SEC Files Fraud Charges in Bitcoin and Office Space Investment Schemes

The Securities and Exchange Commission today filed fraud charges against the clandestine founder of a purported Bitcoin platform and a chain of co-working spaces located in former bars and restaurants, alleging that he bilked investors in both companies while hiding his connection given his checkered past with regulators in the U.K. 

The SEC alleges that Renwick Haddow, a U.K. citizen living in New York, created a broker-dealer and did not register the firm with the SEC as required under the federal securities laws.  Haddow allegedly used sales representatives to cold call potential investors and sell securities in Bitcoin Store Inc. and Bar Works Inc.

According to the SEC’s complaint, offering materials presented to investors in both companies touted the backgrounds of senior executives who do not appear to exist.  The materials also misrepresented other key facts about both companies’ operations.  Haddow allegedly diverted more than 80 percent of the in funds raised by the broker-dealer for the Bitcoin Store, and sent more than $4 million from the Bar Works bank accounts to one or more accounts in Mauritius and $1 million to one or more accounts in Morocco.

“As alleged in our complaint, Haddow created two trendy companies and misled investors into believing that highly-qualified executives were leading them to quick profitability.  In reality, Haddow controlled the companies from behind the scenes and they were far from profitable,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC alleges that materials provided to Bitcoin Store investors claimed it was “an easy-to-use and secure way of holding and trading Bitcoin” and had generated several million dollars in gross sales.  In fact, the SEC alleges that Bitcoin Store has never had any operations nor generated the gross sales it touted.  In 2015, for example, Bitcoin Store’s bank accounts allegedly received less than $250,000 in incoming transfers, none of which appear to reflect revenue from customers.  According to the SEC’s complaint, the corporate address used for Bitcoin Store was Haddow’s residential address minus the apartment number.

According to the SEC’s complaint, Bar Works claimed to bring “real vibrancy to the flexible working scene by adding full-service workspaces to former bar and restaurant premises in central city locations.”  Bar Works primarily sold leases coupled with sub-leases that together functioned like investment notes.  The company also allegedly sold leases for more workspaces than actually existed in at least two locations.  Among false claims made to investors, who invested more than $37 million in the Bar Works scheme, were that a location was profitable within months of opening and that Bar Works had engaged an auditor. 

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Haddow. 

The SEC’s complaint filed in federal district court in Manhattan charges Haddow, Bitcoin Store, Bar Works, and another Haddow-controlled company called Bar Works 7th Avenue, Inc. with violating 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 complaint further alleges that Haddow is liable for aiding and abetting Bitcoin Store, Bar Works, and Bar Works 7th Avenue’s violations and as a control person for the registration violations of his brokerage firm InCrowd Equity Inc. 

The SEC has obtained an emergency asset freeze against all defendants and relief defendants in the case.

The SEC’s investigation is being conducted by Maureen P. King, Preethi Krishnamurthy, Neil Hendelman, and Sandeep Satwalekar.  The case is being supervised by Lara Shalov Mehraban.  The litigation will be handled by Ms. Krishnamurthy, Ms. King, and Christopher J. Dunnigan.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.    

SEC Files Fraud Charges in Bitcoin and Office Space Investment Schemes

The Securities and Exchange Commission today filed fraud charges against the clandestine founder of a purported Bitcoin platform and a chain of co-working spaces located in former bars and restaurants, alleging that he bilked investors in both companies while hiding his connection given his checkered past with regulators in the U.K. 

The SEC alleges that Renwick Haddow, a U.K. citizen living in New York, created a broker-dealer and did not register the firm with the SEC as required under the federal securities laws.  Haddow allegedly used sales representatives to cold call potential investors and sell securities in Bitcoin Store Inc. and Bar Works Inc.

According to the SEC’s complaint, offering materials presented to investors in both companies touted the backgrounds of senior executives who do not appear to exist.  The materials also misrepresented other key facts about both companies’ operations.  Haddow allegedly diverted more than 80 percent of the in funds raised by the broker-dealer for the Bitcoin Store, and sent more than $4 million from the Bar Works bank accounts to one or more accounts in Mauritius and $1 million to one or more accounts in Morocco.

