The Ninth Circuit upheld a conviction for illegal tipping, following Dirks but raising doubt regarding its adherence to Newman in an opinion authored by Judge Rakoff, sitting by designation.
The Commission filed settled proceedings against Goldman Sachs and KKR for, respectively, market access violations and centered on the undisclosed distribution of certain fees. The agency also filed a settled administrative proceeding against a foreign national who traded contracts for a difference on a U.S. issuer in Europe where the issuance of those instruments was ultimately hedged by a foreign institution that purchased the underlying shares on a U.S. exchange. In addition, the SEC brought actions centered on improper principal transactions, offering fraud, a lack of auditor independence and improper valuations by a fund.
Proposed rules: The Commission proposed rules requiring companies to adopt claw back policies on executive compensation. Under proposed Rule 10D-1 listed companies would be required to develop and enforce policies that claw back portions of certain compensation from current and former executives as mandated by Dodd-Frank. July 1, 2015 (here). Commissioner Michael Piwowar issued a separate statement disagreeing with the proposal (here).
Concept release: The Commission is soliciting comment regarding audit committee disclosures in a concept release. In addition to asking for comments on those disclosures, the SEC invited comments on whether there should be refinement of other disclosures such as those regarding overseeing the outside auditors, July 1, 2015 (here).
Statement: Commissioner Luis Aguilar issued a public statement titled “The Role of Chief Compliance Officers Must be Supported” (June 29, 2015), responding to a dissent issued by Commissioner Gallagher earlier in two enforcement actions. Commissioner Aguilar noted that COOs have nothing to fear from the SEC, arguing that few cases have been brought against them over the years (here).
Jurisdiction: The Court agreed to hear Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning. The Question presented for resolution is “Whether §27 of the Securities Exchange Act of 1934 provides federal jurisdiction over state-law claims seeking to establish liability based on violations of the Act or its regulations or seeking to enforce duties created by the Act or its regulations.” Currently there is a split in the circuits with the Fifth and Ninth holding that the Section provides federal jurisdiction over state-law claims seeking to establish liability based on violations of the Act or its regulations or seeking to enforce duties created by the Act or its regulations. The Second and Third Circuits have rejected this theory.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 4 civil injunctive cases and 10 administrative actions, excluding 12j and tag-along proceedings.
Insider trading: In the Matter of Patrick Lehnert, Adm. Proc. File No. 3-16682 (July 9, 2015) names as a Respondent the former Senior Director of Finance & Controlling Europe at Harman International, Inc. whose shares are listed on the NYSE. Mr. Lehnert resides in Karlsruhe, Germany. The action centers on the positive earnings announcement made by the company prior to the market open on October 30, 2014. Mr. Lehnert, by virtue of his position, was aware of positive financial information for a significant segment of the firm. He purchased contracts for a difference through a local affiliate of a London based firm. The contracts are the functional equivalent of owning the actual shares. The London firm hedged the position through swaps with a European-based affiliate of a large international institution which then hedged the swaps by purchasing Harman shares through a U.S. broker-dealer. Following the earnings announcement Mr. Lehnert had profits of about $31,506. The Order alleges violations of Exchange Act Section 10(b). Mr. Lehnert resolved the proceeding, consenting to the entry of a cease and desist order based on Section 10(b) and agreeing to disgorge his trading profits and pay prejudgment interest along with a penalty of $15,753.
Principal transactions: In the Matter of Vero Capital Management, LLC, Adm. Proc. File No. 3-16328 (July 8, 2015) names as Respondents: Vero Capital, a registered investment adviser; Robert Geiger, a co-owner of Vero Capital; George Barbaresi, Esq., also a co-owner of Vero Capital and its general counsel; and Steven Downey, CPA., another co-owner and the CFO of Vero Capital. The Order alleges that between late 2010 and 2011 Respondents caused Vero Capital’s advisory clients — the Funds — to purchase three notes with a total principal value of $7 million from Vero Asset Management LLC, an affiliate of Vero Capital. These transactions constituted principal transactions under Advisers Act Section 206(3) which requires written notice and consent from the client prior to completion which was not obtained. Subsequently, from 2012 to 2013 Respondents improperly diverted about $2.8 million from the Funds by making a series of undocumented, undisclosed bride loans to an affiliates while telling the investors in one fund and its director that the investments were being wound down. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). Respondents resolved the matter with Vero Capital entering into a series of undertakings. In addition, each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The three individuals are barred from the securities business with a right to apply for re-entry after three years. Vero Capital was also censured while Respondents Downey and Barbaresi were denied the privilege of appearing and practicing their profession before the Commission for three years with a right to submit an application to resume appearing after that time. Respondents will, jointly and severally, pay disgorgement of $2,879,623 along with prejudgment interest. Each Respondent will also pay a penalty of $300,000.
