Feb 24, 2020 | Shareholder & Investor Protection
Wells Fargo Has Agreed to Pay $500 million to Settle Charges; Money Will Be Returned to Investors. $500 Million Is Part of a Combined $3 Billion Settlement With the SEC and the Department of Justice.
Kehoe Law Firm, P.C. is making investors aware that on February 21, 2020, the SEC announced that Wells Fargo & Co. has been charged for misleading investors about the success of its core business strategy at a time when it was opening fake accounts for unknowing customers and selling unnecessary products that went unused. The SEC announced that Wells Fargo has agreed to pay $500 million to settle the charges, which will be returned to harmed investors. The $500 million payment is part of a combined $3 billion settlement with the SEC and the Department of Justice.
According to the SEC’s order, between 2012 and 2016, Wells Fargo publicly touted to investors the success of its Community Bank’s “cross-sell” strategy – selling additional financial products to its existing customers – which it characterized as a key component of its financial success. The order finds that Wells Fargo sought to induce investors’ continued reliance on the cross-sell metric even though it was inflated by accounts and services that were unused, unneeded, or unauthorized. According to the order, from 2002 to 2016, Wells Fargo opened millions of accounts of financial products that were unauthorized or fraudulent. Wells Fargo’s Community Bank also pressured customers to buy products they did not need and would not use. The order finds that these accounts were opened through sales practices inconsistent with Wells Fargo’s investor disclosures regarding its purported needs-based selling model.
The SEC’s order finds that Wells Fargo violated the antifraud provisions of the Securities Exchange Act of 1934. Wells Fargo has agreed to cease and desist from committing or causing any future violations of these provisions and to pay a civil penalty of $500 million. The SEC will distribute this money to harmed investors.
According to the Summary of the SEC’s “Order Instituting Cease-And Desist Proceedings Pursuant To Section 21c Of The Securities Exchange Act Of 1934, Making Findings, And Imposing A Cease-And-Desist Order”:
1. These proceedings arise out of a fraud committed by Wells Fargo from 2012 through 2016, when the Company misled investors regarding the success of the core business strategy of the Community Bank operating segment, its largest business unit. Wells Fargo publicly stated on numerous occasions that its sales strategy was “needs-based.” In other words, Wells Fargo claimed that its strategy was to sell customers the accounts that they needed. Well Fargo published a Community Bank “cross-sell metric” in its Annual Reports, and quarterly and annual filings with the Commission that purported to be the ratio of the number of accounts and products per retail bank household. During investor presentations and analyst conferences, Wells Fargo characterized its cross-selling strategy to investors as a key component of its financial success and routinely discussed its efforts to achieve cross-sell growth. Wells Fargo referred to the Community Bank’s cross-sell metric as proof of its success at executing on this core business strategy.
2. In contrast to the Company’s public statements and disclosures about needs-based selling, the Community Bank implemented a volume-based sales model in which employees were directed, pressured, or caused to sell large volumes of products to existing customers, often with little regard to actual customer need or expected use. The Community Bank’s onerous sales goals and accompanying management pressure led thousands of its employees to engage in: (1) unlawful conduct to attain sales through fraud, identity theft, and the falsification of bank records, and (2) unethical practices to sell products of no or low value to the customer, with the belief of the employee that the customer did not actually need the account and was not going to use the account. Collectively, many of these practices were referred to within Wells Fargo as “gaming.”
3. From 2002 to 2016, Wells Fargo opened millions of accounts or financial products that were unauthorized or fraudulent. During that same time period, Wells Fargo also opened significant numbers of unneeded, unwanted, or otherwise low-value products by employees that were not consistent with Wells Fargo’s purported needs-based selling model. Accounts and financial products opened without customer consent or pursuant to gaming practices were included by the Company in the Community Bank cross-sell metric until such accounts were eventually closed for lack of use.
4. Beginning as early as 2002, when a group of employees was fired from a branch in Fort Collins, Colorado, for sales gaming, the Community Bank senior leadership became aware that employees were engaged in unlawful and unethical sales practices, that gaming conduct was increasing over time, and that these practices were the result of onerous sales goals and management pressure to meet those sales goals.
