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SEC Files Complaint Against Former Bank Executives, Alleges Fraudulent Reporting of Loan Losses
On January 13, the SEC filed a complaint against 11 former executives and board members of an Alabama-based federal savings bank and its holding company for allegedly participating in various schemes to mislead investors and bank regulators by concealing loan losses, and for violating reporting, internal controls, books-and-records, and proxy solicitation provisions. According to the SEC, the bank’s officers and directors extended, renewed, and rolled over loans, and/or used straw borrowers to “avoid properly classifying the loans as impaired and increasing the Allowance for Loan and Lease Losses (‘ALLL’).” The SEC’s complaint further alleges that in 2009 and 2010, the bank misstated its reported income by approximately 99% and 54%, respectively. The SEC is charging the defendants with, among other things, various counts of fraud, aiding and abetting fraud, circumvention of internal controls and falsified books and records, and false statements to accounts in violation of the Securities Act and the Exchange Act. Nine out of the 11 named defendants agreed to settle the charges against them, with penalties ranging from $100,000 to $250,000, and the remaining two defendants are contesting the charges in federal district court in Tallahassee, Florida.
Oil and Gas Company Files Lawsuit Against Drilling Partners Challenging Post-FCPA Settlement Reticence
On January 11, a Houston-based oil and gas company filed suit in the U.S. District Court for the Southern District of Texas against its drilling partners in the company’s Guinean operations. The company claims that the drilling partners have unjustly delayed performing the work called for by their operating agreement because of uncertainty over whether the government of Guinea would terminate its drilling agreement with the company in light of the FCPA investigation into the company. That investigation was resolved by a declination letter issued by DOJ in May 2015 and a settlement with the SEC in October 2015. (See previous InfoBytes coverage of that investigation here and here.) The company is seeking a ruling that the drilling partners are in violation of the operating agreement and an order forcing them to fulfill their obligations.
In a November 2015 SEC filing, the company reported a complete lack of operating revenue and warned that further delays in fulfilling requirements imposed by the government of Guinea could result in a loss of the company’s concession to drill in the country. This case illustrates the potential business risks posed by an FCPA investigation—even if it is resolved on relatively favorable terms.
SEC Outlines 2016 Examination Priorities
On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.
SEC Releases Reports on Credit Rating Agencies
On December 28, the SEC, as required by Dodd-Frank and the 2006 Credit Rating Agency Reform Act, released two annual staff reports on credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs) – the Annual Examination Report and the Annual Report to Congress. The Annual Examination Report reviewed the NRSROs’ (i) policies, procedures, and practices regarding quantitative models used in the rating process; (ii) policies and procedures, controls, and documentation relating to IT and cybersecurity; and (iii) the use of third-party vendors and non-NRSRO affiliates in “determining, issuing, or contributing to the NRSROs’ credit ratings or credit rating processes.” Overall, the SEC noted that the report “shows that all of the NRSROs have enhanced their understanding of their obligations as regulated entities and that at many of the firms, operational improvements made in prior years are being further integrated and enhanced.”
The simultaneously-released Annual Report to Congress relates to the period from June 26, 2014 to June 25, 2015, and summarizes the SEC’s views on the NRSROs’ state of competition, transparency, and conflicts of interest.
Former Executive Sentenced for Conspiracy to Bribe Panamanian Government Officials
On December 16, the U.S. District Court for the Northern District of California sentenced a former regional director of a Pennsylvania-based software and technology company for his involvement in a conspiracy to bribe Panamanian government officials to obtain technology contracts. U.S. District Judge Charles R. Breyer sentenced Vicente Eduardo Garcia to 22 months in prison for his role in the bribery scheme. In August 2015, Garcia pleaded guilty to conspiracy to violate the FCPA, admitting that in 2009 he and others conspired to bribe two Panamanian government officials directly and a third official through an agent in order to obtain a contract to provide a Panamanian state agency with a technology upgrade package. Garcia and his co-conspirators used sham contracts and false invoices to conceal the bribes, and Garcia personally received over $85,000 for arranging the bribes. Garcia previously settled with the SEC and agreed to pay disgorgement of $85,965 plus prejudgment interest.
Massachusetts-Based Imaging Company Discloses Settlement Offer to End FCPA Investigations
In a quarterly securities filing made on December 9, a Massachusetts-based manufacturer of airport security equipment, disclosed that the SEC and DOJ have made separate proposals to end their FCPA investigations into the company that would include payments totaling approximately $15 million. The company had previously announced in a September 2015 press release that it had offered the SEC $1.6 million to settle the SEC’s FCPA investigation of the company. The company’s 10-Q disclosed that the SEC rejected that offer. The company stated that it remains in discussion with the SEC and DOJ about settlement and is also discussing a settlement with the Danish government concerning a resolution of these matters.
