Shipping Conglomerate and Former CFO Charged With Failure to Recognize Hundreds of Millions in Tax Liabilities

The Securities and Exchange Commission today charged shipping conglomerate Overseas Shipholding Group (OSG) and its former chief financial officer Myles R. Itkin with failing to recognize hundreds of millions in tax liabilities in its financial statements that had accumulated over nearly 12 years resulting from its controlled foreign subsidiary guaranteeing OSG’s debt that had been borrowed under various credit financing agreements.  As a result of the misconduct, OSG materially understated its income tax liabilities by approximately $512 million (17 percent) of its total liabilities.  In November 2012, following the discovery of the tax liabilities, OSG filed for bankruptcy protection.

“Where public companies derive economic benefits from their offshore earnings, it is critical that those responsible for the company’s accounting and financial reporting understand the federal income tax consequences triggered from these benefits,” said Gerald Hodgkins, Associate Director of the SEC’s Enforcement Division.

According to the SEC’s order instituting settled cease-and-desist proceedings, OSG’s credit agreements from 2000 to the second quarter of 2012 contained a provision making OSG’s controlled foreign subsidiary Overseas International Group Inc. (OIN) and another subsidiary Overseas Bulk Ships (OBS) “jointly and severally” liable for OSG’s debt.  The provision triggered current income tax liability under Section 956 of the Internal Revenue Service Code, which addresses “investments in United States property,” for amounts that OSG borrowed, and deferred tax liabilities for amounts not borrowed but available under the credit agreements.  During this period, OSG and Itkin, who participated in the negotiation of the credit agreements and signed them, failed to recognize OSG’s tax liability despite significant indicia that the structure of its credit agreements in effect made OIN a guarantor under the agreements and could trigger tax consequences, including tax memos from outside counsel and communications with the banks during the negotiation phase of the credit agreements.

Without admitting or denying the charges, OSG and Itkin each consented to the order finding they violated or caused the violation of, among other provisions, the negligence-based antifraud provisions as well as reporting, books-and-records, and internal controls provisions of the federal securities laws.  OSG agreed to pay a $5 million penalty subject to bankruptcy court approval, and Itkin agreed to pay a $75,000 penalty. 

The SEC’s investigation was conducted by Cory C. Kirchert, Nancy E. McGinley, and Brian Palechek with assistance from Kevin Lombardi.  The investigation was supervised by Anita B. Bandy.   

SEC Announces Fraud Charges, Asset Freeze in Alleged Nursing Home Investment Scheme

The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze obtained against a businessman in South Carolina accused of siphoning funds he raised from investors for the purpose of purchasing or renovating senior housing facilities.

The SEC alleges that Dwayne Edwards improperly commingled money from several different municipal bond offerings and the revenues of the facilities underlying the offerings.   The offerings were each supposed to finance a particular assisted living or memory care facility in Georgia or Alabama.  From the commingled funds, Edwards allegedly diverted investor money for personal use as well as to finance other unrelated bond offerings.

“As alleged in our complaint, investors thought they were investing in a single senior housing project while their money was actually being used to fund an ever-expanding web of affiliated facilities and the personal expenses of Edwards and his friends and family,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The SEC’s complaint, filed January 20 in federal district court in Newark, N.J., also charges Edwards’s former business partner Todd Barker, who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date.

The court issued an order at the SEC’s request freezing the assets of Edwards and certain relief defendants.  The court also appointed a temporary receiver over the facilities. 

The SEC’s investigation, which is continuing, is being conducted by Lee A. Greenwood, David H. Tutor, Kerri L. Palen, and Sandeep Satwalekar.  The case is being supervised by Lara S. Mehraban, and the litigation is being handled by Mr. Greenwood, Mr. Tutor, Neal Jacobson, and Alexander Vasilescu.  

SEC Announces $7 Million Whistleblower Award

The Securities and Exchange Commission today announced an award of more than $7 million split among three whistleblowers who helped the SEC prosecute an investment scheme.

One whistleblower provided information that was a primary impetus for the start of the SEC’s investigation.  That whistleblower will receive more than $4 million.  Two other whistleblowers jointly provided new information during the SEC’s investigation that significantly contributed to the success of the SEC’s enforcement action.  Those two whistleblowers will split more than $3 million.

