SEC ANNOUNCES $20.3 MILLION SETTLEMENT RELATED TO MISUSE OF DARK POOL TRADING SUBSCRIBER INFO AND OPERATING SECRET TRADING DESK

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/12/2015 09:00 AM EDT

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.

An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year.  While ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.

ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system.

“ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “In doing so, ITG abused the trust of its customers and engaged in conduct justifying the significant sanctions imposed in this case.”

According to the SEC’s order instituting a settled administrative proceeding:

Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool.
Project Omega employed an algorithmic trading strategy called the “Facilitation Strategy” in which it executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling.

Project Omega accessed the feed by connecting to a software utility that was used by ITG’s sales and support teams.  As a result, Project Omega had a real-time view of subscriber orders being placed through ITG’s algorithms.
From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG.  Based on that information, Project Omega opened positions in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders.  By employing this strategy, Project Omega sought to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).

Project Omega had access to the identities of POSIT subscribers and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy.

To earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed the subscribers with which it traded in POSIT to be configured to trade “aggressively” so that the subscribers would “cross the spread” to trade with Project Omega.  Project Omega took steps to ensure that the sell-side subscribers were configured to trade aggressively in POSIT.
Project Omega’s other primary strategy called the “Heatmap Strategy” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools.  Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions.  The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.

The SEC’s order finds that ITG violated Sections 17(a)(2) and (3) of the Securities Act of 1933 in connection with Project Omega by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.  ITG also violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS by failing to amend its Form ATS filings in light of Project Omega’s trading activities in POSIT, failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers.

The SEC’s continuing investigation is being conducted by Paul T. Chryssikos, Scott A. Thompson, Matthew Koop, and Mandy B. Sturmfelz of the SEC Enforcement Division’s Market Abuse Unit with assistance from G. Jeffrey Boujoukos of the Philadelphia Regional Office.  The case is being supervised by Joseph G. Sansone, acting co-chief of the unit.  Substantial assistance was provided by Michael J. Gaw and Tyler Raimo of the Division of Trading and Markets.

Remarks at a Press Conference Announcing Major Enforcement Charges Involving a Massive Hacking Trading Scheme

Remarks at a Press Conference Announcing Major Enforcement Charges Involving a Massive Hacking Trading Scheme

NY RESIDENT AND COMPANY CHARGED BY CFTC WITH MAKING FALSE STATEMENTS TO NFA

FROM:  U.S. COMMODITIES FUTURES TRADING COMMISSION 

CFTC Charges New York Resident Gary Creagh and his Company, Wall Street Pirate Management, LLC, with Making False Statements to the National Futures Association

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging Defendants Gary Creagh and Wall Street Pirate Management, LLC (Wall Street Pirate), both of New York, New York, with making false, fictitious, or fraudulent statements or omissions to the National Futures Association (NFA) in statutorily required reports and during an NFA audit, in violation of the Commodity Exchange Act (CEA). Both Wall Street Pirate and Creagh, the managing member and sole employee of Wall Street Pirate, were registered with the CFTC at the time of the conduct.

The CFTC Complaint, filed on August 5, 2015, in the U.S. District Court for the Southern District of New York, charges that, from at least December 2011 through September 2013, Creagh willfully made false statements or representations to the NFA and concealed material information from the NFA. Specifically, Creagh falsely represented to the NFA on multiple occasions that the commodity pool he operated on behalf of Wall Street Pirate was not active, despite the fact that he had accepted funds from prospective pool participants and actively traded commodity futures on behalf of the commodity pool, according to the Complaint. The CFTC Complaint also charges that Wall Street Pirate, by and through Creagh, failed to maintain required books and records and provide account statements and privacy notices to pool participants.

The NFA is a Chicago-based futures association, which is registered with the CFTC and serves as an industry self-regulatory organization. Pursuant to the CEA, the NFA is responsible, under CFTC oversight, for certain aspects of the regulation of futures entities and their associated persons.

In its continuing litigation against the Defendants, the CFTC seeks disgorgement of ill-gotten gains, restitution to defrauded customers, a civil monetary penalty, permanent trading and registration bans, and a permanent injunction against further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff members responsible for this case are Jonah E. McCarthy, Timothy J. Mulreany, Patricia Gomersall, and Paul G. Hayeck.

The CFTC would like to thank the NFA for its cooperation in this matter.

MORGAN STANLEY TO PAY $300,000 FINE FOR VIOLATING CUSTOMER PROTECTION RULE AND RELATED SUPERVISION FAILURES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

August 6, 2015

CFTC Orders Morgan Stanley & Co. LLC to Pay a $300,000 Civil Monetary Penalty for Violations of Customer Protection Rule for Cleared Swaps and Related Supervision Failures

Order Finds that the Firm Failed to Maintain Sufficient U.S. Dollars in Segregated Accounts in the United States, Holding Required Funds Instead in Other Currencies

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order requiring Morgan Stanley & Co. LLC (Morgan Stanley), a registered Futures Commission Merchant and provisionally registered swap dealer, to pay a $300,000 civil monetary penalty for failing to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all of its U.S. Dollar obligations to cleared swaps customers. The Order also finds that the firm failed to implement adequate procedures and requires Morgan Stanley to cease and desist from violating CFTC Regulations, as charged.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Since passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC has implemented rules to protect swaps customers and market participants, including rules for protection of cleared swaps customer collateral. This action demonstrates that the Division of Enforcement will investigate and pursue violations of these important rules of the road in the swaps market.”

As set forth in the Order, on numerous days from March 12, 2013 to March 7, 2014, Morgan Stanley failed to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all U.S. Dollar obligations to the firm’s cleared swaps customers, in violation of CFTC Regulation 22.9. On those days, Morgan Stanley held the amount of the U.S. Dollar deficits in Euros and other currencies, rather than in U.S. Dollars, according to the Order. Because Morgan Stanley held the amount of the U.S. Dollar deficits in other currencies, it did not have a shortfall in overall cleared swaps customer collateral. As the Order finds, however, the size of Morgan Stanley’s U.S. Dollar deficits ranged from approximately $5 million to approximately $265 million, at times representing more than 10 percent of the amount that the firm was obligated to maintain in U.S. Dollars for cleared swaps customers.

Additionally, the Order finds that from November 8, 2012 to on or about April 8, 2014, Morgan Stanley did not have in place adequate procedures to comply with the currency denomination requirements for cleared swaps customer collateral and did not train and supervise its personnel to ensure compliance with CFTC Regulation 22.9. Morgan Stanley thereby failed to supervise diligently its officers, employees, and agents and did not have sufficient procedures in place to detect and deter the violations found herein, in violation of Regulation 166.3, the Order finds.

The Order recognizes that Morgan Stanley promptly reported the deficiencies to the CFTC, implemented corrective procedures, and cooperated with the CFTC’s Division of Enforcement in its investigation.

The CFTC appreciates the assistance of the Division of Swap Dealer and Intermediary Oversight.

The CFTC Division of Enforcement staff members responsible for this case are Elizabeth C. Brennan, Douglas K. Yatter, Lenel Hickson, Jr., and Manal M. Sultan.

Additional Dissenting Comments on Pay Ratio Disclosure

Additional Dissenting Comments on Pay Ratio Disclosure

TWO CORPORATE OFFICERS CHARGED WITH INFLATING VALUES OF ENERGY PROPERTIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/06/2015 10:00 AM EDT

The Securities and Exchange Commission today announced charges alleging that Miller Energy Resources Inc., its former chief financial officer, and its current chief operating officer inflated values of oil and gas properties, resulting in fraudulent financial reports for the Tennessee-based company.  The audit team leader at the company’s former independent auditor also was charged in the matter.

In an order instituting administrative proceedings, the SEC’s Division of Enforcement alleges that after acquiring oil and gas properties in Alaska in late 2009, Miller Energy overstated their value by more than $400 million, boosting the company’s net income and total assets.  The allegedly inflated valuation had a significant impact, turning a penny-stock company into one that eventually listed on the New York Stock Exchange, where its stock reached a 2013 high of nearly $9 per share.

“Financial statement information is the cornerstone of investment decisions.  We’ve charged that Miller Energy falsified financial statement information and grossly overstated the value of its Alaska assets and that the company’s independent auditor failed to conduct an audit that complied with professional standards,” said William P. Hicks, Associate Regional Director of the SEC’s Atlanta office.  “The SEC will aggressively prosecute such conduct.”    

