B OF A PAYING $7.65 MILLION TO SETTLE SEC CHARGES OF VIOLATING INTERNAL CONTROLS AND RECORD-KEEPING LAWS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

09/29/2014 11:25 AM EDT

The Securities and Exchange Commission today charged Bank of America Corporation with violating internal controls and recordkeeping provisions of the federal securities laws after it assumed a large portfolio of structured notes and other financial instruments as part of its acquisition of Merrill Lynch.


Bank of America agreed to pay a $7.65 million penalty to settle the charges stemming from regulatory capital overstatements that it made due to its internal accounting control deficiencies and books and records failures.


Regulatory capital refers to the amount of capital that a bank must hold under applicable rules, and it is intended to provide a buffer against adverse market conditions.  According to the SEC’s order instituting a settled administrative proceeding, at the time of its Merrill Lynch acquisition, Bank of America permissibly recorded the inherited notes at a discount to par.  Bank of America was required to realize losses on the notes as they matured because it redeemed the notes at par.  For the purposes of calculating and reporting its regulatory capital, applicable rules required Bank of America to deduct the realized losses as they occurred.


However, according to the SEC’s order, by the time 90 percent of the notes had matured as of March 31, 2014, Bank of America had yet to deduct any of the realized losses from its regulatory capital.  Therefore, with each passing fiscal quarter and fiscal year since 2009 as more and more notes matured, Bank of America overstated its regulatory capital by greater and greater amounts in its regulatory filings, eventually reaching billions of dollars.  Bank of America internally discovered the regulatory capital overstatements in mid-April 2014.  After analyzing the issue, it disclosed the overstatements in a Form 8-K filing on April 28, 2014.  Besides correcting its regulatory capital figures in its Form 8-K filing, Bank of America cooperated with SEC staff during the investigation and voluntarily took steps to remediate the insufficiencies that led to the regulatory capital overstatements.


“Bank of America self-reported its regulatory capital overstatements, remediated the issues quickly, and cooperated in our investigation,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “This penalty reflects credit for that cooperation, which allowed us to conduct our investigation efficiently and effectively.”


Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added, “The federal securities laws require all public companies to maintain accurate books and records as well as a system of internal accounting controls sufficient to assure transactions are recorded as necessary.  Bank of America violated these legal requirements, which are specifically geared to ensure the integrity and accuracy of information that eventually is disclosed to investors.”


In addition to the $7.65 million penalty, the SEC’s order requires Bank of America to cease and desist from committing or causing any violations or future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.


The SEC’s investigation was conducted by Tony Frouge and supervised by Michael Osnato, Reid Muoio, and Daniel Michael.  The SEC appreciates the assistance of the Board of Governors of the Federal Reserve System and the Public Company Accounting Oversight Board.

TWO COMPANIES TO PAY $500,000 FOR CALL COTTON REPORTING VIOLATIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Multigrain SA and Agricola Xingu SA to Pay $500,000 for Call Cotton Reporting Violations

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Multigrain SA (Multigrain) and Agricola Xingu SA (Agricola Xingu), Brazil-based companies that produce and trade cotton and other agricultural products, for failing to comply with their legal obligation as reportable traders to submit weekly Form 304 Reports that show their call cotton purchases and sales.

The CFTC Order explains that CFTC Regulations specifically require cotton merchants and dealers that hold or control at least 100 cotton futures positions, the reportable level for cotton futures contracts under CFTC Regulations, to file CFTC Form 304 Reports that show their call cotton purchases and sales as of the close of business Friday, and no later than two business days following the date of the report. According to the Order, call cotton refers to physical cotton bought or sold, or contracted for purchase or sale, at a price to be fixed later based on a specified delivery month’s futures price. As stated in the Order, the CFTC uses information it gathers from CFTC Form 304 Reports in its weekly Cotton On-Call Reports, published with other Market Reports on the CFTC website at www.cftc.gov/MarketReports/CottonOnCall/index.htm.

The CFTC Order finds that on at least 24 occasions between January 1, 2013 and October 31, 2013, Multigrain and Agricola Xingu held or controlled at least 100 cotton futures positions, but failed to file CFTC Form 304 Reports as required, either by failing to file Form 304 Reports or filing Form 304 Reports late.

The CFTC Order requires Multigrain and Agricola Xingu to jointly pay a $500,000 civil monetary penalty and prohibits them from committing future violations of the CFTC Regulation requiring reports pertaining to cotton call purchases and sales, as charged. The Order also requires Multigrain and Agricola Xingu to adopt internal controls that are reasonably designed to ensure that they comply fully with enhanced written procedures they have adopted regarding future compliance with the CFTC cotton reporting Regulation.

