Mar 11, 2019 | Shareholder & Investor Protection
Investment Advisers Who Self-Reported Advisers Act Violations To Compensate Investors and Ensure Adequate Fee Disclosures
On March 11, 2019, the SEC announced that it settled charges against 79 investment advisers who will return more than $125 million to clients, with a substantial majority of the funds going to retail investors. The actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers. The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders issued address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.
The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected. According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.
SEC’s Division of Enforcement’s Share Class Selection Disclosure Initiative
In February 2018, the SEC’s Division of Enforcement announced the creation of the Share Class Selection Disclosure Initiative to address ongoing concerns that, despite the fiduciary duty imposed by the Advisers Act, an OCIE risk alert, Form ADV reminders, and numerous individual SEC enforcement actions, investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices. These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes. The initiative, which was managed by the Asset Management Unit, enabled investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents. To assist advisers evaluating their eligibility for the initiative, the Division of Enforcement issued answers to frequently asked questions, which provided detailed information about the eligibility of advisers to participate, calculation of disgorgement, and other aspects of the initiative.
The SEC staff is continuing to evaluate self-reports that were received from investment advisers prior to the initiative cut-off date.
Settlement Terms
The SEC’s orders found that the settling investment advisers violated Section 206(2) and, except with respect to state-registered only advisers, Section 207 of the Investment Advisers Act of 1940 by:
- Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or
- Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund.
Without admitting or denying the findings, each of the settling investment advisers consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered only advisers, Section 207. The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients. Each adviser has also undertaken to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary. Consistent with the terms of the initiative, the SEC has agreed not to impose penalties against the investment advisers.
Firms Charged by the SEC
Source: SEC.gov
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
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
Dec 19, 2018 | Shareholder & Investor Protection
On December19, 2018, the SEC announced charges against an additional 13 individuals and 10 companies for unlawfully selling securities of Woodbridge Group of Companies LLC to retail investors. Woodbridge collapsed into bankruptcy in December 2017, and the SEC previously charged the company, its owner and others with operating a $1.2 billion Ponzi scheme and charged five of the top Florida-based sales agents for securities and broker-dealer registration violations.
The 13 individual defendants charged were among Woodbridge’s top revenue producers, selling more than $350 million of its unregistered securities to more than 4,400 investors. According to the complaints, the defendants marketed Woodbridge’s securities as a “safe” and “secure” investment and reaped millions of dollars in commissions on their sales even though they were not registered as, or associated with, registered broker-dealers. The SEC also alleged that defendant Jordan Goodman, a self-described “media influencer,” touted Woodbridge without disclosing that he was paid to do so.
In its latest actions, the SEC is seeking court-ordered injunctions, return of allegedly ill-gotten gains with interest, and financial penalties against Robert S. “Lute” Davis, Jr., Donald Anthony Mackenzie, Jordan E. Goodman (“Goodman”), Aaron R. Andrew, Jeffrey L. Wendel, Alan H. New (“New”), David N. Knuth (“Knuth”), Randy T. Rondberg, Richard Fritts, Marcus Bradford Bray, Gregory W. Anderson, Claude Steven Mosley, Gregory A. Koch, and their companies Old Security Financial Group Inc., Paramount Financial Services Inc., d/b/a Live Abundant, Wendel Financial Network LLC, Synergy Investment Services LLC, Trager LLC, Fritts Financial LLC, Bradford Solutions LLC, Balanced Financial Inc., Security Financial LLC, and Koch Insurance Brokers LLC.
Goodman settled the SEC’s charges without admitting or denying the allegations and agreed to disgorgement of $2.29 million plus prejudgment interest of $315,850 and a $100,000 penalty, and to be subject to an injunction and industry and penny stock bars. Synergy Investment Services, New, and Knuth settled the SEC’s charges without admitting or denying the allegations with the court to determine disgorgement, interest, and penalties at a later date.
The SEC also announced that it reached settlements in its previously filed action against Florida-based sales agents Barry M. Kornfeld, Ferne Kornfeld, and Albert D. Klager (“Klager”). Without admitting or denying the allegations, the three agreed to a permanent injunction and industry and penny-stock bars. The Kornfelds agreed to disgorgement of $3.69 million plus $690,497 in prejudgment interest. Additionally, Barry Kornfeld agreed to a $500,000 penalty, and Ferne Kornfeld agreed to a $150,000 penalty. Klager agreed to $1.36 million in disgorgement, $278,908 in prejudgment interest, and a $100,000 penalty.
Source: SEC.gov
Dec 18, 2018 | Shareholder & Investor Protection
On December 17, 2018, the Securities and Exchange Commission announced that Bank of New York Mellon will pay more than $54 million to settle charges of improper handling of “pre-released” American Depositary Receipts (“ADRs”).
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 BNY Mellon 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, according to the SEC, is the seventh action against a bank or broker and third 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, BNY Mellon agreed to disgorge more than $29.3 million in alleged ill-gotten gains plus pay $4.2 million in prejudgment interest and a $20.5 million penalty for total monetary relief of more than $54 million. The SEC’s order acknowledges BNY Mellon’s cooperation in the investigation and remedial acts.
Source: SEC.gov
