Articles Tagged with SEC

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The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its Examination Priorities for 2015.  The priorities represent certain practices and products that OCIE believes present a potentially higher risk to investors and/or the integrity of the US capital markets.  In 2015, OCIE’s priorities focus on issues involving investment advisers, broker-dealers and transfer agents and are organized into three thematic areas:

  1. Examining important matters to retail investors and investors saving for retirement, such as whether the information, advice, products and services offered is consistent with applicable law.  Specifically, OCIE has identified the following examination priorities:
  • Fee Selection and Reverse Churning – Where an adviser offers a variety of fee arrangements, OCIE will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.
  • Sales Practices – OCIE will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.
  • Suitability – OCIE will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities and whether the suitability of the recommendations or determinations are consistent with existing legal requirements.
  • Branch Offices – OCIE will focus on registered entities’ supervision of registered representatives and financial adviser representatives in branch offices, and attempt to identify branches that may be deviating from compliance practices of the firm’s home office.
  • Alternative Investment Companies – OCIE will continue to assess alternative investment companies and focus on: (i) leverage, liquidity and valuation policies and practices; (ii) factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and (iii) the manner in which such funds are marketed to investors.
  • Fixed Income Companies – OCIE will determine whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading.
  1. Assessing issues related to market risks.  Specifically, OCIE has identified the following examination priorities:
  • Large Firm Monitoring – OCIE will continue to monitor the largest broker-dealers and asset managers to assess risks at individual firms.
  • Clearing Agencies – OCIE will continue to examine all clearing agencies designated as “systemically important” under the Dodd-Frank Act.
  • Cybersecurity – OCIE will continue to examine broker-dealers and investment advisers’ cybersecurity compliance and controls and expand these examinations to include transfer agents.
  • Potential Equity Order Routing Conflicts – OCIE will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.
  1. Analyzing data to identify and examine registrants that may be engaging in illegal activity, such as excessive trading and penny stock, pump-and-dump schemes. Specifically, OCIE has identified the following examination priorities:
  • Recidivist Representatives – OCIE will continue to try to identify individuals with a history of misconduct and examine the firms that employ them.
  • Microcap Fraud – OCIE will continue to examine broker-dealers and transfer agents that aid and abet pump-and-dump schemes or market manipulation.
  • Excessive Trading – OCIE will continue to analyze data from clearing brokers to identify and examine brokers that engage in excessive trading.
  • Anti-Money Laundering – OCIE will continue to examine firms that have not filed suspicious activity reports (SARs) or provide customers with direct access to markets of higher-risk jurisdictions.

In addition, OCIE has identified other examination priorities for 2015, including:

  • Municipal Advisors – OCIE intends to examine newly registered municipal advisors to determine whether they comply with recently adopted SEC and Municipal Securities Rulemaking Board rules.
  • Proxy Services – OCIE intends to examine proxy advisory service firms and investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors.
  • Never-Before-Examined Investment Companies – OCIE will conduct focused, risk-based examinations of registered investment company complexes that haven’t been examined before.
  • Fees and Expenses in Private Equity – this continues to be an area that OCIE is focused on.
  • Transfer Agents – OCIE intends to examine transfer agents, particularly those involved with microcap securities and private offerings.

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Annual Compliance Obligations—What You Need To Know

As the new year is upon us, there are some important annual compliance obligations Investment Advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) and Commodity Pool Operators (“CPOs”) or Commodity Trading Advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) should be aware of.

See upcoming deadlines below and in red throughout this document.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers, CPOs and CTAs (collectively, “Managers”).  The summary is not intended to be a comprehensive review of an Investment Adviser’s securities, tax, partnership, corporate or other annual requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered.  State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.

