SEC STAFF ANALYSE PAY RATIO DISCLOSURES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission staff  made available additional analysis related to its proposed rules for pay ratio disclosure.  The analysis by the Division of Economic and Risk Analysis (DERA) considers the potential effects of excluding different percentages of employees from the pay ratio calculation.

The analysis is posted on the SEC’s website as part of the comment file for rules proposed by the Commission in September 2013 that would require the disclosure of the median of the annual total compensation of all employees of the issuer; the annual total compensation of the chief executive officer of the issuer; and the ratio of the median of the annual total compensation of all employees of the issuer to the annual total compensation of the chief executive officer of the issuer.  

The staff believes that the analysis will be informative for evaluating the potential effects on the accuracy of the pay ratio calculation of excluding different percentages of certain categories of employees, such as employees in foreign countries, part-time, seasonal, or temporary employees as suggested by commenters.  The staff is making the analysis available for public comment.  This analysis may supplement other information considered in connection with the rules.

Comments may be submitted to the comment file (File No. S7‑07‑13) for the proposed rules and should be received by July 6.

Additional studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking.  A notification of the inclusion in the comment file of any such materials will be made available on the SEC’s website.

SEC CHARGES COMPUTER COMPANY AND FORMER EXECS IN ALLEGED ACCOUNTING FRAUD SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION  

06/05/2015 09:40 AM EDT

The Securities and Exchange Commission charged Computer Sciences Corporation and former executives with manipulating financial results and concealing significant problems about the company’s largest and most high-profile contract.  The SEC additionally charged former finance executives involved with CSC’s international businesses for ignoring basic accounting standards to increase reported profits.

CSC agreed to pay a $190 million penalty to settle the charges, and five of the eight charged executives agreed to settlements.  Former CEO Michael Laphen agreed to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty.  Former CFO Michael Mancuso agreed to return $369,100 in compensation and pay a $175,000 penalty.

The SEC filed complaints in federal court in Manhattan against former CSC finance executives Robert Sutcliffe, Edward Parker, and Chris Edwards, who are contesting the charges against them.  Sutcliffe was CSC’s finance director for its multi-billion dollar contract with the United Kingdom’s National Health Service (NHS).

The SEC alleges that CSC’s accounting and disclosure fraud began after the company learned it would lose money on the NHS contract because it was unable to meet certain deadlines.  To avoid the large hit to its earnings that CSC was required to record, Sutcliffe allegedly added items to CSC’s accounting models that artificially increased its profits but had no basis in reality.  CSC, with Laphen’s approval, then continued to avoid the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract.  In reality, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work.  By basing its models on the flailing proposals, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011.

The SEC’s investigation found that Laphen and Mancuso repeatedly failed to comply with multiple rules requiring them to disclose these issues to investors, and they made public statements about the NHS contract that misled investors about CSC’s performance.  Mancuso also concealed from investors a prepayment arrangement that allowed CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate.  Mancuso merely told investors that CSC was hitting its targets “the old fashioned hard way.”

“When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “CSC repeatedly based its financial results and disclosures on the NHS contract it was negotiating rather than the one it actually had, and misled investors about the true status of the contract.  The significant sanctions in this case against the company, CEO, and CFO reflect our focus on ensuring that such misconduct is vigorously pursued and punished.”

Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement, added, “The wide-ranging misconduct in this case spanned several countries and occurred over multiple years, reflecting significant management lapses and internal controls failures.  We expect this settlement and the recommendations of an independent ethics and compliance consultant will help prevent future misconduct.”

In addition to the accounting and disclosure violations involving the NHS contract, the SEC’s investigation found that CSC and finance executives in Australia and Denmark fraudulently manipulated the financial results of the company’s businesses in those regions.

The SEC alleges that Parker, who served as controller in Australia, along with regional CFO Wayne Banks overstated the company’s earnings by using “cookie jar” reserves and failing to record expenses as required.  They overstated CSC’s operating results by more than 5 percent in the first quarter of fiscal year 2009 and allowed the company to meet analysts’ earnings targets during that period.  Banks agreed to settle the charges and pay disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years.  The SEC’s case continues against Parker.

