SEC OBTAINS FINAL JUDGEMENT IN PENNY STOCK REGISTRATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Obtains Final Consent Judgments Against Four Individuals and Certain Entity Defendants in Securities Registration Case

The Securities and Exchange Commission announced today that on August 12, 2014, the Honorable Shira A. Scheindlin of the United States District Court for the Southern District of New York approved settlements and entered final judgments against all the individual defendants, Danny Garber, Michael Manis, Kenneth Yellin, Jordan Feinstein, and certain entity defendants in SEC v. Garber et al., 12-cv-9339 (SAS) (S.D.N.Y.). The SEC's Second Amended Complaint alleges that the defendants violated Section 5 of the Securities Act of 1933, from at least 2007 through 2010, by purchasing over a billion unregistered shares in dozens of penny stock companies and reselling the shares to the investing public without complying with the registration provisions of the securities laws.

Without admitting or denying the allegations, Garber, Manis, Yellin and Feinstein have each agreed to final judgments that enjoin them from any future violations of Section 5 of the Securities Act and require them to pay a $25,000 civil penalty. The final judgment against Garber also includes a permanent penny stock bar, permanently enjoins him from participating in unregistered offerings and requires him to pay disgorgement of $862,000 plus prejudgment interest of $113,000. The final judgments against Manis, Yellin and Feinstein permanently enjoin them from participating in any offering made pursuant to Rule 504 of Regulation D, require Manis to pay disgorgement of $862,000 plus prejudgment interest of $113,000, and require Yellin and Feinstein to each pay disgorgement of $314,550 plus prejudgment interest of $41,419. The entity defendants Coastal Group Holdings, Inc., the OGP Group LLC, Rio Sterling Holdings LLC, Slow Train Holdings LLC, and Spartan Group Holdings LLC have agreed to final judgments that enjoin them from any future violations of Section 5 of the Securities Act.

CFTC ORDERS MAN TO PAY $344,000 FOR ROLE IN COMMODITY POOL FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders New York Resident Jacob N. Stein to Pay More than $344,000 in Restitution and Civil Monetary Penalty for Commodity Pool Fraud and Misappropriation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order requiring Jacob N. Stein of Hankins, New York, individually and doing business as TEPdesign, Inc., to pay restitution of $244,400 to defrauded customers and a $100,000 civil monetary penalty, for committing fraud and misappropriation in connection with a commodity pool that traded leveraged or margined off-exchange foreign currency contracts (forex). Neither Stein nor TEPdesign, Inc. has ever been registered with the CFTC.

According to the CFTC’s Order, from about January 2010 through September 2012, Stein, without registering with the CFTC as a Commodity Pool Operator, solicited and obtained approximately $524,000 from at least 17 investors (Pool Participants) to participate in a commodity pool for the purpose of trading leveraged or margined forex. Stein used approximately $83,000 of the funds solicited to trade forex, of which over $80,000 was lost in forex trading, the Order states. Instead of reporting these losses to the Pool Participants, Stein created and distributed to the Pool Participants false account statements indicating that Stein was earning profits for the Pool Participants through forex trading. The Order also finds that the remaining funds, approximately $441,000, were misappropriated by Stein to pay fabricated “profits” and returns of principal to Pool Participants and for Stein’s personal expenses, such as car payments and retail purchases. Ten Pool Participants are still owed approximately $244,400 in principal, the Order finds.

In addition to ordering restitution and imposing a civil monetary penalty, the CFTC Order also requires Stein to cease and desist from further violations of the Commodity Exchange Act and CFTC regulations, as charged, and imposes permanent bans on Stein’s trading, registration, and certain other CFTC-regulated activities.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this case are Patrick Daly, Xavier Romeu-Matta, Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

SEC CHARGES HOUSTON ADVISORY FIRM WITH FRAUD FOR NOT DISCLOSING CONFLICT OF INTEREST TO CLIENTS

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced fraud charges against a Houston-based investment advisory firm accused of recommending that clients invest in particular mutual funds without disclosing a key conflict of interest: the firm was in turn receiving compensation from the broker offering the funds.