The company previously reported that the DOJ and SEC had “substantially” completed their investigations of potential bribery involving transactions by the company’s Danish subsidiary. The transactions at issue involved distributors paying the subsidiary more than was owed, and the subsidiary then allegedly transferring the excess money to third parties identified by the distributors. At the time of its 2011 disclosure of the potentially problematic transactions, the company stated that it had not ascertained the ultimate beneficiaries or purpose of the transfers.
SEC Files Complaint Against Bitcoin Mining Companies for Running Alleged Ponzi Scheme
On December 1, the SEC announced that it charged two Connecticut-based Bitcoin mining companies and their founder with allegedly running a Ponzi scheme, from approximately August 2014 through December 2014, to defraud investors by purportedly offering shares of a digital Bitcoin mining operation. The companies offered shares in mining profits via investment contracts called “Hashlets,” which entitled the investor to a portion of the profits from the defendants’ calculated “hashing power.” The SEC’s complaint alleges that the “defendants sold far more Hashlets worth of computing power than they actually had in their computer centers,” and that the investors ultimately paid for a share of “hashing power” that did not exist. The SEC further alleged that the defendants misrepresented to investors the potential of their virtual currency mining operations by making false statements about the profitability and life-span of Hashlets and how the payouts for Hashlets were derived, among other things. The defendants earned approximately $19 million in revenue from selling Hashlets to more than 10,000 investors. The SEC’s complaint seeks permanent injunctive relief and the disgorgement of the defendants’ ill-gotten gains, plus pre-judgment interest.
SEC Announces Katherine Martin as Associate Director in Office of International Affairs
On November 30, the SEC named Katherine Martin as Associate Director in its Office of International Affairs. In her new role, Martin will “oversee the development of the SEC’s policy on cross-border regulatory matters, including its participation in multilateral standard-setting bodies and its bilateral dialogues with foreign authorities.” Martin previously served at the SEC as Assistant Director in the Office of International Affairs, Senior Special Counsel in the Office of Clearance and Settlement in the Division of Trading and Markets, Assistant Chief Counsel in the Division of Economic and Risk Analysis, and a Senior Counsel in the Office of International Affairs. Prior to joining the SEC over a decade ago, Martin worked as an associate in private practice.
UK Serious Fraud Office Issues First Deferred Prosecution Agreement with Johannesburg-based Financial Group
On November 30, the United Kingdom’s Serious Fraud Office (SFO), working with the DOJ and SEC, entered into a deferred prosecution agreement (DPA) with a Johannesburg-based financial group under the U.K.’s Bribery Act of 2010 regarding payments by two former employees that were allegedly made to bribe members of the Tanzanian government. The DPA represents the SFO’s first-ever DPA and the first use of Section 7 of the Bribery Act, failure of commercial organizations to prevent bribery, by any U.K. prosecutor. As part of this DPA, the financial group agreed to pay a combined $32.2 million in sanctions to the U.K. and Tanzania, and to cover the SFO’s litigation and investigation costs. The DPA also requires the financial group’s continued cooperation with authorities and the implementation of certain recommendations from its independent compliance consultants.
In addition to the DPA, the financial group agreed to pay $4.2 million to the SEC to settle charges related to the failure to disclose the underlying bribe payments in the bank’s offering documents and statements to potential investors. In light of the financial group’s cooperation with the SFO and the DPA, the DOJ reportedly closed its own investigation without bringing independent charges.
Notably, in one of the first examples of the SEC implementing its plan to make more defendants admit to the allegations against them as part of resolutions, the financial group agreed to the facts underlying the SEC charges.
SEC Reports on Dodd-Frank Whistleblower Program
On November 16, the SEC’s Office of the Whistleblower (OWB) issued its 2015 annual report to Congress on its Whistleblower Program established pursuant to Dodd-Frank. According to the report, in Fiscal Year 2015, the OWB received more than 3,900 whistleblower tips – a 30% increase since 2012, which the SEC attributes to increased public awareness of the program due to Dodd Frank’s implementing rule awarding tipsters 10 to 30 percent of a securities violation when the penalty is greater than $1 million. Additional items to note from the report include: (i) the SEC brought its first enforcement action against a company for using language in confidentiality agreements that impeded a whistleblower from reporting possible securities law violations; (ii) the SEC received whistleblower submissions from all 50 states and the District of Columbia, along with tips from individuals in 95 countries outside of the U.S.; and (iii) the most common complaint categories reported were Corporate Disclosures and Financials, followed by Offering Fraud and Manipulation.