Among recent enforcement actions taken by the SEC were charges against Allianz for violations of the Foreign Corrupt Practices Act that resulted in penalties of more than $12.3 million; against a Connecticut-based advisor for telling clients it was investing in the same collateralized debt obligations it recommended for them; against TheStreet Inc. and three executives for accounting fraud; against a Toronto-based brokerage firm and two executives for allowing layering; and against two investment advisory firms and two portfolio managers in the collapse of a mutual fund.
FINRA, meanwhile, imposed censures and fines for a Toronto firm that inappropriately shared transaction-based commissions with non-FINRA entities, and censures and fines for a Chicago-based firm after it was found to be an introducing broker-dealer established to facilitate U.S. market access for a single large entity and it had failed to design or implement an anti-money-laundering program to track possible violations.
Allianz SE Agrees to Pay Penalty of $12.3 million-plus on FCPA Violations
The SEC charged German-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the FCPA for improper payments to government officials in Indonesia during a seven-year period.
In its investigation, the SEC found 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.
According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint, submitted in 2005, reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using “special purpose accounts” to make illegal payments to government officials in order to secure business in Indonesia. Despite the audit, the payments continued.
According to the SEC’s order, the second complaint was made to Allianz’s external auditor in 2009. Allianz failed to properly account for certain payments in its books and records. The improper payments were disguised in invoices as an “overriding commission” for an agent that was not associated with the government insurance contract. In other instances, the improper payments were structured as an overpayment by the government insurance contract holder, who was later “reimbursed” for the overpayment. Excess funds were then paid to foreign officials who were responsible for procuring the government insurance contracts. Allianz lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting.
Without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.
Connecticut Advisor Charged for ‘Skin in the Game’ Lies to Clients
Connecticut-based Aladdin Capital Management was charged by the SEC with falsely telling clients to whom it recommended two different CDOs that it had “skin in the game” and was investing in the CDOs along with them.
The SEC’s investigation found that Aladdin Capital Management’s co-investment representation was a key feature and selling point for its Multiple Asset Securitized Tranche advisory program involving CDOs and collateralized loan obligations.
For example, Aladdin Capital Management asked in one marketing piece, “Why is an investor better off just investing in Aladdin sponsored CLOs and CDOs?” It then emphasized that the “most powerful response I can give to your question is that Aladdin co-invests alongside MAST investors in every program. Putting meaningful ‘skin in the game’ as we do means our financial interests are aligned with those of our MAST investors.”
Aladdin Capital Management in fact made no such investments in either CDO, and its affiliated broker-dealer Aladdin Capital collected placement fees from the CDO underwriters.
According to the SEC’s order against one of the firms’ former executives, Joseph Schlim, he was significantly involved in the MAST program on a day-to-day basis. He made sales calls to potential clients and negotiated with CDO and CLO underwriters about the amount of equity in those securities that Aladdin Capital could place with customers or purchase for itself. Schlim also negotiated the placement fees to be received by Aladdin Capital for securing MAST investments in equity tranches of each CDO or CLO.
The SEC found that Schlim knew that Aladdin used the co-investment representation as a significant marketing feature in its pitches to clients, but he failed to take any action to ensure that such representations were accurate when they were made. As the CFO of Aladdin, Schlim was responsible for reserving funds for Aladdin to co-invest alongside its MAST clients, yet he failed to ensure that funds were reserved or allocated for any co-investments alongside clients in either CDO.
Aladdin Capital Management and Schlim agreed to cease-and-desist orders without admitting or denying the SEC’s allegations. The Aladdin entities agreed to jointly pay $900,000 in disgorgement, $268,831 in prejudgment interest, and a $450,000 penalty. Schlim agreed to pay a $50,000 penalty to settle charges against him for his role in the misrepresentations.
TheStreet Inc. Charged by SEC with Accounting Fraud
The SEC charged digital financial media company TheStreet Inc. and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.
The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year.
The SEC says the co-presidents of the subsidiary, Gregg Alwine and David Barnett, entered into sham transactions with friendly counterparties that had little or no economic substance. They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting. Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services. The SEC also alleges that TheStreet’s former chief financial officer, Eric Ashman, caused the company to report revenue before it had been earned.
According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes. After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud.
The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet improperly recognized revenue based on sham transactions. It also is alleged to have used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts. In addition, it prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue.
According to the SEC’s complaint, when the subsidiary’s financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for fiscal year 2008. On Feb. 8, 2010, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts.
Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years. Barnett and Alwine agreed to pay penalties of $130,000 and $120,000, respectively, and to be barred from serving as officers or directors of a public company for 10 years. Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws.
SEC Charges Toronto Firm, Execs With Allowing Layering
A Toronto-based brokerage firm, Biremis, saw its license revoked and its two co-founders, Peter Beck and Charles Kim, permanently banned from the U.S. securities industry; all were charged with allowing layering.