SEC COMMUNICATIONS DIRECTOR LEAVING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced that Myron Marlin will be leaving the SEC after nearly five years as communications director, serving under chairs Mary Jo White, Elisse B. Walter, and Mary L. Schapiro.

Since joining the SEC in March 2009, Mr. Marlin coordinated communications strategy on a range of significant issues including the agency’s landmark policy of seeking admissions in certain enforcement settlements and major rulemakings stemming from the Dodd-Frank Act and the JOBS Act.

“Myron is an extraordinary professional and advisor,” said Chair White.  “His substantial knowledge of the agency, judgment, and keen sense of effective communications have been invaluable to me.  I will miss him and his counsel greatly.”

Mr. Marlin said, “It has been an incredible privilege for me to serve under three chairs and alongside so many talented and dedicated public servants who perform work that is so crucial to investors and our nation’s economic well-being.  I am honored to have been at the SEC during a period of such intense rulemaking, record enforcement activity, and regulatory reform.”

Prior to joining the SEC, Mr. Marlin worked for a communications consulting firm.  Previously as director of public affairs at the U.S. Department of Justice, he received the Edmund J. Randolph Award for outstanding service.  Prior to working at the Department of Justice, he was an associate at a law firm in New York.  Mr. Marlin received his undergraduate degree from the University of Michigan and his law degree from American University.

OFFICE OF MUNICIPAL SECURITIES ISSUES GUIDANCE FOR MARKET PARTICIPANTS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that its Office of Municipal Securities has issued interpretive guidance to address questions from market participants regarding the implementation of new final SEC rules requiring municipal advisors to register with the SEC.

The staff guidance, in the form of answers to frequently asked questions, or FAQs, covers topics including:

the advice standard, including the general information exclusion and the treatment of business promotional materials used by underwriters
the request for proposals-request for qualifications exemption
the exemption for independent municipal advisors
the exclusion for registered investment advisers
the underwriter exclusion, including engagements as underwriters
issuance of municipal securities and post-issuance advice
remarketing agent services
opinions by citizens in public discourse
the effective date of the final rules and the compliance period for using the final registration forms
State and local governments frequently use paid advisors to help them decide how and when to issue municipal securities and how to invest proceeds from the sales.  The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required these advisors to register with the SEC like other market intermediaries.  The SEC’s final rule was adopted in September 2013.  Presently, more than 1,100 municipal advisors are registered with the SEC under a temporary registration regime.  The SEC staff may provide periodic updates to the interpretive guidance issued today.

SEC FILES ACTIONS INVOLVING THE UNDERREPORTING OF THE COST FOR WALNUTS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission ("Commission") filed separate actions against Diamond Foods, Inc. ("Diamond"), a San Francisco-based snack food company, and its former chief executive officer (CEO) Michael Mendes, and its former chief financial officer (CFO) Steven Neil for their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts.

According to the Commission's complaints against former CFO Steven Neil and Diamond, which were filed in federal court in San Francisco, Neil directed the effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods. In internal e-mails, Neil referred to these commodity costs as a "lever" to manage earnings in Diamond's financial statements. By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts' estimates for fiscal quarters in 2010 and 2011. After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring walnuts, the company's stock price slid to just $17 per share from a high of $90 per share in 2011.

Diamond Foods agreed to pay $5 million to settle the SEC's charges. Former CEO Michael Mendes, who allegedly should have known that Diamond's reported walnut cost was incorrect at the time he certified the company's financial statements, also agreed to settle charges against him. The SEC's litigation continues against Neil.

According to the Commission's complaints filed against Neil and Diamond, one of the company's significant lines of business involves buying walnuts from its growers and selling the walnuts to retailers. With sharp increases in walnut prices in 2010, Diamond encountered a situation where it needed to pay more to its growers in order to maintain longstanding relationships with them. Yet Diamond could not increase the amounts paid to growers for walnuts, which was its largest commodity cost, without also decreasing the net income that Diamond reports to the investing public. And Neil was facing pressure to meet or exceed the earnings estimates of Wall Street stock analysts.

The Commission alleges that while faced with competing demands, Neil orchestrated a scheme to have it both ways. He devised two special payments to please Diamond's walnut growers and bring the total yearly amounts paid to growers closer to market prices, but improperly excluded portions of those payments from year-end financial statements. Instead of correctly recording the costs on Diamond's books, Neil instructed his finance team to consider the payments as advances on crops that had not yet been delivered. By disguising the reality that the payments were related to prior crop deliveries, Diamond was able to manipulate walnut costs in its accounting to hit quarterly targets for earnings per share (EPS) and exceed estimates by analysts. For instance, after adjusting the walnut cost in order to meet an EPS target for the second quarter of 2010, Diamond went on to tout its record of "Twelve Consecutive Quarters of Outperformance" in its reported EPS results during investor presentations.

