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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Among recent enforcement actions were the Department of Labor’s recovery of $4 million for an employee stock ownership plan and charges by the SEC against the collateral manager of a CDO for fraud and against Diebold for FCPA violations.
Also, in the wake of a previous SEC action, a Minneapolis-based attorney, his advisory firm and a real estate lending fund were found liable for fraud in a jury trial.
Diebold to Pay $48 Million Over FCPA Violations
Ohio-based Diebold Inc., manufacturer of voting machines, ATMs and bank security systems, was charged by the SEC with violating the Foreign Corrupt Practices Act by bribing officials at government-owned banks with pleasure trips to illegally win business.
From 2005 to 2010, Diebold subsidiaries in China and Indonesia, according to the SEC, sent government-owned bank officials on all-expense-paid junkets to such tourist destinations as the Grand Canyon, Napa Valley, Disneyland, Las Vegas, New York and Hawaii, as well as Paris, Amsterdam, Venice, Rome, Australia and Bali.
The company spent more than $1.6 million on bribes for Chinese officials and more than $147,000 for Indonesian officials; it also hid these expenses as legitimate training expenses. Its Chinese subsidiary also dropped annual cash gifts on dozens of officials that ranged from $100 to more than $600.
And in Russia, from 2005 to 2008, the company spent another $1.2 million in bribes to employees at privately owned banks in connection with the sale of ATMs to those banks, and then cooked the books to cover up the fact.
Diebold has agreed to pay more than $48 million to settle the SEC’s charges and resolve a parallel criminal matter announced today by the U.S. Department of Justice. That includes $22.9 million in disgorgement and prejudgment interest, and an additional $25.2 million fine in the parallel criminal proceeding. The company has also agreed to appoint an independent compliance monitor.
Medical Technology Company Stryker Also Caught in FCPA Violation
The SEC charged a Michigan-based medical technology company with violating the Foreign Corrupt Practices Act when subsidiaries in five different countries bribed doctors, health care professionals, and other government-employed officials in order to obtain or retain business.
An SEC investigation found that Stryker Corp.’s subsidiaries in Argentina, Greece, Mexico, Poland and Romania made illicit payments totaling approximately $2.2 million that were incorrectly described as legitimate expenses in the company’s books and records. Descriptions varied from a charitable donation to consulting and service contracts, travel expenses, and commissions. Stryker made approximately $7.5 million in illicit profits as a result of the improper payments.
Without admitting or denying the allegations, Stryker has agreed to pay more than $13.2 million to settle the SEC’s charges.
“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed,” said Andrew Calamari, director of the SEC’s New York Regional Office. “Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”
The SEC’s order instituting settled administrative proceedings details improper payments by employees of Stryker’s subsidiaries as far back as 2003. They used third parties to make the payments in order to win or keep lucrative contracts for the sale of Stryker’s medical technology products. For example, in January 2006, Stryker’s subsidiary in Mexico directed a law firm to pay approximately $46,000 to a Mexican government employee in order to secure the winning bid on a contract. The result was $1.1 million in profits for Stryker. The subsidiary reimbursed the Mexico-based law firm for the bribe and booked the payment as a legitimate legal expense. However, no legal services were actually provided and the law firm simply acted as a funnel to pay the bribe.
According to the SEC’s order, Stryker’s subsidiary in Greece made a purported “donation” of nearly $200,000 in 2007 to a public university in Greece to fund a laboratory that was a pet project of a public hospital doctor. In exchange for the payment, the doctor agreed to provide business to Stryker.
The SEC’s investigation also found that Stryker’s subsidiaries bribed foreign officials by paying their expenses for trips that lacked any legitimate business purpose. For example, in exchange for the promise of future business from the director of a public hospital in Poland, Stryker paid travel costs for the director and her husband in May 2004. This included a six-night stay at a New York City hotel, attendance at two Broadway shows, and a five-day trip to Aruba.
The SEC’s order requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million. Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.
DOL Recovers Over $4 Million for ESOP
A settlement obtained by the Department of Labor requires the fiduciaries of the Parrot Cellular Employee Stock Ownership Plan to pay $4.2 million to the plan. The order comes after an investigation by the Employee Benefits Security Administration and an April 2012 lawsuit that alleged that plan fiduciaries caused or permitted the ESOP to purchase Parrot Cellular stock for more than fair market value.
The defendants in the suit were Dennis Webb, the principal owner of California-based Entrepreneurial Ventures Inc.; Matthew Fidiam and Robert Gallucci, EVI executives and ESOP trustees; and Consulting Fiduciaries Inc., an Illinois company that served as the independent fiduciary for the ESOP during a November 2002 stock purchase. EVI operates Parrot Cellular telephone retail stores and is the sponsor of the worker retirement plan.
Under the terms of the settlement agreement, Consulting Fiduciaries agreed to pay $2 million to the ESOP to settle the allegations. Webb, Fidiam and Gallucci agreed to collectively pay $1.5 million to the ESOP, and Webb agreed to pay an additional $681,818 to the ESOP.
Advisory Firm and Owner Charged With Fraud
Investment advisory firm Harding Advisory and its owner Wing Chau were charged by the SEC with fraud after they misled investors in a collateralized debt obligation (CDO) and breached their fiduciary duties.
Chau and his firm, according to the agency, compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. so that they could accommodate trades requested by a third-party hedge fund firm, Magnetar Capital LLC, whose interests were not necessarily aligned with the debt investors.
Harding agreed to give Magnetar rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO. These rights, which Chau failed to disclose to investors, included the right to veto Harding’s proposed selections during the “warehouse” phase that preceded issuance of the CDO’s debt instruments. Magnetar’s influence led Harding to choose assets against the advice of its own credit analysts.
Magnetar took advantage of its selection rights, choosing assets that would pay off as hedges, bets against the debt issued by the CDO, rather than by being profitable in their own right. Investors in the debt tranches of Octans I, on the other hand, would only benefit if the assets were profitable.
Chau knew this and disregarded his firm’s own analyst recommendations to allow Magnetar to follow its hedging strategy. He also failed to tell investors what Harding was allowing Magnetar to do, in both this case and in the case of other CDOs.
The SEC’s investigation is continuing. Proceedings before an administrative law judge will determine penalties that are in the public interest.
Attorney, Real Estate Finance Fund, Fund Manager Found Liable for Fraud
Minneapolis attorney Todd Duckson, Capital Solutions Monthly Income Fund, a Minneapolis-based real estate lending fund, and Transactional Finance Fund Management, a company owned by Duckson that became the fund's investment advisor in November 2008, were found liable by a jury for fraud in a case brought by the SEC.
According to the agency, from approximately March 2008 through December 2009, the fund raised $21.6 million from investors in a series of unregistered offerings. During most of the period of the fund's existence, it made "mezzanine loans"—loans subordinate to more senior loans—to a single borrower, who ran into money troubles in 2007 and defaulted on those loans by May of 2008. That meant that the fund had no meaningful income-producing assets.
In written documents provided to investors between March 2008 and late 2009, the defendants hid the fund's deteriorating financial condition. In addition, the fund would use proceeds raised in offerings primarily to make real estate loans and other investments, instead of using the money to pay senior lenders on properties it had acquired and to make interest payments to existing investors.
Duckson played a key role in drafting those written documents provided to investors, first as the attorney for the fund and, in and after November 2008, as the fund's manager.
All three were found liable after a five-week trial; the case was originally filed in September of 2010.
Check out last week's SEC, CFTC Enforcement: Knight Capital Fined $12M in Market Access Debacle at ThinkAdvisor