Thursday, February 11, 2016

SEC: California Man Sold Investors Phony Stock to Pay Gambling Debts

The Securities and Exchange Commission today charged an unregistered broker in Oceanside, Calif., with fraudulently selling purported stock in a medical device company and pocketing investors’ money.

The SEC alleges that Gregory Ruehle raised approximately $1.9 million from more than 100 investors but never delivered or transferred the securities as promised while using the money to pay gambling debts among other personal expenditures.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today announced criminal charges against Ruehle. 

“We allege that Ruehle lied to investors, sent them phony documents to further his deception, and spent their money on living expenses and gambling,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. 

According to the SEC’s complaint filed in U.S. District Court for the Southern District of California:

  • Ruehle began his scheme as early as 2012, misrepresenting to investors in California and Minnesota that he would sell them his personally-owned securities in a La Jolla, Calif.-based medical device company called ICB International, Inc.  He was a former consultant for the company.
  • Ruehle, however, sold investors far more securities than he actually owned, and those he did own were not transferable.  Ruehle never disclosed these facts to investors.
  • Ruehle compounded his fraud by creating fabricated documents that he told investors were from the company.
  • He disseminated fake company stock certificates purportedly informing the investor of the number of shares they owned in ICB. 
  • He transmitted the fake stock certificates with a letter falsely stating that the certificates had been transferred from Ruehle to the investor. 
  • Ruehle also fabricated and sent investors an additional document that served as a phony confirmation that his shares had been transferred to the investor.  The document falsely appeared to be on ICB letterhead and signed by the company’s CEO.  

The SEC’s complaint seeks a permanent injunction as well as disgorgement plus prejudgment interest and penalties against Ruehle, who is charged with violating the antifraud provisions of the federal securities laws and acting as unregistered broker-dealer.  Investors can quickly check whether people selling investments are registered by using the SEC’s investor.gov website

The SEC’s continuing investigation is being conducted by Matthew Montgomery and Robert Conrrad, and the litigation will be led by Gary Leung.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of California and the Federal Bureau of Investigation.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Wednesday, February 10, 2016

SEC Adopts Cross-Border Security-Based Swap Rules Regarding Activity in the U.S.

The Securities and Exchange Commission today voted to adopt rules that require a non-U.S. company that uses personnel located in a U.S. branch or office to arrange, negotiate, or execute a security-based swap transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer.  The rules, adopted under by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would help ensure that both U.S. and foreign dealers are subject to Title VII of the Act when they engage in security-based swap dealing activity in the United States.  
“These final rules are integral to the SEC’s regulation of the security-based swap market, marking a key milestone in the completion of our regime for overseeing dealers,” said SEC Chair Mary Jo White.  “The rules should improve transparency and enhance stability and oversight in the security-based swap market, while reducing potential competitive disparities, lessening the likelihood of market fragmentation, and mitigating the risk that may flow into U.S. financial markets.” 

The final rules are effective 60 days after publication in the Federal Register, but compliance is not required until the latest of either 12 months following publication in the Federal Register or the SBS Entity Counting Date, which was specified in the SBS Entity Registration Adopting Release.


FACT SHEET

Cross-Border Security-Based Swap Rules Regarding Activity in the United States

SEC Open Meeting
February 10, 2016

Action

The Commission will consider whether to adopt rules to require a non-U.S. company that uses personnel located in a U.S. branch or office to arrange, negotiate, or execute a security-based swap transaction in connection with its dealing activity to include that transaction in determining whether it is required to register as a security-based swap dealer.  The rules would help ensure that both U.S. and foreign dealers are subject to Title VII of the Dodd Frank Act when they engage in security-based swap dealing activity in the United States.  

This requirement would increase transparency, enhance oversight of firms that carry out a dealing business in the United States, mitigate competitive disparities that could create incentives for market fragmentation, and reduce risks associated with such activity. 

The SEC’s final rules specify when certain non-U.S. persons would be required to count a security-based swap transaction with another non-U.S. person toward the requirement to register as a security-based swap dealer based on the dealer’s activity in the United States. 

These rules, together with the rules finalized in the SEC’s 2014 cross-border adopting release, would finalize the SEC’s rulemaking with respect to identifying transactions that a firm engaged in security-based swap dealing activity must count toward its dealer de minimis thresholds.