The Commission further alleges that Neil misled Diamond's independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments. Neil personally benefited from the fraud by receiving cash bonuses and other compensation based on Diamond's reported EPS in fiscal years 2010 and 2011.

In a separate settled administrative proceeding filed today against former CEO Michael Mendes, the Commission found that Mendes should have known that Diamond's reported walnut cost was incorrect because of information he received at the time, and that he omitted facts in certain representations to Diamond's outside auditors about the special walnut payments. Mendes agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations. Mendes already has returned or forfeited more than $4 million in bonuses and other benefits he received during the time of the company's fraudulent financial reporting.

The Commission's complaint against Diamond alleges that Diamond violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the allegations, Diamond has consented to the entry of a permanent injunction against future violations of the relevant federal securities laws, and the imposition of a $5 million penalty.

The Commission's complaint against CFO Neil alleges that Neil violated Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and Section 304 of the Sarbanes-Oxley Act of 2002, and aided and abetted Diamond's violations of 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The complaint against Neil seeks a permanent injunction, civil penalties, an officer and director bar, disgorgement plus prejudgment interest, and relief pursuant to the Sarbanes-Oxley Act of 2002.

The cease and desist order against CEO Mendes alleges that he directly violated Sections 17(a)(2) and (a)(3) of the Securities Act, Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and caused Diamond's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the factual findings, Mendes has consented to the entry of a cease and desist order against committing violations of Sections 17(a)(2) and (a)(3) of the Securities Act, Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and causing Diamond's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13, and the imposition of a $125,000 penalty. The Commission's order against Mendes noted that he already has returned to Diamond or has forfeited over $4 million in bonuses and other benefits he received during the time of the company's fraudulent financial reporting.

The Commission took into account Diamond's cooperation with the SEC's investigation and its remedial efforts once the fraud came to light. The penalties collected from Diamond and Mendes may be distributed to harmed investors if SEC staff determines that a distribution is feasible.

COURT FINDS ERIC ARONSON LIABLE FOR OPERATING A PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

District Court Finds Eric Aronson Liable for Operating a Ponzi Scheme, Issues Permanent Injunctions Against Remaining Individual Defendants and Grants Other Relief

The Securities and Exchange Commission today announced that U.S. District Court Judge Jed S. Rakoff has ruled that Defendant Eric Aronson violated the antifraud and other provisions of the federal securities laws. In addition, the Court entered orders of permanent injunctions against Defendants Vincent Buonauro and Fredric Aaron and further imposed officer and director and penny stock bars against Aaron. Furthermore, the Court ordered Aronson's wife, Relief Defendant Caroline Aronson, to disgorge the ill-gotten gains she received from her husband.

The Commission's Complaint, filed in October 2011, alleged that, from 2006 to 2010, PermaPave Industries and its affiliates raised more than $26 million from the sale of promissory notes and "use of funds" agreements to over 140 investors. Eric Aronson, Vincent Buonauro and others told investors that there was a tremendous demand for the product - permeable paving stones - and that investors would be repaid from the profits generated by guaranteed product sales. In reality, there was little demand for the product, and defendants used investors' money to make "interest" and "profit" payments to earlier investors and to fund management's lavish lifestyles. In addition, shortly after an affiliate of PermaPave Industries acquired a majority stake in Interlink-US-Network, Ltd., Eric Aronson, Fredric Aaron - who was the attorney for Eric Aronson and the entity defendants - and others issued a press release stating that a company that had never heard of Interlink intended to invest $6 million in Interlink.

On August 6, 2013, the Court granted in part the Commission's motion for summary judgment. Finding that the Commission proved an "almost endless fraud" with evidence that Eric Aronson and others raised millions from investors, misappropriated the funds raised, and then converted the investments several times over to delay and ultimately avoid repayment, the Court ruled that Eric Aronson, age 45 and resident of Syosset, New York, violated Sections 5 and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Subsequently, on December 11, 2013, the Court granted the Commission's motion for reconsideration of the Court's summary judgment order and ruled that Eric Aronson also violated Section 20(e) of the Exchange Act by aiding and abetting Interlink's violations of Exchange Act Sections 10(b) and 13(a) and Rules 10b-5, 12b-20 and 13a-11. Relief for these violations will be determined at a later date.