Disqualification: In the Matter of Macquarie Capital Investment Management, LLC, Adm. Proc. File No. 3-16676 (July 7, 2015) is a proceeding which names as Respondents MCIM, a global financial services firm which is a registered investment adviser that is a wholly owned subsidiary of Macquarie Group Ltd. or MGL and provides certain services to registered investment companies; Delaware Management Company or DMC, a series of the Delaware Management Business Trust or DMBT, a Delaware statutory trust, that provides investment advisory services to certain registered investment companies and is a subsidiary of MGL; Delaware Investments Fund Advisers or DIFA, a series of DMBT that provides sub-advisory services to registered investment companies; Four Corners Capital Management, LLC or FCCM, a subsidiary of DMBT and a registered investment adviser that provides services to certain registered investment companies; Macquarie Funds Management Hong Kong Limited or MFMHK, an investment adviser which is a subsidiary of MGL and provides services to certain registered investment companies; and Delaware Distributors, L.P., a broker dealer registered with the Commission and a wholly owned subsidiary of MGL that serves as a principal underwriter to certain open-ended registered investment companies. In March 2015 the SEC filed a complaint against Macquarie Capital (USA), Inc. or MCUSA, a registered broker-dealer owned by MGL. Subsequently, the Court entered an injunction by consent against the firm and two of its brokers based on Securities Act Sections 17(a)(2) and (3). After becoming aware of the injunction Respondents sought and obtained on May 15, 2015 a temporary exemptive order from Section 9(a) of the Investment Company Act regarding the injunction. MCUSA is an affiliate of each Respondent within the meaning of Section 2(a)(3) of the Investment Company Act. As a result each Respondent was prohibited from engaging in Fund Service Activities as of April 1, 2015. Nevertheless, each engaged in such activities. To resolve the action each Respondent consented to the entry of a cease and desist order based on Section 9(a) of the Investment Company Act. Each Respondent was also directed to pay a penalty of $20,000.
Offering fraud:SEC v. Luca International Group LLC, Civil Action No. 3:15-CV-03101 (N.D. Cal. Filed July 6, 2015). Luca International, founded and controlled by defendant Bingqing Yang, is an umbrella organization for a number of entities called the Luca Managers who act largely as marketing agents. Defendants Lei Lei and Anthony Pollace, were, respectively, the firm’s former vice-president responsible for marketing the Luca Funds, and the CFO. Also named as defendants were Yong Chen and Entholpy, EMC, Inc. d/b/a Mastermind College Funding. The action has two key parts. First, from September 2007 through March 2014, Ms. Yang, though the Luca Managers, and in conjunction with the other defendants, is alleged to have raised $68 million from investors through the purported sale of interests in oil and gas ventures claimed to be profitable. In reality they were losing money. Investor funds were being taken by Ms. Yang for personal use. The second key part of the scheme involved the EB-5 program. Between October 2011 and March 2014 Ms. Yang, through Luca Energy, and in conjunction with Ms. Lei, used Luca I to target Chinese citizens who wanted to participate in the program. Using a private placement memorandum, investors were solicited with claims that Luca I was profitable and that investments could be made in oil wells as part of the EB-5 program. Investors put up about $8 million. Luca I was, however, hopelessly in debt. By early 2014 the Luca Funds and Managers were on the verge of collapse. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a), Securities Act Sections 5(a), 5(c), 17(a) and 17(a)(3) and Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. Luca International’s former CFO Anthony Pollach, who is alleged to have played a small role, settled by agreeing to pay a penalty of $25,500. See also In the Matter of Wisteria Global, Inc., Adm. Proc. File No. 3-16675 (July 6, 2015)(a proceeding naming the entity and its principal, Hiroshi Fujigami, as Respondents who are alleged to have acted as unregistered brokers in the scheme; both settled, consenting to cease and desist orders based on Exchange Act Section 15(a); the firm was censured; disgorgement of $1,793,783 was ordered; but $1,138,985 plus prejudgment interest waived based on financial condition; Mr. Fujigami was barred from the securities business). See Lit. Rel. No. 23298 (July 6, 2015).