Highlights of the Final Rules

The SEC’s final rules are largely unchanged from its 2015 U.S. activity proposing release.  They focus solely on the location of personnel arranging, negotiating, or executing a security-based swap transaction on behalf of the dealer, whether the personnel are employed by the dealer or by the dealer’s agent.

The final rules would require a non-U.S. person using personnel located in a U.S. branch or office to arrange, negotiate, or execute a transaction to include such transaction in its de minimis threshold calculations even if the transaction was executed anonymously and cleared. The final rules would also except those international organizations that are excluded from the definition of U.S. person in Exchange Act rule 3a71-3(a)(4)(iii) from  the requirement that non-U.S. persons include in their dealer de minimis threshold calculations transactions that they arrange, negotiate, or execute using personnel located in a U.S. branch or office. 

The final rules would not address other elements of the U.S. activity proposing release, including the application of business conduct standards or Regulation SBSR to certain transactions, and clearing and trade execution requirements more generally. The SEC anticipates addressing U.S. activity in connection with these requirements in subsequent releases.

Background

Dodd-Frank Act – The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established a comprehensive framework for regulating the over-the-counter derivatives market.  Title VII of the Dodd-Frank Act gave the SEC regulatory authority over security-based swaps and certain key players in that market, including security-based swap dealers and major security-based swap participants.  Among other things, Title VII amends the Securities Exchange Act of 1934 to address the registration and regulation of security-based swap dealers, including the establishment of business conduct standards for such dealers; the reporting and public dissemination of security-based swap data; and the mandatory clearing and trade execution of certain security-based swaps.

Cross-Border Security-Based Swap Market – The security-based swap market often involves counterparties located in different countries.  According to data analyzed by SEC staff, a majority of transactions involving single-name credit default swaps on U.S. reference entities involve one or more counterparties located abroad.  Based on staff estimates, 12 percent of global notional volume between 2008 and 2014 was between two U.S.-domiciled counterparties.  This compares to 48 percent entered into between one U.S-domiciled counterparty and one foreign-domiciled counterparty, and 40 percent entered into between two foreign-domiciled counterparties.  However, the data also show that in approximately 83 percent of transactions on U.S. reference entities, one or both counterparties are affiliated with a U.S. financial group.  In addition, some security-based swaps may be negotiated and executed in two different countries and then booked in other countries.  Finally, the security-based swap market is largely an inter-dealer market.  Commission staff estimates that nearly 75 percent of notional volume has International Swaps and Derivatives Association (ISDA)-recognized dealers as counterparties on both sides of the transaction.

U.S. Activity Proposing Release – In April 2015, the SEC proposed rules to identify when a non-U.S.-person dealer using personnel located in a U.S. branch or office to engage in security-based swap dealing activity would trigger certain requirements under Title VII, including:  the requirement to count security-based swap transactions with another non-U.S. person toward the requirement to register as a security-based swap dealer; the requirement to make certain disclosures and fulfill other obligations pursuant to Title VII’s external business conduct standards; and to report a security-based swap transaction to a registered security-based swap data repository and publicly disseminate the transaction under Regulation SBSR. The SEC said that it was not proposing to use U.S. activity to trigger application of the Title VII clearing or trade execution requirements.

Action by the CFTC – In November 2013, the CFTC staff issued a staff advisory addressing the applicability of certain CFTC requirements to swap activity by non-U.S. registered swap dealers arranged, negotiated, or executed by personnel or agents of the non-U.S. swap dealer located in the United States.  The CFTC subsequently requested comment on the staff advisory and both the staff advisory and comments received on it are under review at the CFTC.

What’s Next?

If approved for publication by the Commission, the rules will be published on the Commission’s website and in the Federal Register.  They will become effective 60 days after publication in the Federal Register.  However, compliance will not be required until the latest of either 12 months following publication in the Federal Register or the SBS Entity Counting Date, which was specified in the SBS Entity Registration Adopting Release.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Tuesday, February 9, 2016

Electronic Storage Failure Results in $2.6 Million Fine

If your firm has not reviewed its electronic storage systems and programs recently, now may be the time. While this is a guess, it seems to me that oversights at one firm cost it $2.6 million in fines.

As we all know, the federal securities laws and FINRA rules require that business-related electronic records - emails - be kept in non-rewritable, non-erasable format (also referred to as "Write-Once, Read-Many" or "WORM" format) to prevent alteration. The SEC has stated that these requirements are an essential part of the investor protection function because a firm's books and records are the "primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards."