The Court also granted summary judgment on the Commission's claim for disgorgement against Caroline Aronson, age 43 and resident of Syosset, New York. On December 23, 2013, the Court issued a final judgment ordering Caroline Aronson to pay the full disgorgement amount sought, $296,262.

Also on December 23, 2013, the Court issued judgments as to Vincent Buonauro, age 42 and resident of West Islip, New York, and Fredric Aaron, age 49 and resident of Plainview, New York. Vincent Buonauro agreed to consent to the judgment as to him, which enjoins him from violating Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a) and Rule 10b-5. Fredric Aaron also agreed to consent to the judgment as to him, which enjoins him from violating Exchange Act Section 10(b) and Rule 10b-5 and from aiding and abetting violations of Exchange Act Section 13(a) and Rules 12b-20 and 13a-11. The judgment as to Fredric Aaron also imposes five year officer and director and penny stock bars. The Commission's claims for monetary relief against Vincent Buonauro and Fredric Aaron will be determined at a later date.

The Commission's civil action also continues against Relief Defendant Deborah Buonauro. The Court previously issued final judgments against all entity defendants and entity relief defendants on January 19, 2012 and against Defendant Robert Kondratick on October 17, 2012.

SEC ANNOUNCES NEW CHIEF OF ENFORCEMENT DIVISION FOR INVESTIGATING COMPLEX FINANCIAL INSTRUMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced that Michael J. Osnato, Jr. has been named chief of the Enforcement Division unit that conducts investigations into complex financial instruments.

Mr. Osnato, who joined the SEC staff in 2008 and has served as an assistant director in the New York Regional Office since 2010, has played a key role in a number of significant SEC enforcement actions.  For instance, Mr. Osnato helped spearhead the SEC’s case against JPMorgan Chase & Co. and two former traders for fraudulently overvaluing a complex trading portfolio in order to hide massive losses, and the subsequent action in which the bank admitted that it violated federal securities laws.

Mr. Osnato will now lead a Complex Financial Instruments Unit that is comprised of attorneys and industry experts working in SEC offices across the country to investigate potential misconduct related to asset-backed securities, derivatives, and other complex financial products.  The unit was created along with four other specialized enforcement units in 2010, and was formerly known as the Structured and New Products Unit.

“Michael is a natural leader who brings keen investigative instincts and exceptional judgment to his work,” said Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement.  “He has been a valuable part of our efforts to punish misconduct related to complex financial instruments, and we are pleased that he will bring his considerable talents and skills to the unit.”

Among other SEC enforcement actions under Mr. Osnato’s purview have been charges against four former investment bankers and traders at Credit Suisse Group in a scheme to overstate the prices of $3 billion in subprime bonds, and actions related to operators of the Reserve Primary Fund.

“I am honored and gratified to have this opportunity to lead the Complex Financial Instruments Unit,” said Mr. Osnato.  “The unit has targeted fraud in some of the most challenging areas of the markets, and I look forward to working with the many talented professionals in the unit to keep the Enforcement Division on the cutting edge of today’s financial markets.”

Prior to joining the SEC enforcement staff, Mr. Osnato worked at Shearman & Sterling LLP and later at Linklaters LLP in New York.  He earned his bachelor’s degree from Williams College and his law degree from Fordham Law School.

PRESIDENT OBAMA'S STATEMENT ON JANET YELLEN'S CONFIRMATION AS FEDERAL RESERVE CHAIR

FROM:  THE WHITE HOUSE 

Statement by the President on the Confirmation of Janet Yellen as Chair of the Federal Reserve

With the bipartisan confirmation of Janet Yellen as the next Chair of the Federal Reserve, the American people will have a fierce champion who understands that the ultimate goal of economic and financial policy making is to improve the lives, jobs and standard of living of American workers and their families. As one of our nation’s most respected economists and a leading voice at the Fed for more than a decade – and Vice Chair for the past three years – Janet helped pull our economy out of recession and put us on the path of steady growth. Janet is committed to the Fed’s dual mandate of keeping inflation in check while also addressing our most important economic challenge by reducing unemployment and creating jobs. And she understands that fostering a stable financial system will help the overall economy and protect consumers. I am confident that Janet will stand up for American workers, protect consumers, foster the stability of our financial system, and help keep our economy growing for years to come.