5. From 2012 to 2016, Wells Fargo failed to disclose to investors that the Community Bank’s sales model had caused widespread unlawful and unethical sales practices misconduct that was at odds with its investor disclosures regarding needs-based selling and that the publicly reported cross-sell metric included significant numbers of unused or unauthorized accounts. Certain Community Bank senior executives who reviewed or approved the disclosures knew, or were reckless in not knowing, that these disclosures were misleading or incomplete.
6. Moreover in a January 12, 2015, response to a SEC Comment Letter that asked how the cross-sell metric was calculated and in its 2014 and 2015 Annual Reports, Wells Fargo characterized the cross-sell metric as a ratio of “products used by customers in retail banking households.” Prior to and after that time, the metric was described as “products per household,” “products per retail bank household,” or “the average number of products sold to existing customers.” Community Bank executives knew that the metric included many products that were not used by customers. Wells Fargo’s inclusion of the word “used” to describe the accounts was therefore misleading.
7. Notwithstanding the substantial effect the unused and unauthorized products had on inflating the cross-sell metric, Wells Fargo continued to tout the cross-sell metric as one of the Company’s competitive advantages in its public statements to investors. By failing to disclose the extent to which the cross-sell metric was inflated by low-quality accounts, Wells Fargo sought not only to induce investors’ continued reliance on the metric but also to avoid confronting the risk of reputational damage that might arise—and eventually did arise—from public disclosure of the severity and extent of sales quality problems.
Source: SEC.gov
Feb 19, 2020 | Shareholder & Investor Protection
Kehoe Law Firm, P.C. is making investors aware that on February 19, 2020 the SEC announced charges against against alcohol producer Diageo plc (“Diageo”) for failing to make required disclosures of known trends relating to the shipments of unneeded products by its North American subsidiary to distributors. Diageo has agreed to pay $5 million to settle the action.
According to the SEC’s order, employees at Diageo North America (“DNA”), Diageo’s largest and most profitable subsidiary, pressured distributors to buy products in excess of demand in order to meet internal sales targets in the face of declining market conditions. The resulting increase in shipments enabled Diageo to meet performance targets and to report higher growth in key performance indicators that were closely followed by investors and analysts.
The SEC’s order found that Diageo failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the overshipping had on sales and profits, and the negative impact that the unnecessary increase in inventory would have on future growth. The order further found that investors were instead left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for Diageo’s products.
The SEC’s order found that Diageo violated the antifraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933, as well as certain reporting provisions of the federal securities laws. Without admitting or denying the findings in the SEC’s order, Diageo agreed to cease and desist from further violations and to pay a $5 million penalty.
According to the Summary of the SEC’s order:
1. In its fiscal years 2014 and 2015, Diageo failed to make required disclosures of known trends and uncertainties, thereby rendering its required periodic filings materially misleading to investors with respect to its financial results. During those periods, employees at Diageo’s largest and most profitable subsidiary—Diageo North America, Inc. (“DNA”)— pressured distributors to buy products in excess of demand to meet performance targets in a flagging market. As a result, distributors in North America held substantial unneeded inventory, which was a known trend or uncertainty: the continued selling over demand was unsustainable because it was likely that distributors would purchase less product in future periods. Diageo’s periodic filings did not disclose these known trends and uncertainties to investors.
2. The DNA employees’ “overshipping” of certain products to counteract the impact of declining market conditions and to meet performance targets allowed Diageo to report higher growth in certain of its key performance indicators. These indicators included organic net sales growth and organic operating profit growth, financial metrics closely followed by investors and analysts. DNA’s overshipping was also a factor in causing Diageo or DNA to meet or surpass analysts’ expectations for these two metrics.
3. By early fiscal 2015, certain distributors’ inventory positions became unsustainable and they began pushing back on orders. In response, DNA designed and implemented, and Diageo approved, a plan to reduce inventory levels. Under newly agreed-to contractual terms with certain distributors, DNA planned to correct the elevated inventories over a period of years, principally through a reduction in shipments to distributors, a process known as “destocking.”
