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Preview: SEC.gov Updates: Press Releases

Press Releases



Official announcements highlighting recent actions taken by the SEC and other newsworthy information.



Published: Thu, 19 Jan 2017 17:45:21 -0500

Last Build Date: Thu, 19 Jan 2017 17:45:21 -0500

 



SEC Establishes Supervisory Cooperation Arrangement With Hong Kong SFC

Thu, 19 Jan 2017 17:45:21 -0500

The Securities and Exchange Commission today announced that it has established a comprehensive arrangement with the Hong Kong Securities and Futures Commission (SFC) as part of the SEC’s long-term strategy to enhance the oversight of regulated entities that operate across national borders. 

Hong Kong is a major financial center and the new supervisory cooperation arrangement will augment the SEC’s and the SFC’s ability to share information about regulated entities that operate in the U.S. and Hong Kong, including investment advisers, broker-dealers, securities exchanges, market infrastructure providers, and credit rating agencies.  The new comprehensive arrangement expands upon the one from 1995 that was limited to investment management activities.

“By creating a formal channel for exchanging supervisory information with the SFC, this new arrangement will enhance the SEC’s ability to supervise firms on a cross-border basis,” said Paul A. Leder, Director of the SEC’s Office of International Affairs.

The SEC’s approach to supervisory cooperation with its overseas counterparts builds on more than three decades of experience with cross-border cooperation, starting in the late 1980s with memoranda of understanding (MOUs) facilitating information sharing between the SEC and other securities regulators in securities enforcement matters. Enforcement cooperation MOUs help the SEC collect information abroad to investigate securities-law violations and compensate victims of securities fraud when possible.  Supervisory cooperation arrangements establish mechanisms for ongoing consultation and the exchange of information regarding the oversight of global firms and markets.  Such information may include routine supervisory information as well as information regulators need to monitor risk concentrations, identify emerging risks, and better understand a globally active regulated entity’s compliance culture.  These arrangements also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located outside the U.S.

Additional information about SEC cooperation arrangements with foreign regulators can be found at: http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml




Jennifer Diamantis Named Chief of Office of Market Intelligence

Thu, 19 Jan 2017 14:20:00 -0500

The Securities and Exchange Commission today announced that Jennifer A. Diamantis has been named Chief of the Enforcement Division’s Office of Market Intelligence, which is responsible for the collection, analysis, and monitoring of the hundreds of thousands of tips, complaints, and referrals that the SEC receives each year.

Before arriving at the SEC in September 2016 to become Deputy Chief of the office, Ms. Diamantis held various positions in the private sector and at federal agencies, including the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, and Commodity Futures Trading Commission.  She supervised, investigated, litigated, and managed enforcement actions and oversaw the implementation of complex regulations in the financial space.

The previous Chief of the Office of Market Intelligence, Vincente L. Martinez, left the SEC last summer, and Ms. Diamantis has been serving as Acting Chief since she arrived.

“Within a short time, Jennifer has enhanced the Office of Market Intelligence’s critical mission of overseeing the SEC’s collection, evaluation, and dissemination of the vast array of market intelligence that we receive,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.  “Jennifer’s rich work experience as a manager and supervisor and her dedication, expertise, and skill make her an ideal fit for leading the office.”

Ms. Diamantis said, “I am honored to lead the team of dedicated professionals charged with the critically important task of leveraging the valuable intelligence we receive from the public to protect investors, and look forward to continuing to cultivate relationships with our regulatory partners to further this mission.”

Before joining the SEC staff, Ms. Diamantis held various roles at the CFPB’s Division of Research, Markets, and Regulations, most recently Managing Counsel.  Before that, she served as Supervisory Counsel in the FDIC’s Enforcement Section and Senior Trial Attorney in the CFTC’s Division of Enforcement.  She also was a partner at the law firm of Schnader Harrison Segal & Lewis LLP. 

Ms. Diamantis received her law degree from the University of Michigan Law School in 1999, and earned her bachelor of arts degree with honors from the University of Florida in 1996.




Financial Company Charged With Improper Accounting and Impeding Whistleblowers

Thu, 19 Jan 2017 13:05:00 -0500

The Securities and Exchange Commission today announced that Seattle-based financial services company HomeStreet Inc. has agreed to pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers.

HomeStreet’s treasurer Darrell van Amen agreed to pay a $20,000 penalty to settle charges that he caused the accounting violations.

According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure.  The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment.  Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range.

The SEC’s order finds that in certain instances from 2011 to 2014, van Amen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment.  The test results with altered inputs to influence the effectiveness ratio were provided to HomeStreet’s accounting department, which resulted in inaccurate accounting entries.

“HomeStreet disregarded its internal accounting policies and procedures to come up with different testing results to enable its use of hedge accounting,” said Erin Schneider, Associate Director of the SEC’s San Francisco Regional Office.  “Companies must follow the rules rather than create their own.”

The SEC’s order further finds that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect.  When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the “whistleblower.”  It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation.  HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments and other post-employment benefits.

“Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

Jane Norberg, Chief of the SEC's Office of the Whistleblower, added, “This is the second case this week against a company that took steps to impede former employees from sharing information with the SEC.  Companies simply cannot disrupt the lines of communications between the SEC and potential whistleblowers.”

HomeStreet and van Amen consented to the SEC’s order without admitting or denying the findings that they violated internal accounting controls and books and records provisions of the federal securities laws.  HomeStreet also violated Rule 21F-17, which prohibits taking actions to impede communication with the SEC.

The SEC’s investigation was conducted by Rebecca Lubens and John Roscigno, and the case was supervised by Tracy Davis in the San Francisco office.




SEC Chief of Staff Andrew J. Donohue to Leave Agency

Thu, 19 Jan 2017 09:45:00 -0500

The Securities and Exchange Commission today announced that SEC Chief of Staff Andrew J. ”Buddy” Donohue will be leaving the agency at the end of January.

SEC Chair Mary Jo White named Mr. Donohue as Chief of Staff in May 2015. As Chief of Staff, Mr. Donohue was a senior adviser to the Chair on all policy, management, and regulatory issues. Mr. Donohue had previously served as the Director of the SEC’s Division of Investment Management from May 2006 to November 2010.