Knoxville-based Miller Energy paid $2.25 million and assumed certain liabilities to purchase the Alaska properties.  It later reported them at a value of $480 million, according to the SEC’s Division of Enforcement.  While accounting standards required the company to record the properties at “fair value,” then-CFO Paul W. Boyd allegedly relied on a reserve report that did not reflect fair value for the assets, and he also is alleged to have double-counted $110 million of fixed assets already included in the reserve report.  The report by a petroleum engineering firm allegedly contained expense numbers that were knowingly understated by David M. Hall, the CEO of Miller Energy’s Alaska subsidiary and Miller Energy’s chief operating officer since July 2013.  Hall, of Anchorage, Alaska, also is alleged to have altered a second report to make it appear as though it reflected an outside party’s estimate of value.

The Division of Enforcement alleges that the fiscal 2010 audit of Miller Energy’s financial statements was deficient due to the failure of Carlton W. Vogt III, the partner in charge of the audit.  Vogt, of Warwick, New York, was then at Sherb & Co LLP, a now defunct firm that was suspended by the SEC in 2013 for conduct unrelated to its work for Miller Energy.  Vogt issued an unqualified opinion of Miller Energy’s 2010 annual report and is alleged to have falsely stated that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board and that Miller Energy’s financial statements were presented fairly and conformed with U.S. generally accepted accounting principles.

As a result of their conduct, Miller Energy, Boyd, and Hall are alleged to have violated anti-fraud provisions of U.S. securities laws and a related SEC anti-fraud rule.  The company also is alleged to have violated books and recordkeeping and internal controls requirements, with Boyd and Hall in some cases causing or aiding and abetting those alleged violations.  The SEC’s Division of Enforcement is seeking to obtain cease-and-desist orders, civil monetary penalties, and return of allegedly ill-gotten gains from the company, Boyd, and Hall.  It also is seeking to bar Boyd and Hall from serving as public company officers or directors and to bar Boyd and Vogt from public company accounting.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted in its Atlanta Regional Office by William Uptegrove and John Nemeth under the supervision of Assistant Regional Director Peter Diskin.  The Enforcement Division’s litigation will be led by Robert Schroeder, Edward Sullivan, William Uptegrove, and M. Graham Loomis of the Atlanta Regional Office.

SEC.gov | Dissenting Statement at an Open Meeting to Adopt the “Pay Ratio” Rule

SEC.gov | Dissenting Statement at an Open Meeting to Adopt the “Pay Ratio” Rule

Statement on Pay Ratio Disclosure

Statement on Pay Ratio Disclosure

SEC CHARGES MAN WITH OPERATING $114 MILLION PONZI SCHEME BASED ON ANTI-DROWSY DRIVING TECHNOLOGY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/03/2015 02:25 PM EDT

The Securities and Exchange Commission charged a Houston-area businessman with operating a $114 million Ponzi scheme that defrauded investors, some of whom were told that their money would fund technology to prevent accidents caused by drowsy driving.

The SEC’s case filed in federal court in Houston charged Frederick Alan Voight of Richmond, Texas with defrauding more than 300 investors in multiple offerings of promissory notes issued by two partnerships he owns, F.A. Voight & Associates LP and DayStar Funding LP.  While Voight’s latest offering promised investors returns as high as 42 percent a year from loans to small public companies, most of the funds went to pay earlier investors, the complaint alleges.  Approximately $22 million of Voight’s allegedly ill-gotten gains remain unaccounted for to date.

“Voight wooed investors with promises of outsized returns and once-in-a-lifetime investment opportunities.  But, like all Ponzi schemes, we allege that this one collapsed when Voight couldn’t find enough new money to keep up with his false promises,” said David L. Peavler, Acting Regional Co-Director of the SEC’s Fort Worth Regional Office.

According to the SEC’s complaint, Voight recently raised $13.8 million that he said would be loaned to a startup named InterCore Inc. to fund its deployment of a “Driver Alertness Detection System,” or DADS.  Starting in October 2014, Voight allegedly wrote to prospective investors about a “tremendous” opportunity to help InterCore install the DADS technology into “several million trucks and buses,” which he said was enough for the company to pay the 30 to 42 percent annual interest rates on the promissory notes “many, many times over.”

Voight knew the claims were false because he served on InterCore’s board and was aware that the Delray Beach, Florida public company was financially troubled and had no means to pay back the loans, the complaint alleges.  The SEC alleges that Voight used funds from the DADS investors to make Ponzi payments to earlier investors or funneled them to InterCore through two of his other partnerships, Rhine Partners LP and Topside Partners LP.  The complaint alleges that InterCore sent the funds to its Montreal-based subsidiary, InterCore Research Canada, Inc., where the funds seemingly disappeared.  By routing funds through Rhine and Topside, Voight is alleged to have garnered benefits – including fees and InterCore stock warrants – that he never disclosed to the DADS investors.

The SEC’s complaint charges Voight and DayStar with securities fraud and with conducting unregistered securities offerings.  Voight and Daystar, without admitting or denying the allegations, agreed to settle the SEC’s complaint by consenting to permanent injunctions against committing these violations in the future.  They also agreed to asset freezes and other emergency relief, and to pay civil penalties and return allegedly ill-gotten gains with interest in amounts to be set later by the court.  Voight also consented to being barred from serving as a public company officer or director and to be barred permanently from participating in the offer, purchase, or sale of any security except for his own personal account.

The SEC named F.A. Voight & Associates, Rhine, Topside, InterCore, and InterCore Research Canada as relief defendants for the purpose of recovering any allegedly ill-gotten gains they received from the fraud.  F.A. Voight & Associates, Rhine, and Topside have agreed to asset freezes and other emergency relief and to return allegedly ill-gotten gains in amounts to be set by the court.  The SEC will litigate its claims against relief defendants InterCore and InterCore Research.

The SEC’s investigation was conducted by Senior Counsel Jeff Cohen, Senior Staff Accountant Keith Hunter and Assistant Regional Director Jessica Magee of the Fort Worth office.  The SEC’s litigation will be led by Jennifer Brandt.

STOCK PRICE SPIKE INDICATED STOCK RISE SCAM ACCORDING TO SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/31/2015 04:30 PM EDT

The Securities and Exchange Commission charged a Canadian citizen with conducting a scheme to conceal his control and ownership of a microcap company whose price quickly spiked last year.  The SEC suspended trading in the stock, Cynk Technology Corp., before the alleged schemer, Phillip Thomas Kueber, could profit on the gains from the stock’s rise to more than $21 from less than 10 cents per share.

The SEC alleges that Kueber was behind a false and misleading registration statement filed by Cynk and enlisted a small group of straw shareholders and sham CEOs to conceal his control of purportedly non-restricted shares in Cynk stock.  The complaint alleges that the straw shareholders – mainly Kuber’s family members and associates in British Columbia and California – never received the shares they “purchased.”  Kueber allegedly transferred the shares to brokerage accounts and offshore shell companies he secretly controlled and misled broker-dealers about his ownership of the shares to create the false appearance of a company with publicly held shares.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Kueber was unable to cash in on selling his Cynk shares when the SEC suspended trading in Cynk on July 11, 2014 amid suspicious activity surrounding the company’s stock.  Once trading resumed, the share price fell, closing at 60 cents per share on July 28, 2014.

“We allege that Kueber used straw shareholders, offshore dummy corporations, and puppet corporate officers to gain and conceal control over the majority of Cynk shares,” said Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “Law enforcement has again pierced through the layers of deceit to hold an alleged wrongdoer accountable, in this case before he could liquidate his shares in the open market and realize ill-gotten profits.”

The SEC’s complaint alleges that Kueber violated the antifraud provisions of federal securities laws and related SEC antifraud rules.  The SEC is seeking to impose a civil monetary penalty, to bar Kueber from serving as a public company officer or director or participating in a penny-stock offer, and to be subject to a court-ordered injunction against future antifraud violations.

The SEC’s continuing investigation has been conducted by Joshua R. Geller, Joseph G. Darragh, and Michael Paley of the Microcap Fraud Task Force along with Wendy Tepperman of the New York office.  The litigation will be conducted by Preethi Krishnamurthy and Mr. Geller.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, Federal Bureau of Investigation, Internal Revenue Service, Department of Homeland Security, and Financial Industry Regulatory Authority.

