SEC Charges Businessman With Misusing EB-5 Investments

The Securities and Exchange Commission today announced fraud charges against an Oakland, Calif.-based businessman accused of misusing money he raised from investors through the EB-5 immigrant investor program intended to create or preserve jobs for U.S. workers.

The SEC alleges that Thomas M. Henderson and his company San Francisco Regional Center LLC falsely claimed to foreign investors that their $500,000 investments would help create at least 10 jobs within several distinct EB-5 related businesses he created, including a nursing facility, call centers, and a dairy operation.  This would qualify the investors for a potential path to permanent U.S. residency through the EB-5 program.

But according to the SEC’s complaint, Henderson jeopardized investors’ residency prospects and combined the $100 million he raised from investors into a general fund from which he allegedly misused at least $9.6 million to purchase his home and personal items and improperly fund several personal business projects such as Bay Area restaurants that were unrelated to the companies he purportedly established to create jobs consistent with EB-5 requirements.  According to the SEC’s complaint, Henderson also improperly used $7.5 million of investor money to pay overseas marketing agents, and he shuffled millions of dollars among the EB-5 businesses to obscure his fraudulent scheme.

“We allege that Henderson exploited a program meant to create employment for Americans and abused the trust of investors seeking residency in the U.S.,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Rather than using investor funds to create jobs and develop communities as promised, Henderson allegedly played a shell game with investor money to buy his home and support personal ventures.”

The SEC is seeking a court order appointing a receiver over San Francisco Regional Center and Henderson’s other businesses involved in the alleged fraud.  The SEC’s complaint, filed in U.S. District Court for the Northern District of California, seeks preliminary injunctions as well as disgorgement of ill-gotten gains plus interest, penalties, and other relief.

The SEC’s investigation was conducted by Thomas Eme and Ellen Chen of the San Francisco office and supervised by Steven Buchholz.  The litigation will be led by Andrew Hefty and Susan LaMarca.  The SEC appreciates the assistance of the U.S. Citizenship and Immigration Services, which administers the EB-5 program.   

Allergan Paying $15 Million Penalty for Disclosure Failures During Merger Talks

The Securities and Exchange Commission today announced that Allergan Inc. has agreed to admit securities law violations and pay a $15 million penalty for disclosure failures in the wake of a hostile takeover bid.

The SEC’s order finds that Allergan failed to disclose in a timely manner its negotiations with potentially friendlier merger partners in the months following a tender offer from Valeant Pharmaceuticals International and co-bidders in June 2014.  Allergan publicly stated in a disclosure filing that the Valeant bid was inadequate and it was not engaging in negotiations that could result in a merger.  It was required to amend the filing if a material change occurred.  According to the SEC’s order, Allergan never publicly disclosed material negotiations it entered with a different company that would have made it more difficult for Valeant to acquire a larger combined entity.  And after those negotiations failed, the investing public wasn’t informed that Allergan entered into merger talks with Actavis, the company that ultimately acquired Allergan, until the announcement that a merger agreement had been executed.

“Allergan failed to fully and timely disclose information about potential merger transactions it was negotiating behind the scenes in response to the Valeant bid,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “As outlined in our order, Allergan was slow to act even after SEC staff reminded the company about its disclosure obligations.”

Allergan, now a wholly owned subsidiary of Allergan plc, admitted the facts in the SEC’s cease-and-desist order finding that the company violated Section 14(d) of the Securities Exchange Act of 1934 and Rule 14d-9. 

The SEC’s investigation was conducted by John Lehmann, Mark Germann, and Charles Riely of the New York office, and the case was supervised by Sanjay Wadhwa.

Allergan Paying $15 Million Penalty for Disclosure Failures During Merger Talks

The Securities and Exchange Commission today announced that Allergan Inc. has agreed to admit securities law violations and pay a $15 million penalty for disclosure failures in the wake of a hostile takeover bid.

The SEC’s order finds that Allergan failed to disclose in a timely manner its negotiations with potentially friendlier merger partners in the months following a tender offer from Valeant Pharmaceuticals International and co-bidders in June 2014.  Allergan publicly stated in a disclosure filing that the Valeant bid was inadequate and it was not engaging in negotiations that could result in a merger.  It was required to amend the filing if a material change occurred.  According to the SEC’s order, Allergan never publicly disclosed material negotiations it entered with a different company that would have made it more difficult for Valeant to acquire a larger combined entity.  And after those negotiations failed, the investing public wasn’t informed that Allergan entered into merger talks with Actavis, the company that ultimately acquired Allergan, until the announcement that a merger agreement had been executed.

