SEC Fraud Actions

SEC
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The Securities and Exchange Commission (SEC) is the United States agency with primary responsibility for enforcing federal securities laws. The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. The SEC was created a few years after the market crash of 1929 through passage of the Securities Exchange Act of 1934. The SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The federal securities laws, and the SEC’s efforts to enforce them, focus on achieving these goals by: (1) requiring companies offering securities to the public to tell the truth about their businesses, the securities being sold, and the risks involved in investing; and (2) requiring those who sell and trade securities to treat investors fairly and honestly.

In July 2010, in response to the 2008 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. One important feature of this legislation was the establishment of the SEC whistleblower program. This program encourages those with knowledge of violations of the federal securities laws to share this information with the SEC by providing both monetary rewards and protection against retaliation by employers.

Below are summaries of the most recent enforcement actions litigated by the SEC. If you believe you have information about securities fraud, please click here to contact one of our experienced whistleblower attorneys.

January 27, 2017 - 

The SEC announced fraud charges against Joseph Meli and Matthew Harriton, two New York City men accused of running a Ponzi scheme with money raised from investors to fund businesses purportedly created to purchase and resell tickets to high-demand shows such as Adele concerts and the Broadway musical Hamilton.  The SEC alleges that Meli and Harriton misrepresented to investors that all of their money would be pooled to buy large blocks of tickets that would be resold at a profit to produce high returns for investors.  The bulk of investor funds were allegedly used for other undisclosed purposes, namely making Ponzi payments to prior investors using money from new investors.  Meli and Harriton also allegedly diverted almost $2 million for such personal expenses as jewelry, private school, camp tuition, and casino payments.  According to the SEC’s complaint, the scheme went so far as to misrepresent that an agreement was in place with the producer of Hamilton to purchase 35,000 tickets to the musical.  Investor money was supposedly paying part of that cost with the return on the investment promised within eight months.  The SEC alleges no such agreement or purchase ever happened.  Meli and Harriton allegedly raised more than $81 million from at least 125 investors in 13 states.  The SEC brough charges against Meli and Harriton along with their four purported ticket reselling businesses: Advance Entertainment, Advance Entertainment II, 875 Holdings, and 127 HoldingsSEC

January 26, 2017 - 

Citigroup Global Markets will pay $18.3 million to settle charges that it overbilled investment advisory clients and misplaced client contracts.  The SEC’s order finds that at least 60,000 advisory clients were overcharged approximately $18 million in authorized fees because Citigroup failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts, billing histories, and other documents.  Citigroup also improperly collected fees during time periods when clients suspended their accounts.  The billing errors occurred during a 15-year period, and the affected clients have since been reimbursed.  The SEC’s order further found that Citigroup could not locate approximately 83,000 advisory contracts for accounts opened from 1990 to 2012.  Without the contracts, Citigroup could not properly validate whether the fee rates negotiated by clients when accounts were opened were the same advisory fee rates being billed.  It is estimated that Citigroup received approximately $3.2 million in excess fees from advisory clients whose contracts were lost.  SEC

January 26, 2017 - 

The SEC charged two former executives at Och-Ziff Capital Management Group with being the driving forces behind a far-reaching bribery scheme that violated the Foreign Corrupt Practices Act (FCPA).  The SEC’s complaint alleges that Michael L. Cohen, former head of Och-Ziff’s European office, and Vanja Baros, an investment executive on Africa-related deals, caused tens of millions of dollars in bribes to be paid to high-level government officials in Africa.  Their alleged misconduct induced the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds.  Cohen and Baros also allegedly directed illicit efforts to secure mining deals to benefit Och-Ziff by directing bribes to corruptly influence government officials in Chad, Niger, Guinea, and the Democratic Republic of the Congo.  SEC

January 25, 2017 - 

The SEC announced administrative proceedings against New York-based brokerage firm Windsor Street Capital and its former anti-money laundering officer John D. Telfer.  The SEC alleges that the firm, formerly Meyers Associates L.P. failed to file Suspicious Activity Reports (SARs) for $24.8 million in suspicious transactions, including those occurring in accounts controlled by microcap stock financiers Raymond H. Barton and William G. Goode who were separately charged by the SEC with conducting a pump-and-dump scheme.  The SEC alleges that Windsor and Telfer should have known about the suspicious circumstances behind many transactions occurring in customer accounts.  Customers like Barton and Goode allegedly deposited large blocks of penny stocks, liquidated them typically amid substantial promotional activity, and then transferred the proceeds away from the firm.  The SEC further alleges that the shares deposited by Barton and Goode could not be sold legally because no registration statement was in effect and no registration exemption was available.  Rather than conduct a reasonable inquiry into the deposits, Windsor allegedly accepted claims of exemption at face value.  The SEC separately filed a complaint in federal court against Barton and Goode along with Matthew C. Briggs, Kenneth Manzo, and Justin Sindelman.  The complaint alleges that they participated in a pump-and-dump scheme that acquired shares of dormant shell companies supposedly in the dietary supplement business, falsely touted news and products stemming from those companies, and dumped the shares on the market for investors to purchase at inflated prices.  Barton, Goode, Briggs, and Manzo will pay almost $8.8 million collectively to settle the charges brought against them.  SEC

