Whistleblower Award of More Than Half-Million Dollars for Company Insider

The Securities and Exchange Commission today announced that a company insider has earned a whistleblower award of more than $500,000 for reporting information that prompted an SEC investigation into well-hidden misconduct that resulted in an SEC enforcement action.

“This company employee saw something wrong and did the right thing by reporting what turned out to be hard-to-detect violations of the securities laws,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Company insiders are in a unique position to provide specific information that allows us to better protect investors and the marketplace.  We encourage insiders with information to bring it to our attention.”

The whistleblower award is the second announced by the SEC in the past week.  Approximately $154 million has now been awarded to 44 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.

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

SEC and NYU to Host Forum on Reviving IPO Market to Help Drive Economy, Create Jobs

Going public has helped many companies grow and create jobs, so why has the number of initial public offerings (IPOs) decreased in recent years? What are the consequences of this trend on investors? The U.S. Securities and Exchange Commission and New York University’s Salomon Center will tackle those questions next week in New York City.

The Commission’s Division of Economic and Risk Analysis (DERA) is partnering with NYU’s Salomon Center for the Study of Financial Institutions to bring together regulators, practitioners, and academics for a half-day symposium on May 10 at NYU. Panelists will take a look at data and explore the economic causes and consequences of the perceived weakness in the IPO market, and discuss ways to encourage more capital-raising through IPOs.

“IPOs can play a critical role in fostering long-term economic growth, but as we see less and less companies taking advantage of the public markets, we could be missing important opportunities,” said Acting Chairman Michael Piwowar. “We are excited to collaborate with NYU in this event focused on the potential causes of the current state of the U.S. IPO market, as well as possible solutions to IPO decline driven by the needs of market participants.”

Attendees can expect discussions focusing on what has led to the existing condition of the IPO market, including changes in technology and funding sources, regulatory and institutional influences, and the challenges that these issues pose to firms seeking to raise capital.

The event is free and open to the public, and will kick off with welcoming remarks by Acting Chairman Michael Piwowar at 9:15 am at NYU’s Salomon Center located at 44 West 4th Street, New York, NY. Information about the event agenda and webcast will be available at DERA Events. The public is welcome to attend, and are asked to register in advance. 

Semiconductor Company and Former CFO Settle Accounting Fraud Charges

The Securities and Exchange Commission today announced that a South Korea-based semiconductor manufacturer and its former CFO have agreed to settle charges related to an accounting scheme to artificially boost revenue and manipulate the financial results reported to investors.

The SEC’s order finds that MagnaChip Semiconductor Corp. overstated revenues for nearly two years in response to immense pressure placed on employees each quarter to meet revenue and gross margin targets that had been communicated to the public.  Then-CFO Margaret Sakai directed or approved several fraudulent accounting practices to make it falsely appear the company had met those targets.  For example, MagnaChip recognized revenue on sales of incomplete or unshipped products, and the company delayed booking obsolete or aged inventory to manipulate its reported gross margin.  MagnaChip also engaged in roundtrip transactions to manipulate accounts receivable balances, and concealed from auditors that there were side agreements with distributors to induce them to accept products early.

“MagnaChip engaged in a panoply of accounting tricks to artificially meet its financial targets,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Companies that sell stock in the U.S. markets should prioritize a robust accounting culture that is entirely truthful with investors.”

Without admitting or denying the findings in the SEC’s order, MagnaChip agreed to pay a $3 million penalty and Sakai agreed to pay a $135,000 penalty.  Sakai also agreed to be barred from serving as an officer or director of a public company and 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 investigation has been conducted by Justin M. Lichterman and Michael D. Foley of the San Francisco office, and supervised by Steven D. Buchholz.

SEC Charges EB-5 Operator With Securities Fraud

The Securities and Exchange Commission today announced that an Idaho man has agreed to pay back several million dollars he siphoned away for personal use rather than investing it as promised to create U.S. jobs through the EB-5 Immigrant Investor Program.

