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SEC Enforcement Actions

The Securities and Exchange Commission (SEC) is the United States agency with primary responsibility for enforcing federal securities laws. Whistleblowers with knowledge of violations of the federal securities laws can submit a claim to the SEC under the SEC Whistleblower Reward Program, and may be eligible to receive  monetary rewards and protection against retaliation by employers.

Below are summaries of recent SEC settlements or successful prosecutions. If you believe you have information about fraud which could give  rise to an SEC enforcement action and claim under the SEC Whistleblower Reward Program, please contact us to speak with one of our experienced whistleblower attorneys.

September 28, 2016

UBS Financial Services will pay more than $15 million to settle charges that it failed to adequately educate and train its sales force about critical aspects of certain complex financial products it sold to retail investors.  The SEC’s order finds that UBS failed to educate and train UBS registered representatives in connection with the sale of reverse convertible notes (RCNs) so that they could form a reasonable basis to make recommendations.  RCNs are complex securities that feature embedded derivatives whose performance is driven by the concept of implied volatility.  Without adequate education and training, certain registered representatives made unsuitable recommendations in the sale of RCNs to certain retail customers in light of their investment profiles.  UBS sold approximately $548 million in RCNs to more than 8,700 relatively inexperienced retail customers.  SEC

September 28, 2016

Anheuser-Busch InBev will pay $6 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) and chilled a whistleblower who reported the misconduct.  An investigation found that the company used third-party sales promoters to make improper payments to government officials in India to increase the sales and production of Anheuser-Busch products in the country.  The SEC’s order further found that Anheuser-Busch improperly chilled whistleblower activity by entering into a separation agreement that stopped an employee from continuing to voluntarily communicate with the SEC about potential FCPA violations by imposing substantial financial penalties for violating strict non-disclosure terms.  SEC

September 27, 2016

Oil services company Weatherford International will pay a $140 million penalty to settle charges that it inflated earnings by using deceptive income tax accounting.  According to the SEC’s order, Weatherford fraudulently lowered its year-end provision for income taxes by $100 million to $154 million each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations.  James Hudgins, Weatherford’s Vice President of Tax, and Darryl Kitay, tax manager, made numerous post-closing adjustments to fill gaps and meet the previously disclosed effective tax rate.  Weatherford regularly touted its favorable effective tax rate to analysts and investors as one of its key competitive advantages, and the fraud created the misperception that Weatherford’s designed tax structure was far more successful than reality.  Weatherford was forced to restate its financial statements on three occasions in 2011 and 2012.   Hudgins and Kitay will pay about $365,000 collectively to settle charges that they were behind the scheme.  SEC

September 26, 2016

Merrill Lynch will pay a $12.5 million penalty for failure to maintain effective trading controls, thus failing to prevent erroneous orders from being sent to the markets and causing mini-flash crashes.  An SEC investigation found that Merrill Lynch caused market disruptions on at least 15 occasions from late 2012 through mid-2014 and violated the Market Access Rule because its internal controls in place to prevent erroneous trading orders were set at levels so high that it rendered them ineffective.  The erroneous orders caused certain stock prices to plummet and then suddenly recover within seconds.  SEC

September 26, 2016

The SEC charged former microcap company CEO Craig V. Sizer and “boiler room” operator Miguel “Michael” Mesa with defrauding seniors and other investors who were pressured to invest in a pair of penny stock companies and promised lucrative profits.  The SEC alleges Sizer founded Sanomedics Inc. and Fun Cool Free Inc., purportedly in the business of selling, respectively, non-contact infrared thermometers and software applications, and hired Mesa to help him attract and defraud investors in both companies.  Sizer allegedly provided Mesa with a list of pitch points for use by boiler room agents hired by Mesa to sell shares of the stocks based on misrepresentations that investor funds would be used for research and development and no sales commissions would be paid out of investor funds.  According to the SEC’s complaint, Sizer and Mesa misappropriated approximately 90% of the funds raised from investors, enriching themselves and paying commissions to boiler room agents.  Several hundred investors nationwide were allegedly defrauded out of a total of approximately $20 million.  SEC

September 23, 2016

The SEC charged three company executives — Manu Kumaran, founder and former chairman and CEO of startup movie production company Medient Studios and later Moon River Studios, Jake Shapiro, his successor CEO, and Roger Miguel, CEO of a separate successor public company called Fonu2 that also operated under the name Moon River Studios — with defrauding investors in a purported project to construct the largest movie studio in North America at a suburban location outside Savannah, Georgia.  Kumaran and Shapiro allegedly made an assortment of false and misleading statements in press releases and corporate filings, claiming that construction of the “Studioplex” was under way and projecting dates by which the studio would be operational while knowing that they did not have anywhere near sufficient funding to begin building the studio.  In addition, Kumaran, Shapiro, and Miguel allegedly backdated and falsified promissory notes as part of a scheme to issue common stock in exchange for financing.  The StudioPlex never materialized and the company eventually shuttered without releasing a single movie or video game.  But Kumaran and Shaprio nevertheless enriched themselves in the process.  According to the SEC’s complaint, Kumaran spent an average of $1,700 per day of company funds on his globetrotting travel and personal expenses from April 2014 through June 2014 after claiming publicly that he did not draw a salary and all funds were being used to benefit the company.  Shapiro allegedly misappropriated company funds for personal use after becoming CEO and lived in a house worth nearly a million dollars that was paid for by the company.  Three company directors who are not alleged to have participated in the fraud were separately charged with violating federal securities laws by failing to timely report their stock transactions in the company while serving on its board.  Former New York Governor David A. Paterson and music producer Charles A. Koppelman each agreed to pay $25,000 to settle the charges against them.  An administrative proceeding was instituted against Matthew T. Mellon II, a businessman and former chairman of the New York Republican Party Finance Committee.  SEC

September 21, 2016

The SEC announced fraud charges against Sheldon R. Rose, alleging that he created more than a dozen blank check companies, installed friends and family members as figurehead company officers and shareholders allowing him to secretly control the companies and their securities, falsified registration statements and other corporate filings to make it appear that the companies were pursuing real business ventures, and then carrying out reverse mergers by which the securities were sold to enrich Rose and others.  Rose is connected to a scheme halted by the SEC last year.  Rose has agreed to settle the charges.  An administrative law judge will determine monetary sanctions.  SEC

September 21, 2016

The SEC charged hedge fund manager Leon G. Cooperman and his firm Omega Advisors with insider trading.  The SEC alleges that Cooperman used his status as one of the largest shareholders in Atlas Pipeline Partners (APL) to gain access to a company executive and learn confidential details about the company’s planned sale of its natural gas processing facility in Elk City, Oklahoma.  Cooperman generated substantial illicit profits by purchasing securities in APL in advance of the sale.  When APL publicly announced the asset sale, its stock price jumped more than 31%.  SEC

September 20, 2016

The SEC announced an award of more than $4 million to a whistleblower whose original information alerted the agency to a fraud.  SEC

September 19, 2016

Public accounting firm Ernst & Young will pay $9.3 million to settle charges that two of the firm’s audit partners maintained inappropriately close personal relationships with clients and violated rules that ensure firms maintain objectivity and impartiality during audits.  SEC investigations found that Gregory S. Bednar, the senior partner on an engagement team for the audit of a New York-based public company, maintained an improperly close friendship with its chief financial officer, and Pamela Hartford, a different partner serving on an engagement team for the audit of another public company, was romantically involved with its chief accounting officer, Robert Brehl.  Ernst & Young misrepresented in audit reports issued with the companies’ financial statements that it maintained its independence throughout these audits.  SEC
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