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SEC enforces rules regarding use of non-GAAP measures and undisclosed perks

Last week, the Securities and Exchange Commission (SEC) made good on its promises to enforce violations of its non-GAAP financial measure disclosure rules. MDC Partners agreed to pay a $1.5 million dollar penalty to settle the SEC’s charges relating to non-GAAP disclosures made by the company. The SEC alleged that MDC Partners had misused several non-GAAP measures in its earnings releases and periodic reporting and that MDC Partners had failed to disclose perks that it had provided to its former chief executive officer.…

Late Form 4s aren’t just embarrassing anymore

Yesterday, the SEC announced penalties totaling approximately $2.6 million against directors, officers, beneficial owners and issuers for failure to promptly report information about holdings and transactions in company stock.

The primary enforcement weapon for these types of failures historically has been public shaming: Rule 405 of Regulation S-K requires issuers to identify insiders who failed to file Section 16 reports on time during the previous year. But, apparently, based on yesterday’s announcement, the SEC also will levy fines against issuers and individual insiders for chronic filing failures.

Settled fines for individuals ranged from approximately $25,000 to $100,000. Six publicly-traded companies settled claims that they contributed to the filing delinquencies of their insiders and paid fines ranging from $75,000 to $150,000.…

SEC Agrees to First Ever Deferred Prosecution Agreement With An Individual

A “deferred prosecution agreement” (or DPA) is not a new concept to government prosecutors or to SEC Chairman Mary Jo White, but it is new to the SEC. Under a DPA, the government agrees to withhold prosecution in exchange for enforcement assistance — providing information, implementing internal compliance policies, or other cooperation with SEC investigations.

This tool has been around for a long time (Mary Jo White used it back in her days as a federal prosecutor) but the SEC did not use it until 2011 when it agreed to a DPA with the steel pipe products company Tenaris S.A. In agreeing to the Tenaris DPA, the SEC announced “its first-ever use of the approach to facilitate and reward cooperation in SEC investigations.” The SEC promised to refrain from civil prosecution of anti-bribery charges against Tenaris in exchange for the company’s strengthening and enforcing stricter internal compliance policies.

Now, the Commission announced that it has, for the first time, agreed to a DPA with an individual, Scott Herckis of Heppelwhite Fund LP. Heppelwhite, a Connecticut-based hedge fund, was charged in 2012 with misleading investors and misappropriating fund assets. Herckis was the fund’s administrator from 2010 to 2012. The Commission credits Herckis’ “voluntary and significant cooperation” in its decision to file an enforcement action against Hepplewhite. Last month, a federal judge in New York ordered the distribution of $6 million of the assets of Heppelwhite’s founder, Berton Hochfeld, to defrauded investors.

Under the DPA, Herckis still faces penalties for his …

SAC Capital Breaks Its Own Record, Settles Insider Trading Charges For $1.2 Billion

In March, an affiliate of SAC Capital agreed to a record high settlement of $616 million for charges of insider trading. As it turned out, the SEC was only getting started with the company and its owner, Steve Cohen. In July, both Cohen and SAC Capital were themselves indicted on insider trading.

Based on reports, SAC Capital agreed earlier this week to settle its charges for $1.2 billion, shattering the record again. In addition, the company agreed to plead guilty to each count in the indictment and close its investment advisory business. The indictment accused the company, among other things, of fostering a culture of insider trading, citing “institutional failure.”

As if setting a new record-high settlement wasn’t enough, the settlement terms give no shelter to Cohen, personally. The settlement states outright that it provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense.” By refusing to grant immunity to Cohen in this deal, the SEC confirmed that it will continue its civil investigation of the billionaire hedge fund manager and is even considering criminal charges in the future.

The settlement still needs to be approved by the federal court in New York. The hearing is scheduled for Friday. For more, Dealbook has a good analysis of the settlement.…

Mark Cuban Wins Insider Trading Trial

After “refusing to be bullied” into settlement, Mark Cuban, the billionaire owner of the Dallas Mavericks, won over a Texas jury and was cleared of insider trading charges brought by the SEC. The nine-person jury in the federal court in Dallas determined that Cuban did not violate federal securities laws in selling his stake in Mamma.com in 2004. Cuban was accused of using material, non-public information in deciding to sell his Mamma.com shares, avoiding a $750,000 loss.

