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Top Ten SEC and CFTC Recoveries of 2019

Posted  January 24, 2020

2019 was another busy year for the SEC and CFTC.  Once again, the SEC netted hundreds of millions of dollars in penalties and fines from companies and individuals accused of defrauding investors, breaching fiduciary duties, and violating the securities laws.  And that’s in addition to the SEC’s robust FCPA enforcement in 2019.  Meanwhile, the CFTC continued to root out market manipulators and other fraudsters in the commodities markets, with whistleblowers playing a growing role in its enforcement activity.  Whistleblowers are now involved in 40% of the CFTC’s ongoing investigations, according to CFTC Director of Enforcement James McDonald.

Here are the Top Ten SEC and CFTC recoveries of 2019 in cases other than FCPA enforcement, with links to more information about each of the cases:

    1. Share Class Selection Disclosure Initiative Settlements – In March 2019, the SEC announced that its Share Class Selection Disclosure Initiative had produced settlements with 79 investment advisers, resulting in over $125 million returned to their clients. Launched in February 2018, the Share Class Selection Disclosure Initiative incentivizes investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest.  The settlements announced in March 2018 addressed advisers who received 12b-1 fees while making inaccurate or otherwise inadequate disclosures regarding investments selected for their clients, included failures to disclose conflicts of interests related to the selection of higher-cost share classes when lower-cost alternatives were available.
    2. FacebookIn July 2019, the SEC hit Facebook with a $100 million penalty to resolve allegations that it misled investors by failing to disclose Cambridge Analytica’s misuse of its user data. According to the SEC’s complaint, Facebook discovered in 2015 that Cambridge Analytica had misappropriated millions of Americans’ user data for use in its political advertising business.  Facebook then failed to disclose this information for over two years and falsely told reporters that it had discovered no evidence of wrongdoing by Cambridge Analytica.  Whistleblowers have been at the heart of this scandal, most notably Christopher Wylie, who helped found Cambridge Analytica and ultimately exposed its misconduct.  For more information, check out our 2018 Whistleblower of the Year profile on Wylie.
    3. State Street – In June 2019, State Street Bank and Trust Company agreed to pay over $88 million to settle SEC charges that it overcharged thousands of mutual funds and other registered investment company clients for expenses related to the firm’s custody of client assets. Instead of charging clients for the actual amount of the expenses, the SEC found that State Street routinely overbilled its clients, primarily through a secret markup added to the cost of sending secured financial messages through the Society of Worldwide Interbank Financial Telecommunication network.  State Street avoided a larger penalty by self-reporting the violation and cooperating with the SEC’s investigation.
    4. Tower Research Capital – In November 2017, the CFTC recovered $67.4 million from Tower Research Capital for its widespread “spoofing” of equity index futures products traded on the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT). It is the largest-ever recovery ordered for spoofing violations.  “Spoofing” refers to a form of market manipulation where a firm disingenuously enters and then quickly cancels large buy or sell orders (“spoof orders”) to produce artificial market conditions.  According to the CFTC, Tower Research Capital used abusive spoof orders to ensure that its genuine orders on the CME and CBOT would fill more quickly, at higher prices, or in larger quantities than genuine market conditions would have produced.  Tower Research Capital also entered a deferred prosecution agreement with DOJ in connection with its market manipulation.
    5. The ADR Cases – Throughout 2019, the SEC closed settlements with numerous brokers—including Industrial and Commercial Bank of China Financial Services LLC (ICBCFS), Wedbush, Merrill Lynch, Jeffries, BMO, and Cantor Fitzgerald—over their improper handling of pre-released American Depository Receipts (ADRs). ADRs are U.S. securities that represent foreign shares of a foreign company and require a corresponding number of foreign shares to be held in custody at a depository bank. Collectively, these settlements totaled over $66.5 million.  These settlements relate to the widespread and improper practice of brokers receiving ADRs when the firms should have known that neither the broker nor its customers owned the foreign shares needed to support those ADRs, which opened the flood gates for inappropriate short selling and dividend arbitrage.  The settlements are part of a broader investigation into ADR practices that has produced over $460 million in recoveries by the SEC, the largest being ICBCFS’s $42 million settlement in June.
    6. AR Capital – In July 2019, AR Capital LLC, along with its founder Nicholas Schorsch and its former CFO Brian Block, agreed to pay $60.75 million, including $39 million in disgorgement and interest as well as penalties totaling $21.75 million, to resolve SEC charges that they wrongfully obtained millions of dollars in connections with mergers that were sponsored and managed by AR Capital. According to the SEC, AR Capital, Schorsch, and Block, breached their proxy disclosures in these mergers by inflating their incentive fees and wrongfully obtained millions of dollars from asset purchase and sale agreements entered into in connection with the mergers.
    7. Golden California Regional Center – In November, Golden California Regional Center and its principal Bethany Liou agreed to pay over $50 million in disgorgement and interest to resolve allegations of fraud in connection with their sale of securities purportedly qualifying under the EB-5 visa program.  Liou and Golden California Regional Center falsely represented that investor funds would be used to finance qualifying real estate development when, in fact, Liou diverted the funds to her personal use.  The EB-5 Program offers EB-5 visas to foreign individuals who invest $1 million in a new commercial enterprise that creates or preserves at least 10 full-time jobs for qualifying U.S. workers or $500,000 in a new enterprise located in a rural area or an area of high unemployment.  Through this scheme, Liou pilfered at least $45 million from foreign citizens intending to make investments that would qualify them for green cards under the EB-5 program.
    8. KPMG – In June 2019, the SEC imposed a $50 million penalty on audit and accounting firm KPMG LLP to resolve charges that it wrongfully obtained lists of the Public Company Accounting Oversight Board’s (PCAOB) inspection targets and then revised audit workpapers—after the audit reports had been issued—in an effort to improve its performance during those inspections.  The SEC also alleged that numerous KPMG audit professionals swapped answers and manipulated results on internal training exams.  In addition to the settlement, former KPMG and PCAOB officials were convicted of wire fraud in connection with the scheme.
    9. Celadon Group – In April 2019, Indianapolis-based trucking company Celadon Group, Inc. reached a settlement with the SEC in which it will pay $42.2 in restitution to shareholders to address an alleged accounting fraud. The SEC alleged that Celadon avoided the recognition of $20 million in impairment charges and losses by recording a series of equipment trades as sales at inflated values and falsely stated to its auditors that the equipment was sold at fair market value.  In a related criminal investigation, Celadon entered into a deferred prosecution agreement with DOJ that requires specific compliance measures and cooperation in its ongoing investigation of the fraud.
    10. Fiat Chrysler – In September 2019, Fiat Chrysler Automobiles N.V.and its U.S. subsidiary FCA US LLC paid $40 million to resolve SEC allegations that the automaker provided misleading information in press releases and regulatory filings about its monthly new vehicle sales and vehicle sales growth rate.  The SEC found that FCA US paid dealers to report fake vehicle sales and that Fiat Chrysler kept legitimate but unreported sales in a separate database referred to internally as the “cookie jar.”  During slow months, Fiat Chrysler stuck its hand into the “cookie jar” and reported these old sales as if they had occurred in the relevant month.  Based on this inflated and manipulated sales data, FCA US issued monthly press releases from 2012 to 2016 that falsely touting a “streak” of uninterrupted monthly year-over-year sales growth, which had in fact ended in September 2013.


Tagged in: Accounting Fraud, CFTC Whistleblower Reward Program, FCPA, Financial and Investment Fraud, Importance of Whistleblowers, Market Manipulation and Trading Violations, Misrepresentations, SEC Whistleblower Reward Program, Securities Fraud, Top 10,