Among recent enforcement actions, the SEC hit a ski resort embroiled in fraudulent EB-5 offerings; the Las Vegas Sands for violations of the Foreign Corrupt Practices Act (FCPA); a technology company for misleading investors; and a research analyst for insider trading.
In addition, Britain’s Financial Conduct Authority (FCA) banned a former LIBOR submitter for manipulating his LIBOR submissions.
SEC Freezes Ski Resort’s Assets on Fraudulent EB-5 Offerings
The SEC froze the assets of a Vermont-based ski resort and related businesses it said were misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program.
According to the agency, Ariel Quiros of Miami, William Stenger of Newport, Vermont, and their companies made false statements and omitted key information while raising more than $350 million from investors to construct ski resort facilities and a biomedical research facility in Vermont.
Investors were told they were investing in one of several projects connected to Jay Peak Inc., a ski resort operated by Quiros and Stenger, and their money would only be used to finance that specific project.
But in Ponzi-like fashion, Quiros tapped money from investors in later projects to fund deficits in earlier projects. Quiros also used investor money for such things as the purchase of a luxury condominium, payment of his income taxes and other taxes unrelated to the investments, and acquisition of an unrelated ski resort.
More than $200 million was allegedly used for other-than-stated purposes, including $50 million spent on Quiros’s personal expenses and in other ways never disclosed to investors.
Quiros, Stenger, Jay Peak, and a company owned by Quiros called Q Resorts Inc., as well as seven limited partnerships and their general partner companies, were charged by the SEC. Four other companies are named as relief defendants, for the purpose of recovering investor funds transferred into their accounts.
In addition to financial penalties and disgorgement of ill-gotten gains plus interest, the SEC seeks conduct-based injunctive relief against Quiros and Stenger along with an officer-and-director bar against Quiros.
Las Vegas Sands Settles With SEC on FCPA Violations
The Las Vegas Sands has agreed to settle SEC charges that it violated the Foreign Corrupt Practices Act (FCPA) by failing to properly authorize or document millions of dollars in payments to a consultant facilitating business activities in China and Macao.
According to the agency, LVS kept inaccurate books and records and frequently lacked supporting documentation or proper approvals for more than $62 million in payments to a consultant in Asia.
The consultant acted as an intermediary to obscure the company’s role in certain business transactions such as the purchases of a basketball team and a building in China, where casino gambling isn’t permitted.
LVS transferred $6 million to the consultant, who was internally referred to as a “beard,” to buy a team to play in the Chinese Basketball Association, which did not permit gaming companies to own a team. The company transferred an additional $8 million to the consultant to cover the costs of operating the team without any documentation of those costs.
In addition, LVS used the same consultant as a beard to purchase a building in Beijing from a Chinese state-owned-entity, ostensibly to develop a business center for U.S. companies seeking to do business in China. Despite concerns by some employees that the real estate purchase was solely for political purposes, approximately $43 million in payments were made to the consultant without research, analysis, or proper approval by any LVS employee authorized to approve the amounts paid.
Approximately $900,000 paid to an entity controlled by the consultant was recorded in company books and records as “property management fees” when no property management services were actually performed. Approximately $1.4 million was recorded as “arts and crafts” when the entity never actually obtained any artwork for the building.
There were other violations, too, involving purchases, reimbursements to outside counsel, and comps to customers. In one case, an employee obtained a cash advance of $28,000 and a cash reimbursement of $86,000 without proper authorization. In another, an outside counsel requested reimbursement of $25,000 for expenses incurred on a business trip but provided no documentation, and later admitted that he actually requested the funds for a friend. And in a third, in its casinos in Macao, LVS employees didn’t track which customers received comps to be sure they weren’t providing improper gifts to government officials.
In additional to paying a $9 million penalty, LVS has agreed to retain an independent consultant for two years to review its FCPA-related internal controls, recordkeeping, and financial reporting policies and procedures and its ethics and compliance functions. The company neither admitted nor denied the SEC’s charges.