FOREIGN CURRENCY PONZI SCHEMERS ORDERED TO PAY $76 MILLION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Court Orders $76 Million in Civil Monetary Penalties against Keith F. Simmons, Deanna Salazar and Their Companies in Connection with Foreign Currency Ponzi Scheme

In Related Criminal Actions, Simmons Sentenced to 40 Years’ and Salazar Sentenced to 4.5 Years’ Incarceration and Ordered to Pay in Total $40 Million in Criminal Restitution

Both Simmons and Salazar Currently are Serving Their Prison Sentences

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Robert J. Conrad, Jr. of the U.S. District Court for the Western District of North Carolina entered separate Consent Orders (Orders) against Defendants Keith F. Simmons and his company, Black Diamond Capital Solutions, LLC, and Deanna Salazar and her companies, Life Plus Group, LLC and Black Diamond Holdings, LLC, imposing a total of $76 million in civil monetary penalties in connection with a foreign currency exchange (forex) scheme in violation of the Commodity Exchange Act (CEA). The Orders also impose permanent trading and registration bans on the Defendants and prohibit them from further violations of the anti-fraud provisions of the CEA, as charged.

Simmons was a resident of West Jefferson, North Carolina, and Salazar was a resident of Yucca Valley, California.

The Orders arise out of a CFTC Complaint, filed on January 13, 2011, charging Simmons, Salazar, and their companies with fraudulent solicitation and misappropriation of customer funds in connection with a Ponzi-style scheme involving forex trading (see CFTC Press Release and Complaint 5985-11, February 16, 2011). Also charged in the CFTC complaint are Bryan Coats of Clayton, North Carolina and his company, Genesis Wealth Management, LLC, and Jonathan Davey of Newark, Ohio and his companies, Divine Circulation Services, LLC, Divine Stewardship, LLC, Safe Harbor Ventures, Inc., Safe Harbor Wealth Investments, Inc., and Safe Harbor Wealth, Inc. The CFTC’s litigation against these Defendants is ongoing.

The Orders find that from at least April 2007 through at least 2009, Simmons and Salazar, acting through their companies and with others, fraudulently solicited and accepted at least $35 million from at least 240 individuals to engage in off-exchange forex trading through a trading platform known as Black Diamond. In fact, according to the Orders, no forex trading was ever conducted through the Black Diamond trading platform, and the Black Diamond trading platform never existed. Rather, Simmons and Salazar misappropriated millions of dollars of customer funds to make purported profit payments to customers, as is typical of a Ponzi scheme, and for personal and unrelated business expenses, according to the Orders. The Orders further find that to conceal their fraud, Simmons, with the assistance of Salazar, issued false customer account statements reflecting the promised returns or more based on Black Diamond’s purportedly successful forex trading.

In a related criminal action brought by the U.S. Attorney’s Office for the Western District of North Carolina, Simmons was convicted on December 16, 2010, on charges of securities fraud, wire fraud, and money laundering. Simmons was sentenced to 40 years’ incarceration and ordered to pay criminal restitution of $35 million. On December 7, 2010, Salazar pleaded guilty to charges of investment fraud conspiracy and tax evasion. Salazar was sentenced to 4.5 years’ incarceration and ordered to pay $5 million in criminal restitution. Both Simmons and Salazar are still serving their sentences.

CFTC Division of Enforcement staff members responsible for this case are Alan Edelman, Maura Viehmeyer, James H. Holl III, Gretchen L. Lowe, and Rick Glaser. The Division would like to thank the U.S. Attorney’s Office for the Western District of North Carolina and the Federal Bureau of Investigation for their cooperation in this matter.

3 FORMER OPPENHEIMER & CO. EMPLOYEES SETTLE SEC CHARGES RELATED TO UNREGISTERED SALES OF PENNY STOCKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

7/23/2015 12:35 PM EDT

The Securities and Exchange Commission announced that three former employees of Oppenheimer & Co. Inc. have agreed to settle charges stemming from the unregistered sales of billions of shares of penny stocks on behalf of a customer.  The actions involve a portion of the conduct announced in January in a settled enforcement action against Oppenheimer in which the broker-dealer admitted wrongdoing and paid $20 million to the SEC and the Treasury Department’s Financial Crimes Enforcement Network.

Today’s actions were instituted against Scott A. Eisler, a former registered representative at Oppenheimer’s branch in Boca Raton, Fla., his former branch manager and supervisor Arthur W. Lewis, and Lewis’s supervisor Robert Okin, a former head of Oppenheimer’s Private Client Division.

According to the SEC’s orders instituting settled administrative proceedings, on behalf of the Oppenheimer customer, Eisler executed billions of penny stock shares in illegal unregistered distributions with Lewis participating in and in some cases approving the sales.  Although securities laws provide an exemption from liability for brokers who engage in a reasonable inquiry into the facts surrounding a customer’s proposed sale, the SEC’s orders find that Eisler and Lewis failed to make the requisite inquiry despite substantial red flags associated with the sales.

The SEC’s orders found supervisory failures by Lewis and Okin because they did not respond to red flags that the individuals they supervised were violating federal securities laws.

“In the face of red flags that their customer’s stock sales were not exempt from registration, Oppenheimer’s branch personnel allowed these unregistered transactions to occur,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Okin, one of Oppenheimer’s senior-most executives, also failed to properly supervise by allowing these transactions to occur and failing to respond appropriately to the red flags suggesting violations of the federal securities laws.”

Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement, added, “These actions show the SEC’s resolve in holding responsible individuals, including senior managers, when they violate the securities laws.”

Eisler agreed to pay a $50,000 penalty and be barred from engaging in penny stock sales or working in the securities industry for at least one year.  Lewis agreed to pay a $50,000 penalty and be barred from working in a supervisory capacity in the securities industry for at least one year.  Okin agreed to pay a $125,000 penalty and be barred from working in a supervisory capacity in the securities industry for at least one year.  They each agreed to the settlements without admitting or denying the SEC’s findings.

The SEC’s investigation was conducted by Margaret W. Smith with assistance from Christian Schultz and Matthew Scarlato.  The case was supervised by Nina B. Finston and Jan Folena.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC CHARGES THREE ALLEGED MICROCAP STOCK SCAMMERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/21/2015 02:30 PM EDT

The Securities and Exchange Commission charged a trio of alleged microcap stock scammers with defrauding investors by disseminating promotional e-mails exhorting readers to immediately buy purportedly hot stocks so they could secretly sell their own holdings at a substantial profit.

The SEC alleges that the three men, who live in Israel, obtained shares in several penny stock companies and pumped the prices as high as 1,800 percent before dumping the shares for at least $2.8 million in illicit proceeds.  In one extravagantly positive promotional e-mail about a particular stock, they stated that a $5,000 investment could be worth more than $250,000 in two years.  The men used numerous corporate identities and developed at least 20 different stock promotion websites to con investors into buying the stocks and causing the spikes in trading volume and share price that spurred their schemes.

The SEC’s complaint filed in federal court in Manhattan names Joshua Samuel Aaron (aka Mike Shields), Gery Shalon (aka Phillipe Mousset and Christopher Engeham), and Zvi Orenstein (aka Aviv Stein and John Avery).  Aaron and Shalon allegedly wrote and designed the e-mails, Shalon allegedly disseminated them, and Orenstein allegedly provided essential operational support by handling brokerage accounts using numerous aliases.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges.

“These men allegedly manipulated the microcap market to make quick profits at the expense of unsuspecting investors, and they have been caught by law enforcement despite using aliases and other ploys in an attempt to cover their tracks,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint charges Aaron, Sharon, and Orenstein with violating or aiding and abetting violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.  The SEC is seeking to bar them from the penny stock business and obtain their ill-gotten gains plus interest and financial penalties.

The SEC’s investigation has been conducted by Kristine Zaleskas, Tim Nealon, Leslie Kazon, and Michael Paley of the Microcap Fraud Task Force along with Judith Weinstock of the New York office.  The litigation will be conducted by Paul Gizzi, Ms. Zaleskas, and Ms. Weinstock.  The case is being supervised by Sanjay Wadhwa.  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 Financial Industry Regulatory Authority.

SEC CHARGES ATTORNEY WITH INSIDER TRADING IN ADVANCE OF MERGER ANNOUNCEMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/16/2015 02:10 PM EDT

The Securities and Exchange Commission charged a Pennsylvania attorney with insider trading in the stock of Harleysville Group, Inc. in advance of the 2011 announcement of a $760 million merger of Harleysville and Nationwide Mutual Insurance Company.