List of annual compliance deadlines:

State registered advisers pay IARD fee November-December (of 2014)
Form 13F (for 12/31/14 quarter-end) February 17, 2015*
Form 13H annual filing February 17, 2015
Schedule 13G annual amendment February 17, 2015
Registered CTA Form PR (for December 31, 2014 year-end) February 17, 2015
TIC Form SLT January 23, 2015 (for December 2014)
TIC Form SHCA March 6, 2015
TIC B Forms Monthly report (December 2014) – by January 15, 2014Quarterly report (December 31, 2014) – by January 20, 2014
Affirm CPO exemption March 2, 2015
Registered Large CPO Form CPO-PQR December 31 quarter-end report March 2, 2015
Registered CPOs filing Form PF in lieu of Form CPO-PQR December 31 quarter-end report March 31, 2015
Registered Mid-Size and Small CPO Form CPO-PQR year-end report March 31, 2015
SEC registered advisers and ERAs pay IARD fee Before submission of Form ADV annual amendment by March 31, 2015
Annual ADV update March 31, 2015
Delivery of Brochure April 30, 2015
Delivery of audited financial statements (for December 31, 2014 year-end) April 30, 2015
California Finance Lender License annual report (for December 31, 2014 year- end) March 15, 2015
Form PF filers pay IARD fee Before submission of Form PF
Form PF for large liquidity fund advisers (for December 31, 2014 quarter end) January 15, 2015
Form PF for large hedge fund advisers (for December 31, 2014 quarter end) March 2, 2015
Form PF  for smaller private fund advisers and large private equity fund advisers (for December 31, 2014 fiscal year-end) April 30, 2015
FBAR Form FinCEN Report 114 (for persons meeting the filing threshold in 2014 and those persons whose filing due date for reporting was previously extended by Notices 2013-1, 2012-2, 2012-1, 2011-2 and 2011-1) June 30, 2015
FATCA information reports filing for 2014 by participating FFIs March 31, 2015
Form D annual amendment One year anniversary from last amendment filing.

* Reflects an extended due date under Exchange Act Rule 0-3.  If the due date of filing falls on a Saturday, Sunday or holiday, a report is considered timely filed if it is filed on the first business day following the due date.

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Now that enforcement agencies have determined that digital currencies are more than a passing fad, they are establishing more permanent efforts focused on the novel legal issues digital currencies present. The SEC’s formation of its multi-office Digital Currency Working Group may foreshadow an increase in the agency’s exercise of regulatory authority over entities offering interests in Bitcoin and other digital currencies.

Businesses that transact in digital currencies or cryptocurrencies, such as Bitcoin and Litecoin, should be aware of the SEC’s increased focus on these transactions.

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By William M. Sullivan, Jr. and Jay B. Gould

Under the Second Circuit’s new ruling, prosecutors have two large hurdles they must clear to convict under securities laws. First, they must prove that a defendant knew that the source of inside information disclosed tips in exchange for a personal benefit. Second, the definition of “personal benefit” is tightened to something more akin to a quid pro quo exchange.

For years, insider trading cases have been slam dunks for federal prosecutors. The United States Attorney’s Office in the Southern District of New York had compiled a remarkable streak of more than eighty insider trading convictions over the past five years. But that record has evaporated thanks to the United States Court of Appeals for the Second Circuit’s ruling in United States v. Newman, in which the Second Circuit concluded that the district court’s jury instructions were improper and that the evidence was insufficient to sustain a conviction.

The Second Circuit relied upon a thirty year old Supreme Court opinion, Dirks v. SEC, 463 U.S. 646 (1983), and highlighted the “doctrinal novelty” of many of the government’s recent successful insider trading prosecutions in failing to follow Dirks. Accordingly, the Court overturned insider trading convictions for Todd Newman and Anthony Chiasson because the defendants did not know they were trading on confidential information received from insiders in violation of those insiders’ fiduciary duties. More broadly, however, the Court laid down two new standards in tipping liability cases, both likely to frustrate prosecutors for years to come.

Tougher Disclosure Requirements

Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission rules 10b-5 and 10b5-1 generally prohibit trading on the basis of material nonpublic information, more conventionally known as insider trading. In addition, federal law also prohibits an individual (the “tipper”) from disclosing private information to an outside person (the “tippee”), if the tippee then trades on the basis of this private information. This disclosure—a breach of one’s fiduciary duty—is known as tipping liability. As with most crimes, tipping liability requires scienter, a mental state that demonstrates intent to deceive, manipulate, or defraud. In these cases, the government must show that the defendant acted willfully—i.e., with the realization that what he was doing was a wrongful act under the securities laws.