In CSC’s Nordic region, the SEC alleges a variety of accounting manipulations to fraudulently inflate operating results as finance executives there struggled to achieve budgets set by CSC management in the U.S.  Among the misconduct was improperly accounting for client disputes, overstating assets, and capitalizing expenses.  For example, Edwards, who was a finance manager, allegedly recorded and maintained large amounts of “prepaid assets” that CSC was required to actually record as expenses.  This tactic guaranteed these expenses would not reduce CSC’s earnings.  CSC’s finance director of the Nordic region Paul Wakefield also engaged in the accounting fraud, which overstated CSC’s consolidated pre-tax income in Denmark as much as 7 percent.  CSC’s finance manager Claus Zilmer was involved in violations of the financial reporting and books and records provisions of the securities laws.  Wakefield and Zilmer agreed to settle the charges, with Wakefield agreeing to accept an officer-and-director bar of at least three years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least three years.  The SEC’s case continues against Edwards.

CSC and the five settling executives neither admit nor deny the findings in the SEC’s order instituting a settled administrative proceeding against them.  CSC must retain an independent consultant to review the company’s ethics and compliance programs.  The SEC particularly acknowledges the cooperation of Wakefield in its investigation, which was conducted by Shelby Hunt, David Miller, Ian Rupell, Robert Peak, and Joseph Zambuto Jr.  The SEC appreciates the assistance of the United Kingdom’s Financial Conduct Authority.

Dissenting Statement on the Final Interagency Policy Statement:Failing to Advance Diversity and Inclusion

Dissenting Statement on the Final Interagency Policy Statement:Failing to Advance Diversity and Inclusion

SEC ANNOUNCES CANADIAN TRADER TO PAY $1 MILLION FOR ALLEGED VIOLATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/09/2015 01:35 PM EDT

The Securities and Exchange Commission today announced that a trader residing in Canada has agreed to pay more than $1 million to settle charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally bought shares in the follow-on offerings to lock in significant profits with little to no market risk.

An SEC investigation found that Andrew L. Evans through his firm Maritime Asset Management violated an anti-manipulation provision of the federal securities laws known as Rule 105 on nearly a dozen occasions.  Rule 105 prohibits short selling an equity security during a restricted period (generally five business days before a public offering) and then purchasing that same security through the offering.  By purchasing lower-priced shares in the follow-on offerings that he could use to cover his short sales, Evans reaped $582,175 in illegal profits.

“Evans repeatedly gamed the system by short selling shares that he knew he could later obtain at a lower price,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Rule 105 was specifically designed to prevent unfair and manipulative trading that erodes pricing integrity and the ability of issuers to effectively raise capital.”

According to the SEC’s complaint filed in U.S. District Court in San Francisco, Evans’s short selling violations occurred from December 2010 to May 2012.  The settlement, which is subject to court approval, requires Evans to pay disgorgement of $582,175, prejudgment interest of $63,424, and a penalty of $364,389 for a total of $1,009,988.  Without admitting or denying the allegations, Evans agreed to be permanently enjoined from violating Rule 105 in the future.

The SEC’s investigation was conducted by Robert J.  Durham and

SEC WARNS INVESTORS TO CHECK BACKGROUNDS OF INVESTMENT SOLICITORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

6/03/2015 11:50 AM EDT

The Securities and Exchange Commission warned investors to thoroughly check the claimed credentials of people soliciting their investments to ensure they are not falsifying, exaggerating, or hiding facts about their backgrounds.  The agency has brought several recent enforcement cases along these lines, including two actions announced today.

An investor alert issued by the SEC’s Office of Investor Education and Advocacy cautions, “Do not trust someone with your investment money just because he or she claims to have impressive credentials or experience, or manages to create a ‘buzz of success.’”  The alert notes that investors sometimes unintentionally contribute to a fraudster’s false reputation of success and accomplishment by merely repeating to others the misrepresentations being made to them.  Investors can conduct background checks of financial professionals to ensure they are properly licensed or registered with the SEC, Financial Industry Regulatory Authority, or a state regulatory authority by visiting the “Ask and Check” section of the SEC’s Investor.gov website.

The SEC Enforcement Division today announced two separate fraud cases against investment advisers who made false claims about their experience and industry accolades in an effort to gain the trust and confidence of investors.

“Advisers looking to raise funds cannot lie about their backgrounds to lull investors into a false sense of security about their purported expertise or the profitability of a potential investment,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Each adviser in these cases used false claims about his background to create trustworthiness and lend credibility to their offering schemes.”

