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The U.S. Securities and Exchange Commission (SEC) is the federal agency responsible for protecting investors, maintaining fair and efficient financial markets, and overseeing the securities industry. Established in 1934, the SEC enforces securities laws, regulates public companies, and ensures transparent financial disclosures to support informed investment decisions. It also facilitates capital formation and monitors market activity through rulemaking, examinations, and enforcement actions.

SEC approves JOBS Act requirement to lift general solicitation ban and adopts final rule to disqualify bad actors from certain offerings

The Securities and Exchange Commission (the “SEC”) today adopted a new rule implementing a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings. In connection with this new rule, the SEC issued an amendment proposal requiring issuers to provide additional information about these offerings to better monitor the market with that ban now lifted. The proposal provides for additional safeguards as the market changes and new practices develop.

Continuing the momentum, the SEC also adopted a long-awaited rule  that disqualifies felons and other bad actors from participating in certain securities offerings as required by the Dodd-Frank Act. Under this final rule, an issuer cannot rely on the Rule 506 exemption if the issuer or any other covered person had what the SEC considers a “disqualifying event,” briefly described as a securities-related criminal conviction, court injunction or restraining order, final bar order, SEC disciplinary, cease-and-desist or stop order, suspension or expulsion from membership in a self-regulatory organization, or U.S. Postal Service false representation order.

The final rule provides an exception from disqualification when the issuer can show that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The disqualification applies only for events that occur after the effective date of this rule. However, matters that existed before the effective date and that otherwise would be disqualifying are subject to a mandatory disclosure requirement to investors.

July 11th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , |

SEC announces new enforcement initiatives to combat fraud

 

The Securities and Exchange Commission, (the “SEC”) announced today three new initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas, as follows:

  • The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the Division’s efforts to identify securities law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. Its principal goal will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. 
  • The Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. These abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The task force’s principal goal will be to develop and implement long-term strategies for detecting and combating fraud especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.
  • The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. A central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.
July 2nd, 2013|Categories: Commercial Transactions Due Diligence|Tags: |

13 Things to Know About Investing

The Securities & Exchange Commission (the “SEC”) recently released an educational bulletin to help investors make informed financial decisions and avoid common scams. Its 13 points include:

  1. Check the investment professional’s background.
    Details about experience and qualifications are available through the Investment Adviser Public Disclosure website and FINRA BrokerCheck.
  2. Be mindful of fees associated with buying, owning, and selling an investment product.
    Expenses vary from product to product, and even small differences in these costs can translate into large differences in earnings over time. An investment with high costs must perform better than a low-cost investment to generate the same returns.
  3. Diversification can help reduce the overall risk of an investment portfolio.
    By picking the right mix, you may be able to limit losses and reduce the fluctuations of investment returns without sacrificing too much in potential gains. Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.
  4. Paying off high-interest debt may be the best “investment” strategy.
    Few investments pay off as well as, or with less risk than, eliminating high-interest debt on credit cards or other loans.
  5. Promises of high returns, with little or no associated risk, are classic warning signs of fraud.
    Every investment carries some degree of risk and the potential for greater returns comes with greater risk. Ignore the so-called “can’t miss” investment opportunities or those promising guaranteed returns or, better yet, report them to the SEC.
  6. Any offer or sale of securities must be either registered with the SEC or exempt from registration.
    Otherwise, it is illegal. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
  7. Do not invest in a company about which little or no information is publicly available.
    Always check whether an offering is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
  8. Investing heavily in shares of any individual stock can be risky.
    In particular, think twice before investing heavily in shares of your employer’s stock. If the value declines significantly, or the company goes bankrupt, you may lose money and there’s a chance you might lose your job, too.
  9. Active trading and some other common investing behaviors actually undermine investment performance.
    According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state or company, and holding on to losing investments for too long and selling winning investments too soon.
  10. Con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims.
    Common tactics include phantom riches (dangling the prospect of wealth, enticing with something you want but can’t have), source credibility (trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience), social consensus (leading you to believe that other savvy investors have already invested), reciprocity (offering to do a small favor for you in return for a big favor) and scarcity (creating a false sense of urgency by claiming limited supply).
  11. Some investments provide tax advantages.
    For example, employer-sponsored retirement plans and individual retirement accounts generally provide tax advantages for retirement savings, and 529 college savings plans also offer tax benefits.
  12. Mutual funds, like other investments, are not guaranteed or insured by the FDIC or any other government agency.
    This is true even if you buy through a bank and the fund carries the bank’s name.
  13. The key to avoiding investment fraud is using independent information to evaluate financial opportunities.
    Many investors may have avoided trouble and losses if they had asked questions from the start and verified the answers with sources outside of their family, community, or group. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information is a significant advantage for investing wisely.
February 13th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , , |

Whistleblower activity for SEC violations on the rise

The U.S. Senate reports that more than half of all uncovered frauds have originated from whistleblower tips. Since the SEC’s Office of the Whistleblower was launched in August 2011, officials have been dealing with close to 100 tips per day. And this number is expected to double in the coming years with Dodd-Frank’s provisions for monetary incentives and protection from retaliation.

