DOL, SEC Enforcement Roundup: 401(k) Trustees Sentenced for Embezzlement

According to the SEC’s complaint filed in U.S. District Court for the District of Minnesota, Krishnan’s scheme began as early as March 2005 and continued until May 2010, when he resigned.

Digi’s internal controls required the CFO’s expense reports to be approved by the CEO. In order to circumvent this internal control, Krishnan, who lives in Plymouth, Minn., arranged for the Hong Kong office to submit his expenses as belonging to other employees. This way, Krishnan had the final authorization to approve the expenses and reimburse the Hong Kong office directly, rather than needing CEO approval.

The SEC alleges that as the scheme went undetected, Krishnan submitted or approved large numbers of fraudulent expense reports for purported work and travel expenses. Krishnan knew the expenditures violated Digi’s travel and entertainment policies because he personally drafted and approved these internal policies. Despite this, Krishnan signed each of Digi’s annual and quarterly reports over a five-year period and, as part of those filings, certified that Digi’s internal controls were effective. He also signed 20 management representation letters to auditors that falsely asserted he had no knowledge of fraud involving management having a significant role in internal controls over financial reporting.

The SEC’s complaint alleges that Krishnan violated the antifraud, issuer reporting, internal controls, books and records, filing certification and lying to auditors provisions of the federal securities laws. Krishnan has consented to the entry of an injunction from future violations of those provisions, with disgorgement, prejudgment interest, financial penalties as well as the duration of the officer-and-director bar to be determined by stipulation of the parties or motion of the SEC at a later date.

Dark Pool Operator Charged on Failing to Protect Confidential Information

Boston-based dark pool operator eBX LLC has been charged by the SEC with failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

According to the SEC’s order instituting a settled administrative proceeding, eBX operates the alternative trading system LeveL ATS, which it calls a “dark pool” trading program. Dark pools do not display quotations to the public, meaning that investors who subscribe to a dark pool have access to potential trade opportunities that other investors using public markets do not.

eBX inaccurately informed its subscribers that their flow of orders to buy or sell securities would be kept confidential and not shared outside of LeveL, and instead allowed an outside technology firm to use information about LeveL subscribers’ unexecuted orders for its own business purposes.

The outside firm’s separate order routing business therefore received an information advantage over other LeveL subscribers, because it was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate. eBX had insufficient safeguards and procedures to protect subscribers’ confidential trading information.

According to the SEC’s order, eBX and the outside firm it hired to run LeveL signed a subscription agreement in February of 2008, after which the outside firm’s separate order routing business began to use certain LeveL subscribers’ confidential trading data. In November 2008, eBX signed a new agreement with the outside firm that allowed its order routing business to remember and use all LeveL subscribers’ unexecuted order information.

As a result of the agreements, the outside firm’s order routing business began to fill far more of its orders than other LeveL users did. Its order router also knew how other eBX subscribers’ orders in LeveL were priced and could use that information to determine whether to route orders to LeveL or another venue based on where it knew it might get a better price for its own customers’ orders.

eBX agreed to pay an $800,000 penalty to settle the charges. In addition, eBX was censured and ordered to cease and desist from committing or causing further violations of certain provisions of the federal securities laws regulating alternative trading systems.

Repeat Offender Charged Over Fraudulent Investment Offers on Oil Drilling

The SEC said that it has obtained an emergency court order to freeze the assets of a South Florida man, Joseph Hilton, who has been charged with fraudulently offering investments in oil drilling projects.

It is not the first time Hilton has been the target of an SEC enforcement action, although at that time he was known as Joseph Yurkin. He changed his name after a final judgment for fraud in a previous SEC enforcement action against him for securities offerings he made through another company he worked for, Homeland Communications Corp.

The SEC’s complaint, unsealed in federal court in West Palm Beach, Fla., alleges that Hilton made numerous misrepresentations to investors while selling limited partnership units in two oil drilling projects earlier this year through his firm, Pacific Northwestern Energy.

After falsely telling potential investors that Pacific acquired its wells from Exxon Mobil Corp., and overstating Pacific’s experience in the oil and gas industry and the historical accomplishments of its drillers, Hilton raised approximately $789,000 from investors.

The SEC’s action froze the assets of Hilton, Pacific, and the two limited partnerships: Rock Castle Drilling Fund and Rock Castle Drilling Fund II. Hilton’s securities offerings were not registered with the SEC as required under the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains plus prejudgment interest, financial penalties and permanent injunctions against Hilton and his entities. The court has appointed David Mandel, an attorney with the law firm Mandel & Mandel in Miami, as a receiver over Pacific, Rock Castle and Rock Castle II.

The SEC’s complaint also includes allegations against Hilton, Pacific, and another company controlled by Hilton called New Horizon Publishing. Through Pacific and New Horizon, Hilton additionally sold $2.5 million worth of investments in oil drilling projects sponsored by United States Energy Corp. while deceiving investors about his identity, the anticipated returns on the investments, the amount of oil being produced by U.S. Energy’s wells, and the existence of natural gas wells. Hilton also operated a boiler room of sales representatives paid on a commission basis.