January 25, 2017 - 

Massachusetts-based investment adviser Michael J. Breton will be banned from the securities industry after the SEC uncovered an illegal cherry-picking scheme through its data analysis used to detect suspicious trading patterns.  The SEC filed charges in federal district court against Breton and his firm Strategic Capital Management, alleging they defrauded clients out of approximately $1.3 million.  Breton allegedly placed trades through a master brokerage account and then allocated profitable trades to himself while placing unprofitable trades into the client accounts.  The SEC’s Market Abuse Unit’s analysis of Breton’s trading showed that he defrauded at least 30 clients during a six-year period.  SEC

January 24, 2017 - 

Morgan Stanley Smith Barney and Citigroup Global Markets will pay $2.96 million each to settle charges that they made false and misleading statements about a foreign exchange trading program sold to investors.  According to the SEC’s orders, Citigroup held a 49% ownership interest in Morgan Stanley at the time, and registered representatives at both firms were pitching a foreign exchange trading program known as “CitiFX Alpha” to Morgan Stanley customers from August 2010 to July 2011.  The SEC’s orders finds that their written and verbal presentations were based on the program’s past performance and risk metrics, and they failed to adequately disclose that investors could be placed into the program using substantially more leverage than advertised and markups would be charged on each trade.  The undisclosed leverage and markups caused investors to suffer significant losses.  SEC

January 23, 2017 - 

Shipping conglomerate Overseas Shipholding Group (OSG) and its former CFO Myles R. Itkin will pay $5 million and $75,000 respectively for to settle charges that they failed to recognize hundreds of millions in tax liabilities in OSG’s financial statements.  According to the SEC’s order, OSG’s credit agreements from 2000 to the second quarter of 2012 contained a provision making OSG’s controlled foreign subsidiary Overseas International Group Inc. (OIN) and another subsidiary Overseas Bulk Ships (OBS) jointly and severally liable for OSG’s debt.  The provision triggered current income tax liability under Section 956 of the Internal Revenue Service Code which addresses “investments in United States property” for amounts that OSG borrowed, and deferred tax liabilities for amounts not borrowed but available under the credit agreements.  During this period, OSG and Itkin, who participated in the negotiation of the credit agreements and signed them, failed to recognize OSG’s tax liability despite significant indicia that the structure of its credit agreements in effect made OIN a guarantor under the agreements and could trigger tax consequences, including tax memos from outside counsel and communications with the banks during the negotiation phase of the credit agreements.   As a result of the misconduct, OSG materially understated its income tax liabilities by approximately $512 million (17% of its total liabilities).  In November 2012, following discovery of the tax liabilities, OSG filed for bankruptcy protection.  SEC

January 23, 2017 - 

The SEC announced fraud charges and an emergency asset freeze obtained against Dwayne Edwards, a South Carolina businessman accused of siphoning funds he raised from investors for the stated purpose of purchasing or renovating senior housing facilities.  The SEC alleges that Edwards improperly commingled money from several different municipal bond offerings and the revenues of the facilities underlying the offerings.  The offerings were each supposed to finance a particular assisted living or memory care facility in Georgia or Alabama.  From the commingled funds, Edwards allegedly diverted investor money for personal use as well as to finance other unrelated bond offerings.  The SEC’s company also charges Edwards’ former business partner Todd Barker who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date.  SEC

January 23, 2017 - 

The SEC announced an award of more than $7 million split among three whistleblowers who helped the SEC prosecute an investment scheme.  One whistleblower provided information that was a primary impetus for the start of the SEC’s investigation.  That whistleblower will receive more than $4 million.  Two other whistleblowers jointly provided new information during the SEC’s investigation that significantly contributed to the success of the SEC’s enforcement action.  Those two whistleblowers will split more than $3 million.  SEC

January 19, 2017 - 

Seattle-based financial services company HoneStreet Inc. will 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 will 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 ration falls outside a certain range.  The SEC’s order finds that in certain instances from 2011 to 2014, van Armen 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, based on altered inputs, were provided to HomeStreet’s accounting department, resulting in inaccurate accounting entries.  The SEC’s order further found 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.  SEC

January 18, 2017 - 

New York-based marketing company MDC Partners will pay a $1.5 million penalty to settle charges that it failed to disclose certain perks enjoyed by its former 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 CEO but failed to disclose additional personal benefits the company paid on his 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.  The SEC’s order also found improper use of non-GAAP measures.  According to the SEC’s order, MDC Partners presented a metric called “organic revenue growth” that represented the company’s revenue growth excluding the effects of 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.  This resulted in higher “organic revenue growth” results.  The SEC also found that MDC Partners failed to give GAAP metrics equal or greater prominence to non-GAAP metrics in its earnings releases.  SEC

January 18, 2017 - 

General Motors will 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.  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.  SEC

