Tuesday, June 28, 2016

C. Dabney O’Riordan Named as Co-Chief of the Asset Management Unit

The Securities and Exchange Commission today announced that C. Dabney O’Riordan has been named co-chief of the Division of Enforcement’s Asset Management Unit, a national specialized unit that focuses on misconduct by investment advisers, investment companies, and private funds. She joins Anthony Kelly as co-chief of the unit and succeeds Marshall Sprung, who left the agency in April.

Ms. O’Riordan has investigated or supervised a number of significant enforcement cases addressing a wide variety of misconduct across the asset management industry and that touch on many of the unit’s priority areas. These matters include advisers who misallocated private fund expenses, including the SEC’s first action charging a private equity fund manager for misallocating expenses between the manager and the private funds and a similar action against a hedge fund adviser, as well as actions against advisers for misallocating trades to its client’s detriment and stealing client assets. In addition, Ms. O’Riordan has supervised investigations involving charges against gatekeepers, including an auditor to a private fund, an accounting firm hired to conduct custody examinations and a brokerage firm that ignored red flags that an adviser was misappropriating client assets.

“Dabney’s excellent judgment, deep knowledge of the laws and rules governing the asset management industry, and strong leadership skills position her perfectly to co-lead the nationwide Asset Management Unit,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “I am confident that she and her co-chief, Anthony, will be great partners in the unit’s mission and the SEC’s efforts to root out misconduct in the asset management industry.”

“I am honored to lead the Asset Management Unit with Anthony,” said Ms. O’Riordan.  “As someone who joined the unit at its inception, I have seen the talent and dedication of the unit’s staff in policing a vital industry that investors have entrusted with trillions of dollars in assets, and I look forward to continuing to build on the unit’s many successes.”

Ms. O’Riordan is currently an Associate Regional Director in the SEC’s Los Angeles Regional Office. She began working in the Los Angeles office in 2005 as a staff attorney in the Division of Enforcement and joined the Asset Management Unit when it was formed in 2010. Ms. O’Riordan also served as counsel to the Director of the Division of Enforcement, and became an Assistant Director in the unit in 2012. 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.

SEC Press Release

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SEC Proposes Rule Requiring Investment Advisers to Adopt Business Continuity and Transition Plans

The Securities and Exchange Commission today proposed a new rule that would require registered investment advisers to adopt and implement written business continuity and transition plans.  The proposed rule is designed to ensure that investment advisers have plans in place to address operational and other risks related to a significant disruption in the adviser’s operations in order to minimize client and investor harm. 

“While an adviser may not always be able to prevent significant disruptions to its operations, advance planning and preparation can help mitigate the effects of such disruptions and in some cases, minimize the likelihood of their occurrence, which is an objective of this rule,” said SEC Chair Mary Jo White. “This is the latest action in the Commission’s efforts to modernize and enhance regulatory safeguards for the asset management industry, which includes rules previously proposed that would modernize the information reported to the Commission and investors, enhance fund liquidity management, and strengthen the regulation of funds’ use of derivatives.”

Business continuity and transition plans would assist advisers in preserving the continuity of advisory services in the event of business disruptions – whether temporary or permanent – such as a natural disaster, cyber-attack, technology failures, the departure of key personnel, and similar events. 

The proposed rule would require an adviser’s plan to be based upon the particular risks associated with the adviser’s operations and include policies and procedures addressing the following specified components: maintenance of systems and protection of data; pre-arranged alternative physical locations; communication plans; review of third-party service providers; and plan of transition in the event the adviser is winding down or is unable to continue providing advisory services.  The plans would be required to address these elements that are critical to minimizing and preparing for material service disruptions, but would permit advisers to tailor the detail of their plans based upon the complexity of their business operations and the risks attendant to their particular business models and activities. 

The proposed rule and rule amendments also would require advisers to review the adequacy and effectiveness of their plans at least annually and to retain certain related records.

In addition to the proposed rule, SEC staff issued related guidance addressing business continuity planning for registered investment companies, including the oversight of the operational capabilities of key fund service providers.

The proposal will be published on the SEC’s website and in the Federal Register.  The comment period will be 60 days after publication in the Federal Register.

