A new report by Cornerstone Research and the NYU Pollack Center shows a significant drop in the number of SEC enforcement cases in the second half of the last Government fiscal year, attributable to the change in administration. The findings in the report appear to conflict with a glossy presentation by the Commission on enforcement activity during the same period.
The DOJ continued to emphasize cases against individual in the FCPA area, unsealing indictments against two individuals. The charging papers alleged two bribery schemes that tied back to the U.S.
Finally, SEC Enforcement brought two cases alleging violations of Exchange Act Section 15(a). In one the Commission claimed that a seller of fractional interests in wells acted as an unregistered broker. In a second the agency alleged that buying convertible bonds and then selling the shares after conversion as a business constituted an unregistered dealer business. And, the Commission brought an action alleging fraud in connection with the sale of municipal bonds where the significant debts of the town issuer were not disclosed.
Report on SEC Enforcement
A new report by Cornerstone Research and the NYU Pollack Center for Law and Business analyzes the activities of SEC Enforcement over the last fiscal year. SEC Enforcement Activity: Public Companies and Subsidiaries (Nov. 2017) (here). The number of new SEC enforcement actions brought involving public companies in the last fiscal year declined by about 33% compared to the prior fiscal year, according to the Cornerstone/NYU report. Specifically, in fiscal 2017 the Division brought 62 actions involving public companies while in fiscal 2016 92 new cases were filed compared to 81 in 2015. In fiscal 2017, according to the Cornerstone/NYU report, the Enforcement Division was on pace in the first half of the year to match the prior year in terms of the number of cases filed. During the first half of the year 45 enforcement actions were filed. In the second half of fiscal 2017 only 17 cases were brought by the Division. The drop in filings “corresponds with the leadership change at the SEC,” the Report notes.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive cases and 1 administrative proceeding, excluding 12j and tag-along proceedings.
Improper investment advice: In the Matter of Gray Financial Group, Inc., Adm. Proc. File No 3-16554 (Nov. 22, 2017) is an action which names as Respondents the formerly registered investment adviser, Laurence Gray, its founder and President, and Robert Hubbard, an employee who held various senior positions. In July 2012 the state of Georgia passed a law permitting public pension plans to invest in certain alternative investments. Respondents put public pension fund clients into certain funds which did not conform to Georgia law. In addition, Respondents made misrepresentations to public pension fund clients regarding whether certain investments were in compliance with the law. The Order alleges violations of Advisers Act Sections 206(1) and 206(2). To resolve the proceedings the firm and Mr. Gray each consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Hubbard consented to the entry of a similar order but based only on Section 206(2). The firm was also censured. Mr. Gray is barred from the securities business with a right to re-apply after two years while Mr. Hubbard is suspended for a period of twelve months. The firm and Mr. Gray will also pay, on a joint and several basis, disgorgement of $224,071and prejudgment interest. Mr. Gray will also pay a penalty of $150,000 while Mr. Hubbard will pay a penalty of $75,000.
Offering fraud: SEC v. Inofin, Inc., Civil Action No. 1:11-cv-10633 (D. Mass.) is a previously filed action against the firm, a Massachusetts-based subprime auto-financing company that raised $110 million from selling promissory notes to hundreds of investors using a series of misrepresentations. The firm is now in bankruptcy and its principles were indicted on wire and mail fraud charges. The firm resolved the action, and the court entered a final judgment, based on Exchange Act Section 10(b) and Securities Act Section 17(a). Previously entered judgments against the three principles of the business require the payment of disgorgement and penalties. See Lit. Rel. No. 23994 (Nov. 20, 2017).
Financial fraud: SEC v. Penn West Petroleum Ltd., Civil Action No. 17-cv-4866 (S.D.N.Y.) is a previously filed action against the firm and three of its former executives. The complaint alleged a years long scheme centered on the improper capitalization of certain operating costs. The court entered a final judgment by consent, enjoining the firm from future violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Securities Act Section 17(a). The firm will also pay a penalty of $8.5 million. See Lit. Rel. No. 23993 (Nov. 20, 2017).