Until last week, willfulness had been fairly easy to show, and that was one of the principal reasons for the government’s string of successes. Prosecutors only had to prove that the defendants traded on confidential information that they knew had been disclosed through a breach of confidentiality. In Newman, however, the Second Circuit rejected this position outright. The Court held that a tippee can only be convicted if the government can prove that he knew that the insider disclosed confidential information in exchange for a personal benefit, and one that is “consequential” and potentially pecuniary.

This distinction may seem minor, but its impact is enormous. The government now must prove—beyond a reasonable doubt, no less—that a defendant affirmatively knew about a personal benefit to the source of the confidential information. From the prosecution’s perspective, this is a massively challenging prospect.

Tightened “Personal Benefit” Standards

The Second Circuit also clarified the definition of “personal benefit” in the tipping liability context. Previously, the Court had embraced a very broad definition of the term—so broad, in fact, that the government argued that a tip in exchange for “mere friendship” or “career advice” could expose a trader to tipping liability.

The Court retreated from this position and narrowed its standard. Now, to constitute a personal benefit, the prosecution must show an exchange “that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature” —in other words, something akin to a quid pro quo relationship. This, too, complicates a prosecution’s case significantly.

Implications of the Ruling

What effect will this ruling have moving forward? Of course, one effect is obvious from the start: prosecutors are going to have a much more difficult time proving tipping liability. But as with many new appellate cases, it may take some time to see how this rule shakes out on the ground in the trial courts. Here are a few things to keep in mind over the next few months and years.

  • This ruling may cause some immediate fallout. For example, there are currently several similar cases in New York that are pending for trial or appeal, and these may now result in acquittals or vacated convictions. In fact, some defendants who previously took guilty pleas in cooperation with Newman and Chiasson’s case are considering withdrawing their pleas in light of this decision. Moving forward, look to see the SEC and potential defendants adjusting their behavior and strategies in light of this ruling. In fact, just this week, a New York Federal Judge expressed strong reservations about whether guilty pleas entered by four defendants in an insider trader case related to a $1.2 billion IBM Corp. acquisition in 2009 should remain in light of Newman.
  • This is also welcome news for tippees who did not interact directly with the source of the inside information. Although the source of the leak may still be prosecuted as usual, this ruling may shield a more remote party from an indictment. As the Newman court noted, the government’s recent insider trading wins have been “increasingly targeted at remote tippees many levels removed from corporate insiders.” Now, without clear evidence that the insider received a quantifiable benefit and that the tippee was aware of such benefit for providing the information, cases against such “remote tippees” will be tremendously more difficult to prove.
  • But, caution should still reign where tippees deal more directly with tippers. The tippees in this case were as many as three or four steps removed from the tippers. It is not difficult to imagine the Court coming out the other way if Newman and Chiasson had been dealing with the tippers themselves.
  • One enormous question mark is to what extent the standards expressed in this case will affect the SEC’s civil enforcement suits. We will have to wait and see, but traders should still use caution. Because civil suits require a substantially lower burden of proof and lesser standard of intent compared to criminal cases, it is possible that these new rules may offer little protection from a civil suit. Additionally, SEC attorneys will probably emphasize this distinction to courts in an attempt to distinguish their enforcement suits from Newman and Chiasson’s criminal case, but whether this tactic is effective remains to be seen.
  • Although the Court refined the meaning of a personal benefit, the definition is still purposefully flexible. This case tells us that abstract psychic benefits—friendship, business advice, church relationships—are not enough, but what about anything just short of exchanging money, favors, or goods? We don’t yet know, and for that reason clients should exercise care.
If you have any questions about the content of this alert,   please contact the Pillsbury attorney with whom you regularly work, or the   authors below.
Jay B. Gould (bio)San Francisco

+1.415.983.1226

jay.gould@pillsburylaw.com

 William M. Sullivan (bio)Washington, DC

+1.202.663.8027

wsullivan@pillsburylaw.com

 

The authors wish to thank Robert Boyd for his valuable assistance with this client alert.

 

About Pillsbury Winthrop Shaw Pittman LLP
Pillsbury is a full-service law firm with an industry focus on energy & natural resources, financial services including financial institutions, real estate & construction, and technology. Based in the world’s major financial, technology and energy centers, Pillsbury counsels clients on global business, regulatory and litigation matters. We work in multidisciplinary teams that allow us to understand our clients’ objectives, anticipate trends, and bring a 360-degree perspective to complex business and legal issues—helping clients to take greater advantage of new opportunities, meet and exceed their objectives, and better mitigate risk. This collaborative work style helps produce the results our clients seek.