According to FINRA's release, it found that for a period of three years Scottrade did not have centralized document-retention processes or procedures for all firm departments to follow. Further, FINRA alleged that no one at the firm was charged with responsibility for ensuring a consistent document-retention process, fully compliant with the record-retention rules, including the requirement that all records be retained in WORM format.

FINRA alleges that personnel in different departments of the firm saved certain documents to a restricted shared drive, which was not WORM-compliant. As a result, Scottrade failed to preserve a large number of key securities business electronic records in the required format. The requirement of storage on a WORM-compliant device has been the topic of dozens of releases over the years. It is surprising that any firm, and in particular one the size of Scottrade would not be using such drives, in any business unit.

The release also discusses an allegation that Scottrade also failed to copy more than 168 million outgoing emails to the firm's WORM storage device, resulting in the deletion of those emails. Here is where the oversight was undoubtedly the issue. According to FINRA the these emails were generated automatically by the firm's internal systems or by third-party vendors acting on Scottrade's behalf, and included items such as margin call notices, address change notifications and failed password attempt notifications.

Let this be a reminder. You need to store business relelated emails - even failed log in messages - in accordance with SEC rules, and you need to have that system enacted firm wide.

And make sure someone is checking that it is working. I would make a small wager that Scottrade thought its systems were storing those third party emails. The failure to insure that was the case has cost the firm significant time, and money. And for some firms, the failure to store emails can cause significant problems in arbitrations and investigations.



FINRA Fines Scottrade $2.6 Million for Significant Failures in Required Electronic Records and Email Retention | FINRA.org:



'via Blog this'

SEC Names C. Dabney O’Riordan and Alka Patel as Associate Regional Directors in Los Angeles Office

The Securities and Exchange Commission today announced that C. Dabney O’Riordan and Alka Patel have been named Associate Directors for Enforcement in the agency’s Los Angeles Regional Office.

Ms. O’Riordan began working in the Los Angeles office in 2005 as a staff attorney, served as counsel to the Director of the Division of Enforcement, and became an Assistant Director in 2012.  She has been a member of the Division of Enforcement’s Asset Management Unit since its inception in 2010.  Ms. O’Riordan has investigated and litigated a number of significant securities law violations, many of which were firsts for the agency:  the first action charging a private equity fund manager for misallocating expenses between the manager and the private funds, the first action regarding the unregistered offer and sale of binary options, and the first action against a CEO solely seeking return of incentive based compensation under Section 304 of Sarbanes-Oxley.  In addition, Ms. O’Riordan has led significant investigations resulting in charges against gatekeepers, including an audit firm and their partners for failures in the audits of China-based companies.

Ms. Patel began working in the Los Angeles office in 2001 as a staff attorney and became an Assistant Director in 2009.  She has served as a member of the Division of Enforcement’s Foreign Corrupt Practices Act since its inception in 2010.  Ms. Patel has investigated and litigated a broad spectrum of significant securities laws matters.  Some examples include an action against a California based company for making improper payments disguised as commissions to foreign agents, charges against three former sales managers with insider trading ahead of a major acquisition, an action against a medical imaging company and its CEO for disclosure violations, and an action against three San Diego stock promoters and a Canadian citizen in a market manipulation scheme.

In their new roles, they will oversee the Los Angeles office’s enforcement’s efforts in southern California, Arizona, Nevada, and Hawaii.

“Alka and Dabney have made tremendous contributions to the Los Angeles Regional Office and the Division of Enforcement on numerous challenging and significant matters,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “I am confident they will lead the enforcement program in Los Angeles to continued success.”

“Alka and Dabney are extremely talented lawyers who are widely respected throughout the Los Angeles Regional Office for their fairness, excellent judgment, tenacity, and strong leadership, said Michele Wein Layne, Director of the Los Angeles Regional Office.  “I am delighted that they will bring their impressive skills and experience in managing our office’s outstanding enforcement group.”

Ms. O’Riordan said, “I am looking forward to continuing to work with the committed and talented enforcement staff in the Los Angeles Regional Office.”

Ms. Patel said, “I am honored to have this opportunity to serve as Associate Director.  Over the years, I have worked closely with the dedicated enforcement staff in the Los Angeles office and I am looking forward to our continued collaborative efforts in enforcing the federal securities laws.”