“Buddy is a seasoned professional whose deep knowledge of the securities laws and broad market expertise have been invaluable to me and the Commission,” said SEC Chair Mary Jo White.  “I am very grateful to Buddy for agreeing to return to the Commission so that all of us could benefit from his leadership, wise counsel, and wealth of knowledge and experience.”

Mr. Donohue added, “It has been a privilege to serve Chair White and the agency, to work with an incredibly talented and dedicated staff and to be a part of the agency’s important mission. I consider myself very fortunate to have had the opportunity to work at the agency twice during my career. I will miss greatly the agency and its staff.”

Prior to rejoining the agency, Mr. Donohue had been managing director, associate general counsel and investment company general counsel at Goldman, Sachs & Co. from November 2012 to May 2015. He had also been a partner in the Investment Management Practice Group at Morgan Lewis & Bockius LLP from March 2011 to October 2012.

From May 2003 to May 2006, Mr. Donohue served as global general counsel at Merrill Lynch Investment Managers. In that role, he oversaw the firm’s legal, regulatory and compliance matters for the investment advisory business.

For over a decade from June 1991 to November 2001, Mr. Donohue served as executive vice president general counsel, director, and as a member of the executive committee of OppenheimerFunds Inc.

Prior to that, and since 1975, Mr. Donohue served in senior roles at other firms.

Mr. Donohue earned his J.D. From New York University School of Law in 1975 and his B.A. cum laude, with high honors in Economics from Hofstra University in 1972. 




General Counsel Anne K. Small to Leave SEC

Wed, 18 Jan 2017 13:40:32 -0500

The Securities and Exchange Commission today announced that General Counsel Anne K. Small will leave the agency later this month. 

Ms. Small has served as the SEC’s General Counsel since April 2013.  As the agency’s chief legal officer, Ms. Small has provided counsel on virtually all of the legal and policy issues before the Commission. This has included providing advice on a record number of enforcement actions, representing and counseling the Commission on high-profile appeals throughout the country on issues ranging from the scope of the anti-fraud provisions to insider trading, advising the Commission on more than 50 significant rulemaking initiatives including those implementing the Dodd-Frank Wall Street Reform and Consumer Protection and the Jumpstart Our Business Startups Acts, and defending against legal challenges to Commission regulations. Ms. Small also led the Commission’s efforts in revising the rules of practice that govern administrative enforcement proceedings.

SEC Chair Mary Jo White said, “Annie is brilliant and has an extraordinary legal mind and tremendous judgment.   She has always provided thoughtful and wise counsel on countless important and complex issues before the Commission.  She is a true champion of the Commission who uses her keen intellect and judgment to guide the Commission to the right result.  She has served me and the Commission superbly well, and I am very grateful that I have always been able to count on her, day or night, for her strategic thinking and knowledgeable advice and counsel.” 

Ms. Small added, “It has been an incredible honor to serve alongside the talented and dedicated SEC staff.  I owe Chair White my profound gratitude for giving me this opportunity and for all of her support. I particularly want to express my appreciation to my phenomenal colleagues in the Office of the General Counsel, whose expertise and professionalism have benefitted me and the Commission in all areas of our work.”

Prior to joining the SEC in April 2013, Ms. Small served as Special Assistant to the President and Associate Counsel to the President.  Prior to that, Ms. Small served as the SEC’s Deputy General Counsel for Litigation and Adjudication.  Ms. Small was previously a litigation partner in the law firm of WilmerHale LLP.  Ms. Small served as a law clerk for Judge Guido Calabresi on the U.S. Court of Appeals for the Second Circuit and for Justice Stephen G. Breyer on the U.S. Supreme Court.  She is a graduate of Yale University and Harvard Law School, where she served as President of the Harvard Law Review.‎

Upon Ms. Small’s departure, Sanket Bulsara, Deputy General Counsel for Appellate Litigation, Adjudication, and Enforcement, will become the Acting General Counsel.




Company Settles Charges Over Undisclosed Perks and Improper Use of Non-GAAP Measures

Wed, 18 Jan 2017 13:10:00 -0500

The Securities and Exchange Commission today announced that New York-based marketing company MDC Partners has agreed to pay a $1.5 million penalty to settle charges that it failed to disclose certain perks enjoyed by its then-CEO and separately violated non-GAAP financial measure disclosure rules.

The SEC’s order finds that MDC Partners disclosed an annual $500,000 perquisite allowance for its senior-most executive, but failed to disclose additional personal benefits the company paid on the CEO’s behalf such as private aircraft usage, club memberships, cosmetic surgery, yacht and sports car expenses, jewelry, charitable donations, pet care, and personal travel expenses.  The CEO later resigned and returned $11.285 million worth of perks, personal expense reimbursements, and other items of value improperly received from 2009 to 2014.

“Compensation paid to high-ranking executives must be fully disclosed,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.  “MDC Partners failed to give its shareholders all of the relevant information about how its top executive was being compensated by the company.”

The SEC’s order also finds improper use of non-GAAP measures, which are allowed under SEC rules to convey information to investors that a company believes is relevant and useful in understanding performance.  But non-GAAP measures must be accurate and must be reconciled to the appropriate GAAP measures so investors and analysts can compare them.  According to the SEC’s order, MDC Partners presented a metric called “organic revenue growth” that represented the company’s growth in revenue excluding the effects of two reconciling items: acquisitions and foreign exchange impacts.  But from the second quarter of 2012 to year end 2013, MDC Partners incorporated a third reconciling item into its calculation without informing investors of the change, which resulted in higher “organic revenue growth” results.  MDC Partners also failed to give GAAP metrics equal or greater prominence to non-GAAP metrics in its earnings releases.

“The reason these rules are in place is so investors can compare non-GAAP financial measures to those consistently defined under GAAP requirements,” said G. Jeffrey Boujoukos, Director of the SEC’s Philadelphia Regional Office.  “The lack of equal or greater prominence for GAAP measures is a practice that we will continue to focus upon.”

MDC Partners consented to the SEC’s cease-and-desist order without admitting or denying the findings.

The SEC’s continuing investigation is being conducted by Brendan P. McGlynn, Oreste P. McClung, Lisa M. Candera, and Brian R. Higgins of the Philadelphia office, and supervised by Mr. Boujoukos.




SEC Deputy Chief of Staff Nathaniel Stankard to Leave Agency

Wed, 18 Jan 2017 12:30:24 -0500

The Securities and Exchange Commission today announced that Nathaniel Stankard, deputy chief of staff for policy, will be leaving the agency. 

