Articles Posted in

Published on:

By

In a case that gives the term “family values” an entirely new meaning, the Securities and Exchange Commission (“SEC”) recently charged a father and son in Lexington, S.C., with operating a fraudulent investment program designed to illegally profit from the deaths of terminally ill individuals.

On September 20, 2013, the SEC alleged that Benjamin S. Staples and his son Benjamin O. Staples deceived brokerage firms and bond issuers and made at least $6.5 million in profits by lying about the ownership interest in bonds they purchased in joint brokerage accounts that were opened with people facing imminent death, and who were concerned about affording the high cost of a funeral. This father-son duo recruited the terminally ill individuals into their program by offering to pay their funeral expenses if they agreed to open the joint accounts and sign documents that relinquished their ownership rights to the accounts or any assets in them. The SEC’s complaint charged the Staples with violating various provisions of the securities laws and, because public stoning is no longer permitted, sought disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions.

Earlier this year, Benjamin Staples was a witness in the trial of bookie Brett Parker, who was convicted of killing his wife, Tammy Jo Parker, and a business partner, Bryan Capnerhurst.  Staples testified at the trial in which Parker was convicted, that he, Staples, had carried on an intimate affair with Tammy Jo Parker on whom Brett Parker had taken out a sizeable insurance policy, according to a local South Carolina press report.  Staples was also interviewed on NBC’s “Dateline,” which ran a national true-crime television show on Parker’s scheme to kill his wife and Capnerhurst.

According to the SEC’s complaint filed in federal court in Columbia, S.C., once a joint account was opened and the Staples had sole control, Staples purchased discounted corporate bonds containing a “survivor’s option” that allowed them to redeem the bonds for the full principal amount prior to maturity if a joint owner of the bond dies. Following the death of one of their terminally ill participants, the Staples redeemed the bonds early by citing the survivor’s option to the brokerage firm and misrepresenting that the deceased individual had ownership rights to the bond. Their illicit profit was the difference between the discounted price of the bonds they purchased and the full principal amount they obtained when redeeming the bonds early.

According to the SEC’s complaint, the Staples operated what they called the Estate Assistance Program from early 2008 to mid-2012. They recruited at least 44 individuals into the program and purchased approximately $26.5 million in bonds from at least 35 issuers. The Staples required the terminally ill individuals to sign three documents: an application to open a joint brokerage account with them, an estate assistance agreement, and a participant letter. The latter two documents required the terminally ill participant to relinquish any ownership interest in the assets in the joint account, including the bonds that the Staples later purchased.

The SEC alleges that after a terminally ill participant died, the Staples wrote a letter to the brokerage firm where the joint account was held and asked that the bonds be redeemed under the survivor’s option. In their redemption request letters, the Staples falsely represented that the deceased participant was an “owner” of the bonds. The Staples did not inform the brokerage firms or bond issuers that the deceased program participants had signed the estate assistance agreements and participant letters relinquishing all ownership interest in the bonds.

By
Posted in: Investment Advisers
Tagged: Fraud and SEC
Published on:
Updated:
Published on:

By

Written by:  Jay B. Gould

On September 17, 2013, the Securities and Exchange Commission (“SEC”) announced enforcement actions against 23 firms for short selling violations as the agency increases its focus on preventing firms from improperly participating in public stock offerings after selling short those same stocks.  The enforcement actions are being settled by 22 of the 23 firms charged, resulting in more than $14.4 million in monetary sanctions.  

The SEC’s Rule 105 of Regulation M prohibits the short sale of an equity security during a restricted period, which is generally defined as five business days before a public offering – and the purchase of that same security through the offering.  The rule applies regardless of the trader’s intent, and promotes offering prices that are set by natural forces of supply and demand rather than manipulative activity.  The rule is intended to prevent short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.

The firms charged in these cases allegedly bought offered shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.   

“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement.  “Through this new program of streamlined investigations and resolutions of Rule 105 violations, we are sending the clear message that firms must pay the price for violations while also conserving agency resources.” 