“As alleged in our complaint, Haddow created two trendy companies and misled investors into believing that highly-qualified executives were leading them to quick profitability.  In reality, Haddow controlled the companies from behind the scenes and they were far from profitable,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC alleges that materials provided to Bitcoin Store investors claimed it was “an easy-to-use and secure way of holding and trading Bitcoin” and had generated several million dollars in gross sales.  In fact, the SEC alleges that Bitcoin Store has never had any operations nor generated the gross sales it touted.  In 2015, for example, Bitcoin Store’s bank accounts allegedly received less than $250,000 in incoming transfers, none of which appear to reflect revenue from customers.  According to the SEC’s complaint, the corporate address used for Bitcoin Store was Haddow’s residential address minus the apartment number.

According to the SEC’s complaint, Bar Works claimed to bring “real vibrancy to the flexible working scene by adding full-service workspaces to former bar and restaurant premises in central city locations.”  Bar Works primarily sold leases coupled with sub-leases that together functioned like investment notes.  The company also allegedly sold leases for more workspaces than actually existed in at least two locations.  Among false claims made to investors, who invested more than $37 million in the Bar Works scheme, were that a location was profitable within months of opening and that Bar Works had engaged an auditor. 

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Haddow. 

The SEC’s complaint filed in federal district court in Manhattan charges Haddow, Bitcoin Store, Bar Works, and another Haddow-controlled company called Bar Works 7th Avenue, Inc. with violating 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 complaint further alleges that Haddow is liable for aiding and abetting Bitcoin Store, Bar Works, and Bar Works 7th Avenue’s violations and as a control person for the registration violations of his brokerage firm InCrowd Equity Inc. 

The SEC has obtained an emergency asset freeze against all defendants and relief defendants in the case.

The SEC’s investigation is being conducted by Maureen P. King, Preethi Krishnamurthy, Neil Hendelman, and Sandeep Satwalekar.  The case is being supervised by Lara Shalov Mehraban.  The litigation will be handled by Ms. Krishnamurthy, Ms. King, and Christopher J. Dunnigan.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.    

SEC Charges Information Technology Company and Former Executives With Accounting Fraud

The Securities and Exchange Commission has charged Chicago-area information technology company Quadrant 4 System Corp. (QFOR) and two former top executives in an accounting fraud scheme that misled investors and allowed the former executives to siphon millions from the firm for their personal benefit.

The SEC’s complaint, filed yesterday in the U.S. District Court for the Northern District of Illinois, alleges that former chief executive officer Nandu Thondavadi and former chief financial officer Dhru Desai stole more than $4 million from Schaumburg, Illinois-based QFOR over a nearly five-year period. The former executives also are alleged to have caused QFOR to understate its liabilities and inflate its revenues and assets, evading scrutiny by lying to the company’s auditors and providing them with forged and doctored documents.

According to the SEC’s complaint, the alleged scheme continued until November 2016, when Thondavadi and Desai were arrested and criminally charged with fraud.  QFOR announced their resignations in December 2016 and disclosed that the company’s financial reports could no longer be relied upon and required a restatement.

“As alleged in our complaint, Thondavadi and Desai perpetrated a multi-faceted scheme to mislead investors about QFOR’s financial condition and secretly enrich themselves,” said David Glockner, Director of the SEC’s Chicago Regional Office.

The SEC’s complaint charges QFOR with filing false and misleading quarterly, annual, and other reports, failing to make and keep accurate books and records, and internal accounting control failures.  Subject to court approval, and without admitting or denying the allegations, QFOR consented to an order to permanently enjoin the company from further antifraud, reporting, books and records, and internal control violations.  The court will determine at a later date whether disgorgement or a financial penalty should be imposed against QFOR.

Thondavadi and Desai are charged with multiple violations, including fraud, falsifying books and records, lying to auditors, falsely certifying QFOR’s filings, and aiding and abetting QFOR’s alleged violations.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced additional criminal charges against Thondavadi and Desai, including charges that Thondavadi and Desai attempted to obstruct the SEC’s investigation, lied to the SEC under oath, and paid two individuals to lie to the SEC in the course of its investigation.

