In the U.K. three F.H. Bertling executives were sentenced on corruption charges. An HSBC senior executive based in London was convicted by a New York jury for front running a client in the currency markets.
The Commission issued no action letters in response to the European Union’s Markets in Financial Instruments Directive or MiFID II. The letters are designed to provide guidance for market participants and permit the staff to continue evaluating the directive. The agency also brought actions against a senior executive at the Apollo group for misappropriating client funds through false expense vouchers, cherry picking and undisclosed conflicts.
MiFID II: The Commission issued three no-action letters in response to the EU’s MiFID II directive which becomes effective in January 2018. Generally, the no-action letters provide that broker-dealers on a temporary basis may receive research payments from money managers in hard dollars or from advisory clients’ research payment accounts; money managers may continue to aggregate orders for mutual funds and other clients; and money managers may continue to rely on the existing safe harbor when paying broker-dealers for research and brokerage. The temporary relief will give the staff sufficient time to continue studying the issues and receive comments (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 civil injunctive case and 4 administrative proceedings, excluding 12j and tag-along proceedings.
Cherry picking: In the Matter of Kenneth P. Krueger, Adm. Proc. File No. 3-18266 (Oct. 26, 2017). Respondent was associated with Canterbury Consulting, a large California based registered investment adviser, from 1988 to November 2016 when the firm terminated him. Beginning in January 2013, and continuing through late 2014, Respondent cherry picked the accounts he traded, disproportionately favoring his personal accounts and disadvantaging those of clients. Specifically, using an omnibus account he would place trades and then if they were positive over the course of the day close the position and disproportionately allocate the profitable trades to his personal accounts. If the security did not appreciate over the course of the day the transactions were disproportionately allocated to client accounts. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the order and to a bar from the securities business and a penny stock bar. He was also directed to pay disgorgement of $309,651, prejudgment interest and a penalty of $80,000. In resolving the case the Commission considered Respondent’s serious medical condition and its progressive nature and impact on his financial condition. See also In the Matter of Canterbury Consulting, Inc., Adm. Proc. File No. 3-1265 (Oct. 26, 2017)(Failure to supervise action against the firm; settled with a consent to the entry of a cease and desist order based on Advisers Act Sections 204 and 206(4) and a censure; and the payment of $66,071 in disgorgement, prejudgment interest and a penalty of penalty of $100,000).
Conflicts: In the Matter of Augustine Capital Management, LLC, Adm. Proc. File No. 3-17740 (Oct. 26, 2017) names as Respondents the unregistered investment adviser and John Porter and Thomas Duszynski, each a one third owner of the firm. Augustine manages the Fund. Respondents caused the Fund, according to the Order, to engage in conflicted transaction without the proper disclosure to, or consent of, the Fund’s investors. Respondents invested in and lent money to two entities in which the adviser’s owners had an interest. They also lent money to Mr. Duszynski to fund another business. Finally, Respondents used about $950,000 in investor funds to pay for the adviser’s expenses despite the fact that under the pertinent documentation virtually all such expenses were to be paid by the adviser. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the action each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm was censured. Each individual Respondent is barred from the securities business with the right to apply for re-entry after three years. Mr. Duszynski, an accountant, is suspended from appearing and practicing before the Commission as an accountant. The firm and Mr. Duszynski will pay, on a joint and several basis, disgorgement of $685,514 along with prejudgment interest. In addition, the firm will pay a penalty of $150,000, Mr. Porter will pay $75,000 and Mr. Duszynski will pay $50,000.
Misrepresentations: In the Matter of YourPeople, Inc., Adm. Proc. File No. 3018263 (Oct. 26, 2017) is an action which names as Respondents the firm, known as Zenefits FTW Insurance Services which is a privately-held, and Parker Conrad, its co-founder and former CEO. The firm company provides cloud-based software to manage human resources, payroll and benefits functions. Respondents are alleged to have been negligent with respect to certain disclosures or omissions in certain private placements that were material to investors. Those misstatements and omissions related to the firm’s compliance with state insurance regulations that it was required to follow as an insurance broker which is the segment of its business that accounted for almost all of the revenues at the time of the private securities offerings. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the action each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Zenefits will pay a penalty of $450,000 while Mr. Conrad will pay a penalty of $160,000, disgorgement of $350,000 and prejudgment interest. The firm has taken steps to remediate deficiencies in its licensing compliance and has resolved at least 40 inquiries by state regulators that have included the payment of over $11 million in monetary sanctions, about $3.6 million of which is suspended pending the outcomes of future regulatory examinations to audit licensing compliance.