An SEC Enforcement Division investigation found that Robare Group Ltd. received a percentage of every dollar that its clients invested in certain mutual funds through an undisclosed compensation agreement with the brokerage firm.  Therefore, unbeknownst to investors, Robare Group and its co-owners Mark L. Robare and Jack L. Jones Jr. had an incentive to recommend these funds to clients over other investment opportunities and generate additional revenue for the firm.  Robare Group ultimately received approximately $440,000 in such payments from the brokerage firm during an eight-year period.    

“Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive.”

The Asset Management Unit has undertaken an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers.  For example, the SEC previously charged an Oregon-based investment adviser for failing to disclose revenue sharing payments and other conflicts of interest to clients.

According to the SEC’s order instituting administrative proceedings against Robare Group and its co-owners, the firm revised its Form ADV in December 2011 to disclose the compensation agreement, but this and later disclosures falsely stated that the firm did not receive any economic benefit from a non-client for providing investment advice.  The disclosures also were inadequate because they stated that Robare Group may receive compensation from the broker when in fact the firm was definitively receiving payments.

The SEC Enforcement Division further alleges that Robare Group and the broker entered into a new agreement in late 2012 that provided similar payments.  But it wasn’t until June 2013 that the firm disclosed the conflict of interest associated with its arrangement with the broker, and even then it failed to disclose the incentive to recommend buying and holding certain mutual funds through the broker’s platform or the magnitude of the conflict.  Robare reviewed and approved the Forms ADV, and Jones reviewed and signed all but one of the filings.

The SEC’s Enforcement Division alleges that Robare Group and Robare willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Jones aided and abetted these violations.  The Enforcement Division further alleges that Robare Group, Robare, and Jones each willfully violated Section 207 of the Advisers Act.     

The SEC’s investigation was conducted by Catherine Floyd and Barbara Gunn of the Fort Worth Regional Office along with John Farinacci.  Ms. Gunn and Mr. Farinacci are members of the Asset Management Unit.  The SEC’s litigation will be led by Janie Frank.

VERDICT RETURNED AGAINST INVESTMENT ADVISER IN FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Jury Returns Verdict Against Massachusetts Investment Adviser in SEC Fraud Case

The Securities and Exchange Commission announced that, on August 13, 2014, a federal court jury in Boston, Massachusetts, returned a verdict against registered investment adviser Sage Advisory Group, LLC, and its principal, Benjamin Lee Grant, both of Boston, MA, in a fraud case filed by the SEC.

In its complaint, filed on September 29, 2010, the Commission alleged that starting on or about October 4, 2005, Grant engaged in a scheme to induce his former brokerage customers to transfer their assets to Sage, his new advisory firm.

The Commission's complaint further alleged that prior to October 2005, Grant was a registered representative of broker-dealer Wedbush Morgan Securities and had customer accounts representing approximately $100 million in assets, virtually all of which were managed by California-based investment adviser First Wilshire Securities Management. According to the complaint, Grant resigned from Wedbush on September 30, 2005 so that he could operate Sage, his own investment advisory firm. In a letter dated October 4, 2005, Grant told his former Wedbush customers that, at the suggestion of First Wilshire, their accounts were being moved from Wedbush to a discount broker and that Sage had been formed to handle their investments. The complaint alleged that the letter told Grant's customers that the charge for their accounts was changing from a 1% management fee paid to First Wilshire plus Wedbush's brokerage commissions to a 2% "wrap fee" paid to Sage, and that First Wilshire had indicated that the wrap fee had been historically less expensive than the previous arrangement. According to the complaint, the letter also told Grant's customers that if they wanted to avoid any disruption in First Wilshire's management of their assets, they had to sign and return the new advisory and custodial account documents as soon as possible. According to the complaint, in subsequent communication with customers, Grant told them that First Wilshire was no longer willing to manage their assets at Wedbush and that they had to transfer to the discount broker and sign up with Sage.

