SEC OBTAINS COURT ORDER HALTER FRAUDULENT BOND OFFERING BY CHICAGO SUBURB

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission obtained an emergency court order against a Chicago suburb and its comptroller to stop a fraudulent bond offering that the city has been marketing to potential investors.

The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and Joseph T. Letke alleging that they have been engaging in a scheme for the past several years to divert bond proceeds for improper, undisclosed uses.  The SEC’s complaint alleges that the purported purpose of prior bond offerings was to fund the development and construction of a Holiday Inn hotel in Harvey.  However without informing investors, Harvey officials diverted at least $1.7 million of bond proceeds from these offerings to pay the city’s operational costs such as its payroll, and Letke received approximately $269,000 in undisclosed payments derived from bond proceeds.  While investigating Harvey’s past bond offerings to investors, the SEC learned that the city is intending to issue new limited obligation bonds as early as this week, and draft offering documents make materially misleading statements about the purpose and risks of those bonds while omitting that past bond proceeds have been misused.

In response to the SEC’s request for emergency relief, the Hon. Judge Rebecca Pallmeyer conducted an emergency hearing today and issued a temporary restraining order preventing Harvey from offering or selling any bonds through July 14.  At the hearing, Harvey agreed to this restriction.  Additionally, to prevent dissipation of Letke’s ill-gotten gains, the court order prohibits Letke from incurring any extraordinary expenses beyond reasonable and customary personal and business expenses.  The court scheduled an additional hearing for July 8.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

David Glockner, director of SEC’s Chicago Regional Office, added, “Harvey’s bond investors were misled into believing their money would go toward construction of a Holiday Inn when instead the bulk of it was diverted into Harvey’s general coffers and Letke’s pocket.  Our action has stopped their scheme in its tracks, and we will continue our investigation to determine additional facts surrounding the misconduct.”

According to the SEC’s complaint, instead of general obligations bonds that are repaid from the general coffers of a municipality, Harvey’s bond offerings in 2008, 2009, and 2010 were limited obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax, or incremental tax from the Tax Increment Financing District that the city created for the development and construction of the Holiday Inn project.  Therefore, it was important to bond investors that the bond offerings were consistent with the stated purpose and the money raised was actually used to fund the hotel development, because the amount of funds available to repay the bonds derived from tax revenues would be materially affected by the funding and progress of the project.

However, the SEC alleges that Harvey’s bond investors were materially misled about the purpose and risks of the bonds they purchased from the city.  As Harvey and Letke perpetrated the scheme to divert bond-related proceeds, the hotel redevelopment project turned into a fiasco for bond investors and city residents. According to news reports, the proposed Holiday Inn hotel and conference center stands as a decrepit shell. The hotel’s façade has many holes in it, and the interior of the hotel appears gutted in places with dangling wires and exposed studs.

The SEC’s complaint alleges that Harvey and Letke violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation, which is continuing, has been conducted by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Eric A. Celauro, Sally J. Hewitt, and Scott Hlavacek.  The litigation will be led by Eric M. Phillips.  The case is being supervised by Peter K.M. Chan.

SEC ANNOUNCES FRAUD CHARGES IN LOAN FALSE CLASSIFICATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes.  As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.

The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions.  Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking.

According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009.  Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.

Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies.  The SEC’s Division of Enforcement will continue to litigate its case against Neely.

“Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things.”

According to the SEC’s orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting.  NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt.  Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Bank’s interest income would be reduced.  Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

The SEC’s Division of Enforcement alleges that when personnel within Regions Bank’s special asset department initiated procedures to place approximately $168 million in NPLs into non-accrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status.  By failing to classify the impaired loans in accordance with its policies, Regions’ financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP.  In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions’ CFO and other senior executives during a meeting in late March.

The SEC’s order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years.

The deferred prosecution agreement with Regions relates to the bank’s failure to maintain adequate accounting controls at the time.  The agreement credits the company’s extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures.  The agreement credits the substantial cooperation by Regions during the SEC’s investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserve’s action.  Regions also will pay a $5 million penalty to the Alabama Department of Banking.