Independence: In the Matter of Deloitte & Touche LLP, Adm. Proc. File No. 3-16672 (July 1, 2015) is a proceeding which names as Respondents the audit firm, a subsidiary of Deloitte and a PCOAB registered auditor and Andrew Boynton, who served on the board of trustees and audit committee of Fund A, B and C which were serviced by ALPS Fund Services, Inc. Mr. Boynton developed a proprietary business brainstorming methodology which he sold to Deloitte Consulting LLP and helped implement over a five year period beginning in 2006. During that period Funds A, B and C were both D&T audit clients and registered investment companies. Deloitte represented in audit reports for the three funds that it was independent, when it was not. As a result Respondent D&T engaged in improper professional conduct, violated Rule 2-02(b) of Regulation S-X, and caused reporting violations. Respondent ALPS, was responsible for assisting with the implementation of policies and procedures to avoid violations of the Federal securities laws which were inadequate regarding auditor independence. It caused certain violations by the Funds of Investment Company Act Rule 38a-1. Respondents resolved the proceeding. D&T consented to the entry of a cease and desist order based on Rule 2-02 of Regulation S-X as well as Sections 20(a) and 30(a) of the Investment Company Act. The firm will also pay disgorgement of $497,438, prejudgment interest and a civil penalty of $500,000. Respondent ALPS consented to the entry of a cease and desist order based on Rule 38a-1 of the Investment Company Act. In addition, the firm agreed to pay a civil penalty of $45,000. Mr. Boynton consented to the entry of a cease and desist order based on the same provisions as D&T. He also agreed to pay disgorgement of $30,000, prejudgment interest and a civil penalty of $25,000.
Investment fund fraud: SEC v. Segal, Civil Action No. 15-3668 (E.D. Pa. Filed July 1, 2015) is an action naming as a defendant Malcom Segal, a registered representative at a brokerage firm from 1988 through July 2014. The complaint alleges that beginning in at least 2009 Mr. Segal raised about $15.5 million from at least 50 investors by convincing them to purchase fraudulent certificates of deposits, claiming that they paid a higher rate of interest than other FDIC insured certificates. While in some instances Mr. Segal actually purchased CDs, in others he did not. In both cases he misappropriated the funds by either cashing the instrument in early and taking the money or directly misappropriating the investor funds. The proceeds were used for his personal benefit. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The action is pending. A parallel criminal case has been filed by the U.S. Attorney’s Office for the Eastern District of Pennsylvania. See Lit. Rel. No. 23295 (July 1, 2015).
Valuation: In the Matter of Alphabridge Capital Management, LLC, Adm. Proc. File No. 3-16670 (July 1, 2015); In the Matter of Richard Lawrence Evans, Adm. Proc. File No. 3-16670 (July 1, 2015). Alphabridge names as Respondents the registered investment adviser, Thomas Kutzen, its founder and managing member, and Michael Carino, its COO and minority owner. Mr. Evans was employed at a Huston, Texas broker dealer as a registered representative until he was terminated in July 2013. Since the inception of the Fund investors, the administrator and the auditor have been told that the largely illiquid securities held were valued by obtaining independent quotes from registered representatives at two reputable broker-dealers. That process diverged over time and by 2010 the adviser supplied its valuations to the registered representatives for them to furnish to the fund administrator and auditors as their own. At one point the adviser agreed to make Mr. Evans available to speak with the auditors. He provided representations based on a supplied script. The Order alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. This caused the fund to pay higher management and performance fees. To resolve the Alphabaridge proceeding, the adviser agreed to implement a series of procedures including the retention of an independent adviser, along with Mr. Carino, and consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Kutzen agreed to the entry of a similar order but based only on Sections 206(2) and 206(4). Both the adviser and Mr. Kutzen agreed to the entry of a censure. Mr. Carino is also barred from the securities business with a right to reapply after three years. In addition, the adviser agreed to pay a penalty of $725,000 while Mr. Carino will pay $200,000 and Mr. Kutzen $50,000. The Respondents will, jointly and severally, pay disgorgement of $4,025,000. That payment will be made by depositing $5 million in disgorgement and penalties in a fund which will be distributed to the harmed investors. The Order as to Mr. Evans, who cooperated with the SEC, alleged violations of Advisers Act Section 206(2) and 206(4). Mr. Evans consented to the entry of a cease and desist order based on those Sections. He is also barred from the securities business with a right to reapply after 1 year and will pay a civil penalty of $15,000.