The Commission contended that these statements were materially false and misleading because First Wilshire had not required a transfer from Wedbush, had not refused to continue managing the customers' assets at Wedbush, and had not authorized Grant's statements. Moreover, Grant's wrap fee statements were without factual basis. The complaint further alleged that Grant failed to disclose that the switch from Wedbush to the discount broker would result in significant savings that would flow to Grant and Sage rather than to the advisory clients and that, as a result, Grant and Sage's compensation would be substantially increased. Indeed, once Grant's customers transferred their accounts from Wedbush to Sage, Grant more than doubled his own compensation.

After a trial that began on August 4, 2014, the jury deliberated for approximately two hours before rendering its verdict of liability against both defendants under Sections 204A and 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rules 204A-1 and 206(4)-7 thereunder. The Court will later determine whether and what relief to impose against the defendants. The case was tried by Marc Jones and J.R. Drabick, with assistance from Stephanie DeSisto and Frank Huntington, of the Commission's Boston Regional Office.

For further information, see Litigation Release No. 21672 (September 29, 2010).

On September 1, 2011, the Commission filed a separate civil injunctive action against Sage, Benjamin Lee Grant, and his father Jack Grant alleging that Jack Grant, a lawyer and former stockbroker, had violated a Commission bar from association with investment advisers by associating with his son Benjamin Lee Grant's investment advisory firm, Sage, and by acting as an investment adviser himself. The Complaint further alleged that Jack Grant, Benjamin Lee Grant and Sage fraudulently failed to disclose Jack Grant's barred status and disciplinary history to Sage's advisory clients. On May 30, 2013, Jack Grant consented to settle the charges, but the action against Sage and Lee Grant is still pending and a trial date is to be determined. For further information, see Litigation Release No. 22081 (September 1, 2011) (SEC Charges Massachusetts-Based Attorney for Violating an Investment Adviser Bar and his Son for Failing to Disclose his Father's Bar to Advisory Clients); and Litigation Release No. 22708 (May 30, 2013) (SEC Obtains Final Judgment and Issues Administrative Orders against John A. ("Jack") Grant).

SEC COMMISSIONER AGUILAR'S DISSENTING STATEMENT REGARDING CPA PUNISHMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Dissenting Statement In the Matter of Lynn R. Blodgett and Kevin R. Kyser, CPA, Respondents

Commissioner Luis A. Aguilar

Aug. 28, 2014

During my tenure, I have been a strong supporter of the SEC’s Enforcement program.  I have advocated for an effective Enforcement program by focusing on individual accountability, effective sanctions that deter and punish egregious misconduct, and policies designed to eradicate recidivism.[1]  The importance of a strong and robust Enforcement program cannot be overstated.  It is a vital component of an effective capital market on which investors can rely.  Much of the agency’s enforcement decisions are to be commended.  However, I am obligated to speak out when it appears that the agency falters.

Accordingly, I respectfully dissent from the Commission’s Order accepting the settlement offer of Kevin R. Kyser, a Certified Public Accountant and former Chief Financial Officer (“CFO”) of Affiliated Computer Services, Inc. (“ACS” or “Company”). 

Given the egregious conduct that Mr. Kyser engaged in at ACS, the Commission’s settlement, which lacks fraud charges or a timeout in the form of a Rule 102(e) suspension, is a wrist slap at best.   

First, let’s discuss the improper accounting at issue here.  As the Commission’s Order[2]states, ACS violated generally accepted accounting principles (“GAAP”) by inserting itself into pre-existing sales transactions between a manufacturer and a reseller for the primary purpose of booking revenues from those transactions.[3]  Thus, the Company’s involvement in those transactions had no economic substance.[4]  ACS’s misconduct enabled it to improperly report approximately $125 million in revenues,[5] and, crucially, gave the misleading impression that it had met its internal revenue growth guidance.[6]  ACS failed to disclose the true nature of these improper transactions,[7] and falsely reported its internal revenue growth in public filings.[8]

Second, let’s discuss how Mr. Kyser, in his critical role as CFO, facilitated ACS’s misconduct.  As described in the Commission’s own Order, Mr. Kyser:

