Statement on NYSE

Statement on NYSE

SEC ANNOUNCES CRIMINAL CONVICTION OF INDIVIDUAL INVOLVED WITH AMATEUR GOLFER INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23289 / June 17, 2015

Securities and Exchange Commission v. Eric McPhail, et al., Civil Action No. 1:14-cv-12958 (District of Massachusetts, Complaint filed July 11, 2014)

United States v. Eric McPhail and Douglas Parigian, 1:14-cr-10201-DJC (District of Massachusetts filed July 9, 2014)

Jury in Criminal Case Convicts Individual in Insider Trading Case Involving Group of Amateur Golfers

The Securities and Exchange Commission announced that, on June 16, 2015, a federal jury in Massachusetts convicted Eric McPhail of criminal charges of conspiracy and securities fraud for his role in an insider trading ring that traded on inside information about Massachusetts-based American Superconductor Corporation. The criminal charges against McPhail arose out of the same fraudulent conduct for which the Commission instituted a securities fraud action against him and others during July 2014.

The U.S. Attorney's Office for the District of Massachusetts indicted McPhail and another defendant, Douglas Parigian, in July 2014. The indictment alleged that McPhail had a history, pattern and practice of sharing confidences with an individual who had material, nonpublic information concerning American Superconductor's quarterly earnings and other business activities (the "Inside Information"). This individual provided McPhail with the Inside Information with the understanding that it would be kept confidential. Instead, McPhail used email and other means to provide the Inside information to his friends, including Parigian, with the intent that they profit by buying and selling American Superconductor stock and options. Parigian, who used this information to profit on the purchase and sale of American Superconductor stock and options, pled guilty to criminal securities fraud and conspiracy charges on May 13, 2015.

In July 2014, the Commission filed a civil injunctive against Eric McPhail and six of his golfing buddies, including Parigian, alleging that McPhail repeatedly provided non-public information about American Superconductor. McPhail's source was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend. According to the complaint, from July 2009 through April 2011, the executive told McPhail about American Superconducter's expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential. Instead, McPhail misappropriated the inside information and tipped his friends, who improperly traded on the information. Four defendants settled the SEC's charges, without admitting or denying the allegations, by consenting to the entry of judgments permanently enjoining them from violating the antifraud provisions of the Exchange Act, paying disgorgement and civil penalties. The SEC's case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing.

TWO FIRMS CHARGED WITH EB-5 FOREIGN INVESTOR VIOLATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/23/2015 03:10 PM EDT

The Securities and Exchange Commission charged two firms that illegally brokered more than $79 million of investments by foreigners seeking U.S. residency.  The charges are the first against brokers handling investments in the government’s EB-5 Immigrant Investor Program and follow earlier SEC actions against fraudulent EB-5 offerings.

Ireeco LLC, originally of Boca Raton, Fla., and its successor Ireeco Limited, a Hong Kong-based company operating in the U.S., were charged with acting as unregistered brokers for more than 150 EB-5 investors.  The EB-5 program administered by the U.S. Citizenship and Immigration Services (USCIS) provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries.

According to the SEC’s order, Ireeco LLC and Ireeco Limited used their website to solicit EB-5 investors, some of whom were already in the U.S. on a temporary visa.  While Ireeco LLC and Ireeco Limited promised to help investors choose the right regional center to invest with, they allegedly directed most EB-5 investors to the same handful of regional centers, ones that paid them commissions of about $35,000 per investor once USCIS approved an investor’s petition for conditional residence (“green card”).

“While raising money for EB-5 projects in the U.S., these two firms were not registered to legally operate as securities brokers,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “The broker-dealer registration requirements are critical safeguards for maintaining the integrity of our securities markets, and the SEC will vigorously enforce compliance with these provisions.”

Without admitting or denying the SEC’s findings, Ireeco LLC and Ireeco Limited agreed to be censured and to cease and desist from committing or causing similar violations in the future.  They also agreed to administrative proceedings to determine whether they should be ordered to return their allegedly ill-gotten gains, pay penalties, or both based on their violations.

The SEC’s investigation was conducted by Brian Theophilus James in the Miami office, and the case was supervised by Assistant Regional Director Chedly C. Dumornay and Associate Regional Director Glenn S. Gordon.  The SEC appreciates the assistance of the USCIS.

SEC TAKES ENFORCEMENT ACTION AGAINST COMPANY OFFERING COMPLEX DERIVATIVE PRODUCTS TO RETAIL INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

06/17/2015 12:05 PM EDT

The Securities and Exchange Commission announced an enforcement action against a company that illegally offered complex derivatives products to retail investors.

The Dodd-Frank Act implemented two key requirements for any security-based swaps offering to a retail investor who doesn’t meet the high standard of an “eligible contract participant” defined in the law.  A registration statement must be effective for the offering, and the contracts must be sold on a national securities exchange.  These requirements are intended to make financial information and other significant details about the offering fully transparent to retail investors, and limit the transactions to platforms subject to the highest level of regulation.

