The Securities and Exchange Commission today announced that in fiscal year 2015, it continued to build a strong record of first-of-their-kind cases that spanned the spectrum of the securities industry.
In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties. Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.
In fiscal year 2014, the SEC filed 755 enforcement actions and obtained orders totaling $4.16 billion in disgorgement and penalties. Of the 755 enforcement actions filed in fiscal year 2014, 413 were independent actions for violations of the federal securities laws and 342 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.
The agency’s first-of-their-kind cases included the first action involving: a private equity adviser for misallocating broken deal expenses; an underwriter for pricing-related fraud in the primary market for municipal securities; a “Big Three” credit rating agency; violations arising from a dark pool’s disclosure of order types to its subscribers; an FCPA action against a financial institution; an admissions settlement with an auditing firm; and an SEC rule prohibiting the use of confidentiality agreements to impede whistleblower communication with the SEC.
“Vigorous and comprehensive enforcement protects investors and reassures them that our financial markets operate with integrity and transparency, and the Commission continues that enforcement approach by bringing innovative cases holding executives and companies accountable for their wrongdoing sending clear warnings to would-be violators,” said SEC Chair Mary Jo White. “The Enforcement Division’s leveraging of data, quantitative analytics and the expertise of our other divisions contributed significantly to this year’s very strong results.”
“The Division’s hard work, tremendous energy, and efficiency uncovered significant misconduct during the past fiscal year, and helped bring a significant number of high-impact, first-of-their-kind actions,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “I continue to be proud of the Division’s record of accomplishments, and we have already continued to pave new ground in the new fiscal year.”
Overview of SEC Enforcement in Fiscal Year 2015
Combating Financial Fraud and Enhancing Issuer Disclosure
- Financial reporting remained a key enforcement priority and this past fiscal year involved a number of significant financial fraud and issuer disclosure matters, including actions against companies and executives: Computer Sciences Corporation and eight of its former executives, including its former CEO and CFO; ITT Educational Services, its CEO and CFO; Deutsche Bank AG; Miller Energy and its former CFO and current COO; MusclePharm Corp., its CEO, its two former CFOs, and the former chair of its audit committee; Assisted Living Concepts and its former CEO and CFO; Broadwind Energy and its former CEO and CFO; Bankrate and three of its former executives; two former top executives of KIT Digital; and Trinity Capital Corporation and five of its current or former executives.
Holding Gatekeepers Accountable
- Held attorneys, accountants and other gatekeepers accountable for failures to comply with professional standards.
- In the first non-independence case against a major audit firm since 2009, charged BDO USA, LLP with issuing false and misleading unqualified audit opinions about the financial statements of General Employment Enterprises, and five of the firm’s partners, including national office personnel, for their roles in the deficient audits.
- Sanctioned Deloitte & Touche LLP and eight auditing firms for various brokerage firms for violating independence rules.
- In the SEC’s case against MusclePharm Corp., the SEC charged the company’s former audit committee chair who substituted his wrong interpretation of SEC rules for those of an outside expert, resulting in an incorrect disclosure.
- Charged 14 accountants and 10 attorneys for their roles in aiding perpetrators of microcap fraud.
- Charged Oppenheimer & Co. and current and former E*Trade subsidiaries for failing in their gatekeeping function as broker-dealers by allowing billions of unregistered microcap stock shares to be sold into the market.
Ensuring Exchanges, Traders and Other Market Participants Operate Fairly
- Sanctioned Morgan Stanley & Co., Goldman, Sachs & Co., and Latour Trading LLC for violations of the market access rule, which requires firms to have adequate risk controls in place before providing customers with access to the market.
- Obtained the largest penalty to date against an alternative trading system, ITG Inc. and AlterNet Securities, Inc., to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.
- Charged UBS Securities LLC with disclosure failures and other securities law violations related to the operation and marketing of its dark pool.
- In the first case involving high frequency trading manipulation, sanctioned Athena Capital Research, a New York City-based high frequency trading firm.
- In the first case principally focusing on stock exchange order types and the largest penalty for an exchange, charged two exchanges formerly owned by Direct Edge with failing to accurately describe their order types in SEC rule filings.
- Charged two Merrill Lynch entities with using inaccurate data in executing short sale orders.
Rooting Out Insider and Abusive Trading Schemes through Innovative Uses of Data and Analytics
- Charged 87 parties in cases involving trading on the basis of inside information. Many of these cases involved complex insider trading rings which were cracked by Enforcement’s innovative uses of data and analytics to spot suspicious trading.