The SEC’s National Examination Program simultaneously has issued a risk alert to highlight risks to firms from non-compliance with Rule 105.  The risk alert highlights observations by SEC examiners focusing on Rule 105 compliance issues as well as corrective actions that some firms proactively have taken to remedy Rule 105 concerns.

In a litigated administrative proceeding against G-2 Trading LLC, the SEC’s Division of Enforcement is alleging that the firm violated Rule 105 in connection with transactions in the securities of three companies, resulting in profits of more than $13,000.  The Enforcement Division is seeking disgorgement of the trading profits, prejudgment interest, penalties, and other relief as appropriate and in the public interest.  

The SEC charged the following firms in this series of settled enforcement actions:

  • Blackthorn Investment Group – Agreed to pay disgorgement of $244,378.24, prejudgment interest of $15,829.74, and a penalty of $260,000.00.
  • Claritas Investments Ltd. – Agreed to pay disgorgement of $73,883.00, prejudgment interest of $5,936.67, and a penalty of $65,000.00.
  • Credentia Group – Agreed to pay disgorgement of $4,091.00, prejudgment interest of $113.38, and a penalty of $65,000.00.
  • D.E. Shaw & Co. – Agreed to pay disgorgement of $447,794.00, prejudgment interest of $18,192.37, and a penalty of $201,506.00.
  • Deerfield Management Company – Agreed to pay disgorgement of $1,273,707.00, prejudgment interest of $19,035.00, and a penalty of $609,482.00.
  • Hudson Bay Capital Management – Agreed to pay disgorgement of $665,674.96, prejudgment interest of $11,661.31, and a penalty of $272,118.00.
  • JGP Global Gestão de Recursos – Agreed to pay disgorgement of $2,537,114.00, prejudgment interest of $129,310.00, and a penalty of $514,000.00.
  • M.S. Junior, Swiss Capital Holdings, and Michael A. Stango – Agreed to collectively pay disgorgement of $247,039.00, prejudgment interest of $15,565.77, and a penalty of $165,332.00.
  • Manikay Partners – Agreed to pay disgorgement of $1,657,000.00, prejudgment interest of $214,841.31, and a penalty of $679,950.00.
  • Meru Capital Group – Agreed to pay disgorgement of $262,616.00, prejudgment interest of $4,600.51, and a penalty of $131,296.98.00.
  • Merus Capital Partners – Agreed to pay disgorgement of $8,402.00, prejudgment interest of $63.65, and a penalty of $65,000.00.
  • Ontario Teachers’ Pension Plan Board – Agreed to pay disgorgement of $144,898.00, prejudgment interest of $11,642.90, and a penalty of $68,295.
  • Pan Capital AB – Agreed to pay disgorgement of $424,593.00, prejudgment interest of $17,249.80, and a penalty of $220,655.00.
  • PEAK6 Capital Management – Agreed to pay disgorgement of $58,321.00, prejudgment interest of $8,896.89, and a penalty of $65,000.00.
  • Philadelphia Financial Management of San Francisco – Agreed to pay disgorgement of $137,524.38, prejudgment interest of $16,919.26, and a penalty of $65,000.00.
  • Polo Capital International Gestão de Recursos a/k/a Polo Capital Management – Agreed to pay disgorgement of $191,833.00, prejudgment interest of $14,887.51, and a penalty of $76,000.00.
  • Soundpost Partners – Agreed to pay disgorgement of $45,135.00, prejudgment interest of $3,180.85, and a penalty of $65,000.00.
  • Southpoint Capital Advisors – Agreed to pay disgorgement of $346,568.00, prejudgment interest of $17,695.76, and a penalty of $170,494.00.
  • Talkot Capital – Agreed to pay disgorgement of $17,640.00, prejudgment interest of $1,897.68, and a penalty of $65,000.00.
  • Vollero Beach Capital Partners – Agreed to pay disgorgement of $594,292, prejudgment interest of $55.171, and a penalty of $214,964..
  • War Chest Capital Partners – Agreed to pay disgorgement of $187,036.17, prejudgment interest of $10,533.18, and a penalty of $130,000.00.
  • Western Standard – Agreed to pay disgorgement of $44,980.30, prejudgment interest of $1,827.40, and a penalty of $65,000.00.
Published on:

By

This article was published by The FCPA Report and is reprinted here with permission.

