Wednesday, August 23, 2017

Muni Bond Issuer and Underwriter Charged With Disclosure Failures

The Securities and Exchange Commission today announced that a municipal financing authority in Beaumont, California, and its then-executive director have agreed to settle charges that they made false statements about prior compliance with continuing disclosure obligations in five bond offerings.

Also settling charges are the underwriting firm behind those offerings and its co-founder for failing to conduct reasonable due diligence on the continuing disclosure representations.

The SEC’s Enforcement Division uncovered the violations as part of a review of municipal issuers and underwriters that did not voluntarily self-report under the agency’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.  The Beaumont Financing Authority and the underwriter, O’Connor & Company Securities Inc., would have been eligible for more lenient remedies had they self-reported during the MCDC Initiative.

According to the SEC’s order, the Beaumont Financing Authority had issued approximately $260 million in municipal bonds in 24 separate offerings from 2003 to 2013 for the development of public infrastructure.  For each of those offerings, a community facilities district established by Beaumont agreed to provide investors with annual continuing disclosures, including important financial information and operating data.  From at least 2004 to April 2013, the district regularly failed to provide investors with the promised information.  The Beaumont Financing Authority failed to disclose this poor record of compliance when it conducted the 2012 and 2013 offerings totaling more than $32 million.  As a result, the bonds appeared more attractive and investors were misled about the likelihood that the district would comply with its continuing disclosure obligations in the future.

“Investors in municipal bonds depend on timely and complete continuing disclosure from municipal issuers,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Issuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations.”

In a complaint filed in the Eastern Division of the U.S. District Court for the Central District of California, the SEC charged Beaumont’s then-city manager Alan Kapanicas, who also served as the Beaumont Financing Authority’s executive director.  According to the complaint, he approved and signed the misleading offering documents.  Kapanicas agreed to settle the charges without admitting or denying the allegations, and pay a $37,500 penalty.  He also agreed to be barred from participating in any future municipal bond offerings. 

In consenting to an SEC order without admitting or denying the findings, the Beaumont Financing Authority agreed to retain an independent consultant to review its policies and procedures.  It also is required to establish appropriate and comprehensive policies, procedures, and training for employees as well as designate a compliance officer in order to ensure compliance with continuing disclosure agreements. 

O’Connor & Company Securities Inc. and its co-founder and former primary investment banker Anthony Wetherbee agreed to settle the charges against them without admitting or denying the SEC’s findings.  O’Connor & Company Securities Inc. will pay a $150,000 penalty and retain an independent compliance consultant to review its policies and procedures.  Wetherbee will pay a $15,000 penalty and serve a suspension from the securities industry for six months.

The SEC’s investigation was conducted by Steven Varholik and Jason H. Lee of the Public Finance Abuse Unit with assistance from Deputy Chief Mark R. Zehner, Jonathan Wilcox, and Creighton L. Papier.  The investigation was supervised by Monique C. Winkler.   



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, August 22, 2017

SEC Charges Investment Adviser With Defrauding Professional Athlete and His Wife

The Securities and Exchange Commission today charged investment adviser Jeremy Drake with defrauding two clients, a high profile professional athlete and the athlete’s wife, by deceiving them about the investment advisory fees they were paying.  The SEC alleges that Drake went to elaborate lengths to conceal his fraud, including creating and sending false documents and masquerading as another person to corroborate his lies. 

The SEC alleges that Drake, then with Los Angeles-based HCR Wealth Advisors, deceived the clients for more than three years, telling them that they paid a special “VIP” annual rate of 0.15 to 0.20 percent of their assets under management when in fact they paid 1 percent.  Drake’s deception led the clients to pay $1.2 million more in management fees than Drake represented.  Drake personally received approximately $900,000 of incentive-based compensation based on the fees paid by the clients during the course of his deception.

According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Drake repeatedly lied to the clients and their representatives and sent false and misleading emails, deceptive fee reports, and other fabricated documents.  The complaint alleges that in June 2016, as one of the clients demanded an explanation about the fees, Drake created the persona of “Ron Stenson,” who purportedly corroborated Drake’s story.  Upon discovery, the complaint alleges that Drake admitted to one of the clients that he had been lying and warned her that reporting his misconduct could result in bad publicity for her husband.

“As alleged in our complaint, these two clients trusted Drake to manage their investments, but all the while Drake was lying to them and then tried to conceal his lies by fabricating documents and even acting as an imposter to back up his claims,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC charged Drake with violating and aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940.  The SEC is seeking a permanent injunction, return of Drake’s allegedly ill-gotten gains plus interest, and penalties.

The SEC’s investigation, which is continuing, has been conducted by M. Lance Jasper and Spencer E. Bendell, and the litigation will be led by Kristin Escalante.  