- Charged dozens of defendants in an alleged scheme to profit from hacked nonpublic information about corporate earnings announcements. The underlying investigation was developed through the use of innovative analytical tools designed to find suspicious trading patterns and expose misconduct. Since filing the emergency action, the SEC froze more than $70 million and obtained a $30 million settlement from two of the defendants.
- Charged an entrepreneur and private equity investor and a general partner at a venture capital firm; a former Fortune 500 company executive and his brother-in-law; a managing director at a prominent investment bank and his father, a CPA and CFO of a technology company, a former day trader, his two friends, and his brother-in-law, and a Swiss trader who traded on nonpublic information ahead of a Florida-based biometrics company’s acquisition by Apple Inc.
- Filed an emergency asset freeze of two U.S. brokerage accounts belonging to a Bulgarian national brought three weeks after a posting on the SEC’s EDGAR system about a false tender offer for Avon.
Uncovering Misconduct by Investment Advisers and Investment Companies
- Brought a first-ever action charging a private equity adviser with misallocating so-called “broken deal” expenses against Kohlberg Kravis Robert & Co., related to the firm’s misallocation of more than $17 million in expenses to its flagship private equity funds in breach of its fiduciary duty.
- Brought a first-ever action for failure to report a material compliance matter to a fund board against Blackrock Advisors LLC, arising from the firm’s failure to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager. The SEC also charged Blackrock’s former CCO.
- Brought a first-ever action under the Distribution-in-Guise initiative, a recent SEC initiative to protect mutual fund shareholders from bearing the costs when firms improperly use fund assets to pay for distribution-related services, against New York-based investment adviser First Eagle Investment Management and its affiliated distributor, FEF Distributors.
- Charged an investment management firm F-Squared Investments, as well as its CEO, for defrauding investors through false performance advertising about its flagship product.
- Charged a Wisconsin-based investment advisory firm and its owner for fraudulently “cherry-picking” winning options trades which were identified with help from the agency’s Division of Economic and Risk Analysis (DERA), which conducted a statistical analysis to determine whether the trades at issue could have resulted from a coincidental or lucky combination of trades.
- Charged Patriarch Partners, the firm’s CEO, and three other entities with fraud in overvaluing assets in three collateralized loan obligations.
Fighting Market Manipulation and Microcap Fraud
- Continued to devote resources to combat market manipulation and microcap fraud, including by using trading suspensions to neutralize threats to investors after questions arise concerning the adequacy or accuracy of an issuer’s disclosures. The SEC suspended trading in the securities of 334 issuers, including 128 issuers arising from a microcap fraud-fighting initiative known as Operation Shell-Expel.
- Brought significant actions against firms acting as unregistered broker-dealers catering to customers engaged in microcap manipulation, including charges against three Costa Rica-based firms and three Nevada-based firms and their employees who were part of a wider scheme involving 34 defendants to manipulate the trading of microcap stocks and charges against International Capital Group for selling more than nine billion shares of penny stocks.
- Brought additional significant microcap and market manipulation actions, including charges against five offshore entities for offering and selling unregistered penny stocks into the public markets; charges against a securities lawyer who planned and implemented market manipulation schemes; and charges against a microcap promoter for selling more than 83 million penny stock shares that he secretly obtained through at least 10 different offshore front companies.
Halting International and Affinity-Based Investment Frauds
- Filed several actions to halt international investment frauds, including those that targeted, among others, immigrant communities. These cases include actions against a Bay Area oil and gas company and its CEO; against the “Path America” companies and its founder; and against DFRF Enterprises and related individuals.
Upholding Disclosure Standards in Municipal Securities
- Announced the first two rounds of settlements with 58 municipal underwriting firms under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which encourages and rewards self-reporting of continuing disclosure violations by municipal issuers and underwriters.
- Brought a first-ever action for pricing-related fraud in the primary market for municipal securities against Edward Jones and head of its municipal underwriting desk.
- Brought first-ever actions against 13 dealers charging violations of MSRB (Municipal Securities Rulemaking Board) Rule G-15(f), which prohibits dealers from effecting customer transactions in municipal securities in amounts below the minimum denomination set for the issue.