Before joining the SEC, Ms. O’Riordan worked as a litigation associate for over four years at Munger, Tolles & Olson in Los Angeles and served as a law clerk to the Honorable David R. Thompson on the U.S. Court of Appeals for the Ninth Circuit.  Ms. O’Riordan received her law degree from UCLA School of Law where she was Order of the Coif and her undergraduate degree with honors from Wellesley College.

Before joining the SEC, Ms. Patel worked as a litigation and transactional associate in Irvine, Calif., and St. Louis and as an auditor at two international accounting firms.  Ms. Patel received her law degree from Southwestern University School of Law, her master’s degree in business taxation from the University of Southern California, and her undergraduate degree from California State University, Northridge.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Monsanto Paying $80 Million Penalty for Accounting Violations

The Securities and Exchange Commission today announced that St. Louis-based agribusiness Monsanto Company agreed to pay an $80 million penalty and retain an independent compliance consultant to settle charges that it violated accounting rules and misstated company earnings as it pertained to its flagship product Roundup.  Three accounting and sales executives also agreed to pay penalties to settle charges against them. 

An SEC investigation found that Monsanto had insufficient internal accounting controls to properly account for millions of dollars in rebates offered to retailers and distributers of Roundup after generic competition had undercut Monsanto’s prices and resulted in a significant loss of market share for the company.  Monsanto booked substantial amounts of revenue resulting from sales incentivized by the rebate programs, but failed to recognize all of the related program costs at the same time.  Therefore, Monsanto materially misstated its consolidated earnings in corporate filings during a three-year period.

“Financial reporting and disclosure cases continue to be a high priority for the Commission and these charges show that corporations must be truthful in their earnings releases to investors and have sufficient internal accounting controls in place to prevent misleading statements,” said SEC Chair Mary Jo White. “This type of conduct, which fails to recognize expenses associated with rebates for a flagship product in the period in which they occurred, is the latest page from a well-worn playbook of accounting misstatements.”

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, added, “Improper revenue and expense recognition practices that obscure a company's true financial results have long been a focus of the Commission. We are committed to vigorously pursuing and punishing corporate executives and other individuals whose actions contribute to the filing of inaccurate financial statements and other securities law violations.”

According to the SEC’s order instituting a settled administrative proceeding against Monsanto, accounting executives Sara M. Brunnquell and Anthony P. Hartke, and then-sales executive Jonathan W. Nienas:

·         Monsanto’s sales force began telling U.S. retailers in 2009 that if they “maximized” their Roundup purchases in the fourth quarter they could participate in a new rebate program in 2010.

·         Hartke developed and Brunnquell approved talking points for Monsanto’s sales force to use when encouraging retailers to take advantage of the new rebate program and purchase significant amounts of Roundup in the fourth quarter of the company’s 2009 fiscal year.  Approximately one-third of its U.S. sales of Roundup for the year occurred during that quarter.

·         Brunnquell and Hartke, both certified public accountants, knew or should have known that the sales force used this new rebate program to incentivize sales in 2009 and Generally Accepted Accounting Principles (GAAP) required the company to record in 2009 a portion of Monsanto’s costs related to the rebate program.  But Monsanto improperly delayed recording these costs until 2010.

·         Monsanto also offered rebates to distributors who met agreed-upon volume targets.  However, late in the fiscal year, Monsanto reversed approximately $57.3 million of rebate costs that had been accrued under these agreements because certain distributors did not achieve their volume targets (at the urging of Monsanto).

·         Monsanto then created a new rebate program to allow distributors to “earn back” the rebates they failed to attain in 2009 by meeting new targets in 2010.  

·         Under this new program, Monsanto paid $44.5 million in rebates to its two largest distributors as part of side agreements arranged by Nienas, in which they were promised late in fiscal year 2009 that they would be paid the maximum rebate amounts regardless of target performance.

·         Because the side agreements were reached in 2009, Monsanto was required under GAAP to record these rebates in 2009.  But the company improperly deferred recording the rebate costs until 2010. 

·         Monsanto repeated the program the following year and improperly accounted for $48 million in rebate costs in 2011 that should have been recorded in 2010.

·         Monsanto also improperly accounted for more than $56 million in rebates in 2010 and 2011 in Canada, France, and Germany.  They were booked as selling, general, and administrative (SG&A) expenses rather than rebates, which boosted gross profits from Roundup in those countries.  


Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement, said, “Monsanto devised rebate programs that elevated form over substance, which led to the booking of substantial amounts of revenue without the recognition of associated costs.  Public companies need to have robust systems in place to ensure that all of their transactions are recognized in the correct reporting period.”


Monsanto consented to the SEC’s order without admitting or denying the findings that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, the reporting provisions of Section 13(a) of the Securities Exchange Act of 1934 and underlying rules 12b-20, 13a-1, 13a-11, and 13a-13; the books-and-records provisions of Exchange Act Section 13(b)(2)(A); and the internal accounting control provisions of Exchange Act Section 13(b)(2)(B). 

Brunnquell, Hartke, and Nienas also consented to the order without admitting or denying the findings that they violated Rule 13b2-1 and caused Monsanto’s violations of various provisions.  Nienas also was found to have violated Exchange Act Section 13(b)(5).  Brunnquell, Nienas, and Hartke must pay penalties of $55,000, $50,000, and $30,000 respectively, and Brunnquell and Hartke agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Brunnquell to apply for reinstatement after two years, and Hartke is permitted to apply for reinstatement after one year. 

The SEC’s investigation found no personal misconduct by Monsanto CEO Hugh Grant and former CFO Carl Casale, who reimbursed the company $3,165,852 and $728,843, respectively, for cash bonuses and certain stock awards they received during the period when the company committed accounting violations.  Therefore, it wasn’t necessary for the SEC to pursue a clawback action under Section 304 of the Sarbanes-Oxley Act.

The SEC’s investigation was conducted by Antony Richard Petrilla, Darren E. Long, and Paul C. Gunson with assistance from Duane Thompson, Dwayne Brown, and Jan Folena.  The investigation was supervised by Brian O. Quinn. 



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Friday, February 5, 2016

SEC Charges Company Executive With Insider Trading

The Securities and Exchange Commission today charged an executive at Stamford, Conn.-based electronics company Harman International Industries with insider trading in the company’s stock.

The SEC alleges that Dennis Wayne Hamilton made more than $130,000 in illegal profits by trading on nonpublic information he learned on the job in advance of Harman’s release of its fiscal year 2014 first quarter earnings.  

In a parallel action, the U.S. Attorney’s Office for the District of Connecticut today announced criminal charges against Hamilton.

“We allege that Hamilton traded on details known only to company insiders and took advantage of the stock market’s fair and level playing field,” said Sharon B. Binger, Director of the Philadelphia Regional Office. 

According to the SEC’s complaint filed in U.S. District Court for the District of Connecticut:

  • In his role as Harman’s vice president of tax, Hamilton reviewed Harman’s earnings and learned the company would report stronger-than-expected results for its FY14 first quarter, which spanned from July 1 to Sept. 30, 2013. 
  • The day before Harman publicly released the financial results, Hamilton purchased 17,000 shares of Harman stock at a cost of more than $1.2 million.  He liquidated his position when the quarterly results were publicly announced. 
  • Harman’s stock price rose more than 12 percent on the news and Hamilton’s illicit trading produced one-day profits in excess of $130,000.

The SEC’s continuing investigation is being conducted by Suzanne C. Abt, Jacquelyn King, Daniel Koster, and Scott A. Thompson of the Philadelphia Regional Office.  The case is being supervised by G. Jeffrey Boujoukos.  The SEC’s litigation will be led by David L. Axelrod and Mark Sylvester.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Federal Bureau of Investigation.    



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Federal Court Says You Can Waive FINRA Arbitration

Firms can force employees to waive FINRA rules and arbitrate before a private arbitrator.



We have held in several cases that an SRO's arbitration provisions are default rules which may be overridden by more specific contractual terms. See, e.g., Ameriprise Fin. Servs., Inc. v. Beland (In re Am. Express Fin. Advisors Secs. Litig.), 672 F.3d 113, 132 (2d Cir. 2011) ("In particular, as relevant here, different or additional contractual arrangements for arbitration can supersede the rights conferred on a customer by virtue of a broker's membership in a self-regulating organization such as FINRA.") (alterations and quotation marks omitted).


'CREDIT SUISSE SECURITIES (USA) LLC v. Tracy, Court of Appeals, 2nd Circuit 2016

Thursday, February 4, 2016

SEC: Miami Firm Broke Anti-Money Laundering Protocols

The Securities and Exchange Commission today announced that a Miami-based brokerage firm agreed to pay a $1 million penalty to settle charges that it violated anti-money laundering rules by allowing foreign entities to buy and sell securities without verifying the identities of the non-U.S. citizens who beneficially owned them.