Since being named deputy chief of staff in May 2013, Mr. Stankard has served as a senior advisor to Chair Mary Jo White on a broad range of complex legal and policy matters, including all aspects of rulemakings before the Commission, significant market events, and the agency’s implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.  He has also been responsible for coordinating teams from across the agency to implement the rulemaking agenda of the Commission and has served as the Chair’s principal policy liaison to the Financial Stability Oversight Council and other federal financial regulators.

SEC Chair Mary Jo White said, “Nathaniel is brilliant, always provides thoughtful and sound legal advice, and has extraordinary judgment.  He is truly a key reason why so many important rules got done.  He is a person of the highest character and unparalleled capability, always doing what is right and just on behalf of America’s investors and our markets. I could not be more fortunate, proud, or grateful to have had Nathaniel as such an integral part of my team.”

“The strength of the Commission is rooted in its staff, and I have been privileged to work closely with extraordinary teams from across the agency to enhance the Commission’s oversight of the securities markets,” said Mr. Stankard.  “I am deeply grateful for the opportunity to serve under Chair White’s leadership to protect investors.”

During Mr. Stankard’s time working with Chair White, the Commission advanced more than 50 major rulemakings, including significant measures addressing equity market structure, asset management, corporate disclosures, over-the-counter derivatives, capital raising by smaller issuers, credit rating agency operations, asset-backed securities, clearance and settlement, and municipal advisors.

Mr. Stankard joined the Commission in June 2010 as counsel to the director of the Division of Trading and Markets.  Previously, he was an executive director at Morgan Stanley and an associate at the law firm of Cleary Gottlieb Steen & Hamilton LLP.

Mr. Stankard earned his law degree cum laude from Harvard Law School and his undergraduate degree in economics magna cum laude from Oberlin College.




General Motors Charged With Accounting Control Failures

Wed, 18 Jan 2017 11:35:00 -0500

The Securities and Exchange Commission today announced that General Motors has agreed to pay a $1 million penalty to settle charges that deficient internal accounting controls prevented the company from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.

According to the SEC’s order, when loss contingencies such as a potential vehicle recall arise, accounting guidance requires companies like General Motors to assess the likelihood of whether the potential recall will occur, and provide an estimate of the associated loss or range of loss or otherwise provide a statement that such an estimate cannot be made.  The SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other General Motors personnel understood in the spring of 2012 that there was a safety issue at hand.  Therefore, during at least an 18-month period, accountants at General Motors did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch.   

“Internal accounting controls at General Motors failed to consider relevant accounting guidance when it came to considering disclosure of potential vehicle recalls,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Proper consideration of loss contingencies and assessment of the need for disclosure are vital to the preparation of financial statements that conform with Generally Accepted Accounting Principles.” 

Without admitting or denying the charges, General Motors consented to the SEC’s order finding that the company violated Section 13(b)(2)(B) of the Securities Exchange Act by not devising and maintaining a sufficient system of internal accounting controls.

The SEC’s investigation was conducted by Peter Pizzani, Lisa Knoop, Scott York, and Thomas P. Smith Jr.  The case was supervised by Sanjay Wadhwa.




Medical Device Company Charged With Accounting Failures and FCPA Violations

Wed, 18 Jan 2017 11:20:00 -0500

The Securities and Exchange Commission today announced that Texas-based medical device company Orthofix International has agreed to admit wrongdoing and pay more than $14 million to settle charges that it improperly booked revenue in certain instances and made improper payments to doctors at government-owned hospitals in Brazil in order to increase sales.

Four then-executives at Orthofix also agreed to pay penalties to settle cases related to the accounting failures, which according to the SEC’s order involved Orthofix improperly recording certain revenue as soon as a product was shipped despite contingencies requiring certain events to occur in order to receive payment in the transaction.  In other instances, Orthofix immediately recorded revenue when it had provided customers with significant extensions of time to make payments.  The accounting failures caused the company to materially misstate certain financial statements from at least 2011 to the first quarter of 2013.

“Orthofix’s accounting failures were widespread and significant, causing Orthofix to make false statements to the public about its financial condition,” said Antonia Chion, Associate Director in the SEC’s Enforcement Division.

A separate SEC order finds that Orthofix violated the Foreign Corrupt Practices Act (FCPA) when its subsidiary in Brazil schemed to use high discounts and make improper payments through third-party commercial representatives and distributors to induce doctors under government employment to use Orthofix’s products.  Fake invoices were used for purported services.

Kara N. Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, added, “Orthofix did not have adequate internal controls across all its subsidiaries and failed to detect and prevent the improper payments in Brazil that were intended to boost sales.”

Orthofix agreed to pay an $8.25 million penalty to resolve the accounting violations and more than $6 million in disgorgement and penalties to settle the FCPA charges.  The company agreed to retain an independent compliance consultant for one year to review and test its FCPA compliance program.  The SEC’s order noted Orthofix’s cooperation and remedial acts.

Jeff Hammel, a former accounting executive in Orthofix’s largest business segment, agreed to pay a $20,000 penalty and former sales executives Kenneth Mack and Bryan McMillan agreed to pay penalties of $40,000 and $25,000 respectively.  Hammel also agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Hammel to apply for reinstatement after two years.  Orthofix’s former corporate CFO Brian McCollum agreed to pay a $35,000 penalty and reimburse the company $40,885 for bonuses he received during the period when the company committed accounting violations.  The four consented to the SEC’s orders without admitting or denying the findings.

Orthofix’s then-CEO Robert Vaters, who was not charged with wrongdoing, has reimbursed the company $72,886 for cash bonuses and certain stock awards he received during the period when the company committed accounting violations.  Therefore, it wasn’t necessary for the SEC to pursue a Sarbanes-Oxley Section 304(a) clawback action against him. 

The SEC’s investigation into the accounting violations was conducted by Noel Gittens and Richard Haynes with assistance from Gregory Bockin.  It was supervised by Ricky Sachar and Ms. Chion.  The SEC’s investigation into the FCPA violations was conducted by Sana Muttalib and supervised by Ansu N. Banerjee and Ms. Brockmeyer.  The SEC appreciates the assistance of the Comissao de Valores Mobiliarios in Brazil.