“Whistleblowers played an important role in the success of this case as they helped our agency detect and prosecute a scheme preying on vulnerable investors,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Whistleblowers not only helped us open the investigation but provided critical information after the investigation was already underway.”  

SEC enforcement actions from whistleblower tips have resulted in more than $935 million in financial remedies.

Since the SEC’s whistleblower program began, approximately $149 million has been awarded to 41 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. 

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

SEC Establishes Supervisory Cooperation Arrangement With Hong Kong SFC

The Securities and Exchange Commission today announced that it has established a comprehensive arrangement with the Hong Kong Securities and Futures Commission (SFC) as part of the SEC’s long-term strategy to enhance the oversight of regulated entities that operate across national borders. 

Hong Kong is a major financial center and the new supervisory cooperation arrangement will augment the SEC’s and the SFC’s ability to share information about regulated entities that operate in the U.S. and Hong Kong, including investment advisers, broker-dealers, securities exchanges, market infrastructure providers, and credit rating agencies.  The new comprehensive arrangement expands upon the one from 1995 that was limited to investment management activities.

“By creating a formal channel for exchanging supervisory information with the SFC, this new arrangement will enhance the SEC’s ability to supervise firms on a cross-border basis,” said Paul A. Leder, Director of the SEC’s Office of International Affairs.

The SEC’s approach to supervisory cooperation with its overseas counterparts builds on more than three decades of experience with cross-border cooperation, starting in the late 1980s with memoranda of understanding (MOUs) facilitating information sharing between the SEC and other securities regulators in securities enforcement matters. Enforcement cooperation MOUs help the SEC collect information abroad to investigate securities-law violations and compensate victims of securities fraud when possible.  Supervisory cooperation arrangements establish mechanisms for ongoing consultation and the exchange of information regarding the oversight of global firms and markets.  Such information may include routine supervisory information as well as information regulators need to monitor risk concentrations, identify emerging risks, and better understand a globally active regulated entity’s compliance culture.  These arrangements also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located outside the U.S.

Additional information about SEC cooperation arrangements with foreign regulators can be found at: http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml

SEC Establishes Supervisory Cooperation Arrangement With Hong Kong SFC

The Securities and Exchange Commission today announced that it has established a comprehensive arrangement with the Hong Kong Securities and Futures Commission (SFC) as part of the SEC’s long-term strategy to enhance the oversight of regulated entities that operate across national borders. 

Hong Kong is a major financial center and the new supervisory cooperation arrangement will augment the SEC’s and the SFC’s ability to share information about regulated entities that operate in the U.S. and Hong Kong, including investment advisers, broker-dealers, securities exchanges, market infrastructure providers, and credit rating agencies.  The new comprehensive arrangement expands upon the one from 1995 that was limited to investment management activities.

“By creating a formal channel for exchanging supervisory information with the SFC, this new arrangement will enhance the SEC’s ability to supervise firms on a cross-border basis,” said Paul A. Leder, Director of the SEC’s Office of International Affairs.

The SEC’s approach to supervisory cooperation with its overseas counterparts builds on more than three decades of experience with cross-border cooperation, starting in the late 1980s with memoranda of understanding (MOUs) facilitating information sharing between the SEC and other securities regulators in securities enforcement matters. Enforcement cooperation MOUs help the SEC collect information abroad to investigate securities-law violations and compensate victims of securities fraud when possible.  Supervisory cooperation arrangements establish mechanisms for ongoing consultation and the exchange of information regarding the oversight of global firms and markets.  Such information may include routine supervisory information as well as information regulators need to monitor risk concentrations, identify emerging risks, and better understand a globally active regulated entity’s compliance culture.  These arrangements also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located outside the U.S.

Additional information about SEC cooperation arrangements with foreign regulators can be found at: http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml

Jennifer Diamantis Named Chief of Office of Market Intelligence

The Securities and Exchange Commission today announced that Jennifer A. Diamantis has been named Chief of the Enforcement Division’s Office of Market Intelligence, which is responsible for the collection, analysis, and monitoring of the hundreds of thousands of tips, complaints, and referrals that the SEC receives each year.