The trial centered around a conversation between Cuban and then-CEO of Mamma, Guy Faure, in which Faure informed Cuban of an upcoming equity transaction that would dilute Cuban’s ownership stake in the company. Testimony at the trial boiled down to comparing Faure’s and Cuban’s accounts of their conversation. In the end, the SEC failed to convince the jury, among other elements of insider trading, that Cuban promised to keep the information confidential or that the information was not already in the public domain.

It is a big win for Cuban, who chose to take the SEC to trial over negotiating a settlement. Cuban was pleased with the outcome, but said “it’s not like winning a [Mavericks] championship.” A spokesman for the SEC, John Nester, said the agency will “respect the jury’s decision,” but it “will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws.”  …

SEC Agrees to $5 Million Settlement With Two Brazilian Insider Traders

On Oct. 10, 2013, the Securities and Exchange Commission (SEC) announced that Rodrigo Terpins and his brother, Michel Terpins, have agreed to pay $5 million to settle charges that they were behind suspicious trading in call H.J. Heinz Company options one day before the company publicly announced its acquisition by Berkshire Hathaway and 3G Capital. In an amended complaint filed in federal court in Manhattan, the SEC alleges that Rodrigo Terpins, through a Caymans Islands-based entity named Alpine Swift, placed the order to purchase nearly $90,000 in option positions in Heinz based on material non-public information that he received from his brother Michel Terpins.

On Feb. 14, 2013, Heinz announced that Berkshire Hathaway and 3G Capital agreed to acquire Heinz in a deal valued at $28 billion, which resulted in a gain of approximately $1.8 million or an increase by nearly 2,000 percent of the original investment. The timing, size and profitability of the trades as well as the lack of a prior history of Heinz trading in the Alpine Swift account made the transactions highly suspicious in the wake of the Heinz announcement. Shortly thereafter, the SEC froze the assets in a Swiss-based trading account.…

SEC Charges Former VP of IR with Violation of Reg FD

On September 6, 2013, in its first Regulation FD enforcement action in almost two years, the SEC charged the former VP of IR for First Solar, Inc. ("First Solar") with violating Regulation FD. 

An SEC investigation determined that Lawrence Polizzotto violated Regulation FD when he indicated in telephone conversations with certain analysts that First Solar was not likely to receive a significant loan guarantee from the U.S. Department of Energy.  After becoming aware of the selective disclosure, First Solar issued an press release the next morning.

Mr. Polizzotto agreed to settle the SEC’s charges without admitting or denying the findings.  He agreed to pay $50,000 to settle the SEC’s charges and agreed to cease and desist from causing any violations and any future violations of Regulation FD and Section 13(a) of the Securities and Exchange Act.

The SEC determined that it would not bring an enforcement action against First Solar due to the its "extraordinary cooperation" with the investigation among other factors.  Prior to Mr. Polizzotto’s selective disclosure, First Solar cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD.  In addition to immediately issuing a press release upon becoming aware of the selective disclosure, First Solar quickly reported the misconduct to the SEC.  The company also conducted additional Regulation FD training as a remedial measure.…

Feds Announce Indictment Against SAC Capital Advisors

Federal prosecutors and the F.B.I. today announced a criminal indictment against SAC Capital Advisors, the embattled hedge fund managed by billionaire Steven Cohen, based on an alleged broad conspiracy to commit securities fraud through insider trading. The indictment against the hedge fund itself — as opposed to its employees — could have disastrous consequences for the fund, including a potential exodus by its investors.

The indictment of SAC Capital is by far the largest crack yet in the company’s bow. The fund has already seen two of its employees charged with insider trading, and an SAC Capital affiliate, CR Intrinsic, recently agreed to pay over $600 million to settle SEC charges that it traded on nonpublic information about clinical pharmaceutical trials — the largest settlement in SEC history. Then, just last Friday, the SEC announced charges against Steven Cohen for failing to adequately supervise his employees and ignoring signs of suspicious trading activity.…

District Court Dismisses Conflict Minerals Challenge

On July 23, 2013, the United States District Court for the District of Columbia dismissed the challenge to the Securities and Exchange Commission (SEC) conflict minerals rules (the Rules) brought by a group of trade associations. The Rules were issued under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and require that public companies disclose the country of origin of certain minerals used in the products they manufacture or contract to manufacture.

