A look forward – a look back:
Those who have long argued for a statutory definition of insider trading may be about to obtain their wish. Last week the U.S. House of Representatives passed a bill which defines and precludes insider trading. This is one key issue which has long lingered on Capitol Hill, but which may be resolved in 2020 if the draft legislation passes the Senate
SEC Enforcement seems to have refocused last week. In recent months the focus has been cases centered on retail investors and seniors. While one offering fraud action was filed last week, the key topic seems to have been financial fraud. Indeed, five of the six cases brought last week focused on financial fraud.
SEC Enforcement – Filed and Settled Actions
The Commission filed 5 civil injunctive action and 6 administrative proceedings last week, exclusive of 12j and tag-along actions.
Offering fraud: SEC v. Burroughs, Civil Action No. 3:19-cv-01913 (D. Conn. Filed Dec. 4, 2019). Defendant Lester Burroughs has been employed as either an investment adviser representative or an investment adviser for years. Beginning in November 2012, he implemented a scheme which targeted seniors, enticing them to invest in instruments he called a Guaranteed Interest Contract. The Contract, or GIC, was represented to pay a guaranteed return for the life of the contract of either 4% or 7% per year. This Contract would thus pay a safe, guaranteed and above market return. Over a period of several years Mr. Burroughs sold a number of the Guaranteed Interest Contracts to seniors. In some instances, the money from one or more investors was used to pay others. In others, Mr. Burroughs misappropriated the investor funds. No investor money was put into a Guaranteed Interest Contract. The Commission’s complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. See Lit. Rel. No. 24681 (Dec. 5, 2019). The U.S. Attorney’s Office for the Southern District of Connecticut filed a parallel criminal action.
Financial fraud: SEC v. Peavler, Civil Action No. 1:1-cv4804 (S.D. Ind. Filed Dec. 12, 2019) is an action which names as defendants Bobby Peavler and William Meet, respectively the president and CFO and also CFO for a period of Celadon Group, Inc. , a large trucking firm. The complaint centers on a financial fraud implemented by the company and its executives involving two third paritesin 2016 and 2017 to falsely inflate revenue. Specifically, during the period the firm owned a large number of trucks that had significantly decreased in value. To boost the firm’s revenues Defendants engaged in what was essentially a sham round trip transaction, selling a large number of trucks at inflated prices and then repurchasing them. The impact of the transaction was to fraudulently inflate revenues. Defendants also covered-up the transaction and concealed it from the auditors. The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 20(a) and 20(e) and Securities Act Section 17(a). The case is pending. The U.S. Attorney’s Office for the Southern District of Indiana filed a parallel criminal action.
Financial fraud: SEC v. Iconix Brand Group, Civil Action No. 1:19-cv-11150 (S.D.N.Y. Filed Dec. 5, 2019) is an action which names as a defendant the company, and in two related actions, three of is senior executives. The firm is one of the world’s premier brand management companies and owned a diversified portfolio of strong global brands. In 2013 and 2014 the firm and its executives engaged in a multi-faceted financial fraud. First, the firm entered into an agreement with a joint venture partner to sell intellectual property rights at artificially inflated prices. Recording the revenues from the fraudulent transaction permitted the firm to meet analysts’ expectations. Second, the company failed to write off certain impaired assets despite clear evidence that they were impaired. This improperly inflated revenues in certain quarters in 2013. Finally, the firm failed to recognize impairments on three brands despite the presence of clear indicators of impairment. As a result of these improprieties the firm recognized millions of dollars of fraudulent revenues from 2013 to 2015. The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) and Securities Act Section 17(a). The company resolved the matter by consenting to the entry of a permanent injunction based on the sections cited in the complaint. The firm also agreed to pay a penalty of $5.5 million which recognizes the cooperation of the company and its remedial efforts. See also SEC v. Cole, Civil Action No. 1:19-cv-11148 (S.D.N.Y. Filed Dec. 5, 2019)(action charging CEO Neil Cole and COO Seth Horowitz based on essentially the same conduct and, in addition trading in the firm shares; the complaint alleges violations of Exchange Act Sections (10), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5), Securities Act Section 17(a) and SOX Section 304(a); Mr. Horwitz consented to the entry of a permanent injunction and a permanent officer and director bar; he will also pay disgorgement and prejudgment interest of $147000 and a penalty to be determined later; In the Matter of Warren Clamen, Adm. Proc. File No. 3-19612 (Dec. 5, 2019)(charging the former CFO with violations of Securities Act Sections 17(a)(2) &(3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B); resolved with the entry of a cease and desist order and an agreement to pay disgorgement and prejudgment interest of about $50,0000 and a penalty of $150,000; the Order also suspends the former CFO’s right to appear and practice before the Commission as an accountant with the right to reapply after three years). A parallel action was filed by the U.S. Attorney’s Office for the Southern District of New York). See also Lit. Rel. No 24682 (Dec. 5, 2019).
