A case that has dragged on for 13 years was finally settled, with Nationwide agreeing to a tentative settlement in an ERISA case.
Among other enforcement actions, the SEC was busy, filing charges on cases ranging from securities fraud to FCPA violations, fraudulent stock manipulation, manipulative trading, a phony gold mining scheme and audit failures.
In addition, a jury reached a verdict in the SEC’s favor in a case filed in January of 2012.
13-Year Litigation Brings $140 Million Settlement From Nationwide
It took over 13 years of litigation, but Nationwide Life Insurance Co., and its affiliate, Nationwide Financial Services Inc., have finally made a tentative agreement to settle a service-provider revenue-sharing lawsuit. The proposed settlement of $140 million is thought to be the largest ever in such a case.
Money isn’t the only thing Nationwide has agreed to. Other provisions in the agreement apply to disclosure of mutual fund revenue agreements, and will likely affect other service providers in the future, since the company is the third-largest writer of 401(k) contracts.
Not only will Nationwide have to improve notification procedures for the addition or deletion of a mutual fund from an annuity, it will also have to provide extensive fee and expense disclosure forms for all its group and individual variable annuity contracts through plan sponsors’ websites.
The original case, Haddock vs. Nationwide, was filed in August of 2001 in federal court in Connecticut. The plaintiffs, trustees of five employer-sponsored defined contribution plans, and that Nationwide received undisclosed revenue sharing payments from third-party nonproprietary mutual funds that resulted in losses to the plans and breaches of Nationwide’s fiduciary duty under ERISA.
While Nationwide claimed the revenue sharing amounted to “service contract payments” that the mutual fund companies paid for “services” rendered by Nationwide, the plaintiffs argued that, on the contrary, the money was plan assets retained by Nationwide, in violation of ERISA, in exchange for offering the mutual fund companies’ products.
In an amended memorandum of decision, U.S. District Judge Stefan Underhill wrote, “In other words, the trustees contend that Nationwide engages in a quid pro quo arrangement with the mutual funds, agreeing to include their funds as investment options for the plans in exchange for the revenue-sharing payments.”
As the case dragged on, plaintiffs amended their complaints, Nationwide twice appealed the certification of the case as a class action and there were motions to dismiss.
It’s not a done deal yet; the proposed settlement still must be approved by the court.
Avon to Pay $130M to Settle FCPA Violations
The SEC charged global beauty products company Avon Products Inc. with violating the Foreign Corrupt Practices Act (FCPA) by failing to put controls in place to detect and prevent payments and gifts to Chinese government officials from employees and consultants at a subsidiary.
Avon entities agreed to pay a total of $135 million to settle the SEC’s charges and a parallel case announced today by the U.S. Department of Justice and the U.S. Attorney’s Office for the Southern District of New York.
The SEC alleges that Avon’s subsidiary in China made $8 million worth of payments in cash, gifts, travel, and entertainment to gain access to Chinese officials implementing and overseeing direct selling regulations in China. Avon sought to be among the first allowed to test the regulations, and eventually received the first direct selling business license in China in March 2006.
The improper payments also were made to avoid fines or negative news articles that could have impacted Avon’s clean corporate image required to retain the license. Examples of improper payments alleged in the SEC’s complaint include paid travel for Chinese government officials within China or to the U.S. or Europe as well as such gifts as Louis Vuitton merchandise, Gucci bags, Tiffany pens, and corporate box tickets to the China Open tennis tournament. “Avon’s subsidiary in China paid millions of dollars to government officials to obtain a direct selling license and gain an edge over their competitors, and the company reaped substantial financial benefits as a result,” said Scott Friestad, an associate director in the SEC’s Division of Enforcement. “Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”
Home Restoration Business Owner Charged With Fraud by SEC
David Fleet, owner of a home restoration business in upstate New York, was charged with securities fraud by the SEC after he sold unsecured notes to investors to finance his real estate ventures.
According to the agency, Fleet misrepresented or failed to disclose vital information to investors in Cornerstone Homes Inc., which was in the business of buying and restoring distressed single-family homes to sell or rent to low-income customers.
Among other things, Fleet claimed his company didn’t use bank financing at times when Fleet relied heavily on bank mortgages to get nearly all the homes Cornerstone was buying with investor money.
Not only that, but during the real estate downturn, Fleet turned to secret investments in stock options to try to keep his company afloat. Not only did he not tell his investors about this, even as he lost between $3 and $4 million of the $6 million or so that he invested, he actually entered the options market just shortly after he sent newsletters to investors, many of them senior citizens, warning that investing in the stock market was risky and they would be better off investing their money in Cornerstone. Fleet ended up filing for bankruptcy.
The SEC is seeking financial remedies and a permanent injunction against Fleet.