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On November 25, 2014, the Securities and Exchange Commission (the “SEC”) brought charges against a Swiss-based bank that should serve as notice to all non-U.S. banks that maintain relationships with clients who have moved to the U.S., as well as U.S.-based banks that provide services to clients who have relocated to other countries.  The SEC found that HSBC’s Swiss-based private banking arm violated U.S. securities laws by providing investment advisory and brokerage services to U.S. clients without being properly registered as either an investment adviser or a broker-dealer.  HSBC Private Bank (Suisse) agreed to admit wrongdoing and pay $12.5 million to settle the SEC’s charges in a combination of disgorgement, prejudgment interest, and penalties.

How often do financial institutions, foreign or U.S., put themselves in the position of willfully violating the securities and banking laws of other countries?  Pretty routinely, as it turns out.  By way of example, suppose you are a citizen of a European Union country with a local banking relationship.  You work for a large multi-national company that offers you a promotion, but that new job is in New York.  Not one to decline an opportunity, off you go to the Center of the Universe.  You open a new bank account at a local New York bank, but you maintain your European bank relationship because you have a consolidated banking, investment advisory and brokerage relationship there that has worked quite well for you.  The relationship manager at your European bank certainly does not want to give up the revenue stream from your lucrative relationship, particularly now that you are making so much more money and you are willing to purchase and sell stocks more frequently.  Multiply this scenario several times over and before you know it, this certain European bank is routinely providing banking, investment advisory, and brokerage services to U.S. residents without being properly registered to do so.

This same scenario can and often does play out in reverse.  A U.S. citizen moves to a foreign country and maintains his banking, investment advisory and/or brokerage relationships with a financial institution that is not qualified to do business in the client’s new country of residence and before you know it, the U.S. financial institution is in violation of the laws of the country in which its client now resides.  And, not to gratuitously pick on any particular jurisdiction, the provision of such services in some countries pourrait être criminelle.

In the case of HSBC, the SEC found that HSBC Private Bank and its predecessors began providing cross-border advisory and brokerage services in the U.S. more than 10 years ago on behalf of at least 368 U.S. client accounts and collected fees totaling approximately $5.7 million.  HSBC relationship managers traveled to the U.S. on at least 40 occasions to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered in the U.S. as investment adviser representatives or licensed brokers, nor were they affiliated with a registered investment adviser or broker-dealer (or “chaperoned” by a registered U.S. broker-dealer).  The relationship managers also communicated directly with clients in the U.S. through overseas mail and e-mails.  In 2010, HSBC Private Bank decided to exit the U.S. cross-border business, and nearly all of its U.S. client accounts were closed or transferred by the end of 2011.

According to the SEC’s order, HSBC Private Bank understood there was a risk of violating U.S. securities laws by providing unregistered investment advisory and brokerage services to U.S. clients, and the firm undertook certain compliance initiatives in an effort to manage and mitigate the risk.  The firm created a dedicated North American desk to consolidate U.S. client accounts among a smaller number of relationship managers and service them in a compliant manner that would not violate U.S. registration requirements.  However, certain relationship managers were reluctant to lose clients by transferring them to the North American desk and stalled the process or ignored it altogether.  HSBC Private Bank’s internal review revealed multiple occasions when U.S. accounts that were expected to be closed under certain compliance initiatives remained open.  HSBC Private Bank admitted to the SEC’s findings in the administrative order, acknowledged that its conduct violated U.S. securities laws, and accepted a censure and a cease-and-desist order.

Foreign financial institutions, even those that have U.S. affiliates that are properly registered and regulated as banks, investment advisers, or broker-dealers should undertake a review of their client accounts to determine whether they are providing services that are in violation of applicable law.  It is possible, perhaps even likely, that even if a non-U.S. financial institution has properly registered U.S. entities, services are being provided to certain clients outside of those entities as a result of historical relationships.  U.S. banks should also determine whether they are providing financial services to relocated clients in countries that would either prohibit such services or require some form of notification or registration.  A failure to abide by the laws of non-U.S. countries could also place a U.S. institution in the position of violating certain U.S. laws that require diligence of and compliance with the laws of other countries.

