Hyperdynamics Resolves FCPA Investigation with SEC Settlement

On September 29, Hyperdynamics Corp. announced a settlement with the SEC, fully resolving the SEC’s FCPA investigation into the Houston-based oil and gas company’s operations in the Republic of Guinea. The SEC proceeded via an administrative cease and desist order. Hyperdynamics consented to the SEC’s order without admitting or denying the findings, and agreed to pay a $75,000 penalty. The SEC’s order describes books and records and internal control offenses based on the lack of supporting documentation related to $130,000 the company paid for public relations and lobbying services in the Republic of Guinea during 2007 and 2008.

Hyperdynamics first disclosed that the DOJ was investigating alleged FCPA violations by the company in the Republic of Guinea in 2013. In May of this year, the company announced that the DOJ’s investigation had concluded without enforcement action, and released the DOJ’s declination letter, which noted Hyperdynamics’s cooperation with the investigation. At that time, the company acknowledged that a parallel SEC investigation was ongoing. Previous BuckleySandler coverage of this investigation can be found here.


Hitachi Settles SEC FCPA Case for $19M

On September 28, the SEC filed a settled complaint in Washington, D.C. federal court against Tokyo-based Hitachi, Ltd. for alleged FCPA books and records and internal controls offenses. According to the SEC’s Complaint, the company failed to accurately report payments made to the African National Congress (ANC), South Africa’s ruling political party, in connection with a multi-billion dollar plan to build new power stations in the country. Hitachi purportedly sold a 25-percent stake in a South African subsidiary to a company that was a front to funnel funds to the ANC. The SEC alleges that Hitachi was (i) aware that it had partnered with a “funding vehicle” for the ANC; (ii) encouraged the front company to continue using its political influence to obtain additional government contracts; and (iii) agreed to pay “success fees” to the front company. Hitachi did not admit wrongdoing in the settlement and agreed to pay a $19 million penalty.

In its announcement, the SEC’s Director of Enforcement, Andrew Ceresney, cited Hitachi’s “lax internal control environment” as the factor that led to the conduct described in the complaint. Continuing the trend of international cooperation in FCPA investigations, the SEC also thanked the African Development Bank and the South African Financial Services Board for their assistance with the investigation.


New Jersey Resident Charged with Securities and Wire Fraud

On October 1, the U.S. Attorney for the Southern District of New York filed a complaint against New Jersey fund manager William J. Wells charging him with running a “Ponzi” scheme which raised over $1.5 million from investors. According to the complaint, Wells “engaged in a fraudulent scheme to obtain investments by falsely representing that he had achieved consistently positive trading returns in the U.S. equity markets, including through the successful use of options to hedge risk.” Wells allegedly misled investors by claiming that (i) his trading was generating positive returns when it was not; (ii) investors held investments in certain stocks when, in fact, neither Wells nor his firm did; and (iii) sub-accounts had been created for clients, but no such sub-accounts were ever funded. Wells was charged with one count of securities fraud and one count of wire fraud, each carrying a maximum prison sentence of 20 years and a maximum fine of $5 million, or two times the gross gain or loss from the offense.

In a parallel action, the SEC filed a complaint charging Wells with violations of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act.

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SEC Appoints New Head of Examination Program in Atlanta Regional Office

On September 29, the SEC named William Royer as the Atlanta Regional Office’s Associate Director of the examination program. Since June of this year, Royer has served as the examination program’s Acting Associate Director. In his role, Royer will supervise staff responsible for the examination of broker-dealers, investment advisers, investment companies, transfer agents, along with other SEC registrants. Prior to joining the SEC in 2013 as an Assistant Director within the Office of Compliance and Inspections and Examinations’ Office of the Chief Counsel, Royer worked as a securities attorney in private practice and served as General Counsel for two international investment management firms.


Legislation Seeking Better Transparency in Federal Agency Settlements Passes Unanimously in U.S. Senate

On September 21, Senate Bill 1109, the Truth in Settlements Act, passed in the U.S. Senate with amendments by unanimous consent and has now been referred to the U.S. House of Representative’s Committee on Oversight and Government Reform for consideration. Originally introduced in January 2014 and sponsored by Elizabeth Warren (D-MA), the Truth in Settlements Act would require federal agencies to post online, in a searchable format, a list of each covered settlement agreement, criminal or civil, with payments totaling $1 million or more. The list would entail, among other things, (i) the names of the settling parties and the amount each must pay; (ii) a description of the claims each party settled; (iii) whether a portion of the settlement amount is tax-deductible; and (iv) any actions the settling parties must take under the settlement agreement in lieu of payment. If enacted, the bill would require agencies to publicly explain via written statement why confidentiality is justified for certain instances. The bill, co-sponsored by Senators James Lankford (R-OK) and Tammy Baldwin (D-WI), aims to provide greater transparency and oversight regarding settlements reached by federal enforcement agencies.