The SEC’s complaint seeks injunctions and return of allegedly ill-gotten gains plus interest and penalties against the company and the former executives as well as officer-and-director bars against Thondavadi and Desai.

The SEC’s investigation, which is continuing, is being conducted by Meredith J. Laval, Robin Andrews, and Rebecca Hollenbeck of the Chicago Regional Office.  Michael Foster, Mr. Andrews, and Ms. Laval will lead the litigation.  The case is being supervised by Amy S. Cotter and Robert J. Burson. 

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the Federal Bureau of Investigation’s Chicago Field Office. 

SEC Charges Information Technology Company and Former Executives With Accounting Fraud

The Securities and Exchange Commission has charged Chicago-area information technology company Quadrant 4 System Corp. (QFOR) and two former top executives in an accounting fraud scheme that misled investors and allowed the former executives to siphon millions from the firm for their personal benefit.

The SEC’s complaint, filed yesterday in the U.S. District Court for the Northern District of Illinois, alleges that former chief executive officer Nandu Thondavadi and former chief financial officer Dhru Desai stole more than $4 million from Schaumburg, Illinois-based QFOR over a nearly five-year period. The former executives also are alleged to have caused QFOR to understate its liabilities and inflate its revenues and assets, evading scrutiny by lying to the company’s auditors and providing them with forged and doctored documents.

According to the SEC’s complaint, the alleged scheme continued until November 2016, when Thondavadi and Desai were arrested and criminally charged with fraud.  QFOR announced their resignations in December 2016 and disclosed that the company’s financial reports could no longer be relied upon and required a restatement.

“As alleged in our complaint, Thondavadi and Desai perpetrated a multi-faceted scheme to mislead investors about QFOR’s financial condition and secretly enrich themselves,” said David Glockner, Director of the SEC’s Chicago Regional Office.

The SEC’s complaint charges QFOR with filing false and misleading quarterly, annual, and other reports, failing to make and keep accurate books and records, and internal accounting control failures.  Subject to court approval, and without admitting or denying the allegations, QFOR consented to an order to permanently enjoin the company from further antifraud, reporting, books and records, and internal control violations.  The court will determine at a later date whether disgorgement or a financial penalty should be imposed against QFOR.

Thondavadi and Desai are charged with multiple violations, including fraud, falsifying books and records, lying to auditors, falsely certifying QFOR’s filings, and aiding and abetting QFOR’s alleged violations.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced additional criminal charges against Thondavadi and Desai, including charges that Thondavadi and Desai attempted to obstruct the SEC’s investigation, lied to the SEC under oath, and paid two individuals to lie to the SEC in the course of its investigation.

The SEC’s complaint seeks injunctions and return of allegedly ill-gotten gains plus interest and penalties against the company and the former executives as well as officer-and-director bars against Thondavadi and Desai.

The SEC’s investigation, which is continuing, is being conducted by Meredith J. Laval, Robin Andrews, and Rebecca Hollenbeck of the Chicago Regional Office.  Michael Foster, Mr. Andrews, and Ms. Laval will lead the litigation.  The case is being supervised by Amy S. Cotter and Robert J. Burson. 

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the Federal Bureau of Investigation’s Chicago Field Office. 

SEC’s Division of Corporation Finance Expands Popular JOBS Act Benefit to All Companies

The Securities and Exchange Commission today announced that the Division of Corporation Finance will permit all companies to submit draft registration statements relating to initial public offerings for review on a non-public basis. This process will be available for IPOs as well as most offerings made in the first year after a company has entered the public reporting system. It will take effect on July 10, 2017.

“This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors,” said Director of the Division of Corporation Finance, Bill Hinman. “This process makes it easier for more companies to enter and participate in our public company disclosure-based system.”

Permitting all companies to submit registration statements for non-public review, similar to the benefit used by emerging growth companies (EGC) under the JOBS Act, will provide companies with more flexibility to plan their offering. The non-public review process after the IPO reduces the potential for lengthy exposure to market fluctuations that can adversely affect the offering process and harm existing public shareholders. By requiring a public filing period prior to the launch of marketing, the process incorporates a feature of the EGC review process that provides an opportunity for the public to evaluate those offerings.