“Allergan failed to fully and timely disclose information about potential merger transactions it was negotiating behind the scenes in response to the Valeant bid,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “As outlined in our order, Allergan was slow to act even after SEC staff reminded the company about its disclosure obligations.”

Allergan, now a wholly owned subsidiary of Allergan plc, admitted the facts in the SEC’s cease-and-desist order finding that the company violated Section 14(d) of the Securities Exchange Act of 1934 and Rule 14d-9. 

The SEC’s investigation was conducted by John Lehmann, Mark Germann, and Charles Riely of the New York office, and the case was supervised by Sanjay Wadhwa.

10 Firms Violated Pay-to-Play Rule By Accepting Pension Fund Fees Following Campaign Contributions

The Securities and Exchange Commission today announced that 10 investment advisory firms have agreed to pay penalties ranging from $35,000 to $100,000 to settle charges that they violated the SEC’s investment adviser pay-to-play rule by receiving compensation from public pension funds within two years after campaign contributions made by the firms’ associates.

According to the SEC’s orders, investment advisers are subject to a two-year timeout from providing compensatory advisory services either directly to a government client or through a pooled investment vehicle after political contributions were made to a candidate who could influence the investment adviser selection process for a public pension fund or appoint someone with such influence.  The SEC’s orders find that these 10 firms violated the two-year timeout by accepting fees from city or state pension funds after their associates made campaign contributions to elected officials or political candidates with the potential to wield influence over those pension funds.

“The two-year timeout is intended to discourage pay-to-play practices in the investment of public money, including public pension funds,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Advisory firms must be mindful of the restrictions that can arise from campaign contributions made by their associates.” 

Without admitting or denying the findings, the 10 firms consented to the SEC’s orders finding they violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-5.  The firms are censured and must pay the following monetary penalties:

• Adams Capital Management – $45,000
• Aisling Capital – $70,456
• Alta Communications – $35,000
• Commonwealth Venture Management Corporation – $75,000
• Cypress Advisors – $35,000
• FFL Partners – $75,000
• Lime Rock Management – $75,000
• NGN Capital – $100,000
• Pershing Square Capital Management – $75,000
• The Banc Funds Company – $75,000

The SEC’s investigations were coordinated by Louis A. Randazzo, who conducted them along with Kevin B. Currid, Brian Fagel, Natalie G. Garner, William T. Salzmann, and Monique Winkler of the Public Finance Abuse Unit and Kelly Gibson and Benjamin D. Schireson of the Philadelphia Regional Office.  

BlackRock Charged With Removing Whistleblower Incentives in Separation Agreements

The Securities and Exchange Commission today announced that New York-based asset manager BlackRock Inc. has agreed to pay a $340,000 penalty to settle charges that it improperly used separation agreements in which exiting employees were forced to waive their ability to obtain whistleblower awards.

According to the SEC’s order, more than 1,000 departing BlackRock employees signed separation agreements containing violative language stating that they “waive any right to recovery of incentives for reporting of misconduct” in order to receive their monetary separation payments from the firm.

BlackRock added the waiver provision in October 2011 after the SEC adopted its whistleblower program rules, and the firm continued using it in separation agreements until March 2016.

“BlackRock took direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Asset managers simply cannot place restrictions on the ability of whistleblowers to accept financial awards for providing valuable information to the SEC.”

Jane Norberg, Chief of the Office of the Whistleblower, added, “This enforcement action against BlackRock underscores our ongoing commitment to ensure the lines of communication between whistleblowers and the SEC remain unimpeded.  Companies should review and revise their agreements that stifle whistleblowers from reporting to the SEC.”

BlackRock consented to the SEC’s order without admitting or denying the findings that it violated Rule 21F-17.  The order notes that BlackRock voluntarily revised its separation agreement and took a number of remedial actions, including the implementation of mandatory yearly training to summarize employee rights under the SEC’s whistleblower program.

The SEC’s investigation was conducted by Alfred Tierney and Luke Pazicky and supervised by Adam Aderton of the Asset Management Unit.  

Chemical and Mining Company in Chile Paying $30 Million to Resolve FCPA Cases

The Securities and Exchange Commission today announced that Chilean-based chemical and mining company Sociedad Quimica y Minera de Chile S.A. (SQM) agreed to pay more than $30 million to resolve parallel civil and criminal cases finding that it violated the Foreign Corrupt Practices Act (FCPA).

According to the SEC’s order, SQM made nearly $15 million in improper payments to Chilean political figures and others connected to them.  Most of the payments were made based on fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.  The payments occurred for at least a seven-year period.