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On October 29, 2014, the Securities and Exchange Commission (“SEC”) announced an administrative enforcement action against an investment advisory firm and three top officials for violating rule 206(4)-2 under the Investment Advisers Act of 1940 (“Advisers Act”), the “custody rule,” that requires firms to follow certain procedures when they control or have (or are deemed to have) access to client money or securities.  This enforcement action follows closely on the heels of statements by SEC officials indicating that violations of the custody rule were a recurring theme during the “presence exams” of private equity fund advisers and other first time investment adviser registrants that have been conducted by the SEC staff over the last year and a half.

Advisory firms with custody of private fund assets can comply with the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year.  This provides investors with regular independent verification of their assets as a safeguard against misuse or theft.  The SEC’s Enforcement Division alleges that Sands Brothers Asset Management LLC has been repeatedly late in providing investors with audited financial statements of its private funds, and the firm’s co-founders along with its chief compliance officer and chief operating officer were responsible for the firm’s failures to comply with the custody rule.  As investment adviser registrants are painfully aware, chief compliance officers have personal liability for compliance failures under Advisers Act rule 206(4)-7.  This particular enforcement action was brought pursuant to section 203(f) of and rule 206(4)-2 under the Advisers Act.  It remains to be seen whether the SEC will bring a separate action against the Sands Brothers’ chief compliance officer under rule 206(4)-7.

Also nervously awaiting any further action by the SEC would be the accountants and lawyers that advised the Sands Brothers and their hedge funds with respect to the custody matter.  The accounting firm or firms that conducted the audit of the Sands Brothers hedge funds likely knew that the funds did not meet the requirements of the custody rule.  It is less certain whether the external lawyers knew or should have known about these violations.  However, if either the accountants or lawyers knew of these violations and advised that they were only technical in nature and immaterial or  unimportant, the SEC could take separate administrative action pursuant to SEC rule 102(e) to bar any such party from practicing before the SEC.  We previously wrote about the more aggressive posture that the SEC signaled with respect to service providers, specifically lawyers that assist or “aid and abet” violations of the securities laws.  The SEC has a fairly high standard to meet when bringing these types of cases, but that has not deterred the regulator from aggressively pursuing more accountants and lawyers in recent months.

According to the SEC’s order instituting the administrative proceeding, Sands Brothers was at least 40 days late in distributing audited financial statements to investors in 10 private funds for fiscal year 2010.  The next year, audited financial statements for those same funds were delivered anywhere from six months to eight months late.  The same materials for fiscal year 2012 were distributed to investors approximately three months late.  According to the SEC’s order, Sands Brothers and the two co-founders were previously sanctioned by the SEC in 2010 for custody rule violations.

If you have been late on the delivery of your audited financial statements and have not availed yourself of the “surprise audit” provision of the custody rule, or if you manage “side car” funds that have never been audited, you should immediately get in touch with your Pillsbury attorney contact.

 

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On September 22, 2014, the Securities and Exchange Commission (the “SEC”) charged private equity fund adviser, Lincolnshire Management, Inc. (“Lincolnshire”), with misallocating expenses shared between two portfolio companies. Lincolnshire integrated two portfolio companies that were each owned by a different Lincolnshire private equity fund. Lincolnshire owed a fiduciary duty to each fund and such fiduciary duty was breached when Lincolnshire would charge one portfolio company more than its fair share for expenses benefiting both portfolio companies.

Lincolnshire was aware of the complexity involved in sharing expenses and did have an expense allocation policy in place, though it was not in writing. The instances that resulted in a breach of Lincolnshire’s fiduciary duty were those in which the verbal expense allocation policy was not followed. The SEC also found, with respect to the integration of the portfolio companies, that Lincolnshire did not have sufficient written policies and procedures in place to prevent violations of the Investment Advisers Act of 1940 (“Adviser’s Act”). Lincolnshire agreed to a settlement with the SEC in excess of $2.3 million.

It is interesting to note that, while the SEC announced several months ago it had conducted presence exams and found many issues in private equity managers, Lincolnshire was not one of the companies subject to a presence exam. Private equity managers who have not had a presence exam should not assume they are unlikely to be examined outside of the presence exam protocol. This enforcement action reinforces the requirement that private equity fund advisers are required to have policies and procedures in place that are designed to prevent violations of the Adviser’s Act and other securities laws. More importantly, once in place, such policies and procedures must be monitored by the chief compliance officer and observed by all “covered persons.”

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On September 16, 2014, the Securities and Exchange Commission (“SEC”) announced the latest sanctions in a continuing enforcement initiative against certain hedge fund advisers and private equity firms that have participated in an offering of a stock after short selling it during a restricted period in contravention of SEC rules.

The SEC last year announced the initiative to enhance enforcement of Rule 105 of Regulation M, which is designed to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation.  Rule 105 typically prohibits firms or individuals from short selling a stock within five business days of participating in an offering for that same stock.  Such dual activity typically results in illicit profits for the firms or individuals while reducing the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock.

The SEC’s investigations targeted 19 firms and one individual trader in the latest cases engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on public offering.  Each firm and the individual trader have agreed to settle the SEC’s charges and pay a combined total of more than $9 million in disgorgement, interest, and penalties.

Pursuant to this enforcement initiative, the SEC’s Enforcement Division works closely with FINRA and the SEC’s National Exam Program to identify potential violations of Rule 105.  Enforcement staff seeks trading data and certain other relevant information from traders and expedites these cases by using uniform methodologies for determining trading profits and deciding appropriate penalties.

This latest round of administrative proceedings for Rule 105 violations included the following organizations with the monetary sanctions as indicated below:

  • Advent Capital Management – The New York-based firm agreed to pay disgorgement of $75,292, prejudgment interest of $3,836.36, and a penalty of $65,000.
  • Antipodean Advisors – The New York-based firm agreed to pay disgorgement of $27,970, prejudgment interest of $702.83, and a penalty of $65,000.
  • BlackRock Institutional Trust Company – The California-based firm agreed to pay disgorgement of $1,122,400, prejudgment interest of $22,471.13, and a penalty of $530,479.
  • East Side Holdings II – The New Jersey-based firm agreed to pay disgorgement of $26,613, prejudgment interest of $397.38, and a penalty of $130,000.
  • Explorador Capital Management – The Brazil-based firm agreed to pay disgorgement of $83,722, prejudgment interest of $6,936.65, and a penalty of $65,000.
  • Formula Growth – The Canada-based firm agreed to pay disgorgement of $42,488, prejudgment interest of $4,255.15, and a penalty of $65,000.
  • Great Point Partners – The Connecticut-based firm agreed to pay disgorgement of $43,068, prejudgment interest of $1,529.13, and a penalty of $65,000.
  • Indaba Capital Management – The California-based firm agreed to pay disgorgement of $194,797, prejudgment interest of $11,990.79, and a penalty of $97,398.59.
  • Ironman Capital Management – The Texas-based firm agreed to pay disgorgement of $21,844, prejudgment interest of $382.66, and a penalty of $65,000.
  • James C. Parsons – An individual trader who lives in New York City agreed to pay disgorgement of $135,531, prejudgment interest of $3,063.90, and a penalty of $67,765.72.
  • Midwood Capital Management – The Massachusetts-based firm agreed to pay disgorgement of $72,699, prejudgment interest of $5,248.19, and a penalty of $65,000.
  • Nob Hill Capital Management – The California-based firm made sworn statements to the Commission attesting to a financial condition that makes it unable to pay any penalty.
  • RA Capital Management – The Massachusetts-based firm agreed to pay disgorgement of $2,646,395.21, prejudgment interest of $73,394.16, and a penalty of $904,570.84.
  • Rockwood Investment Management (also known as Rockwood Partners LP) – The Connecticut-based firm agreed to pay disgorgement of $156,631, prejudgment interest of $9,222.16, and a penalty of $72,135.23.
  • Seawolf Capital – The New York-based firm agreed to pay disgorgement of $192,730, prejudgment interest of $7,842.28, and a penalty of $96,365.
  • Solus Alternative Asset Management – The New York-based firm agreed to pay disgorgement of $39,600, prejudgment interest of $895.22, and a penalty of $65,000.
  • SuttonBrook Capital Management – The New York-based firm agreed to pay disgorgement of $70,000.
  • Troubh Partners – The New York-based firm agreed to pay disgorgement of $262,744, prejudgment interest of $39,315.13, and a penalty of $106,651.15.
  • Vinci Partners Investimentos – The Brazil-based firm agreed to pay disgorgement of $283,480, prejudgment interest of $23,487.08, and a penalty of $141,740.
  • Whitebox Advisors – The Minnesota-based firm agreed to pay disgorgement of $788,779, prejudgment interest of $48,553.49, and a penalty of $365,592.83

Pillsbury’s Investment Funds Team regularly advises clients on how not to show up on lists such as these.

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In a press release yesterday, the CFTC issued an exemptive letter, CFTC Letter No. 14-116, providing relief from certain provisions of CFTC Regulations 4.7(b) and 4.13(a)(3) that restrict marketing to the public.  The exemptive relief was issued to make CFTC Regulations 4.7(b) and 4.13(a)(3) consistent with SEC Rule 506(c) of Reg. D and Rule 144A, which were amended by the Jumpstart Our Business Startups Act (JOBS Act), to permit general solicitation or advertising subject to certain limitations.

Generally, the JOBS Act adopted SEC Rule 506(c) to permit an issuer, subject to the conditions of the rule, to engage in general solicitation or general advertising when offering and selling securities, and amended SEC Rule 144A to permit the use of general solicitation, subject to the limitations of the rule, when securities are sold to qualified institutional buyers (“QIBs”) or to purchasers that the seller reasonably believes are QIBs.  Prior to the CFTC’s exemptive relief, commodity pool operators (“CPOs”) relying on CFTC Regulations 4.7(b) and 4.13(a)(3) were not able to use general solicitation under Rule 506(c) or Rule 144A, as the CFTC exemptions prohibited general solicitation.

The new relief from provisions in CFTC Regulations 4.7(b) and 4.13(a)(3) is subject to the following conditions:

  1. The exemptive relief is strictly limited to CPOs who are 506(c) Issuers or CPOs using 144A Resellers.
  2. CPOs claiming the exemptive relief must file a notice with the Division.  The notice of claim of exemptive relief must:
  • State the name, business address, and main business telephone number of the CPO claiming the relief;
  • State the name of the pool(s) for which the claim is being filed;
  • State whether the CPO claiming relief is a 506(c) Issuer or is using one or more 144A Resellers;
  • Specify whether the CPO intends to rely on the exemptive relief pursuant to Regulation 4.7(b) or 4.13(a)(3), with respect to the listed pool(s);

 i.      If relying on Regulation 4.7(b), represent that the CPO meets the conditions
of the exemption, other than that provision’s requirements that the offering be
exempt pursuant to section 4(a)(2) of the 33 Act and be offered solely to QEPs,
such that the CPO meets the remaining conditions and is still required to sell
the participations of its pool(s) to QEPs;
ii.       If relying on Regulation 4.13(a)(3), represent that the CPO meets the
conditions of the exemption, other than that provision’s prohibition against
marketing to the public;

  • Be signed by the CPO; and
  • Be filed with the Division via email using the email address dsionoaction@cftc.gov and stating “JOBS Act Marketing Relief” in the subject line of such email.
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At the Intersection of Faith and Illiteracy.

In what may have been one of the more interesting weeks this year for SEC enforcement actions, the Enforcement Division brought a number of actions last week, several of which will make you wonder if the warnings that we issued when the JOBS Act was passed are not coming to pass.  Although none of these actions are based on 506(c) reliance, they do suggest that as capital finally starts to seek new opportunities outside the mainstream, it is necessary for investors to evaluate investment opportunities very carefully in order to avoid the scam artists who, like Jesse James, go where the money is.

On July 31, 2014, the SEC filed fraud charges and sought emergency relief against Thomas J. Lawler of Snellville, Georgia, a self-proclaimed minister, and his company, Freedom Foundation USA LLC for fraudulently offering and selling fictitious securities.  With all due respect to Siskel and Ebert, this case is not to be missed.  I laughed, I cried, if you only read one enforcement action this year, it has to be this one.

The SEC’s complaint filed in U.S. District Court for the Northern District of Georgia alleged that, since as early as 2004, the defendants  Lawler and Freedom Foundation offered investors the opportunity to eliminate their debts and collect lucrative profits through the purchase of so called “administrative remedies” (“ARs”).  Defendants told potential investors that every individual had funds established for them in an account at birth — where, by whom, and in what amount the supposed account is established are details Lawler does not provide.  Defendants further told potential investors that the investors therefore did not owe their creditors for mortgage and other debts, and that Freedom Foundation would use its unique and proprietary process to create the ARs, which would eliminate the investors’ debt and provide a lucrative financial return.  Does the Wesley Snipes tax case come to mind?

The SEC alleged that defendants told potential investors that a $1,000 AR would cancel the investor’s debt and return $325,000 to the investor, while a $10,000 investment would supposedly entitle the investor to receive $1 million when the AR funded.  Freedom Foundation claimed it would fund the ARs through a mysterious process involving a Papal decree.  What could possibly go wrong there?  The SEC claims that Lawler sold approximately 2,000 ARs over ten years to investors throughout the country and that he was actively soliciting additional investors.  This is not exactly one per minute, but it is impressive.  And, as shocking as this may sound, the SEC found that not one investor in this scheme received any of the promised returns.

Freedom Club targeted our most ignorant and vulnerable citizens through an internet presentation that was designed to prey on the uninformed and easily swayed.  Let’s hope that the SEC is not successful in shutting down the Freedom Club website before you have the opportunity to check it out: http://www.freedomclubusa.com/.  Admit it, this case does raise the question of whether anyone who would fall for this scam should be allowed to handle money at all…ever.

Chief Compliance Officer/General Counsel Takes the Fall.

You may recall that we recently wrote about attorneys who seem to escape scrutiny by the SEC when they participate in illegal activities.  There is an administrative remedy against attorneys who facilitate or promote wrongdoing, but the SEC has been slow to target ethically challenged attorneys.  Well, wait no longer.  Last month, a judgment was entered by consent against the general counsel and chief compliance officer of an investment adviser who was found to have aided and abetted fiduciary violations of the firm’s principal in the misappropriation of hedge fund client assets in contravention of the offering documents of the fund.  What is the take away here?  If you are a Chief Compliance Officer, I believe you know the answer to that one.

See, Securities and Exchange Commission v. Weston Capital Asset Management, LLC, et al., Civil Action Number 14-CV-80823-COHN, in the United States District Court for the Southern District of Florida.

Criminal Referrals Catching On.

Robert G. Bard was sentenced on July 31 by a U.S. District Court in Pennsylvania. Bard had been found guilty by a jury and convicted of 21 counts of securities fraud, mail fraud, wire fraud, bank fraud, and making false statements for defrauding his investment advisory clients between December 2004 and August 2009.  The court sentenced Bard to 262 months imprisonment and ordered him to pay $4.2 million in restitution to 66 victims.  If you do the math, this comes out to right around $200,000 per year sentence.

The criminal case arose out of the same facts that were the subject of a civil injunctive action filed by the SEC in 2009. The Commission’s complaint alleged that defendant Bard, an investment adviser, and his solely-owned company Vision Specialist Group LLC had violated the federal securities laws through fraudulent misrepresentations regarding client investments, account performance and advisory fees, and by Bard’s creation of false client account statements, forgery of client documents.

In a follow-on administrative proceeding to the SEC’s civil court action, an administrative law judge barred Bard from the securities industry in an initial decision.

Elder Abuse also Brings Criminal Action.

The SEC also brought charges against a broker based in Roanoke, Va., for allegedly defrauding elderly customers, including some who are legally blind, by stealing their funds for her personal use and falsifying their account statements to cover up her fraud.

According to the SEC’s complaint, Donna Jessee Tucker siphoned $730,289 from elderly customers and used the money to pay for such personal expenses as vacations, vehicles, clothes, and a country club membership.  Tucker ensured that the customers received their monthly account statements electronically, knowing that they were unable or unwilling to access their statements in that format. The SEC further alleges that Tucker engaged in unauthorized trading and other financial transactions while making misrepresentations to customers about their investment accounts and forging brokerage, banking, and other documents.

In a parallel action, the U.S. Attorney’s Office for the Western District of Virginia announced criminal charges against Tucker.

The above cited actions represent just some of the more interesting enforcement actions brought by the SEC and the Department of Justice in recent days.  The full list is more extensive.