“By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital,” said Chairman Jay Clayton. “We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy.”

Click here to read the full announcement on the Division of Corporation Finance’s Announcements website.

SEC’s Division of Corporation Finance Expands Popular JOBS Act Benefit to All Companies

The Securities and Exchange Commission today announced that the Division of Corporation Finance will permit all companies to submit draft registration statements relating to initial public offerings for review on a non-public basis. This process will be available for IPOs as well as most offerings made in the first year after a company has entered the public reporting system. It will take effect on July 10, 2017.

“This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors,” said Director of the Division of Corporation Finance, Bill Hinman. “This process makes it easier for more companies to enter and participate in our public company disclosure-based system.”

Permitting all companies to submit registration statements for non-public review, similar to the benefit used by emerging growth companies (EGC) under the JOBS Act, will provide companies with more flexibility to plan their offering. The non-public review process after the IPO reduces the potential for lengthy exposure to market fluctuations that can adversely affect the offering process and harm existing public shareholders. By requiring a public filing period prior to the launch of marketing, the process incorporates a feature of the EGC review process that provides an opportunity for the public to evaluate those offerings.

“By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital,” said Chairman Jay Clayton. “We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy.”

Click here to read the full announcement on the Division of Corporation Finance’s Announcements website.

SEC Charges Oil and Gas Company and Top Finance Executives with Accounting Fraud

The Securities and Exchange Commission today charged a Canadian-based oil and gas company and three of its former top finance executives for their roles in an extensive, multi-year accounting fraud.

The SEC’s complaint alleges that Penn West Petroleum Ltd., which has since been renamed Obsidian Energy Ltd., fraudulently moved hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This alleged fraudulent movement caused Penn West to artificially reduce its operating costs by as much as 20 percent in certain periods, which falsely improved reported metrics for oil extraction efficiency and profitability. Penn West was one of Canada’s largest oil producers at the time.

According to the SEC’s complaint, the fraud was orchestrated by the company’s former CFO Todd Takeyasu, former vice president of accounting and reporting Jeffery Curran, and former operations controller Waldemar Grab. The SEC alleges that they manipulated the company’s operating expenses in order to lower a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil. Penn West allegedly created an internal budget target representing the amount it would improperly move in its publicly-reported financial statements and gave the illusion that it was spending less money to get oil of out the ground. In fact, the SEC alleges, the company historically struggled to keep its operating costs under control, and Takeyasu, Curran, and Grab managed operating expenses to meet the budget target. According to the SEC’s complaint, they frequently met this target to the dollar by having the company record large, round number, and unsupported adjusting journal entries. Within the company, this practice was referred to as “reclass to capital.”

As alleged in the SEC’s complaint, Takeyasu and Curran directed the reclass-to-capital practices without ensuring that the accounting entries reconciled with actual capital spending amounts, and Curran and Grab were repeatedly warned by a subordinate accountant that the reclass entries lacked support. In September 2014, the company publicly reported that it would restate its financial statements from 2012 to the first quarter of 2014 and its historical financial statements and related audit reports could no longer be relied upon.

“Combating financial fraud is critical to maintaining a fair and transparent marketplace,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “We will continue to vigorously pursue and punish corporate executives and other individuals whose actions violate the federal securities laws.”

“As alleged in our complaint, Penn West’s widespread accounting abuses were directed by its most senior accounting executives,” said Gerald W. Hodgkins, Associate Director in the SEC’s Enforcement Division. “These executives breached their disclosure obligations to investors and kept hidden from the market the true nature of a key financial metric and the company’s struggle to control its operating expenses.”

The SEC’s complaint, which was filed in federal court in Manhattan, charges Penn West, Takeyasu, Curran, and Grab with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC seeks permanent injunctions and monetary relief against all the defendants, officer-and-director bars from Takeyasu and Curran, and a clawback of incentive-based compensation awarded to Takeyasu. Grab, who is cooperating with the SEC’s litigation, has agreed to a settlement including permanent injunctions and an officer-and-director bar. Grab also agreed to a permanent suspension from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The settlement is subject to court approval. Grab agreed to the settlement without admitting or denying the allegations or findings.