The SEC’s investigation was conducted in its Atlanta Regional Office.  The SEC appreciates the assistance of the Federal Reserve.

FINAL JUDGEMENT ENTERED IN KICKBACK STOCK SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

District Court Enters Final Judgment Setting a Civil Penalty in the Amount of $28,000 Against Defendant Health Sciences Group, Inc.

The Commission announced that on March 10, 2014, the United States District Court for the Southern District of Florida entered a Final Judgment setting a civil penalty in the amount of $28,000 against Defendant Health Sciences Group, Inc. ("HESG"), pursuant to Section 20(d) of the Securities Act of 1933 ("Securities Act") and Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act").

The Final Judgment follows a previous order by United States District Judge Robert N. Scola, Jr. in which the Court entered a Judgment of Permanent Injunction and Other Relief against HESG, enjoining the company from violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a).

The Commission commenced this action by filing its Complaint on August 14, 2013, against HESG and co-defendant, Thomas Gaffney. The Complaint alleged the defendants engaged in a fraudulent scheme involving HESG's stock, illicit kickbacks, and phony agreements to mask those kickbacks. On November 20, 2013, the Court entered a Final Judgment of Permanent Injunction and Other Relief by consent against Gaffney, enjoining him from violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a), and permanently barring him from participating in an offering of penny stock, and from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

2 MORE CHARGED BY SEC WITH INSIDER TRADING IN SPSS INC. ACQUISITION BY IBM CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced it has charged two additional brokers with trading on inside information ahead of the $1.2 billion acquisition of SPSS Inc. in 2009 by IBM Corporation.

The SEC alleged that former brokers Benjamin Durant III and Daryl M. Payton illegally traded on a tip about the acquisition from Thomas C. Conradt, a friend and fellow broker in the New York office of a Connecticut-based broker-dealer.  The SEC complaint, filed in federal court in Manhattan, seeks return of alleged ill-gotten trading gains of approximately $300,000, with interest, financial penalties, and permanent injunctions.

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

The SEC previously charged that Conradt and David J. Weishaus, another fellow broker and tippee, traded on confidential information that Conradt received from his roommate, Trent Martin, a research analyst who misappropriated it from an attorney working on the transaction.  Martin, Conradt, and Weishaus settled with the SEC and pled guilty last year to related criminal charges in the matter.

“Durant and Payton were licensed professionals who knowingly disregarded insider trading laws to enrich themselves at the expense of investors,” said Sharon B. Binger, director of the SEC’s Philadelphia Regional Office.  “The SEC is committed to taking action against those who undermine the public’s confidence in the markets by engaging in insider trading.”

According to the SEC’s complaint, in a private meeting with Martin, his attorney friend revealed nonpublic information about the acquisition, including the names of the companies and the anticipated transaction price.  The lawyer expected Martin to keep the information in confidence and refrain from trading on it but instead, Martin traded and tipped Conradt, who traded and tipped Durant and Payton, among others.  The SEC further alleges that on the day that IBM’s acquisition of SPSS was publicly announced, Durant, Payton, and others met at a Manhattan hotel room and discussed what to do if law enforcement officials contacted them about their trading in SPSS securities.

The SEC’s continuing investigation is being conducted by Scott A. Thompson, A. Kristina Littman, and John S. Rymas.  G. Jeffrey Boujoukos and Catherine E. Pappas are handling the litigation.  All are with the SEC’s Philadelphia Regional Office.

The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA), the U.S. Attorney’s Office for the Southern District of New York, and the Federal Bureau of Investigation.

Chair’s Opening Statement on the Adoption of Cross-Border Securities-Based Swap Rules under Title VII of the Dodd-Frank Act

Chair’s Opening Statement on the Adoption of Cross-Border Securities-Based Swap Rules under Title VII of the Dodd-Frank Act

Statement at SEC Open Meeting

Statement at SEC Open Meeting