While coming to grips with the complexities of Dodd-Frank, many companies and financial institutions are heightening their efforts to mitigate the potential liability from whistleblowing. Developing and evaluating existing risk management and compliance programs is now a priority. The programs established under the 2002 Sarbanes-Oxley Act may not be effective in this new regulatory environment, and may need to be modified or strengthened, with an emphasis on internal communications and investigations of possible violations. When determining if and how much leniency to grant an entity, the SEC notes that “the promptness with which entities voluntarily self-report their misconduct…is an important factor.”

According to a recent study published by the Association of Certified Fraud Examiners and the Institute of Internal Auditors, fraudulent acts by employees and outsiders rise during periods of economic stress. Crime experts say that fraud and other misconduct are committed primarily because of three factors, referred to as the Fraud Triangle, and involve financial pressure, opportunity, and rationalization. In these still challenging times, businesses of all types and sizes need to tighten their internal controls and be proactive in preventing wrongful acts. Allocating budgets for compliance programs which include compelling due diligence with a focus on background investigations, will provide a high return on the investment and ultimately protect the bottom line.
March 2nd, 2012|Categories: Commercial Transactions Due Diligence|Tags: , , |

SEC charges green-product company with running a $26 million Ponzi scheme

 

The Securities and Exchange Commission (SEC) announced today that it obtained an emergency court order to halt a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers but bilked them of approximately $26 million over a four-year period.

Filed in the U.S. District Court for the Southern District of New York, the SEC alleges in its complaint that between 2006 and 2010, convicted felon Eric Aronson and others defrauded about 140 individual investors in PermaPave Companies, a group of firms based on Long Island, NY, and controlled by Aronson. According to the complaint, the investors were told that PermaPave had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns of 7.8% to 33%. But in reality, the complaint states, there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

In their Ponzi scheme, Aronson and two other PermaPave executives, Vincent Buonauro Jr. and Robert Kondratick, used the new funds to make payments to earlier investors and then siphoned off much of the rest for themselves, buying luxury cars, gambling trips, and jewelry, according to the complaint. Aronson also allegedly used the investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty in 2000.

The complaint further states that when investors began demanding their money, Aronson accused them of committing a felony by lending the PermaPave Companies money at the interest rates he promised them, which he suddenly claimed were usurious. Aronson and his attorney, Fredric Aaron, then allegedly made false statements to persuade investors to convert their securities into ones that deferred payments for several years.

The SEC also charges that the defendants used some of the money raised through the Ponzi scheme to purchase a publicly traded company, Interlink-US-Network, Ltd. Several months later, the SEC said that Interlink issued a Form 8-K, signed by Kondratick, which falsely claimed that LED Capital Corp. had agreed to invest $6 million in Interlink. According to the complaint, LED Capital Corp. did not have $6 million and had no dealings with Interlink.

The U.S. Attorney’s Office for the Eastern District of New York, which conducted a parallel investigation, filed criminal charges against Aronson, Buonauro, and Kondratick.

October 10th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , |

SEC Defines Due Diligence for Dodd-Frank ABS Certification Requirements

On May 28, 2011, as part of its ongoing efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) approved for public comments (which will be accepted until July 18, 2011) proposed rules pursuant to Section 932 that would require nationally recognized statistical rating organizations (NRSROs), issuers and underwriters to make public the findings and conclusions of any due diligence reports prepared by a third-party service provider in an asset-backed securities transaction. Such third-parties would also have to furnish a certification to each NRSRO rating the securities.

Since the Dodd-Frank Act does not define “due diligence services,” the SEC has identified four categories of reviews, and thus has defined “due diligence services” in the proposed Rule 17g-10 to mean “an entity that engages in a review of the assets underlying an Exchange Act-ABS for purposes of making findings with respect to:

  • quality or integrity of the information or data about the assets provided, directly or indirectly, by the securitizer or originator of the assets;
  • whether the assets origination conformed to stated underwriting or credit extension guidelines, standards, criteria or other requirements;
  • value of collateral securing such assets;
  • whether the assets originator complied with federal, state or local laws or regulations; and
  • any other factor or characteristic of such asset that would be material to the likelihood that the issuer of the Exchange Act-ABS will pay interest and principal according to its terms and conditions.”

Proposed Rule 17g-10 will also define “issuer” to include a sponsor (as defined in 17 CFR 229.11) or depositor (as defined in 17 CFR 229.1011) that participates in the issuance of an Exchange Act-ABS. The terms “originator” and “securitizer” as used in proposed Rule 17g-10 will have the meanings stated in Section 15Gf of the Exchange Act.