The SEC alleges that Serofim Muroff raised more than $140.5 million in EB-5 offerings to Chinese investors through his companies Blackhawk Manager and ISR Capital for the intended purposes of acquiring and developing luxury real estate in McCall, Idaho, and investing in gold mining ventures in Idaho and Montana.  Muroff allegedly misappropriated more than $5 million in investor funds for such unrelated uses as an investment in a zip line operation as well as his purchase of two personal residences, a Range Rover, and a BMW.

“As alleged in our complaint, Muroff secretly enriched himself with millions of dollars in EB-5 investor funds that should have gone into job-creating enterprises,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.

In the settlement, which is subject to court approval, Muroff and his companies agreed to pay disgorgement of $5,062,082 plus interest totaling $865,270 and a penalty of $2 million.  Muroff also agreed to be prohibited from conducting EB-5 offerings, acting as an officer or director of a public company, and associating with any investment adviser.  Muroff’s bookkeeper and administrative assistant Debra L. Riddle, who was charged in the SEC’s complaint along with Muroff and his companies, agreed to pay disgorgement of $503,417 plus interest totaling $81,626 and a penalty of $100,000.  They neither admitted nor denied the allegations in the SEC’s complaint.

The SEC’s investigation was conducted by Alice Liu Jensen, Rahul Kolhatkar, and Ellen Chen of the San Francisco office, and the case was supervised by Steven D. Buchholz.  The SEC appreciates the assistance of U.S. Citizenship and Immigration Services.

Executives Charged in Connection With Accounting Failures at Government Contractor

The Securities and Exchange Commission today announced charges against two former executives at a government contractor that was the subject of an SEC enforcement action earlier this year and paid a $1.6 million penalty for accounting failures.

The SEC Enforcement Division alleges that David Pruitt, the then-vice president of finance in the Army Sustainment Division of L3 Technologies Inc., circumvented internal accounting controls and caused L3 to improperly recognize $17.9 million in revenue from a contract with the U.S. Army by creating invoices that were not actually delivered at the same time that the revenue was recorded.  The extra revenue allegedly enabled employees in that division to barely satisfy an internal target for management incentive bonus payments. 

The SEC Enforcement Division further alleges that Pruitt, a CPA, took steps on several occasions to conceal from L3’s corporate office and external auditor the fact that the invoices were not delivered.  The matter against Pruitt will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

The SEC separately instituted an order against Mark Wentlent, the former president of L3’s Army Sustainment Division, finding that he failed to follow up on red flags that Pruitt had caused L3 to improperly recognize revenue.  Wentlent consented to the order without admitting or denying the findings, and he agreed to pay a $25,000 penalty.  The bonus payment that Wentlent received as a result of the misconduct already has been rescinded by L3.

“Executives must be held accountable when they’re actively involved in corporate wrongdoing or look the other way.  We allege that Pruitt circumvented critical accounting safeguards so improper revenue could be recorded to reach an internal target that enabled management to receive bonuses, and it was unreasonable for Wentlent to rely solely on Pruitt under the circumstances,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s investigation was conducted by H. Gregory Baker, David Oliwenstein, Christopher Mele, and Steven G. Rawlings of the New York office.  The litigation against Pruitt will be led by Paul Gizzi, Mr. Baker, and Mr. Oliwenstein.  The case is being supervised by Sanjay Wadhwa.

Broker Charged With Defrauding Customers

The Securities and Exchange Commission today charged a former broker with knowingly or recklessly trading unsuitable investment products in the accounts of five customers and misappropriating more than $170,000 from one of those customers.

The SEC’s complaint alleges that Demitrios Hallas repeatedly traded unsuitable investments in his customers’ accounts, exposing customers who were unsophisticated with limited or no investing experience and modest incomes, net worth levels, and assets to a significant degree of volatility and risk.  In a little more than a year, Hallas allegedly traded 179 daily leveraged exchange traded funds (ETFs) and exchange traded notes (ETNs) – products that the SEC alleges are inherently risky, complex and volatile, and only appropriate for sophisticated investors – in the customers’ accounts, generating commissions and fees of approximately $128,000.  The net loss across all 179 positions was approximately $150,000.  The SEC’s complaint further alleges that Hallas misappropriated more than $170,000 in funds from one customer.  Instead of investing the funds on the customer’s behalf, Hallas allegedly deposited the funds into his own personal bank accounts and spent them on personal expenses, including significant bar and restaurant bills, credit card and student loan payments, and rent.