SEC Penalizes Investment Adviser over Inadequate Cyber-Risk Program Prior to Data Breach

On September 22, the SEC ordered a Missouri-based investment adviser to pay a $75,000 penalty, settling allegations that the investment adviser failed to implement required written cybersecurity policies and procedures prior to a data breach affecting the firm’s clients. According to the SEC, in July 2013, the investment adviser’s third party-hosted web server was hacked by a then unknown source compromising the personally identifiable information of more than 100,000 individuals. Subsequent investigations determined that the breach originated in China, and, to date, the firm’s clients have suffered no financial injury. In addition to the $75,000 penalty, the firm was censured and agreed to cease and desist from committing or causing any future violations of the Safeguards Rule.

To coincide with the announcement, the SEC also issued an Investor Alert, “Identity Theft, Data Breaches, and Your Investment Accounts,” which provides actions retail investors can take to protect their investment accounts in the event of a data breach or identity theft.


Imaging Company Offers $1.6 Million to Settle FCPA Investigation

Analogic Corp., a manufacturer of airport security equipment, offered the SEC $1.6 million to settle the agency’s FCPA investigation of the company, according to a company press release. The company previously reported that the DOJ and SEC had “substantially” completed their investigations of potential bribery involving transactions by the company’s Danish subsidiary, BK Medical ApS. The transactions at issue involved distributors paying BK Medical more than was owed, and then BK Medical transferring the excess money to third parties identified by the distributors. At the time of its 2011 disclosure of the potentially problematic transactions, the company stated that it had not ascertained the ultimate beneficiaries or purpose of the transfers. According to the company it had not yet engaged in similar settlement discussions with the DOJ or Danish government.


Traders Who Allegedly Profited from Hacked News Releases Settle With SEC for $30 Million

On September 14, the SEC announced that it had reached a $30 million settlement with two defendants who allegedly profited from trading based on information hacked from newswire services. The settlement stems from an SEC complaint filed in August against 34 defendants for their alleged involvement in an international scheme that generated over $100 million in illegal profits over a five-year period. According to the SEC charges, defendants hacked into newswire services and transmitted stolen data to a network of international traders. The SEC claims that the parties to the settlement made $25 million in illicit profits by buying and selling contracts-for-differences (CFDs) based on hacked press release information they received from other defendants. In the proposed settlement offer, which requires court approval, the two defendants neither admit nor deny the SEC’s allegations, but agree to be enjoined from violating U.S. and SEC securities antifraud provisions, and to return $30 million in alleged illegal profits. The Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit stated that the discovery and prosecution of the scheme “should serve as a shot across the bow of any trader who thinks that CFDs traded outside the United States can be used to mask their unlawful conduct,” and demonstrates the SEC’s “ability to police this opaque market.” The SEC’s case against the remaining 32 defendants remains pending.


Former Chief Credit Officer Sentenced to Over Eight Years in Prison for Role in Securities Fraud Scheme

On September 1, Ebrahim Shabudin, the former Chief Credit Officer of a San Francisco-based bank, was sentenced to 97 months in prison for his involvement in a securities fraud scheme stemming from the bank’s 2009 financial collapse. In 2008, the Troubled Asset Relief Program (TARP) gave the bank roughly $298 million in federal funds. The FDIC took over the bank in 2009 and stated that it was “the ninth largest failure since 2007 of a bank insured by the FDIC’s Deposit Insurance Fund.” In 2013, the FDIC estimated that the bank would accrue losses exceeding $1.1 billion; however, with the United States’ economic recovery, the estimated loss dropped to approximately $677 million. Read more…

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DOJ and SEC Announce Parallel Action Against Former Investment Banking Analyst and Two Individuals for Alleged Involvement in Insider Trading Scheme

On August 25, the DOJ unsealed an indictment charging three defendants each with (i) one count of conspiracy to commit securities and tender offer fraud; (ii) 13 counts of securities fraud; (iii) 13 counts of tender offer fraud; and (iv) three counts of wire fraud. In a parallel action, the SEC filed a complaint in the Central District of California against the same three individuals, asserting that the three individuals violated certain provisions of the Securities Exchange Act by participating in a scheme that involved “coordinated, illegal trading in stock and stock options of two separate companies that participated in merger activity” in which the same investment bank played an advisory role. According to the SEC, having learned of impending acquisitions involving two of the investment bank’s clients and other companies, one of the investment bank’s former analysts allegedly provided information regarding the transaction to a friend before any public announcements were made. The friend then communicated the information to a third individual, and the two made a series of trades in the two companies’ securities. When the acquisitions were publicly announced, both companies’ stock prices increased, resulting in profits of more than $670,000 for the two individuals on the receiving end of the former analyst’s inside information. The SEC’s complaint seeks a final judgment ordering the three defendants “to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of [certain] provisions of the federal securities laws.”


