SEC Charges Former Staffer With Securities Fraud Violations

The Securities and Exchange Commission today charged a former employee with securities fraud in connection with his trading of options and other securities.

The SEC’s complaint alleges that David R. Humphrey, who worked at the SEC from 1998 to 2014, concealed his personal trading from the SEC’s ethics office and later misrepresented his trading activities to the SEC’s Office of Inspector General when questioned during an investigation. 

“As alleged in our complaint, Humphrey never sought pre-clearance for his prohibited options trades and he filed forms that falsely represented his securities holdings,” said Gerald W. Hodgkins, Associate Director in the SEC’s Division of Enforcement. 

SEC employees are subject to rigorous rules regarding securities transactions to guard against even the appearance of using public office for private gain.  The ethics rules specifically prohibit trading in options or derivatives.  The rules also require staff to disclose their securities holdings and transactions to the agency’s ethics office in annual filings. 

According to the SEC’s complaint, Humphrey violated the rules by engaging in transactions involving derivatives, failing to obtain pre-clearance before trading non-prohibited securities, and failing to hold securities for the required period.

The SEC’s complaint charges Humphrey with violating Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act.  Humphrey has agreed to settle the charges and pay $51,917 in disgorgement of profits made in the improper trades plus $4,774 in interest and a $51,917 penalty.  Humphrey also agreed to be permanently suspended 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.

In a parallel action, the Department of Justice today announced that Humphrey has pleaded guilty to criminal charges stemming from his false federal filings.

The SEC’s investigation was conducted by Gary M. Zinkgraf and Tom Bednar, and the case was supervised by Jeffrey Weiss.  The SEC appreciates the assistance of the U.S. Department of Justice’s Fraud Section.

SEC Announces Agenda for May 10 Meeting of the Advisory Committee on Small and Emerging Companies

The Securities and Exchange Commission today announced the agenda for the May 10 meeting of its Advisory Committee on Small and Emerging Companies.  The committee will discuss the underwriting of small offerings and will receive updates from SEC staff about the tick size pilot program and from state securities regulators about their latest enforcement report.  The committee also will consider recommendations on secondary market liquidity for Regulation A, Tier 2 securities and the treatment of so-called “finders” that assist companies in capital raising activities.

The May 10 meeting will begin at 9:00 a.m. in the multipurpose room at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  It will be webcast live on the SEC’s website and archived on the website for later viewing. 

The committee provides a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

Members of the public who wish to provide their views on the matters to be considered by the committee may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Paper submissions:

Send paper submissions to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

Agenda

Jay Clayton Sworn in as Chairman of SEC

Jay Clayton was sworn into office this afternoon by U.S. Supreme Court Justice Anthony M. Kennedy as the 32nd Chairman of the Securities and Exchange Commission.

“It is a tremendous honor to lead the SEC and to be sworn in by Justice Kennedy, whom I greatly admire,” said Chairman Clayton. “The work of the SEC is fundamental to growing the economy, creating jobs, and providing investors and entrepreneurs with a share of the American Dream. I would like to thank Acting Chairman Piwowar for his leadership, and I look forward to working with my fellow Commissioners and the talented SEC staff to ensure that our markets remain the safest and most vibrant markets in the world.”

Mr. Clayton was nominated to chair the U.S. Securities and Exchange Commission on January 20, 2017, by President Donald Trump and confirmed by the U.S. Senate on May 2, 2017.

Prior to joining the Commission, Mr. Clayton was a partner at Sullivan & Cromwell LLP, where for over 20 years he advised public and private companies on a wide range of matters, including securities offerings, mergers and acquisitions, corporate governance, and regulatory and enforcement proceedings. His experience includes counseling companies in various industries and advising market participants on capital raising and trading matters in the United States and abroad, including while resident in Europe for five years.

Mr. Clayton has authored publications on securities law, cybersecurity, and other regulatory issues. From 2009 to 2017, he was an Adjunct Professor at the University of Pennsylvania Law School, teaching “M&A Through the Business Cycle” each spring semester as well as guest lecturing in other classes and at other institutions.

Prior to joining Sullivan & Cromwell, Mr. Clayton served as a law clerk for the Honorable Marvin Katz of the U.S. District Court for the Eastern District of Pennsylvania. A member of the New York and Washington, D.C. bars, Mr. Clayton studied and received degrees in engineering, economics, and law. He earned a B.S. in Engineering from the University of Pennsylvania, where he was the recipient of the Thouron Award for post-graduate study in the United Kingdom, enabling him to earn a B.A. and M.A. in Economics from the University of Cambridge. Mr. Clayton received a J.D. from the University of Pennsylvania Law School.

Firm, CEO Settle Charges in Ponzi-Like Scheme Involving Life Settlements

The Securities and Exchange Commission today announced that a New Jersey-based firm and its CEO have agreed to pay more than $4 million to settle charges that they used new investor money to repay earlier investors in Ponzi-like fashion and tapped investor funds for the CEO’s personal use.

According to the SEC’s complaint, Verto Capital Management and William Schantz III raised approximately $12.5 million selling promissory notes to purportedly fund Verto Capital’s purchase and sale of life settlements, which are life insurance policies sold in the secondary market.  The SEC alleges that they misrepresented to investors that Verto Capital was a profitable company and investor funds would be used for general working capital purposes.  Verto Capital and other Schantz businesses had been unprofitable for several years, according to the SEC’s complaint, and Schantz resorted to taking disproportionately large distributions of investor funds for himself and using new investor money to repay earlier investors. 

Verto Capital and Schantz also allegedly made misrepresentations to investors about the safety of the notes and collateral underlying them.  The SEC alleges that the promissory notes were primarily sold through a group of insurance brokers in Texas, and religious investors were targeted.

“As alleged in our complaint, investors were told that the life settlement-backed notes were short-term investments with an unlikely event of default.  Schantz and Verto misled investors about the company’s past performance and the value of the collateral, and they diverted significant investor funds for Schantz’s personal use,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

A Fair Fund will be created to return money collected in the settlement to harmed investors.  Schantz and Verto Capital agreed to pay disgorgement of $3,433,666 plus interest of $124,851 and a penalty of $600,000.  Without admitting or denying the allegations, they consented to permanent injunctions against further violations of Section 17(a)(2) and (3) and Section 5 of the Securities Act of 1933.  Schantz further agreed to be enjoined from selling any promissory notes.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, is being conducted by Jennifer K. Vakiener, Vincent T. Hull, Christopher Mele, Thomas Feretic, and Steven G. Rawlings in the New York office.  The case is being supervised by Lara S. Mehraban.  The SEC examination that led to the investigation was conducted by Steven C. Vitulano, Terrence P. Bohan, and Edward J. Janowsky in the New York office.

SEC Staff Supplements Quarterly Private Funds Statistics

The U.S. Securities and Exchange Commission staff today published a suite of new data and analyses of private fund statistics and trends.

The Private Funds Statistics, released quarterly since October 2015 by the Division of Investment Management’s Risk and Examinations Office, offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF.  New analyses include information about the use of financial and economic leverage by hedge funds, and characteristics of private liquidity funds.

“We believe publishing these statistics provides the public with more transparency into and understanding of the private funds industry,” said Acting Chairman Michael Piwowar. “The additional statistical analyses represent a continued focus on using data to inform policy and provide public information and will continue to facilitate feedback and analysis that could be used by the Commission and others.”

With 90 separate tables and figures, the report provides comprehensive analysis of hedge fund industry practices, such as the use of economic and financial leverage, investment strategies, collateralization of borrowings, and investment category exposures. These new statistics supplement information about numbers and types of funds, the gross and net assets of funds, the distribution of borrowings, analysis of gross notional exposure to net asset value, and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

About the Data Sources

Form ADV is used by investment advisers to register with the Commission and or certain state securities authorities. Advisers must report on Form ADV general information about private funds that they manage, such as basic organizational and operational information, fund size and ownership.

Form PF is filed by SEC-registered investment advisers with at least $150 million in private funds assets under management to report information about the private funds that they manage. Most advisers file Form PF annually to report general information such as the types of private funds advised (e.g., hedge funds or private equity), each fund’s size, leverage, liquidity and types of investors. Certain larger advisers provide more information on a more frequent basis (including more detailed information on certain larger funds).

SEC, FINRA Announce National Compliance Outreach Program for Broker-Dealers

Cybersecurity, investing by seniors, and other regulatory topics of interest will be discussed when the Securities and Exchange Commission and Financial Industry Regulatory Authority (FINRA) hold their National Compliance Outreach Program for Broker-Dealers on July 27. 

Registration opened today for the program, which is designed to provide an open forum for regulators and industry professionals, including compliance, audit, and other senior personnel of broker-dealer firms and branch offices, to discuss current compliance practices and promote an effective compliance structure for the protection of investors.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) and FINRA sponsor the program in coordination with the SEC’s Division of Trading and Markets.  It will be held at the SEC’s Washington D.C., headquarters from 10:30 a.m. to 4:45 p.m. 

Peter Driscoll, Acting Director of OCIE’s National Examination Program said, “The Compliance Outreach Program for Broker-Dealers helps to facilitate effective communication and transparency and furthers the mission to protect investors and maintain fair, orderly, and efficient markets.”

Susan Axelrod, FINRA Executive Vice President of Regulatory Operations said, “FINRA is pleased to continue our successful partnership with the SEC to provide this opportunity for broker-dealer senior personnel, particularly compliance officers, and regulators to foster open lines of communication and work together.”  

There is no cost to attend the event, but in-person attendance is limited to 500 on a first-come, first-served basis.  There will be a maximum of 10 attendees per firm.  The event will be webcast live on the SEC’s website, but CPE credits will be available to in-person attendees only.

Visit the SEC’s website or FINRA’s website for additional details on the 2017 National Compliance Outreach Program for Broker-Dealers, including the agenda and information on how to register for the event.

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.