Court Decision

The court determined, among other things, that:…

Second Circuit Holds Statute of Repose for Securities Claims Cannot Be Circumvented

The Second Circuit’s holding in Police & Fire Retirement Sys. of City of Detroit v. IndyMac MBS, Inc., Nos. 11-2998-cv(L) & 11-3036-cv(CON), 2013 WL 3214588 (June 27, 2013) confirms that Section 13’s three-year statute of repose is indeed iron-clad. The case originated as a putative class action brought against IndyMac for fraud in the sale of mortgage pass-through certificates. The Southern District of New York dismissed some of the claims on the basis that the named plaintiffs had not actually purchased the securities at issue and therefore lacked standing to sue. Other members of the putative class who had purchased the securities at issue then sought to intervene in the action to revive the dismissed claims.

Although the statute of repose had passed at this point, the proposed interveners invoked the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held that the filing of a class action tolled any applicable statute of limitations with respect to the claims of putative class members. The proposed interveners argued that the American Pipe rule should apply equally to a statute of repose. But the district court, as well as the Second Circuit, found this to be an apples-to-oranges comparison and rejected intervention.…

SEC Brings Civil Charges Against Cohen, Asks For Ban

Friday afternoon, the Securities and Exchange Commission (“SEC”) announced that it filed charges against Steven Cohen, manager of SAC Capital Advisors (“SAC Capital”), for failing to adequately supervise his employees and ignoring signs of suspicious trading activity. Cohen is alleged to have missed warning signs that “any reasonable hedge fund manager” should have seen, though the charges fall short of alleging Cohen was directly involved in insider trading. The SEC alleges SAC Capital realized $275 million in profits or avoided losses, and is asking for Cohen to be banned from overseeing investor funds.…

SEC Charges Revlon with Misleading Shareholders in Going Private Transaction

On June 13, 2013, the Securities and Exchange Commission (“SEC”) charged Revlon with violating federal securities laws when the company misled shareholders during a going private transaction.  Specifically, the SEC found that Revlon violated Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3(b)(1)(iii), which prohibits issuers and their affiliates in going private transactions from directly or indirectly engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit.

In its investigation, the SEC found that in connection with a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon erected “informational barriers” or engaged in what one employee termed as "ring fencing" that deprived the Revlon independent board members from knowing critical information (i.e., a third-party financial adviser found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders). The trustee administering Revlon’s 401(k) plan determined that 401(k) members could only tender their shares if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) participants would receive was at least equal to the fair market value of the exchanged common stock shares.

The SEC’s order determined that, in an attempt to avoid a potential disclosure obligation, Revlon undertook a number of actions to avoid receiving the adequate consideration determination from the third-party adviser, including the following:

  • Revlon amended the trust agreement it had with the trustee to ensure that the trustee would

This Week in SEC Enforcement Activity

State of Illinois Charged With Misleading Muni Bond Investors

The SEC charged the state of Illinois with failing to inform municipal bond investors of potential issues with its pension funding plan. The state failed to disclose that its pension obligations were at risk of “structural underfunding” issues associated with the state’s statutory funding plan, and misrepresented the overall risk associated with the pension’s financial condition.  Illinois offered $2.2 billion in bonds during 2005 to 2009.…

SEC Enforcement Activity: March 4-8

Mark Cuban Insider Trading Case Set For Trial

Mark Cuban, the charismatic owner of the NBA’s Dallas Mavericks, lost his attempt to dismiss the SEC’s insider trading case against him, sending it to trial. The district court judge in Dallas said the ruling was “in some respects a close one.” Mr. Cuban is charged in connection with a 2004 sale of his stock in Mamma.com, allegedly after learning non-public information about an upcoming equity offering.  Read the original complaint here.…