To submit a comment, please use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov

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, June 27, 2016

SEC Adopts Rules for Resource Extraction Issuers Under Dodd-Frank Act

The Securities and Exchange Commission today announced it adopted rules to require resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas or minerals.  The rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to further the statutory objective to advance U.S. foreign policy interests by promoting greater transparency about payments related to resource extraction.

The final rules require an issuer to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.  The issuer must also disclose payments made by a subsidiary or entity controlled by the issuer. 

“I am pleased that the Commission has completed these final rules, which will provide enhanced transparency to further the statutory goal,” said SEC Chair Mary Jo White.

Under the final rules, resource extraction issuers must disclose payments that are:  made to further the commercial development of oil, natural gas, or minerals; “not de minimis”; and within the types of payments specified in the rules. The final rules define commercial development of oil, natural gas, or minerals as exploration, extraction, processing, and export, or the acquisition of a license for any such activity. 

The rules define “not de minimis” as any payment, whether a single payment or a series of related payments, which equals or exceeds $100,000 during the same fiscal year.  Payments that must be disclosed are:  taxes; royalties; fees (including license fees); production entitlements; bonuses; dividends; payments for infrastructure improvements; and, if required by law or contract, community and social responsibility payments.  The disclosure must be made at the project level, similar to the approach adopted in the European Union and Canada. 

The final rules include two targeted exemptions to the reporting obligations.  One exemption provides that a resource extraction issuer that has acquired a company not previously subject to the final rules will not be required to report payment information for the acquired company until the filing of a Form SD for the first fiscal year following the acquisition. Another exemption provides a one-year delay in reporting payments related to exploratory activities. The Commission also could exercise its existing Exchange Act authority to provide exemptive relief from the requirements of the rules on a case-by-case basis. 

The required disclosure will be filed publicly with the Commission annually on Form SD no later than 150 days after the end of its fiscal year.  The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.  Resource extraction issuers are required to comply with the rules starting with their fiscal year ending no earlier than September 30, 2018.

A resource extraction issuer may use a report prepared for other disclosure regimes to comply with the rules if the Commission determines that the requirements applicable to those reports are substantially similar.  In a separate order issued today, the Commission determined that the current reporting requirements of the European Union Accounting and Transparency Directives (as implemented in a European Union or European Economic Area member country), Canada’s Extractive Sector Transparency Measures Act, and the U.S. Extractive Industries Transparency Initiative (USEITI) are substantially similar to the Commission’s rules, subject to certain conditions specified in the order and in the final rules. 


Section 13(q) was added to the Exchange Act in 2010 by Section 1504 of the Dodd Frank Act.  It directs the Commission to issue final rules that require each resource extraction issuer to include, in an annual report, information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the federal government for the purpose of the commercial development of oil, natural gas, or minerals.  Among other things, Section 13(q) specifies that, to the extent practicable, the rules shall support the commitment of the federal government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.

Rule 13q-1 was initially adopted by the Commission on August 22, 2012, but it was subsequently vacated by the U.S. District Court for the District of Columbia.  Since then, the European Union and Canada have adopted transparency initiatives similar to the rules the Commission previously adopted and the USEITI has issued its first annual report.  The re-proposed rules were issued on December 11, 2015.

SEC Press Release

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SEC Proposes Amendments to Smaller Reporting Company Definition

The Securities and Exchange Commission voted today to propose amendments that would increase the financial thresholds in the “smaller reporting company” definition.  The proposal to update the definition would expand the number of companies that qualify as smaller reporting companies, thus qualifying for certain existing scaled disclosures provided in Regulation S-K and Regulation S-X.

“Raising the financial thresholds in the smaller reporting company definition is intended to promote capital formation and reduce compliance costs for smaller companies while maintaining important investor protections,” said SEC Chair Mary Jo White. “The Commission will benefit greatly from the public comments we receive from investors, issuers and other affected market participants on today’s proposal, as well as comments we receive on the Regulation S-K concept release, which will help inform any changes to the scaled disclosure system or other changes to our disclosure requirements.”