SEC Charges Businessman With Misusing EB-5 Investments

Tue, 17 Jan 2017 16:45:00 -0500

The Securities and Exchange Commission today announced fraud charges against an Oakland, Calif.-based businessman accused of misusing money he raised from investors through the EB-5 immigrant investor program intended to create or preserve jobs for U.S. workers.

The SEC alleges that Thomas M. Henderson and his company San Francisco Regional Center LLC falsely claimed to foreign investors that their $500,000 investments would help create at least 10 jobs within several distinct EB-5 related businesses he created, including a nursing facility, call centers, and a dairy operation.  This would qualify the investors for a potential path to permanent U.S. residency through the EB-5 program.

But according to the SEC’s complaint, Henderson jeopardized investors’ residency prospects and combined the $100 million he raised from investors into a general fund from which he allegedly misused at least $9.6 million to purchase his home and personal items and improperly fund several personal business projects such as Bay Area restaurants that were unrelated to the companies he purportedly established to create jobs consistent with EB-5 requirements.  According to the SEC’s complaint, Henderson also improperly used $7.5 million of investor money to pay overseas marketing agents, and he shuffled millions of dollars among the EB-5 businesses to obscure his fraudulent scheme.

“We allege that Henderson exploited a program meant to create employment for Americans and abused the trust of investors seeking residency in the U.S.,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Rather than using investor funds to create jobs and develop communities as promised, Henderson allegedly played a shell game with investor money to buy his home and support personal ventures.”

The SEC is seeking a court order appointing a receiver over San Francisco Regional Center and Henderson’s other businesses involved in the alleged fraud.  The SEC’s complaint, filed in U.S. District Court for the Northern District of California, seeks preliminary injunctions as well as disgorgement of ill-gotten gains plus interest, penalties, and other relief.

The SEC’s investigation was conducted by Thomas Eme and Ellen Chen of the San Francisco office and supervised by Steven Buchholz.  The litigation will be led by Andrew Hefty and Susan LaMarca.  The SEC appreciates the assistance of the U.S. Citizenship and Immigration Services, which administers the EB-5 program.   




Allergan Paying $15 Million Penalty for Disclosure Failures During Merger Talks

Tue, 17 Jan 2017 16:20:00 -0500

The Securities and Exchange Commission today announced that Allergan Inc. has agreed to admit securities law violations and pay a $15 million penalty for disclosure failures in the wake of a hostile takeover bid.

The SEC’s order finds that Allergan failed to disclose in a timely manner its negotiations with potentially friendlier merger partners in the months following a tender offer from Valeant Pharmaceuticals International and co-bidders in June 2014.  Allergan publicly stated in a disclosure filing that the Valeant bid was inadequate and it was not engaging in negotiations that could result in a merger.  It was required to amend the filing if a material change occurred.  According to the SEC’s order, Allergan never publicly disclosed material negotiations it entered with a different company that would have made it more difficult for Valeant to acquire a larger combined entity.  And after those negotiations failed, the investing public wasn’t informed that Allergan entered into merger talks with Actavis, the company that ultimately acquired Allergan, until the announcement that a merger agreement had been executed.

“Allergan failed to fully and timely disclose information about potential merger transactions it was negotiating behind the scenes in response to the Valeant bid,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “As outlined in our order, Allergan was slow to act even after SEC staff reminded the company about its disclosure obligations.”

Allergan, now a wholly owned subsidiary of Allergan plc, admitted the facts in the SEC’s cease-and-desist order finding that the company violated Section 14(d) of the Securities Exchange Act of 1934 and Rule 14d-9. 

The SEC’s investigation was conducted by John Lehmann, Mark Germann, and Charles Riely of the New York office, and the case was supervised by Sanjay Wadhwa.




10 Firms Violated Pay-to-Play Rule By Accepting Pension Fund Fees Following Campaign Contributions

Tue, 17 Jan 2017 12:50:00 -0500

The Securities and Exchange Commission today announced that 10 investment advisory firms have agreed to pay penalties ranging from $35,000 to $100,000 to settle charges that they violated the SEC’s investment adviser pay-to-play rule by receiving compensation from public pension funds within two years after campaign contributions made by the firms’ associates.

According to the SEC’s orders, investment advisers are subject to a two-year timeout from providing compensatory advisory services either directly to a government client or through a pooled investment vehicle after political contributions were made to a candidate who could influence the investment adviser selection process for a public pension fund or appoint someone with such influence.  The SEC’s orders find that these 10 firms violated the two-year timeout by accepting fees from city or state pension funds after their associates made campaign contributions to elected officials or political candidates with the potential to wield influence over those pension funds.

“The two-year timeout is intended to discourage pay-to-play practices in the investment of public money, including public pension funds,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Advisory firms must be mindful of the restrictions that can arise from campaign contributions made by their associates.” 

Without admitting or denying the findings, the 10 firms consented to the SEC’s orders finding they violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-5.  The firms are censured and must pay the following monetary penalties:

The SEC’s investigations were coordinated by Louis A. Randazzo, who conducted them along with Kevin B. Currid, Brian Fagel, Natalie G. Garner, William T. Salzmann, and Monique Winkler of the Public Finance Abuse Unit and Kelly Gibson and Benjamin D. Schireson of the Philadelphia Regional Office.  




BlackRock Charged With Removing Whistleblower Incentives in Separation Agreements

Tue, 17 Jan 2017 11:20:00 -0500

The Securities and Exchange Commission today announced that New York-based asset manager BlackRock Inc. has agreed to pay a $340,000 penalty to settle charges that it improperly used separation agreements in which exiting employees were forced to waive their ability to obtain whistleblower awards.

According to the SEC’s order, more than 1,000 departing BlackRock employees signed separation agreements containing violative language stating that they “waive any right to recovery of incentives for reporting of misconduct” in order to receive their monetary separation payments from the firm.

BlackRock added the waiver provision in October 2011 after the SEC adopted its whistleblower program rules, and the firm continued using it in separation agreements until March 2016.

“BlackRock took direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Asset managers simply cannot place restrictions on the ability of whistleblowers to accept financial awards for providing valuable information to the SEC.”

Jane Norberg, Chief of the Office of the Whistleblower, added, “This enforcement action against BlackRock underscores our ongoing commitment to ensure the lines of communication between whistleblowers and the SEC remain unimpeded.  Companies should review and revise their agreements that stifle whistleblowers from reporting to the SEC.”

