Jan 29, 2019 | Shareholder & Investor Protection
On January 29, 2019, the Securities and Exchange Commission announced settled charges against four public companies for failing to maintain internal control over financial reporting (“ICFR”) for seven to 10 consecutive annual reporting periods. Two of the charged companies also failed to complete the required evaluation of the effectiveness of ICFR for two consecutive annual reporting periods.
According to the SEC’s orders, year after year, the four companies disclosed material weaknesses in ICFR involving certain high-risk areas of their financial statement presentation. As discussed in the SEC orders, each of the four companies took months, or years, to remediate their material weaknesses after being contacted by the SEC staff. One of the companies is still in the process of remediating its material weaknesses.
Without admitting or denying the findings, each of the four companies agreed to a cease and desist order making certain findings, requiring payment of civil penalties, and requiring an undertaking for one of the companies as detailed below:
- Grupo Simec S.A.B de C.V. disclosed material weaknesses in its annual filings for 10 consecutive years, from 2008 to 2017. In both 2015 and 2016, its management failed to complete the required ICFR evaluation. The company did not make significant progress in devising a control structure and remediating material weaknesses until after the SEC staff contacted it. The company continues to have material weaknesses that are being addressed through remediation. The Commission’s settled order includes violations of Exchange Act Section 13(b)(2)(B) and Rules 13a-15(a) and 13a-15(c), thereunder, payment of a $200,000 civil penalty, and an undertaking requiring retention of an independent consultant to ensure remediation of material weaknesses, including those involving related party transactions.
- Lifeway Foods Inc. disclosed material weaknesses in each of its Forms 10-K for a period of nine years, from 2007 through 2015, and significant deficiencies that in the aggregate constituted a material weakness in 2016. In both 2013 and 2014, company management failed to complete the required ICFR evaluation. Lifeway did not fully remediate its material weaknesses and conclude that ICFR was effective until its fiscal year ended December 31, 2017. Lifeway’s failure to address its material weaknesses was compounded by three announced restatements since fiscal 2012, including two restatements announced during fiscal 2016. The Commission’s settled order includes violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 13a-1, 13a-15(a) and 13a-15(c), thereunder, and payment of a $100,000 civil penalty.
- Digital Turbine Inc. disclosed material weaknesses in each of its Forms 10-K over a period of seven years, from fiscal year 2011 through fiscal year 2017. The company did not fully remediate its material weaknesses until the end of fiscal year 2018, as disclosed in its Form 10-K for the year ended March 31, 2018. The Commission’s settled order includes violations of Exchange Act Section 13(b)(2)(B) and Rule 13a-15(a), thereunder, and payment of a $100,000 civil penalty.
- CytoDyn Inc. disclosed material weaknesses in each of its Forms 10-K over a period of nine years, from 2008 through 2016. CytoDyn included in its public filings the same, nearly boilerplate, disclosure of material weaknesses for nine consecutive years. CytoDyn remediated its material weaknesses and determined that ICFR was effective as of May 31, 2017. The Commission’s settled order includes violations of Exchange Act Section 13(b)(2)(B) and Rule 13a-15(a), thereunder, and payment of a $35,000 civil penalty.
Source: SEC.gov
Jan 29, 2019 | Shareholder & Investor Protection
On January 28, 2019, the Securities and Exchange Commission announced that a federal court in Florida ordered Woodbridge Group of Companies LLC and its former owner to pay $1 billion in penalties and disgorgement for operating a Ponzi scheme that targeted retail investors.
A federal judge in United States District Court for the Southern District of Florida approved judgments against Woodbridge and its 281 related companies ordering them to pay $892 million in disgorgement. The court ordered former owner and CEO Robert H. Shapiro (“Shapiro”) to pay a $100 million civil penalty and to disgorge $18.5 million in ill-gotten gains plus $2.1 million in prejudgment interest.
In December 2017, the SEC filed an emergency action charging the company and other defendants with operating a massive $1.2 billion Ponzi scheme that defrauded 8,400 retail investors nationwide, many of them seniors who had invested retirement funds. The SEC’s complaint alleged that Shapiro made Ponzi payments to investors and used a web of shell companies to conceal the scheme.
The court’s disgorgement order against Woodbridge and related corporate defendants will be deemed satisfied by a Liquidation Trust being formed under a plan in the Woodbridge Chapter 11 case in the U.S. District Court for the District of Delaware (Case No. 17-12560-KJC). The Liquidation Trust will be obligated to make distributions of net proceeds from the disposition of the defendants’ assets in bankruptcy. The amount to be distributed will depend upon the amounts collected by the Liquidation Trust.