Smaller reporting companies may provide scaled disclosures under the Commission’s rules and regulations.  The proposed rules would enable a company with less than $250 million of public float to provide scaled disclosures as a smaller reporting company, as compared to the $75 million threshold under the current definition.  In addition, if a company does not have a public float, it would be permitted to provide scaled disclosures if its annual revenues are less than $100 million, as compared to the current threshold of less than $50 million in annual revenues.

In addition, as in the current rules, once a company exceeds either of the thresholds, it will not qualify as a smaller reporting company again until public float or revenues decrease below a lower threshold.  Under the proposal, a company would qualify only if its public float is less than $200 million or, if it has no public float, its annual revenues are less than $80 million.

The Commission is not proposing to increase the $75 million threshold in the “accelerated filer” definition.  As a result, companies with $75 million or more of public float that would qualify as smaller reporting companies would be subject to the requirements that apply currently to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

Public comment on the proposed amendments should be received by the Commission no later than 60 days after publication in the Federal Register.  To submit comments, use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

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.

Broker Pays the Price for Passing on Arbitration

Lessons Learned: You cannot ignore an arbitration complaint. You will lose, and the award will become a judgment. Plus - FINRA's two year jurisdiction retention does not limit your arbitration agreement.

From the Securities Arbitration Commentator:

The term “customer” in FINRA Form U-4 and FINRA’s Code of Customer Arbitration Rule 12200 includes a member firm’s account-holder victimized by the rogue investment activities of a FINRA registered broker, even with respect to investments made outside the account that do not result in any commissions or fees to the broker.

The court decision affirming the arbitration award is here.

Friday, June 24, 2016

SEC Charges “Frack Master” With Running an $80 Million Oil and Gas Fraud

The Securities and Exchange Commission today charged four companies and eight individuals in an $80 million oil and gas fraud orchestrated by a Dallas man who calls himself the “Frack Master” for his purported expertise in hydraulic fracturing. 

The SEC charged Chris Faulkner – the CEO of Breitling Energy Corporation (BECC) and recurring guest on CNBC, CNN International, Fox Business News, and the BBC to discuss oil-and-gas topics – with disseminating false and misleading offering materials, misappropriating millions of dollars of investor funds and attempting to manipulate BECC’s stock. The SEC also charged BECC and suspended trading in BECC’s securities for 10 business days.

According to the SEC’s complaint, Faulkner started the scheme dating back to at least 2011 through privately-held Breitling Oil and Gas Corporation (BOG), which offered and sold “turnkey” oil and gas working interests.  Faulkner ran most of BOG’s operations, while co-owners Parker Hallam and Michael Miller oversaw the sales process.  The SEC alleged that BOG’s offering materials contained false statements and omissions about Faulkner’s experience, estimates for drilling costs, and how investor funds would be used.  The SEC further alleged that the offering materials included reports by licensed geologist Joseph Simo that included baseless production projections and failed to disclose his affiliation with BOG.  The scheme evolved to include BOG’s successor, BECC, a reporting company with shares traded on OTC Link and two affiliated entities, Crude Energy LLC and later Patriot Energy Inc. Faulkner allegedly established Crude and Patriot to deceive investors through offerings similar to those conducted by BOG.  The complaint alleges that even though investors thought Hallam and Miller ran these two entities, Faulkner directed much of Crude’s and Patriot’s operations. The SEC alleged that BOG, Crude and Patriot raised more than $80 million from investors as part of these deceptive offerings.

The SEC alleged that Faulkner misappropriated at least $30 million of investor funds for personal expenses, including lavish meals and entertainment, international travel, cars, jewelry, gentlemen’s clubs, and personal escorts.  The SEC alleged that Beth Handkins, a former employee of Crude and Patriot, Rick Hoover, the former CFO of BECC, and Jeremy Wagers, BECC’s general counsel and COO, all played essential roles in assisting Faulkner in the alleged fraud.

“Chris Faulkner orchestrated a sophisticated and multilayered scheme using BECC and its affiliated entities as a conduit to access millions of investor dollars,” said Shamoil T. Shipchandler, Regional Director of the SEC's Fort Worth Regional office. “The financing for Faulkner’s opulent lifestyle came directly at the expense of unwitting investors across the country.” 

