Among recent enforcement actions by the Securities and Exchange Commission were charges against a company and its general counsel/chief compliance officer for failure to disclose a loss contingency and victory in a jury trial against the City of Miami and its former budget director for fraud in municipal bond offerings.
In addition, the agency won settlements in three separate cases, from concealment of problems and red flags from investors to a newsletter scheme to undisclosed credit risk in investments.
Jury Finds Miami, Boudreaux Liable in SEC Fraud Case
A jury has found the City of Miami and its former budget director Michael Boudreaux liable for multiple counts of antifraud violations of the federal securities laws. Boudreaux and the city were charged in 2013 with fraud in municipal bond offerings.
The agency had brought charges in the case after it found that the city and Boudreaux made materially false and misleading statements and omissions about some interfund transfers in three 2009 bond offerings totaling $153.5 million. They were also alleged to have provided false and misleading information in the city’s fiscal 2007 and 2008 comprehensive annual financial reports (CAFRs) received by investors, particularly those who had invested in previously issued city debt.
In a statement, the SEC said, “We are very pleased by today’s jury verdict holding the City of Miami, a recidivist violator of the federal securities laws, and its former budget director (Michael Boudreaux) liable for multiple counts of antifraud violations of the federal securities laws.”
The agency added, “[T]he jury took less than a day to decide that the City and Boudreaux had committed securities fraud in connection with their disclosures concerning the deteriorating financial condition of the City during 2007 and 2008 and in three separate offerings of municipal securities in 2009.”
Newsletter Scheme Costs “Whiz Kid” $1.5 Million
A self-proclaimed “stock trading whiz kid” and his stock newsletter company in Los Angeles have agreed to pay nearly $1.5 million to settle charges that they defrauded subscribers through false statements and misrepresentations.
According to the agency, Manuel Jesus and his newsletter company Wealthpire Inc. used advertising materials and websites touting him as “the untutored prodigy of stock investing” under the alias Manny Backus. A self-proclaimed “math whiz” who boasted a “skyscraping” IQ and training as a professional chess player, Backus claimed to be actively trading in the stock market with “real money” by age 19.
The SEC also said Wealthpire materials claimed that Backus made millions of dollars before “deciding to help other investors” by starting an alert service that let traders copy his every trading move. However, from at least January 2012 to September 2014, Backus was not trading in the same stocks recommended by his services as he claimed.
In addition, he wasn’t the one making all of the recommendations. The SEC said that Robert Joiner was paid by Wealthpire to make all the stock picks for one alert service, without any guidance from Backus on how to choose them. Joiner posed as Backus during chat room sessions, signing in using a password that Backus supplied, and Joiner told investors that he was buying and selling certain recommended stocks when no such transactions were actually taking place.
Joiner also is named in the SEC’s complaint and agreed to settle.
The SEC also noted a series of other misrepresentations to Wealthpire subscribers, including false claims about one particular stock alert service that supposedly made historic trading recommendations that yielded huge past returns higher than 1,400 percent.
Backus and Wealthpire agreed to pay disgorgement of $1,135,145 plus interest of $112,902, and Backus also must pay a $235,000 penalty. Without admitting or denying the allegations, Backus, Wealthpire, and Joiner consented to a final judgment permanently enjoining each of them from future violations.
SEC Charges Firm, General Counsel for Not Disclosing Loss Contingency
The SEC has charged RPM International, Inc. and its general counsel and chief compliance officer Edward Moore after it said they failed to disclose a loss contingency or record an accrual for the loss contingency based on an investigation by the Department of Justice.
According to the agency, the DOJ investigated, beginning in 2011, a complaint filed under the False Claims Act against RPM and its wholly owned subsidiary Tremco, Inc. for overcharging on government contracts. In 2013, RPM settled the DOJ investigation and underlying litigation for $61 million.
However, Moore, although he oversaw the company’s response to the DOJ investigation, not only failed to disclose material facts about the investigation to RPM’s chief executive officer, chief financial officer, audit committee and independent auditors, he also made material misrepresentations to the audit firm about the DOJ investigation in connection with the audit firm’s reviews and audits of RPM’s financial statements and SEC filings.
That led the company to file false and misleading filings with the SEC, a situation that continued even after disclosure about the investigation and recording of an accrual were made. Investors were misled by the filings until August of 2014, when the company finally restated its financial results for three quarters that occurred during the DOJ investigation and filed amended SEC filings for those quarters.
Moore, for his part, owned 65,952 shares of RPM stock, worth more than $1.8 million, as well as 65,000 RPM stock options as of August 31, 2012. Knowing that disclosure of the investigation could cause reputational harm to the company, he chose to keep quiet about the investigation, and later to lie outright about the situation, to protect his own financial position.
The SEC seeks a judgment against RPM and Moore providing permanent injunctive relief and ordering RPM and Moore to pay disgorgement with prejudgment interest and civil money penalties.
Company Settles With SEC on Investment Scheme
A subsidiary of Oklahoma-based BOK Financial Corp. has agreed to pay more than $1.6 million to settle charges that it concealed numerous problems and red flags from investors in municipal bond offerings to purchase and renovate senior living facilities.
The agency also filed a complaint in federal court against a former senior vice president at the bank, Marrien Neilson, who allegedly was chiefly responsible for the failures of the bank’s corporate trust department while overseeing what turned out to be fraudulent bond offerings managed by Christopher Brogdon, an Atlanta-based businessman. Brogdon has since been charged with fraud and ordered by the court to repay $85 million to investors.
According to the agency, BOKF NA failed in its gatekeeper role as indenture trustee and dissemination agent for Brogdon’s bond offerings. BOKF and Neilson learned that Brogdon was withdrawing money from reserve funds for the bond offerings and failing to replenish them, and had also failed to file annual financial statements for the offerings.
BOKF and Neilson also knew that the nursing home facilities serving as collateral for one of the bond offerings had been closed for years. But Neilson warned that disclosing these and other problems could impair future business and fees from Brogdon, upset bondholders, and cause regulatory issues for bond underwriters-so they decided not to inform bondholders as required.
Without admitting or denying the SEC’s findings, BOKF agreed to pay disgorgement of $984,200.73 of the fees the bank collected from its work with Brogdon. The bank also agreed to pay interest totaling $83,520.63 and a penalty of $600,000. BOKF promptly terminated Neilson following an internal investigation and reported its misconduct to the SEC. The SEC’s litigation against Neilson will take place in federal court in Newark, N.J.
The SEC’s investigation is continuing.
Portuguese Telecom to Pay $1.25 Million for Disclosure Failure
A Portuguese-based telecommunications company has agreed to pay a $1.25 million penalty for its failure to properly disclose the nature and extent of credit risk involved in its investments in debt instruments issued by companies of Portuguese conglomerate Grupo Espirito Santo.
According to the SEC, Portugal Telecom SGPS S.A.’s 2013 financial statements had multiple disclosure failures. As a result of these failures, Portugal Telecom’s investors were unable to form an overall picture of the risks arising from the company’s investment in Grupo Espirito Santo debt instruments—which made up 82% of Portugal Telecom’s short-term investments.
The SEC also found that Portugal Telecom mischaracterized its short-term investment in commercial paper issued by a Grupo Espirito Santo company by claiming Portugal Telecom issued the debt securities instead of subscribing to them. In addition, the agency cited Portugal Telecom’s insufficient internal accounting controls.
Portugal Telecom is now known as Pharol SGPS S.A.
The company has agreed to the SEC’s penalties without admitting or denying the findings.
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