Market access: In the Matter of Goldman, Sachs & Co., Adm. Proc. File No. 3-16665 (June 30, 2015). The action centers on erroneously sending 16,000 mispriced options orders to various option exchanges in less than an hour on August 20, 2013. Respondent Goldman, a wholly owned subsidiary of The Goldman Sachs Group, is a registered broker dealer and a member of FINRA. One of the client service functions performed by the firm is the provision of options liquidity to electronic trading customers. This service was done in part through the use of a matching engine that attempts to pair the firm’s indications of interest against customer orders for the particular option contract. If there was a match the paired order was sent to an exchange for execution. If there was no match the customer order was routed to an exchange. The firm’s indications of interest, called axes, were contingent in price, size and other parameters. They were not intended to go to the exchanges unless paired with a customer order. To the contrary, axes were intended to remain in the matching engine and search for customer orders to pair-off.
On August 20, 2013, as a result of a configuration error in one of the firm’s options order routers, Goldman sent thousands of $1 limit orders to options exchanges prior to the start of regular market trading. Specifically, about 1.5 million options contracts representing 150 million underlying shares were executed. Goldman faced a potential $500 million loss, although in the end it was about $38 million in view of cancellations or price adjustments for erroneous trades. Before the market opened the firm halted the creation of orders and began canceling the erroneous ones that had been sent for execution. The error resulted from a series of failures and inadequate policies. The Order alleges violations of Exchange Act Section 15(c)(3) and Rule 15c-3-5. To resolve the proceeding Goldman consented to the entry of a cease and desist order based on the Section and Rule cited in the Order as well as to a censure. In addition, the firm agreed to pay a civil penalty of $7 million.
Investment fund fraud: SEC v. DFRF Enterprises LLC, Civil Action No. 1:15-cv-12857 (D. Mass. Filed June 30, 2015) is an action which names as defendants the company, founded by defendant Daniel Fernaudes Rojo Filho; Wanderley Dalman, Gaspar Jesus and Eduardo Da Silva, all representatives of the firm; Heriberto C. Perez Valdes, a manger of the Massachusetts DFRF; Jeffry Feldman, the sole officer and director of Universal Marketing Group, Inc.; and Romildo Da Cunha, who trains promoters of multi-level marketing programs. Since the summer of 2014 Mr. Filho has been selling memberships in DFRB which supposedly has over 50 gold mines; a line of credit with a Swiss private bank; donates 25% of its profits to charitable work in Africa; offers 10% credit for recruiting new members; and pays 15% to members whose interests are convertible into shares that are about to go public and which are registered with the Commission. DFRF raised over $15 million from 1,400 investors. In fact DFRF is a fraud. Much of the money raised has been diverted to paying other investors or misappropriated. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a). The case is pending. See Lit. Rel. No. 23296 ( July 2, 2015).
Offering fraud: In the Matter of Peter Voutsas, Adm. Proc. File No. 3-16667 (June 30, 2015) names as Respondents: Mr. Voutsas the CEO and also the CIO of Gepco, Ltd. and Gem Vest, Ltd. From September 2013 through September 2014 Mr. Voutsas participated in the offer and sale of shares of Gepco, a penny stock. Gepco entered into a reverse merger with GemVest Ltd in late 2013. The firm claimed to broker high end investment grade diamonds. GemVest had been formed by Izak Zirk De Maison, a/k/a Zirk Engelbrecht who was married to Angelique de Maison. After the merger Mrs. De Maison was named Executive Chairman of Gepco. Although her husband was a control person, that fact was never disclosed. In a January 2014 press release the firm announced the purchase of a large diamond. The release quoted Mr. Voutsas. What the release failed to state was that the stone was pledged to another company controlled by Mr. Engelbrecht. The Order alleges violations of Securities Act Section 17(a)(3). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, he agreed to be barred from participating in any penny stock offering and agreed to pay a civil penalty of $50,000.