Offering fraud: SEC v. Town of Oyster Bay, Civil Action No. 1:17-cv-06809 (E.D.Y.Y. Filed Nov. 11, 2017) names as defendants the town and its CEO during the period, John Venditto. The action centers on 26 fraudulent securities offerings by the Town from August 2010 through December 2015. Between June 2010 and June 2012 the Town agreed to indirectly guarantee four private loans totaling over $20 million for one of its long standing concessionaires who owned and operated restaurants and concessions at several town facilities. Because of certain state law restrictions the arrangements were structured as indirect obligations. In the offerings they were concealed until revealed in media reports and by the indictment of the concessionaire. The complaint alleges violations of each Subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U. S. Attorney’s Office for the Eastern District of New York filed a parallel criminal case.
Unregistered dealer business: SEC v. Almagarby, Civil Action No. 17-cv-62255 (S.D. Fla. Filed Nov. 17, 2017). The action names as defendants Ibrahim Almagarby and Microcap Equity Group LLC. Mr. Almagarby controls Microcap Equity. The complaint alleges that over a two and one half year period, beginning in January 2013, the Defendants purchased over 1.1 million of convertible debt involving 39 different microcap issuers. Later they sold over 7.4 billion shares of the microcap issuers’ stock into the market. The Defendants undertook these transactions through a series of steps involving purchasing the debt, making a deal to convert the debt to shares and selling the shares into the market. Over the two and one half year period Defendants entered into 58 transactions of this type. Through the conversion of the debt securities Defendants acquired 8.9 billion shares of which about 7.4 billion were sold into the market. The transactions resulted in profits of over $1.4 million. The complaint alleges that Defendants entered into these transactions as part of a regular business. Any person engaged in the business of buying and selling securities for their own account must register with the Commission, according to the complaint. At least “some” of the 7.4 billion microcap shares sold by Defendants were penny stocks. Defendants therefore participated in the offering of penny stock by acting as dealers engaged in the buying and selling of penny stocks. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 23992 (Nov. 20, 2017).
Unregistered broker: SEC v. Green Tree Investment Group, Inc., Civil Action No. 1:17-cv-1091 (Nov. 17, 2017) is an action against the company and its owner, Jeffrey Mallett, alleging that each acted as an unregistered broker. Beginning in April 2010, and continuing through October 2014, Defendants purchased fractional ownership interests in various wells and oil filed interests for others. Defendants solicited and received about $3.7 million. The complaint alleged violations of Exchange Act Section 15(a). To resolve the action each defendant consented to the entry of a cease and desist order based on the Section cited in the complaint. In addition, Defendants will pay disgorgement of $652,597, prejudgment interest and each defendant will pay a penalty of $7,500. See Lit. Rel. No. 2390 (Nov. 17, 2017).
Offering fraud: SEC v. Capital Financial Partners, LLC, Civil Action No. 15-cv-11447 (D. Mass.) is a previously filed action action against Will Allen, Susan Daub and their two entities Capital Financial and Capital Financial Partners Enterprises, LLC. The defendants operated a Ponzi scheme, raising about $32 million from investors who were told the funds were to make loans to professional athletes. The claims were false. After pleading guilty in related criminal proceedings and being sentenced to serve six years in prison and to pay restitution of $16.6 million, the two individual defendants settled with the Commission. The Court entered final judgments against each individual defendant, enjoining each from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). They were also directed to pay disgorgement of $15.7 million which will be deemed satisfied by the payment of restitution in the related criminal case. See Lit. Rel. No. 23991 (Nov. 17, 2017).