“SQM permitted millions of dollars in payments to local politicians while failing for years to exercise proper oversight over a key discretionary account and internal controls,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.

SQM agreed to pay a $15 million penalty to settle the SEC’s charges and a $15.5 million penalty as part of a deferred prosecution agreement announced today by the U.S. Department of Justice.  SQM agreed to retain an independent compliance monitor for two years and self-report to the SEC and Justice Department for one year after the monitor’s work is complete.

The SEC’s investigation, which is continuing, is being conducted by William B. McKean.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section.

Morgan Stanley Paying $13 Million Penalty for Overbilling Clients and Violating Custody Rule

The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney has agreed to pay a $13 million penalty to settle charges that it overbilled investment advisory clients due to coding and other billing system errors.  The firm also violated the custody rule pertaining to annual surprise examinations.

The SEC’s order finds that Morgan Stanley overcharged more than 149,000 advisory clients because it failed to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements.  Morgan Stanley also failed to validate billing rates contained in the firm’s billing system against client contracts, fee billing histories, and other documentation.

According to the SEC’s order, Morgan Stanley received more than $16 million in excess fees due to the billing errors that occurred from 2002 to 2016.  Morgan Stanley has reimbursed this full amount plus interest to affected clients.

“Investors must be able to trust that their investment advisers have put appropriate safeguards in place to ensure accurate billing.  The long-running deficiencies in those safeguards at Morgan Stanley resulted in 36 different types of billing errors that caused overcharges to customers,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The SEC’s order further finds that Morgan Stanley failed to comply with the annual surprise custody examination requirements for two consecutive years when it did not provide its independent public accountant with an accurate or complete list of client funds and securities for examination.  Morgan Stanley also failed to maintain and preserve client contracts.

“The custody rule’s surprise examination requirement is designed to provide clients protection against assets being misappropriated or misused,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office.  “Morgan Stanley failed in consecutive years to do what was required of it to give investment advisory accounts that important protection.”

Without admitting or denying the findings that it violated various provisions of the Investment Advisers Act of 1940 and related rules, Morgan Stanley consented to the SEC’s cease-and-desist order and agreed to the $13 million penalty, a censure, and undertakings related to its fee billing and books and records practices.

The SEC’s investigation was conducted by Ranah Esmaili, Kenneth Gottlieb, Nicholas Pilgrim, and Celeste Chase of the New York office, and the case was supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Heather Palmer, Jennifer Klein, and Anthony Fiduccia.

Citadel Securities Paying $22 Million for Misleading Clients About Pricing Trades

The Securities and Exchange Commission today announced that Citadel Securities LLC has agreed to pay $22.6 million to settle charges that its business unit handling retail customer orders from other brokerage firms made misleading statements to them about the way it priced trades.

The SEC’s order finds that Citadel Execution Services suggested to its broker-dealer clients that upon receiving retail orders they forwarded from their own customers, it either took the other side of the trade and provided the best price that it observed on various market data feeds or sought to obtain that price in the marketplace.  The process of taking the other side of the trade of the retail orders is known as “internalization.”

But the SEC’s order finds that two algorithms used by Citadel Securities did not internalize retail orders at the best price observed nor sought to obtain the best price in the marketplace.  These algorithms were triggered when they identified differences in the best prices on market feeds, comparing the SIP feeds to the direct feeds from exchanges.  One strategy, known as FastFill, immediately internalized an order at a price that was not the best price for the order that Citadel Securities observed.  The other strategy, known as SmartProvide, routed an order to the market that was not priced to obtain immediately the best price that Citadel Securities observed. 

“Citadel Securities made misleading statements suggesting that it would provide or try to get the best prices it saw for retail orders routed by other broker-dealers,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.  “Internalizers can’t suggest they are doing one thing yet do another when it comes to pricing trades.”

As a “wholesale market maker” or “internalizer” that specializes in handling retail orders from investors who are customers of other broker-dealers, Citadel Securities executes approximately 35 percent of the average daily volume of retail equity shares traded in the U.S. markets, according to the SEC’s order.

“These two algorithms represented a small part of Citadel Securities’ internalization business, but they nevertheless affected millions of orders placed by retail investors because of Citadel Securities’ large role in that market,” said Robert Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.  “We are focused on the execution of retail orders and encourage investors to ask brokers, and brokers to ask internalizers, how they are determining best prices for retail orders.” 

The SEC’s order finds that Citadel Securities, which has since discontinued the two algorithms at issue, violated Section 17(a)(2) of the Securities Act from late 2007 through January 2010.  Without admitting or denying the findings, Citadel Securities agreed to be censured and pay $5.2 million in disgorgement of ill-gotten gains plus interest of more than $1.4 million and a penalty of $16 million. 

The SEC’s investigation was conducted by Wm. Max Hathaway, Fuad Rana, David Bennett, Ainsley Kerr, Matthew Koop, John Marino, and Carolyn Welshhans of the Market Abuse Unit, and Stephan Schlegelmilch from the Trial Unit.  Maxwell Clarke and Michael Barnes of the Division of Economic and Risk Analysis provided substantial assistance.  The investigation was supervised by Mr. Cohen. 

Michael J. Osnato Jr., Chief of Enforcement Division’s Complex Financial Instruments Unit, to Leave SEC

The Securities and Exchange Commission today announced that Michael J. Osnato Jr., Chief of the Enforcement Division’s Complex Financial Instruments Unit, is planning to leave the agency later this month.

For the past three years, Mr. Osnato led the specialized unit of 45 attorneys and industry experts in offices across the country that investigate potential misconduct related to complex financial products and practices involving sophisticated market participants.  In addition, Mr. Osnato has played a leading role in SEC programs, including the Enforcement Division’s national Cooperation Committee.

“Mike has been an insightful and innovative leader of the Enforcement Division’s unit dedicated to policing complex financial instruments and practices,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “As the financial crisis ebbed, Mike proactively refocused the unit toward instruments and practices that disadvantaged retail investors, and put a premium on smart and efficient investigative techniques.  The investing public is safer because of these efforts.”

Mr. Osnato said, “It has been a singular honor to serve alongside the talented staff of the Enforcement Division whose professionalism and commitment to fairness knows no equal.  I am particularly proud of my colleagues in the Complex Financial Instruments Unit, who have helped pave the way for the Division’s use of novel and streamlined investigative techniques and data analytics to root out the most sophisticated forms of misconduct in today’s markets.”

Under Mr. Osnato’s supervision, the SEC has brought enforcement actions that addressed a wide range of sophisticated misconduct:

• The SEC’s first three sets of charges involving issuers of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices, against UBS AG, Merrill Lynch, and UBS Financial Services.
• The SEC’s actions against a Big Three credit rating agency against Standard & Poor’s for post-financial crisis misconduct arising from the rating of complex debt instruments.
• The SEC’s fraud charges against a high-frequency trading firm that used algorithmically-generated rapid-fire trades to manipulate the closing prices of thousands of NASDAQ-listed stocks.
• Charges against Merrill Lynch for violating the SEC’s Customer Protection Rule through usage of complex options trades that placed customer funds at risk, the settlement of which involved admissions of wrongdoing and hundreds of millions of dollars in monetary sanctions.  
• Charges against three Morgan Stanley entities for misleading investors in a pair of residential mortgage-backed securities (RMBS) securitizations that the firms underwrote, sponsored, and issued.
• The SEC’s charges against four veteran investment bankers at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis.

Mr. Osnato joined the SEC’s Enforcement Division in September 2008.  He was promoted to assistant regional director in the SEC’s New York Office in 2010.  Prior to his arrival at the SEC, Mr. Osnato worked at Shearman & Sterling LLP and later at Linklaters LLP in New York.  He earned his bachelor’s degree from Williams College and his law degree from Fordham Law School.

BNY Mellon Settles Charges Stemming From Miscalculations of Regulatory Capital Figures

The Securities and Exchange Commission today announced that BNY Mellon has agreed to pay a $6.6 million penalty to settle charges stemming from miscalculations of its risk-based capital ratios and risk-weighted assets reported to investors.

An SEC investigation found that BNY Mellon deviated from regulatory capital rules by excluding from its calculations approximately $14 billion in collateralized loan obligation assets that the firm consolidated onto its balance sheet in 2010.  BNY Mellon never obtained Federal Reserve Board approval as required under regulatory capital rules to exclude the assets from its calculations.  Due to the miscalculations and the firm’s lack of internal accounting controls to ensure its financial statements were being prepared properly, BNY Mellon understated its risk-weighted assets and overstated certain risk-based capital ratios in quarterly and annual reports from the third quarter of 2010 to the first quarter of 2014.

“Regulatory capital ratios and risk-weighted assets are critical data points for investors in large banking institutions like BNY Mellon,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to aggressively focus on these kinds of disclosures to ensure that control failures do not prevent investors from receiving accurate and timely information.”

Without admitting or denying the charges, BNY Mellon consented to an SEC order finding that it violated internal controls and recordkeeping provisions of the federal securities laws, specifically Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. 

The SEC’s investigation was conducted by Armita Cohen and Amy Flaherty Hartman and the case was supervised by Michael Osnato, Reid Muoio, and Jeffrey Shank.  The SEC appreciates the assistance of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.

Biomet Charged With Repeating FCPA Violations

The Securities and Exchange Commission today announced that a Warsaw, Ind.-based medical device manufacturer has agreed to pay more than $30 million to resolve parallel SEC and Department of Justice investigations into the company’s repeat violations of the Foreign Corrupt Practices Act (FCPA).

Biomet first faced FCPA charges from the SEC and entered into a deferred prosecution agreement with the Department of Justice in March 2012, agreeing to pay more than $22 million to settle both cases.  As part of the SEC settlement, Biomet agreed to retain an independent compliance consultant to review its FCPA compliance program.  After the settlement as Biomet was implementing recommendations from the independent monitor, the company learned about potential anti-bribery violations in Brazil and Mexico and notified the monitor and the SEC in 2013.

The SEC’s order finds that Biomet continued to interact and improperly record transactions with a known prohibited distributor in Brazil, and used a third-party customs broker to pay bribes to Mexican customs officials to facilitate the importation and smuggling of unregistered and mislabeled dental products.

“Biomet didn’t entirely learn its lesson the first time around as it continued to use a prohibited agent in Brazil and engaged in a new bribery scheme in Mexico,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. 

Biomet, which has since been acquired by Zimmer Holdings and renamed Zimmer Biomet, agreed to pay more than $5.82 million in disgorgement plus $702,705 in interest and a $6.5 million penalty for a total of more than $13 million.  Zimmer Biomet also agreed to retain an independent compliance monitor for a three-year period to review its FCPA policies.  As part of the deferred prosecution agreement with the Department of Justice, Zimmer Biomet agreed to pay a fine of more than $17.46 million.

The SEC’s investigation was conducted by Michelle L. Ramos, Robert Dodge, and Shahriar Masud.  The case was supervised by Tracy L. Price.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section and the Federal Bureau of Investigation.

SEC Announces 2017 Examination Priorities

The Securities and Exchange Commission today announced its Office of Compliance Inspections and Examinations’ (OCIE) 2017 priorities.   Areas of focus include electronic investment advice, money market funds, and financial exploitation of senior investors.  The priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing market-wide risks.

“These priorities make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice,” said SEC Chair Mary Jo White.  “Whether it is protecting our most vulnerable senior investors or those investing in the trillion dollar money market fund industry, OCIE continues its efficient and effective risk-based approach to ensure compliance with our nation’s securities laws.”

“OCIE’s priorities identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements,” said OCIE Director Marc Wyatt.

The 2017 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges, and municipal advisors.  Areas of examination focus include:

Retail Investors – Protecting retail investors remains a priority in 2017.  OCIE will continue several 2016 initiatives to assess risks to retail investors seeking information, advice, products, and services. It also will undertake examinations to review firms delivering investment advice through electronic mechanisms, sometimes referred to as “robo-advising,” as well as wrap fee programs in which investors are charged a single bundled fee for advisory and brokerage services.

Senior Investors and Retirement Investments – OCIE also is continuing its focus on public pension advisers and expanding its focus on senior investors and individuals investing for retirement.  OCIE is broadening its ReTIRE initiative to include reviews of investment advisers and broker-dealers that offer variable insurance products to investors with retirement accounts as well as those advisers that offer and manage target-date funds.  OCIE also will focus more specifically on registrants’ interactions with senior investors, including with respect to identifying financial exploitation.

Market-Wide Risks – To help fulfill the SEC’s mission of maintaining fair, orderly, and efficient markets, OCIE will continue its focus on registrants’ compliance with the SEC’s Regulation SCI and anti-money laundering rules.  New initiatives for 2017 include an evaluation of money market funds’ compliance with the SEC’s amended rules, which became effective in October 2016.

FINRA – Consistent with OCIE’s goal of enhancing oversight of FINRA to protect investors and the integrity of our markets, it will continue conducting inspections of FINRA’s operations and regulatory programs, and focus resources on assessing the examinations of individual broker-dealers.

Cybersecurity – OCIE will continue its ongoing initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers and investment advisers.

The published priorities for 2017 are not exhaustive and may be adjusted in light of market conditions, industry developments, and ongoing risk assessment activities.  OCIE selected the priorities in consultation with the Commission, the SEC’s policy divisions and regional offices, the Division of Enforcement, the SEC’s Investor Advocate, and other regulators.