SEC Enforcement Activity: Feb. 11- 15

Second Circuit Hears Oral Argument on SEC-Citigroup Settlement

Last November, a federal judge in New York rejected a proposed settlement between the SEC and Citigroup in connection with charges of misleading investors at the beginning of the financial crisis. This week the Second Circuit Court of Appeals heard oral arguments in the case, which saw the SEC and Citigroup join forces against the District Court. Jim Hamilton has a good analysis of the proceedings here. …

SEC Freezes Assets in Swiss-Based Account From Suspected Heinz Acquisition Insider Trading Scheme

On February 15, 2013, the Securities and Exchange Commission ("SEC") issued a press release announcing that it had obtained an emergency court order to freeze assets in a Swiss-based trading account that was used to gain more than $1.7 million from insider trading activities in connection with yesterday’s announced acquisition of H.J. Heinz Company.

In a complaint filed in Federal Court in Manhattan, the SEC alleges that, prior to any public disclosure of Berkshire Hathaway’s and 3G Capital’s agreement to acquire Heinz for approximately $28 billion, unknown traders purchased call options on the day prior to the announcement of the merger.  The announcement of the merger caused Heinz’s stock to increase nearly 20 percent on substantially increased trading volume from the prior day, allowing the traders to realize substantial gains from their trades.  The SEC further alleges that the traders were in possession of material nonpublic information about the Heinz acquisition when they purchased out-of-the-money Heinz call options prior to the announcement. Additionally, these trades were made through an account that had no history of trading Heinz securities during the last six months, and on in a period where there was minimal trading in activity in Heinz call options.…

SEC Enforcement Activity: Jan. 14-18

SEC Settles with Pond Securities In Market Manipulation Case

Four defendants – Andreas Badian, Jeffrey Graham, Pond Securities, and Ezra Birnbaum – agreed to settle charges of market manipulation, the SEC announced this week. In a complaint filed in April 2006, the SEC alleged that the defendants manipulated the stock of Sedona Corporation and violated record-keeping rules by falsely creating trade tickets. Without admitting or denying the allegations, the defendants agreed to disgorgement of profits and civil penalties of over $700,000. 

Read the SEC release here.…

SEC Enforcement Activity: Week of Dec. 31

Nekekim Corp. and CEO Charged In Fraudulent Gold Mining Scheme

The SEC brought charges against California corporation Nekekim Corp. and its CEO Kenneth Carlton alleging both defrauded investors by claiming they had “unconventional” methods to extract gold from a “complex ore.”  According to the SEC complaint, Carlton and Nekekim advertized that their “physicist” – who had no scientific background – had developed a proprietary technique to extract gold.  Using test results from discredited labs and withholding negative results from reputable labs, Nekekim and Carlton allegedly misrepresented that their mines contained significant gold deposits.  Hundreds invested in the scheme, which ultimately failed to produce mining revenue.

Read the complaint here.…

SEC Enforcement Activity: Dec. 24-28

Following the short holiday week, below are notable developments in SEC enforcement activity for the week of Dec. 24-28. 

Insider Trading: One More Charged for IBM-SPSS Merger Scheme

The SEC has charged another broker for taking part in an insider trading scheme connected to IBM’s acquisition of SPSS. Trent Martin learned of the impending merger from an attorney friend working on the deal, who confided in Martin for “moral support, reassurance, and advice,” according to the SEC complaint. Martin allegedly purchased SPSS shares the first day he learned of the deal, then tipped his roommate, Thomas Conradt, who was charged earlier this month.  

Read the SEC complaint here.…

SEC Enforcement Activity Round-Up

Below are notable developments in SEC enforcement activity for the week of December 3-7, 2012.

Big Lots CEO Resigns Amidst SEC Inquiry

The CEO of Central Ohio-based Big Lots (NYSE: BIG) is under scrutiny by the SEC surrounding his sale of over $10 million in company stock prior to a negative quarterly earnings report. Big Lots stock fell 24 percent as a result of the April 2012 earnings report. Steven Fishman will retire as soon as a replacement is found, after serving as CEO since 2005.

Article here.

Chinese Affiliates of Big Four Accounting Firms Charged For Refusing To Produce Documents

The SEC announced charges this week against the Chinese affiliates of the Big Four accounting firms for refusing to produce audit records for Chinese companies under investigation for violations of accounting fraud. According to the SEC’s administrative order, the four firms (as well as BDO) have refused to cooperate with the SEC investigations for months. For the Shanghai office of Deloitte & Touche, these recent charges are similar to those brought by the SEC in May  and September.