The SEC also alleged that Faulkner, Wagers and Hoover misrepresented various aspects of BECC’s operations in BECC’s public reports, including statements about the company’s financial performance, and its relationship to Crude and Patriot.  In addition, while in the middle of perpetrating this fraud on investors, Faulkner engaged in a scheme to manipulate the price of BECC’s stock, with the assistance of former BECC employee Gilbert Steedley, by placing trades at the end of the day to “mark the close” of the stock. 

The SEC charged Faulkner, Hallam, Miller, Simo, Handkins, BOG, Crude, and Patriot with violations of the antifraud provisions for their respective roles in the offering frauds, and charged BECC, Faulkner, Wagers, and Hoover with violations of the antifraud, reporting, recordkeeping and internal controls provisions of the federal securities laws.  The SEC also charged Faulkner, Wagers, and Hoover with lying to auditors, and charged Faulkner and Hoover with violating certification provisions of the Sarbanes-Oxley Act. Faulkner faces additional fraud charges based on his alleged manipulation of Breitling Energy’s stock, and the SEC charged Steedley was charged with aiding and abetting Faulkner’s manipulative conduct.

Miller, Handkins and Steedley have offered to settle the Commission’s action against them on a bifurcated basis.  Each will agree to full injunctive relief, including a conduct-based injunction for Miller, and will have the Court determine the appropriate disgorgement and civil penalties at a later date upon motion by the Commission.

The SEC’s investigation, which is continuing, has been conducted by Scott Mascianica, Ty Martinez and Melvin Warren and supervised by Eric Werner and David Peavler. The SEC’s litigation will be led by B. David Fraser and Mr. Mascianica. 

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.

Thursday, June 23, 2016

Merrill Lynch Paying $10 Million Penalty for Misleading Investors in Structured Notes

The Securities and Exchange Commission today announced that Merrill Lynch has agreed to pay a $10 million penalty to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.  

According to the SEC’s order instituting a settled administrative proceeding, the offering materials emphasized that the notes were subject to a 2 percent sales commission and 0.75 percent annual fee.  Due to the impact of these costs over the five-year term of the notes, the volatility index would need to increase by 5.93 percent from its starting value in order for investors to earn back their original investment on the maturity date.  But the offering materials failed to adequately disclose a third cost included in the volatility index known as the “execution factor” that imposed a cost of 1.5 percent of the index value each quarter.

The notes were issued by Merrill Lynch’s parent company Bank of America Corporation, and Merrill Lynch had principal responsibility for drafting and reviewing the retail pricing supplements.  The SEC’s order finds that Merrill Lynch did not have in place effective policies or procedures to ensure its personnel drafted and approved disclosures that adequately disclosed the impact of the execution factor.

This is the agency’s second case involving misleading statements by a seller of structured notes.  In October 2015, UBS AG agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy.

“This case continues our focus on disclosures relating to retail investments in structured notes and other complex financial products.  Offering materials for such products must be accurate and complete, and firms must implement systems and policies to ensure investors receive all material facts,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. 

Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added, “This case demonstrates the SEC’s ongoing commitment to creating a level playing field when it comes to the sale of highly complex financial products to retail investors.”

The SEC’s order finds that Merrill Lynch violated Section 17(a)(2) of the Securities Act of 1933, which prohibits obtaining money or property by means of material misstatements and omissions in the offer or sale of securities.  Without admitting or denying the findings, Merrill Lynch agreed to cease and desist from committing or causing any similar future violations and pay a penalty of $10 million. 

The SEC’s investigation was conducted by Christopher C. Nee, Thomas D. Silverstein, and Kapil Agrawal with assistance from Thomas A. Bednar and David S. Johnson.  The case was supervised by Andrew B. Sporkin, Reid A. Muoio, and Mr. Osnato.  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.