An SEC investigation found that Silicon Valley-based Sand Hill Exchange was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange and without the required registration statements in effect.  The violations were detected shortly after the offering process began, and with cooperation from the company the platform was shut down before any investor harm occurred.

Sand Hill agreed to settle the SEC’s charges.

“The Dodd-Frank Act prohibits security-based swaps from being offered in the darkness to retail investors, and we were able to act quickly before any losses materialized in this offering that occurred outside the proper regulatory framework,” said Reid A. Muoio, Deputy Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to scrutinize this space for companies circumventing the law to offer security-based swaps without the safeguards provided to retail investors.”

According to the SEC’s order instituting a settled administrative proceeding against Sand Hill and two individuals:

Sand Hill began as two Silicon Valley entrepreneurs creating an online business involving the valuation of private startup companies in the region along the lines of a fantasy sports league.  But Gerrit Hall and Elaine Ou changed their business model multiple times, and earlier this year Sand Hill evolved to invite web users to use real money to buy and sell contracts referencing pre-IPO companies and their value.

Sand Hill sought people to fund accounts using dollars or bitcoins.  Hall and Ou did not ask users about their financial holdings or limit the offering to users with any specific amount of assets.  In fact, they wrote on the Sand Hill website: “We accept everybody regardless of accreditation status.”  Hall and Ou intended to pay users who profited from their contracts.

Hall and Ou understood that they were buying and selling derivatives linked to the value of private companies, and Ou falsely claimed that they were in the process of seeking regulatory approval for Sand Hill’s contracts.

For about seven weeks, Sand Hill offered, bought, and sold contracts through the website in violation of the Dodd-Frank provisions that limit security-based swaps transactions with people who don’t meet the definition of an eligible contract participant.  Hall and Ou exaggerated Sand Hill’s trading, operations, controls, and financial backing.

Sand Hill, Hall, and Ou ceased offering and selling security-based swaps following inquiries from the SEC in early April.

The SEC’s order finds that Sand Hill, Hall, and Ou violated Section 5(e) of the Securities Act and Section 6(l) of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Sand Hill, Hall, and Ou agreed to cease and desist from committing or causing any future violations of the securities laws.  Sand Hill agreed to pay a $20,000 penalty.

The Complex Financial Instruments Unit will continue its scrutiny of the retail market for conduct that may violate the Dodd-Frank Act’s swaps provisions, including online competitions creatively monetizing what actually constitute security-based swaps transactions.  The SEC’s investigation of Sand Hill was conducted by Brent Mitchell and Creola Kelly, and the case was supervised by Michael Osnato and Mr. Muoio.  The investigation was assisted by Carol McGee and Andrew Bernstein of the Division of Trading and Markets as well as Amy Starr and Andrew Schoeffler of the Division of Corporation Finance.

SEC CHARGES INVESTMENT ADVISORY FIRM, OWNERS WITH INFLATING SECURITIES' PRICES IN HEDGE FUND

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 10:30 AM EDT

The Securities and Exchange Commission charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios they managed.

An SEC investigation found that AlphaBridge Capital Management told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities.  AlphaBridge instead gave internally-derived valuations to broker-dealer representatives to pass off as their own.  The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.

AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million combined to settle the charges.

“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.”

The SEC separately charged Richard L. Evans, who lives in Houston, for assisting in the pricing scheme while working as a broker-dealer representative.  Evans, who cooperated with the SEC’s investigation, agreed to pay a $15,000 penalty and be barred from working in the securities industry for at least one year to settle charges that he aided and abetted and caused violations by AlphaBridge.  Evans neither admitted nor denied the findings.

According to the SEC’s orders instituting settled administrative proceedings, AlphaBridge also misled the funds’ auditor during two year-end audits by suggesting that Evans independently generated data to support AlphaBridge’s prices.  Carino actually developed the data himself.

The SEC’s order finds that AlphaBridge violated and Kutzen and Carino aided and abetted and caused violations of the antifraud and other provisions of the Investment Advisers Act of 1940. AlphaBridge, Kutzen, and Carino consented to the entry of the SEC’s order without admitting or denying the findings.  AlphaBridge and Kutzen are censured and Carino is barred from working in the securities industry for at least three years.  AlphaBridge will return more than $4 million in disgorgement and nearly $1 million in penalties to compensate for the funds’ overpayment of management and performance fees, and the firm will then close down the funds.

The SEC’s investigation was conducted by staff in the Asset Management Unit and Boston Regional Office, including Robert Baker, Brian Fitzpatrick, Patrick Noone, Naomi Sevilla, and Kathleen Shields.  The examination that led to the investigation was conducted by Lily Chan-Sann, Michael McGrath, and Di Tu.  The SEC appreciates the assistance of the Bermuda Monetary Authority as well as the New Orleans office of the Financial Industry Regulatory Authority and the Boston office of the U.S. Department of Labor’s Employee Benefits Security Administration.