BlackRock consented to the SEC’s order without admitting or denying the findings that it violated Rule 21F-17.  The order notes that BlackRock voluntarily revised its separation agreement and took a number of remedial actions, including the implementation of mandatory yearly training to summarize employee rights under the SEC’s whistleblower program.

The SEC’s investigation was conducted by Alfred Tierney and Luke Pazicky and supervised by Adam Aderton of the Asset Management Unit.  




Chemical and Mining Company in Chile Paying $30 Million to Resolve FCPA Cases

Fri, 13 Jan 2017 15:30:00 -0500

The Securities and Exchange Commission today announced that Chilean-based chemical and mining company Sociedad Quimica y Minera de Chile S.A. (SQM) agreed to pay more than $30 million to resolve parallel civil and criminal cases finding that it violated the Foreign Corrupt Practices Act (FCPA).

According to the SEC’s order, SQM made nearly $15 million in improper payments to Chilean political figures and others connected to them.  Most of the payments were made based on fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.  The payments occurred for at least a seven-year period.

“SQM permitted millions of dollars in payments to local politicians while failing for years to exercise proper oversight over a key discretionary account and internal controls,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.

SQM agreed to pay a $15 million penalty to settle the SEC’s charges and a $15.5 million penalty as part of a deferred prosecution agreement announced today by the U.S. Department of Justice.  SQM agreed to retain an independent compliance monitor for two years and self-report to the SEC and Justice Department for one year after the monitor’s work is complete.

The SEC’s investigation, which is continuing, is being conducted by William B. McKean.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section.




Morgan Stanley Paying $13 Million Penalty for Overbilling Clients and Violating Custody Rule

Fri, 13 Jan 2017 12:55:00 -0500

The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney has agreed to pay a $13 million penalty to settle charges that it overbilled investment advisory clients due to coding and other billing system errors.  The firm also violated the custody rule pertaining to annual surprise examinations.

The SEC’s order finds that Morgan Stanley overcharged more than 149,000 advisory clients because it failed to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements.  Morgan Stanley also failed to validate billing rates contained in the firm’s billing system against client contracts, fee billing histories, and other documentation.

According to the SEC’s order, Morgan Stanley received more than $16 million in excess fees due to the billing errors that occurred from 2002 to 2016.  Morgan Stanley has reimbursed this full amount plus interest to affected clients.

“Investors must be able to trust that their investment advisers have put appropriate safeguards in place to ensure accurate billing.  The long-running deficiencies in those safeguards at Morgan Stanley resulted in 36 different types of billing errors that caused overcharges to customers,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The SEC’s order further finds that Morgan Stanley failed to comply with the annual surprise custody examination requirements for two consecutive years when it did not provide its independent public accountant with an accurate or complete list of client funds and securities for examination.  Morgan Stanley also failed to maintain and preserve client contracts.

“The custody rule’s surprise examination requirement is designed to provide clients protection against assets being misappropriated or misused,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office.  “Morgan Stanley failed in consecutive years to do what was required of it to give investment advisory accounts that important protection.”

Without admitting or denying the findings that it violated various provisions of the Investment Advisers Act of 1940 and related rules, Morgan Stanley consented to the SEC’s cease-and-desist order and agreed to the $13 million penalty, a censure, and undertakings related to its fee billing and books and records practices.

The SEC’s investigation was conducted by Ranah Esmaili, Kenneth Gottlieb, Nicholas Pilgrim, and Celeste Chase of the New York office, and the case was supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Heather Palmer, Jennifer Klein, and Anthony Fiduccia.




Citadel Securities Paying $22 Million for Misleading Clients About Pricing Trades

Fri, 13 Jan 2017 10:25:00 -0500

The Securities and Exchange Commission today announced that Citadel Securities LLC has agreed to pay $22.6 million to settle charges that its business unit handling retail customer orders from other brokerage firms made misleading statements to them about the way it priced trades.

The SEC’s order finds that Citadel Execution Services suggested to its broker-dealer clients that upon receiving retail orders they forwarded from their own customers, it either took the other side of the trade and provided the best price that it observed on various market data feeds or sought to obtain that price in the marketplace.  The process of taking the other side of the trade of the retail orders is known as “internalization.”

But the SEC’s order finds that two algorithms used by Citadel Securities did not internalize retail orders at the best price observed nor sought to obtain the best price in the marketplace.  These algorithms were triggered when they identified differences in the best prices on market feeds, comparing the SIP feeds to the direct feeds from exchanges.  One strategy, known as FastFill, immediately internalized an order at a price that was not the best price for the order that Citadel Securities observed.  The other strategy, known as SmartProvide, routed an order to the market that was not priced to obtain immediately the best price that Citadel Securities observed. 

"Citadel Securities made misleading statements suggesting that it would provide or try to get the best prices it saw for retail orders routed by other broker-dealers," said Stephanie Avakian, Acting Director of the SEC Enforcement Division.  "Internalizers can't suggest they are doing one thing yet do another when it comes to pricing trades."

As a “wholesale market maker” or “internalizer” that specializes in handling retail orders from investors who are customers of other broker-dealers, Citadel Securities executes approximately 35 percent of the average daily volume of retail equity shares traded in the U.S. markets, according to the SEC’s order.

“These two algorithms represented a small part of Citadel Securities’ internalization business, but they nevertheless affected millions of orders placed by retail investors because of Citadel Securities’ large role in that market,” said Robert Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.  “We are focused on the execution of retail orders and encourage investors to ask brokers, and brokers to ask internalizers, how they are determining best prices for retail orders.” 

The SEC’s order finds that Citadel Securities, which has since discontinued the two algorithms at issue, violated Section 17(a)(2) of the Securities Act from late 2007 through January 2010.  Without admitting or denying the findings, Citadel Securities agreed to be censured and pay $5.2 million in disgorgement of ill-gotten gains plus interest of more than $1.4 million and a penalty of $16 million. 

The SEC’s investigation was conducted by Wm. Max Hathaway, Fuad Rana, David Bennett, Ainsley Kerr, Matthew Koop, John Marino, and Carolyn Welshhans of the Market Abuse Unit, and Stephan Schlegelmilch from the Trial Unit.  Maxwell Clarke and Michael Barnes of the Division of Economic and Risk Analysis provided substantial assistance.  The investigation was supervised by Mr. Cohen. 




