Vigilant’s Director, Justin Dausch, Provides Insights towards the Ad Rule and its effect on Social Media

On February 22nd, Ignites provided a publication on the Ad Rule and how it may push shops to ban social media. Professionals are saying that fund shops […]

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How Firms Can Work to Protect Senior Investors

Baby boomers are growing older, and that is transforming our national demographics. By 2035, it is estimated that 78 million senior citizens will live in the United […]

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How to Prepare for an SEC Examination

No matter how smoothly your firm operates or how diligent your compliance team is, the prospect of an SEC examination strikes fear, stress and anxiety […]

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The Impact of GDPR on the Asset and Wealth-Management Industry

Regarded as the largest data regulation act in modern European history, the General Data Protection Regulation (GDPR) has taken the compliance world by storm.  Adopted […]

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Guide to SEC Investment Adviser Registration

Becoming a registered investment advisor (RIA) is not merely an industry best-practice. In most cases, it’s a regulatory obligation that stamps more than security and […]

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SEC Charges CSC and Former Executives With Accounting Fraud

The Securities and Exchange Commission today charged Computer Sciences Corporation and former executives with manipulating financial results and concealing significant problems about the company’s largest and most high-profile contract.  The SEC additionally charged former finance executives involved with CSC’s international businesses for ignoring basic accounting standards to increase reported profits.

CSC agreed to pay a $190 million penalty to settle the charges, and five of the eight charged executives agreed to settlements.  Former CEO Michael Laphen agreed to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty.  Former CFO Michael Mancuso agreed to return $369,100 in compensation and pay a $175,000 penalty.

The SEC filed complaints in federal court in Manhattan against former CSC finance executives Robert Sutcliffe, Edward Parker, and Chris Edwards, who are contesting the charges against them.  Sutcliffe was CSC’s finance director for its multi-billion dollar contract with the United Kingdom’s National Health Service (NHS).

The SEC alleges that CSC’s accounting and disclosure fraud began after the company learned it would lose money on the NHS contract because it was unable to meet certain deadlines.  To avoid the large hit to its earnings that CSC was required to record, Sutcliffe allegedly added items to CSC’s accounting models that artificially increased its profits but had no basis in reality.  CSC, with Laphen’s approval, then continued to avoid the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract.  In reality, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work.  By basing its models on the flailing proposals, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011.

The SEC’s investigation found that Laphen and Mancuso repeatedly failed to comply with multiple rules requiring them to disclose these issues to investors, and they made public statements about the NHS contract that misled investors about CSC’s performance.  Mancuso also concealed from investors a prepayment arrangement that allowed CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate.  Mancuso merely told investors that CSC was hitting its targets “the old fashioned hard way.” 

“When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “CSC repeatedly based its financial results and disclosures on the NHS contract it was negotiating rather than the one it actually had, and misled investors about the true status of the contract.  The significant sanctions in this case against the company, CEO, and CFO reflect our focus on ensuring that such misconduct is vigorously pursued and punished.”

Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement, added, “The wide-ranging misconduct in this case spanned several countries and occurred over multiple years, reflecting significant management lapses and internal controls failures.  We expect this settlement and the recommendations of an independent ethics and compliance consultant will help prevent future misconduct.”

In addition to the accounting and disclosure violations involving the NHS contract, the SEC’s investigation found that CSC and finance executives in Australia and Denmark fraudulently manipulated the financial results of the company’s businesses in those regions. 

The SEC alleges that Parker, who served as controller in Australia, along with regional CFO Wayne Banks overstated the company’s earnings by using “cookie jar” reserves and failing to record expenses as required.  They overstated CSC’s operating results by more than 5 percent in the first quarter of fiscal year 2009 and allowed the company to meet analysts’ earnings targets during that period.  Banks agreed to settle the charges and pay disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years.  The SEC’s case continues against Parker.

In CSC’s Nordic region, the SEC alleges a variety of accounting manipulations to fraudulently inflate operating results as finance executives there struggled to achieve budgets set by CSC management in the U.S.  Among the misconduct was improperly accounting for client disputes, overstating assets, and capitalizing expenses.  For example, Edwards, who was a finance manager, allegedly recorded and maintained large amounts of “prepaid assets” that CSC was required to actually record as expenses.  This tactic guaranteed these expenses would not reduce CSC’s earnings.  CSC’s finance director of the Nordic region Paul Wakefield also engaged in the accounting fraud, which overstated CSC’s consolidated pre-tax income in Denmark as much as 7 percent.  CSC’s finance manager Claus Zilmer was involved in violations of the financial reporting and books and records provisions of the securities laws.  Wakefield and Zilmer agreed to settle the charges, with Wakefield agreeing to accept an officer-and-director bar of at least three years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least three years.  The SEC’s case continues against Edwards.