The SEC’s investigation found no personal misconduct by Penn West’s two former CEOs, Murray Nunns and David Roberts, who have reimbursed the company for cash bonuses and certain stock awards they received during the period when the company allegedly committed accounting violations. Therefore, it isn’t necessary for the SEC to pursue clawback actions under Section 304(a) of the Sarbanes-Oxley Act of 2002. Those amounts, converted to U.S. dollars, are approximately $262,451 for Nunns and $22,290 for Roberts.

The SEC’s investigation was conducted by Matthew T. Spitzer and Colin J. Rand, and the case was supervised by Anita B. Bandy. The litigation will be led by Sarah H. Concannon, Thomas A. Bednar, and Matthew Spitzer. The SEC appreciates the assistance of the Alberta Securities Commission.

SEC Charges Oil and Gas Company and Top Finance Executives with Accounting Fraud

The Securities and Exchange Commission today charged a Canadian-based oil and gas company and three of its former top finance executives for their roles in an extensive, multi-year accounting fraud.

The SEC’s complaint alleges that Penn West Petroleum Ltd., which has since been renamed Obsidian Energy Ltd., fraudulently moved hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This alleged fraudulent movement caused Penn West to artificially reduce its operating costs by as much as 20 percent in certain periods, which falsely improved reported metrics for oil extraction efficiency and profitability. Penn West was one of Canada’s largest oil producers at the time.

According to the SEC’s complaint, the fraud was orchestrated by the company’s former CFO Todd Takeyasu, former vice president of accounting and reporting Jeffery Curran, and former operations controller Waldemar Grab. The SEC alleges that they manipulated the company’s operating expenses in order to lower a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil. Penn West allegedly created an internal budget target representing the amount it would improperly move in its publicly-reported financial statements and gave the illusion that it was spending less money to get oil of out the ground. In fact, the SEC alleges, the company historically struggled to keep its operating costs under control, and Takeyasu, Curran, and Grab managed operating expenses to meet the budget target. According to the SEC’s complaint, they frequently met this target to the dollar by having the company record large, round number, and unsupported adjusting journal entries. Within the company, this practice was referred to as “reclass to capital.”

As alleged in the SEC’s complaint, Takeyasu and Curran directed the reclass-to-capital practices without ensuring that the accounting entries reconciled with actual capital spending amounts, and Curran and Grab were repeatedly warned by a subordinate accountant that the reclass entries lacked support. In September 2014, the company publicly reported that it would restate its financial statements from 2012 to the first quarter of 2014 and its historical financial statements and related audit reports could no longer be relied upon.

“Combating financial fraud is critical to maintaining a fair and transparent marketplace,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “We will continue to vigorously pursue and punish corporate executives and other individuals whose actions violate the federal securities laws.”

“As alleged in our complaint, Penn West’s widespread accounting abuses were directed by its most senior accounting executives,” said Gerald W. Hodgkins, Associate Director in the SEC’s Enforcement Division. “These executives breached their disclosure obligations to investors and kept hidden from the market the true nature of a key financial metric and the company’s struggle to control its operating expenses.”

The SEC’s complaint, which was filed in federal court in Manhattan, charges Penn West, Takeyasu, Curran, and Grab with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC seeks permanent injunctions and monetary relief against all the defendants, officer-and-director bars from Takeyasu and Curran, and a clawback of incentive-based compensation awarded to Takeyasu. Grab, who is cooperating with the SEC’s litigation, has agreed to a settlement including permanent injunctions and an officer-and-director bar. Grab also agreed to a permanent suspension from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The settlement is subject to court approval. Grab agreed to the settlement without admitting or denying the allegations or findings.

The SEC’s investigation found no personal misconduct by Penn West’s two former CEOs, Murray Nunns and David Roberts, who have reimbursed the company for cash bonuses and certain stock awards they received during the period when the company allegedly committed accounting violations. Therefore, it isn’t necessary for the SEC to pursue clawback actions under Section 304(a) of the Sarbanes-Oxley Act of 2002. Those amounts, converted to U.S. dollars, are approximately $262,451 for Nunns and $22,290 for Roberts.

