alpha Fiduciary during a portion of the period discussed above; he consented to a cease and desist order based on the same Sections as the firm and to a censure; he also agreed to pay a penalty of $25,000).

Compliance: In the Matter of Marwood Group Research, LLC, Adm. Proc. File No. 3-16970 (November 24 2015). Marwood is a political intelligence firm, an SEC registered broker-dealer and a state registered investment adviser. The firm had a policy which prohibits insider trading. Its written policies and procedures concerning the use and dissemination of inside information provided for a review process over the preparation and publication of its regulatory and legislative research notes. The Order alleges two instances in which the firm failed to enforce its existing policies. The first concerned the drug Provenge, an immunotherapy approved by the FDA in 2010 for metastatic prostate cancer. For certain medical items and services CMS may make a National Coverage Determination. When that process was initiated for Provenge some clients sought Marwood’s views on the reason the NCA had been initiated and the likely outcome. A Marwood employee who was a former employee of CMS contacted a person at the agency he knew. From that contact he learned information which provided “color” to the events and which he cautioned should be kept confidential. No steps were taken to present the information to the CCO. On July 8, 2010 Marwood published a research note predicting CMS’s continued coverage and reimbursement of Provenge’s on-label usages. The second drug was Bydureon, an injectable diabetes drug. The sponsoring company submitted a new drug application which was later revised. Some clients sought Marwood’s view on the likely outcome of the decision. A firm consultant who was a former high ranking FDA official had a lengthy conversation with Marwood staff during which he discussed information obtained from contacts at the agency. In part that information revealed that the FDA had continued concerns and there was a debate between safety and reviewers. Marwood informed clients about the intense debate regarding the drug within the agency. While Marwood’s analysts interacted with government employees who were likely to be in possession of material nonpublic information the firm did not have written policies or procedures that required the CCO be provided with sufficient information to assess the situation. To the contrary the firm relied largely on line employees. This resulted in violations of Exchange Act Section 15(g) and Advisers Act Section 204A, according to the Order. To resolve the proceeding the firm agreed to implement a series of undertakings including the retention of a consultant. The firm also admitted to the facts detailed in the Order. Marwood consented to the entry of a cease and desist order. It will also pay a penalty of $375,000.

Offering fraud: SEC v. Parker, Civil Action No. 15-1535 (W.D. Pa. Filed November 23, 2015) is an action against Mr. Parker, a representative at a brokerage firm. He is also a registered investment adviser. On the side from his brokerage firm, from 2008 through 2014, he solicited 22 investors and raised about $1.2 million. Investors were solicited to acquire interests in what were claimed to be municipal tax liens. In fact little of the money went for that purpose. Significant portions of the investor funds were diverted to the personal use of Mr. Parker. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23413 (November 24, 2015). A parallel criminal case was filed by the U.S. Attorney’s Office for the Western District of Pennsylvania.

Conflicts: In the Matter of JH Partners, LLC, Adm. Proc. File No. 3-16968 (November 23, 2015) is a proceeding which names the registered investment adviser as a Respondent. Over a six year period beginning in 2006 the adviser and certain of its principals loaned about $62 million to the Funds’ portfolio companies for interim financing. In doing so the adviser and its principals in some cases obtained interests in the portfolio companies that were senior to the equity interest held by the Funds, creating a conflict. The adviser also cause Funds to invest in the same portfolio company at different levels, creating the potential for one to be favored. And, it failed to adequately disclose to the advisory boards when certain of their investments exceeded concentration limits in the Funds’ organizational documents. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondent resolved the proceeding by consenting to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm will also pay a penalty of $225,000.

Expenses: In the Matter of Cranshire Capital Advisors, LLC, Adm. Proc. File No. 3-16969 (November 23, 2015) is a proceeding which names as a Respondent the registered investment adviser. Over a two year period beginning on 2012 the adviser negligently charged certain expenses to clients without making disclosure. The firm also failed to adopt policies and procedures with respect to the allocation of expenses. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the matter Respondent agreed to implement certain undertakings and consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay a penalty of $250,000.

Offering fraud: SEC v. Argyropoulos, Civil Action No. 14-cv-09800 (C.D. Cal.) is a previously filed action against Mr. Argyropoulos and his firm, Prima Capital Group, Inc. The complaint alleged that the defendants raised about $3.5 million by selling what they claimed to be pre-IPO shares of Facebook and Twitter. Rather than acquiring the shares the funds were misappropriated. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Previously the defendants consented to the entry of a permanent injunction based on the Sections cited in the complaint. The court entered a judgment requiring the payment, on a joint and several basis, of disgorgement in the amount of $1,495,657, prejudgment interest and a penalty equal to the amount of the disgorgement. Mr. Argyropoulos and the firm also agreed to settle charges to be barred from working and an investment adviser or a broker dealer. See Lit. Rel. No. 23411 (November 20, 2015).

Offering fraud: SEC v. Brogdon, (D. N.J. November 20, 2015). The action names as a defendant Christopher Brogdon. He has a number of real estate and business entities throughout the state of Georgia in addition to those involved here. From 1992 to 2014 Mr. Brogdon acquired or renovated at least 60 facilities through 54 separate offerings, raising about $189,980,000. At least 22 of those offerings are still outstanding. They involved just under $100,000,000. Three municipal bond offerings are in default. Generally, the proceeds of an offering were used to undertake a particular project. As early as 2000 Mr. Brogdon began commingling the funds generated by unrelated facilities, securities offerings and other business ventures. As a result of this practice, and the fact that the facilities were not generating sufficient revenue to service the debt, when payments were due on an offering associated with a facility it had insufficient funds. The practice of commingling funds increased over time. In the offerings Mr. Brogdon misrepresented the nature of the investors’ and bondholders’ investment. Since the projects had insufficient funding to cover the debt service from the commingling, Mr. Brogdon frequently raided the debt service reserve fund. He also failed to make the required disclosures and misrepresented his compliance with certain requirements. The complaint alleges violations of Securities Act Sections 15(b) and 17(a) and Exchange Act Sections 10(b) and 20(e). The court entered an emergency freeze order. The action is pending.

FINRA

Offering fraud: The regulator filed a complaint against Canton Research Inc. and its President, Anthony J. Cantone. It centers on the sale of over $8 million of certificates of participation in five promissory notes. The funds were to be used to purchase and/or develop a nursing home, assisted living facility or other real-estate he controlled. Misrepresentations were made in connection with the solicitations. Defaults have resulted in about $6 million in investor losses. The matter will be set for hearing.

Australia

Independence: The Australian Securities Commission disqualified Abe Samuel as an auditor. The Commission concluded that he violated independence requirements by auditing a fund of which he was a member and director of its corporate trustee and the power of attorney holder for, and a relative of, a member of the fund.

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