Michael J. Osnato Jr., Chief of Enforcement Division’s Complex Financial Instruments Unit, to Leave SEC

Thu, 12 Jan 2017 16:10:00 -0500

The Securities and Exchange Commission today announced that Michael J. Osnato Jr., Chief of the Enforcement Division’s Complex Financial Instruments Unit, is planning to leave the agency later this month. For the past three years, Mr. Osnato led the specialized unit of 45 attorneys and industry experts in offices across the country that investigate potential misconduct related to complex financial products and practices involving sophisticated market participants.  In addition, Mr. Osnato has played a leading role in SEC programs, including the Enforcement Division’s national Cooperation Committee. “Mike has been an insightful and innovative leader of the Enforcement Division’s unit dedicated to policing complex financial instruments and practices,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “As the financial crisis ebbed, Mike proactively refocused the unit toward instruments and practices that disadvantaged retail investors, and put a premium on smart and efficient investigative techniques.  The investing public is safer because of these efforts.” Mr. Osnato said, “It has been a singular honor to serve alongside the talented staff of the Enforcement Division whose professionalism and commitment to fairness knows no equal.  I am particularly proud of my colleagues in the Complex Financial Instruments Unit, who have helped pave the way for the Division’s use of novel and streamlined investigative techniques and data analytics to root out the most sophisticated forms of misconduct in today’s markets.” Under Mr. Osnato’s supervision, the SEC has brought enforcement actions that addressed a wide range of sophisticated misconduct: The SEC’s first three sets of charges involving issuers of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices, against UBS AG, Merrill Lynch, and UBS Financial Services. The SEC’s actions against a Big Three credit rating agency against Standard & Poor’s for post-financial crisis misconduct arising from the rating of complex debt instruments. The SEC’s fraud charges against a high-frequency trading firm that used algorithmically-generated rapid-fire trades to manipulate the closing prices of thousands of NASDAQ-listed stocks. Charges against Merrill Lynch for violating the SEC’s Customer Protection Rule through usage of complex options trades that placed customer funds at risk, the settlement of which involved admissions of wrongdoing and hundreds of millions of dollars in monetary sanctions.   Charges against three Morgan Stanley entities for misleading investors in a pair of residential mortgage-backed securities (RMBS) securitizations that the firms underwrote, sponsored, and issued. The SEC’s charges against four veteran investment bankers at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis. Mr. Osnato joined the SEC’s Enforcement Division in September 2008.  He was promoted to assistant regional director in the SEC’s New York Office in 2010.  Prior to his arrival at the SEC, Mr. Osnato worked at Shearman & Sterling LLP and later at Linklaters LLP in New York.  He earned his bachelor’s degree from Williams College and his law degree from Fordham Law School.[...]



BNY Mellon Settles Charges Stemming From Miscalculations of Regulatory Capital Figures

Thu, 12 Jan 2017 13:20:00 -0500

The Securities and Exchange Commission today announced that BNY Mellon has agreed to pay a $6.6 million penalty to settle charges stemming from miscalculations of its risk-based capital ratios and risk-weighted assets reported to investors.

An SEC investigation found that BNY Mellon deviated from regulatory capital rules by excluding from its calculations approximately $14 billion in collateralized loan obligation assets that the firm consolidated onto its balance sheet in 2010.  BNY Mellon never obtained Federal Reserve Board approval as required under regulatory capital rules to exclude the assets from its calculations.  Due to the miscalculations and the firm’s lack of internal accounting controls to ensure its financial statements were being prepared properly, BNY Mellon understated its risk-weighted assets and overstated certain risk-based capital ratios in quarterly and annual reports from the third quarter of 2010 to the first quarter of 2014.

“Regulatory capital ratios and risk-weighted assets are critical data points for investors in large banking institutions like BNY Mellon,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to aggressively focus on these kinds of disclosures to ensure that control failures do not prevent investors from receiving accurate and timely information.”

Without admitting or denying the charges, BNY Mellon consented to an SEC order finding that it violated internal controls and recordkeeping provisions of the federal securities laws, specifically Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. 

The SEC’s investigation was conducted by Armita Cohen and Amy Flaherty Hartman and the case was supervised by Michael Osnato, Reid Muoio, and Jeffrey Shank.  The SEC appreciates the assistance of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.




Biomet Charged With Repeating FCPA Violations

Thu, 12 Jan 2017 12:15:00 -0500

The Securities and Exchange Commission today announced that a Warsaw, Ind.-based medical device manufacturer has agreed to pay more than $30 million to resolve parallel SEC and Department of Justice investigations into the company’s repeat violations of the Foreign Corrupt Practices Act (FCPA).

Biomet first faced FCPA charges from the SEC and entered into a deferred prosecution agreement with the Department of Justice in March 2012, agreeing to pay more than $22 million to settle both cases.  As part of the SEC settlement, Biomet agreed to retain an independent compliance consultant to review its FCPA compliance program.  After the settlement as Biomet was implementing recommendations from the independent monitor, the company learned about potential anti-bribery violations in Brazil and Mexico and notified the monitor and the SEC in 2013.

The SEC’s order finds that Biomet continued to interact and improperly record transactions with a known prohibited distributor in Brazil, and used a third-party customs broker to pay bribes to Mexican customs officials to facilitate the importation and smuggling of unregistered and mislabeled dental products.

“Biomet didn’t entirely learn its lesson the first time around as it continued to use a prohibited agent in Brazil and engaged in a new bribery scheme in Mexico,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. 

Biomet, which has since been acquired by Zimmer Holdings and renamed Zimmer Biomet, agreed to pay more than $5.82 million in disgorgement plus $702,705 in interest and a $6.5 million penalty for a total of more than $13 million.  Zimmer Biomet also agreed to retain an independent compliance monitor for a three-year period to review its FCPA policies.  As part of the deferred prosecution agreement with the Department of Justice, Zimmer Biomet agreed to pay a fine of more than $17.46 million.

The SEC’s investigation was conducted by Michelle L. Ramos, Robert Dodge, and Shahriar Masud.  The case was supervised by Tracy L. Price.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section and the Federal Bureau of Investigation.




