Among recent enforcement actions was a judge’s order for Bank of America to pay $1.27 billion for a Countrywide mortgage program known as “Hustle.”
In addition, the SEC went after LavaFlow for failing to protect confidential client data; Smith & Wesson for violations of the Foreign Corrupt Practices Act; a penny stock company linked to a solar farm scheme the agency has already acted on; and a CEO and a former CFO with hiding deficiencies in internal controls and violations of Sarbanes-Oxley requirements.
SEC Fines Smith & Wesson for Bribing Pakistani, Indonesian Officials
Smith & Wesson Holding Corp. has been fined $2 million by the SEC with violating the Foreign Corrupt Practices Act over improper payments to foreign officials while trying to win contracts to supply firearm products to military and law enforcement groups overseas.
According to the agency, the U.S.-based parent company was trying to break into new overseas markets from 2007 to 2010. During that time, Smith & Wesson’s international sales staff went all out to attract new business by attempting to bribe government officials in Pakistan, Indonesia and other foreign countries, the SEC said. Many of those attempts were unsuccessful.
In one instance, the company retained a third-party agent in Pakistan in 2008 to help get a deal to sell firearms to a Pakistani police department. Company officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments. In this case, Smith & Wesson did win a contract to sell 548 pistols to the Pakistani police, for a profit of $107,852.
Other such efforts were not so successful. A 2009 effort win a contract to sell firearms to an Indonesian police department involved making improper payments to a third-party agent in Indonesia, who said part of the money would go to Indonesian officials and would be disguised as firearm lab testing costs. The agent also said Indonesian police officials expected to be paid more than the actual cost of testing the guns. Smith & Wesson officials paid, but no deal resulted.
The company also authorized improper payments to third-party agents, some of which were intended for foreign officials in Turkey, Nepal and Bangladesh. These efforts also failed.
Smith & Wesson agreed to settle without admitting or denying the SEC’s findings. It also agreed to pay a $1.906 million penalty, $107,852 in disgorgement and $21,040 in prejudgment interest. The SEC also considered the company’s cooperation, which included stopping the impending international sales transactions before they went through and implementing significant measures to improve internal controls and compliance. The company also terminated its entire international sales staff.
“We are pleased to have concluded this matter with the SEC and believe that the settlement we have agreed upon is in the best interests of Smith & Wesson and its shareholders,” Smith & Wesson President and CEO James Debney said in a statement. “Today’s announcement brings to conclusion a legacy issue for our company that commenced more than four years ago, and we are pleased to now finally put this matter behind us.”
Bank of America Ordered to Pay $1.27 Billion for ‘Hustle’
U.S. District Judge Jed Rakoff has ordered Bank of America to pay $1.27 billion in the wake of a jury decision last October to hold the bank liable for sales of defective loans to Fannie Mae and Freddie Mac by Countrywide Financial Corp., which the bank bought in July 2008.
In addition, Rakoff ordered Rebecca Mairone, a former Countrywide executive who was the only one charged in the case and was also found liable, to pay $1 million.
The Department of Justice had sought a penalty of $2.1 billion, but Rakoff was reported to say of his decision that the amount of liability was based on $2.96 billion, the amount Fannie and Freddie paid for 17,611 Hustle loans—so called because the program under which they were made was known as “High Speed Swim Lane,” or HSSL—which transmogrified to “Hustle.”
Rakoff said he based his decision on a government expert’s finding that only some loans were materially defective, and on the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
According to U.S. Attorney Preet Bharara, it was the first case in which civil penalties for mortgage fraud leading to the financial crisis were levied on a bank and an executive under FIRREA.
Bank of America is considering appealing the fine.
LavaFlow Charged with Failure to Protect Subscriber Data
LavaFlow, Inc., owned by Citigroup Financial Products, was charged by the SEC with failing to protect the confidential trading data of its subscribers.
LavaFlow operates an alternative trading system (ATS), a venue that executes stock trades on behalf of broker-dealers and other traders. LavaFlow’s particular type of ATS is known as an electronic communications network (ECN). Unlike a dark pool, an ECN displays some information about pending orders in its system, such as best bid or best offer.