During SEC examinations of E.S. Financial Services, which is now named Brickell Global Markets, the firm twice failed to provide required books and records identifying certain foreign customers whom they were soliciting directly and providing investment advice.  Federal law requires all financial institutions to maintain an adequate customer identification program (CIP) to ensure financial institutions know their customers and do not become a conduit for money laundering or terrorist financing.  An ensuing SEC investigation found that E.S. Financial’s CIP failed to obtain and maintain documentation to verify the identities of certain non-U.S. customers who traded through a brokerage account opened by a Central American bank affiliated with the firm.

As part of the settlement, E.S. Financial agreed to retain an independent monitor to directly review its anti-money laundering/CIP policies, procedures, and practices for the next two years.

“While no fraud occurred in this instance, our investigation found there were significant holes in the framework of E.S. Financial’s CIP that left the firm susceptible to illegal activity by customers who were not fully known,” said Eric Bustillo, Director of the SEC’s Miami Regional Office.  “Firms must stick to the CIP rules that require a broker-dealer to establish, document, and maintain procedures for identifying all customers and verifying their identities.”

According to the SEC’s order instituting a settled administrative proceeding:

  • During approximately a decade, E.S. Financial maintained a brokerage account for a Central American bank that was purportedly trading for its sole benefit.
  • E.S. Financial allowed 13 non-U.S. corporate entities and, in turn, 23 non-U.S. citizens who were their beneficial owners, to execute more than $23 million in securities transactions through the Central American bank’s brokerage account.
  • E.S. Financial worked directly with these non-U.S. citizens as if they were E.S. Financial customers, but did not collect, verify, or document any information regarding their identities as required under anti-money laundering/CIP regulations. 

The SEC’s order finds that E.S. Financial willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8, which require a broker-dealer to comply with the reporting, recordkeeping, and record retention requirements in regulations implemented under the Bank Secrecy Act, including the requirements in the CIP rule applicable to broker-dealers. The order also finds that E.S. Financial willfully violated Exchange Act Rules 17a-3 and 17a-4 which require broker-dealers to create and maintain customer account records and furnish them to SEC representatives upon request. Without admitting or denying the findings, E.S. Financial consented to the order and agreed to cease and desist from committing or causing any future violations. 

The SEC’s continuing investigation has been conducted by Scott A. Lowry, under the supervision of Thierry Olivier Desmet.  The examination that led to the investigation was conducted by Ileana Rodriguez and Debra Williamson, and supervised by Nicholas A. Monaco and John C. Mattimore of the Miami Regional Office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Announces Advisory Committee on Small and Emerging Companies Members

The Securities and Exchange Commission today announced the members of its Advisory Committee on Small and Emerging Companies.  The advisory committee was established in 2011 and has been renewed twice for additional terms.  The renewed committee will hold its first meeting on Thursday, February 25.

“Small businesses play a crucial role in our nation’s economy,” said SEC Chair Mary Jo White.  “The advisory committee members have a wealth of experience and ideas that will help inform the Commission on the many important issues affecting small and emerging businesses.”

Stephen M. Graham, Managing Partner of Fenwick & West LLP’s Seattle office, and Sara Hanks, CEO of CrowdCheck in Alexandria, Virginia, will serve as co-chairs of the committee.  Voting members of the committee, in addition to the co-chairs, are:

  • Robert Aguilar, CFO and Chief Operating Officer, Cabrera Capital Markets LLC, Chicago
  • Xavier Gutierrez, President and Chief Investment Officer, Meruelo Investment Partners, Downey, California
  • Brian Hahn, CFO, GlycoMimetics Inc., Rockville, Maryland
  • Kyle Hauptman, Executive Director of the Main Street Growth Project, Washington, D.C.
  • Jenny Kassan, owner, Jenny Kassan Consulting, Fremont, California
  • Catherine V. Mott, founder and CEO, BlueTree Capital Group, Wexford, Pennsylvania
  • Jonathan Nelson, founder and CEO, Hackers/Founders, Mountain View, California
  • Patrick Reardon, owner, The Reardon Firm, Fort Worth, Texas
  • Lisa Shimkat, State Director, America’s Small Business Development Center at Iowa State University, Ames, Iowa
  • Tisha R. Tallman, President and CEO, the Georgia Hispanic Chamber of Commerce, Atlanta
  • Annemarie Tierney, Vice President and Head of Strategy and New Markets, NASDAQ Private Market, New York
  • Gregory C. Yadley, Partner, Shumaker, Loop & Kendrick LLP, Tampa, Florida
  • Laura Yamanaka, President and Co-Founder, teamCFO, Inc., Los Angeles