4. Diageo did not disclose the known trends and uncertainties created by DNA’s overshipping and elevated distributor inventory levels because it did not have sufficient procedures in place to consider whether DNA’s overshipping or distributor inventory builds were trends or uncertainties that needed to be disclosed. As a result, Diageo failed to disclose significant known trends and uncertainties in its 2014 and 2015 Forms 20-F. In particular, Diageo did not disclose DNA’s overshipments versus demand and the resulting distributor inventory levels; the positive impact those trends had on organic net sales and organic profit growth, and the negative impact they were reasonably likely to have on future sales; and the fact that they caused Diageo’s and DNA’s reported financial information to not be indicative of future operating results or financial condition. These omissions also rendered misleading certain statements the company made concerning its and DNA’s financial performance.
Source: SEC.gov
Feb 18, 2020 | Shareholder & Investor Protection
Kehoe Law Firm, P.C. is making investors aware that on February 18, 2020, the Securities and Exchange Commission announced an emergency enforcement action and a temporary restraining order and asset freeze against Florida-based private real estate firm EquiAlt LLC, its CEO Brian Davison (“Davison”), and its Managing Director Barry Rybicki (“Rybicki”), in connection with an allegedly fraudulent unregistered securities offering that raised more than $170 million from at least 1,100 investors, a number of whom invested their retirement funds.
According to the SEC’s complaint, unsealed on Feb. 14, 2020 in United States District Court for the Middle District of Florida, EquiAlt, Davison, Rybicki, and the entities they control, fraudulently raised millions of dollars by making material misrepresentations to investors about EquiAlt’s investment strategy, the financial condition of the investments, and the uses of investor proceeds. The defendants allegedly told investors they would pool investor funds and use approximately 90% of the money to purchase undervalued real estate, rent or flip the properties, and pay investors 8-10% annual interest generated from the real estate investments. In reality, the complaint alleges, a large portion of investor money went to support Davison’s and Rybicki’s lavish personal spending, and less than 50% of the funds raised were used to invest in properties. Additionally, money from one investment fund controlled by EquiAlt, allegedly, was used to make Ponzi-like payments to investors in another fund.
On Feb. 14, 2020, a federal judge granted the SEC’s request for emergency relief, including a temporary restraining order, an asset freeze, an order against the destruction of documents, and an accounting against EquiAlt, Davison, Rybicki and a number of companies charged by the SEC as relief defendants. The court also granted the SEC’s request to appoint a receiver over the corporate defendants and the relief defendants. The SEC’s complaint charges EquiAlt, Davison, and Rybicki with violations of the antifraud and securities registration provisions and aiding and abetting violations of the broker-dealer registration provisions of the federal securities laws. The SEC seeks disgorgement of allegedly ill-gotten gains, and financial penalties against the defendants.
Source: Sec.gov
Apr 16, 2019 | Shareholder & Investor Protection
On April 11, 2019, the SEC announced that it charged two former directors of investments at Woodbridge Group of Companies LLC for their roles in its massive Ponzi scheme. According to the SEC, the defendants, California-based Ivan Acevedo (“Acevedo”) and Dane R. Roseman (“Roseman”), were separately arrested and charged by criminal authorities, along with Woodbridge owner Robert H. Shapiro.
The SEC previously charged Woodbridge and Shapiro, and Woodbridge’s highest-earning unregistered brokers. In January, a federal court in Florida ordered Woodbridge, related companies, and Shapiro together to pay $1 billion for operating this Ponzi scheme.
According to the SEC’s complaint, although Acevedo and Roseman were not registered in any capacity with the SEC, they were responsible for fraudulently raising at least $1.2 billion from more than 8,400 retail investors, many of them seniors, and together received more than $3 million in transaction-based and other compensation.
According to the SEC, the complaint, filed in United States District Court for the Southern District of Florida, alleged that Acevedo oversaw Woodbridge’s fundraising for Woodbridge’s securities from 2012 until his departure in 2015, when he was succeeded by Roseman. According to the complaint, the defendants were responsible for hiring and training Woodbridge’s sales force, approved fraudulent marketing materials and sales scripts, and helped create the false appearance that Woodbridge was a legitimate operation when in reality it was a Ponzi scheme that used money from new investors to pay existing investors.