According to the SEC, LavaFlow allowed an affiliate operating a technology application known as a smart order router to access and use confidential information related to the nondisplayed orders of LavaFlow’s ECN’s subscribers. The order router was located outside of the ECN’s operations, without adequate safeguards to protect the confidential data accessed by the router.
While LavaFlow only allowed the affiliate to use the confidential trading data for order router customers who also were ECN subscribers, the firm did not obtain subscriber consent, nor did it disclose the use in regulatory filings with the SEC.
LavaFlow eventually discontinued this practice, but not before the smart order router executed more than 400 million shares in a three-year period based in part on the subscriber information contained in the ECN’s unexecuted hidden orders.
In addition to violations of Regulation ATS, the SEC also found that LavaFlow aided and abetted a violation by the same affiliate that operated the smart order router, Lava Trading Inc., which continued to provide broker-dealer services for several months after it deregistered in August 2008. Lava Trading, which also was owned by Citigroup Financial Products, earned approximately $1.8 million in broker-dealer business during this time period, and LavaFlow provided operational and administrative support while also responsible for a website that claimed Lava Trading was a registered broker-dealer.
Without admitting or denying the charges, LavaFlow agreed to pay $1.8 million in disgorgement of money earned by Lava Trading while unregistered plus $350,000 in prejudgment interest and a $2.85 million penalty. Solar Farm Penny Stock Scheme Gathers More SEC Charges
The SEC has filed charges against penny stock company MSGI Technology Solutions and its CEO, J. Jeremy Barbera, in a solar farm scheme against which it has already taken other actions.
According to the agency, MSGI and Barbera defrauded investors by touting a joint venture to develop and manage solar energy farms across the country on land supposedly owned by an electricity provider operated by Christopher Plummer. Barbera and Plummer coauthored press releases depicting MSGI as a successful renewable energy company on the brink of profitable solar energy projects. However, MSGI had no operations, customers, or revenue, and Plummer’s company never had the assets or financing necessary for solar farm development.
Barbera also described MSGI in press releases and on its website as an operational security company with customers all over the world, falsely claimed in press releases that another sham entity operated by Plummer had purchased MSGI’s sizable outstanding debt, and also falsely touted nonexistent solar energy projects with an entity unrelated to Plummer.
Plummer himself, along with another penny stock company and its CEO, were charged earlier in the month in the same scheme.
Barbera and MSGI neither admitted nor denied the charges, but agreed to settle. Barbera has agreed to pay a $100,000 penalty and be permanently barred from acting as an officer or director of a public company or from participating in a penny stock offering. The settlement is subject to court approval.
SEC Charges CEO, Former CFO with Disclosure Failures, Sarbanes-Oxley Violations
The SEC has announced charges against Marc Sherman, CEO, and Edward Cummings, former CFO, of QSGI Inc., a Florida-based computer equipment company, for misrepresenting to external auditors and the investing public the state of its internal controls over financial reporting.
According to the agency, Sherman and Cummings represented in a management’s report accompanying the fiscal year 2008 annual report for QSGI Inc. that Sherman participated in management’s assessment of the internal controls, which he did not. In addition, each of the two certified that they had disclosed all significant deficiencies in internal controls to outside auditors, when they had not. The pair also hid a series of maneuvers to accelerate some inventory and accounts receivable to maximize the amount the firm could borrow from its chief creditor.
The company had problems, and its efforts in 2008 to introduce new internal controls to the operations at its Minnesota facility largely failed. Deficiencies continued until the company filed for bankruptcy in July 2009. Among the problems were a failure to design inventory control procedures that took into account the existing control environment, such as employees’ qualifications and experience levels. For example, sales and warehouse personnel often failed to document their removal of items from inventory. When they did prepare the paperwork, accounting personnel often failed to process it and adjust inventory in the company’s financial reporting system.
Instead of disclosing these problems and accounts receivable issues, Sherman and Cummings hid them and claimed otherwise, which affected the audit of the firm’s financial statements.
Cummings has agreed to settle without admitting or denying the charges. He agreed to pay a $23,000 penalty, to be barred from serving as an officer and director of a publicly traded company for five years, and to be suspended for at least five years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
The SEC will conduct an administrative proceeding against Sherman.
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