The Securities and Exchange Commission not only spends a lot of time creating rules they also hit the streets and enforce them. Monolithic and ill thought out legislation such as Dodd-Frank create an almost never ending list of new rules adding complexity and inertia to an already very challenging enforcement environment. So the SEC has lots to do and they shared some of their accomplishments for the end of Fiscal 2104 (ended in September) that included a record number of 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to their preliminary figures. This is in contrast to the 686 enforcement actions and obtained orders that totaled $3.14 billion in 2013.The SEC has utilized “new investigative approaches” benefitting from the “use of data and analytical tools” that spanned the entire securities industry. Enforcement actions in 2014 also included some “first ever” cases. These involved; pay to play rule for investment advisors, halting a municipal bond offer and action on a whistleblower retaliation.
“Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets,” said SEC Chair Mary Jo White. “The innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in
detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions that resulted in stiff monetary sanctions.”
“Time and again this past year, the Division’s staff applied its tremendous energy and talent, uncovered misconduct, and held accountable those who were responsible for wrongdoing,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.”
Director Ceresney added that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment adviser and municipal securities cases, microcap fraud, insider trading, and cases against gatekeepers.
SEC Enforcement in Fiscal Year 2014
Combatting Financial Fraud and Enhancing Issuer Disclosure
- Charged more than 135 parties with violations relating to reporting and disclosure. Cases include actions againstBank of America Corporation; Fifth Third Bancorp and its former CFO; snack food maker Diamond Foods Inc. and its former CEO and CFO; five executives and finance professionals from collapsed law firm Dewey & LeBoeuf LLP; animal feed company AgFeed Industries Inc. and eight executives; and CVS Caremark Corp. and its retail controller.
- Continued to devote resources to combat market manipulation and microcap fraud, including by filing multiple actions against penny stock promoters and others who created a false appearance of genuine interest in various stocks, and by using trading suspensions to neutralize threats to investors after questions arise concerning the adequacy or accuracy of an issuer’s disclosures. The SEC also suspended trading in hundreds of dormant shell companies that were ripe for abuse in the over-the-counter market.
- Filed several actions to halt international investment frauds, including those that spread through social media and targeted, among others, immigrant communities. These cases include actions against 11 operators and promoters in a scheme known as CKB and CKB168, plus related entities; against World Capital Market Inc., WCM777 Inc., and their founder; and against eight operators and promoters of TelexFree, Inc. and related entities. The Enforcement Division will continue to root out pyramid and Ponzi schemes that prey on vulnerable investors.
- Brought coordinated charges against 34 individuals and companies for violating laws requiring them to promptly report information about their holdings and transactions in company stock, under a new initiative using quantitative analytics to identify especially high rates of filing deficiencies.
Ensuring Exchanges, Traders and Other Market Participants Operate Fairly
- Brought first-ever actions under a rule requiring firms to establish adequate risk controls before providing customers with market access. One action was resolved against Knight Capital Americas LLC, and another is continuing against Wedbush Securities Inc. and two of its executives.
- Obtained the largest penalty to date against an alternative trading system, Lavaflow Inc.
- Charged dark pool operator Liquidnet Inc. with improperly using subscribers’ confidential trading information in marketing its services. Also charged the co-owner of brokerage firm Visionary Trading LLC with manipulative trading, and charged the owner, two firms, and four other individuals with registration violations.
- Imposed the largest penalty ever for net capital rule violations, in a case against high frequency trading firm Latour Trading LLC and a former senior executive.
- Charged four officials from clearing firm Penson Financial Services, including its CEO and CCO, relating to violations of Regulation SHO arising from its securities lending practices.
- Filed significant enforcement actions against the New York Stock Exchange and brokerage subsidiaries for their failure to comply with exchange rules; brokerage subsidiaries and former employees of ConvergEx Group, including its former CEO, for deceiving brokerage customers with hidden fees; and Wells Fargo Advisors LLC, in the Commission’s first case against a broker-dealer for failing to protect a customer’s material nonpublic information.
Uncovering Misconduct by Investment Advisers and Investment Companies
- Brought first-ever action under investment adviser “pay-to-play” rule, charging private equity firm TL Ventures Inc.with providing certain services within two years after an associate made contributions to two political candidates. Also charged this firm and an affiliated adviser with improperly acting as unregistered investment advisers.
- Filed first action arising from a focus on fees and expenses charged by private equity firms. The Commission instituted an action against private equity firm Clean Energy Capital LLC and its president, alleging fraud in the allocation of expenses to the firm’s funds.
- Charged three investment advisory firms with failures to maintain adequate controls on the custody of customer accounts. The misconduct at Further Lane Asset Management, GW & Wade, and Knelman Asset Management Group involved failures to maintain client assets with a qualified custodian or to engage an independent public accountant to conduct surprise exams as required by the custody rule. Also charged the CEO of Further Lane and the CEO and chief compliance officer of Knelman for custody rule and other violations.
