SEC CHARGES FORMER TECH CEO WITH USING CORPORATE FUNDS FOR PERSONAL PURPOSES WITHOUT DISCLOSURE TO INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23225 / March 31, 2015

Accounting and Auditing Enforcement Release No. AAER-3646 / March 31, 2015

Securities and Exchange Commission v. Andrew M. Miller, Civil Action No. 3:15-cv-1461

The Securities and Exchange Commission charged the former CEO of Silicon Valley-based technology firm Polycom Inc. with using nearly $200,000 in corporate funds for personal perks that were not disclosed to investors.

The SEC alleges that Andrew Miller created hundreds of false expense reports with bogus business descriptions for his personal use of company dollars to pay for meals, entertainment, and gifts. Furthermore, he used Polycom funds to travel with his friends and girlfriend to luxurious international resorts while falsely claiming the trips were business-related site inspections in advance of company sales retreats. Miller hid the costs by directing a travel agent to bury them in fake budget line items. In 2012 alone, Miller charged Polycom for more than $115,000 in personal expenses despite publicly reporting that he received less than $35,000 in perks that year.

The SEC separately charged Polycom in an administrative order finding that the company had inadequate internal controls and failed to report Miller's perks to investors. Polycom agreed to pay $750,000 to settle the SEC's charges, without admitting or denying the SEC's findings as to the company. The case against Miller continues in federal court.

According to the SEC's complaint filed in the San Francisco Division of U.S. District Court for the Northern District of California, Miller's undisclosed use of company funds for personal perks was wide-ranging:

More than $80,000 for personal travel and entertainment that Miller hid in falsified invoices or passed off as legitimate business expenses.
More than $10,000 for clothing and accessories and more than $5,000 worth of spa gift cards that Miller falsely claimed to have given as gifts to customers and employees.
More than $10,000 for tickets to professional baseball and football games that Miller falsely claimed to have attended with clients.
More than $5,000 for plants and a plant-watering service at Miller's apartment that he falsely claimed were for the company's San Francisco office.
The SEC's complaint against Miller alleges that he violated the antifraud, proxy solicitation, periodic reporting, books and records and internal controls provisions of the federal securities laws. The complaint also alleges that he falsely certified the accuracy of Polycom's annual reports, which incorporated its proxy statements.

The SEC's order against Polycom found that its internal controls over Miller's expenses were inadequate. For example, Polycom allowed Miller to approve his own expenses that were charged on his assistants' credit cards, and the company allowed him to book and charge airline flights without providing any descriptions of their purpose. As a result of Miller's misconduct, Polycom's proxy statements contained false compensation information and failed to accurately describe Miller's perks as required.

The SEC's complaint against Miller alleges that he violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(b)(5) and 14(a) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13a-14, 13b2-1, 14a-3 and 14a-9 thereunder, and aided and abetted violations of Sections 13(a), 13(b)(2)(A) and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, 14a-3 and 14a-9 thereunder.

The SEC's order against Polycom found that it violated Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3 and 14a-9 thereunder.

The SEC's investigation was conducted by David Berman and John Roscigno of the San Francisco office, and was supervised by Tracy Davis. The SEC's litigation against Miller will be led by Susan LaMarca and David Johnson.

SEC CHAIR'S REMARKS TO INVESTOR ADVISORY COMMITTEE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Opening Remarks to the Investor Advisory Committee

SEC Chair Mary Jo White

April 9, 2015

Good morning and welcome.  Thank you again for making time in your schedules to be here and for all the work you do for the Investor Advisory Committee and the SEC.  Today, I want to give you a couple of updates since your last meeting in February.  And then I will just very briefly touch on some of what lies ahead that I think are of interest to this Committee.

Update on Rulemakings

In March, the Commission adopted rules as required by the JOBS Act to create a new exemption from registration under the Securities Act for offerings of up to $50 million in a 12 month period, which are intended to enhance the ability of small companies to raise capital.  We have come to refer to this rulemaking as Regulation A+, which updates and expands the exemption in existing Regulation A.  In crafting the rules, we sought to both protect investors and address the challenges presented by federal and state securities registration and qualification requirements.  In light of the significant investor protections included in Regulation A+, state registration and qualification requirements were preempted for certain offerings of up to $50 million in an effort to make the exemption more workable.