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, August 21, 2017

Hedge Fund Adviser Charged for Inadequate Controls to Prevent Insider Trading

The Securities and Exchange Commission today announced that hedge fund advisory firm Deerfield Management Company L.P. has agreed to pay more than $4.6 million to settle charges that it failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of inside information, including information about confidential government decisions.

The case relates to insider trading charges that the SEC recently filed against current and former Deerfield analysts, a political intelligence analyst who passed them information, and an employee at the Centers for Medicare and Medicaid Services (CMS). 

According to the SEC’s order, Deerfield conducted extensive research in the health care sector to help inform its investment decisions, and engaged research firms specializing in political intelligence about upcoming regulatory and legislative decisions.  But Deerfield’s policies and procedures required only an initial review of the research firms’ own policies and procedures, and Deerfield otherwise placed the burden on its own employees to police themselves by identifying issues and informing supervisors.

The SEC’s order finds that Deerfield was on notice that the political intelligence analyst might be conveying material, nonpublic information.  An email from the analyst said that he “heard from a reliable cms source” that CMS was about to issue a regulation, and an internal Deerfield email noted that the analyst “has a guy” at a “closed-door” government meeting.  From at least May 2012 to November 2013, Deerfield generated more than $3.9 million in trading profits based on material, nonpublic information from the political intelligence analyst.  Through its management agreements with the hedge funds, including performance-based compensation, Deerfield received approximately $714,110 due to these trades. 

“An investment adviser’s policies and procedures must be tailored to address the specific risks presented by its business.  Deerfield relied on political intelligence firms, creating a risk that it would receive and trade on illegal inside information.  As it turns out, that is exactly what happened,” said Robert A. Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit. 

Without admitting or denying the findings, Deerfield consented to the SEC’s order finding that it violated Section 204A of the Investment Advisers Act of 1940 by failing to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information.  Deerfield is censured and required to pay disgorgement of $714,110 plus interest of $97,585 and pay a penalty of $3,946,267. 

The SEC’s investigation was conducted by Ann Rosenfield, Patrick McCluskey, and Carolyn Welshhans in the Market Abuse Unit.  The SEC’s ongoing litigation in the insider trading matter is being led by Gregory Bockin and Cheryl Crumpton.  The case has been supervised by Mr. Cohen.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Department of Health and Human Services Office of Inspector General.  



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, August 18, 2017

Commission and Commission Staff Issue Updates to Interpretive Guidance on Revenue Recognition

The Securities and Exchange Commission today issued two releases and the SEC staff released a Staff Accounting Bulletin to update interpretive guidance regarding revenue recognition.

Consistent with developments in private-sector accounting standard setting, the SEC issued a release to update its guidance for bill-and-hold arrangements by stating that registrants should no longer refer to the criteria in Accounting and Auditing Enforcement Release No. 108, In the Matter of Stewart Parness (AAER 108), to recognize revenue for such arrangements upon the registrants' adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. The release states that until a registrant adopts ASC Topic 606, it should continue referring to the guidance included in AAER 108.

In addition, the SEC issued a release to update its 2005 Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile. The release states that consistent with ASC Topic 606, manufacturers should recognize revenue for vaccines that are placed into the Vaccines for Children Program and the Strategic National Stockpile.  The release states that until a registrant adopts ASC Topic 606, it should continue referring to the guidance included in the 2005 Release.

Separately, the SEC's Office of the Chief Accountant and Division of Corporation Finance released Staff Accounting Bulletin (SAB) No. 116 that brings existing SEC staff guidance into conformity with the Financial Accounting Standard Board's adoption of and amendments to ASC Topic 606. The SAB modifies SAB Topic 13, Revenue Recognition, SAB Topic 8, Retail Companies, and Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure. The guidance in SAB 116 applies upon a registrant's adoption of ASC Topic 606. Until such time, the SAB states that registrants should continue referring to prior staff guidance on revenue recognition.

The statements in Staff Accounting Bulletins are not Commission rules or interpretations nor are they published as bearing the Commission's official approval.  They represent interpretations and practices followed by the SEC's Office of the Chief Accountant and the Division of Corporation Finance in administering the federal securities laws.



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.

Banca IMI Securities to Pay $35 Million for Improper Handling of ADRs in Continuing SEC Crackdown

The Securities and Exchange Commission today announced that broker Banca IMI Securities Corp. (BISC), an indirect, wholly-owned U.S. subsidiary of Italian bank Intesa Sanpaolo SpA, has agreed to pay more than $35 million to settle charges that it violated federal securities laws when it requested the issuance of and received American Depositary Receipts (ADRs) without possessing the underlying foreign shares.