According to the SEC’s complaint, Herbert K. Sudfeld illegally traded on the news that sent Harleysville’s stock price up 87 percent when the merger of the two insurance companies was announced in September 2011.  At the time, Sudfeld was a real estate partner at a law firm that advised Harleysville on the merger.  Sudfeld was not involved in the merger and learned that the announcement of it was imminent from a conversation between an attorney working on the transaction and their shared legal assistant.  Sudfeld allegedly stole the inside information and purchased Harleysville stock in his and his wife’s accounts.  Once the merger was announced, Sudfeld sold all the shares he had purchased, realizing approximately $79,000 of illegal profits.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced criminal charges against Sudfeld.

“We allege that Sudfeld breached his duties of trust and confidence owed to his law firm when he misappropriated information about the merger to enrich himself,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.  “The Commission will continue to aggressively pursue attorneys and other professionals who abuse their access to confidential information.”

The SEC’s complaint filed in federal court in Philadelphia names Sudfeld’s wife, Mary Jo Sudfeld, as a relief defendant for the purpose of recovering insider trading profits in her brokerage account through trades conducted by Sudfeld.  The complaint charges Sudfeld with violating antifraud provisions of the federal securities laws and an SEC antifraud rule.  The SEC seeks a permanent injunction and financial penalties against Sudfeld and return of allegedly ill-gotten gains and prejudgment interest from Sudfeld and Mary Jo Sudfeld.

The SEC’s investigation has been conducted by Kelly L. Gibson, Assunta Vivolo and John Rymas of the SEC’s Market Abuse Unit in the Philadelphia Regional Office.  The case is being supervised by Mr. Hawke and G. Jeffrey Boujoukos.  The litigation will be led by David A. Axelrod and John V. Donnelly of the Philadelphia Office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.

The Benefits of Shortening the Securities Settlement Cycle

The Benefits of Shortening the Securities Settlement Cycle

SEC CHARGES NON-REGISTERED INVESTMENT ADVISER WITH STEALING CLIENT'S MONEY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/16/2015 02:05 PM EDT

The Securities and Exchange Commission charged a purported investment adviser in San Diego with stealing money from clients for personal use and conducting a Ponzi scheme to pay customers making redemption requests.

In a complaint filed in federal court in San Diego, the SEC alleges that Paul Lee Moore and Coast Capital Management, his purported investment advisory firm, raised $2.6 million from clients.  Instead of investing their money as promised, Moore allegedly siphoned nearly $2 million of client funds to pay travel expenses, buy retail goods, and fund his use of pornographic websites.  The complaint alleges that Moore used the remaining $625,000 in client funds to repay earlier clients with money from new clients in classic Ponzi scheme fashion.  Moore allegedly sent fake account statements to clients showing securities that he never purchased and attracted new clients when existing customers showed the statements to family, friends, and business associates.  Moore also is alleged to have lied to clients about his education, past employment experience, and the amount assets managed by Coast Capital.

Coast Capital, which was not registered as an investment adviser with the SEC or any state regulator, is no longer in business.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today will announce criminal charges against Moore.

“As alleged in our complaint, Moore betrayed his clients, brazenly stole nearly $2 million for his own activities and conducted a Ponzi scheme with the remaining funds,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint, filed in federal court in San Diego, charges Moore with violating federal antifraud laws and related SEC rules.  The SEC seeks a permanent injunction, return of allegedly ill-gotten gains plus prejudgment interest and a penalty.

The SEC’s investigation was conducted by David M. Rosen and supervised by Marc J. Blau of the Los Angeles office.  The SEC’s litigation will be led by Gary Leung.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of California and the Federal Bureau of Investigation.

SEC ANNOUNCES MULTI-MILLION DOLLAR PAYMENT TO FRAUD SCHEME WHISTLEBLOWER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Pays More Than $3 Million to Whistleblower

07/17/2015 10:54 AM EDT

The Securities and Exchange Commission today announced a whistleblower award of more than $3 million to a company insider whose information helped the SEC crack a complex fraud.  The multi-million dollar payout is the third highest award to date under the SEC’s whistleblower program.

The whistleblower’s specific and detailed information comprehensively laid out the fraudulent scheme which otherwise would have been very difficult for investigators to detect. The whistleblower’s initial tip also led to related actions that increased the whistleblower’s award.

“Insiders may hold the key to helping our investigators unlock intricate fraudulent schemes,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “By providing significant financial incentives for people to come forward, the SEC’s whistleblower program continues to be profoundly effective in helping us protect investors and hold wrongdoers accountable.”

“The award made today is another testament to the agency’s commitment to reward those who provide high-quality information that leads to successful enforcement actions and related actions,” said Sean X. McKessy, Chief of the Office of the Whistleblower.  “Our office continues to receive thousands of whistleblower tips each year.  When those tips bear fruit, those individuals, like today’s whistleblower, may receive significant financial awards.”

Whistleblowers who provide the SEC with unique and useful information that contributes to a successful enforcement action are eligible for awards that can range from 10 percent to 30 percent of the money collected when financial sanctions exceed $1 million.  By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

Since its inception in 2011, the SEC’s whistleblower program has paid more than $50 million to 18 whistleblowers, including a more than $30 million award in 2014 and a more than $14 million award in 2013.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money is taken or withheld from harmed investors to pay whistleblower awards.

SEC SAYS TWO DEFENDANTS ADMIT TO TARGETING ASIAN-AMERICAN COMMUNITY IN CKB PYRAMID SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23306 / July 17, 2015

Securities and Exchange Commission v. CKB168 Holdings Ltd., et al., Civil Action No. 13-5584 (E.D.N.Y., filed October 9, 2013)

In the Matter of Chih Hsuan "Kiki" Lin; Administrative Proceeding File No. 3-16694

Two Defendants Admit Liability in CKB Pyramid Scheme Targeting Asian-American Community

The Securities and Exchange Commission (the "SEC") today announced that the United States District Court for the Eastern District of New York entered settled judgments against defendants Rayla Melchor Santos and Chih Hsuan "Kiki" Lin. In 2013, the SEC charged 16 defendants, including Santos and Lin, with perpetrating a worldwide pyramid scheme.

In settling the SEC's charges against her, Santos admitted that CKB was a pyramid scheme and that she was one of its three primary founders. Santos also admitted that she travelled to the United States and worked with other CKB founders and promoters to convince investors to join CKB by falsely telling them that CKB was a legitimate multi-level marketing company that sold online education courses for children when, in fact, Santos knew that CKB sold its products only to investors and had no significant retail sales.

In settling the SEC's charges against her, Kiki Lin admitted that CKB was an unlawful scheme and that she worked with CKB's founders and others to promote CKB to investors across the United States. Kiki Lin also admitted that she made false and misleading statements to investors and potential investors in order to induce them to join CKB. For instance, Kiki Lin admitted that she falsely told CKB investors and potential investors that they would receive profit reward points ("Prpts") with a value in U.S. dollars that would increase exponentially over time when, in fact, she knew that Prpts could not be converted to actual money.

Defendants Santos and Kiki Lin consented to the entry of Judgments, which: (i) permanently enjoin each of them from violating the unregistered offering provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), and the anti-fraud provisions of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5(a) and (c) thereunder. Kiki Lin also consented to the entry of the Judgment against her which permanently enjoins her from violating the antifraud provisions of the Section 17(a)(2) of the Securities Act and Rule 10b-5(b) under the Exchange Act and the unregistered broker-dealer provisions of Section 15(a) of the Exchange Act. Santos and Kiki Lin also agreed to conduct-based injunctions that prohibit each of them from participating in an illegal pyramid scheme disguised as a multi-level marketing program. Santos and Kiki Lin have agreed to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties in amounts to be determined at a later date by the court upon motion of the Commission. Kiki Lin has also agreed that her wholly-controlled Relief Defendant, USA Trade Group, Inc. will pay disgorgement of ill-gotten gains and prejudgment interest in amounts to be determined at a later date by the court upon motion of the Commission.

As part of the settlement, Kiki Lin also agreed to the issuance of a Commission Order Instituting Administrative Proceedings Pursuant to Section 15(b)(6) of the Exchange Act Making Findings, and Imposition Remedial Sanctions ("Order"), which was issued today. This Order permanently bars Kiki Lin from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or national recognized statistical rating organization, and from participating in any offering of a penny stock.