The SEC’s investigation was conducted by Matthew T. Spitzer and Colin J. Rand, and the case was supervised by Anita B. Bandy. The litigation will be led by Sarah H. Concannon, Thomas A. Bednar, and Matthew Spitzer. The SEC appreciates the assistance of the Alberta Securities Commission.

Additional Charges Announced in Case Involving Pre-Released ADRs

The Securities and Exchange Commission today announced additional charges in an enforcement investigation involving the improper handling of American Depositary Receipts (ADRs) by a Wall Street firm’s securities lending desk.

The SEC’s order finds supervisory failures by Anthony Portelli, a former managing director and head of operations at broker-dealer ITG Inc.  Portelli supervised ITG’s securities lending operations and was responsible for the firm’s compliance with “pre-release agreements” for ADR transactions.  ADRs are U.S. securities that represent foreign shares of a foreign company.  Before obtaining a “pre-released ADR” to lend to a customer, brokers like ITG must own, or determine that a customer owns, the number of foreign shares that corresponds to the number of shares the ADR represents.  Under Portelli’s watch, personnel on ITG’s securities lending desk failed to take reasonable steps to determine whether the proper amounts of foreign shares were owned and held by ITG’s customers.  This failure opened up the possibility that the ADRs could be used improperly for short selling or dividend arbitrage.

Portelli has agreed to settle the charges and pay a $100,000 penalty.  He also is prohibited from acting in a supervisory capacity for at least 18 months.

Earlier this year, ITG agreed to pay more than $24 million to settle the SEC’s case against the firm.

“Supervisors at broker-dealers have a responsibility to act reasonably to prevent and detect violations of the securities laws.  Portelli routinely signed off on transactions involving ADRs that were not backed by actual shares and should never have been issued,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

Portelli agreed to the settlement without admitting or denying the SEC’s findings that under Section 15(b)(6) of the Securities Exchange Act of 1934, Portelli failed reasonably to supervise members of ITG’s securities lending desk with a view to preventing violations of Section 17(a)(3) of the Securities Act of 1933.

The SEC’s continuing investigation is being conducted by Andrew Dean, William Martin, Elzbieta Wraga, and Adam Grace of the New York office.  The case is being supervised by Mr. Wadhwa.

The SEC previously issued an investor bulletin about ADRs and what investors should understand about them.

Additional Charges Announced in Case Involving Pre-Released ADRs

The Securities and Exchange Commission today announced additional charges in an enforcement investigation involving the improper handling of American Depositary Receipts (ADRs) by a Wall Street firm’s securities lending desk.

The SEC’s order finds supervisory failures by Anthony Portelli, a former managing director and head of operations at broker-dealer ITG Inc.  Portelli supervised ITG’s securities lending operations and was responsible for the firm’s compliance with “pre-release agreements” for ADR transactions.  ADRs are U.S. securities that represent foreign shares of a foreign company.  Before obtaining a “pre-released ADR” to lend to a customer, brokers like ITG must own, or determine that a customer owns, the number of foreign shares that corresponds to the number of shares the ADR represents.  Under Portelli’s watch, personnel on ITG’s securities lending desk failed to take reasonable steps to determine whether the proper amounts of foreign shares were owned and held by ITG’s customers.  This failure opened up the possibility that the ADRs could be used improperly for short selling or dividend arbitrage.

Portelli has agreed to settle the charges and pay a $100,000 penalty.  He also is prohibited from acting in a supervisory capacity for at least 18 months.

Earlier this year, ITG agreed to pay more than $24 million to settle the SEC’s case against the firm.

“Supervisors at broker-dealers have a responsibility to act reasonably to prevent and detect violations of the securities laws.  Portelli routinely signed off on transactions involving ADRs that were not backed by actual shares and should never have been issued,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

Portelli agreed to the settlement without admitting or denying the SEC’s findings that under Section 15(b)(6) of the Securities Exchange Act of 1934, Portelli failed reasonably to supervise members of ITG’s securities lending desk with a view to preventing violations of Section 17(a)(3) of the Securities Act of 1933.

