Among recent enforcement actions by the Securities and Exchange Commission were charges against a company and its former CEO for misleading investors, and against four for fraud perpetrated against investors, including seniors, in a “free dinner” scheme.
In addition, the Financial Industry Regulatory Authority censured and fined Merrill Lynch for inadequate employee background checks.
SEC Charges Four on ‘Free Dinner’ Fraud
The SEC has filed fraud charges against four individuals who solicited seniors at “free dinner” investment seminars in Florida.
According to the agency, Philadelphia residents Joseph Andrew Paul and John Ellis Jr. lied about the track record of their investment advisory firm and recruited James Quay of Atlanta and Donald Ellison of Palm Bay, Florida, to lure potential victims with promises of big returns. A large portion of the money the four drew in was never invested, but was split among them instead.
Paul and Ellis made up fraudulent marketing materials, including some with performance numbers that were “cut and pasted” from another firm’s website, the SEC said. Quay and Ellison then used these materials to deceive seniors who responded to their mass-mailing offer of a free dinner at a Tampa restaurant.
Quay, who was convicted of tax fraud in 2005 and found liable for securities fraud in a 2012 SEC enforcement action, used the alias “Stephen Jameson” to hide his true identity — and history — from potential victims.
“Jameson” was not registered as an investment professional during the relevant period of fraudulent conduct, and Ellison also was not registered for the majority of that period.
Navistar, Ex-CEO Charged With Lying About Truck Technology
The SEC has charged Lisle, Illinois-based Navistar International Corp. with misleading investors about its development of an advanced technology truck engine that could be certified to meet U.S. emission standards. The agency also separately charged former Navistar CEO Daniel Ustian with misleading investors and with aiding and abetting violations by Navistar.
According to the agency, Navistar and Ustian failed to fully disclose the company’s difficulties obtaining Environmental Protection Agency (EPA) certification of a truck engine able to meet stricter EPA Clean Air Act standards that took effect in 2010.
In addition, Navistar and Ustian are alleged to have repeatedly deceived investors about Navistar’s development of the engine, which used exhaust-gas-recirculation (EGR) technology. Navistar later abandoned the effort and adopted the selective catalytic reduction (SCR) technology used by its competitors.
In early 2011, Navistar tried to reassure investors about its emissions control strategy by applying for certification of an engine it knew wasn’t ready for production and sale, even if the EPA certified it. The EPA didn’t approve the application; by summer 2011, Navistar decided to abandon it. Late in the same year, Navistar started on another EPA certification application. But four days after EPA staff told Navistar in a meeting that its proposed engine didn’t meet certification requirements, the company filed its 2011 annual report on Form 10-K. In the report, Navistar said it planned to apply for EPA certification and believed the engine met EPA requirements.
In response to a new application, filed early in 2012, EPA staff raised “several serious concerns” standing in the way of approval. But in a press release and filings in March 2012, Navistar characterized the application as a “milestone”; in a conference call with analysts and investors, Ustian claimed that certification was proceeding in a typical timeframe and that Navistar could begin production on the engine in June 2012.
But in May 2012, Navistar withdrew the January 2012 application and submitted a third one that incorporated changes to lower emissions at the expense of fuel economy and other engine performance features. In a June 4, 2012 meeting, EPA staff told Navistar that it had serious concerns; the next day, the EPA told Navistar in writing that the engine as currently designed was “unlikely” to be certified.
But that didn’t stop the company. In its June 2012 quarterly filing and conference call, Navistar suggested it was unaware of any EPA concerns about the May 2012 application. That was just one of several misstatements in the filing and call regarding the application.
In July 2012, Navistar announced that it was withdrawing its application and would begin work on an engine using SCR technology.
Navistar, without admitting or denying the charges, has reached a settlement with the SEC and agreed to pay a $7.5 million penalty. Charges against Ustian are proceeding in litigation.
FINRA Censures, Fines Merrill on Background Check Failures
FINRA censured Merrill Lynch and fined the company $1.25 million as well as requiring it to review systems and procedures on identification, fingerprinting and screening of nonregistered associated persons.
According to the agency, the firm failed to conduct adequate background checks on approximately 4,500 of its 20,000 nonregistered associated persons. Some of the individuals were not fingerprinted at all, and others were not fingerprinted until after they began to work for the firm.
Although the 4,500 nonregistered associated persons were screened under Section 19 of the Federal Insurance Deposit Act for certain criminal convictions, they were not screened for some types of felony convictions or regulatory actions, as required under the Securities Exchange Act of 1934 (Exchange Act).
As a result, the firm allowed at least one person who was subject to statutory disqualification due to a felony conviction to associate with it, and was not able to determine whether other associated persons were subject to a disqualification because their association terminated before the firm screened them.
In addition, the firm failed to create and maintain a record of the arrest and felony conviction for the person subject to a disqualification, or fingerprint records for all of its eligible associated persons. The firm’s failure to fingerprint or properly screen 4,500 of its associated persons arose in part as a result of its acquisition by another company; after acquisition, the firm did not establish a supervisory system to handle such activities.
Without admitting or denying the findings, the firm consented to the sanctions.