More and more, venture capital firms are investing in start-ups seeking to expand internationally or with nascent cross-border operations in place.  Such investments offer opportunities for lucrative returns but also carry significant anti-corruption risk that VC firms are often ill-equipped to manage.  For many businesses, managing anti-corruption risk is a necessary cost center.  But VC firms are uniquely positioned to use that risk to drive a better deal and gain greater control over management and direction of the business.

The overlapping and increasingly aggressive anti-corruption regimes, including the FCPA, the U.K. Bribery Act, the anti-bribery laws in China, Germany and the newly enacted law in Brazil, coupled with the heightened risk of corruption in emerging economies, can quickly derail an otherwise strong investment.  Not only are VC firms subject to fines, penalties and reputational harm through the conduct of the start-up, but the conduct itself may have occurred before the VC firm even considered taking a stake.

This article offers an assessment of the opportunities and risks that VC firms should consider, and concludes with four strategies for maximizing returns while limiting anti-corruption risks.

READ MORE…

Published on:

By

Written by:  Kimberly V. Mann

The Security and Exchange Commission’s recent enforcement action against Lawrence D. Polizzotto serves as a reminder to all issuers that Regulation FD enforcement is alive and well.

The Polizzotto Case

Polizzotto, the former vice president of investor relations at First Solar, Inc. (and, ironically, a member of the company’s Disclosure Committee, which is responsible for ensuring the company’s compliance with Regulation FD), was found by the SEC to have violated Section 13(a) of the Exchange Act of 1934 (the “Exchange Act”) and Regulation FD by selectively disclosing material nonpublic information to certain analysts and investors before the information was publicly disclosed.  The selective disclosures were made to reassure certain analysts and investors about the company’s prospects of obtaining two loan guarantees and to correct information that was previously disclosed about another loan guarantee. Polizzotto knew that First Solar had not yet issued a press release containing information about the status of the guarantees, but went forward with the selective disclosures in any event to counter adverse research reports about the company and stem substantial declines in the company’s stock price. The SEC also determined that Polizzotto directed a subordinate to make similar selective disclosures in advance of the public announcement. First Solar did not publicly disclose the information about the guarantees until the morning after the selective disclosures were made and the company’s stock price declined by 6% on the news.

Polizzotto’s selective disclosure caused First Solar to violate Section 13(a) and Regulation FD. Because First Solar provided what the SEC described as “extraordinary cooperation,” and because the company demonstrated a culture of compliance, it was not charged with any violations. The SEC’s order can be found at www.sec.gov/litigation/admin/2013/34-70337.pdf.