Importantly, the states will continue to retain their role in certain offerings up to $20 million and issuers will be able to avail themselves of the coordinated review process developed by NASAA on those offerings.  And, the states continue to have their full anti-fraud powers for all Regulation A+ offerings.  As we move forward, the staff will be actively monitoring the implementation and development of the new rules, to assess its impact on capital formation and investor protection.  Staff will report its findings to the Commission, within five years of the adoption of Regulation A+, so that the Commission can consider possible changes to the Regulation A+ offering regime.

Also, in March, the Commission proposed amendments to Rule 15b9‑1, which would require certain active cross-market proprietary trading firms to register with FINRA.  These amendments seek to update the rule and fill a regulatory gap with respect to significant over-the-counter trading by these firms.  This registration requirement should, in my view, help better protect investors and the stability of our markets by requiring this trading to be overseen by both the Commission and the SRO tasked with the primary responsibility of regulating such off-exchange trading.

Going Forward in 2015

As we proceed in 2015, as you know, some front and center priorities are in the market structure and asset management spaces, as well as our disclosure effectiveness initiative and I expect activity in those areas.  The staff is also completing its internal review of the very important definition of “accredited investors.”  On tick size pilot, the Commission has until May 6th to act.

As most of you know from the remarks I made last month on my own behalf, I expect we will be discussing advancing rulemakings to impose a uniform fiduciary duty on broker-dealers and investment advisers under Section 913 of the Dodd-Frank Act and to require a program of third party examinations of investment advisers to increase our exam coverage.

On the mandated rulemaking front, as I said at the end of last year, we will be advancing the remaining Title VII and executive compensation rulemakings under Dodd-Frank Act, including the Section 956 executive compensation rulemaking to be done with our fellow financial regulators.  On the JOBS Act side, adoption of final crowdfunding rules is our last major rulemaking to complete, which is also a priority for 2015.

Closing

Let me conclude on that note.  Again, thank you for all of your hard work.

SEC CHARGES INVESTMENT ADVISER OF HIDING POOR PERFORMANCE OF LOAN ASSETS IN CLO FUNDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

03/30/2015 09:45 AM EDT

The Securities and Exchange Commission announced fraud charges against an investment adviser and her New York-based firms accused of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage.

The SEC’s Enforcement Division alleges that Lynn Tilton and her Patriarch Partners firms have breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for the CLO funds, which have portfolios comprised of loans to distressed companies.  Instead, nearly all valuations of loan assets have been reported to investors as unchanged from the time they were acquired despite many of the companies making partial or no interest payments to the funds for several years.  Investors have not only been misled to believe that objective valuation analyses were being performed, but Tilton and her firms allegedly have avoided significantly reduced management fees because the valuation methodology described in fund documents would have given investors greater fund management control and earlier principal repayments if collateral loans weren’t performing to a particular standard.  Tilton and her firms also consequently have misled investors about asset valuations in fund financial statements.

“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels, creating a major conflict of interest that was never disclosed to them.”

According to the SEC’s order instituting an administrative proceeding, CLO funds raise capital by issuing secured notes and using proceeds to purchase a portfolio of collateral typically comprised of commercial loans.  Investors are paid based on cash flows and other proceeds from the collateral.  The three CLO funds managed by Tilton and the Patriarch Partners firms are collectively known as the Zohar funds, and more than $2.5 billion has been raised from investors.  Tilton’s investment strategy for the Zohar funds has been to improve the operations of the distressed portfolio companies so they can pay off their debt, increase in value, and eventually be sold for a profit.

The SEC’s Enforcement Division alleges that under the contractual terms of the deals, Tilton and her firms are required to categorize the value of each loan asset in monthly reports by using a specific method set forth in deal documents.  To be assigned the highest category, a loan has to be current in its interest payments to the Zohar funds.  The category of each asset impacts the calculation of a fund’s “overcollateralization” ratio, which reflects the likelihood that investors will receive a return on their principal.  If the overcollateralization ratio falls below a specific threshold, Tilton and her firms are not entitled to receive certain management fees and may be required to cede more control of fund management to investors.

The SEC’s Enforcement Division alleges that rather than following the required methodology for valuing these loan assets, Tilton and her firms have maintained their control over the funds and preserved their management fees by not lowering an asset’s category until she decides to cease financial support of the distressed company.  Thus the valuation of an asset simply reflects Tilton’s subjective assessment of the company’s future.  Absent an actual overcollateralization ratio test, investors aren’t getting a true assessment of the actual values of their investments, which in reality have declined substantially.