Before arriving at the SEC in September 2016 to become Deputy Chief of the office, Ms. Diamantis held various positions in the private sector and at federal agencies, including the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, and Commodity Futures Trading Commission.  She supervised, investigated, litigated, and managed enforcement actions and oversaw the implementation of complex regulations in the financial space.

The previous Chief of the Office of Market Intelligence, Vincente L. Martinez, left the SEC last summer, and Ms. Diamantis has been serving as Acting Chief since she arrived.

“Within a short time, Jennifer has enhanced the Office of Market Intelligence’s critical mission of overseeing the SEC’s collection, evaluation, and dissemination of the vast array of market intelligence that we receive,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.  “Jennifer’s rich work experience as a manager and supervisor and her dedication, expertise, and skill make her an ideal fit for leading the office.”

Ms. Diamantis said, “I am honored to lead the team of dedicated professionals charged with the critically important task of leveraging the valuable intelligence we receive from the public to protect investors, and look forward to continuing to cultivate relationships with our regulatory partners to further this mission.”

Before joining the SEC staff, Ms. Diamantis held various roles at the CFPB’s Division of Research, Markets, and Regulations, most recently Managing Counsel.  Before that, she served as Supervisory Counsel in the FDIC’s Enforcement Section and Senior Trial Attorney in the CFTC’s Division of Enforcement.  She also was a partner at the law firm of Schnader Harrison Segal & Lewis LLP. 

Ms. Diamantis received her law degree from the University of Michigan Law School in 1999, and earned her bachelor of arts degree with honors from the University of Florida in 1996.

Jennifer Diamantis Named Chief of Office of Market Intelligence

The Securities and Exchange Commission today announced that Jennifer A. Diamantis has been named Chief of the Enforcement Division’s Office of Market Intelligence, which is responsible for the collection, analysis, and monitoring of the hundreds of thousands of tips, complaints, and referrals that the SEC receives each year.

Before arriving at the SEC in September 2016 to become Deputy Chief of the office, Ms. Diamantis held various positions in the private sector and at federal agencies, including the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, and Commodity Futures Trading Commission.  She supervised, investigated, litigated, and managed enforcement actions and oversaw the implementation of complex regulations in the financial space.

The previous Chief of the Office of Market Intelligence, Vincente L. Martinez, left the SEC last summer, and Ms. Diamantis has been serving as Acting Chief since she arrived.

“Within a short time, Jennifer has enhanced the Office of Market Intelligence’s critical mission of overseeing the SEC’s collection, evaluation, and dissemination of the vast array of market intelligence that we receive,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.  “Jennifer’s rich work experience as a manager and supervisor and her dedication, expertise, and skill make her an ideal fit for leading the office.”

Ms. Diamantis said, “I am honored to lead the team of dedicated professionals charged with the critically important task of leveraging the valuable intelligence we receive from the public to protect investors, and look forward to continuing to cultivate relationships with our regulatory partners to further this mission.”

Before joining the SEC staff, Ms. Diamantis held various roles at the CFPB’s Division of Research, Markets, and Regulations, most recently Managing Counsel.  Before that, she served as Supervisory Counsel in the FDIC’s Enforcement Section and Senior Trial Attorney in the CFTC’s Division of Enforcement.  She also was a partner at the law firm of Schnader Harrison Segal & Lewis LLP. 

Ms. Diamantis received her law degree from the University of Michigan Law School in 1999, and earned her bachelor of arts degree with honors from the University of Florida in 1996.

Financial Company Charged With Improper Accounting and Impeding Whistleblowers

The Securities and Exchange Commission today announced that Seattle-based financial services company HomeStreet Inc. has agreed to pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers.

HomeStreet’s treasurer Darrell van Amen agreed to pay a $20,000 penalty to settle charges that he caused the accounting violations.

According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure.  The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment.  Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range.

The SEC’s order finds that in certain instances from 2011 to 2014, van Amen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment.  The test results with altered inputs to influence the effectiveness ratio were provided to HomeStreet’s accounting department, which resulted in inaccurate accounting entries.

“HomeStreet disregarded its internal accounting policies and procedures to come up with different testing results to enable its use of hedge accounting,” said Erin Schneider, Associate Director of the SEC’s San Francisco Regional Office.  “Companies must follow the rules rather than create their own.”

The SEC’s order further finds that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect.  When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the “whistleblower.”  It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation.  HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments and other post-employment benefits.

“Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “This is the second case this week against a company that took steps to impede former employees from sharing information with the SEC.  Companies simply cannot disrupt the lines of communications between the SEC and potential whistleblowers.”

HomeStreet and van Amen consented to the SEC’s order without admitting or denying the findings that they violated internal accounting controls and books and records provisions of the federal securities laws.  HomeStreet also violated Rule 21F-17, which prohibits taking actions to impede communication with the SEC.

The SEC’s investigation was conducted by Rebecca Lubens and John Roscigno, and the case was supervised by Tracy Davis in the San Francisco office.

Financial Company Charged With Improper Accounting and Impeding Whistleblowers

The Securities and Exchange Commission today announced that Seattle-based financial services company HomeStreet Inc. has agreed to pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers.

HomeStreet’s treasurer Darrell van Amen agreed to pay a $20,000 penalty to settle charges that he caused the accounting violations.

According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure.  The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment.  Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range.

The SEC’s order finds that in certain instances from 2011 to 2014, van Amen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment.  The test results with altered inputs to influence the effectiveness ratio were provided to HomeStreet’s accounting department, which resulted in inaccurate accounting entries.

“HomeStreet disregarded its internal accounting policies and procedures to come up with different testing results to enable its use of hedge accounting,” said Erin Schneider, Associate Director of the SEC’s San Francisco Regional Office.  “Companies must follow the rules rather than create their own.”

The SEC’s order further finds that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect.  When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the “whistleblower.”  It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation.  HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments and other post-employment benefits.

“Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “This is the second case this week against a company that took steps to impede former employees from sharing information with the SEC.  Companies simply cannot disrupt the lines of communications between the SEC and potential whistleblowers.”

HomeStreet and van Amen consented to the SEC’s order without admitting or denying the findings that they violated internal accounting controls and books and records provisions of the federal securities laws.  HomeStreet also violated Rule 21F-17, which prohibits taking actions to impede communication with the SEC.

The SEC’s investigation was conducted by Rebecca Lubens and John Roscigno, and the case was supervised by Tracy Davis in the San Francisco office.

SEC Chief of Staff Andrew J. Donohue to Leave Agency

The Securities and Exchange Commission today announced that SEC Chief of Staff Andrew J. ”Buddy” Donohue will be leaving the agency at the end of January.

SEC Chair Mary Jo White named Mr. Donohue as Chief of Staff in May 2015. As Chief of Staff, Mr. Donohue was a senior adviser to the Chair on all policy, management, and regulatory issues. Mr. Donohue had previously served as the Director of the SEC’s Division of Investment Management from May 2006 to November 2010.

“Buddy is a seasoned professional whose deep knowledge of the securities laws and broad market expertise have been invaluable to me and the Commission,” said SEC Chair Mary Jo White.  “I am very grateful to Buddy for agreeing to return to the Commission so that all of us could benefit from his leadership, wise counsel, and wealth of knowledge and experience.”

Mr. Donohue added, “It has been a privilege to serve Chair White and the agency, to work with an incredibly talented and dedicated staff and to be a part of the agency’s important mission. I consider myself very fortunate to have had the opportunity to work at the agency twice during my career. I will miss greatly the agency and its staff.”

Prior to rejoining the agency, Mr. Donohue had been managing director, associate general counsel and investment company general counsel at Goldman, Sachs & Co. from November 2012 to May 2015. He had also been a partner in the Investment Management Practice Group at Morgan Lewis & Bockius LLP from March 2011 to October 2012.

From May 2003 to May 2006, Mr. Donohue served as global general counsel at Merrill Lynch Investment Managers. In that role, he oversaw the firm’s legal, regulatory and compliance matters for the investment advisory business.

For over a decade from June 1991 to November 2001, Mr. Donohue served as executive vice president general counsel, director, and as a member of the executive committee of OppenheimerFunds Inc.

Prior to that, and since 1975, Mr. Donohue served in senior roles at other firms.

Mr. Donohue earned his J.D. From New York University School of Law in 1975 and his B.A. cum laude, with high honors in Economics from Hofstra University in 1972. 

SEC Chief of Staff Andrew J. Donohue to Leave Agency

The Securities and Exchange Commission today announced that SEC Chief of Staff Andrew J. ”Buddy” Donohue will be leaving the agency at the end of January.