The committee also will include as non-voting members:

  • Michael Pieciak, Deputy Commissioner, Securities Division, State of Vermont Department of Financial Regulation, and Chair of the Corporation Finance Section of the North American Securities Administrators Association
  • Mark Walsh, Associate Administrator, Office of Investment and Innovation, U.S. Small Business Administration

The appointments to the renewed committee are effective until Sept. 24, 2017.  

More information about the advisory committee, including prior committee recommendations, is available at:  http://ift.tt/165pBPJ



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Tuesday, February 2, 2016

SEC and FINRA to Hold Regional Compliance Outreach Programs for Broker-Dealers

The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) today announced the opening of registration for their 2016 Regional Compliance Outreach Programs for Broker-Dealers that will take place in New York, Atlanta, Dallas, Boston, Chicago, and San Francisco, beginning in the spring.

The SEC's Office of Compliance Inspections and Examinations, in coordination with the SEC's Division of Trading and Markets, is partnering with FINRA to sponsor the programs.  Similar to the 2015 National Compliance Outreach Program for Broker-Dealers, each regional program will provide a forum for regulators and industry professionals of broker-dealer firms to discuss current regulatory issues and exchange ideas for effective compliance practices.

“The regional programs illustrate our continued commitment to foster an open dialogue among broker-dealers and regulators,” said Kevin Goodman, National Associate Director of the SEC’s Broker-Dealer Examination Program.  “These outreach programs are an opportunity to discuss current compliance topics of regional and national importance.” 

Susan Axelrod, FINRA’s Executive Vice President of Regulatory Operations, added: “The financial markets are evolving rapidly and the industry must continually assess risk, exposure, and how brokers interact with customers.  Each year, these direct dialogues between regulators and compliance leaders yield new insights about how we can best achieve our mutual goal of investor protection in this dynamic environment.”

There is no cost to attend the regional programs, which will be held in New York on April 7; Atlanta, April 20; Dallas, June 7; Boston, June 14; Chicago, July 25; and San Francisco, August 18.   Registration is open to risk, audit, legal and compliance professionals employed by broker-dealers, with limited seating available on a first-come, first-served basis.  CPE credits will be available at each program.

For registration and additional details about the regional programs, please visit the SEC website or the FINRA website.  



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Completes Muni-Underwriter Enforcement Sweep

The Securities and Exchange Commission today announced enforcement actions against 14 municipal underwriting firms for violations in municipal bond offerings.  The actions conclude charges against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.  In all, 72 underwriters have been charged under the voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.

The MCDC Initiative, announced in March 2014, offered favorable settlement terms to municipal bond underwriters and issuers that self-reported violations.  The first enforcement actions against underwriters under the initiative were brought in June 2015 against 36 municipal underwriting firms.  An additional 22 underwriting firms were charged in September 2015.  All of the firms settled the actions and paid civil penalties up to a maximum of $500,000.

The initiative is continuing with respect to issuers who may have provided investors with inaccurate information about their compliance with continuing disclosure obligations.  The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking important information about their municipal bond holdings.

“The settlements obtained under the MCDC initiative have brought much-needed attention to disclosure obligations in municipal bond offerings,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “As part of the settlements, 72 underwriting firms – comprising approximately 96% of the market share for municipal underwritings – have agreed to improve their due diligence procedures and we expect that investors will benefit from those improvements.”

In today’s actions, the SEC found that between 2011 and 2014, the 14 underwriting firms sold municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The SEC also found that the underwriting firms failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.

The 14 firms, which did not admit or deny the findings, agreed to cease and desist from such violations in the future.  Under the terms of the MCDC Initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm.  In addition, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting.   