An issuer or underwriter is not required to furnish a Form ABS-15G if such issuer or underwriter obtains a representation from each NRSRO engaged in the rating of the Exchange Act-ABS that the NRSRO will publicly disclose the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The NRSRO must disclose the finding and conclusions of any third-party due diligence report with the publication of the credit rating in an information disclosure form prepared pursuant to new paragraph (a)(1) of Rule 17g-7 no less than five business days prior to the first sale in the offering. Rule 17g-7 as amended by the proposed rules, would require an NRSRO to disclose in the information disclosure form:

  • whether and to what extent it relied upon third-party due diligence services;
  • description of the information that such third-party reviewed in conducting its due diligence services; and
  • description of the findings or conclusions of such third-party.

Also in accordance with Section 15E(s)(4)(C) of the Exchange Act, the SEC proposed that the format of the certification in Form ABS Due-Diligence-15E include the following line items:

  • identity and address of the provider of the third-party due diligence services;
  • identity and address of the issuer, underwriter or NRSRO that hired the provider of the third-party due diligence services;
  • identity of each NRSRO that published criteria for performing;
  • scope and manner of the due diligence performed, including but not limited to the type of assets that were reviewed, the same size of the assets reviewed, how the sample size was determined and any other type of review conducted with respect to the assets; and
  • findings and conclusions resulting from the review.

In addition, any individual executing the Form ABS Due Dilignce-15E on behalf of a third-party due diligence provider will be required to represent that he/she executed the form on behalf of, and on the authority of, the third-party due diligence provider and the third-party due diligence provider conducted a complete due diligence review.

June 26th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , |

Dodd-Frank rule disqualifies felons and bad actors from securities offerings

On May 25, 2011, the Securities and Exchange Commission (SEC) proposed a rule to deny certain securities offerings from qualifying for exemption from registration if they involve “felons and other bad actors.”

When an individual or a company offers or sells a security such as a stock or bond, generally the offering must be registered with the SEC. However, the SEC’s Regulation D provides three exemptions that can used to avoid such registration.  The most widely used exemption is Rule 506, which accounts for more than 90% of the offerings made, as well as the majority of capital raised. If an offering qualifies for the Rule 506 exemption, an issuer can raise unlimited capital from an unlimited number of “accredited investors” and from up to 35 non-accredited investors.

Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would deny this exemption to any securities offering in which certain “felons and other bad actors” are involved. This new rule is substantially similar to the bad actor disqualification provisions of another limited offering exemptive rule – Rule 262 of Regulation A – which provides for an exemption from registration for certain small offerings.

Under the proposed rule, an offering cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule (including the issuer’s predecessors and affiliated issuers, directors, officers, general partners and managing members of the issuer, 10% beneficial owners and promoters of the issuer, persons compensated for soliciting investors, and the general partners, directors, officers and managing members of any compensated solicitor) has had a “disqualifying event” identified as follows:

  • Criminal conviction in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction would have to have occurred within 10 years of the proposed sale of securities (or five years, in the case of the issuer and its predecessors and affiliated issuers).

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  • Court injunction and restraining order in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order would have to have occurred within five years of the proposed sale of securities.

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  • Final order from state securities, insurance, banking, savings association or credit union regulators, federal banking agencies or the National Credit Union Administration that bar the issuer from: 1) associating with a regulated entity; 2) engaging in the business of securities, insurance or banking; 3) engaging in savings association or credit union activities, or 4) orders that are based on fraudulent, manipulative or deceptive conduct and are issued within 10 years before the proposed sale of securities.

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  • Certain commission disciplinary order relating to brokers, dealers, municipal securities dealers, investment companies and investment advisers and their associated persons, which would be disqualifying for as long as the order is in effect.

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  • Suspension or expulsion from membership in a “self-regulatory organization” or from association with an SRO member, which would be disqualifying for the period of suspension or expulsion.

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  • Commission stop order and order suspending the Regulation A exemption issued within five years before the proposed sale of securities; and

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  • U.S. Postal Service false representation order issued within five years before the proposed sale of securities.

The proposed rule would provide an exception from disqualification when the issuer can show it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed. Any pre-existing convictions, suspensions, injunctions and orders would be disqualifying. For further information, see http://www.sec.gov/rules/proposed/2011/33-9211.pdf

 

 

 

 

 

 

May 26th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , |

Spotlight on insider trading

Many people associate the term “insider trading” with illegal conduct. But the term refers to both legal and illegal activities. The SEC’s legal version is that corporate insiders, i.e., officers, directors, employees, or anyone with at least a 10% stake in a company, can buy and sell stock in the company providing they abide by the SEC’s restrictions and transactional requirements.

