FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged Eli Lilly and Company with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China and Poland.
The SEC alleges that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore "marketing agreements" to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services, and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with off-shore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.
The SEC alleges that when the company did become aware of possible FCPA violations in Russia, Lilly did not curtail the subsidiary’s use of the marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.
As alleged in the SEC’s complaint filed in federal court in Washington D.C.:
Lilly’s subsidiary in Russia paid millions of dollars to off-shore entities for alleged "marketing services" in order to induce pharmaceutical distributors and government entities to purchase Lilly’s drugs, including approximately $2 million to an off-shore entity owned by a government official and approximately $5.2 million to off-shore entities owned by a person closely associated with an important member of Russia’s Parliament. Despite the company’s recognition that the marketing agreements were being used to "create sales potential" with government customers and that it did not appear that any actual services were being rendered under the agreements, Eli Lilly allowed its subsidiary to continue using the agreements for years.
Employees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to government-employed physicians.
Lilly’s subsidiary in Brazil allowed one of its pharmaceutical distributors to pay bribes to government health officials to facilitate $1.2 million in sales of a Lilly drug product to state government institutions.
Lilly’s subsidiary in Poland made eight improper payments totaling $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities in exchange for the official’s support for placing Lilly drugs on the government reimbursement list.
Lilly agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8,700,000 for a total payment of $29,398,734. Without admitting or denying the allegations, Lilly consented to the entry of a final judgment permanently enjoining the company from violating the anti-bribery, books and records, and internal controls provisions of the FCPA, Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act. Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures. The settlement is subject to court approval.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony Before the US House of Representatives Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management
Commissioner Jill E. Sommers
December 13, 2012
Good morning Chairman Conaway, Ranking Member Boswell and members of the Committee. Thank you for inviting me to testify on the challenges facing U.S. and international markets resulting from the Dodd-Frank derivatives reforms. I have worked in the derivatives industry for over fifteen years and have been a Commissioner at the Commodity Futures Trading Commission (CFTC or Commission) since August of 2007. During my time at the Commission I have served as the Chairman and sponsor of the CFTC’s Global Markets Advisory Committee (GMAC) and have represented the Commission at meetings of the International Organization of Securities Commissions (IOSCO), one of the principal organizations formed to develop, implement and promote internationally recognized and consistent standards of regulation, oversight and enforcement in the securities and derivatives markets. I am pleased to give you my perspective on the many challenges facing regulators across the globe in their quest to meet the commitments on over-the-counter (OTC) derivatives reform made by the G20 Leaders in 2009 and, in particular, the challenges presented in interpreting the cross-border scope of Dodd-Frank. The views I present today are my own and not those of the Commission.
Section 722(d) of the Dodd-Frank Act, which added Section 2(i) to the Commodity Exchange Act, provides that the Act shall not apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States, or contravene rules or regulations prescribed by the Commission designed to prevent evasion. In 2011 the Commission acknowledged the growing uncertainty surrounding the extraterritorial reach of Dodd-Frank and in August of that year held a two-day roundtable, followed by a public comment period. In July 2012 the Commission published proposed guidance setting forth an interpretation of how it might construe Section 2(i), followed by another round of public comment. The guidance included a proposed definition of "U.S. person," the types and levels of activities that would require foreign entities to register as U.S. swap dealers or major swap participants (swap entities), and the areas in which such swap entities might be required to comply with U.S. law and those in which the Commission might recognize substituted compliance with the law of an entity’s home jurisdiction.
On November 7, 2012 I convened a meeting of the GMAC to further discuss the Commission’s proposed interpretive guidance and to identify questions and areas of concern in implementing the CFTC’s proposed approach. A number of foreign jurisdictions were represented, including regulators from Australia, the European Commission, the European Securities and Markets Authority, Hong Kong, Japan, Quebec and Singapore. Representatives of the U.S. Securities and Exchange Commission (SEC) also attended to discuss the SEC’s perspective. A common theme that emerged was concern over the breadth of CFTC’s proposed definition of "U.S. person," the implications of having to register in the U.S., the uncertainty of the Commission’s proposal on substituted compliance, and the need to identify areas where complying with a particular U.S. requirement might conflict with the law of a foreign swap entity’s home country regime.
On November 28, 2012 regulatory leaders from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States met in New York to continue the dialogue. In a press statement issued after the meeting the leaders supported the adoption and enforcement of robust and consistent standards in and across jurisdictions, and recognized the importance of fostering a level playing field for market participants, intermediaries and infrastructures, while furthering the G20 commitments to mitigating risk and improving transparency. The leaders identified five areas for further exploration, including:
the need to consult with each other prior to making final determinations regarding which products will be subject to a mandatory clearing requirement and to consider whether the same products should be subject to the same requirements in each jurisdiction, taking into consideration the characteristics of each domestic market and legal regime;
the need for robust supervisory and cooperative enforcement arrangements to facilitate effective supervision and oversight of cross-border market participants, using IOSCO standards as a guide;
the need for reasonable, time-limited transition periods for entities in jurisdictions that are implementing comparable regulatory regimes that have not yet been finalized and to establish clear requirements on the cross-border applicability of regulations;
the need to prevent the application of conflicting rules and to minimize the application of inconsistent and duplicative rules by considering, among other things, recognition or substituted compliance with foreign regulatory regimes where appropriate; and
the continued development of international standards by IOSCO and other standard setting bodies.