Merrill Lynch to Pay $415 Million for Misusing Customer Cash and Putting Customer Securities at Risk

The Securities and Exchange Commission today announced that Merrill Lynch has agreed to pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.
An SEC investigation found that Merrill Lynch violated the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account.  Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.  The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities.  Had Merrill Lynch failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account.
According to the SEC’s order instituting a settled administrative proceeding, Merrill Lynch further violated the Customer Protection Rule by failing to adhere to requirements that fully-paid for customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse.  From 2009 to 2015, Merrill Lynch held up to $58 billion per day of customer securities in a clearing account that was subject to a general lien by its clearing bank and held additional customer securities in accounts worldwide that similarly were subject to liens.  Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities.
“The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Merrill Lynch violated these rules, including during the heart of the financial crisis, and the significant relief imposed today reflects the severity of its failures.”
In conjunction with this case, the SEC announced a two-part initiative designed to uncover additional abuses of the Customer Protection Rule.  The first encourages broker-dealers to proactively report potential violations of the rule to the SEC and provides for cooperation credit and favorable settlement terms in any enforcement recommendations arising from self-reporting.  Second, the Enforcement Division, in coordination with the Division of Trading and Markets and the Office of Compliance Inspections and Examinations, will conduct risk-based examinations of certain broker-dealers to assess their compliance with the Customer Protection Rule.
“Simultaneous with today's action, SEC staff will begin a coordinated effort across divisions to find potential violations by other firms through a targeted sweep and by encouraging firms to self-report any potential violations of the Customer Protection Rule,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
In addition to the Customer Protection Rule violations, Merrill Lynch violated Exchange Act Rule 21F-17 by using language in severance agreements that operated to impede employees from voluntarily providing information to the SEC.  Merrill Lynch also engaged in significant remediation in response to the Rule 21F-17 violation, including the revision of its agreements, policies and procedures, and the implementation of a mandatory annual whistleblower-training program for all employees of Merrill Lynch and its parent corporation, Bank of America.  Merrill Lynch and Bank of America also agreed to provide employees, on an annual basis, with a summary of their rights and protections under the SEC’s Whistleblower Program.
The SEC separately announced a litigated administrative proceeding against William Tirrell, who served as Merrill Lynch’s Head of Regulatory Reporting when the firm was misusing customer cash in violation of the Customer Protection Rule.  The SEC’s Enforcement Division alleges that Tirrell was ultimately responsible for determining how much money Merrill Lynch would reserve in its special account, and failed to adequately monitor the trades and provide specific information to the firm’s regulators about the substance and mechanics of the trades.  The litigated administrative proceeding against Tirrell will be scheduled for a public hearing before an administrative law judge who will issue an initial decision stating what, if any, remedial actions are appropriate.
The SEC’s order finds that Merrill Lynch violated Securities Exchange Act Sections 15(c)(3) and 17(a)(1) and Rules 15c3-3, 17a-3(a)(10), 17a-5(a), 17a-5(d)(2)(ii), 17a-5(d)(3), 17a-11(e), and 21F-17.  Its subsidiary Merrill Lynch Professional Clearing Corporation is charged with violating Sections 15(c)(3) and 17(a)(1) and Rules 15c3-3, 17a-3(a)(10) and 17a-5(a).  Merrill Lynch cooperated fully with the SEC's investigation and has engaged in extensive remediation, including by retaining an independent compliance consultant to review its compliance with the Customer Protection Rule.  Merrill Lynch agreed to pay $57 million in disgorgement and interest plus a $358 million penalty, and publicly acknowledged violations of the federal securities laws.
The SEC’s investigation was conducted by Jeff Leasure and James Murtha with assistance from Eli Bass and Michael Birnbaum.  The case was supervised by Mr. Osnato and Daniel Michael.  The SEC’s litigation against Mr. Tirrell will be led by Michael Birnbaum, Jeff Leasure, and James Murtha.  The SEC appreciates the assistance of the Public Company Accounting Oversight Board.

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, June 22, 2016

SEC Sues UK-Based Trader for Account Intrusion Scheme

The Securities and Exchange Commission today announced it has obtained an emergency court order to freeze the assets of a United Kingdom resident charged with intruding into the online brokerage accounts of U.S. investors to make unauthorized stock trades that allowed him to profit on trades in his own account.

In a complaint filed in U.S. District Court in the Southern District of New York, the SEC alleges that in April and May, Idris Dayo Mustapha hacked into numerous accounts of U.S. customers of broker-dealers in and outside the U.S.  The complaint alleges that Mustapha placed stock trades without the customers’ knowledge and then traded in the same stocks through his own brokerage account.  In one case, Mustapha allegedly hacked into a brokerage account and rapidly purchased shares at increasing prices and then profited by selling his own shares of the stock in his brokerage account.  According to the complaint, Mustapha’s scheme made at least $68,000 profits for himself and caused losses in the victims’ accounts of at least $289,000.   