The SEC previously issued an Investor Alert warning about excessive trading and churning that can occur in brokerage accounts, and an Investor Bulletin educating investors about ETNs and the risks associated with them.

“As alleged in our complaint, Hallas enriched himself by systematically disregarding his customers’ investment profiles and repeatedly trading in risky, volatile products that were unsuitable for them,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker Dealer Task Force.  “As reflected in this case and our recent case against two former JD Nicholas brokers, the SEC is very focused on brokers who seek to exploit their customers by willfully recommending unsuitable trades or strategies to them.”

The SEC’s complaint charges Hallas 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 seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties.

The SEC’s investigation was conducted by Michael C. Ellis and Thomas P. Smith Jr. in the New York office.  The litigation will be led by David Stoelting and Mr. Ellis, and the case is being supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Ronald Krietzman, John Celio, Dee-Ann DiSalvo, and Bernard Bujak.

SEC Awards Nearly $4 Million to Whistleblower

The Securities and Exchange Commission today announced an award of nearly $4 million to a whistleblower who tipped the agency with detailed and specific information about serious misconduct and provided additional assistance during the ensuing investigation, including industry-specific knowledge and expertise.

“Not only did this whistleblower step forward and report suspicious conduct, but continued to help after we opened our investigation,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.”

Approximately $153 million has now been awarded to 43 whistleblowers who became eligible for an award after voluntarily providing the SEC with original and useful information that led to successful enforcement actions. 

SEC enforcement actions from whistleblower tips have resulted in more than $953 million in financial remedies against wrongdoers.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  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.

Investment Bank VP Charged With Insider Trading

The Securities and Exchange Commission today charged a vice president in the risk management department of a New York-based investment bank with insider trading on confidential information he learned in advance of a private equity firm’s acquisition of a publicly-traded technology company.

The SEC alleges that Avaneesh Krishnamoorthy learned that Golden Gate Capital planned to acquire Neustar Inc., and he then began trading in Neustar securities.  The trading took place in two brokerage accounts that Krishnamoorthy allegedly kept hidden from his employer, which had been approached by Golden Gate Capital to finance the transaction.  According to the SEC’s complaint, Krishnamoorthy made approximately $48,000 in illicit profits.

“As alleged in our complaint, Krishnamoorthy was entrusted with confidential, market-moving information by his employer and he misused it for personal gain,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

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

The SEC is seeking an emergency court order to freeze the assets in the brokerage accounts belonging to Krishnamoorthy and his wife, who has been named as a relief defendant in the SEC’s complaint for purposes of recovering allegedly ill-gotten gains in the account in her name.  The complaint charges Krishnamoorthy with violating Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. 

The SEC’s investigation is being conducted by Alison R. Levine, Preethi Krishnamurthy, Neil Hendelman, and Thomas P. Smith Jr.  The litigation will be led by Ms. Krishnamurthy and Ms. Levine.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

Portfolio Manager Charged With Diverting Nearly $2 Million to Personal Account

The Securities and Exchange Commission today announced fraud charges against a Massachusetts-based portfolio manager accused of diverting at least $1.95 million to his personal brokerage account from a fund over which he had trading authority.

The SEC’s complaint alleges that Kevin J. Amell carried out a fraudulent matched-trades scheme in which he prearranged the purchase or sale of call options between his own account and the brokerage accounts of the fund at prices that were disadvantageous to the fund and advantageous to him.  In one series of trades involving Amazon securities, for example, Amell allegedly generated a $23,000 profit for himself in less than 23 minutes at the fund’s expense.

“As alleged in our complaint, Amell abused his trading authority at least 265 times by matching trades between the fund and his personal account at prices that he intentionally and fraudulently skewed to benefit himself,” said Joseph G. Sansone, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit.

In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts today filed criminal charges against Amell.

The SEC’s complaint charges Amell with violating Sections 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c), and Sections 17(a)(1), 17(a)(2) and 17(j) of the Investment Company Act of 1940 and Rules 17j-1(b)(1), (3) and (4).  The SEC is seeking disgorgement of Amell’s ill-gotten gains plus interest and penalties as well as injunctions.  

The SEC’s investigation, which is continuing, is being conducted by Melanie A. MacLean, John D. Marino, and Simona Suh of the Market Abuse Unit and Elzbieta Wraga of the New York Regional Office.  The case has been supervised by Mr. Sansone.  The litigation will be led by Ms. MacLean, Ms. Suh, and Martin F. Healey of the Boston Regional Office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, the Federal Bureau of Investigation’s Boston Field Office, and the Financial Industry Regulatory Authority.

Telecom Executives Agree to Pay Penalties For FCPA Violations

The Securities and Exchange Commission today announced that two former executives at Hungarian-based telecommunications company Magyar Telekom have agreed to pay financial penalties and accept officer-and-director bars to settle a previously-filed SEC case alleging they violated the Foreign Corrupt Practices Act (FCPA).

Magyar Telekom paid a $95 million penalty in December 2011 to settle parallel civil and criminal charges that the company bribed officials in Macedonia and Montenegro to win business and shut out competition in the telecommunications industry.  The SEC’s complaint also charged the company’s former CEO Elek Straub and former chief strategy officer Andras Balogh with orchestrating the use of sham contracts to funnel millions of dollars in corrupt payments.  The two executives were set to stand trial this month.

Straub has agreed to pay a $250,000 penalty and Balogh has agreed to pay a $150,000 penalty.  Both executives agreed to a five-year bar from serving as an officer or director of any SEC-registered public company.  The settlements are subject to court approval.

“The executives in this case were charged with spearheading secret agreements with a prime minister and others to block out telecom competitors,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.  “We persevered in order to hold these overseas executives culpable for corrupting a company that traded in the U.S. market.”

A third Magyar Telekom executive charged in the SEC’s complaint, former director of business development and acquisitions Tamas Morvai, agreed to a settlement that was approved by the court in February requiring him to pay a $60,000 penalty for falsifying the company’s books and records in connection with the bribery scheme.

The SEC’s litigation was led by Robert I. Dodge, Thomas A. Bednar, and John D. Worland Jr.  The case was investigated by Adam J. Eisner and supervised by Charles E. Cain, Deputy Chief of the Enforcement Division’s FCPA Unit.  The SEC appreciates the assistance of the Fraud Section of the Department of Justice’s Criminal Division and the Federal Bureau of Investigation.   

SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors

The Securities and Exchange Commission today announced enforcement actions against 27 individuals and entities behind various alleged stock promotion schemes that left investors with the impression they were reading independent, unbiased analyses on investing websites while writers were being secretly compensated for touting company stocks.

SEC investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks, and the firms subsequently hired writers to publish articles that did not publicly disclose the payments from the companies.  The writers allegedly posted bullish articles about the companies on the internet under the guise of impartiality when in reality they were nothing more than paid advertisements.  More than 250 articles specifically included false statements that the writers had not been compensated by the companies they were writing about, the SEC alleges.

“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public.  These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.

According to the SEC’s orders as well as a pair of complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors.  For example, one writer wrote under his own name as well as at least nine pseudonyms, including a persona he invented who claimed to be “an analyst and fund manager with almost 20 years of investment experience.”  One of the stock promotion firms went so far as to have some writers it hired sign non-disclosure agreements specifically preventing them from disclosing compensation they received.

“Deception takes many forms.  Our markets cannot operate fairly when there are deliberate efforts to reach prospective investors with positive articles about a stock while hiding that the companies paid for those articles,” said Melissa Hodgman, Associate Director of the SEC’s Division of Enforcement.

The SEC filed fraud charges against three public companies and seven stock promotion or communications firms as well as two company CEOs, six individuals at the firms, and nine writers.  Of those charged, 17 have agreed to settlements that include disgorgement or penalties ranging from approximately $2,200 to nearly $3 million based on frequency and severity of their actions.  The SEC’s litigation continues against 10 others. 

The SEC also instituted separate charges against another company for its involvement in circulating promotional materials that did not comply with prospectus requirements under the federal securities laws.  The company settled the case.

The SEC today released an investor alert warning that articles on an investment research website that appear to be an unbiased source of information or provide commentary on multiple stocks may be part of an undisclosed paid stock promotion.  Investors should never make an investment based solely on information published on an investment research website.  When making an investment decision, thoroughly research the company using multiple sources.

“Stock promotion schemes may be conducted through investment research websites,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Investors looking for objective investment information should be aware that fraudsters may use these websites to profit at investors’ expense.”

The SEC’s investigations were conducted by Beth Groves, Ian Rupell, Shelby Hunt, Jim Blenko, and Jonathan Jacobs with assistance from Michi Harthcock, Jamie Wohlert, Suzanne Romajas, and Frederick Block.  The cases were supervised by Rami Sibay, and the litigation will be led by Ms. Romajas and Patrick Costello.

SEC Adopts JOBS Act Amendments to Help Entrepreneurs and Investors

The Securities and Exchange Commission today announced that it has adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation.  It also approved amendments that adjust for inflation a threshold used to determine eligibility for benefits offered to “emerging growth companies” (EGCs) under the Jumpstart Our Business Startups (JOBS) Act.

“Regular updates to the JOBS Act, as prescribed by Congress, ensure that the entrepreneurs and investors who benefit from crowdfunding will continue to do so,” said SEC Acting Chairman Michael S. Piwowar. “Under these amendments, the JOBS Act can continue to create jobs and investment opportunities for the general public.”

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012.  In addition to the inflation adjustments, the SEC adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) by Title I of the JOBS Act.

The Commission approved the new thresholds March 31. They will become effective when they are published in the Federal Register.

BACKGROUND

Section 101 of the JOBS Act added new Securities Act Section 2(a)(19) and Exchange Act Section 3(a)(80) to define the term “emerging growth company” (“EGC”).  Pursuant to those sections, every five years the SEC is directed to index the annual gross revenue amount used to determine EGC status to inflation to reflect the change in the Consumer Price Index for All Urban Consumers (“CPI-U”) published by the Bureau of Labor Statistics (“BLS”).  To carry out this statutory directive, the SEC has adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold.  The JOBS Act also added new Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Section 5 under the Securities Act for certain crowdfunding transactions.  In October 2015, the SEC promulgated Regulation Crowdfunding to implement that exemption.  Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts used in connection with the crowdfunding exemption, and Section 4A(h)(1) states that such dollar amounts shall be adjusted by the SEC not less frequently than once every five years to reflect the change in the CPI-U published by the BLS.  The SEC has adopted amendments to Rules 100 and 201(t) of Regulation Crowdfunding and Securities Act Form C to reflect the required inflation adjustments.

In addition, Sections 102 and 103 of the JOBS Act amended the Securities Act and the Exchange Act to provide several exemptions from a number of disclosure, shareholder voting, and other regulatory requirements for any issuer that qualifies as an EGC. The exemptions reduce the financial disclosures an EGC is required to provide in public offering registration statements and relieve an EGC from conducting advisory votes on executive compensation, as well as from a number of accounting and disclosure requirements.  The regulatory relief provided under Sections 102 and 103 of the JOBS Act was self-executing and became effective once the JOBS Act was signed into law.  The technical amendments that the SEC is adopting conform several rules and forms to reflect these JOBS Act statutory changes.

Table 1:  Inflation-Adjusted Amounts in Rule 100 of Regulation Crowdfunding (Offering Maximum and Investment Limits)

Table 2:  Inflation-Adjusted Amounts in Rule 201(t) of Regulation Crowdfunding (Financial Statement Requirements)