Fees: In the Matter of Kohlberg Kravis Robert & Co. L.P.¸Adm. Proc. File No. 3-16656 (June 29, 2015). Respondent KKR is a private equity firm specializing in buyout and other transactions. The firm incurs significant investment expenses sourcing investment opportunities. It is reimbursed directly from portfolio companies for expenses incurred with successful transactions. For broken deal expenses it is reimbursed through fee sharing arrangements with its funds. Consistent with the applicable limited partnership agreements, and those for the Flagship 2006 Fund LPA, KKR shared a portion of its monitoring, transaction and break-up fess with the 2006 Fund. Under the fee sharing arrangement KKR received 20% of the fees and economically bore 20% of the broken deal expenses. However, the 2006 Fund’s LPA and offering materials did not include any express disclosure that KKR did not allocate broken deal expenses to its co-investors despite the fact that they participated in, and benefited from, KKR’s general sourcing transactions. From 2006 through 2011 KKR allocated broken deal expenses by geographic region where the potential deal was sourced. Thus it allocated broken deal expenses related to potential North American investments to the 2006 Fund. Before 2011, however, the firm did not allocate or attribute any of those expenses to co-investors. In June 2011 KKR concluded that it lacked a written policy governing its broken deal expenses and revised its procedures. A new methodology was developed and implemented which allocated part of the expenses to partner vehicles and other co-investors. In 2013 OCIE conducted a compliance exam which included a review of expense allocations. During the examination KKR refunded its Flagship PE Funds a total of $3.26 million in certain broken deal expenses that had been allocated to them from 2009 to 2011. Prior to the institution of the new policy KKR did not allocate any share of broken deal expenses to its co-investors, with certain exceptions, and it did not expressly disclose in the LPAs or related materials that it did not allocate or attribute broken deal expenses to co-investors. As a result KKR misallocated $17.4 million in broken deal expenses between its Flagship PE Funds and co-investors, thereby breaching its fiduciary duty as an investment adviser, according to the Order. The Order alleges violations of Advisers Act Sections 206(2) and 206(4)-7. Respondent resolved the matter, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, they agreed to pay disgorgement of $14,165,968 (net broken deal expenses), prejudgment interest and a penalty of $10 million.
Offering fraud:SEC v. Baldwin, Civil Action No. 2:15-cv-00458 (D. UT. Filed June 25, 2015) names as defendants Dwight Baldwin and Silverleaf Financial, LLC. The firm’s primary business was the acquisition of defaulted commercial loans collateralized by real property which could be sold at a profit. Mr. Baldwin controlled the firm.
In early 2010 Mr. Baldwin successfully bid on sixteen discounted commercial loans which were purchased under a June 29, 2010 agreement with a bank. One of the loans acquired was the Oviedo property loan. Within days of the purchase, the loan was sold. Despite the sale of the Oviedo property loan, Mr. Baldwin continued to solicit investors for funds to acquire the property, raising $2 million from one investor. After receiving the funds Mr. Baldwin provided the investor with optimistic updates.
In September 2011 Mr. Baldwin began taking steps to acquire the Trailhead note. After securing a sham letter of intent with a purported purchase price of $33 million, Mr. Baldwin solicited two investors who were convinced to put up a total of $6 million. Each was told that there was a buyer for the property which would soon be sold for a quick profit. In fact there was no buyer. The property remains unsold. The investors remain unpaid. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23299 (July 6, 2015).
Fee overcharges: Wells Fargo, Raymond James and LPL Financial consented to the entry of orders requiring them to collectively pay over $30 million in restitution, along with interest, to customers who did not obtain waivers of certain fees in connection with the acquisition of select mutual funds. Specifically, mutual funds offer several classes of shares, each with different sales charges and fees. Many funds waive their upfront sales charges on certain classes for select types of retirement accounts and/or for charities. Here the firms failed to waive the applicable fees. Accordingly, Wells Fargo will repay about $15 million; Raymond James about $8.7 million; and LPL about $6.3 million. In addition, LPL will pay restitution to certain customers from January 1, 2015 through the date the firm fully implemented certain procedures.
Independence: The Board settled disciplinary orders sanctioning seven audit firms and two partners at those firms for independence violations in connection with the audits of broker-dealers. In each instance the audit firm prepared financial statements it then audited. The penalties assessed ranged from $20,000 to $2,500. Each firm was censured. Two were prohibited from accepting new clients for one year.
The Board determined not to take any action against an eighth firm which was engaged in similar conduct based on its extraordinary cooperation. That included self-reporting and instituting meaningful remedial actions which included reporting the violation to the client.
Insider trading: U.S. v. Wang, 3:13-cr-03487(C.D. Calif. Filed Sept. 20, 2013). Jing Wang, a former Qualcomm Inc. Executive Vice President, used insider information, taken from his employer in three instances to successfully trade. Although he took steps to conceal his activities, the scheme uncovered. Mr. Wang has been sentenced to 18 months in prison and directed to pay a $500,000 fine after pleading guilty to securities fraud based on his insider trading, money laundering tied to his efforts to evade detection and obstruction.