The Commission's litigation in this matter continues against the remaining Defendants Hung Wai ("Howard") Shern, Rui Ling ("Florence") Leung, Daliang ("David") Guo, Yao Lin, Wen Chen Hwang (aka "Wen Chen Lee" and "Wendy Lee"), Joan Congyi Ma (aka "JC Ma"), Toni Tong Chen, Cheongwha ("Heywood") Chang, Heidi Mao Liu (aka "Heidi Mao"), CKB168 Holdings Ltd., WIN168 Biz Solutions Ltd., CKB168 Ltd., CKB168 Biz Solution, Inc., and Cyber Kids Best Education Ltd.

Opening Remarks at the Compliance Outreach Program for Broker-Dealers

Opening Remarks at the Compliance Outreach Program for Broker-Dealers

SEC CHAIR WHITE LEADS EVENT SUPPORTING MILITARY CONSUMER PROTECTION DAY 2015

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/15/2015 05:00 PM EDT

Securities and Exchange Commission Chair Mary Jo White led a multi-agency event today to support Military Consumer Protection Day 2015, highlighting how service members can best protect themselves and their finances from fraud and identity theft.

Chair White was joined at the Joint Base McGuire-Dix-Lakehurst event by officials from the U.S. Postal Inspection Service, the Department of Justice’s Service Members and Veterans Initiative, the U.S. Attorneys' Housing and Civil Enforcement Section of the Fair Housing Program, the FBI’s Securities Fraud Program and the U.S. Secret Service.

“Taking control of your finances starts with access to information about financial products and services and the people who sell them,” said SEC Chair Mary Jo White. “We want to ensure the men and women of our armed forces who protect us are themselves protected in the financial marketplace.”

White took questions from the base commander, Col. Frederick Thaden, as well as other senior base leadership, before an audience of several hundred at JBMDL’s Timmerman Center in New Jersey, consisting of service members and their families.

“We find that most people, service members included, want more information on how to better manage their finances and check out financial professionals, so they can make the best decisions for their families and for their future.” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.

Questions ranged from what service members should consider before investing to how to avoid becoming victims of investment fraud. Both Chair White and Ms. Schock cautioned service members about offers that sound too good to be true, high-pressure sales tactics, and fraudulent opportunities that appear on social media.  Chair White also discussed cases the SEC has brought to halt frauds that targeted service members and advised the audience on how to best protect themselves from such scams.

Service members and their families are frequent targets for financial fraud and identity theft.  Military Consumer Protection Day aims to provide men and women in uniform with the knowledge and skills to better understand their finances so they can invest wisely and avoid fraud.

SEC CHARGES 15 INDIVIDUALS AND 19 ENTITIES IN MICROCAP MANIPULATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/14/2015 02:30 PM EDT

The Securities and Exchange Commission today charged 15 individuals and 19 entities for their roles in alleged schemes to manipulate the trading of microcap stocks.  The 34 defendants include six firms alleged to have acted as unregistered broker-dealers catering to customers who sought to conceal their stock ownership and manipulate the market for microcap securities.

Owners and employees at the six firms, several customers, stock promoters, and two microcap issuers – Warrior Girl Corp. and Nature’s Peak, formerly Everock, Inc.  –  also are among the defendants in the case filed in federal district court in Manhattan.  The SEC charged the defendants with fraud, manipulative trading, touting, and with registration violations.  Nine of the defendants were named in a criminal indictment charging them based on their roles in the alleged stock manipulation scheme.

The SEC complaint alleges that Costa Rica-based Moneyline Brokers and its founder Harold Bailey “B.J.” Gallison II unlawfully operated as a broker-dealer for U.S.-based customers who engaged in “pump and dump” schemes to artificially inflate a stock’s price and then sell their own shares.  According to the complaint, Moneyline and certain of its employees routinely accepted transfers of microcap stocks from the U.S. customers and had stock certificates reissued in Moneyline’s name to conceal the true owners of the shares.

Carl H. Kruse Sr. and Carl H. Kruse Jr., both of Miami, allegedly conspired with Moneyline and others to manipulate trading in Warrior Girl, a former shell company that the Kruses controlled.  Warrior Girl’s purported business changed from hydroelectric power (in 2008) to extracting oil from tar sands (in 2009) to online education (in 2010), and the Kruses allegedly engaged in multiple manipulations to profit from promotions to inflate the stock’s price. As a result of the various campaigns the Kruses are alleged to have obtained illegal profits estimated to total $2.3 million.

Another alleged scheme involved trading in Everock, Inc., a Canada-based mining company that relocated to Nevada and sold sandwich spreads after reorganizing itself with Nature’s Peak in 2008.  A concerted campaign promoting the mining-turned condiment company allegedly included videos and Facebook postings and produced more than $2.5 million in profits for defendants Charles S. Moeller, of Sea Cliff, N.Y., Mark S. Dresner, of Dix Hills, N.Y. and Frank J. Zangara, of Locust Valley, N.Y.

“This case demonstrates the Commission’s resolve to relentlessly pursue the villains behind these microcap fraud schemes wherever in the world they may be hiding,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force, added: “This case presents an excellent example of the capacity the Microcap Fraud Task Force has developed to pierce the layers of sham entities and nominee accounts that predators employ to harm investors and evade detection by law enforcement.”

In addition to Moneyline, the complaint alleges that two Costa Rica-based firms, Sandias Azucaradas CR, S.A. and Vanilla Sky, S.A., and three Nevada-based firms, Bastille Advisors, Inc., Club Consultants, Inc., and Jurojin, Inc., operated as unregistered broker-dealers.  Employees of the firms who were charged are: Roger G. Coleman Sr., of Las Vegas, Ann M. Hiskey, of Costa Rica, Robin M. Rushing and David K. Rushing, both of Spokane, Wash., and Michael J. Randles, of Costa Rica.

Promoters who were charged include: Dresner, Antonio J. Katz, of Red Bank, N.J., Moeller, Richard S. Roon, of Rumson, N.J., AKAT Global LLC, Digital Edge Marketing LLC, Oceanic Consulting LLC, and Spectrum Research Group Inc.

The other defendants charged are: Allan M. Migdall, of Fort Lauderdale, Florida, Robert S. Oppenheimer, of Belvedere Tiburon, Calif., Core Business One, Inc., Bermuda-based Fry Canyon Corp., L.F. Technology Group LLC, Starburst Innovations LLC, and Tachion Projects, Inc., along with B.H.I. Group, Inc. and U D F Consulting Inc., both of New York.

The SEC is seeking return of allegedly ill-gotten gains with interest from all defendants.  It also is seeking civil monetary penalties from nearly all the defendants and seeks to bar nearly all of them from the penny stock business and bar some of them from serving as public company officers or directors.

The SEC’s investigation has been conducted by Laura Yeu, Christopher Ferrante and Eric Schmidt of the Microcap Fraud Task Force along with Joshua Newville and Nicholas Pilgrim in the New York Regional Office.  The SEC’s litigation will be led by Mr. Pilgrim.  The SEC appreciates the assistance of the Department of Justice, the U.S. Attorney’s Office for the Eastern District of Virginia, and the Federal Bureau of Investigation.

Ere Misery Made Me Wise[1] — The Need to Revisit the Regulatory Framework of the U.S. Treasury Market

Ere Misery Made Me Wise[1] — The Need to Revisit the Regulatory Framework of the U.S. Treasury Market

Opening Remarks at the Compliance Outreach Program for Broker-Dealers

Opening Remarks at the Compliance Outreach Program for Broker-Dealers

OZ MANAGEMENT LP TO PAY $4.25 MILLION PENALTY TO SETTLE CHARGES FOR MISIDENTIFYING TRADES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

07/14/2015 10:00 AM EDT

The Securities and Exchange Commission today charged OZ Management LP with providing inaccurate trade data to four prime brokers, causing inaccuracies in the brokers’ books and records and in data provided to the SEC in investigations.  OZ Management, an investment adviser for numerous Och-Ziff funds, admitted wrongdoing and agreed to pay a $4.25 million penalty to settle the charges.