Regulation FD Basics

  • Under Regulation FD, an issuer or any person acting on its behalf that intentionally discloses material nonpublic information to (i) broker-dealers or their associated persons, (ii) investment advisers or their associated persons,
    (iii) investment companies or entities such as hedge funds that would be investment companies but for their reliance on exceptions available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 or their affiliated persons or (iv) any of the holders of the issuer’s securities, where it is foreseeable that the recipient of the information would purchase or sell the issuer’s securities on the basis of the information disclosed is required to make simultaneous public disclosure of the information. Disclosure is intentional if the disclosing person knows or is reckless in not knowing that the information being disclosed is material and nonpublic.
  • If selective disclosure is unintentional, public disclosure is required to be made promptly following the selective disclosure. Public disclosure is made promptly by a fund if it is made as soon as reasonably practicable after a senior official of the fund or of the fund’s investment adviser learns that there has been unintentional disclosure of material nonpublic information. In no event will public disclosure be deemed promptly made if it is made after the later of (i) 24 hours after the senior official learns of the unintentional disclosure and
    (ii) commencement of trading on the New York Stock Exchange on the trading day after the senior official learns of the unintentional disclosure.
  • In the context of an investment fund, the term “issuer” means a closed-end fund that (i) has a class of securities registered under Section 12 of the Exchange Act (for example, a fund that has more than $10 million in assets and at least 2000 record holders of any class of its equity securities, or has at least 500 record holders of such securities that are not accredited investors) or (ii) is required to file reports under Section 15(d) of the Exchange Act. Open-end and other types of investment companies are not issuers for purposes of Regulation FD. Foreign private issuers also are not subject to Regulation FD.
  • A “person acting on behalf of a closed-end fund” would include a senior official of the fund or of the fund’s investment adviser or any other officer, employee or agent of the fund that regularly communicates with any person to whom selective disclosure of material nonpublic information is prohibited. An agent of a closed-end fund would include a director, officer or employee of the fund’s adviser or another service provider that is acting as an agent of the fund.
  • The requirements of Regulation FD do not apply to disclosures made by a fund  (i) to its attorneys or any other person that owes a duty of trust or confidence to the fund, (ii) to any person that is subject to an obligation to keep the disclosed information confidential, or (iii) in connection with most primary registered offerings of securities under the Securities Act of 1933. The requirements of Regulation FD apply to disclosures made in connection with unregistered private offerings; however, information may be disclosed privately to select recipients if the recipients are bound by a confidentiality agreement.
  • Public disclosure may be made by way of public filings under the Exchange Act, such as on Form 8-K, or by using any other method reasonably designed to provide broad, nonexclusionary public distribution (such as press releases through wire services with wide circulation, news conferences that are open to the public or publication on the issuer’s website).  In 2008, the SEC issued guidance on public disclosure through company websites, which can be found at   http://www.sec.gov/rules/interp/2008/34-58288.pdf.
  • On April 2, 2013, the SEC issued guidance indicating that social media outlets are permitted to be used to disseminate material information publicly in compliance with Regulation FD. The principles outlined in the 2008 guidance on company websites should be used to determine whether a particular social media outlet is an appropriate channel of distribution for purposes of Regulation FD. In order to use a company website or social media to disclose information publicly, investors must be notified of the specific website or social media channel to be used to provide information to the public. The SEC’s investigative report on social media and Regulation FD can be found at http://www.sec.gov/litigation/investreport/34-69279.pdf.

Regulation FD Compliance Measures 

The following is a partial list of measures that funds and their advisers might implement to assist with Regulation FD compliance.

  • Review existing Regulation FD policies with counsel and update them from time to time as appropriate. Indicate in the Regulation FD compliance policy the names and titles of those persons that are authorized to speak to investors on behalf of the fund.
    • Establish procedures for responding to inquiries from investors and market professionals.
    • Develop a definition of “material information” and incorporate it in the Regulation FD policy.
    • Establish procedures for handling one-on-one discussions with investors and market professionals.
    • Develop policies and procedures for the use of a website or social media to disseminate information to the public.
    • Maintain records of prior disclosures of material information.
  • Conduct periodic Regulation FD training for persons acting on behalf of the fund.
  • Conduct periodic Regulation FD compliance audits.
  • Establish accountability for Regulation FD compliance at top management levels.

Establishing effective policies and procedures designed to ensure compliance with Section 13(a) and Regulation FD may, in addition to reducing the risk of violations, have the effect of reducing the risk of liability in the event a violation occurs.

Published on:

By

The 4th Annual Excellence In Investing: San Francisco, in partnership with The Sohn Conference Foundation, will be held on October 23, 2013 at The Bentley Reserve.   Excellence In Investing: San Francisco is the premiere Bay Area investor conference benefiting local and national education and other children’s causes.  

For more information and to register, please visit www.excellencesf.org or click here.

By
Posted in: Events
Published on:
Updated: