SEC Uncovers Wide-Reaching Insider Trading Scheme

The Securities and Exchange Commission today announced insider trading charges against seven individuals who generated millions in profits by trading on confidential information about dozens of impending mergers and acquisitions.  Data analysis allowed the SEC’s enforcement staff to uncover the illicit trading despite the traders’ alleged use of shell companies, code words, and an encrypted, self-destructing messaging application to evade detection.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today unsealed criminal charges against the same seven individuals.

According to the SEC’s complaint, Daniel Rivas, a former IT employee of a large bank, was at the center of the alleged scheme, misusing his access to a bank computer system to tip four individuals who traded on the information.  He allegedly tipped others who also traded and passed along the tips.  According to the complaint, the traders profited on market-moving news related to 30 impending corporate deals from October 2014 to April 2017.

The SEC’s complaint alleges that Rivas frequently tipped his girlfriend’s father, James Moodhe, who traded on the information and used coded conversations and in-person meetings to relay the tips to his friend, Michael Siva, a financial advisor at a brokerage firm.  Siva allegedly used the confidential information to make profitable trades for his brokerage firm clients, earning commissions for himself in the process, and he passed numerous tips along to a client who traded on them.  The complaint alleges that Siva also traded on behalf of himself and his wife based on two of the tips he got from Moodhe, a former financial services company treasurer.

A separate trading ring allegedly involved two of Rivas’s friends in Florida, Roberto Rodriguez and Rodolfo Sablon, who discussed tips on an encrypted, self-destructing smartphone messaging application and used shell companies to carry out their insider trading.  Although Rodriguez and Sablon were inexperienced traders, in just over a year they turned less than $100,000 into more than $2 million in profits by making aggressive options trades based on the confidential information.  Rodriguez also is alleged to have passed several tips to one of his friends who also traded.

According to the SEC’s complaint, a third trading ring involved Jhonatan Zoquier, another inexperienced trader who profited by trading on inside information communicated through the encrypted messaging application.  The complaint further alleges that New Jersey-based Zoquier repeatedly passed the confidential information along to Jeffrey Rogiers of Oakland, California, who placed several illegal trades for himself and tipped others to trade.

The case stems from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns such as improbably successful trading across different securities over time.  Enhanced detection capabilities enabled SEC enforcement staff to spot the unusual trading activities.

“The tippers and traders in this case are alleged to have used various methods to try to cover their tracks, but their efforts failed,” said Steven Peikin, Co-Director of the SEC Enforcement Division.  “These charges reflect our continued use of sophisticated tools to detect and root out secretive and wide-reaching insider trading schemes.”

“We allege that this case involves repeated insider trading based on tips about dozens of confidential mergers and acquisitions stolen by an IT employee at a bank,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “IT employees are often entrusted with broad access to incredibly valuable, nonpublic information and have a duty to safeguard that information.”

The SEC’s complaint, which was filed in the Southern District of New York, charges Rivas, Moodhe, Rodriguez, Sablon, Zoquier, Siva, and Rogiers with fraud and seeks permanent injunctions along with the return of allegedly ill-gotten gains plus interest and penalties.

The SEC’s investigation, which is continuing, has been conducted by Walker Newell and David Makol with assistance from John Rymas.  The case has been supervised by Joseph G. Sansone, Erin E. Schneider, Steven Buchholz, and Jennifer J. Lee.  The SEC’s litigation will be led by Susan F. LaMarca and Mr. Newell.  The investigation has been conducted jointly by the San Francisco office and the Market Abuse Unit.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

SEC Charges KPMG with Audit Failures

The Securities and Exchange Commission today announced that KPMG has agreed to pay more than $6.2 million to settle charges that it failed to properly audit the financial statements of an oil and gas company, resulting in investors being misinformed about the energy company’s value.  KPMG’s engagement partner in charge of the audit also agreed to settle charges against him.

According to the SEC’s order, KPMG was hired as the outside auditor for Miller Energy Resources in 2011 and issued an unqualified audit report despite grossly overstated values for key oil and gas assets.  KPMG and the engagement partner John Riordan failed to properly assess the risks associated with accepting Miller Energy as a client and did not properly staff the audit, which overlooked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year.  Among other audit failures, KPMG and Riordan did not adequately consider and address facts known to them that should have raised serious doubts about the company’s valuation, and they failed to detect that certain fixed assets were double-counted in the company’s valuation. 

“Auditing firms must fully comprehend the industries of their clients.  KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars,” said Walter E. Jospin, Director of the SEC’s Atlanta Regional Office.

The SEC’s order finds that KPMG and Riordan engaged in improper professional conduct and caused Miller Energy’s violation of Section 13(a) of the Securities Exchange Act and Rules 13a-1 and 13a-13.  Without admitting or denying the findings, KPMG agreed to be censured and pay $4,675,680 in disgorgement of all the audit fees received from Miller Energy plus $558,319 in interest and a $1 million penalty.  KPMG also agreed to significant undertakings designed to improve its system of quality control.  Riordan agreed, without admitting or denying the findings, to pay a $25,000 penalty and be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Riordan to apply for reinstatement after two years.

Miller Energy was charged with accounting fraud in 2015 and later settled the charges.

The SEC’s investigation was conducted by William M. Uptegrove and John Nemeth, and the case was supervised by Peter J. Diskin and Aaron W. Lipson of the Atlanta office.

SEC Files Charges in Oil Drilling Investment Scheme

The Securities and Exchange Commission today charged two Tennessee men and an accomplice in Fort Lauderdale with allegedly defrauding investors they lured by false promises of high returns from an oil drilling investment opportunity.

According to the SEC’s complaint filed in federal court in Savannah, Georgia, David R. Greenlee and David A. Stewart Jr. orchestrated the $15 million scheme by recruiting and controlling a network of salesmen who offered and sold investors a stake in various companies purportedly using enhanced oil recovery techniques like fracking to extract and sell oil from wells in Kansas, Oklahoma, and Texas.  Investors were allegedly promised profits of 15 to 55 percent per year for decades. 

The SEC alleges that Greenlee and Stewart weren’t registered to sell investments and used fake names like “Dave Johnson” when speaking to investors in order to hide their past criminal records, and they diverted nearly two-thirds of the money raised from investors to pay themselves and their salesmen as well as advertise for new investors.  According to the SEC’s complaint, minimal funds were used for oil production at just a few of the wells in order to create the appearance of oil production and dupe investors who wanted to see activity in-person.

The SEC’s complaint further alleges that Richard “Ric” P. Underwood helped Greenlee and Stewart draft false offering brochures, and he oversaw a boiler room sales team of telemarketers in Florida as they solicited investors nationwide.

“As alleged in our complaint, misleading brochures and radio advertisements lured investors into believing they could strike it rich by investing in these oil drilling opportunities.  Unbeknownst to the investors, most of their money was being used for other purposes,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office. 

The SEC has previously alerted investors about the risks and possible fraudulent activity involved in private offerings of securities for oil-and-gas ventures.  The SEC also encourages investors to check the backgrounds of people selling investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Georgia today announced criminal charges against Greenlee, Stewart, and Underwood.

The SEC’s complaint charges Greenlee, Stewart, and Underwood with violations of the antifraud provisions of the federal securities laws.  The SEC seeks the disgorgement of ill-gotten gains plus interest and penalties as well as injunctions.

The SEC’s continuing investigation has been conducted by Brian M. Basinger with assistance from Lauren B. Poper, and the case is being supervised by Aaron W. Lipson and Stephen E. Donahue.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Georgia and the U.S. Secret Service.

SEC Announces $2.5 Million Whistleblower Award

The Securities and Exchange Commission today announced an award of nearly $2.5 million to an employee of a domestic government agency whose whistleblower tip helped launch an SEC investigation and whose continued assistance enabled the SEC to address a company’s misconduct.

”Whistleblowers can provide a wealth of information and ongoing assistance that helps our agency bring enforcement actions quicker and more efficiently,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  ”This whistleblower not only helped us open the case, but also provided timely ongoing assistance along with critical documents and testimony that accelerated the pace of our enforcement action.”

Approximately $156 million has now been awarded to 45 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

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.

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

SEC Names Bryan Wood as Director of the Office of Legislative and Intergovernmental Affairs

The Securities and Exchange Commission today announced that Bryan Wood has been named Director of the agency’s Office of Legislative and Intergovernmental Affairs. Mr. Wood will advise the Chairman, Commissioners, and SEC staff on legislative matters, provide technical assistance on securities-related legislation to congressional committees and staff, assist in preparing SEC testimony for congressional hearings, and coordinate with other government entities.

“It is important that the SEC work in cooperation with Congress and other government entities in a way that is responsive, efficient, and effective to best serve the American people,” said SEC Chairman Jay Clayton. “The SEC will benefit from Bryan’s experience in Congress, his knowledge of our federal securities laws, and his commitment to public service.”

Mr. Wood added, “I am honored to have the opportunity to work with the Chairman, Commissioners, and dedicated staff here at the SEC. I look forward to helping the agency continue to fulfill its critical mission.”

Mr. Wood spent 10 years on Capitol Hill, most recently as Senior Advisor and Counsel at the House Financial Services Committee. Previously, he served as Counsel for the Subcommittee on Capital Markets, Securities, and Investment, and as Legislative Director to Rep. Robert Hurt, former vice chairman of the Capital Markets and Government-Sponsored Enterprises Subcommittee.

Mr. Wood received his J.D. from Georgetown University, magna cum laude. He received his B.A. from the University of Virginia.

Federal Regulatory Agencies Announce Coordination of Reviews for Certain Foreign Funds Under Volcker Rule

Five federal financial regulatory agencies today announced that they are coordinating their respective reviews of the treatment of certain foreign funds under section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, and the agencies’ implementing regulations.

These foreign funds are investment funds organized and offered outside of the United States that are excluded from the definition of “covered fund” under the agencies’ implementing regulations (foreign excluded funds).  Section 619, and the implementing regulations, generally do not apply to investments in, or sponsorship of, these foreign excluded funds by a foreign banking entity.

However, complexities in the statute and the implementing regulations may result in certain foreign excluded funds becoming subject to regulation under section 619 because of governance arrangements with or investments by a foreign bank. As a result, a number of foreign banking entities, foreign government officials, and other market participants have expressed concern about possible unintended consequences and extraterritorial impact.

The staff of the agencies are considering ways in which the implementing regulations may be amended, or other appropriate action may be taken. It may also be the case that congressional action is necessary to fully address the issue. To aid full consideration, the federal banking regulators, which generally oversee foreign banks, announced that they would not take action under section 619 for qualifying foreign excluded funds, subject to certain conditions, for a period of one year.

Section 619 generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a covered fund. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions.

Final regulations implementing section 619 were previously issued by five agencies – the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. 

Today’s announcement does not otherwise modify the rules implementing section 619 and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities. 

Media Contacts:

Federal Reserve                     Eric Kollig                                202-452-2955

CFTC                                      Erica Elliott Richardson           202-418-5382

FDIC                                       David Barr                               202-898-6992

OCC                                        Stephanie Collins                    202-649-6870

SEC                                        Office of Public Affairs             202-551-4120

SEC Bars Lawyer Who Committed Fraud

The Securities and Exchange Commission today barred a New York-based attorney from appearing or practicing before it and acting as an officer or director of a public company after finding that he made false and misleading statements in corporate filings.

The SEC’s order finds that David Lubin committed fraud while serving as a director and corporate counsel of Entertainment Art, a public company in which Lubin also was a large shareholder.  Lubin negotiated the sale of all of the outstanding stock of Entertainment Art, including both restricted and previously registered shares that were purportedly “free trading,” to an acquaintance interested in purchasing shell companies.  Absent a valid exemption, common ownership of all of the shares of a public company would require the owner to register the shares for resale to the public.  According to the SEC’s order, Lubin fraudulently misrepresented in Entertainment Art’s corporate filings that the purportedly free-trading shares had not been purchased by the acquaintance.  This left the false impression that those shares remained immediately available for public resale.  During the next two years and until he left the company, Lubin drafted and signed SEC filings that continued to lie about the true ownership of the company’s stock.

According to the SEC’s order, soon after the company was renamed Biozoom, more than 14 million shares were resold to the public in an illegal unregistered distribution for illicit proceeds of $34 million.  The SEC froze assets from the unregistered sales in 2013.

“As the SEC’s order notes, Lubin drafted and signed misleading public filings and masked the true ownership and restricted nature of a significant portion of the company’s stock,” said Antonia Chion, Associate Director in the SEC’s Enforcement Division.  “Lubin’s deception led to many of these same shares being illegally resold to the general public by others a few years later.”

The U.S. Attorney’s Office for the Southern District of Florida today announced criminal charges against Lubin.

The SEC’s order finds that Lubin willfully violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, imposes a cease-and-desist order and an officer-and-director bar.  The SEC’s order also prohibits Lubin from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content.  The SEC ordered a public hearing before an administrative law judge to prepare an initial decision determining what, if any, disgorgement or monetary penalties are in the public interest.

The SEC’s investigation, which is continuing, is being conducted by Marc E. Johnson, Jennie B.  Krasner, and Deborah A. Tarasevich, and the case is being supervised by Ms. Chion.  The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of Florida.

SEC Announces Christopher Hetner as Senior Advisor to the Chairman for Cybersecurity Policy

The Securities and Exchange Commission today announced that Christopher R. Hetner will continue to serve as Senior Advisor to Chairman Jay Clayton for Cybersecurity Policy, having previously served in this role under Chair Mary Jo White and Acting Chairman Michael Piwowar. Mr. Hetner will continue to coordinate efforts across the agency to address cybersecurity policy, engage with external stakeholders, and help enhance the SEC’s mechanisms for assessing cyber-related market risk.

“Technology has become commonplace in our lives, including in our financial transactions, and cybersecurity should be a major concern for all Americans,” said SEC Chairman Jay Clayton.  “It is critical that we regularly assess the cybersecurity landscape and adapt accordingly as we strive to fulfill our mission. Chris’ experience will help our agency evaluate risk, coordinate with others, and communicate with companies and investors.”

Mr. Hetner has more than 20 years of experience in information security and technology. He joined the SEC in January 2015 as the Cybersecurity Leader for the Technology Control Program in the SEC’s Office of Compliance Inspections and Examinations, where he coordinated cybersecurity efforts and advised on enforcement matters. 

Prior to joining the SEC, Mr. Hetner led Ernst and Young’s Wealth and Asset Management Sector Cybersecurity practice and was the Chief Information Security Officer at GE Capital. Mr. Hetner also implemented information security and regulatory compliance programs for Citigroup’s Institutional Client Group global business and technology units. 

Mr. Hetner holds industry-leading certifications including the CISSP (Certified Information Systems Security Professional), NSA INFOSEC (National Security Agency Information Security) Assessment Certification, and CISM (Certified Information Security Manager).  He earned an M.S. in Information Assurance from Norwich University and a B.S in Security Management from The City University of New York’s John Jay College of Criminal Justice.

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’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.