According to the SEC’s order instituting a settled cease-and-desist proceeding, for nearly six years, ending in December 2013, OZ Management misidentified some trades in data provided to four of its prime brokers.  Although trade settlement was unaffected, the erroneous data had a significant impact, causing the four prime brokers to inaccurately list approximately 552 million shares in their own books and records.  The erroneous information also was incorporated into data that brokers provide electronically to regulators, resulting in approximately 14.4 million shares being inaccurately reported in response to the SEC’s “blue sheet” requests.  FINRA made several referrals to the Commission based on the incorrect trade data.

Detailed trade data on “blue sheets,” named for the original paper form, help the SEC investigate conduct such as insider trading and market manipulation, and reconstruct trading after extreme market volatility.  The SEC discovered OZ Management’s violations during an investigation in 2013, when it determined that the firm’s own files identified certain trades differently than the blue sheets.  The discrepancy arose for trades where OZ Management did not characterize sales as long or short based on how they were marked when they were sent to the market but filtered them based on other factors, such as the relevant fund’s position in the stock at the prime broker.  As a result, the way trades were identified sometimes changed, causing some long sales to be erroneously shown as short sales when OZ Management provided the data to its prime brokers.  OZ Management has since provided corrected historical information to the affected prime brokers who are working to make their own corrections.

“The SEC relies on the accuracy of the books and records of financial institutions and blue sheet data,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “OZ Management’s inaccurate data had a substantial ripple effect that the SEC staff discovered through diligent investigative work.”

This is the second recent SEC enforcement action involving blue sheets.  In 2014, the Commission sanctioned Scottrade for failing to provide accurate and complete blue sheet submissions to the SEC.

The SEC’s order finds that OZ Management’s conduct caused violations by four prime brokers of the federal securities laws and SEC rules requiring accurate books and records.  The SEC also found that OZ Management wrongfully purchased stock during a restricted period for a secondary offering in 2011, in violation of SEC Rule 105.  OZ Management admitted the facts in the SEC’s order and consented to a cease-and-desist order.  In addition to the $4.25 million penalty, OZ Management agreed to return $243,427 of ill-gotten trading gains and prejudgment interest from its trading in violation of Rule 105.

The SEC’s investigation was conducted by Ann Rosenfield, John Marino, Ainsley Kerr and Carolyn M. Welshhans of the Enforcement Division’s Market Abuse Unit.  The case was supervised by Daniel M. Hawke, Chief of the Market Abuse Unit, and co-deputy unit chief Robert A. Cohen.

ALLEGED PONZI/PYRAMID GOLD MINE INVESTMENT SCHEMERS CHARGED BY SEC WITH FRAUD

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/02/2015 01:10 PM EDT

The Securities and Exchange Commission announced fraud charges and an asset freeze against the operators of a pyramid and Ponzi scheme falsely promising a gold mine of investment opportunity to investors in Spanish and Portuguese-speaking communities in Massachusetts, Florida, and elsewhere in the U.S.

The SEC alleges that DFRF Enterprises, named for its founder Daniel Fernandes Rojo Filho, claimed to operate more than 50 gold mines in Brazil and Africa, but the company’s revenues came solely from selling membership interests to investors and not from mining gold.  With the help of several promoters, they lured investors with such false promises as their money would be fully insured, DFRF has a line of credit with a Swiss private bank, and one-quarter of DFRF’s profits are used for charitable work in Africa.  The scheme raised more than $15 million from at least 1,400 investors by recruiting new members in pyramid scheme fashion to keep the fraud afloat, and commissions were paid to earlier investors in Ponzi-like fashion for their recruitment efforts.  The SEC further alleges that Filho has withdrawn more than $6 million of investor funds to buy a fleet of luxury cars among other personal expenses.

“DFRF and its operators falsely claimed that they were running a lucrative gold mining business when in reality they were operating a Ponzi and pyramid scheme that preyed on investors in particular ethnic communities who stand to lose millions of dollars,” said John T. Dugan, Associate Regional Director of the SEC’s Boston Regional Office.  “Investors were not given the full story about the true value and security of their investments.”

According to the SEC’s complaint filed June 30 and unsealed today in federal court in Boston, Filho is a Brazilian native who lives in Winter Garden, Fla., and he orchestrated the scheme with assistance from six promoters also charged in the case: Wanderley M. Dalman of Revere, Mass.; Gaspar C. Jesus of Malden, Mass.; Eduardo N. Da Silva of Orlando, Fla.; Heriberto C. Perez Valdes of Miami; Jeffrey A. Feldman of Boca Raton; and Romildo Da Cunha of Brazil.

The SEC alleges that Filho and others began selling “memberships” in DFRF last year through meetings with prospective investors primarily in Massachusetts hotel conference rooms, private homes, and businesses.  DFRF promoted the investment opportunity through online videos in which Filho falsely claimed that the company had registered with the SEC and its stock would be publicly traded.  As DFRF’s marketing reach widened, membership sales dramatically increased from under $100,000 in June 2014 to more than $4 million in March 2015 alone.

The SEC’s complaint alleges that all defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and registration provisions Section 5(a) and 5(c) of the Securities Act.

The SEC’s investigation was conducted by Caitlyn M. Campbell, Mark Albers, John McCann, Frank C. Huntington, and Michele T. Perillo of the SEC’s Boston Regional Office, and assisted by Carlos Costa-Rodrigues in the agency’s Office of International Affairs.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, the Boston field office of the Federal Bureau of Investigation, the Massachusetts Securities Division of the Massachusetts Secretary of Commonwealth’s office, the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico, the British Columbia Securities Commission, the Swiss Financial Market Supervisory Authority, the Financial Services Commission  of Barbados, and the United Kingdom Financial Conduct Authority.

Statement on NYSE

Statement on NYSE

SEC ANNOUNCES CRIMINAL CONVICTION OF INDIVIDUAL INVOLVED WITH AMATEUR GOLFER INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23289 / June 17, 2015

Securities and Exchange Commission v. Eric McPhail, et al., Civil Action No. 1:14-cv-12958 (District of Massachusetts, Complaint filed July 11, 2014)

United States v. Eric McPhail and Douglas Parigian, 1:14-cr-10201-DJC (District of Massachusetts filed July 9, 2014)

Jury in Criminal Case Convicts Individual in Insider Trading Case Involving Group of Amateur Golfers

The Securities and Exchange Commission announced that, on June 16, 2015, a federal jury in Massachusetts convicted Eric McPhail of criminal charges of conspiracy and securities fraud for his role in an insider trading ring that traded on inside information about Massachusetts-based American Superconductor Corporation. The criminal charges against McPhail arose out of the same fraudulent conduct for which the Commission instituted a securities fraud action against him and others during July 2014.

The U.S. Attorney's Office for the District of Massachusetts indicted McPhail and another defendant, Douglas Parigian, in July 2014. The indictment alleged that McPhail had a history, pattern and practice of sharing confidences with an individual who had material, nonpublic information concerning American Superconductor's quarterly earnings and other business activities (the "Inside Information"). This individual provided McPhail with the Inside Information with the understanding that it would be kept confidential. Instead, McPhail used email and other means to provide the Inside information to his friends, including Parigian, with the intent that they profit by buying and selling American Superconductor stock and options. Parigian, who used this information to profit on the purchase and sale of American Superconductor stock and options, pled guilty to criminal securities fraud and conspiracy charges on May 13, 2015.

In July 2014, the Commission filed a civil injunctive against Eric McPhail and six of his golfing buddies, including Parigian, alleging that McPhail repeatedly provided non-public information about American Superconductor. McPhail's source was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend. According to the complaint, from July 2009 through April 2011, the executive told McPhail about American Superconducter's expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential. Instead, McPhail misappropriated the inside information and tipped his friends, who improperly traded on the information. Four defendants settled the SEC's charges, without admitting or denying the allegations, by consenting to the entry of judgments permanently enjoining them from violating the antifraud provisions of the Exchange Act, paying disgorgement and civil penalties. The SEC's case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing.

TWO FIRMS CHARGED WITH EB-5 FOREIGN INVESTOR VIOLATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/23/2015 03:10 PM EDT

The Securities and Exchange Commission charged two firms that illegally brokered more than $79 million of investments by foreigners seeking U.S. residency.  The charges are the first against brokers handling investments in the government’s EB-5 Immigrant Investor Program and follow earlier SEC actions against fraudulent EB-5 offerings.