Misappropriation: SEC v. Rashid, Civil Action No. 1:17-cv-08223 (S.D.N.Y. Filed Oct. 25, 2017). Defendant Mohammed Ali Rashid began with registered investment adviser Apollo, an indirect subsidiary of alternative investment manager Apollo Global Management, LLC, in August of 2000. He rose to the position of senior partner. At the time of his departure in February 2014 Mr. Rashid was engaged in the business of advising private equity funds managed by Apollo affiliates, including several investment funds. During the period 2010 through mid-2013 Mr. Rashid was an investment adviser to Apollo’s private equity funds. Mr. Rashid was issued a firm credit card to use in connection with business but not for personal charges. In 2010 Mr. Rashid began charging personal expenses to funds with which he was involved. Charges were made on the firm credit card. Mr. Rashid then claimed that the charges were business expenses on his monthly expense reports to Apollo. In late 2010 he was confronted by the CFO about certain expenses charged to funds and admitted they were personal. Despite the admission and being required to repay the charges, the wrongful conduct continued. In 2012 he was again confronted and forced to admit that certain expenses charged to the funds were personal. Again the expenses were repaid. Finally, in 2013 a firm wide review was conducted. Prior to an independent forensic review, Apollo gave Mr. Rashid an opportunity to review his expenses since January 2010 and make any necessary adjustments. Again he admitted charging personal expenses to the funds. Overall, in 2013 Mr. Rashid repaid about $290,000 for personal expenses. The funds were reimbursed. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending
Insider trading: SEC v. O’Neill, Civil Action No. 1:14-cv-13381 (D. Mass.) is a previously filed action which named as defendants Patrick O’Neill and Robert Bray. The case centered on the acquisition of Mr. O’Neill’s employer, Eastern Bank, about which he tipped his friend Mr. Bray who traded and had about $300,000 in profits. Both men were charged criminally. Mr. O’Neill pleaded guilty while Mr. Bray was convicted after a trial, sentenced to serve two years in prison and ordered to forfeit the trading profits and to pay a $1 million criminal fine. His conviction was affirmed on appeal. In August 2017 he was located in Puerto Rico and arrested after failing to surrender. Mr. O’Neill settled with the Commission. The court entered a final judgment against Mr. Bray, enjoining him from future violations of Exchange Act Section 10(b) and directing him to pay as disgorgement the amount of his trading profits. That payment is deemed satisfied by the order of forfeiture in the parallel criminal case. Mr. O’Neill previously settled with the Commission. See Lit. Rel. No. 23971 (Oct. 25, 2017).
Front running: U.S. v. Johnson, No. 16-cr-457 (E.D.N.Y.). Mark Johnson, former head of global foreign exchange cash trading for HSBC Bank plc was found guilty of front running in the foreign exchange markets by a jury after a four week trial. In the fall of 2011 HSBC was approached by Carin Energy Company, a publically traded U.K. oil and gas firm, about a transaction in which the firm would require converting $3.5 billion in sales proceeds into British Pound Sterling. The information was highly confidential. Accordingly, HSBC was required to maintain the confidentiality of the information. Despite the confidentially obligation, Mr. Johnson, and others acting under his direction, purchased Pound Sterling for the bank’s proprietary accounts shortly before the Carin transaction was to occur. In December 2011 when Carin was ready to proceed Mr. Johnson and others at the bank executed the transactions in a manner designed to “ramp” or drive-up the price of Pound Sterling. That benefited HSBC at the expense of the Carin. The bank made a profit of $7.5 million on the transactions. Following the transaction, misrepresentations were made to Carin to conceal the nature of the transaction. Mr. Johnson was convicted of one count of conspiracy to commit wire fraud and eight counts of wire fraud. The date for sentencing has not been set.
U.K. Three former executives of F.H. Bertling Limited, the U.K. subsidiary of German based Bertling Group, were sentenced on corruption charges. Joerg Blumberg, Dirk Juergensen and Marc Scheiger, all German nationals, previously pleaded guilty to the charges. The underlying scheme involved making corrupt payments to an agent of the Angolan state oil company in relation to F.H. Bertling’s freight forwarding business in Angola and a contract worth about $20 million. Each former executive was sentenced to serve 20 months in prison, suspended for 2 years, and directed to pay a fine of £20,000, payable within 3 months with a default sentence of 1 year for non-payment. Each was also disqualified from being a company director for 5 years. The company, and other executives who pleaded guilty, are awaiting sentencing.
Financial fraud: Glyn Raines, the former CFO of Hastie Services Pty Ltd, was sentenced to two year imprisonment to be served by way of an intensive corrections order on charges brought by the Australian Securities and Investment Commission. Mr. Raines pleaded guilty to two charges of conspiracy to falsify the books and records of the firm and one charge of conspiracy to give false or misleading information to an auditor. The books and records were falsified between 2008 and 2011 so the firm could meet the earnings forecast. The firm is in administration.