SEC Charges Tech Company With Fraud
A Texas-based technology company and its founder have been charged with fraud by the SEC after it said they boosted stock sales with phony claims about a supposedly revolutionary computer server and big-name customers purportedly placing orders to buy it.
Also charged are Texas Attorney General Ken Paxton and a former member of the company’s board of directors; they are accused of recruiting investors while keeping quiet about being paid to promote the company’s stock.
According to the agency, Servergy Inc. and William Mapp III sold $26 million worth of company stock in private offerings while misleading investors to believe that the Cleantech CTS-1000 server (the company’s sole product) was especially energy efficient. They claimed it could replace “power-hungry” servers found in top data centers and compete directly with top server makers like IBM, Dell and Hewlett Packard.
But neither Mapp nor Servergy told investors that its own CTS-1000 server was already obsolete and couldn’t compete, using a 32-bit processor that didn’t stand up in computing power to the 64-bit processors used in those “power-hungry” servers made by top companies.
In addition, when Servergy was low on operating funds, Mapp lured prospective investors with the phony claim that well-known companies were ordering the CTS-1000, specifically mentioning an order he claimed was from Amazon. What really happened was that an Amazon employee had contacted Servergy to test the product in his free time for personal use.
Paxton, for his part, had an agreement with Mapp, while he was serving in the Texas House of Representatives, to promote Servergy to prospective investors in return for shares of Servergy stock.
The SEC said that Paxton raised $840,000 in investor funds for Servergy and in return got 100,000 shares of stock. However, he never disclosed that remuneration to prospective investors while recruiting them.
Also, former Servergy director Caleb White brought in more than $1.4 million for Servergy, receiving in exchange $66,000 and 20,000 shares of Servergy stock. He never told investors about that either. White has agreed to settle the SEC’s charges, without admitting or denying them, by paying $66,000 in disgorgement and returning his shares of Servergy stock to the company.
Servergy has also agreed to settle without admitting or denying the charges. The company agreed to pay a penalty of $200,000.
The cases against Mapp and Paxton continue.
SEC Charges Research Analyst With Insider Trading in Mom’s Account
Research analyst John Afriyie has been charged by the SEC with insider trading, using his mother’s brokerage account, based on nonpublic information he learned at work.
According to the agency, Afriyie found out about an impending acquisition of home security company The ADT Corporation when prospective acquirer Apollo Global Management approached the Manhattan-based investment firm where he was employed and discussed potential debt financing for a public-to-private deal.
After accessing several highly confidential, deal-related documents on the firm’s computer network, Afriyie then purchased thousands of high-risk, out-of-the-money ADT call options in his mother’s account in anticipation that ADT’s stock price would rise when the transaction was publicly announced. The deal was made public on February 16; Afriyie then sold all the ADT options he’d bought in his mother’s account. The deal made him more than $1.5 million in illicit profits.
The SEC has named Afriyie’s mother as a relief defendant to recover the money Afriyie made trading in her name. The investigation is continuing.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against Afriyie.
FCA Bans Former LIBOR Submitter
Britain’s FCA has banned former Royal Bank of Scotland LIBOR submitter Paul White from performing any function in relation to any regulated financial activity, and has publicly censured him, after finding that he manipulated his submissions for Japanese yen (JPY) and Swiss francs(CHF) in accordance with requests from currency traders seeking more advantageous rates.
According to the FCA, between 8 March 2007 and 24 November 2010, White was the primary RBS submitter for JPY and CHF. During that period, he received 68 documented communications from RBS JPY and CHF derivatives traders requesting submissions that would benefit their trading positions. In addition, between March 2007 and November 2008 he sat next to a CHF derivatives trader who made oral requests for CHF LIBOR submissions to him on a weekly basis.
White not only took those requests into account in his submissions, he also engaged to do so for an external JPY derivatives trader.
The FCA said that, in addition to the ban and censure, “were it not for … White’s serious financial hardship,” he would also have been fined £250,000 ($353,320).