ADRs are U.S. securities that represent shares of a foreign company, and for all issued ADRs there must be a corresponding number of foreign shares held in custody at a depositary bank.  Under “pre-release agreements,” brokers such as BISC may obtain ADRs without depositing corresponding foreign shares provided the broker owns or takes reasonable steps to determine that the customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

The SEC’s order finds that BISC obtained pre-released ADRs and lent them to counterparties without satisfying the proper requirements.  BISC’s improper handling of ADRs, which lasted from at least January 2011 to August 2015, made it possible for such ADRs to be used for inappropriate short selling or inappropriate profiting around dividend record dates.  In certain countries, demand for ADR borrowing increased around dividend record dates so that certain tax-advantaged borrowers could, through a series of transactions, collect dividends without any tax withholding.  Pre-released ADRs that were improperly issued were used to satisfy that demand. 

Earlier this year, broker ITG settled charges for similar misconduct.

“U.S. investors who invest in foreign companies through ADRs have a right to expect market professionals to create new ADRs only when they are backed by foreign shares so that the new ADRs are not used to game the system,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “As our order finds, BISC’s actions left the ADR markets ripe for potential abuse.”

The SEC’s order finds that BISC violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel.  Without admitting or denying the SEC’s findings, BISC agreed to be censured and pay more than $18 million in disgorgement plus more than $2.3 million in interest and a $15 million penalty.  The SEC’s order acknowledges BISC’s cooperation in the investigation and its remedial actions.

The SEC’s continuing investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, and Adam Grace of the New York office and supervised by Mr. Wadhwa.  



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, August 16, 2017

SEC Uncovers Wide-Reaching Insider Trading Scheme

The Securities and Exchange Commission today announced insider trading charges against seven individuals who generated millions in profits by trading on confidential information about dozens of impending mergers and acquisitions.  Data analysis allowed the SEC’s enforcement staff to uncover the illicit trading despite the traders’ alleged use of shell companies, code words, and an encrypted, self-destructing messaging application to evade detection.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today unsealed criminal charges against the same seven individuals.

According to the SEC’s complaint, Daniel Rivas, a former IT employee of a large bank, was at the center of the alleged scheme, misusing his access to a bank computer system to tip four individuals who traded on the information.  He allegedly tipped others who also traded and passed along the tips.  According to the complaint, the traders profited on market-moving news related to 30 impending corporate deals from October 2014 to April 2017.

The SEC’s complaint alleges that Rivas frequently tipped his girlfriend’s father, James Moodhe, who traded on the information and used coded conversations and in-person meetings to relay the tips to his friend, Michael Siva, a financial advisor at a brokerage firm.  Siva allegedly used the confidential information to make profitable trades for his brokerage firm clients, earning commissions for himself in the process, and he passed numerous tips along to a client who traded on them.  The complaint alleges that Siva also traded on behalf of himself and his wife based on two of the tips he got from Moodhe, a former financial services company treasurer.

A separate trading ring allegedly involved two of Rivas’s friends in Florida, Roberto Rodriguez and Rodolfo Sablon, who discussed tips on an encrypted, self-destructing smartphone messaging application and used shell companies to carry out their insider trading.  Although Rodriguez and Sablon were inexperienced traders, in just over a year they turned less than $100,000 into more than $2 million in profits by making aggressive options trades based on the confidential information.  Rodriguez also is alleged to have passed several tips to one of his friends who also traded.

According to the SEC’s complaint, a third trading ring involved Jhonatan Zoquier, another inexperienced trader who profited by trading on inside information communicated through the encrypted messaging application.  The complaint further alleges that New Jersey-based Zoquier repeatedly passed the confidential information along to Jeffrey Rogiers of Oakland, California, who placed several illegal trades for himself and tipped others to trade.

The case stems from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns such as improbably successful trading across different securities over time.  Enhanced detection capabilities enabled SEC enforcement staff to spot the unusual trading activities.

“The tippers and traders in this case are alleged to have used various methods to try to cover their tracks, but their efforts failed,” said Steven Peikin, Co-Director of the SEC Enforcement Division.  “These charges reflect our continued use of sophisticated tools to detect and root out secretive and wide-reaching insider trading schemes.”

“We allege that this case involves repeated insider trading based on tips about dozens of confidential mergers and acquisitions stolen by an IT employee at a bank,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “IT employees are often entrusted with broad access to incredibly valuable, nonpublic information and have a duty to safeguard that information.”

The SEC’s complaint, which was filed in the Southern District of New York, charges Rivas, Moodhe, Rodriguez, Sablon, Zoquier, Siva, and Rogiers with fraud and seeks permanent injunctions along with the return of allegedly ill-gotten gains plus interest and penalties.