In 2002, the SEC tightened its rules by adopting the Regulation Fair Disclosure to curb the practice of company executives giving securities analysts an inside track; the rules mandate that anything disclosed to an outsider must be revealed to the general public. The SEC also includes in its definition of insiders those who have “temporary” or “constructive” access to the material information, such as business associates, friends, family members, brokers, attorneys and “other tipees.” The U.S. Supreme Court ruled recently that any individual, with or without ties to the particular company, who is in possession of material information, even if the information was stolen, is an insider.

Illegal insider trading, according to the SEC, refers to the buying or selling of a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information. Insider trading violations include “tipping” such information, trading in securities by the person “tipped” and trading by those who misappropriate the information.

The SEC considers the prosecution of insider trading violations a top priority. The exhaustive publicity of illegal insider trading cases sends a strong message that no one is outside its radar. A spokesperson for the Division of Enforcement said that the SEC is aggressively rooting out and identifying hard-to-detect insider trading by connecting patterns of trading to sources of material nonpublic information, whether those sources are law firms, banks or others with a duty to keep the information confidential. Prosecutors add that illegal trading is now easier to prove as direct evidence of fraudulent intent can be obtained through wiretaps, e-mails, text messages, social media contacts, etc. And that evidence also is useful to convince co-conspirators to turn on each other and provide even more substantial proof of fraud. Going after the violators is critical because their actions hurt individual investors and undermine public confidence that allows firms to raise money in the capital markets.

Individuals who are convicted of criminal insider trading face prison terms (the Sarbanes-Oxley Act extended the maximum length of sentences) and fines in addition to civil penalties, which can be triple the realized profit or the loss avoided. Violators also may be charged with mail and wire frauds and possibly with tax evasion and obstruction of justice. Further consequences include being barred from serving as executives or directors of public companies and being named as defendants in multi-million dollar lawsuits. Corporations are subject to penalties for failure to establish compliance programs and for failure to ensure reasonable efforts to prevent violations under the theory of “controlling person” liability. Even if an insider trading investigation does not result in formal charges, the company’s reputation may suffer from the stigma and adverse publicity.

May 24th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , |

Wall Street firms slow in reporting infractions to FINRA

The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-reporting system that allows investors to vet stockbrokers and other financial professionals, says that it has a persistent problem with financial firms not reporting infractions properly or in a timely manner.

FINRA, which shares oversight of Wall Street with federal agencies such as the Securities and Exchange Commission (SEC), requires financial firms to disclose employee infractions within 30 days. Those records, ranging from serious criminal offenses to minor customer complaints, are then entered into a database known as the Central Registration Depository. Individual investors use the 30-year-old system to check out a stockbroker’s history, including employment, criminal records and client lawsuits. Institutions use the database to investigate job candidates.

FINRA depends on Wall Street, which finances its operations, to update the records. But dozens of new cases show that critical information is missing, out of date or erroneous. And Wall Street has a checkered history of reporting infractions by brokers. When regulators last cracked down on disclosure violations in 2004, the sweep ensnared nearly 30 securities firms. At the time, the National Association of Securities Dealers, FINRA’s predecessor, fined brokerage firms a collective $9.2 million for failing to report customer complaints and criminal convictions properly. That same year, Morgan Stanley was hit with a $2.2 million penalty, the largest ever levied against a firm for disclosure issues, for failing to appropriately report 1,800 incidents of customer complaints and other problems. In 2010, the regulator suspended 56 brokers for failing to report previous infractions, up from 34 in 2006. Annual fines rose to $2 million from $1.6 million over the same period.

In one of the most prominent cases in 2010, FINRA fined Goldman Sachs $650,000 for failing to disclose that a trader, Fabrice P. Tourre, and another employee had received an SEC “Wells” warning that the agency was considering an enforcement action against them. Tourre was the only individual named in the SEC fraud case against Goldman Sachs last year, which accused the investment bank of misleading investors about subprime mortgages. Tourre purportedly was ”principally responsible” for marketing the bonds. Goldman, without admitting or denying any wrongdoing, settled the SEC’s charges in July 2010 for $550 million – one of the largest fines ever paid by a Wall Street firm. The charges against Tourre are pending.

Also in 2010, FINRA fined Citigroup $150,000 for filing inaccurate disclosures regarding about 120 brokers who had been fired or resigned after being accused of theft or fraud. In its disciplinary action, FINRA said that Citigroup ”hindered the investing public’s ability to access pertinent background information.” It fined JPMorgan Chase $150,000 for similar violations in 2009.

FINRA soon will face another test. Policy makers are considering whether to expand its responsibilities, giving the regulator oversight of tens of thousands of investment advisers, on top of the 600,000-plus brokers it already under its purview.

March 2nd, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , |
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