• Understood that ACS had inserted itself into these pre-existing transactions and that they would impact ACS’s reported revenue growth;[9]
• Was responsible for the content of ACS’s false and misleading public filings with the Commission, earnings releases, and analyst conference calls;[10]
• Highlighted ACS’s false and misleading internal revenue growth in earnings releases and analyst conference calls;[11]
• Failed to ensure that ACS adequately disclosed and described the significance of these transactions in ACS’s public filings and analyst conference calls;[12]
• Signed false certifications in connection with the Company’s periodic filings;[13] and
• Received an inflated bonus based on ACS’s financial performance that was overstated by 43%.[14]

Accountants—especially CPAs—serve as gatekeepers in our securities markets.  They play an important role in maintaining investor confidence and fostering fair and efficient markets.  When they serve as officers of public companies, they take on an even greater responsibility by virtue of holding a position of public trust.  To this end, when these accountants engage in fraudulent misconduct, the Commission must be willing to charge fraud and must not hesitate to suspend the accountant from appearing or practicing before the Commission.  This is true regardless of whether the fraudulent misconduct involves scienter.

The Commission instead chose to charge Mr. Kyser with limited, narrow non-fraud charges, comprising of violations of the books and records, internal controls, reporting, and certification provisions of the federal securities laws.  In the past, respondents with the same state of mind and similar type of misconduct as Mr. Kyser have been charged with violations of the antifraud provisions of the Securities Act, in particular, Sections 17(a)(2) and/or (3), as well as the books and record and internal control violations.[15]

In addition, where CPAs engage in this type of egregious securities fraud—especially misconduct that relates to the CPAs’ core expertise of financial reporting—the Commission has rightly required such persons to forfeit their privilege to appear and practice before the Commission by imposing a suspension under Rule 102(e) of the Commission’s Rules of Practice.[16]  

Beyond this particular matter, I am concerned that the Commission is entering into a practice of accepting settlements without appropriately charging fraud and imposing Rule 102(e) suspensions against accountants in financial reporting and disclosure cases.  I am also concerned that this reflects a lack of conviction to charge what the facts warrant and to bring appropriate remedies. 

The statistics on financial reporting and disclosure cases and related Rule 102(e) suspensions reflect a troubling trend.  In fiscal year 2010, the Commission brought 117 financial reporting and disclosure cases against issuers and individuals, and imposed Rule 102(e) suspensions in 54% of those cases.[17]  In 2011, the number of financial reporting and disclosure cases against issuers and individuals brought by the Commission fell to 86, and the Commission imposed Rule 102(e) suspensions in 53% of those cases.[18]  In 2012, again the number of similar cases brought by the Commission fell, this time to 76, and the Commission imposed Rule 102(e) suspensions in 49% of those cases.[19]  In 2013, the Commission brought only 68 similar cases, and imposed Rule 102(e) suspensions in only 41% of those cases.[20]  These declining numbers reveal a departure from the Commission’s efforts to keep bad apples out of the securities industry, and this puts investors and the integrity of the Commission’s processes at grave risk.

In my six years as a Commissioner, I have watched defendants fight charging decisions on all fronts, including fighting tooth-and-nail to avoid being suspended from appearing or practicing before the Commission pursuant to Rule 102(e).  This is to be expected, as a suspension order takes a fraudster out of the industry, and often has a far more lasting impact on the fraudster than the imposition of a monetary fine.[21]

A Rule 102(e) suspension is an appropriate sanction to be imposed when people choose to engage in deception and perpetuate fraud—in other words, when people engage in flagrant, harmful misconduct.  Thus, to avoid sanctions under Rule 102(e), defendants strenuously object to scienter-based and non-scienter-based fraud charges[22] (as opposed to lesser charges, such as books and records or internal control violations).  That is to be expected. 

What is not to be expected is when defendants engage in fraud and the Commission affirmatively accepts a weak settlement with lesser charges.  This leaves the investing public significantly at risk, as bad actors are not appropriately charged or sanctioned and are permitted to continue to operate in the securities industry.  This is completely unacceptable.

I am concerned that this case is emblematic of a broader trend at the Commission where fraud charges—particularly non-scienter fraud charges—are warranted, but instead are downgraded to books and records and internal control charges.  This practice often results in individuals who willingly engaged in fraudulent misconduct retaining their ability to appear and practice before the Commission. 

I fear that cases in the future will continue to be weak.  More specifically, I fear that when the staff determines not to seek a Rule 102(e) suspension, it will also forgo bringing fraud charges.  Likewise, I am concerned that Commission Orders may, at times, be purposely vague and/or incomplete, and written in a way so as to lead the public to conclude that no fraud had occurred.  When this happens, the public is denied a full accounting and appreciation of the egregious nature of a defendant’s misconduct.  In addition, this practice muzzles my voice by not allowing any statement by me (including this dissent) to include a fulsome description of facts that support the view that the Commission should have brought fraud charges.[23]  This adversely impacts my ability as a Commissioner to provide the American public honest and transparent information—including a description of facts discovered by the staff during its investigation.  In the end, these behind-the-curtain decisions can make fraudulent behavior appear to be an honest mistake.

In my view, Mr. Kyser’s egregious misconduct violated, at a minimum, the non-scienter-based antifraud provisions of the Securities Act.  Accordingly, charges under Sections 17(a)(2) and/or (3) are warranted and a Rule 102(e) suspension is necessary and appropriate in this case.

The Commission must send a strong and consistent message to the industry that the Commission takes seriously its responsibility of requiring integrity in the financial markets.  For these reasons, I dissent.

---

[1] See, for example, Commissioner Luis A. Aguilar: A Stronger Enforcement Program to Enhance Investor Protection (Oct. 25, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540071677; Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws (Oct. 18, 2012), available athttp://www.sec.gov/News/Speech/Detail/Speech/1365171491510; Combating Securities Fraud at Home and Abroad” (May 28, 2009), available athttp://www.sec.gov/news/speech/2009/spch052809laa.htm;   Reinvigorating the Enforcement Program to Restore Investor Confidence (Mar. 18, 2009), available at http://www.sec.gov/news/speech/2009/spch031809laa.htm; Empowering the Markets Watchdog to Effect Real Results (Jan. 10, 2009), available athttp://www.sec.gov/news/speech/2009/spch011009laa.htm.  

[2] Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, Securities Exchange Act of 1934 Release No. 72938, Accounting and Auditing Enforcement Release No. 3578, Administrative Proceeding File No. 3-16045 (Aug. 28, 2014) (hereinafter “Order”), available at http://www.sec.gov/litigation/admin/2014/34-72938.pdf.

[3] “At or near the end of each quarter ended September 30, 2008 through the quarter ended June 30, 2009, Affiliated Computer Services (“ACS”) arranged for an equipment manufacturer to re-direct through its pre-existing orders through ACS, which gave the appearance that ACS was involved.”  Order at p. 2.  “ACS improperly applied GAAP in determining the amount of revenue to report in each of its quarters in FY 2009.  In making a determination of the amount of revenue to report, ACS did not appropriately take into account all of the critical terms of the arrangement and therefore failed to reflect the lack of economic substance of the ‘resale transactions’ under GAAP.”  Order at p. 4.  See also SEC Press Release, “SEC Charges Two Information Technology Executives With Mischaracterizing Resale Transactions to Increase Revenue” (Aug. 28, 2014) (hereinafter “Press Release”),available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542786775 (“The Securities and Exchange Commission today charged two executives at a Dallas-based information technology company with mischaracterizing an arrangement with an equipment manufacturer to purport that it was conducting so-called “resale transactions” to inflate the company’s reported revenue.”).

[4] “ACS, however, had no substantive involvement in the orders, and there were no changes to the terms of the pre-existing orders.”  Order at p. 2.  “In making a determination of the amount of revenue to report, ACS did not appropriately take into account all of the critical terms of the arrangement and therefore failed to reflect the lack of economic substance of the ‘resale transactions’ under GAAP.”  Order at p. 4.    