SEC Charges Scientific Instruments Manufacturer With FCPA Violations
Bruker Corporation, a Billerica, Mass.-based global manufacturer of scientific instruments, was charged by the SEC with violations of the Foreign Corrupt Practices Act (FCPA) for providing nonbusiness-related travel and improper payments to various Chinese government officials to try to win business.
According to the agency, Bruker Corporation failed to prevent and detect approximately $230,000 in improper payments out of its China-based offices that falsely recorded them in books and records as legitimate business and marketing expenses. The payments brought Bruker approximately $1.7 million in profits from sales contracts with state-owned entities in China whose officials received the improper payments.
A Bruker office in China paid more than $111,000 to Chinese government officials under 12 suspicious collaboration agreements contingent on state-owned entities providing research on Bruker products or using Bruker products in demonstration laboratories. The agreements did not specify what the state-owned entities had to do to get paid, and no work product was actually provided. Some agreements were made directly with a Chinese government official, and in some cases the official was paid directly.
Other improper payments involved reimbursements to Chinese government officials for leisure travel to the U.S., Czech Republic, Norway, Sweden, France, Germany, Switzerland, and Italy. These officials often were responsible for authorizing the purchase of Bruker products, and the leisure trips typically followed business-related travel for the officials funded by the company.
Bruker self-reported its misconduct and provided extensive cooperation during the SEC’s investigation. While neither admitting nor denying the charges, Bruker agreed to pay approximately $2.4 million to settle: $1,714,852 in disgorgement, $310,117 in prejudgment interest and a $375,000 penalty. It has also taken remedial action to revise its compliance program and beef up internal controls on travel and contract approvals.
SEC Charges New Orleans Energy Company, Execs With Stock Manipulation
New Orleans-based Treaty Energy Company and five of its executives were charged by the SEC with running a stock trading scheme in which they claimed to have struck oil in Belize so they could manipulate the company’s stock price while illegally selling restricted shares to the public. According to the agency, the oil-and-gas company’s scheme had three parts. The first was in January 2012, when company founder Ronald Blackburn directed Treaty Energy to issue a press release claiming that the so-called Belize oil strike contained an estimated five to six million barrels of recoverable oil. Treaty’s stock price shot up nearly 80% that day, and Blackburn and the four other officers made at least $3.5 million in illicit profits.
The Belize government publicly refuted the news the very next day, calling the company’s statement “false and misleading” and “irresponsible.” However, Blackburn and the company’s officers continued to mislead investors by claiming that Belize was merely downplaying an actual oil strike for strategic reasons.
The second part of the scheme was Treaty Energy’s failure to disclose in public filings from 2009 to 2013 that Blackburn, who had previously been convicted of federal income tax evasion, actually controlled the company and was a de facto officer. The four other officers—Andrew Reid, Bruce Gwyn, Lee Schlesinger and Michael Mulshine—all knew Blackburn’s true role at the company, but intentionally kept from the public in its disclosures that a convicted felon was in charge.
The third part of the scheme began in November 2013 when Treaty Energy offered investors working interests in a West Texas well, claiming low-risk working interests and an expected return of 111.42% over a 10-year period. Treaty Energy and its officers, however, knew the well produced only marginal amounts of oil; from October 2013 to October 2014, its total production was just 235 barrels.
Treaty Energy’s outside counsel Samuel Whitley enabled these actions with legal opinion letters that allowed the company and its officers to illegally distribute unregistered stock to the public. He was aware that Blackburn was running the company and Treaty Energy was abusing registration rules under the federal securities laws, but did nothing to stop any of it and issued the opinion letters that kept the scheme going.
The SEC has charged Treaty Energy, Blackburn, Reid, Gwyn, Mulshine and Schlesinger with securities fraud as well as violations of the registration and reporting violations of the federal securities laws. The agency seeks disgorgement of ill-gotten gains with prejudgment interest plus financial penalties as well as penny stock bars, officer-and-director bars, and permanent injunctions against them. Reid and Gwyn are additionally charged with signing false certifications in Treaty Energy’s SEC filings, and Whitley is accused of securities registration violations.
SEC Charges Equity Research Firm With Manipulative Trading
Paul Pollack, owner of Phoenix-based equity research firm Montgomery Street Research LLC, was charged by the SEC with manipulating the market for a publicly traded stock he was soliciting investors to purchase.
According to the agency, after a company hired his firm to assist in two private placement offerings, Pollack conducted approximately 100 wash trades where the buy or sell orders came within 90 seconds of each other at prices and quantities that were virtually identical. The wash trades are alleged to have occurred during a nearly one-year period and created the appearance of consistent active trading in the otherwise thinly traded stock.