Ireeco LLC, originally of Boca Raton, Fla., and its successor Ireeco Limited, a Hong Kong-based company operating in the U.S., were charged with acting as unregistered brokers for more than 150 EB-5 investors.  The EB-5 program administered by the U.S. Citizenship and Immigration Services (USCIS) provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries.

According to the SEC’s order, Ireeco LLC and Ireeco Limited used their website to solicit EB-5 investors, some of whom were already in the U.S. on a temporary visa.  While Ireeco LLC and Ireeco Limited promised to help investors choose the right regional center to invest with, they allegedly directed most EB-5 investors to the same handful of regional centers, ones that paid them commissions of about $35,000 per investor once USCIS approved an investor’s petition for conditional residence (“green card”).

“While raising money for EB-5 projects in the U.S., these two firms were not registered to legally operate as securities brokers,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “The broker-dealer registration requirements are critical safeguards for maintaining the integrity of our securities markets, and the SEC will vigorously enforce compliance with these provisions.”

Without admitting or denying the SEC’s findings, Ireeco LLC and Ireeco Limited agreed to be censured and to cease and desist from committing or causing similar violations in the future.  They also agreed to administrative proceedings to determine whether they should be ordered to return their allegedly ill-gotten gains, pay penalties, or both based on their violations.

The SEC’s investigation was conducted by Brian Theophilus James in the Miami office, and the case was supervised by Assistant Regional Director Chedly C. Dumornay and Associate Regional Director Glenn S. Gordon.  The SEC appreciates the assistance of the USCIS.

SEC TAKES ENFORCEMENT ACTION AGAINST COMPANY OFFERING COMPLEX DERIVATIVE PRODUCTS TO RETAIL INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/17/2015 12:05 PM EDT

The Securities and Exchange Commission announced an enforcement action against a company that illegally offered complex derivatives products to retail investors.

The Dodd-Frank Act implemented two key requirements for any security-based swaps offering to a retail investor who doesn’t meet the high standard of an “eligible contract participant” defined in the law.  A registration statement must be effective for the offering, and the contracts must be sold on a national securities exchange.  These requirements are intended to make financial information and other significant details about the offering fully transparent to retail investors, and limit the transactions to platforms subject to the highest level of regulation.

An SEC investigation found that Silicon Valley-based Sand Hill Exchange was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange and without the required registration statements in effect.  The violations were detected shortly after the offering process began, and with cooperation from the company the platform was shut down before any investor harm occurred.

Sand Hill agreed to settle the SEC’s charges.

“The Dodd-Frank Act prohibits security-based swaps from being offered in the darkness to retail investors, and we were able to act quickly before any losses materialized in this offering that occurred outside the proper regulatory framework,” said Reid A. Muoio, Deputy Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to scrutinize this space for companies circumventing the law to offer security-based swaps without the safeguards provided to retail investors.”

According to the SEC’s order instituting a settled administrative proceeding against Sand Hill and two individuals:

Sand Hill began as two Silicon Valley entrepreneurs creating an online business involving the valuation of private startup companies in the region along the lines of a fantasy sports league.  But Gerrit Hall and Elaine Ou changed their business model multiple times, and earlier this year Sand Hill evolved to invite web users to use real money to buy and sell contracts referencing pre-IPO companies and their value.

Sand Hill sought people to fund accounts using dollars or bitcoins.  Hall and Ou did not ask users about their financial holdings or limit the offering to users with any specific amount of assets.  In fact, they wrote on the Sand Hill website: “We accept everybody regardless of accreditation status.”  Hall and Ou intended to pay users who profited from their contracts.

Hall and Ou understood that they were buying and selling derivatives linked to the value of private companies, and Ou falsely claimed that they were in the process of seeking regulatory approval for Sand Hill’s contracts.

For about seven weeks, Sand Hill offered, bought, and sold contracts through the website in violation of the Dodd-Frank provisions that limit security-based swaps transactions with people who don’t meet the definition of an eligible contract participant.  Hall and Ou exaggerated Sand Hill’s trading, operations, controls, and financial backing.

Sand Hill, Hall, and Ou ceased offering and selling security-based swaps following inquiries from the SEC in early April.

The SEC’s order finds that Sand Hill, Hall, and Ou violated Section 5(e) of the Securities Act and Section 6(l) of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Sand Hill, Hall, and Ou agreed to cease and desist from committing or causing any future violations of the securities laws.  Sand Hill agreed to pay a $20,000 penalty.

The Complex Financial Instruments Unit will continue its scrutiny of the retail market for conduct that may violate the Dodd-Frank Act’s swaps provisions, including online competitions creatively monetizing what actually constitute security-based swaps transactions.  The SEC’s investigation of Sand Hill was conducted by Brent Mitchell and Creola Kelly, and the case was supervised by Michael Osnato and Mr. Muoio.  The investigation was assisted by Carol McGee and Andrew Bernstein of the Division of Trading and Markets as well as Amy Starr and Andrew Schoeffler of the Division of Corporation Finance.

SEC CHARGES INVESTMENT ADVISORY FIRM, OWNERS WITH INFLATING SECURITIES' PRICES IN HEDGE FUND

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 10:30 AM EDT

The Securities and Exchange Commission charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios they managed.

An SEC investigation found that AlphaBridge Capital Management told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities.  AlphaBridge instead gave internally-derived valuations to broker-dealer representatives to pass off as their own.  The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.

AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million combined to settle the charges.

“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.”

The SEC separately charged Richard L. Evans, who lives in Houston, for assisting in the pricing scheme while working as a broker-dealer representative.  Evans, who cooperated with the SEC’s investigation, agreed to pay a $15,000 penalty and be barred from working in the securities industry for at least one year to settle charges that he aided and abetted and caused violations by AlphaBridge.  Evans neither admitted nor denied the findings.

According to the SEC’s orders instituting settled administrative proceedings, AlphaBridge also misled the funds’ auditor during two year-end audits by suggesting that Evans independently generated data to support AlphaBridge’s prices.  Carino actually developed the data himself.

The SEC’s order finds that AlphaBridge violated and Kutzen and Carino aided and abetted and caused violations of the antifraud and other provisions of the Investment Advisers Act of 1940. AlphaBridge, Kutzen, and Carino consented to the entry of the SEC’s order without admitting or denying the findings.  AlphaBridge and Kutzen are censured and Carino is barred from working in the securities industry for at least three years.  AlphaBridge will return more than $4 million in disgorgement and nearly $1 million in penalties to compensate for the funds’ overpayment of management and performance fees, and the firm will then close down the funds.

The SEC’s investigation was conducted by staff in the Asset Management Unit and Boston Regional Office, including Robert Baker, Brian Fitzpatrick, Patrick Noone, Naomi Sevilla, and Kathleen Shields.  The examination that led to the investigation was conducted by Lily Chan-Sann, Michael McGrath, and Di Tu.  The SEC appreciates the assistance of the Bermuda Monetary Authority as well as the New Orleans office of the Financial Industry Regulatory Authority and the Boston office of the U.S. Department of Labor’s Employee Benefits Security Administration.

SEC PROPOSES RULES ON EXECUTIVE COMPENSATION CLAWBACKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation

07/01/2015 12:45 PM EDT

The Securities and Exchange Commission today proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously.  With this proposal, the Commission has completed proposals on all executive compensation rules required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the proposed new Rule 10D-1, listed companies would be required to develop and enforce recovery policies that  in the event of an accounting restatement, “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement.  Recovery would be required without regard to fault.  The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies.

“These listing standards will require executive officers to return incentive-based compensation that was not earned,” said SEC Chair Mary Jo White.  “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.”

Under the proposed rules, the listing standards would apply to incentive-based compensation that is tied to accounting-related metrics, stock price or total shareholder return.  Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement.

Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act.  In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement.

The comment period for the proposed rules will be 60 days after publication in the Federal Register.

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FACT SHEET

Listing Standards for Clawing Back Erroneously Awarded Executive Compensation

SEC Open Meeting

July 1, 2015

Action

The Commission will consider whether to propose rules directing national securities exchanges and associations to establish listing standards requiring companies to develop and implement policies to claw back incentive-based executive compensation that later is shown to have been awarded in error.  The proposed rules are designed to improve the quality of financial reporting and benefit investors by providing enhanced accountability.  The proposed new rules required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act would be the last of the executive compensation rules to be proposed.