The SEC’s continuing investigation is being conducted by Andrew Dean, William Martin, Elzbieta Wraga, and Adam Grace of the New York office.  The case is being supervised by Mr. Wadhwa.

The SEC previously issued an investor bulletin about ADRs and what investors should understand about them.

Robert Evans III Named Deputy Director in SEC’s Division of Corporation Finance

The Securities and Exchange Commission today announced that Robert Evans III has been named Deputy Director in the agency’s Division of Corporation Finance. He will join Deputy Director Shelley Parratt as a senior advisor to the division’s director, William H. Hinman. 

Most recently, Mr. Evans worked at Shearman & Sterling LLP as a partner in the firm’s capital markets practice. Mr. Evans has experience advising on public and private offerings, securities law compliance, and corporate governance. 

“For over 20 years, Rob has been a leading voice on a wide range of issues relating to how investors and companies interact in the public and private markets, and we are excited to have him join the team here at the SEC,” said SEC Chairman Jay Clayton. “The Division of Corporation Finance will benefit greatly from Rob’s extensive experience and his commitment to advancing the SEC’s mission.”

Mr. Evans added, “I am honored to serve at the SEC, having long admired the work of my former colleague and friend, Linda Quinn, a former Director of the Division of Corporation Finance who served at the SEC from 1980 to 1996.  Linda was a great example of what it means to give back – serving our country by regulating financial markets and modernizing the securities laws. Having spent my entire professional career as a corporate and securities lawyer, I can confidently say that the staff at the SEC is among the most dedicated and respected, and it is a pleasure to join their ranks.” 

Mr. Evans has been a frequent speaker and writer on securities law, compliance, and legal ethics.  In addition to his extensive transactional practice, he was a member of the TriBar Opinion Committee, the Working Group on Legal Opinions, the American Law Institute, and Co-Chair of Shearman & Sterling’s Opinion Committee. 

“Rob has many years of experience helping U.S. and international companies and financial institutions comply with the U.S. securities laws,” said Mr. Hinman. “He is a thoughtful disclosure lawyer with skills critical to the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

Mr. Evans received his bachelor’s degree from Harvard College and law degree from Boston University School of Law, both cum laude.

Robert Evans III Named Deputy Director in SEC’s Division of Corporation Finance

The Securities and Exchange Commission today announced that Robert Evans III has been named Deputy Director in the agency’s Division of Corporation Finance. He will join Deputy Director Shelley Parratt as a senior advisor to the division’s director, William H. Hinman. 

Most recently, Mr. Evans worked at Shearman & Sterling LLP as a partner in the firm’s capital markets practice. Mr. Evans has experience advising on public and private offerings, securities law compliance, and corporate governance. 

“For over 20 years, Rob has been a leading voice on a wide range of issues relating to how investors and companies interact in the public and private markets, and we are excited to have him join the team here at the SEC,” said SEC Chairman Jay Clayton. “The Division of Corporation Finance will benefit greatly from Rob’s extensive experience and his commitment to advancing the SEC’s mission.”

Mr. Evans added, “I am honored to serve at the SEC, having long admired the work of my former colleague and friend, Linda Quinn, a former Director of the Division of Corporation Finance who served at the SEC from 1980 to 1996.  Linda was a great example of what it means to give back – serving our country by regulating financial markets and modernizing the securities laws. Having spent my entire professional career as a corporate and securities lawyer, I can confidently say that the staff at the SEC is among the most dedicated and respected, and it is a pleasure to join their ranks.” 

Mr. Evans has been a frequent speaker and writer on securities law, compliance, and legal ethics.  In addition to his extensive transactional practice, he was a member of the TriBar Opinion Committee, the Working Group on Legal Opinions, the American Law Institute, and Co-Chair of Shearman & Sterling’s Opinion Committee. 

“Rob has many years of experience helping U.S. and international companies and financial institutions comply with the U.S. securities laws,” said Mr. Hinman. “He is a thoughtful disclosure lawyer with skills critical to the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

Mr. Evans received his bachelor’s degree from Harvard College and law degree from Boston University School of Law, both cum laude.