SEC Announces 2017 Examination Priorities

Thu, 12 Jan 2017 11:50:41 -0500

The Securities and Exchange Commission today announced its Office of Compliance Inspections and Examinations’ (OCIE) 2017 priorities.   Areas of focus include electronic investment advice, money market funds, and financial exploitation of senior investors.  The priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing market-wide risks. “These priorities make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice,” said SEC Chair Mary Jo White.  “Whether it is protecting our most vulnerable senior investors or those investing in the trillion dollar money market fund industry, OCIE continues its efficient and effective risk-based approach to ensure compliance with our nation’s securities laws.” “OCIE’s priorities identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements,” said OCIE Director Marc Wyatt. The 2017 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges, and municipal advisors.  Areas of examination focus include: Retail Investors – Protecting retail investors remains a priority in 2017.  OCIE will continue several 2016 initiatives to assess risks to retail investors seeking information, advice, products, and services. It also will undertake examinations to review firms delivering investment advice through electronic mechanisms, sometimes referred to as “robo-advising,” as well as wrap fee programs in which investors are charged a single bundled fee for advisory and brokerage services. Senior Investors and Retirement Investments – OCIE also is continuing its focus on public pension advisers and expanding its focus on senior investors and individuals investing for retirement.  OCIE is broadening its ReTIRE initiative to include reviews of investment advisers and broker-dealers that offer variable insurance products to investors with retirement accounts as well as those advisers that offer and manage target-date funds.  OCIE also will focus more specifically on registrants’ interactions with senior investors, including with respect to identifying financial exploitation. Market-Wide Risks – To help fulfill the SEC’s mission of maintaining fair, orderly, and efficient markets, OCIE will continue its focus on registrants’ compliance with the SEC’s Regulation SCI and anti-money laundering rules.  New initiatives for 2017 include an evaluation of money market funds’ compliance with the SEC’s amended rules, which became effective in October 2016. FINRA – Consistent with OCIE’s goal of enhancing oversight of FINRA to protect investors and the integrity of our markets, it will continue conducting inspections of FINRA's operations and regulatory programs, and focus resources on assessing the examinations of individual broker-dealers. Cybersecurity – OCIE will continue its ongoing initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers and investment advisers. The published priorities for 2017 are not exhaustive and may be adjust[...]



ITG Paying $24 Million for Improper Handling of ADRs

Thu, 12 Jan 2017 11:15:00 -0500

The Securities and Exchange Commission today announced that broker ITG agreed to pay more than $24.4 million to settle charges that it violated federal securities laws when it prompted the issuance of American Depository Receipts (ADRs) without possessing the underlying foreign shares.

ADRs are U.S. securities that represent shares of a foreign company, and for all issued ADRs there must be a corresponding number of foreign shares in custody.  On behalf of counterparties, ITG obtained ADRs from depositary banks that administer ADR programs.

The SEC’s order finds that ITG facilitated transactions known as “pre-releases” of ADRs to its counterparties without owning the foreign shares or taking the necessary steps to ensure they were custodied by the counterparty on whose behalf they were being obtained.  Many of the ADRs obtained by ITG through pre-release transactions were ultimately used to engage in short selling and dividend arbitrage even though they may not have been backed by foreign shares.  ITG’s improper handling of ADRs lasted from 2011 to 2014.

“ITG’s failure to properly supervise its securities lending desk caused ADRs to be issued that were not backed by actual shares, leaving them ripe for potential market abuse,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The SEC’s order finds that ITG violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its employees on its securities lending desk.  Without admitting or denying the findings, ITG agreed to be censured and pay more than $15 million in disgorgement plus more than $1.8 million in interest and a penalty of more than $7.5 million.  The SEC’s order acknowledges ITG’s cooperation in the investigation and its remedial acts.             

The SEC’s continuing investigation is being conducted by Andrew Dean, William Martin, Elzbieta Wraga, and Adam Grace of the New York office, and the case is being supervised by Sanjay Wadhwa.  




SEC Charges Government Contractor With Inadequate Controls and Books and Records Violations

Wed, 11 Jan 2017 13:55:00 -0500

The Securities and Exchange Commission today announced that L3 Technologies Inc. (formerly known as L-3 Communications Holdings Inc.), a contractor for U.S. and various foreign government agencies, has agreed to pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls.  An SEC investigation found that in December 2013, L3’s Army Sustainment Division (ASD) – part of L3’s Aerospace Systems segment – improperly recorded $17.9 million in revenue from a contract with the U.S. Army by creating invoices associated with unresolved claims against the U.S. Army that were not delivered when the revenue was recorded.  While certain employees immediately reported their concerns to L3’s ethics department, the subsequent ethics review failed to uncover the misconduct due, in part, to a failure by internal investigators to adequately understand the billing process.  In October 2014, following a subsequent investigation conducted by outside advisors, L3 concluded it had material weaknesses in its internal controls over financial reporting for the fiscal year ended Dec. 31, 2013 and for the first quarter of 2014.  L3 revised its financial statements from 2011 to 2014. “Adequate internal accounting controls function as a critical safeguard against the type of improper revenue recognition that occurred at L3,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “L3 failed to have such controls in place, which rendered inaccurate its books and records.” According to the SEC’s order, in or around August 2013, ASD executives developed a “Revenue Recovery Initiative” that identified approximately $50 million in work performed under a contract with the U.S. Army that had not been billed.  Because L3 and the U.S. Army had not reached any agreement on payment for the work performed, any revenue recognition for that work would have been improper under relevant accounting rules.  Nonetheless, in December 2013, a senior finance official at ASD requested that 69 invoices be generated – but not delivered – to the U.S. Army, which caused ASD to recognize almost $18 million in revenue.  Because of that revenue, ASD employees barely satisfied an internal target for management incentive bonuses. The SEC’s order finds that immediately after the 69 invoices were generated, ASD employees internally reported to L3’s ethics department, but a subsequent internal investigation concluded that there was no improper revenue recognition and the issue was not promptly raised to the L3’s Audit Committee.  In June 2014, L3 retained outside advisors to conduct an internal investigation, which concluded that the revenue recognized on the undelivered invoices was improper.  This investigation uncovered additional accounting errors in L3’s Aerospace Systems segment from 2011 to 2014, which combined with the improper accounting associated with the 69 undelivered invoices had the effect of overstating the company’s pre-tax income by $169 million. Without admitting or denying the findings, L3 agreed to pay the $1.6 million penalty and consented to the entry of the SEC’s cease-and-desist order finding that it violated the books and records and internal controls provisions of the federal securities laws.   The SEC’s continuing investigation is being conducted by H. Gregory Baker, David Oliwenstein, Christopher Mele, and Steven G. Rawlings of the [...]