Pollack and Montgomery Street Research raised more than $2.5 million from 11 investors after being hired by the company to raise money and make introductions to potential investors in its stock. Among other things, they identified and solicited potential investors, provided financial information regarding the issuer, fielded investor inquiries, and in some instances received transaction-based compensation.
Pollack and his firm are also charged with acting as brokers on behalf of the company without first registering with the SEC.
Two Individuals and Companies Charged in Gold Mining Scheme
The SEC has charged two individuals and their companies in a phony gold mining scheme based in Miami.
According to the agency, Michael Crow and Alexandre Clug promised investors a stake in so-called “quick-to-production” gold mines that their company Aurum Mining LLC purported to own and operate in Brazil and Peru. Crow, who had filed for personal bankruptcy, teamed up with Clug to raise approximately $3.9 million from seniors and other investors in Florida, who never received any money back from their investments.
Instead, Crow and Clug used much of the money they raised to cover their monthly salaries, rental of upscale apartments in Lima, and other living or travel expenses.
Among the phony claims made by the pair was one that Aurum Mining had acquired a 50% interest in a Brazilian gold mine with reserves of approximately $400 million worth of gold. The two knew the claims were baseless and had no backing by any mining authorities.
Crow had already been the target of two earlier SEC actions, and was barred from working in the securities industry or acting as an officer or director of a public company. That didn’t stop him, however.
Crow and Clug established PanAm Terra Inc. as a public company and raised $400,000 from investors in Florida for purported farmland investment opportunities in South America. PanAm Terra never disclosed in SEC filings that Crow acted as a de facto officer despite being barred. The filings also hid Crow’s bankruptcy. The company never bought any farmland, much of the money going instead to Crow, Clug and their business associates.
Crow and Clug operated another company called The Corsair Group through which they brokered the sale of bonds to investors and received more than $10,000 in transaction-based compensation. The Corsair Group was not registered as a broker-dealer and Crow and Clug were not associated with any registered broker-dealer. Crow had been barred from associating with any broker-dealer.
In a separate action, certified public accountant Angel Lana agreed to settle findings that he was involved in the scheme as the CFO of Aurum Mining. Without admitting or denying the findings, he agreed to pay a $50,000 penalty and be barred from practicing as an accountant on behalf of any SEC-regulated entity for five years.
Hong Kong Firm, Two Accountants Sanctioned on Audit Failures
The SEC imposed sanctions against a Hong Kong-based audit firm and two accountants for failing to properly audit year-end financial statements of a company that the SEC has charged with fraud.
Baker Tilly Hong Kong Limited, its director Andrew Ross, and its former director Helena Kwok ignored red flags surrounding approximately $59 million in related-party transactions reflected in internal accounting records of China North East Petroleum Holdings Limited but not adequately disclosed in year-end 2009 financial statements.
The audit failure resulted in the magnitude of 176 related-party transactions detailed in an independent forensic accounting report not being adequately disclosed. In addition, the resulting financial statements failed to adequately disclose the magnitude of the related-party transactions and mention that they involved the then-CE and his mother. The audit team also failed to properly obtain adequate evidential matter to support its audit report.
The agency said that Baker Tilly and the two accountants failed to plan and implement an appropriate audit response to the related-party transactions. Baker Tilly consequently issued an audit report containing an unqualified opinion on China North East Petroleum’s financial statements.
Baker Tilly, Ross, and Kwok neither admitted nor denied the findings of the order, which censures Baker Tilly. They did, however, agree to settle the SEC’s charges. Baker Tilly must disgorge its audit fees of $75,000 plus prejudgment interest of $9,101, and cannot accept any new U.S. issuer audit clients until an independent consultant has reviewed and certified that the firm’s audit policies and procedures are compliant with SEC regulations and PCAOB standards. Ross and Kwok must pay penalties of $20,000 and $10,000 respectively and are barred from practicing as an accountant on behalf of any SEC-regulated entity for at least three years.
Jury Finds Securities Fraud in 2012 SEC Case
The SEC was handed a victory by a jury that found BankAtlantic Bancorp, Inc., now known as BBX Capital Corporation, and CEO Alan Levan committed securities fraud in connection with BBX’s public disclosures and financial statements in 2007.
The case, brought by the SEC in January of 2012, charged the bank and Levan with misleading investors by making statements in public filings and earnings calls that hid the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.
After a six-week trial, the SEC said, the jury found “that Levan’s 2007 statements during BBX’s second quarter earnings conference call fraudulently misled investors regarding the financial health of the bank, that BBX’s 2007 annual report fraudulently understated the Bank’s loss for that year by approximately $53 million, and that Levan and BBX engaged in a course of business that operated as a fraud throughout 2007.”
– Check out last week’s enforcement roundup: SEC, DOL Enforcement: Fiduciaries Fined $4.7M Over Fake Health Plan