CSC and the five settling executives neither admit nor deny the findings in the SEC’s order instituting a settled administrative proceeding against them.  CSC must retain an independent consultant to review the company’s ethics and compliance programs.  The SEC particularly acknowledges the cooperation of Wakefield in its investigation, which was conducted by Shelby Hunt, David Miller, Ian Rupell, Robert Peak, and Joseph Zambuto Jr.  The case was supervised by Rami Sibay.  The SEC appreciates the assistance of the United Kingdom’s Financial Conduct Authority.

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SEC Announces Charges Against Owner of Equity Research Firm Accused of Manipulative Trading

The Securities and Exchange Commission today announced charges against a Phoenix-based equity research firm owner who allegedly manipulated the market for a publicly traded stock he was soliciting investors to purchase.

The SEC Enforcement Divisi…

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Former Hedge Fund Manager in Bay Area Charged With Taking Excess Management Fees to Make Lavish Purchases

The Securities and Exchange Commission today announced charges against a former hedge fund manager accused of fraudulently taking excess management fees from the accounts of fund clients and using their money to remodel his multi-million dollar home and buy a Porsche. 

An SEC Enforcement Division investigation found that Sean C. Cooper improperly withdrew more than $320,000 from a hedge fund he managed for San Francisco-based investment advisory firm WestEnd Capital Management LLC.  While WestEnd disclosed to clients the withdrawal of annual management fees of 1.5 percent of each investor’s capital account balance, Cooper actually withdrew amounts that far exceeded that percentage.  He then transferred the money to personal bank accounts so he could spend it freely.  Cooper’s misconduct occurred for a two-year period until he ceased misappropriating fund assets when the SEC began an examination of WestEnd in April 2012.

WestEnd, which expelled Cooper and reimbursed the hedge fund once it became aware of his scheme, is being charged separately by the SEC for failing to effectively supervise him.  The firm agreed to pay a $150,000 penalty to settle the SEC’s charges.

“Cooper betrayed the hedge fund’s investors by lining his own pockets with fund assets that he had not earned,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “His fraud went undetected because WestEnd had no internal controls to limit Cooper’s ability to withdraw excessive amounts from the fund.”

According to the SEC’s order instituting a litigated administrative proceeding against Cooper, he began indiscriminately withdrawing money from the hedge fund – WestEnd Partners L.P. – in March 2010.  Cooper mischaracterized the withdrawals as management fees in the fund’s books and records, but they bore no relation to the actual amount of fees that WestEnd had earned.  The SEC Enforcement Division alleges that, in reality, Cooper simply was using the hedge fund as his own private bank.  He had sole authority to transfer money out of the fund, and there were no controls in place at the firm to prevent him from making improper withdrawals.  Once he routed the money into his personal accounts, Cooper purchased a $187,000 Porsche amid other lavish spending.

The SEC Enforcement Division alleges that Cooper, a resident of New Orleans, willfully violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Cooper is charged with aiding, abetting and causing WestEnd’s violations of Section 206(4) and Rule 206(4)-7. 

According to the SEC’s order instituting a settled administrative proceeding against WestEnd, Cooper operated the hedge fund with little to no supervision from others at WestEnd, and he had sole discretion to calculate and wire out money that he claimed the fund owed to WestEnd.  Besides its failure to adopt any policies or procedures that imposed the necessary internal controls, WestEnd also failed to maintain several required books and records relating to its finances, including the management fees it collected from the fund.    

WestEnd consented to the entry of the order finding that it violated Sections 204, 206(4), and 207 of the Advisers Act and Rules 204-2(a)(1), (2), (6), and (7) and 206(4)-7.  The order also finds that WestEnd failed to reasonably supervise Cooper within the meaning of Section 203(e)(6) of the Advisers Act.  In addition to the financial penalty, WestEnd agreed to cease and desist from committing or causing future violations of these provisions without admitting or denying the findings.  The settlement also requires the firm to retain a compliance consultant.

The SEC’s investigation was conducted by Eric Brooks and Erin E. Schneider of the Asset Management Unit in the San Francisco Regional Office.  The SEC’s litigation against Cooper will be led by Sheila O’Callaghan and Mr. Brooks.  The SEC examination that led to the investigation was conducted by Ed Haddad, John Chee, Karah To, and Arturo Hurtado of the San Francisco office’s investment adviser/investment company examination program.

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SEC, Massachusetts U.S. Attorney, and FBI Charge Five with Attempted Manipulation of Microcap Company

The Securities and Exchange Commission, the U.S. Attorney for the District of Massachusetts, and the Federal Bureau of Investigation today announced charges against five individuals whose attempt to manipulate shares of Boston-based Amogear Inc. was …

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Three Software Company Founders to Pay $5.8 Million to Settle Charges of Insider Trading Ahead of Sale

The Securities and Exchange Commission today filed insider trading charges against three software company founders for taking unfair advantage of incorrect media speculation and analyst reports about the company’s acquisition.