Cracking Down on Misconduct Involving Complex Financial Instruments
- Brought a first-ever action against a big three credit rating agency against Standard & Poor’s (S&P) and the former head of S&P’s Commercial Mortgage-Backed Securities (CMBS) ratings group involving fraudulent misconduct in its ratings of certain CMBS.
- Filed enforcement actions against three senior residential mortgage-backed securities (RMBS) traders at the broker-dealer Nomura Securities International, Inc. and Taberna Capital Management and the firm’s former managing director and former chief operating officer for misconduct involving mortgage-backed securities and collateralized debt obligations.
- Brought a first-ever action applying Dodd-Frank provisions limiting the sale of security-based swaps against Sand Hill Exchange, a Silicon Valley-based startup company, and the two individuals who ran the exchange.
Combating Foreign Corrupt Practices
- Filed significant actions under the Foreign Corrupt Practices Act (FCPA) against Bio-Rad Laboratories Inc., Avon Products Inc., Goodyear Tire & Rubber Company, BHP Billiton, and Hitachi Ltd.
- Brought a first-ever action against a financial institution for violations of the FCPA and a first-ever action involving hiring practices against BNY Mellon.
- Charged individuals with FCPA violations, including two former employees in the Dubai office of FLIR Systems Inc., an officer of PBSJ Corporation, and a former officer of SAP SE.
Standing Up for Whistleblowers
- The program awarded eight whistleblowers with total awards of approximately $38 million in FY 2015.
- Awarded $600,000 to a whistleblower for providing key original information that led to a successful enforcement action against Paradigm Capital Management and its owner, which was brought in fiscal year 2014.
- Brought a first-ever action for violating Exchange Act Rule 21F-17, which prohibits the use of confidentiality agreements or other actions to impede a whistleblower from communicating with the SEC, against KBR Inc.
Demanding Admissions in Important Cases Enhancing Public Accountability
- Demanded and obtained acknowledgements of wrongdoing under the admissions policy. Cases from this fiscal year involved an auditing firm in issuing false and misleading unqualified audit opinions; causing inaccuracies in the brokers’ books and records and in data provided to the SEC in investigations; a broker-dealer for failing to have adequate risk controls in place before providing customers with access to the market; the SEC’s action against F-Squared Investments described above; two defendants charged with perpetrating a worldwide pyramid scheme; and a longstanding failure by an international financial institution to comply with the broker-dealer registration provisions, among other actions.
- Won all six U.S. District Court jury or bench trials in fiscal year 2015 and enjoyed strong successes in administrative proceedings. Obtained favorable jury verdicts in the following cases:
- BankAtlantic Bancorp, now known as BBX Capital Corporation, and its CEO Alan Levan were found liable for fraud in connection with disclosures concerning the state of the bank’s loan portfolio early in the financial crisis. The court entered final judgments against BBX and Mr. Levan ordering BBX and Mr. Levan to pay more than $5.8 million in civil penalties and imposing a two year officer-and-director bar on Mr. Levan, and imposed other ancillary relief.
- Charles Kokesh was found liable for defrauding four business development companies of tens of millions of dollars. The court entered a final judgment against Mr. Kokesh, ordering him to pay over $55 million in monetary relief, and imposed other ancillary relief.
- Willie Gault was found liable for filing false certifications with the SEC and knowingly circumventing the internal controls of HeartTronics, Inc., a company that claimed to sell a heart monitoring device, while Mr. Gault served as that company’s co-CEO.
- George Levin was found liable for fraud in connection with his and his companies’ purchase of discounted legal settlements in the form of promissory notes and limited partnership interests offered by Ft. Lauderdale attorney Scott Rothstein, which turned out to be non-existent and comprised one of the largest-ever Ponzi schemes in South Florida. Following the verdict, the court entered judgment against Mr. Levin and ordered him to pay approximately $50 million in disgorgement, prejudgment interest and a penalty, and imposed other ancillary relief.
- Ralph Pirtle and his friend and business associate, Morando Berrettini, were found liable for insider trading in the securities of three companies that were acquisition targets for Philips.
Breakout of Enforcement Actions for Fiscal Years 2013 through 2015
The following table breaks down the SEC’s enforcement results for FY 2013 through 2015:
Independent Enforcement Actions
Disgorgement and Penalties Ordered
From 2005 to 2012, independent actions filed by the SEC (excluding contempt actions, which have been excluded from enforcement action numbers for the last three fiscal years) ranged from approximately 318 to 445, and monetary remedies ordered ranged from $1 billion to $3.1 billion.