The SEC’s Enforcement Division further alleges that Tilton and her firms were responsible for misstatements in the quarterly financial statements of the Zohar funds.  When preparing these financial statements, they failed to conduct a required impairment analysis on the assets of the Zohar funds despite disclosures stating that such analysis had occurred.  They also falsely stated that assets of the Zohar funds were reported at fair value.  Tilton repeatedly and falsely certified that the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP).

The SEC’s Enforcement Division alleges that Tilton, Patriarch Partners LLC, Patriarch Partners VIII LLC, Patriarch Partners XIV LLC, and Patriarch Partners XV LLC violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8).  Patriarch Partners LLC also is charged with aiding and abetting violations by the others.  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 has been conducted by Amy Sumner, Amanda de Roo, and John Smith with assistance from Judy Bizu.  Also contributing to the investigation were Allison Lee, Creola Kelly, and Brent Mitchell.  The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato.  The Enforcement Division’s litigation will be led by Dugan Bliss, Nicholas Heinke, and Ms. Sumner.

SEC FILES SUIT AGAINST COMPANY, OWNER ALLEGING FRAUD AGAINST INVESTORS THROUGH OIL AND GAS WELL DEALS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION  

Litigation Release No. 23231 / April 6, 2015

Securities and Exchange Commission v. GC Resources, LLC and Brian J. Polito, Civil Action No. 3:15-CV-0104-B, (NDTX, filed April 6, 2015)

SEC Charges Oil and Gas Company and Founder with Fraud

The Securities and Exchange Commission ("Commission") filed suit against GC Resources, LLC and Brian J. Polito in the United States District Court for the Northern District of Texas, Dallas Division, for defrauding investors through the sale of interests in oil and gas wells the company never owned.

The Commission alleges that GC Resources, through its owner and sole operator, Brian J. Polito, raised approximately $11.8 million by creating a fake agreement with a well-known oil company that purported to give GC Resources the right to sell interests in certain oil wells. Polito forged signatures on the false contract and used it to lure investors to purchase interests in the wells GC Resources claimed to own. Polito then used investor money for Ponzi-type payments back to investors and to purchase luxury cars, designer watches, and exotic vacations for himself.

The Commission's complaint charges both defendants with securities fraud under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint also alleges that Polito violated Section 15(a) of the Exchange Act by acting as an unregistered broker-dealer. The Commission's complaint seeks permanent injunctions, civil penalties, disgorgement plus prejudgment interest, and other relief against both of the defendants.

In a parallel action, the U.S. Attorney's Office for the Northern District of Texas, Dallas Division also filed criminal charges against Polito.

The SEC's investigation was conducted by Rebecca Fike and supervised by Jim Etri of the Fort Worth Regional Office. The litigation will be led by Jennifer Brandt. The Commission appreciates the assistance of the U.S. Attorney's Office in Dallas and the Federal Bureau of Investigation.

SEC CHARGES COMPANY AND OWNER WITH FRAUD IN RELATED TO SALE OF "LIFE SETTLEMENT" INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

04/07/2015 04:30 PM EDT

The Securities and Exchange Commission charged Los Angeles-based Pacific West Capital Group Inc. and its owner Andrew B. Calhoun IV with fraud in the sale of “life settlement” investments.

Life settlements are securities structured around when life insurance policies “mature” after the insured individual dies and benefits are paid.  Life settlement investors purchase an interest in a life insurance policy and in exchange receive a share of the death benefit.

The SEC’s complaint alleges that since 2004, Pacific West and Calhoun, a Beverly Hills-based life insurance agent, have raised nearly $100 million from life settlement investors.  Since at least 2012, Pacific West and Calhoun allegedly defrauded investors by using proceeds from the sale of new life settlements to continue funding life settlement investments sold years earlier.  Pacific West and Calhoun did not disclose this practice to investors and undertook it to make life settlement investments appear successful when, in fact, Pacific West had used up the primary reserves to pay premiums on those policies.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Pacific West and Calhoun made false and misleading statements about the risks of investing in life settlements, including the risk of investors having to make increased premium payments as insured individuals lived longer than Pacific West and Calhoun anticipated.  Pacific West and Calhoun also allegedly misled investors about annual returns and have falsely represented to investors that their investments had nothing to do with Pacific West’s efforts and fortunes.

“Investors are entitled to fair disclosures about the risks associated with their investments,” said Michele Wein Layne, Director of SEC’s Los Angeles Regional Office.  “We allege that Pacific West and Calhoun did the opposite here by hiding and minimizing those risks in order to sell more life settlements.”