The SEC’s investigation, which is continuing, has been conducted by Walker Newell and David Makol with assistance from John Rymas.  The case has been supervised by Joseph G. Sansone, Erin E. Schneider, Steven Buchholz, and Jennifer J. Lee.  The SEC’s litigation will be led by Susan F. LaMarca and Mr. Newell.  The investigation has been conducted jointly by the San Francisco office and the Market Abuse Unit.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance 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.

Tuesday, August 15, 2017

SEC Charges KPMG with Audit Failures

The Securities and Exchange Commission today announced that KPMG has agreed to pay more than $6.2 million to settle charges that it failed to properly audit the financial statements of an oil and gas company, resulting in investors being misinformed about the energy company’s value.  KPMG’s engagement partner in charge of the audit also agreed to settle charges against him.

According to the SEC’s order, KPMG was hired as the outside auditor for Miller Energy Resources in 2011 and issued an unqualified audit report despite grossly overstated values for key oil and gas assets.  KPMG and the engagement partner John Riordan failed to properly assess the risks associated with accepting Miller Energy as a client and did not properly staff the audit, which overlooked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year.  Among other audit failures, KPMG and Riordan did not adequately consider and address facts known to them that should have raised serious doubts about the company’s valuation, and they failed to detect that certain fixed assets were double-counted in the company’s valuation. 

“Auditing firms must fully comprehend the industries of their clients.  KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars,” said Walter E. Jospin, Director of the SEC’s Atlanta Regional Office.

The SEC’s order finds that KPMG and Riordan engaged in improper professional conduct and caused Miller Energy’s violation of Section 13(a) of the Securities Exchange Act and Rules 13a-1 and 13a-13.  Without admitting or denying the findings, KPMG agreed to be censured and pay $4,675,680 in disgorgement of all the audit fees received from Miller Energy plus $558,319 in interest and a $1 million penalty.  KPMG also agreed to significant undertakings designed to improve its system of quality control.  Riordan agreed, without admitting or denying the findings, to pay a $25,000 penalty and be suspended from appearing or 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 Riordan to apply for reinstatement after two years.

Miller Energy was charged with accounting fraud in 2015 and later settled the charges.

The SEC’s investigation was conducted by William M. Uptegrove and John Nemeth, and the case was supervised by Peter J. Diskin and Aaron W. Lipson of the Atlanta office.



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, August 11, 2017

SEC Files Charges in Oil Drilling Investment Scheme

The Securities and Exchange Commission today charged two Tennessee men and an accomplice in Fort Lauderdale with allegedly defrauding investors they lured by false promises of high returns from an oil drilling investment opportunity.

According to the SEC’s complaint filed in federal court in Savannah, Georgia, David R. Greenlee and David A. Stewart Jr. orchestrated the $15 million scheme by recruiting and controlling a network of salesmen who offered and sold investors a stake in various companies purportedly using enhanced oil recovery techniques like fracking to extract and sell oil from wells in Kansas, Oklahoma, and Texas.  Investors were allegedly promised profits of 15 to 55 percent per year for decades. 

The SEC alleges that Greenlee and Stewart weren’t registered to sell investments and used fake names like “Dave Johnson” when speaking to investors in order to hide their past criminal records, and they diverted nearly two-thirds of the money raised from investors to pay themselves and their salesmen as well as advertise for new investors.  According to the SEC’s complaint, minimal funds were used for oil production at just a few of the wells in order to create the appearance of oil production and dupe investors who wanted to see activity in-person.

The SEC’s complaint further alleges that Richard “Ric” P. Underwood helped Greenlee and Stewart draft false offering brochures, and he oversaw a boiler room sales team of telemarketers in Florida as they solicited investors nationwide.

“As alleged in our complaint, misleading brochures and radio advertisements lured investors into believing they could strike it rich by investing in these oil drilling opportunities.  Unbeknownst to the investors, most of their money was being used for other purposes,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office. 

The SEC has previously alerted investors about the risks and possible fraudulent activity involved in private offerings of securities for oil-and-gas ventures.  The SEC also encourages investors to check the backgrounds of people selling investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Georgia today announced criminal charges against Greenlee, Stewart, and Underwood.

The SEC’s complaint charges Greenlee, Stewart, and Underwood with violations of the antifraud provisions of the federal securities laws.  The SEC seeks the disgorgement of ill-gotten gains plus interest and penalties as well as injunctions.

The SEC’s continuing investigation has been conducted by Brian M. Basinger with assistance from Lauren B. Poper, and the case is being supervised by Aaron W. Lipson and Stephen E. Donahue.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Georgia and the U.S. Secret Service.



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.