Among recent enforcement actions were a positive jury verdict for the SEC in a case of insider trading; charges filed by the agency against the Chinese and U.S. executives of an animal feed company for accounting fraud; charges against Jefferies LLC for failure to supervise mortgage-backed securities during the financial crisis; and a judge’s ruling on the disgorgement amount former Goldman Sachs trader “Fabulous Fab” Fabrice Tourre must pay.
Goldman’s ‘Fabulous Fab’ Ordered to Pay More Than $825,000
The SEC got some backup from U.S. District Judge Katherine Forrest in Manhattan for the financial penalties it sought to levy on “Fabulous Fab” Fabrice Tourre, former Goldman Sachs trader, for his role in defrauding investors in subprime mortgage products that melted down during the financial crisis.
The agency had sought to make Tourre pay a $910,000 fine and additional penalties that totaled approximately $1.15 million, after he was found liable in a jury trial for his actions. While the judge did not go quite that far, she did impose a stiff penalty—$650,000 in civil fines and another $175,463 from his bonus, plus interest, that was tied to the fraud.
Tourre had challenged the SEC’s right to demand bonus disgorgement from him, citing the $15 million disgorgement already paid by Goldman in the firm’s settlement with the SEC. He also challenged other provisions, including one that sought to bar him from re-entering the securities industry.
While the judge did not bar Tourre, saying that there was no evidence he planned to re-enter the industry, she said the SEC could reapply if he returned within three years. Backing the SEC, she also barred Tourre from being reimbursed by Goldman for the penalty. Goldman did pay Tourre’s legal fees.
Brothers Found Guilty in Insider Trading Case
Two brothers charged by the SEC with insider trading last June were found guilty by a jury.
Andrew Jacobs of Cleveland, Ohio, and his brother Leslie Jacobs II of Lancaster, Pa. had been charged with insider trading in connection with the December 2009 tender offer for Chattem Inc., a Chattanooga, Tenn.-based distributor of pharmaceutical products. Andrew Jacobs found out about the proposed tender from his brother-in-law, who at the time was an executive of Chattem.
Although he had been asked to keep the information confidential and promised that he would, the next day Andrew Jacobs called Leslie Jacobs and filled him in on the deal. Leslie Jacobs promptly bought 2000 shares of Chattem, which he sold after the acquisition was publicly announced. Leslie Jacobs made a total of $49,457.21 in illicit profits.
The SEC had charged the brothers, and a six-day jury trial resulted in a guilty verdict on the charge of insider trading in connection with a tender. The court will decide the penalties in the case.
SEC Charges Jefferies on MBS Supervision Failures
Global investment bank and brokerage firm Jefferies LLC was charged by the SEC with failing to supervise employees on its mortgage-backed securities desk who were lying to customers about pricing.
Jefferies representatives including Jesse Litvak, who was charged last year with securities fraud, lied to customers about the prices that the firm paid for certain mortgage-backed securities; that misled them about the true profit margin earned by the firm in its trading.
Jefferies’ policy required supervisors to review traders’ and salespeople’s electronic communications to flag any untrue or misleading information provided to customers. However, the firm did not implement the policy in a way that could detect misrepresentations about price.
According to the agency, on numerous occasions from 2009 to 2011, Jefferies failed to provide direction or tools to supervisors on the MBS desk to meaningfully review communications to customers by Litvak and others about the price that Jefferies paid for MBS. Jefferies supervisors failed to check traders’ communications against actual pricing information, which made it hard to identify misrepresentations. MBS supervisors also did not review communications with customers that took place in Bloomberg group chats, where Jefferies traders and salespeople lied about pricing.
Jefferies agreed to pay $25 million to settle the SEC’s charges as well as a parallel action by the U.S. Attorney’s Office for the District of Connecticut. In a related criminal trial, Litvak was convicted of multiple counts of securities fraud and other charges.
Jefferies agreed to make payments to customers totaling more than $11 million, which represents not just the ill-gotten gains of $4.2 million but the full amount of profits earned by the firm on these trades. Jefferies also agreed to pay a $4.2 million penalty to the SEC and an additional $9.8 million as part of a nonprosecution agreement with the U.S. Attorney’s office. The firm must retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.
The SEC’s investigation is continuing.
Chinese, U.S. Animal Feed Execs Charged With Accounting Fraud
The SEC has charged executives in China and in the U.S. with accounting fraud for reporting fake revenues from operations in China so that they could keep the stock price up and appear to be making company financial targets.
Four executives in China set up the scheme, according to the SEC. The company, AgFeed Industries Inc., was based in China and publicly traded in the U.S. before it merged with a U.S. company in September 2010 and spread its operations between the two countries.
Executive Chairman Songyan Li, CEO Junhong Xiong, CFO Selina Jin, and controller Shaobo Ouyang, the managers in China behind the scheme, created the scheme after AgFeed acquired 29 Chinese farms for its new hog production division.
The four resorted to numerous strategies to inflate revenue from 2008 to mid-2011 at the majority of its hog production operations in China; these included fake invoices for the sale of feed and purported sales of hogs that didn’t really exist. Later they claimed the fake hogs died in an attempt to cover up what they’d done. However, since fatter hogs bring better prices at market, they also claimed actual hogs sold by the company weighed more than they did, and correspondingly inflated the sales revenues for those hogs.
The executives actually kept two complete sets of books — one for the auditors and one for the company, which indicated that the scheme resulted in phony revenues of about $239 million.
K. Ivan (Van) Gothner, who was chairman of AgFeed’s audit committee, and Edward Pazdro, the CFO who replaced Jin after the merger, found out about the two sets of books and that Ouyang had admitted to the scheme.
Gothner and Pazdro even got hold of a partial copy of the two sets of books, as well as a memo from AgFeed’s in-house counsel from China that concluded—based on witness accounts and documentary evidence—that the company was involved in a widespread accounting fraud. The memo said the two sets of accounting books were kept “in order to make AgFeed’s revenue and net income look better.” It also said Xiong and Jin had directed the accounting fraud, and Xiong had ordered the destruction of the second set of books.
With all this damaging information in their hands, neither Gothner nor Pazdro blew the whistle on the fraud. Instead of calling in the authorities, Gothner asked a former director and company advisor what he should do — but when that individual told him the company should bring in outside investigators and outside legal counsel, Gothner instead buried the scheme and took it even further. He and Pazdro set about a move to spin off the company’s feed division and raise capital for expansion and acquisitions that would enable profits for AgFeed and also for them personally.
The SEC charged AgFeed, Xiong, Li, Jin, Ouyang, Gothner and Pazdro with violating or aiding and abetting violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. They are also charged with making false statements to AgFeed’s outside auditors. The SEC seeks disgorgement of ill-gotten gains, plus prejudgment interest as well as financial penalties and officer-and-director bars, and also seeks to suspend Jin, Ouyang, and Pazdro from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC.
AgFeed’s former chairman and interim CEO, John Stadler, separately consented to an SEC order barring him from acting as an officer or director and requiring him to pay a $100,000 penalty and cease and desist from further violations. He has neither admitted nor denied the findings.
AgFeed’s former CFO Clayton Marshall, who replaced Pazdro, entered a cooperation agreement with the SEC. His settlement terms reflect his assistance in the SEC’s investigation and anticipated cooperation in the pending court action. Without admitting or denying the SEC’s findings, Marshall has agreed to be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC for at least five years. Whether a fine will be assessed has yet to be determined.
The company has filed for bankruptcy; registrations for all classes of its securities have been revoked.
Check out SEC, DOL Enforcement: Camelot Manager Charged With Stealing $9M From Clients on ThinkAdvisor.