All defendants and relief defendants, without admitting or denying the SEC’s allegations, consented to the entry of final judgments which also permanently prohibit the defendants from violating the antifraud and other provisions of the federal securities laws.
RS Protection Trust and several relief defendants were collectively ordered to pay $5.3 million in ill-gotten gains and interest. Shapiro also consented to the entry of an SEC administrative order, without admitting or denying the SEC’s findings, permanently barring Shapiro from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock.
Source: SEC.gov
Jan 23, 2019 | Consumer Protection, Employment & Technology Archive
Kehoe Law Firm, P.C. Investigating Class-Action Claims on Behalf of Purchasers of the Now-Discontinued Dual-Ended Combat Arms™ Earplugs (CAEv2).
3M Company Agrees to Pay $9.1 Million to Resolve Allegations That it Supplied the United States With Defective Dual-Ended Combat Arms Earplugs
In July 2018, the Department of Justice announced that 3M “. . . agreed to pay $9.1 million to resolve allegations that it knowingly sold the dual-ended Combat Arms Earplugs, Version 2 (CAEv2) to the United States military without disclosing defects that hampered the effectiveness of the hearing protection device.” Further, the Department of Justice announced that
[t]he settlement . . . resolves allegations that 3M violated the False Claims Act by selling or causing to be sold defective earplugs to the Defense Logistics Agency. Specifically, the United States alleged that 3M, and its predecessor, Aearo Technologies, Inc., knew the CAEv2 was too short for proper insertion into users’ ears and that the earplugs could loosen imperceptibly and therefore did not perform well for certain individuals. The United States further alleged that 3M did not disclose this design defect to the military.
The allegations resolved by the settlement were brought in a lawsuit filed under the qui tam, or whistleblower, provisions of the False Claims Act. The act permits private parties to sue on behalf of the government when they believe that defendants submitted false claims for government funds and to share in any recovery. As part of [the] resolution, the whistleblower will receive $1,911,000. [Emphasis added]
Defective Earplugs Issued to Thousands of Military Service Members
In August 2018, IEN reported (“Competitor Blows Whistle on Defective Combat Gear”):
The earplugs in question are designed to provide normal hearing while protecting eardrums from gunfire and explosions that create a concussive sound. Over time, these are the damage-producing noises that lead to hearing loss and other health concerns.
The [Dual-Ended Combat Arms™ Earplugs (CAEv2)] were designed to be worn with either end placed inside the ear. One end allows for hearing speech and communicating, while the other end blocked all noise more completely.
The problem is that these earplugs, which were issued to thousands of military servicemen and woman deployed to Afghanistan and Iraq between 2003 and 2015, is that they can loosen while in the ear. The soldier wouldn’t notice, but this looser fit means potentially damaging sounds make their way into the ear. [Emphasis added]
Purchasers of Dual-Ended Combat Arms™ Earplugs, Version 2 (CAEv2)
If you purchased Dual-Ended Combat Arms™ Earplugs, Version 2 (CAEv2) and have questions or concerns about your potential legal rights, please contact Michael Yarnoff, Esq., [email protected], [email protected], (215) 792-6676, Ext. 804.
Jan 4, 2019 | Consumer Protection, Employment & Technology Archive
On January 3, 2019, the Consumer Financial Protection Bureau (“CFPB”) announced a settlement with USAA Federal Savings Bank, a federally chartered savings association headquartered in San Antonio, Texas.
As described in the consent order, the CFPB found that USAA violated the Electronic Fund Transfer Act and Regulation E by failing to properly honor consumers’ stop payment requests on preauthorized electronic fund transfers, and by failing to initiate and complete reasonable error resolution investigations. USAA also violated the Consumer Financial Protection Act of 2010 by reopening deposit accounts consumers had previously closed without seeking prior authorization or providing adequate notice.
Under the terms of the consent order USAA Federal Savings Bank must, among other provisions, provide approximately $12 million in restitution to certain consumers who were denied a reasonable error resolution investigation, in addition to paying a $3.5 million civil money penalty.
Source: CFPB
Dec 26, 2018 | Shareholder & Investor Protection
On December 26, 2018, the SEC announced that JPMorgan Chase Bank N.A. will pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (“ADR”).
According to the SEC, ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.
The SEC’s order found that JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs. Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.
This is the eighth action against a bank or broker, and fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. Information about ADRs is available in an SEC Investor Bulletin.
Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million. The SEC’s order acknowledges JPMorgan’s cooperation in the investigation and remedial acts.
Source: SEC.gov