“We will swiftly track down hackers who prey on investors as we allege Mustapha did, no matter where they are operating from and no matter how sophisticated their technology,” said Robert Cohen, Co-Chief of the SEC Enforcement Division's Market Abuse Unit.  

The SEC obtained an emergency court order today that freezes more than $100,000 in Mustapha’s assets and prohibits Mustapha from destroying evidence.

The SEC alleges that Mustapha violated the antifraud provisions of federal securities laws and a related SEC antifraud rule.  In addition to the emergency relief, the SEC is seeking permanent injunctions, return of allegedly ill-gotten gains with interest, and financial penalties.

The SEC's Market Abuse Unit and its Boston Regional Office jointly conducted the investigation, which is continuing.  Eric Forni, Susan Cooke Anderson, Mark Albers, and Michele Perillo investigated the matter, with the assistance of Alex Lefferts of the Enforcement Division’s Center for Risk and Quantitative Analytics and Stuart Jackson of the Division of Economic and Risk Analysis.   

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, June 21, 2016

SEC Charges Medical Device Manufacturer With FCPA Violations

The Securities and Exchange Commission today announced that Massachusetts-based medical device manufacturer Analogic Corp. and its wholly-owned Danish subsidiary have agreed to pay nearly $15 million to settle parallel civil and criminal actions involving Foreign Corrupt Practices Act (FCPA) violations.
An SEC investigation found that Analogic’s Danish subsidiary, BK Medical ApS, engaged in hundreds of sham transactions with distributors that funneled about $20 million to third parties, including individuals in Russia and apparent shell companies in Belize, the British Virgin Islands, Cyprus, and Seychelles.
Analogic agreed to pay $7.67 million in disgorgement and $3.8 million in prejudgment interest to settle the SEC’s charges that it failed to keep accurate books and records and maintain adequate internal accounting controls.  In determining the settlement, the SEC considered Analogic’s self-reporting, remedial acts, and general cooperation with the SEC’s investigation. BK Medical agreed to pay a $3.4 million criminal fine in a non-prosecution agreement announced today by the U.S. Department of Justice.
“Analogic’s subsidiary, BK Medical, allowed itself to be used as a slush fund for its distributors, funneling millions of dollars around the world at its distributors’ direction without knowing the purpose of the payments or anything about the recipients,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “Issuers and their subsidiaries cannot turn a blind eye to suspicious payments, even if they believe they are simply ‘helping out’ a business partner.”
Lars Frost, BK Medical’s former Chief Financial Officer, agreed to pay a $20,000 penalty to the SEC to settle charges that he knowingly circumvented the internal controls in place at BK Medical and falsified its books and records.
According to the SEC’s order instituting a settled administrative proceeding against Analogic and Frost:
  • From at least 2001 through early 2011, at the direction of its distributors, BK Medical participated in hundreds of highly suspicious transactions that posed a significant risk of bribery or other improper conduct, such as embezzlement or tax evasion.
  • At its distributors’ request, BK Medical would issue fictitious inflated invoices to the distributors and direct the overpayments it received to third parties identified by the distributors.  BK Medical did not have a relationship with the third parties and did not know if the payments had any business purpose.
  • BK Medical’s Russian distributor accounted for at least 180 payments totaling more than $16 million.  BK Medical participated in similar arrangements, but to a lesser degree, with distributors in Ghana, Israel, Kazakhstan, Ukraine, and Vietnam, for which BK Medical acted as a conduit for at least 80 payments totaling approximately $3.8 million.
  • Frost, who was BK Medical’s CFO from 2008 to 2011, personally authorized approximately 150 conduit payments and submitted false quarterly sub-certifications to Analogic.
Frost, a Danish citizen, consented to the SEC’s order without admitting or denying the findings that he caused Analogic’s violations and that he violated provisions of the federal securities laws and a related SEC rule that prohibit the knowing circumvention of internal controls and knowing falsification of books and records.
The SEC’s investigation was conducted by James R. Drabick and Patrick Noone of the Boston Regional Office and was supervised by Paul G. Block of the FCPA Unit.  The SEC appreciates the assistance of the Fraud Section of the U.S. Department of Justice, the U.S. Attorney’s Office for the District of Massachusetts, and the Federal Bureau of Investigation, as well as the Danish State Prosecutor for Serious Economic and International Crime, the Austrian Financial Market Authority, the Latvian Financial and Capital Market Commission and the Financial Services Commission of the British Virgin Islands.

