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December 17, 2014 at 11:12 AM
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.