- Pursued other types of wrongdoing by asset managers, and leveraged proactive risk identification initiatives such as the Aberrational Performance Inquiry that uses proprietary analytics to identify hedge funds with suspicious returns.
Increasing Activity in Whistleblower Program
- The program awarded nine whistleblowers with total awards of approximately $35 million in FY 2014.
- Brought the first charges ever under new authority to bring anti-retaliation enforcement actions. The SEC charged hedge fund advisory firm Paradigm Capital Management with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the Commission, and charged the firm’s owner in connection with the principal transactions.
- Awarded more than $30 million to a whistleblower who provided key original information that led to a successful enforcement action, making it the largest-ever whistleblower award.
Holding Gatekeepers Accountable
- Held attorneys, accountants and compliance professionals accountable for the important roles they play in the securities industry.
- Cases include an action against Ernst & Young LLP relating to auditor independence rules, and against audit firmSherb & Co. LLP and four of its auditors for their roles in the failed audits of three China-based companies.
- The Commission charged two Florida-based attorneys for their roles in an offering fraud conducted by a transfer agent, and charged transfer agent Registrar and Transfer Company and its CEO for violations involving improper distributions of billions of shares of unregistered stock.
- In its fraud case against animal feed company AgFeed Industries Inc., the Commission charged the company’s audit committee chair, who learned of the misconduct in question and failed to take meaningful action to investigate it or disclose it to investors after learning of it.
Rooting Out Insider Trading
- Charged 80 people in cases involving trading on the basis of inside information. The Commission also is implementing and developing next generation analytical tools to help identify patterns of suspicious trading.
- Among those charged are a former hedge fund trader, a portfolio manager, the co-chairman of a board, aninvestment banker, an investor relations executive, an accountant, husbands who traded on information they learned from their wives, and a group of golfing buddies and other friends.
Upholding Disclosure Standards in Municipal Securities
- Focused on upholding appropriate standards of disclosure in securities issuances by local and state governments. Cases this year included an emergency court order against a Chicago suburb and its comptroller, featuring the Commission’s first emergency action to halt a municipal bond offering; charges against the state of Kansas; and the first penalty imposed against a municipal issuer.
- Announced the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which encourages and rewards self-reporting of certain violations by municipal issuers and underwriters. Under the MCDC Initiative, these parties may self-report inaccurate statements in bond offerings about their prior compliance with certain continuing disclosure obligations. In exchange, they may receive settlement terms that reflect credit for their self-reporting. In the first action to arise from this Initiative, the Commission reached a settlement with a California school district for charges of misleading bond investors.
Cracking Down on Misconduct Involving Complex Financial Instruments
- Filed enforcement actions against RBS Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and three Morgan Stanley entities for misconduct involving mortgage-backed securities and collateralized debt obligations. The SEC also held global investment bank and brokerage firm Jefferies LLC responsible for its failure to properly supervise trading on its mortgage-backed securities desk.
Combatting Foreign Corrupt Practices and Obtaining Highest-Ever Penalties Against Individuals
- Filed significant actions under the Foreign Corrupt Practices Act (FCPA) against Alcoa Inc., Weatherford International Ltd., the Archer-Daniels-Midland Company, and the Hewlett-Packard Company. Additionally, in concluding its case against former Siemens executives who were charged with bribery in Argentina, the SEC also obtained the highest-ever FCPA penalties against individuals.
Demanding Admissions in Important Cases Enhancing Public Accountability
- Demanded and obtained acknowledgements of wrongdoing under the admissions policy announced in the previous fiscal year. Cases from this fiscal year involved fraud on clients concerning trading prices, a longstanding failure to comply with registration provisions, and failures to provide the Commission with accurate information during its investigations, among other things.
- Staff considers requiring admissions in cases where the violation of the securities laws includes particularly egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the conduct obstructs the Commission’s investigation, where an admission can send a particularly important message to the markets, or where the wrongdoer poses a particular future threat to investors or the markets.
Successful Litigation
- Obtained a jury verdict against Samuel Wyly and the estate of the late Charles Wyly in a matter alleging a longstanding fraudulent scheme to use offshore trusts to conceal their ownership of tens of millions of shares of public companies. This was the first litigation in which a defendant testified at trial against his co-defendants after agreeing to settle on terms requiring a written acknowledgement of wrongdoing. The court issued a preliminary decision under which defendants are required to pay disgorgement of approximately $187 million and substantial prejudgment interest.
- Obtained a jury verdict against a Minneapolis attorney and entities he controls for fraud in connection with unregistered offerings in a real estate fund. The court ordered almost $20 million of monetary relief.
- Obtained a jury verdict finding a Connecticut hedge fund manager liable for fraud after he funneled money to a Ponzi scheme. The court ordered more than $80 million of monetary relief.
- Obtained a jury verdict against Massachusetts advisory firm Sage Advisory Group, LLC and its principal in a case charging a scheme to induce the principal’s former brokerage customers to transfer their assets to his new advisory firm. The court will later determine whether and what relief to impose against the defendants.