The MCDC Initiative is being coordinated by Kevin Guerrero of the Enforcement Division’s Municipal Securities and Public Pensions Unit.  The cases announced today were investigated by members of the unit, including Michael Adler, Robert Barry, Joseph Chimienti, Kevin Currid, Peter Diskin, Robbie Mayer, Heidi Mitza, William Salzmann, Ivonia K. Slade, Jonathan Wilcox, Monique C. Winkler, and Deputy Unit Chief Mark R. Zehner, with assistance from Ellen Moynihan of the Boston Regional Office. 

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The SEC’s orders and penalty amounts are:



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Monday, February 1, 2016

SEC Charges Software Company With FCPA Violations

The Securities and Exchange Commission today announced that software manufacturer SAP SE has agreed to give up $3.7 million in sales profits to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) when procuring business in Panama.

An SEC investigation found that SAP’s deficient internal controls allowed a former SAP executive to pay $145,000 in bribes to a senior Panamanian government official and offer bribes to two others in exchange for lucrative sales contracts.  The SEC charged the SAP executive, Vicente E. Garcia, in a separate enforcement action last year that included a parallel criminal action.  Garcia has been sentenced to 22 months in prison.

“SAP’s internal controls failed to flag Garcia’s misconduct as he easily falsified internal approval forms and disguised his bribes as discounts,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. 

According to the SEC’s order instituting a settled administrative proceeding:

  • SAP is headquartered in Germany and executes most of its sales through a network of worldwide corporate partners, including a partner in Panama.
  • The bribery scheme involved providing large discounts of up to 82 percent to SAP’s Panamanian partner, who used the excessive discounts to create a slush fund out of which to pay bribes to Panamanian officials on Garcia’s behalf so SAP could sell software.
  • SAP had no requirements for heightened anti-corruption scrutiny for such large discounts.
  • SAP falsely recorded the slush fund as legitimate discounts on the books of SAP’s Mexican subsidiary, and the figures were subsequently consolidated into SAP’s financial statements.
  • SAP failed to devise and maintain a sufficient system of internal accounting controls to provide reasonable assurances that the discounts were recorded in accordance with U.S. Generally Accepted Accounting Principles. 

The SEC’s order finds that SAP violated the internal controls provisions and the books and records provisions of the FCPA.  Without admitting or denying the findings, SAP consented to the entry of the cease-and-desist order and agreed to pay disgorgement of $3.7 million in profits from SAP’s software sales to the Panamanian government plus prejudgment interest of $188,896.  The settlement reflects SAP’s cooperation and remedial measures.

The SEC’s investigation was conducted by Ansu Banerjee and supervised by Alka Patel.  The SEC appreciates the assistance of the U.S. Department of Justice, U.S. Attorney’s Office for the Northern District of California, and Federal Bureau of Investigation. 



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC News - Investor Losses, Overcharged Fees, and Whistleblower Award

Hedge Fund Manager Agrees to Reimburse Investor Losses
A Manhattan-based investment advisory firm and its Toronto-based hedge fund manager have agreed to settle charges that they misled investors about a fund’s investment strategy and historical performance. They will reimburse investors $2.877 million in losses.

Ocwen Paying Penalty for Misstated Financial Results
Ocwen Financial Corp. has agreed to settle charges that it misstated financial results by using a flawed, undisclosed methodology to value complex mortgage assets.

Alternative Fund Manager Overcharged Fees, Misled Investors
A Denver-based alternative fund manager has agreed to settle charges that the firm overcharged management fees and misled investors about how it valued certain assets.

SEC Awards Whistleblower More Than $700,000 for Detailed Analysis
The SEC announced a whistleblower award of more than $700,000 to a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action.

Goldman Sachs Charged With Improper Securities Lending Practices
Goldman, Sachs & Co. has agreed to pay $15 million to settle charges that its securities lending practices violated federal regulations.



The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

FINRA Funding Portal Rules Approved

United States Securities and Exchange Commission

The SEC approved new FINRA Rule 4518 as part of FINRA’s proposal to establish the new Funding Portal Rules and related forms.

This Notice provides further guidance on new Rule 4518, which applies to registered broker-dealer members of FINRA that contemplate acting as intermediaries in transactions involving the offer or sale of securities pursuant to the crowdfunding provisions of Title III of the JOBS Act and the SEC’s Regulation Crowdfunding.

Under the new rule, registered broker-dealer members must provide notification to FINRA, as specified in the rule and as discussed further in this Notice, prior to engaging in such activities.

FINRA Rule 4518 will become effective on January 29, 2016.


Regulatory Notice 16-07 | FINRA.org: