More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Among recent enforcement actions by the SEC were charges against a Florida-based stock promoter for lying to SEC investigators, suspension of trade of 61 shell companies to preclude fraud, charges against a Fortune 200 company for accounting deficiencies, charges against a penny stock company and its CEO for an illegal stock offering and insider trading, and an emergency freeze on the assets of a Thailand-based trader who engaged in insider trading ahead of the announcement that Smithfield Foods had agreed to be acquired by a Chinese company.
Florida-Based Stock Promoter Charged with Lying to SEC Investigators
The SEC announced that former broker Robert Vitale, the subject of an enforcement inquiry in Florida, has been criminally charged for obstructing justice and lying to SEC investigators looking into his real estate securities offerings to investors.
Vitale and his investment company, Realty Acquisitions & Trust, received subpoenas from SEC investigators, working to identify investor funds and assets related to the securities offerings in question, for all related bank records. In addition, Vitale testified under oath.
However, he lied about the existence of two separate bank accounts, failing to disclose them to the SEC. In one case, he deposited $100,000 into a bank account in Fort Lauderdale under the name of “B.L. Inc.” in the days before he testified in June of 2012. When he was asked under oath by SEC investigators, he did not reveal the existence of the account.
Vitale is a repeat offender. Several years ago he was charged by the SEC for participating in a pump-and-dump market manipulation scheme. He later settled the charges, and was barred from the brokerage industry.
SEC Suspends Trading on 61 Shell Companies
In the second-largest trading suspension in its history, the SEC suspended trade in the stocks of 61 microcap shell companies with delinquent public filings that apparently are no longer in business.
The SEC's microcap fraud working group identified the over-the-counter companies in at least 17 states and one foreign country, and suspended trade in their stocks to either compel the companies to prove they’re still operational by submitting updated financial information, or to ward off hijacking by fraudsters who look for such companies to use in pump-and-dump schemes.
The perpetrators will hype these thinly traded companies to the public with faked or misleading statements about them, then buy up the shares at a low price to make it appear as if there’s market interest in them. Then they reel in the public, which buys shares and drives the price higher. When the price is high enough to make it worth their while, the perpetrators will then dump their shares, reap the profits, and disappear.
In 2012, the SEC conducted its highest ever shutdown of 379 companies in one day, in its Operation Shell Expel initiative.
Fortune 200 Company Charged for Accounting Deficiencies
Bellevue, Wash.-based commercial truck manufacturer PACCAR and a subsidiary, PACCAR Financial Corp., were charged by the SEC for various accounting deficiencies that clouded their financial reporting to investors in the midst of the financial crisis.
According to the SEC, PACCAR, a Fortune 200 company that designs, manufactures and distributes trucks and related aftermarket parts that are sold worldwide under the Kenworth, Peterbilt and DAF nameplates, failed to report the results for its parts business as a separate segment from its truck sales as required under generally accepted accounting principles (GAAP). This occurred from 2008 through the third quarter of 2012.
As an example, the company’s 2009 annual report showed $68 million in income before taxes for its truck segment. However, PACCAR documents and board materials reviewed by senior executives showed a very different picture: the trucks business suffered a $474 million loss and the parts business had $542 million profit; those together arrived at the net income before taxes of $68 million. By at least 2008, PACCAR should have been reporting aftermarket parts as a separate segment in its SEC filings, but it did not do so until the end of 2012.
PACCAR and its subsidiary also failed to maintain accurate books and records regarding their impaired loans and leases, causing them to improperly identify and disclose loans and leases for impairment. As a result, they understated the amounts of their impaired receivables and the specific reserve associated with the receivables in footnotes to their respective 2009 Form 10-K filings. In addition, there were other reporting failures.
Without admitting or denying the charges, PACCAR and PACCAR Financial Corp. agreed to settle, with PACCAR paying a $225,000 penalty. The settlement is subject to court approval.
Penny Stock Company, CEO Charged in Stock Offering, Insider Trading
Microcap company Laidlaw Energy Group and its CEO, Michael Bartoszek, were charged by the SEC; the former with an illegal stock offering, the latter with insider trading.
Laidlaw, which is based in New York City, purports to be a developer of facilities that generate electricity from wood biomass. It was under an SEC trading suspension proactively targeting questionable penny stocks. However, despite the suspension, it sold more than 2 billion shares of its common stock in 35 issuances to three commonly controlled purchasers at deep discounts from the market price.
The company did not register this offering with the SEC, and no exemptions from registration were applicable. The proceeds from the offering, some $1.2 million, was essentially the sole source of funds for the company’s operations during most of its existence.
Bartoszek violated insider trading laws and personally sold more than 100 million shares of Laidlaw common stock from December 2009 to June 2011; he made more than $318,000 in profits. Not only that, but he was in possession of material nonpublic information at the time of his trades—knowing about the company’s poor financial condition, the illegal sale of more than 80% of the company’s stock and adverse developments about the firm’s business prospects.
Both the volume of Bartoszek’s sales and the lack of current publicly available information about the company meant that these sales also violated the registration requirements of the federal securities laws.
As a result of these and additional violations, the SEC is seeking disgorgement plus prejudgment interest, financial penalties, and injunctive relief, as well as penny stock and officer and director bars against Bartoszek.
Thailand-Based Trader’s Assets Frozen for Smithfield Insider Trading
Badin Rungruangnavarat, a Thailand-based trader, was the target of an emergency asset freeze by the SEC after he made more than $3 million in profits by trading in advance of last week’s announcement that Smithfield Foods agreed to a multibillion-dollar acquisition by China-based Shuanghui International Holdings.
Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts from May 21 to May 28 in an account at Interactive Brokers. He is thought to have acquired inside information from, among other possible sources, a Facebook friend who is an associate director at an investment bank to a different company that was exploring an acquisition of Smithfield.
In eight days, Rungruangnavarat made a total unrealized return on his investment of 3,400%. The public announcement of Smithfield’s acquisition was not made till May 29. Shuanghui had agreed to pay $4.7 billion for the company, and after the announcement, Smithfield stock opened almost 25% higher than it had closed the previous day.
The order freezes the proceeds of Rungruangnavarat’s securities purchases, grants expedited discovery, and prohibits Rungruangnavarat from destroying evidence.
Check out SEC Enforcement: Oil Firm Busted for Bribing Iran Official; Goldman VP Settles Pay-to-Play Charge on AdvisorOne.