SEC: Port Authority Omitted Risks to Investors in Roadway Projects

Tue, 10 Jan 2017 11:35:00 -0500

The Securities and Exchange Commission today announced that the Port Authority of New York and New Jersey has agreed to admit wrongdoing and pay a $400,000 penalty to settle charges that it was aware of risks to a series of New Jersey roadway projects but failed to inform investors purchasing the bonds that would fund them.

The SEC’s order finds that the Port Authority offered and sold $2.3 billion worth of bonds to investors despite internal discussions about whether certain projects outlined in offering documents, including the Pulaski Skyway, ventured outside its mandate and potentially weren’t legal to pursue.  One internal memo noted, “There is no clear path to legislative authority to undertake such projects.” Another memo explicitly identified “the risk of a successful challenge by the bondholders and investors” in connection with the funding of the roadway projects.  But the Port Authority omitted any mention in its offering documents about these risks surrounding its ability to fund the projects.  Its offering documents stated that it issued bonds “only for purposes for which the Port Authority is authorized by law to issue bonds.”

“The Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest.”

The Port Authority is the first municipal issuer to admit wrongdoing in an SEC enforcement action.

The SEC’s order finds that the Port Authority violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  The SEC’s order acknowledges the Port Authority’s cooperation and prompt remedial acts.  The projects at issue have proceeded as planned.

The SEC’s continuing investigation is being conducted by Osman Nawaz and Celeste Chase of the New York office.  The case is being supervised by Sanjay Wadhwa.     




Investment Adviser, Lawyer Settle Charges in Secret Referral Fee Scheme

Mon, 09 Jan 2017 15:05:00 -0500

The Securities and Exchange Commission today announced that a Connecticut-based investment adviser has agreed to admit wrongdoing and pay more than $575,000 to settle charges that he defrauded a client and then compounded his scheme by attempting to mislead SEC investigators while lying to other clients about the status of the SEC’s investigation. According to the SEC’s order against John W. Rafal, he secretly paid a lawyer for referring a legal client’s large account to Essex Financial Services, an investment advisory firm Rafal founded.  Instead of disclosing the referral fee arrangement to the elderly widow who owned the account, as required by law, Rafal and the lawyer agreed to disguise the payments as legal services purportedly provided by the lawyer’s firm.  After other Essex officers discovered and stopped Rafal’s payment arrangement, Rafal continued to secretly pay the lawyer using other accounts he controlled.  The SEC’s order further finds that while the SEC’s investigation was ongoing, Rafal reacted to escalating rumors that he had committed a securities law violation by sending numerous emails to Essex clients falsely stating that the SEC had “fully investigated all matters” and “issued a ‘no action’ letter completely exonerating” him and the firm. According to the SEC’s order, Rafal also tried in vain to throw SEC enforcement investigators off the track.  During testimony while responding to direct questions about the referral fees, Rafal concealed the additional payments he made after Essex halted the arrangement and falsely indicated that the lawyer had returned all the money he was previously paid.  Enforcement investigators referred the suspected obstruction to the SEC’s Office of Inspector General, whose agents conducted a parallel investigation along with the U.S. Attorney’s Office for the District of Massachusetts, which today announced a criminal case against Rafal for obstructing the proceedings of a federal agency. “Rafal misled one client by hiding referral fees, misled other clients by falsely stating the SEC’s investigation was over, and then attempted to mislead those investigating him.  He will now be paying the price for his deceit,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “We will not tolerate attempts to mislead and we will continue to refer possible obstruction cases to the SEC’s Office of Inspector General.” SEC Inspector General Carl Hoecker said, “The charges announced by the U.S. Attorney’s Office reflect the Office of Inspector General’s commitment to investigate individuals who obstruct SEC enforcement activities.” The lawyer involved in the payment scheme, Peter D. Hershman, agreed to pay more than $90,000 to settle SEC charges against him for aiding and abetting Rafal’s securities law violations.  Both Rafal and Hershman also agreed to be barred from the securities industry and from serving as an officer or director of a publicly-traded company, and they agreed to be permanently suspended from appearing and practicing before the SEC as attorneys.  The SEC’s orders prohibit them from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content.  Rafal is no longer affiliated with Essex Financial Services, which agreed to pay more than $180,000 in disgorgement [...]



SEC Charges Two Brokers With Defrauding Customers

Mon, 09 Jan 2017 14:15:00 -0500

The Securities and Exchange Commission today charged two New York-based brokers with fraudulently using an in-and-out trading strategy that was unsuitable for customers in order to generate hefty commissions for themselves.

The SEC’s complaint alleges that Gregory T. Dean and Donald J. Fowler did no reasonable diligence to determine whether their investment strategy involving frequent buying and selling of securities could deliver even a minimal profit for their customers.  Their strategy, which generally involved selling the securities within a week or two of purchase and charging customers a commission for each transaction, allegedly resulted in substantial losses for 27 customers.

“This case marks another chapter in the SEC’s pursuit of brokers who deploy excessive trading as a strategy in customer accounts to enrich themselves at customers’ expense,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker Dealer Task Force.  “The allegations in our complaint are based on our examination of trading patterns across more than two dozen customer accounts, and this trading data shows that only the brokers stood to profit from this cost-laden in-and-out strategy.”

The SEC today issued an Investor Alert warning about excessive trading and churning that can occur in brokerage accounts. 

“Investors should be wary of unauthorized trading, frequent sales and purchases, or excessive fees in their brokerage accounts,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “If you do not know why a trade was made or why a fee was charged, ask your broker to explain it to you.”

The SEC’s complaint, filed in federal court in Manhattan, charges Dean and Fowler with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation was conducted by Kristin M. Pauley, David Stoelting, Barry O’Connell, Nathaniel I. Kolodny, Michael P. Fioribello, Leslie Kazon, and Thomas P. Smith Jr. in the New York office.  The litigation will be led by Mr. Stoelting and Ms. Pauley.  The case is being supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Jennifer A. Grumbrecht, Jeffrey Berfond, Glen Riddle, and Margaret Lett.