See the order here.…

SEC Enforcement Activity Round-Up

Below are updates on notable SEC enforcement activity from the week of November 26-30, 2012:

“White-Out” Firm Found Guilty

Jeffrey Liskov and his firm, EagleEye Asset Management, LLC were found guilty of securities fraud by a jury in Boston. The Plymouth, MA firm was found guilty of misleading investors by misrepresenting the risks associated with investments in the foreign currency exchange (“forex”) market. 

The Commission alleged that Liskov and EagleEye persuaded “older” clients to shift investments from low-risk securities into high-risk forex positions based on misleading information. Despite racking up huge losses for the clients, Liskov earned over $300,000 in performance fees. Among the allegations were that Liskov used “white-out” to change names and dates on forms in order to, among other things, fraudulently transfer client assets into forex trading accounts. 

After four hours of deliberation, the jury found Liskov and EagleEye liable for violations of Section 10(b) of the Exchange Act, Rule 10b-5, and the Advisers Act. 

For more, read the SEC Release

Insider Trading: Oil Company CEO Charged

Former CEO of Denver-based oil company Delta Petroleum Corporation was charged with insider trading. In the run-up to California-based investment firm Tracinda taking a 35% stake in Delta, former CEO Roger Parker tipped a close friend, who in turn tipped friends and family, according to the SEC complaint. Delta’s stock rose 20% in value once the Tracinda investment was announced. The complaint also alleges Parker provided early insights into a positive earnings report. The SEC obtained emails and phone records in connection with the alleged tipping.…

NYSE Agrees to SEC Settle Charges for Improper Distribution of Market Data

On September 14, 2012, Securities and Exchange Commission ("SEC") announced that it had brought charges against the New York Stock Exchange and its parent company NYSE Euronext ("NYSE") for compliance failures that improperly gave certain customers a "head start" on trading information.  A graphic analysis of the NYSE’s improper practices is attached.  The NYSE agreed to a $5 million penalty and significant undertakings to settle the SEC’s charges.  This case marks the first time that the SEC has brought charges against a national securities exchange that resulted in the payment of monetary damages. 

Pursuant to Regulation NMS, the SEC prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in consolidated feeds, which broadly distribute trade and quote data to the public. The purpose of these provisions are to ensure that the public has fair access to current market information about stock prices and trades at the same time.

The SEC Order alleges that the NYSE’s practices violated Rule 603(a) of Regulation NMS which "requires that exchanges distribute market data on terms that are ‘fair and reasonable’ and ‘not unreasonably discriminatory.’"  The SEC alleges that "[o]ver an extended period [beginning in June 2008], NYSE violated Rule 603(a) in connection with the release of certain data through two proprietary feeds.  The primary reason for the disparity in the release of the information appears to be due to an internal architecture issue where the proprietary feed to customers was faster than the path used to send …

SEC Charges Oracle With FCPA Violations

On August 16, 2012, in a Complaint filed in the U.S. District Court in the Northern District of California, the Securities and Exchange Commission (“SEC”) charged Oracle Corporation with violating the Foreign Corrupt Practices Act (“FCPA”).  The Complaint alleges that, from 2005 to 2007, employees of an Indian subsidiary of Redwood Shores, a California-based enterprise systems firm, arranged transactions with India’s government in a way that enabled Oracle India Private Limited’s distributors to secretly “park” approximately $2.2 million of transaction proceeds in side funds. The Complaint alleges that Oracle India employees then directed its distributors to make unauthorized payments out of these side funds to local vendors, who operated merely as storefronts that did not provide any services to Oracle. It is further alleged that these payments were documented by Oracle’s subsidiary using fake invoices.

The SEC’s Complaint alleges that (1) Oracle violated the FCPA’s books and records provisions and internal controls provisions by failing to accurately record the side funds that Oracle India maintained with its distributors, and (2) Oracle failed to devise and maintain a system of effective internal controls that would have prevented the improper use of company funds.  Without admitting or denying the SEC’s allegations, Oracle agreed to pay a $2 million penalty to settle the SEC’s charges.…