FinCEN Issues NPRM Establishing BSA/AML Requirements for Investment Advisers

On August 25, FinCEN issued a Notice of Proposed Rulemaking (NPRM) seeking to adopt minimum Bank Secrecy Act (BSA) and anti-money laundering (AML) standards that would be applicable to investment advisers. Under the proposal, investment advisers would be required to implement AML programs and report suspicious activity, among other safeguards. The NPRM states that the proposal would cover investment advisers registered or required to register with the SEC. The proposal would also add such investment advisers to the definition of “financial institution.” This would result in investment advisers being required to file currency transaction reports and to comply with recordkeeping and other requirements applicable to financial institutions. With respect to supervisory authority, FinCEN stated that it would delegate its authority to the SEC for purposes of examining investment advisers for compliance with the proposed requirements.


Large Multinational Financial Services Company Settles FCPA Charges Relating to Internships

On August 18, the SEC announced a settlement with a large multinational financial services company over allegations that the company had violated the FCPA by giving internships to family members of government officials working at a Middle Eastern sovereign wealth fund in hopes of retaining or gaining more business from that fund. The order entered as part of the settlement quoted emails between company employees purportedly demonstrating that the company gave the internships in hopes of keeping and growing the business relationship with the fund. The SEC also alleged that the company gave the internships to the family members without requiring that they pass through the competitive screening process the company typically requires for interns. Finally, the SEC alleged that the company had inadequate controls to prevent the improper hiring of relatives of government officials. The company paid $14.8 million to settle the charges, with $8.3 million in disgorgement, $1.5 million in pre-judgment interest, and a $5 million penalty.

The company previously disclosed in January 2015 that it had received a Wells Notice concerning possible FCPA violations in connection with the internships. The settlement follows earlier press reports of a broad SEC investigation into bank hiring practices in Asia, and appears to be the first settlement resulting from the investigation.


Former SAP Executive Pleads Guilty to Paying “Necessary” Bribes

On August 12, the DOJ and SEC announced joint enforcement actions against software giant SAP International’s former head of Latin American sales, Vicente Garcia. Garcia pleaded guilty to conspiracy to violate the FCPA and will be sentenced on December 16, 2015 in the Northern District of California. The DOJ alleges that SAP paid bribes to Panamanian officials to secure software license sales in late 2009, using sham contracts and fake invoices. Garcia “admitted that he believed paying such bribes was necessary” to secure the contracts.

The SEC simultaneously issued an administrative cease and desist order against Garcia describing a scheme by which Garcia, in violation of SAP’s internal controls, gave discounts to a local business partner to generate excess earnings, which were used to create the slush fund used to pay at least $145,000 in bribes to secure approximately $3.7 million in sales. Garcia and others also arranged to receive kickbacks from the sales. Garcia agreed to pay disgorgement of the kickbacks he received plus prejudgment interest, totaling $92,395.


SEC Sues 32 Defendants Involved in Insider Trading Operation; DOJ Files Criminal Charges Against Leaders

On August 10, the SEC filed a complaint against 32 defendants in the District of New Jersey for their alleged involvement in an international scheme to profit from stolen, confidential information regarding corporate earnings announcements. According to the SEC, the defendants hacked at least two newswire services’ computer servers to retrieve unpublished corporate press releases, subsequently using it to make trades generating over $100 million in profits. The SEC further asserted that the two leaders of the scheme designed a “secret web-based location to transmit the stolen data to traders in Russia, the Ukraine, Malta, Cyprus, France, and three U.S. states, Georgia, New York, and Pennsylvania.” The SEC contends that, for five years, the two leaders of the scheme (i) disguised their identity by posing as newswire service employees, using proxy servers, and/or using backdoor access-modules; and (ii) recruited traders by making a video that displayed their ability to steal earnings information prior to public release. In return for information, the traders paid the hackers either a percentage of the profits obtained from trading the stolen information, or a flat fee. The SEC Director called the scheme “one of the most intricate and sophisticated trading rings [the agency has] ever seen.” The U.S. Attorneys’ offices for New Jersey and the Eastern District of New York also announced criminal charges against nine of the same defendants, including the two leaders of the scheme.


SEC Adopts Final CEO Pay Disclosure Rule

On August 5, the SEC adopted a rule requiring public companies to disclose the pay ratio of their CEO to the median compensation of their employees. The rule gives companies some flexibility in the method of determining the pay ratio while providing investors with information to assess the compensation of CEOs. Methods companies may employ to identify the median employee include using (i) a statistical sample of the total employee population; (ii) payroll or tax records that contain a consistently applied compensation measure; or (iii) yearly total compensation as calculated under the existing executive compensation rules. The total compensation for CEOs and total compensation for average employees must be calculated in the same manner. Under the new rule, companies must also disclose the methodology used for identifying the median employee’s annual compensation. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017. Smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, and registered investment companies are exempt from the pay ratio rule, which will be effective 60 days after publication in the Federal Register.