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.

Former CEO of Chicago Charter School Operator Settles Muni-Bond Fraud Charges

The Securities and Exchange Commission today announced a settlement with Juan Rangel, the former President of UNO Charter School Network Inc. and former CEO of United Neighborhood Organization of Chicago, for his role in a misleading $37.5 million bond offering to build three charter schools.
Rangel agreed to pay a $10,000 penalty and be barred from participating in any future municipal bond offerings to settle the SEC’s fraud charges.  The SEC announced a settlement with UNO in 2014 for defrauding investors in the same 2011 bond offering.
The SEC’s complaint alleges that Rangel negligently approved and signed a bond offering statement that omitted the charter schools’ multi-million-dollar contracts with two brothers of UNO’s chief operating officer – conflicted transactions that could have threatened UNO’s ability to repay bond investors. 
“We allege that Juan Rangel signed off on the offering document without even reading it,” said David Glockner, Regional Director of the SEC’s Chicago Regional Office.  “This kind of negligent behavior is unacceptable in the securities markets.”
According to the SEC’s complaint filed in U.S. District Court for the Northern District of Illinois, in 2010 and 2011, UNO entered into grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) to build three charter schools.  Rangel signed the agreements, which required UNO to certify that no conflict of interest existed and to immediately notify IDCEO in writing if any conflicts subsequently arose.  If UNO breached the requirements, IDCEO could suspend the grant payments and recover grant funds already paid to UNO.
The complaint alleges that UNO breached the agreement when, at Rangel’s direction, it contracted with its COO’s brothers, agreeing to pay approximately $11 million to one brother’s window company and approximately $1.9 million to another brother for services during construction.  According to the complaint, UNO did not notify IDCEO in writing about either transaction and its offering statement disclosed only the $1.9 million contract, not the larger $11 million contract.  In addition, the offering document did not disclose that by breaching its agreement, IDCEO could seek to recover the grants, requiring UNO to liquidate its charter schools to repay them, losing the assets it depended on to repay bond investors.
The SEC’s complaint charges Rangel with violations of Section 17(a)(2) of the Securities Act.  Rangel settled without admitting or denying the SEC’s charges.  He agreed to pay a $10,000 civil penalty, to be permanently enjoined from future violations of Section 17(a) (2) and to be barred from participating in municipal bond offerings, other than for his personal account.  The settlement is subject to court approval.
The SEC’s investigation was conducted by Michael Mueller of the Chicago Regional Office and Eric Celauro and Brian Fagel of the Public Finance Abuse Unit.  

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 Halts Scheme Defrauding Pro Athletes

