Tag Archives: compliance

Supreme Court Holds 5-Year Statute of Limitations Applies to SEC Disgorgement

On June 5, 2017, by unanimous decision, the U.S. Supreme Court determined that disgorgement – a remedy that generated $3 billion in 2015 – is a “penalty” thereby subjecting it to the 5-year statute of limitations that applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” Kokesh v. SEC, No. 16-529, slip op. at 1 (June 5, 2017) (quoting 28 U.S.C. §2462). The Court’s decision relieved Kokesh of a $30 million disgorgement order entered in the lower court.

The SEC had argued that disgorgement is a different animal – it simply places the defendant in the same position as he or she would have been but for the offense. The Court strongly disagreed noting the deterrent qualities of disgorgement, which is a hallmark of a penalty, “[s]anctions imposed for the purpose of deterring infractions of public laws are inherently punitive.” Id. at 8. The Court observed that the victims (if there are any) of a securities law violation need not participate in the enforcement action and may not even support it. In addition, money that is disgorged to the Treasury often stays there; i.e., there is no absolute requirement that the money that is recovered be distributed to the purportedly aggrieved investors.

Going forward, the SEC is faced with having to speed up its investigations and charging decisions.  That can be a challenge, especially in complex cases where the Enforcement Division would prefer to thoroughly build out a case in advance.

Here is the decision:

https://www.supremecourt.gov/opinions/16pdf/16-529_i426.pdf

 

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EB-5 Program Operator Settles With SEC For Over $7.9 Million

The SEC has announced that an Idaho man who operated an EB-5 regional center has agreed to settle a case against him alleging that he took millions of dollars to pay for luxury cars and investments unrelated to the purpose of the particular EB-5 program at issue, i.e., to develop luxury real estate and invest in gold mining ventures in Idaho and Montana.

The EB-5 program is a special expedited path to a green card for foreign investors who provide a set minimum of investment capital that creates at least 10 U.S. jobs within 2 years of the investment. The program is designed to incentivize investment in rural areas (e.g., Idaho) or high unemployment areas. Whereas the minimum for such “targeted employment areas” is $500,000, the minimum for more affluent areas is $1 million.

The respondent, Serofim Muroff, and his assistant and bookkeeper are alleged to have diverted about $5.5 million of the $140.5 million in investment money provided by Chinese investors. In addition to disgorging the allegedly diverted proceeds, Muroff has agreed to a $2 million penalty plus interest, and to be barred from conducting further EB-5 offerings. Neither Muroff nor his assistant admitted or denied the allegations in the SEC’s complaint.

Here is the press release.

https://www.sec.gov/litigation/litreleases/2017/lr23818.htm

Senate Bill Would Increase SEC Penalties To $1 Million And Up

Under a Senate bill, the SEC would be able to administratively impose a maximum $1 million per violation penalty on individuals and a maximum $10 million per violation penalty on financial firms for the most serious (e.g., fraud, deceit) violations.  The current levels are substantially lower — at $181,071 for individuals and $905,353 for firms — though the SEC is empowered to go to federal court to get the equivalent of the ill-gotten gains in a given case.

Under the proposed measure, the SEC would not have to go to federal court to get large remedies, though the total remedy per violation would be capped – the maximum penalty for an individual could not exceed, for each violation, the greater of (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.  The maximum amount that could be obtained from entities could not exceed, for each violation, the greater of (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.

In addition, individuals and firms that were found civilly or criminally liable for securities law violations in the 5 years leading up to a new violation could face up to three times the new caps, e.g., penalties of $3 million/$30 million.

It is important to note that SEC administrative or “in-house” courts have faced substantial constitutional challenges recently and are often considered subject to agency bias.  At a minimum, it is clear that the SEC courts lack some of the procedural safeguards provided in federal court.  If the Senate bill becomes law, the SEC will have significantly increased leverage in negotiations with respondents not only because of the amounts involved but because the Enforcement staff would not need to go to federal court to get such amounts.