January 18, 2017 - 

Texas-based medical device company Orthofix International will 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 to increase sales.  According to the SEC’s order, Orthofix improperly recorded 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.  Four former Orthofix executives will pay penalties to settle cases related to these accounting failures.  A separate SEC order found 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.  Orthofix will pay a $8.25 million penalty to resolve the accounting violations and more than $6 million in disgorgement and penalties to settle the FCPA charges.  SEC

January 17, 2017 - 

The SEC announced fraud charges against Thomas M. Henderson, an Oakland, California-based businessman accused of misusing money he raised from investors through the EB-5 immigrant investor program.  The SEC alleges that Henderson and his company San Francisco Regional Center LLC falsely claimed to investors that their $500,000 investments would help create at least 10 jobs within several distinct EB-5 related businesses Henderson created, including a nursing facility, call centers, and a dairy operation.  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.  Henderson also allegedly improperly used $7.6 million of investor money to pay overseas marketing agents, and shuffled millions of dollars along the EB-5 business to obscure his fraudulent scheme.  SEC

January 17, 2017 - 

Allergan Inc. will 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.  SEC

January 17, 2017 - 

Ten investment advisory firms will pay penalties of $35,000 to $100,000 each 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 were made by the firms’ associates.  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 order found 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 10 firms and the penalties paid by each are as follows: Adams Capital Management ($45,000), Aisling Capital ($70,456), Alta Communications ($35,000), Commonwealth Venture Management Corporation ($75,000), Cypress Advisors ($35,000), FFL Partners ($75,000), Lime Rock Management ($75,000), NGN Capital ($100,000), Pershing Square Capital Management ($75,000), and The Banc Funds Company ($75,000).  SEC

January 17, 2017 - 

New York-based asset manager BlackRock Inc. will 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.”  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.  SEC

January 13, 2017 - 

Chilean-based chemical and mining company Sociedad Quimica y Minera de Chile S.A. (SQM) will 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 over a seven-year period.  Most of the payments were made based on fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.  SQM will pay a $15 million penalty to settle the SEC’s charges and a $15.5 million penalty as part of a deferred prosecution agreement with the Department of Justice.  SEC

January 13, 2017 - 

Morgan Stanley Smith Barney will pay a $13 million penalty to settle charges that it overbilled more than 149,000 investment advisory clients due to billing system errors.  According to the SEC’s order, Morgan Stanley received more than $16 million in excess fees between 2002 and 2016 due to more than 36 types of billing errors.  Morgan Stanley has reimbursed the full amount plus interest to affected clients.  The SEC’s order also found 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.  SEC

January 13, 2017 - 

Citadel Securities LLC will pay $22.6 million to settle charges that its business unit handling retail customer orders from other brokerage firms made misleading statements 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 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 (“internalization”), or sought to obtain that price in the marketplace.  Rather, the SEC’s order finds that two algorithms used by Citadel did not internalize retail orders at the best price observed nor sought to obtain the best price in the marketplace.   One strategy, known as “FastFill,” immediately internalized orders at prices that were not the best price Citadel observed.  The other, known as “SmartProvide,” routed orders to market such that they were not priced to immediately obtain the best price observed.  SEC

January 12, 2016 - 

BNY Mellon will 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. SEC

January 12, 2016 - 

Warsaw, Indiana-based medical device manufacturer Biomet will pay more than $30 million to resolve SEC and DOJ investigations into the company’s repeat violations of the Foreign Corrupt Practices Act.  Biomet first faced FCPA charges from the SEC and entered into a deferred prosecution agreement with the DOJ in March 2012 when it also agreed to pay $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, while implementing recommendations from the consultant, Biomet discovered potential anti-bribery violations in Mexico and Brazil.  The company 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. SEC

January 12, 2016 - 

Broker ITG will 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 processing the underlying foreign shares. ADRs are U.S. securities that represent shares in a foreign company. For all issued ADRs, there must be a corresponding number of foreign shares in custody. On behalf of counterparties, ITG obtained ADRs from depository banks that administer ADR programs. The SEC’s order found 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. SEC

January 11, 2017 - 

January 11, 2017 – Government contractor L-3 Technologies Inc. will pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls. According to the SEC’s order, around August 2013, executives in L-3’s Army Sustainment Division 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 L-3 and the Army had not reached agreement on payment, any revenue recognition for that work was improper. Nonetheless, in December 2013, a senior finance official requested that 69 invoices be generated, but not delivered, causing the division to recognize almost $18 million in revenue. Because of that revenue, division employees just satisfied an internal target for management incentive bonuses. In June 2014, L-3 hired outside consultants to conduct an internal investigation. In addition to the improper revenue recognized in association with the 69 invoices, the consultants identified additional accounting errors in the division’s books from 2011 through 2014. All together, these errors had the effect of overstating the company’s pre-tax income by $169 million. SEC

January 10, 2017 - 

The Port Authority of New York and New Jersey will admit wrongdoing and pay a $400,000 penalty to settle charges that it failed to inform bond purchasers of risks to a series of New Jersey roadway projects the bonds were being used to fund. The SEC’s order found 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 ventured outside its mandate and potentially weren’t legal to pursue. The Port Authority omitted any mention in its offering documents about these risks to its ability to fund the proposed projects. SEC