The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of an investment advisor it has charged with secretly siphoning millions of dollars from accounts he managed for professional athletes and investing them in a struggling online sports and entertainment ticket business on whose board he served.
In a complaint filed on May 24 and unsealed today in federal court in Dallas, the SEC charged the advisor, Ash Narayan, of Newport Coast, California, along with The Ticket Reserve Inc., CEO Richard M. Harmon, and chief operating officer John A. Kaptrosky.  The SEC obtained a court order on May 24 to freeze the assets of the defendants and the court appointed a receiver over The Ticket Reserve.
The SEC’s complaint alleges that Narayan transferred more than $33 million from clients’ accounts to The Ticket Reserve, typically without their knowledge or consent and often using forged or unauthorized signatures.  According to the complaint, the Ticket Reserve became dependent on the fraudulent cash infusions from Narayan’s unsuspecting clients to stay in business and in exchange, Narayan received nearly $2 million in hidden compensation from the company, most of it directly traceable to funds stolen from his clients.
According to the SEC’s complaint, The Ticket Reserve also made Ponzi-like payments to existing investors using money from new investors.  Since being fired from the investment firm where he worked and losing access to the clients’ accounts, Narayan is alleged to have been redirecting to The Ticket Reserve the sham fees he received out of the money taken from client accounts.  The SEC secured the court-ordered asset freeze before Narayan could make a planned financial transaction on May 31.
“We allege that Narayan exploited athletes and other clients who trusted him to manage their finances.  He fraudulently funneled their savings into a money-losing business and his own pocket,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.  “The asset freeze stops the uncontrolled spending of investor assets within The Ticket Reserve until the case is resolved, preserving money that rightfully belongs to Narayan’s clients.”
According to the SEC’s complaint:
  • Narayan was a managing director in the California office of Dallas-based investment advisory firm RGT Capital Management. 
  • Narayan’s clients trusted and relied upon Narayan to pursue safe, conservative investments that would not put their principal at risk, realizing that as professional athletes with injury risks, their earnings might occur within a short window.
  • Besides failing to disclose the bulk of The Ticket Reserve investments to his clients and the fees he was receiving in exchange for investing their money, Narayan failed to disclose other key conflicts of interest—including that he was a member of The Ticket Reserve’s board of directors and owned more than three million shares of company stock.  Narayan also falsely claimed to be a CPA.
  • Harmon and Kaptrosky participated in the scheme by making undisclosed finder’s fee payments to Narayan out of his clients’ funds and covertly describing them as “director's fees” and “loans” in various company documents.
  • Harmon and Kaptrosky approved and executed Ponzi-like payments, falsified and backdated documents, and created sham promissory notes between The Ticket Reserve and Narayan in attempts to further conceal the scheme. 
The SEC’s complaint alleges that Narayan, The Ticket Reserve, Harmon, and Kaptrosky violated antifraud provisions of the federal securities laws and a related SEC antifraud rule, and charges Narayan with violating the antifraud provisions of the Investment Advisers Act of 1940.  The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as preliminary and permanent injunctions. 
The SEC’s investigation was conducted by Michael A. Umayam, Keith J. Hunter, and Carol J. Hahn, and the case was supervised by David L. Peavler, Jessica B. Magee, and Eric R. Werner in the SEC’s Fort Worth office.  The SEC’s litigation will be led by Christopher A. Davis and Ms. Magee.

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, June 17, 2016

SEC Approves IEX Proposal to Launch National Exchange, Issues Interpretation on Automated Securities Prices

The Securities and Exchange Commission today approved Investors’ Exchange LLC’s (IEX) application to register as a national securities exchange.  At the same time, the Commission issued an updated interpretation that will require trading centers to honor automated securities prices that are subject to a small delay or “speed” bump when being accessed.
“Today’s actions promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors,” said SEC Chair Mary Jo White.  “A critical role of the Commission’s regulatory framework is to facilitate the ability of market participants to craft appropriate market-based initiatives, consistent with our mission to protect investors, maintain market integrity, and promote capital formation.”
IEX must satisfy certain standard conditions specified in the Commission’s order before it is able to begin the process of transitioning its operation to a national securities exchange, including participating in a variety of national market system plans and joining the Intermarket Surveillance Group.
The Commission’s interpretation applies to the Order Protection Rule under Regulation NMS, which protects the best priced automated quotations of certain trading centers by generally obligating other trading centers to honor those protected quotations and not execute trades at inferior prices.  Under Regulation NMS, an automated quotation is one that, among other things, can be executed immediately and automatically against an incoming immediate-or-cancel order.
The Commission’s updated interpretation determined that a small delay will not prevent investors from accessing stock prices in a fair and efficient manner consistent with the goals of the Order Protection Rule.  In doing so, the Commission interprets the term “immediate” under Rule 600(b)(3) of Regulation NMS as precluding any coding of automated systems or other type of intentional action that would delay access to a security price beyond a de minimis amount of time.
Additionally, Commission staff issued guidance concerning the duration of the de minimis intentional access delays. The staff guidance states that delays of less than one millisecond are at a de minimis level.
Within two years of the Commission’s interpretation, staff will conduct a study regarding the effects of any intentional access delays on market quality, including asset pricing and report back to the Commission with the results of any recommendations.  Based on the results of that study, or earlier as it determines, the Commission will reassess whether further action is appropriate.

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.