The SEC’s complaint charged Acevedo and Roseman with violating the securities registration, broker-dealer registration, and anti-fraud provisions of the federal securities laws, and seeks disgorgement of allegedly ill-gotten gains, with interest, and financial penalties.
The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert to help seniors identify signs of investment fraud and, in conjunction with the Division of Enforcement’s Retail Strategy Task Force, another Investor Alert about Ponzi schemes targeting seniors. The SEC strongly encourages investors to use the agency’s Investor.gov website to check the backgrounds of people selling them investments to quickly identify whether they are registered professionals.
Source: SEC.gov
Apr 4, 2019 | Shareholder & Investor Protection
On March 22, 2019, the Securities and Exchange Commission announced that Merrill Lynch, Pierce, Fenner & Smith Incorporated will pay over $8 million to settle charges of improper handling of “pre-released” American Depositary Receipts (“ADRs”).
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. According to the SEC, 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 Merrill Lynch improperly borrowed pre-released ADRs from other brokers when Merrill Lynch should have known that those brokers – middlemen who obtained pre-released ADRs from depositaries – did not own the foreign shares needed to support those 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. The order against Merrill Lynch found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen.
The SEC advised that this is the ninth enforcement action against a bank or broker resulting from its ongoing investigation into abusive ADR pre-release practices, which, to date, has resulted in monetary settlements exceeding $370 million. Information about ADRs is available in an SEC Investor Bulletin.
Without admitting or denying the SEC’s findings, Merrill Lynch agreed to pay more than $4.4 million in disgorgement of ill-gotten gains plus over $724,000 in prejudgment interest and a $2.89 million penalty for total monetary relief of over $8 million.
Source: SEC.gov
Kehoe Law Firm, P.C.
Mar 12, 2019 | Shareholder & Investor Protection
On March 12, 2019, the Securities and Exchange Commission announced charges against Lumber Liquidators Holdings Inc. for making fraudulent misstatements to investors. The charges stem from Lumber Liquidators’ false public statements in response to media allegations that the company was selling laminate flooring that contained levels of formaldehyde exceeding regulatory standards. Lumber Liquidators agreed to pay more than $6 million to settle the SEC action.
The SEC’s order found that in early 2015, Lumber Liquidators, a discount retailer of hardwood flooring, made public statements in response to a “60 Minutes” news program episode that showed undercover video of Lumber Liquidators’ suppliers stating that they provided the company with products that did not comply with regulatory requirements. In its response, Lumber Liquidators, according to the SEC, fraudulently informed investors that third-party test results of its flooring products proved compliance with formaldehyde emissions standards and that it had discontinued sourcing materials from suppliers that were unable to meet these standards. In reality, Lumber Liquidators knew that its largest Chinese supplier had failed third-party formaldehyde emissions testing and was unable to produce documentation showing regulatory compliance. The SEC’s order further found that despite having evidence confirming that the individuals in the “60 Minutes” undercover video were factory employees of its suppliers, Lumber Liquidators falsely stated that its suppliers were not depicted in the video.
Lumber Liquidators consented to the SEC’s order finding that it violated the antifraud provisions in Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 13(a) of the Exchange Act and related rules, which require periodic filings with the Commission to contain all material information. In addition to paying more than $6 million in disgorgement and prejudgment interest, Lumber Liquidators agreed to cease and desist from future violations of the charged provisions and cooperate fully with any further investigation, litigation or other proceeding by the Commission staff relating to this matter.
In a parallel criminal action, Lumber Liquidators entered into a deferred prosecution agreement with the U.S. Justice Department’s Fraud Section and the U.S. Attorney’s Office for the Eastern District of Virginia by which Lumber Liquidators agreed to pay $33 million in criminal fines and forfeiture. The Department of Justice agreed to credit the amount paid to the SEC in disgorgement as part of its agreement. Thus, the combined total amount of criminal and regulatory penalties paid by Lumber Liquidators will be $33 million.
Source: SEC.gov
