Among recent enforcement actions by the Securities and Exchange Commission were the imposition of a $2.5 million fine on RBC Capital Markets LLC for proxy statement disclosure violations, charges against a supposed green technology company for defrauding investors and against an Alabama attorney and companies he controls for defrauding professional athletes out of millions.
Also, the Financial Industry Regulatory Authority went after two Morgan Stanley entities for failures regarding potentially suspicious transactions and for large options positions reporting errors.
SEC: Lawyer Defrauding Pro Athletes to Pay Alimony
The SEC has charged Alabama attorney Donald Watkins and companies he controls with defrauding professional athletes and other investors out of millions of dollars, much of which he spent on his girlfriend and to cover personal expenses like alimony, past-due taxes and credit card bills.
According to the agency, Watkins and his companies, Watkins Pencor LLC and Masada Resource Group LLC, claimed to investors that their money would be used to support waste-to-energy ventures.
Investors were further duped by being told that Waste Management Inc., a large international waste treatment company, was seriously considering acquiring Watkins Pencor, Masada, and its affiliated companies in a multibillion-dollar transaction. However, the SEC said that Waste Management’s “interest” in Masada never went beyond a short initial meeting in August 2012, more than a year after the defendants began telling investors that negotiations were progressing and that the acquisition was imminent.
“We allege that Watkins duped investors into believing that there was a lucrative transaction on the horizon, when in fact there was none,” Walter Jospin, regional director of the SEC’s Atlanta regional office, said in a statement.
The agency seeks permanent injunctions, penalties and return of ill-gotten gains with prejudgment interest. It has also charged Watkins’ law firm, Donald V. Watkins P.C., as a relief defendant for recovery of ill-gotten gains from investor monies the SEC says it received.
RBC to Pay $2.5 Million on Proxy Statement Disclosure Violations
RBC Capital Markets LLC has agreed to a $2.5 million settlement with the SEC for causing materially false and misleading disclosures about its valuation analysis in a proxy statement for Rural/Metro Corp.’s sale in 2011 to a private equity firm.
According to the agency, RBC was the lead financial advisor to Rural/Metro, a medical transportation services provider, and received a $500,000 fee for a fairness opinion presented to Rural/Metro’s board as it considered the sale.
But an investigation by the SEC found that RBC’s presentation contained materially false and misleading statements that made the bid look more attractive. RBC also got that information included in the proxy statement Rural/Metro filed in May 2011 to solicit shareholder approval for the sale.
RBC’s presentation claimed that one of its valuations was based on Wall Street analysts’ “consensus projections” of Rural/Metro’s 2010 adjusted EBITDA, a pretax earnings figure. However, the valuation had nothing to do with analysts’ research or a “consensus” view; instead, it was Rural/Metro’s actual 2010 adjusted EBITDA of $69.8 million.
Rural/Metro’s proxy statement included a summary of RBC’s valuation analysis, including the false statement that RBC used “Wall Street research analyst consensus projections” for 2010 “consensus” adjusted EBITDA. Not only was the proxy statement false, it was also misleading, since it would lead shareholders to believe the analysis reflected the “consensus” calculation of $76.8 million.
The SEC also said RBC caused the proxy statement to include a misleading disclosure suggesting that RBC had relied on another valuation analysis in its fairness presentation to Rural/Metro’s board when it did not use that analysis for valuation purposes.
Without admitting or denying the SEC’s findings, RBC agreed to the SEC’s order and to pay $500,000 in disgorgement, $77,759 in interest and a $2 million penalty.
SEC Charges ‘Green Tech’ Company with Fraud
A California company and two executives purporting to manufacture environmentally friendly building materials have been charged by the SEC with using baseless financial projections and other misleading statements to defraud investors.
According to the agency, Enviro Board Corp. and its co-chairmen/CEOs Glenn Camp and William Peiffer raised approximately $6 million from investors during a four-year period by using documents predicting company earnings ranging from $18 million to $95 million per year.
What investors didn’t know was that there was no reasonable basis for those estimates, and that the company had been plagued by persistent manufacturing problems since its inception. Enviro Board claimed its green materials had already been used in residential and commercial construction projects, yet the company has never developed a commercially viable mill to manufacture its products. Among other misrepresentations to investors were claims to have secured $161 million in financing from a “vendor” that turned out to be nothing more than an entity created by Peiffer that lacked the resources to actually make such a loan.
But that didn’t stop Camp, Peiffer and their primary salesman, Joshua Mosshart, from paying themselves approximately $2.6 million in compensation out of investor funds. Mosshart also is named in the SEC’s complaint and charged with selling unregistered securities and acting as an unregistered broker.
The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus interest and penalties, and officer-and-director bars against Camp and Peiffer.
FINRA Fines Morgan Stanley Over Client’s Ponzi Scheme, Options Reporting
Two Morgan Stanley entities, Morgan Stanley Smith Barney LLC and Morgan Stanley & Co., were censured and fined by FINRA on two separate issues.
Morgan Stanley Smith Barney was censured by the agency and fined $200,000 after FINRA found that the firm failed to adequately supervise, by following firm policies and procedures, to detect and cause the reporting of potentially suspicious transactions.
According to FINRA, a firm client was able to kite checks between his financial management account maintained at the firm and a separate bank account maintained at a local bank, working a Ponzi scheme, even though his activity raised red flags that were identified in firm policies and procedures as indicating potentially suspicious activity.
The firm allowed the client to write checks against uncleared funds, and the client kept afloat a Ponzi scheme in part by moving money between the firm account and the bank account. During this period of increased deposit and withdrawal activity, the firm account had almost no securities transactions. Instead, the account was used almost exclusively to transfer funds between the firm account and the bank account.
The activity in the firm account triggered red flags that were covered in the firm’s written policies and procedures, and the firm’s electronic alert system generated alerts as a result of the rapid movement of funds through the firm account.
Although the firm then reviewed the client relationship and met with the client, it accepted what it believed was a plausible business explanation for the activity. However, the alerts and the red flags indicative of potentially suspicious activity continued, at which point the firm again reviewed the activity in the client’s account and concluded that it would no longer pay the client’s checks on uncleared funds. The client’s Ponzi scheme then collapsed when he bounced several checks.
The firm neither admitted nor denied FINRA’s findings but consented to the sanctions.
FINRA also censured Morgan Stanley & Co. and fined the firm $80,000 after it found that due to a coding error, the firm deleted over-the-counter (OTC) options positions upon expiration, and thereby underreported each of these OTC options positions to the Large Options Positions Report (LOPR) system on one day.
The agency said that the firm failed to maintain an adequate system of supervision, including systems of follow-up and review, that would achieve compliance in the reporting of options positions to the LOPR system. The firm also lacked adequate WSPs requiring reviews to ensure that its LOPR submissions were accurate.
The firm was unaware of the coding error that deleted expiring options on the expiration date from the LOPR and, as a result, it failed to find and prevent that deletion.
The firm neither admitted nor denied the findings but consented to the sanctions.
— Check out Third-Party Advisor Exam Rule May Come Before Election: Ex-SEC Official on ThinkAdvisor.