SEC PROPOSES RULES ON EXECUTIVE COMPENSATION CLAWBACKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation

07/01/2015 12:45 PM EDT

The Securities and Exchange Commission today proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously.  With this proposal, the Commission has completed proposals on all executive compensation rules required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the proposed new Rule 10D-1, listed companies would be required to develop and enforce recovery policies that  in the event of an accounting restatement, “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement.  Recovery would be required without regard to fault.  The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies.

“These listing standards will require executive officers to return incentive-based compensation that was not earned,” said SEC Chair Mary Jo White.  “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.”

Under the proposed rules, the listing standards would apply to incentive-based compensation that is tied to accounting-related metrics, stock price or total shareholder return.  Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement.

Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act.  In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement.

The comment period for the proposed rules will be 60 days after publication in the Federal Register.

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FACT SHEET

Listing Standards for Clawing Back Erroneously Awarded Executive Compensation

SEC Open Meeting

July 1, 2015

Action

The Commission will consider whether to propose rules directing national securities exchanges and associations to establish listing standards requiring companies to develop and implement policies to claw back incentive-based executive compensation that later is shown to have been awarded in error.  The proposed rules are designed to improve the quality of financial reporting and benefit investors by providing enhanced accountability.  The proposed new rules required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act would be the last of the executive compensation rules to be proposed.

Highlights of the Proposed Rules

Listing Standards – Proposed Rule 10D-1 under the Securities Exchange Act

The proposed rules would require national securities exchanges and associations to establish listing standards that would require listed companies to adopt and comply with a compensation recovery policy in which:

Recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error.  The recovery would be required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.

Companies would be required to recover the amount of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement.  For incentive-based compensation based on stock price or total shareholder return, companies could use a reasonable estimate of the effect of the restatement on the applicable measure to determine the amount to be recovered.

Companies would have discretion not to recover the excess incentive-based compensation received by executive officers if the direct expense of enforcing recovery would exceed the amount to be recovered or, for foreign private issuers, in specified circumstances where recovery would violate home country law.
Under the proposed rules, a company would be subject to delisting if it does not adopt a compensation recovery policy that complies with the applicable listing standard, disclose the policy in accordance with Commission rules or comply with the policy’s recovery provisions.
Definition of Executive Officers

The proposed rules would include a definition of an “executive officer” that is modeled on the definition of “officer” under Section 16 under the Exchange Act.  The definition includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.  

Incentive-Based Compensation Subject to Recovery

Under the proposal, incentive-based compensation that is granted, earned or vested based wholly or in part on the attainment of any financial reporting measure would be subject to recovery.  Financial reporting measures are those based on the accounting principles used in preparing the company’s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return.

Proposed Disclosure

Each listed company would be required to file its compensation recovery policy as an exhibit to its Exchange Act annual report.

In addition, if during its last completed fiscal year the company either prepared a restatement that required recovery of excess incentive-based compensation, or there was an outstanding balance of excess incentive-based compensation relating to a prior restatement, a listed company would be required to disclose:

The date on which it was required to prepare each accounting restatement, the aggregate dollar amount of excess incentive-based compensation attributable to the restatement and the aggregate dollar amount that remained outstanding at the end of its last completed fiscal year.
The name of each person subject to recovery from whom the company decided not to pursue recovery, the amounts due from each such person, and a brief description of the reason the company decided not to pursue recovery.
If amounts of excess incentive-based compensation are outstanding for more than 180 days, the name of, and amount due from, each person at the end of the company’s last completed fiscal year.
The proposed disclosure would be included along with the listed company’s other executive compensation disclosure in annual reports and any proxy or information statements in which executive compensation disclosure is required.

Listed companies would also be required to block tag the disclosure in an interactive data format using eXtensible Business Reporting Language (XBRL).

Covered Companies

The proposed rules would apply to all listed companies except for certain registered investment companies to the extent they do not provide incentive-based compensation to their employees.

Transition Period

The proposal requires the exchanges to file their proposed listing rules no later than 90 days following the publication of the adopted version of Rule 10D-1 in the Federal Register.  The proposal also requires the listing rules to become effective no later than one year following the publication date.

Each listed company would be required to adopt its recovery policy no later than 60 days following the date on which the listing exchange’s listing rule becomes effective.  Each listed company would be required to recover all excess incentive-based compensation received by current and former executive officers on or after the effective date of Rule 10D-1 that results from attaining a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1.

Listed companies would be required to comply with the new disclosures in proxy or information statements and Exchange Act annual reports filed on or after the effective date of the listing exchange’s rule.

What’s Next?

If approved for publication by the Commission, the proposed rules will be published on the Commission’s website and in the Federal Register.  The comment period for the proposed rules would be 60 days after publication in the Federal Register.