They agreed to pay nearly $5.8 million to settle the SEC’s charges.

The SEC alleges that Lawson Software’s co-chairman Herbert Richard Lawson tipped his brother William Lawson and family friend John Cerullo with nonpublic information about the status of the company’s 2011 merger discussions with Infor Global Solutions, a privately-held software provider.  Lawson Software’s stock price had begun to climb following media and analyst reports that the company was considering a sale and multiple bidders were possible.  However, Richard Lawson knew reports about possible multiple bidders were incorrect, and the merger share price offered by the lone bidder was significantly lower than what journalists and analysts were speculating.  While in possession of the accurate, inside information from his brother, William Lawson sold more than one million shares of his family’s Lawson Software stock holdings.  He also suggested that another trader sell shares.  Cerullo sold approximately 175,000 of his company shares on the basis of the nonpublic information.  When Lawson Software later announced the merger agreement at the lower-than-anticipated share price, the company’s stock value dropped 8.7 percent.  By selling their shares at the inflated stock prices prior to the merger announcement, the traders collectively profited by more than $2 million. 

“Richard Lawson conveyed material information that was contrary to what was being publicly reported, and his brother and friend made a windfall when they subsequently sold their company shares at inflated prices,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement. “When news surfaces about the possibility of a merger and details of the media reports are incorrect, it is illegal for insiders who know the true facts to trade and profit.”

According to the SEC’s complaint filed in federal court in San Francisco, Lawson Software was founded by the Lawsons and Cerullo in 1975 and based in St. Paul, Minn.  William Lawson and Cerullo each retired in 2001, but Richard Lawson was still serving as co-chairman of the board of directors when the company began considering a possible sale.  After Lawson Software and Infor Global Solutions entered into a non-disclosure agreement and met about a possible merger, Richard Lawson and other members of the board were regularly informed about the ongoing merger discussions.  While Infor conducted its due diligence in late February 2011, Lawson Software began a “market check” in which its financial adviser reached out to five competitors to gauge their interest in acquiring the company.  The market check elicited little-to-no interest, and Richard Lawson and the board were kept informed throughout the process.

Meanwhile, according to the SEC’s complaint, a March 8 article reported that Lawson Software had retained a financial adviser to explore a possible sale.  The article identified other companies as potential acquirers of Lawson Software and led to a 13-percent jump in Lawson Software’s stock price that day.  The article also fueled widespread – and incorrect – media speculation about potential acquirers of Lawson Software and possible merger prices.  Soon thereafter, Lawson Software publicly confirmed an acquisition offer from Infor for $11.25 per share.  Nevertheless, ensuing media and analyst reports still incorrectly suggested that other potential purchasers would likely enter the bidding and submit competing higher offers for Lawson Software.  Some reports suggested a merger price of up to $15-16 per share.  In reality, the same companies being speculated as potential purchasers already had informed Lawson Software that they weren’t interested in an acquisition.  But fueled in part by the reports, Lawson Software’s stock price closed at $12.24 per share on March 14 – nearly $1 higher than Infor’s offer of $11.25.  The stock price had increased approximately 23 percent since the March 8 article. 

The SEC alleges that Richard Lawson knew that these media and analyst reports were inaccurate and the very entities mentioned as possible acquirers had in fact told the company they were not interested.  He knew that Infor was the lone bidder and would not increase its offer.  Richard Lawson also knew that Lawson Software’s financial adviser and board of directors viewed Infor’s bid as reasonable.  After Richard Lawson tipped his brother and Cerullo with nonpublic information about the planned deal, they proceeded to sell their shares at approximately $1 per share higher than the eventual merger price of $11.25.  Following the merger announcement on April 26, Lawson Software’s stock price dipped to $11.06 per share at market close.  The merger became effective in July 2011.

Richard Lawson agreed to settle the SEC’s charges by paying a penalty of $1,557,384.57 for tipping his brother and Cerullo. The penalty amount is equivalent to the ill-gotten gains received by William Lawson and Cerullo.  Richard Lawson also agreed to be barred from serving as an officer or director of a public company.  William Lawson agreed to pay disgorgement of $1,853,671.28, prejudgment interest of $162,442.60, and a penalty of $1,853,671.28 for a total of $3,869,785.16.  William Lawson’s disgorgement amount includes the ill-gotten gains of the other trader who he suggested sell shares.  Cerullo agreed to pay disgorgement of $178,481.29, prejudgment interest of $15,640.81, and a penalty of $178,481.29 for a total of $372,603.39.  Without admitting or denying the SEC’s allegations, the Lawsons and Cerullo agreed to the entry of final judgments enjoining them from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The settlement is subject to court approval.  

The SEC’s investigation was conducted by Michael Fuchs and Wendy Kong, and supervised by Josh Felker.  The SEC appreciates the assistance of the Options Regulatory Surveillance Authority and the Financial Industry Regulatory Authority.

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