Financial fraud: SEC v. Fuselier, Civil Action No. 17-cv-04240 (S.D.N.Y.) is a previously filed action against microcap issuer Integrated Freight Corporation and its CEO, David Fuselier. In an effort to conceal the firm’s poor financial condition Mr. Fueselier entered into a series of transactions in which he sold several heavily indebted subsidiaries and then caused the company to make misleading disclosures regarding the transactions. To resolve the case Mr. Fuselier consented to the entry of a final judgment of permanent injunction based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 13(b)(2)(A). The order also bars him serving as an officer or director of a public company and from participating in a penny stock offering. In addition, Mr. Fuselier was ordered to pay disgorgement of $128,187.86, prejudgment interest and a penalty of $150,000. See Lit. Rel. No. 23989 (Nov. 17, 2017).
FCPA – Anti-Corruption
U.S. v. Ho, No. 17 mag 8611 (S.D.N.Y. unsealed Nov. 20, 2017) is an action which names as defendants Chi Ping Patrick Ho and Cheikh Gadio. Mr. Ho is the head of a non-governmental organization based in Virginia and Hong Kong. Mr. Gadio is a former Minister from Senegal. Both are charged with conspiring to violate the FCPA, conspiring to engage in money laundering and money laundering. The two defendants caused Energy Company to offer a $2 million bribe to the President of Chad to secure business advantages for Energy Company in connection with its efforts to obtain valuable oil rights from the Chadian government, according to the charging papers. Mr. Gadio was instrumental in the scheme by connecting Mr. Ho with the President of Chad.
Mr. Ho also caused a $500,000 bribe to be paid by a wire transmitted through New York to an account designated by the Minister of Foreign Affairs of Uganda who had recently completed his term as the President of the UN General Assembly. Mr. Ho provided the Ugandan Foreign Minister and the President of Uganda with gifts and promises of future benefits, including the offer of part of the profits of a potential joint venture in Uganda involving the Energy Company and businesses owned by the families of the Ugandan Foreign Minister and the President of Uganda. The promises were in exchange for certain business advantages for the Energy Company. The case is pending.
Background screening: The regulator fined J.P. Morgan Securities LLC $1.25 million for failing to conduct timely or adequate background checks on about 8,600 non-registered associated persons from January 2009 through May 2017. The federal securities laws require broker-dealers to fingerprint certain associated persons. For eight years the firm did not do this for about 2,000 of its non-registered associated persons in a timely manner. The firm did fingerprint others but limited the screening to criminal convictions specified in federal banking laws and an internally created list. Four individuals who were subject to statutory disqualifications were also employed by the firm.
AML: The regulator imposed an $8 million penalty of Artichoke Joe’s Casino, one of the largest card clubs in California which traces back to 1916. For a period of eight years the firm failed to maintain an effective AML program. Specifically, a raid in March 2011 lead to the indictment and conviction of two customers for loan-sharking and other illicit activities conducted at the club. The club failed to file SARs as required. In addition, the club had inadequate internal controls.
Separation of functions: The Australian Securities and Investment Commission accepted an enforceable undertaking from Foster Stockbroking Pty Ltd. Under the terms of the agreement the firm will separate it investment banking activities from its traditional stockbroking services, including research.
Unauthorized transactions: The Securities and Futures Commission banned Danny Fung Kwong Shing, a former account executive at Fulbright Securities Limited. It was found that he repeatedly engaged in improper transactions in a client account, disadvantaged a client to benefit another and falsified records of the firm. The SFC also imposed a penalty of $542,071.
Suitability: The disciplinary decision of the SFC to impose a HK $400 million fine against HSBC Private Bank (Suisse) SA was upheld on appeal. The charges stem from the period 2003 through 2008 when the firm was found to have systematic failures in connection with the sale of structured notes in understanding each client’s risk profile, ensuring that the products were suitable and in supervising and monitoring sales processes in order to detect and avoid risk mismatch.
Program: The Fourth Annual Dorsey Federal Enforcement Forum will be held on December 6, 2017. There will be panel discussions and presentation on EPA enforcement, SEC enforcement, investment advisers, international sanctions, FinTec, and FBI international corruption investigations, followed by a holiday party. Attend in person, listen on the web or watch a live stream; CLE available. For a detailed program and free registration click here.