SEC Chair Mary Jo White named Mr. Donohue as Chief of Staff in May 2015. As Chief of Staff, Mr. Donohue was a senior adviser to the Chair on all policy, management, and regulatory issues. Mr. Donohue had previously served as the Director of the SEC’s Division of Investment Management from May 2006 to November 2010.

“Buddy is a seasoned professional whose deep knowledge of the securities laws and broad market expertise have been invaluable to me and the Commission,” said SEC Chair Mary Jo White.  “I am very grateful to Buddy for agreeing to return to the Commission so that all of us could benefit from his leadership, wise counsel, and wealth of knowledge and experience.”

Mr. Donohue added, “It has been a privilege to serve Chair White and the agency, to work with an incredibly talented and dedicated staff and to be a part of the agency’s important mission. I consider myself very fortunate to have had the opportunity to work at the agency twice during my career. I will miss greatly the agency and its staff.”

Prior to rejoining the agency, Mr. Donohue had been managing director, associate general counsel and investment company general counsel at Goldman, Sachs & Co. from November 2012 to May 2015. He had also been a partner in the Investment Management Practice Group at Morgan Lewis & Bockius LLP from March 2011 to October 2012.

From May 2003 to May 2006, Mr. Donohue served as global general counsel at Merrill Lynch Investment Managers. In that role, he oversaw the firm’s legal, regulatory and compliance matters for the investment advisory business.

For over a decade from June 1991 to November 2001, Mr. Donohue served as executive vice president general counsel, director, and as a member of the executive committee of OppenheimerFunds Inc.

Prior to that, and since 1975, Mr. Donohue served in senior roles at other firms.

Mr. Donohue earned his J.D. From New York University School of Law in 1975 and his B.A. cum laude, with high honors in Economics from Hofstra University in 1972. 

General Counsel Anne K. Small to Leave SEC

The Securities and Exchange Commission today announced that General Counsel Anne K. Small will leave the agency later this month. 

Ms. Small has served as the SEC’s General Counsel since April 2013.  As the agency’s chief legal officer, Ms. Small has provided counsel on virtually all of the legal and policy issues before the Commission. This has included providing advice on a record number of enforcement actions, representing and counseling the Commission on high-profile appeals throughout the country on issues ranging from the scope of the anti-fraud provisions to insider trading, advising the Commission on more than 50 significant rulemaking initiatives including those implementing the Dodd-Frank Wall Street Reform and Consumer Protection and the Jumpstart Our Business Startups Acts, and defending against legal challenges to Commission regulations. Ms. Small also led the Commission’s efforts in revising the rules of practice that govern administrative enforcement proceedings.

SEC Chair Mary Jo White said, “Annie is brilliant and has an extraordinary legal mind and tremendous judgment.   She has always provided thoughtful and wise counsel on countless important and complex issues before the Commission.  She is a true champion of the Commission who uses her keen intellect and judgment to guide the Commission to the right result.  She has served me and the Commission superbly well, and I am very grateful that I have always been able to count on her, day or night, for her strategic thinking and knowledgeable advice and counsel.” 

Ms. Small added, “It has been an incredible honor to serve alongside the talented and dedicated SEC staff.  I owe Chair White my profound gratitude for giving me this opportunity and for all of her support. I particularly want to express my appreciation to my phenomenal colleagues in the Office of the General Counsel, whose expertise and professionalism have benefitted me and the Commission in all areas of our work.”

Prior to joining the SEC in April 2013, Ms. Small served as Special Assistant to the President and Associate Counsel to the President.  Prior to that, Ms. Small served as the SEC’s Deputy General Counsel for Litigation and Adjudication.  Ms. Small was previously a litigation partner in the law firm of WilmerHale LLP.  Ms. Small served as a law clerk for Judge Guido Calabresi on the U.S. Court of Appeals for the Second Circuit and for Justice Stephen G. Breyer on the U.S. Supreme Court.  She is a graduate of Yale University and Harvard Law School, where she served as President of the Harvard Law Review.‎

Upon Ms. Small’s departure, Sanket Bulsara, Deputy General Counsel for Appellate Litigation, Adjudication, and Enforcement, will become the Acting General Counsel.