Financial fraud: SEC v. SBB Research Group, LLC, Civil Action No. 19-cv-6473 (N.D. Ill. Filed Dec. 4, 2019) is an action which names as defendants the firm, a registered investment adviser to a series of funds and its founder, and Samuel Barnett. The firm focused largely on the sale of structured notes. Investors were primarily members of the Barnett family but later outside investors were sought. Investors were told that the notes would be priced at “fail value.” Rather than following that policy, the firm adopted its own processes which permitted the notes to be over-valued. The fees charged clients were also over overstated by about $1.4 million as a result of the valuation policies. After the exam staff discovered the improper valuations the firm tried to conceal them from investors. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4). The action is pending.
CFTC annual report
The CFTC Division of Enforcement issued its Third Annual Report (here). The Report cites four key priorities of the Division: Market integrity, protecting customers, individual accountability and coordination with criminal and other authorities. The numbers in the report largely reflect the goals of the Division. First, the number of actions brought last fiscal year exceeded those brought in every fiscal year this decade except 2018. Second, the largest category of cases brought in 2019 involved commodities fraud at 25. The second largest category of cases involved manipulation and spoofing at 16. That represents more cases involving manipulation and spoofing than in any other year this decade except 2019. Indeed, from 2009 through 2017 the Commission filed an average of 5 manipulation cases per year. In 2019 the agency filed more than triple that number, suggesting an increased focus on market integrity.
Third, in fiscal 2019 the CFTC also moved forward with its goal of coordinating with other regulators. Last fiscal year the agency filed more actions tied to a parallel criminal case than in any other year this decade – 16. The next closest year was fiscal 2018 when fourteen actions had a parallel criminal case. This suggests that the cases brought last year may have centered on more serious misconduct than in other years. Finally, in fiscal 2019 the Division moved forward not just in implementing its four key themes but also in other areas such as transparency, risk management and cooperation. For example, the Division helped achieve greater transparency last year by publishing its Enforcement Manual which provides significant insight into the operations of the Division.
Remarks: Danielle Press, Commissioner of the Australian Securities and Investments Commission, delivered remarks at the FPA Professionals Congress, Melbourne (Nov. 28, 2019). Her remarks concerned in part enforcement and the focus of the agency on cases that have a high degree of deterrence (here).
Report: The Securities and Futures Commission published its latest Quarterly Report summarizing key developments from July to September 2019 (Dec. 5, 2019)(here). The Report reviews two consultations opened during the period, the introduction of new safeguards for client assets. It also includes a number of statistics regarding the number of registrants and licensed corporations which generally increased since last year.
Remarks: Edward Robinson, Deputy Managing Director (Economic Policy) & Chief Economist, Monetary Authority of Singapore, delivered remarks at the IMF High-Level Peer-to-Peer Forum on Central Ban Communications (Dec. 4, 2019). His remarks discussed the shift to a high degree of transparency by central banks (here).
Anticorruption: The Serious Frauds Office confirmed it is investigating Glencore PLC for suspected bribery. (Dec. 5, 2019).