Consistent with this filing, the CFTC issued a market advisory on May 8, 2013 to remind cotton market participants of their ongoing obligation to comply in a timely manner with applicable reporting obligations. See CFTC Staff Advisory No. 13-14 (Obligation of Reportable Market Participants to File CFTC Form 304 Reports for Call Cotton in a Timely Manner as Required by Commission Regulation 19.02) (May 8, 2013).

SEC SETTLES CHARGES OF EVADING INTERNAL CONTROLS WITH FORMER CFO

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Former CFO Agrees to Settle Charges of Evading Internal Controls to Pay for Unauthorized Travel and Entertainment Expenses
The Securities and Exchange Commission announced today that Subramanian Krishnan (Krishnan), the former Chief Financial Officer (CFO) of Digi International, Inc. (Digi), has agreed to settle the Commission’s civil action against him. The Commission’s complaint, filed September 28, 2012, in the U.S. District Court for the District of Minnesota, alleges that Krishnan engaged in conduct which resulted in the filing of inaccurate reports and accompanying certifications in Digi’s annual quarterly reports from March 2005 through May 2010. The complaint alleges that Krishnan engaged in a course of conduct, that resulted in corporate funds being used to pay for unauthorized travel and entertainment expenses. Krishnan authorized such expenses for Digi employees, caused the Company to file inaccurate reports, failed to enforce Digi’s internal controls, demonstrated a lack of management integrity, and wrongly certified that Digi’s internal controls were effective.


Simultaneously with the Commission’s complaint, without admitting or denying the allegations in the Commission’s complaint, Krishnan had previously consented to a final judgment permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. Krishnan is also permanently restrained and enjoined from future violations of Sections 13(a) and 13(b)(5) and Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and 13b2-2 thereunder of the Exchange Act and from aiding and abetting violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

Under today’s announcement, Krishnan consented to the entry of a judgment prohibiting him from acting as an officer or director of a public company for a period of five years following the date of the filing of the Commission’s complaint and imposing a $60,000 civil penalty. Krishnan also has consented to the issuance of a Commission order, pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice, suspending him from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after five years.

Jennifer Moore, Justin J. Sutherland, and Karen I. Martinez conducted the Commission’s investigation. Daniel J. Wadley and Thomas M. Melton led the litigation.

KOSS COMPANY AND TOP EXECUTIVES AGREE TO KEEP BETTER BOOKS

The following excerpt is from the SEC website:
March 9, 2012
“DISTRICT JUDGE APPROVES SEC SETTLEMENT WITH KOSS CORPORATION AND MICHAEL J. KOSS, ITS CEO AND FORMER CFO
On February 22, 2012, the Honorable Rudolph T. Randa, U.S. District Judge for the Eastern District of Wisconsin, approved the settlement of the Securities and Exchange Commission’s Complaint against Koss Corporation (“Koss”), located in Milwaukee, Wisconsin, and Michael J. Koss, its CEO and former CFO. The case is based on Koss Corporation’s preparation of materially inaccurate financial statements, book and records, and lack of adequate internal controls from fiscal years 2005 through 2009. The S.E.C. responded to a letter dated December 20, 2011, in which the District Judge Randa requested that the S.E.C. address concerns about the proposed settlement. Based on the S.E.C.’s response, District Judge Randa stated the Court was “satisfied that the injunctions are sufficiently specific… [and] that the proposed final judgments are fair, reasonable, adequate, and in the public interest.” The Injunctive Orders:

(1) Enjoin Koss from violating and Michael J. Koss from aiding and abetting violations of the reporting, books and records and internal controls provisions (Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13) of the federal securities laws and Michael J. Koss from violating the certification provision (Section 13a-14 of the Exchange Act) and

(2) Order Michael J. Koss to reimburse Koss $242,419 in cash and 160,000 of options pursuant to Section 304 of the Sarbanes-Oxley Act. This bonus reimbursement, together with his previous voluntary reimbursement of $208,895 in bonuses to Koss Corporation represents his entire fiscal year 2008, 2009 and 2010 incentive bonuses.

The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Eastern District of Wisconsin, the Federal Bureau of Investigation and the Public Company Accounting Oversight Board. The Commission considered the cooperation of Koss Corporation and Michael J. Koss in determining to accept their settlement.”