 

 

DOL Proposes 60-Day Delay of Fiduciary Rule

The DOL has proposed an initial 15-day public comment period on the issue of whether to delay the April 10 implementation date of the DOL fiduciary rule, which, if ever effective, would subject large amounts of IRA rollover advice, and other retirement advice, to a fiduciary standard. After the 15 days, the DOL has proposed another 45 days during which the DOL is to analyze the economic impact of the Rule on investors and the marketplace.

Specifically, in his February 3, 2017 memorandum, President Trump directed the the DOL “to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” Accordingly, it is likely that the Rule, as is or amended, will not become effective for some time. Meanwhile, many broker dealers, registered investment advisers, and the representatives they employ have already spent thousands of hours in training and millions of dollars preparing to comply with the Rule.

Stay tuned.

Whistleblower Rejects $8.25 Million SEC Award

On August 19, 2016, Eric Ben-Artzi, a former Deutsche Bank risk officer, stated he would not accept his portion of a $16.5 million whistleblower award from the SEC because the executives he contends were responsible for overvaluing certain portfolios at the bank were not being personally held accountable in the bank’s settlement with the SEC.  Ben-Artzi had provided information to the SEC, which led to a $55 million fine and settlement in 2015.

Ben-Artzi’s main criticism of the settlement and whistleblower award is that Deutsche Bank shareholders and rank-and-file employees bear the cost of paying such penalties.  He also accused the SEC of having too many connections to the bank through the “revolving door” between government and the industry.  Ben-Artzi noted that his ex-wife and attorneys may have claims on portions of the award.  He also stated that he would accept his portion if he was sure it came out of the pockets of the executives who he claims caused violations of the securities laws.

Here’s a Bloomberg article on the subject:

http://www.bloomberg.com/news/articles/2016-08-19/deutsche-bank-whistle-blower-spurns-8-million-reward-from-sec

SEC to Increase Focus on Advisor Fee Disclosures

The SEC’s investor advocate, Rick Fleming, has told Congress that one of the SEC’s focuses in the coming budgetary year (starting October 2016) will be the quality of advisor and broker dealer fee disclosures. The SEC is concerned that such disclosures (referencing things like advisory, trailer, administrative, “regulatory,” and custodial fees) are confusing to retail investors who don’t know industry parlance. Broker dealers are likely to be paying extra attention to the quality of their disclosures, not only because of this initiative but because the “best interests” standard under the DOL’s fiduciary rule will take effect in April 2017.  For further discussion, please see the link below.

http://www.investmentnews.com/article/20160701/FREE/160709997/sec-investor-advocate-fleming-targets-fees-charged-by-advisers

SEC: Ski Resort Operators Abused Immigrant Investor Program (EB-5)

The SEC recently announced it would pursue fraud charges and freeze the assets of the Jay Peak, Inc. Vermont ski resort. The SEC alleges that Ariel Quiros, of Miami, and William Stenger, of Vermont, conducted an illegal Ponzi-like scheme in connection with the funds raised for the resort. The total amount of money in question with these activities is $350 million, a large portion of which was raised through the EB-5 Immigrant Investor Program, a program designed to incentivize foreign investment by promising a fast track to a green card.

According to the SEC, Quiros and Stenger diverted money from the ski resort project to other projects in an attempt to finance them. In addition, an alleged $50 million was spent on Quiros’s personal expenses, such as his personal income taxes and a luxury condominium. There appears to be little money left to fund the ski resort renovations.

Further, the actions of Quiros and Stenger could put many investors’ funds and immigration petitions in jeopardy. In order to get their green card the investors need to fund at least 10 new jobs, which may not happen here.

Given these charges, it is unclear whether investors who were considering committing capital to U.S. projects under EB-5 will still do so. It is also unclear as to whether this is a continuing problem or isolated incident.

Here’s the link to the SEC news release.  https://www.sec.gov/news/pressrelease/2016-69.html