Highlights of the Proposed Rules

Listing Standards – Proposed Rule 10D-1 under the Securities Exchange Act

The proposed rules would require national securities exchanges and associations to establish listing standards that would require listed companies to adopt and comply with a compensation recovery policy in which:

Recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error.  The recovery would be required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.

Companies would be required to recover the amount of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement.  For incentive-based compensation based on stock price or total shareholder return, companies could use a reasonable estimate of the effect of the restatement on the applicable measure to determine the amount to be recovered.

Companies would have discretion not to recover the excess incentive-based compensation received by executive officers if the direct expense of enforcing recovery would exceed the amount to be recovered or, for foreign private issuers, in specified circumstances where recovery would violate home country law.
Under the proposed rules, a company would be subject to delisting if it does not adopt a compensation recovery policy that complies with the applicable listing standard, disclose the policy in accordance with Commission rules or comply with the policy’s recovery provisions.
Definition of Executive Officers

The proposed rules would include a definition of an “executive officer” that is modeled on the definition of “officer” under Section 16 under the Exchange Act.  The definition includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.  

Incentive-Based Compensation Subject to Recovery

Under the proposal, incentive-based compensation that is granted, earned or vested based wholly or in part on the attainment of any financial reporting measure would be subject to recovery.  Financial reporting measures are those based on the accounting principles used in preparing the company’s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return.

Proposed Disclosure

Each listed company would be required to file its compensation recovery policy as an exhibit to its Exchange Act annual report.

In addition, if during its last completed fiscal year the company either prepared a restatement that required recovery of excess incentive-based compensation, or there was an outstanding balance of excess incentive-based compensation relating to a prior restatement, a listed company would be required to disclose:

The date on which it was required to prepare each accounting restatement, the aggregate dollar amount of excess incentive-based compensation attributable to the restatement and the aggregate dollar amount that remained outstanding at the end of its last completed fiscal year.
The name of each person subject to recovery from whom the company decided not to pursue recovery, the amounts due from each such person, and a brief description of the reason the company decided not to pursue recovery.
If amounts of excess incentive-based compensation are outstanding for more than 180 days, the name of, and amount due from, each person at the end of the company’s last completed fiscal year.
The proposed disclosure would be included along with the listed company’s other executive compensation disclosure in annual reports and any proxy or information statements in which executive compensation disclosure is required.

Listed companies would also be required to block tag the disclosure in an interactive data format using eXtensible Business Reporting Language (XBRL).

Covered Companies

The proposed rules would apply to all listed companies except for certain registered investment companies to the extent they do not provide incentive-based compensation to their employees.

Transition Period

The proposal requires the exchanges to file their proposed listing rules no later than 90 days following the publication of the adopted version of Rule 10D-1 in the Federal Register.  The proposal also requires the listing rules to become effective no later than one year following the publication date.

Each listed company would be required to adopt its recovery policy no later than 60 days following the date on which the listing exchange’s listing rule becomes effective.  Each listed company would be required to recover all excess incentive-based compensation received by current and former executive officers on or after the effective date of Rule 10D-1 that results from attaining a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1.

Listed companies would be required to comply with the new disclosures in proxy or information statements and Exchange Act annual reports filed on or after the effective date of the listing exchange’s rule.

What’s Next?

If approved for publication by the Commission, the proposed rules will be published on the Commission’s website and in the Federal Register.  The comment period for the proposed rules would be 60 days after publication in the Federal Register.

SEC CHARGES FOR STOCKBROKER FOR ROLE IN PONZI SCHEME

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 11:55 AM EDT

The Securities and Exchange Commission charged a former stockbroker in Pennsylvania with conducting a Ponzi scheme and stealing investor money to purchase a condominium in Florida and afford his own vacations and other luxuries.

The SEC alleges that Malcolm Segal fraudulently sold so-called certificates of deposits (CDs) to his brokerage customers by falsely claiming that he could get them higher interest rates of return on FDIC-insured CDs than otherwise available to the general public.  In some instances, Segal purchased CDs on behalf of investors but secretly redeemed them early and took the proceeds.  Other times, Segal did not purchase CDs at all despite telling customers he had.  He raised approximately $15.5 million from at least 50 investors.  Besides spending investor money on himself, Segal used it in Ponzi scheme fashion for purported interest payments and principal repayments to earlier investors.

The SEC further alleges that Segal eventually started stealing directly from his customers’ brokerage accounts in a last-ditch effort to keep funding the Ponzi payments.  He forged letters of authorization to facilitate the transfer of customer funds to accounts he controlled, notably forging the signature of one customer’s wife who had died before the date of the transfer.  The scheme collapsed in July 2014.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced criminal charges against Segal.

“As alleged in our complaint, Segal duped investors by pretending to sell them safe investments while stealing their money for his own benefit and making Ponzi payments to earlier investors,”  said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.  “Segal put his own greed above his obligations to customers and violated the law.”

The SEC’s complaint filed in federal court in Philadelphia charges Segal with violations of Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC seeks disgorgement plus prejudgment interest and penalties as well as a permanent injunction.

The SEC’s continuing investigation is being conducted by Michael F. McGraw and Brendan P. McGlynn in the Philadelphia Regional Office.  The SEC’s litigation will be led by David L. Axelrod and Michael J. Rinaldi, and the case is being supervised by G. Jeffrey Boujoukos.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.

SEC SAYS DELOITTE & TOUCHE TO PAY $1 MILLION TO SETTLE ALLEGED AUDITOR INDEPENDENCE RULES VIOLATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 01:35 PM EDT

The Securities and Exchange Commission today charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited.  Deloitte agreed to pay more than $1 million to settle the charges.

The SEC charged the trustee Andrew C. Boynton with causing related reporting violations by the funds, and charged the funds’ administrator ALPS Fund Services with causing related compliance violations.  They also agreed to settle the charges.

Auditor independence rules require outside auditors to remain independent from their clients to ensure there is not even the appearance of a firm compromising its objectivity and impartiality when auditing financial statements.  According to the SEC’s order instituting a settled administrative proceeding, Deloitte violated the rules with respect to the appearance of independence by failing to follow its own policies and conduct an independence consultation prior to entering into a new business relationship with Boynton.  Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work.  Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees.

“The investing public depends on independent auditors like Deloitte to test the reliability of publicly-reported financial statements, and they have front-line responsibility for ensuring their own independence,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “But they are not alone in safeguarding the audit process, and the other fiduciaries charged in this case failed to fulfill their roles and preserve investor confidence.”

According to the SEC’s order:

Deloitte Consulting acquired a proprietary brainstorming business methodology from Boynton in 2006 and collaborated with Boynton to implement it and serve both internal and external firm clients through 2011.

As a member of the three funds’ boards and audit committees, Boynton was required to complete annual trustee and officer (T&O) questionnaires designed in part to identify conflicts of interest.  Boynton did not identify his business relationship with Deloitte Consulting in response to a question calling for identification of his “principal occupation(s) and other positions.”  Relying on his understanding that Deloitte Consulting was a separate legal entity from Deloitte, Boynton also did not identify the business relationship in his responses to a question added to the questionnaire in 2009 inquiring whether he had any “direct or material indirect business relationship” with Deloitte.

ALPS contractually agreed to assist the funds in discharging their responsibilities yet failed to adopt sufficient written policies and procedures as required to prevent auditor independence violations. The funds’ audit committee charter addressed auditor independence generally, but the T&O questionnaires did not expressly cover business relationships with the auditor’s affiliates.  The funds also did not have sufficient written policies and procedures to prevent other types of auditor independence violations, nor did they provide sufficient training to assist board members in the discharge of their responsibilities related to auditor independence.

The SEC’s order censures Deloitte for violating the auditor independence standards of Rule 2-02(b) of Regulation S-X, and sanctioned Deloitte for causing the funds to violate Sections 20(a) and 30(a) of the Investment Company Act and Rule 20a-1 thereunder.  The order finds that Boynton was a cause of the same reporting violations and ALPS caused the funds’ related compliance violations under Rule 38a-1 of the Investment Company Act.  Each party agreed to cease and desist from future violations without admitting or denying the findings.  Deloitte agreed to pay disgorgement of audit fees in the amount of $497,438 plus prejudgment interest of $116,478 and a penalty of $500,000.  Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a penalty of $25,000.  ALPS agreed to pay a $45,000 penalty.

The SEC’s investigation was conducted by James J. Bresnicky and Brian M. Privor, and supervised by J. Lee Buck II.