The SEC’s complaint charges Pacific West and Calhoun with violating the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws.  Also named as defendants are Ohio-based PWCG Trust, which held and serviced the insurance policies, and five sales agents of Pacific West: Brenda C. Barry of Issaquah, Wash., and her company BAK West, Andrew B. Calhoun Jr. of Anderson, S.C., Eric C. Cannon of Lakewood, Calif., and his company Century Point, and Michael W. Dotta and Caleb A. Moody, both of Los Angeles.

PWCG Trust and the sales agents are charged with violating the securities registration provisions, and the sales agents also are charged with broker-dealer registration violations.  The SEC’s complaint seeks permanent injunctions against all defendants and the return of allegedly ill-gotten gains with interest and penalties from Pacific West, Calhoun, and the sales agents.

The SEC’s investigation was conducted by Todd Brilliant, Dora Zaldivar, Kelly Bowers, and Robert Conrrad.  The SEC’s litigation will be led by John Bulgozdy and Kristin Escalante.

SEC CHARGES BROKERAGE FOR UNDERWRITING COMPANY WITH POSSIBLE MISLEADING OFFERING MATERIALS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

03/27/2015 10:00 AM EDT

The Securities and Exchange Commission announced charges against a New York-based brokerage firm responsible for underwriting a public offering despite obtaining a due diligence report indicating that the China-based company’s offering materials contained false information.

Macquarie Capital (USA) Inc., a wholly owned subsidiary of global financial services firm Macquarie Group Limited, has agreed to settle the SEC’s charges by paying $15 million and separately covering the costs of setting up a Fair Fund to compensate investors who suffered losses after purchasing shares in the public offering by Puda Coal.  The SEC previously charged the Puda Coal executives behind the offering fraud at the company, which is no longer in business.

“Underwriters are critical gatekeepers who are relied upon by the investing public to ferret out the essential facts and address potential inaccuracies before marketing a public stock offering,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Macquarie Capital proceeded with this offering despite a due diligence process that exposed a false claim by Puda Coal, and investors suffered massive losses when the truth publicly came to light.”

The SEC also charged former Macquarie Capital managing director Aaron Black and former investment banker William Fang for failing to exercise appropriate care in their due diligence review.  Black agreed to pay $212,711 and Fang agreed to pay $35,000 to settle the charges.

According to the SEC’s complaint filed in federal court in Manhattan, Macquarie Capital was the lead underwriter on a secondary public stock offering in 2010 by Puda Coal, which traded on the New York Stock Exchange at the time and purported to own a coal company in the People’s Republic of China (PRC).  In the offering documents, Puda Coal falsely told investors that it held a 90-percent ownership stake in the Chinese coal company.  Macquarie Capital repeated those statements in its marketing materials for the offering despite obtaining a report from Kroll Associates showing that Puda Coal did not own any part of the coal company.  According to corporate registry filings in the PRC that Kroll accessed in its due diligence review, Puda Coal’s chairman had transferred ownership of the coal company to himself and then sold nearly half of his interest to the largest state-owned investment firm in the PRC.  As a result, Puda Coal no longer had any ownership stake or source of revenue.

According to the SEC’s complaint, Kroll provided its report to Fang, who read it but failed to act on the information revealing that Puda Coal no longer owned the coal company.  Instead, Fang circulated the report to other members of the Puda Coal deal team and stated in the e-mail that “no red flags were identified.”  Black, who served as one of the transaction directors on the Puda Coal deal, received the report from Fang and read portions stating that Puda Coal’s chairman owned 50 percent of the coal company of which Puda Coal was claiming to own 90 percent.  Black likewise failed to act on the information.  

The SEC alleges that Macquarie Capital made a net profit of $4.17 million as lead underwriter on the Puda Coal offering, which sold stock to investors at a price of $12 per share.  When reports about Puda Coal’s false claim appeared on the Internet based on the same PRC filings that Kroll Associates accessed for its report, Puda Coal’s stock price plunged as low as pennies per share.

The SEC’s complaint charges Macquarie Capital, Black, and Fang with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  They agreed to settle the charges and accept permanent injunctions without admitting or denying the allegations.  The settlement is subject to court approval.  In addition to the monetary penalties, Black has agreed to be barred from supervisory positions in the securities industry and Fang has agreed to be barred from the securities industry, both for at least five years.

The SEC’s investigation was conducted by Charu A. Chandrasekhar, George N. Stepaniuk, David Stoelting, and Sheldon Pollock of the SEC’s New York Regional Office.  The case was supervised by Sanjay Wadhwa.