[5] “ACS improperly reported approximately $125 million in revenue due to such arrangements.”  Order at p. 2.  “In total, ACS reported revenue of $124.5 million from such arrangements during fiscal 2009. …  In making a determination of the amount of revenue to report, ACS did not appropriately take into account all of the critical terms of the arrangement and therefore failed to reflect the lack of economic substance of the ‘resale transactions’ under GAAP.  In addition, ACS’s internal controls were insufficient to provide reasonable assurance that ACS reported revenues in conformity with GAAP, primarily because ACS failed to appropriately evaluate the economic substance of the ‘resale transactions.’”  Order at p. 4.

[6] “The revenue from these ‘resale transactions’ enabled ACS to meet its publicly disclosed internal revenue growth (“IRG”) guidance for three of the four quarters for that fiscal year.”  Order at p. 4.

[7] “Even though the ‘resale transactions’ were the largest contributors to ACS’s internal revenue growth, ACS did not disclose them in its September 30, 2008 Form 10-Q.  In subsequent quarters, ACS disclosed these transactions as ‘information technology outsourcing related to deliveries of hardware and software.’  This description did not accurately disclose the nature of these transactions, and falsely suggested that they were executed as part of existing ACS outsourcing contracts.”  Order at p. 4.

[8] “As a result, ACS falsely reported its internal revenue growth, which Blodgett and Kyser highlighted in earnings releases and analyst conference calls during the period.”  Order at p. 2.

[9] “Blodgett and Kyser understood the origination of these ‘resale transactions’ and their impact on ACS’s reported revenue growth.”  Order at p. 5.  See also Press Release, supranote 3 (“ACS positioned itself in the middle of pre-existing transactions without adding value, but still improperly reported the revenue.  Blodgett and Kyser knew the truth about these deals, and they were responsible for ensuring that ACS accurately disclosed the full story to investors.”) (quoting David R. Woodcock, Director of the SEC’s Fort Worth Regional Office and Chair of the SEC’s Financial Reporting and Audit Task Force).

[10] “During all relevant periods, Respondents Blodgett and Kyser were, respectively, ACS’s chief executive officer and chief financial officer.  As such, they were responsible for the content of ACS’s filings with the Commission, as well as ACS’s earnings releases and analyst conference calls.”  Order at p. 2.

[11] “As a result, ACS falsely reported its internal revenue growth, which Blodgett and Kyser highlighted in earnings releases and analyst conference calls during the period.”  Order at p. 2.

[12] “Blodgett and Kyser understood the origination of these ‘resale transactions’ and their impact on ACS’s reported revenue growth.  However, Blodgett and Kyser did not ensure that ACS adequately described their significance in ACS’s public filings and on analyst calls.”  Order at p. 5. 

[13] “Blodgett and Kyser certified each of ACS’s fiscal year 2009 Forms 10-Q and 10-K.”  Order at p. 5.

[14] “As a result of the improperly reported revenue, Blodgett and Kyser received bonuses based on fiscal 2009 performance that were 43% higher than they would have received if ACS had properly applied GAAP with respect to determining the amount of revenue to report from the resale transactions.”  Order at p. 5.