Court of appeals
Illegal tipping: U.S. v. Salman, No. 14-10204 (9th Cir. Filed July 6, 2015). The case came before the court following the conviction for insider trading of Defendant-Appellant Bassam Yacoub Salman. The brother-in-law of Mr. Salman began working at Citigroup’s healthcare investment banking group in 2002. Over a period of years Maher began discussing information about his job with his brother Michael who traded on it. The year after Maher Kara began at Citigroup he became engaged to Mr. Salman’s sister, Saswan Salman. As the families became close, Michael began sharing the inside information with Mr. Salman who traded through the joint account of his wife’s sister and her husband, Karim Bayyouk. The profits were split. At one point Mr. Salman asked Michael where the information came from and was told. Brothers Maher and Michael had a close and mutually beneficial relationship, according to the evidence. For example, Michael helped pay for Maher’s college and aided him in a number of other ways. At one point Michael called and asked for assistance with a debt. Maher refused to furnish him with cash but did give him inside information. Mr. Salaman was aware of this relationship, according to the evidence introduced at trial. The jury found Mr. Salman guilty on one count of conspiracy and four counts of securities fraud. On appeal, Mr. Salman argued that the evidence was insufficient to meet the requirements of Newman. The Ninth Circuit affirmed.
The personal benefit requirement for tippee liability stems from Dirks v. SEC, 463U.S. 646 (1983), Judge Rakoff, sitting by designation, wrote for the Court. Analyzing that decision the Court concluded that the key question of what constitutes a personal benefit is whether, according to Dirks, there is “a pecuniary gain or a reputational benefit that will translate into future earnings . . . [the]elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.” (emphasis omitted). Here Maher’s disclosures to Michael knowing that he intended to trade in the information is a Dirks gift to a relative. Maher testified he intended to give Michael a benefit. Michael testified that he told Mr. Salman the source of the information. In addition, “[g]iven the Kara brothers’ close relationship, Salman could readily have inferred Maher’s intent to benefit Michael. Thus, there can be no question that, under Dirks, the evidence was sufficient . . .” Finally, Mr. Salman argued that “because there is no evidence that Maher received any such tangible benefit [as described in Newman] in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden.” The Court responded, stating: “To the extent Newman can be read to go so far, we decline to follow it.”
Misleading statements:David Hodgson of Sunshine Coastal was banned for two years from the financial services business. The Australian Securities and Investment Commission found that he made misleading statements regarding fund shares he recommended and failed to keep the proper financial records for the fund which he also failed to register.
Financial fraud: Elmo De Alwis and Mark Smith, respectively, the CEO and CFO of Signa Pharmaceuticals Ltd. pleaded guilty to falsifying the books and records of the company. Specifically, between June 2009 and March 2010 the two men were involved in arranging transactions for Sigma to purchase wholesale pharmaceutical drugs at inflated prices. The amount of the inflated payment was returned to Signa and recorded in its books as revenue. As a result Sigma’s year end January 31, 2010 reports were overstated by over $16.5 million and its inventory was understated by over $11.3 million. The proceedings were adjourned until September 17, 2015.
Financial results: Sapphire Aged Care Pty Ltd. agreed to reformulate its financial results as a result of inquiries by the ASIC. Specifically, the firm made revisions which include: Reclassifying $54.5 million previously shown as a related party loan and receivables to goodwill; writing back a previous revaluation of bed licenses; and reducing cash outflows and borrowing to related parties.
Adviser barred: The ASIC barred Lee Bobin, a financial adviser and also a director of Protect Ensure Pty Ltd which is now in liquidation from acting as a financial adviser, concluding that he was not of good character. Specifically, he was found to have acted dishonestly by using client funds for personal expenses; failed to properly disclose that client funds were pooled; failed to ensure that Protect Ensure had adequate financial resources to provide its services and supervise its representative; and failed to ensure that the firm acted in accord with its Australian Financial Services License.
Takeovers: The Takeovers and Mergers Panel imposed a “cold shoulder order” against Chow Yei Ching, Oscar Chow Vee Teung and Joseph Leung Wing Kong and publically censured them. The findings are based on their failure to comply with the Code when they acted in concert with the late Ms. Nina Kung to obtain and consolidate control over ENM Holdings Ltd. They then failed to make a general offer as required by the Takeovers Code. As a result Mr. Ching is denied access to the securities markets for ten years; Messrs. Oscar Chow Vee Tsung and Joseph Leung Wing Kong are denied access to the markets for two years.