The authorities agreed to meet again in early 2013 to inform each other on the progress made in finalizing reforms in their respective jurisdictions and to consult on possible transition periods. Future meetings will explore options for addressing identified conflicts, inconsistencies, and duplicative rules and ways in which comparability assessments and appropriate cross-border supervisory and enforcement arrangements may be made.
The Commission has worked for decades to establish relationships with our foreign counterparts, built on respect, trust, and information sharing, which has resulted in a successful history of mutual recognition of foreign regulatory regimes in the futures and options markets spanning 20-plus years. At the Pittsburg summit in 2009 all G20 nations agreed to a comprehensive set of principles for regulating the OTC derivatives markets. We should rely on their regional expertise. While the pace of implementing reforms among the various jurisdictions has been uneven, I have no reason to believe that comparable or equivalent regulation is unachievable. It is obvious that more time is needed to facilitate an orderly transition to a regulated environment. It is important that assessments of comparability be made at a high level, keeping in mind the core policy objectives of the G20 commitments rather than a line-by-line comparison of rulebooks. It is also important to avoid creating an unlevel playing field for U.S. firms just because the U.S. is ahead of the rest of the world in finalizing reforms. U.S. firms should not be disadvantaged by tight compliance deadlines set by the CFTC. Global coordination is key. It is my hope that in the coming days the Commission will issue clear and concise relief from having to comply with various Dodd-Frank requirements, for both domestic and foreign swap entities, until we have a better sense of the direction in which we are all headed.
I am grateful for the opportunity to speak about these important issues and am happy to answer any questions.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.
The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.
Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.
"Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned nest assets."
The SEC Enforcement Division’s Asset Management Unit continues to prioritize asset valuation investigations, with recent enforcement actions including charges against three top executives at New York-based KCAP Financial and two executives at former $1 billion hedge fund advisory firm Yorkville Advisors LLC.
According to the SEC’s order, the eight directors’ failure to fulfill their fair value-related obligations was particularly inexcusable given that fair-valued securities made up the majority of the funds’ net asset values – in most cases more than 60 percent. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.
The SEC Enforcement Division alleges that the directors caused the funds to violate the federal securities laws by failing to adopt and implement meaningful fair valuation methodologies and procedures and failing to maintain internal control over financial reporting. For example, the funds’ valuation procedures did not include any mechanism for identifying and reviewing fair-valued securities whose prices remained unchanged for weeks, months, and even entire quarters.
"While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used," said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.
According to the SEC’s order, the funds’ valuation procedures required that the directors be given explanatory notes for the fair values assigned to securities. However, no such notes were ever provided to the directors, and they never followed up to request such notes or any other specific information about the basis for the assigned fair values. In fact, Morgan Keegan’s Fund Accounting unit, which assigned values to the securities, did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the net asset values of the funds were materially misstated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed, and repurchased its shares were inaccurate. Furthermore, other reports and at least one registration statement filed by the funds with the SEC contained net asset values that were materially misstated.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged New York-based fund manager Steven B. Hart (Hart) with repeated violations of the federal securities laws related to two distinct multi-year trading schemes, involving illegal matched trading and insider trading. In addition, the Commission charged Hart with making fraudulent representations in two securities purchase agreements.
The SEC alleges that from January 17, 2008 through June 4, 2009, Hart used his control of Octagon Capital Partners, LP, a small investment fund he controls, and his position of authority at an investment fund for which he was employed as a portfolio manager to direct thirty-one matched trades between the two investment funds, benefitting Octagon at the expense his employer's fund. Generally, Hart caused Octagon to purchase stock in small, thinly traded issuers at the going market price and, on the following day, sold the same stock to his employer's fund at a price substantially above the prevailing market price. Each of the sales from Octagon to the employer's fund occurred in premarket trading; thus, Hart ensured that the trades matched. Later that same day or within a few days of the matched trades, the employer's fund, at Hart's direction, sold the recently-acquired stock on the open market at a loss. As a result of this scheme, Hart generated ill-gotten gains of $586,338 for Octagon.
According to the SEC's complaint, Hart, after being confidentially solicited to invest in numerous securities offerings - and despite expressly agreeing to keep the information he received confidential and to not trade on it by agreeing to go "over-the-wall" - nevertheless traded on behalf of Octagon while in possession of material nonpublic information concerning the offerings. From June 19, 2007 through March 15, 2011, in breach of a duty of trust or confidence, Hart directed trades in the securities of nineteen issuers conducting twenty separate offerings, including PIPEs, registered direct offerings, and confidentially marketed public offerings. As a result of Hart's conduct, Octagon derived ill-gotten gains of $244,733.
In addition, on two occasions, in order to induce issuers to sell securities to his fund, Hart signed securities purchase agreements falsely representing that, after he was solicited, Octagon had not traded the issuers' securities in the days leading up to the public announcement of the transactions. Despite going "over-the-wall" during the solicitation process for the offerings, Hart nevertheless directed short sales of the issuer's securities, realizing insider trading gains, and subsequently signed the securities purchase agreements.
The SEC filed action in the U.S. District Court for the Southern District of New York against Hart, alleging violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the allegations of the complaint, Hart consented to the entry of a judgment enjoining him from future violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act. Hart also agreed to pay $831,071 in disgorgement and $103,424 in prejudgment interest, and a civil penalty of $394,733. The settlement is subject to court approval.
The SEC's investigation was conducted in the New York Regional Office by Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz, with assistance from Frank J. Milewski. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.
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