An SEC investigation found that Michael G. Thomas of Oil City, Pa., touted that he was named a “Top 25 Rising Business Star” by Fortune Magazine as he solicited investors through blast e-mails and the Internet for a private fund named Michael G. Investments LLC.  No such distinction actually exists at Fortune Magazine, and Thomas also greatly exaggerated his own past investment performance, misrepresented that certain industry professionals would co-manage and advise the fund, and inflated the fund’s projected performance.  To settle the SEC’s charges, Thomas agreed to pay a $25,000 penalty and consented to an order requiring him not to participate in the issuance, offer, or sale of certain securities for five years.  He also is barred from associating with any broker, dealer, or investment adviser for at least five years.

A separate SEC investigation found that Todd M. Schoenberger of Lewes, Del., misrepresented that he had a college degree from the University of Maryland and touted his appearances on cable news programs while soliciting investors to purchase promissory notes issued by his unregistered investment advisory firm LandColt Capital LP.  Schoenberger falsely told prospective investors that LandColt would repay the notes through fees earned from managing a private fund.  Schoenberger never actually launched the fund, never had the commitments of capital to the fund that he claimed, and never paid investors the returns he promised.  To settle the SEC’s charges, Schoenberger agreed to pay $65,000 in disgorgement of ill-gotten gains plus interest.  He consented to an order barring him from associating with any broker, dealer, or investment adviser and from serving as an officer or director of a public company.

The SEC’s investigation of Thomas was conducted by Mark D. Salzberg and Corey A. Schuster of the Asset Management Unit, and the case was supervised by Panayiota K. Bougiamas and Jeffrey B. Finnell.  The SEC’s investigation of Schoenberger was conducted by John G. Westrick of the Asset Management Unit and supervised by Stephen E. Donahue.  The investor alert was prepared by M. Owen Donley III and Holly Pal in the Office of Investor Education and Advocacy.

FOUR CHARGED BY SEC WITH INSIDER TRADING AND STEALING CONFIDENTIAL INFORMATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/03/2015 10:45 AM EDT

The Securities and Exchange Commission announced insider trading charges against four individuals stealing confidential information from investment banks and their public company clients in order to trade in advance of secondary stock offerings.  The scheme allegedly involved at least 15 stocks and generated more than $4.4 million in illegal trading profits.

The SEC alleges that a former day trader living in California, Steven Fishoff, schemed with two friends and his brother-in-law to pose as legitimate portfolio managers and induce investment bankers to bring them “over the wall” and share confidential information about an upcoming secondary offering.  After promising they wouldn’t disclose the nonpublic information to others or trade an issuer’s stock before an offering was announced, they violated the agreements and tipped each other about the upcoming offerings expected to inherently depress the price of the issuer’s stock.  The tippees then shorted the stock before an offering was publicly announced and assured themselves profits on the short sales after the stock price dropped.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, they eventually expanded the scope of their scheme from short selling to buying stock in advance of a positive corporate news announcement based on confidential information obtained about secret negotiations between two large pharmaceutical companies.

Charged along with Fishoff in the SEC’s complaint is his brother-in-law Steven Costantin of New Jersey, his friend and California neighbor Ronald Chernin, and his friend Paul Petrello, also a former day trader who resides in Florida.  In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Fishoff, Petrello, Chernin, and Costantin.

“We allege an insider trading scheme based on a short-selling business model designed to systematically profit on confidential information obtained under false pretenses,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “But the defendants’ short selling proved to be short-sighted as they overlooked the fact that their trading patterns would be detected and they would be caught by law enforcement.”

The SEC’s complaint charges Fishoff, Petrello, Chernin, and Costantin as well as seven entities they collectively controlled with illegal insider trading in violation of the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.  The complaint also charges Fishoff, Petrello, Chernin, Costantin, and three associated entities with violations of Rule 105 of Regulation M of the Exchange Act in connection with certain short sales made in advance of public securities offerings in which they purchased shares.

The SEC’s investigation is continuing and being conducted by Dominick Barbieri, David Austin, Matthew Lambert, Stephen Johnson and George Stepaniuk.  The litigation will be led by Todd Brody, Dominick Barbieri, and David Austin.  The case is being supervised by Mr. Wadhwa.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, and Options Regulatory Services Authority.