[15] It has long been held that the second and third subsections of Section 17(a) of the Securities Act, Sections 17(a)(2) and (3), can be satisfied by proof of negligence, rather than scienter as is necessary for Section 17(a)(1) of the Securities Act.  See Aaron v. SEC, 446 U.S. 680, 697 (1980) (stating that “It is our view, in sum, that the language of §17 (a) requires scienter under § 17 (a)(1), but not under § 17 (a)(2) or § 17 (a)(3).”).  For examples of accountants found to have negligently violated the federal securities laws and charged with violations of Securities Act Sections 17(a)(2) and (3), see e.g., In the Matter of Fifth Third Bank and Daniel Poston, Securities Act Release No. 9490 (Dec. 4, 2013) (Misclassification of loans; imposing a Rule 102(e) suspension on a CFO in a matter in which the individual was charged with violations of Sections 17(a)(2) and (3) of the Securities Act), available athttp://www.sec.gov/litigation/admin/2013/33-9490.pdf; In the Matter of Craig On (CPA), Exchange Act Release No. 66051 (Dec. 23, 2011) (Understated loan losses; imposing a Rule 102(e) suspension on a CFO in a matter in which the individual was charged with, among other things, violations of Sections 17(a)(2) and (3) of the Securities Act), available athttp://www.sec.gov/litigation/admin/2011/34-66051.pdf; In the Matter of Larry E. Hulse, CPA, Exchange Act Release No. 62589 (July 29, 2010) (Improper reserve adjustments; imposing a Rule 102(e) suspension on Sunrise Senior Living, Inc.’s CFO in a matter in which the individual was charged with violations of Sections 17(a)(2) and (3) of the Securities Act),available at http://www.sec.gov/litigation/admin/2010/34-62589.pdf; In the Matter of Lawrence Collins, CPA, Exchange Act Release No. 64808 (July 5, 2011) (Improper revenue reporting; imposing a Rule 102(e) suspension in a matter in which a finance division employee was charged with violations of Sections 17(a)(2) and (3) of the Securities Act),available at http://www.sec.gov/litigation/admin/2011/34-64808.pdf; In the Matter of Gregory Pasko, CPA, Exchange Act Release No. 61149 (Dec. 10, 2009) (Earnings management; imposing a Rule 102(e) suspension on the Director of External Reporting at SafeNet, Inc. after he was charged with non-scienter-based violations of the antifraud (Sections 17(a)(2) and (3) of the Securities Act), books and records and internal controls violations of the federal securities laws), available at http://www.sec.gov/litigation/admin/2009/34-61149.pdf.

[16] Id.   Indeed, in the last five years, there is only one case where the Commission did not obtain a suspension against a CPA/CFO who was subject to an antifraud injunction.  See SEC v. John Michael Kelly et al., Lit. Rel. No. 22109 (Sept. 29, 2011), available athttp://www.sec.gov/litigation/litreleases/2011/lr22109.htm.  In that matter, the Commission agreed to a settlement with Mr. Kelly permanently enjoining him from violations of the non-scienter antifraud provisions of the federal securities laws (Securities Act Sections 17(a)(2) and (3)), but did not impose a Rule 102(e) suspension against him.  In my view, agreeing to that settlement was an abdication of the Commission’s responsibility to police the financial reporting system and maintain the integrity of the securities markets.  Thus, I dissented in that case.

[17] Select SEC and Market Data, Fiscal 2010, at 11, available athttp://www.sec.gov/about/secstats2010.pdf.

[18] Select SEC and Market Data, Fiscal 2011, at 16, available athttp://www.sec.gov/about/secstats2011.pdf.

[19] Select SEC and Market Data, Fiscal 2012, at 14, available athttp://www.sec.gov/about/secstats2012.pdf.

[20] Select SEC and Market Data, Fiscal 2013, at 13, available athttp://www.sec.gov/about/secstats2013.pdf.

[21] See, Jayne W. Barnard, When Is a Corporate Executive “Substantially Unfit to Serve?" 70 N.C.L. Rev. 1489, 1522 (1992).

[22] For the same reasons, defendants who are accountants have also been known to object to charges under Exchange Act Section 13(b)(5) (knowingly circumventing or failing to implement internal controls or knowingly falsifying records) and/or Exchange Act Rule 13b2-2 (lying to auditors).

[23] Facts and information discovered by the investigative staff in the course of an investigation that are not described in a Commission Order or other public document are deemed confidential and, therefore, SEC representatives are prohibited from revealing to the public such non-public information that are not made a matter of the public record.  See, e.g., 17 C.F.R. Section 230.122, which provides that “[e]xcept as provided by 17 C.F.R. 203.2, officers and employees are hereby prohibited from making … confidential [examination and investigation] information or documents or any other non-public records of the Commission available to anyone other than a member, officer or employee of the Commission, unless the Commission or the General Counsel, pursuant to delegated authority, authorizes the disclosure of such information or the production of such documents as not being contrary to the public interest.”

SEC Chairman Whites Statement at SEC Open Meeting

Statement at SEC Open Meeting