INVESTMENT ADVISORY FIRM CHARGED WITH ENGAGING TRANSACTIONS WITHOUT INFORMING CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged an investment advisory firm located outside Tacoma, Wash., with engaging in hundreds of principal transactions through its affiliated broker-dealer without informing clients or obtaining their consent. 

Strategic Capital Group LLC, which is additionally charged with distributing false and misleading advertisements to investors, agreed to pay nearly $600,000 to settle the SEC’s charges.  The firm’s CEO N. Gary Price was charged with causing some of the firm’s violations, and agreed to pay a $50,000 penalty to settle the charges against him.

In a principal transaction, a firm acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They also must obtain the client’s consent.

An SEC investigation found that Strategic Capital engaged in more than 1,100 principal transactions through its brokerage affiliate RP Capital LLC without making the required disclosures to clients or obtaining consent beforehand.  Strategic Capital also failed to seek best execution for the transactions it executed through RP Capital.  Price signed regulatory filings falsely stating that the firm did not engage in principal transactions.

The SEC investigation also found that Strategic Capital provided prospective investors with a pair of false and misleading advertisements.  One advertisement failed to disclose that the portrayed results were partially based on returns of an index rather than actual, historical returns achieved by Strategic Capital’s recommendations.   The second advertisement did not disclose that the portrayed results did not deduct fees and thus materially overstated Strategic Capital’s investment performance.

“Investment advisers must be fully forthcoming about how they execute client trades and portray past performance,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Strategic Capital clients were not provided all of the information they needed to evaluate the firm’s potential conflicts of interest and investment management skills.”

According to the SEC’s order instituting a settled administrative proceeding, Strategic Capital also failed to implement proper compliance procedures at the firm.

The SEC’s order finds that Strategic Capital, based in Gig Harbor, Wash., violated the Investment Advisers Act of 1940, specifically the antifraud, principal transactions, advertising, compliance, and reporting provisions.  The order finds that Price caused Strategic Capital’s violations of the compliance and reporting provisions.  Strategic Capital’s disgorgement amount of $368,459 will be distributed to current and former clients, and the firm also must pay prejudgment interest of $17,831 and a penalty of $200,000.  Without admitting or denying the findings in the order, Strategic Capital and Price agreed to cease and desist from committing or causing future violations of these provisions. 

The SEC’s investigation was conducted by Jeremy E. Pendrey and Erin E. Schneider, who work in the Asset Management Unit in the San Francisco Regional Office.  The SEC examination that led to the investigation was conducted by Tracey Bonner, James Marchi, and Alice Schulman of the San Francisco office’s investment adviser/investment company examination program.

MAN AND COMPANY CHARGED BY CFTC WITH ILLEGAL OFF-EXCHANGE PRECIOUS METALS TRADING

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Florida Resident Sean F. McCabe and His Company WorldPMX, Inc. to Pay Restitution and a Civil Monetary Penalty of More than $1.1 Million for Engaging in Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order filing and simultaneously settling charges against Sean F. McCabe, a resident of Sunny Isles, Florida, and his company, WorldPMX, Inc. (WorldPMX), for engaging in illegal, off-exchange precious metals transactions and for operating WorldPMX as an unregistered Futures Commission Merchant (FCM). The CFTC Order requires McCabe and WorldPMX jointly to pay restitution totaling $1,048,807 and a civil monetary penalty of $140,000. In addition, the Order imposes permanent registration and trading bans on McCabe and WorldPMX.

The Order finds that from at least March 2012 to February 2013, WorldPMX solicited and accepted at least $2.4 million from retail customers to engage in financed transactions in precious metals, such as gold, silver, and platinum. The Order further finds that McCabe solicited customers directly and supervised other telemarketers involved in solicitation. According to the Order, WorldPMX would contact AmeriFirst Management LLC (AmeriFirst) to execute the customers’ buy or sell orders, and then confirmed the execution of the transactions to the customers. In connection with those financed precious metals transactions, WorldPMX accepted money from or extended credit to its customers to margin, guarantee, or secure trades when it was not registered with the CFTC as an FCM, according to the Order.

As stated in the Order, financed transactions in commodities with retail customers, like those in which WorldPMX engaged, must be executed on or subject to the rules of an exchange approved by the CFTC. According to the Order, however, McCabe and WorldPMX offered financed off-exchange transactions in precious metals. The Order finds that neither WorldPMX nor AmeriFirst delivered any precious metals in connection with these transactions. The Order also finds that, in connection with these transactions, WorldPMX received commissions and fees totaling $1,048,807.

On July 30, 2013, the CFTC sued AmeriFirst in federal court in Florida charging it with engaging in illegal, off-exchange precious metals transactions, fraud, and other violations (see CFTC Press Release 6655-13). On July 24, 2014, the court entered a supplemental consent Order against AmeriFirst and the three individual defendants in that case requiring them to pay more than $25 million in restitution and $10 million in civil monetary penalties (see CFTC Press Release 6973-14).

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC thanks the Florida Department of Agriculture and Consumer Services for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this case are Karin N. Roth, Michael C. McLaughlin, David W. MacGregor, Douglas K. Yatter, Lenel Hickson, Jr., and Manal M. Sultan.

FORMER EXECS, SEC CHARGES SOFTWARE CO., IN ALLEGED ACCOUNTING FRAUD SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Software Company in Silicon Valley and Two Former Executives Behind Fraudulent Accounting Scheme

09/24/2014 11:45 AM EDT

The Securities and Exchange Commission today charged a Silicon Valley-based software company and two former executives behind an accounting fraud in which timesheets were falsified to hit quarterly financial targets.

An SEC investigation found that company vice presidents Patrick Farrell and Sajeev Menon were atop a scheme at Saba Software in which managers based in the U.S. directed consultants in India to either falsely record time that they had not yet worked, or purposely fail to record hours worked during certain pay periods to conceal budget overruns from management and finance divisions.  The improper time-reporting practices enabled Saba Software to achieve its quarterly revenue and margin targets by improperly accelerating and misstating virtually all of its professional services revenue during a four-year period as well as a substantial portion of its license revenue.

Saba Software agreed to pay $1.75 million to settle the SEC’s charges, and Farrell and Menon agreed to settle the case as well.

Under the “clawback” provision of the Sarbanes-Oxley Act, executives can be compelled to return to the company and its shareholders certain money they earned while their company was misleading investors.  In a separate order instituted today, the SEC required Saba Software’s CEO Babak “Bobby” Yazdani to reimburse the company $2.5 million in bonuses and stock profits that he received while the accounting fraud was occurring, even though he was not charged with misconduct.

“CEOs and CFOs can be deprived of bonuses and stock profits if there is misconduct on their watch that requires a restatement by their employer,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “We will not hesitate to pursue clawbacks in appropriate cases.”

According to the SEC’s order instituting a settled administrative proceeding, Saba Software offers professional services often sold simultaneously with software products.  The professional services historically have accounted for about one-third of approximately $120 million in yearly revenues, and the company maintains a group of consultants within its subsidiary in India to help deliver professional services to its customers.  The SEC’s order finds that Saba Software’s timekeeping practices of “pre-booking” and “under-booking” hours worked by these consultants precluded the time records from serving as reliable evidence under U.S. Generally Accepted Accounting Principles to recognize revenue in the manner that the company did.  Therefore, from Oct. 4, 2007 to Jan. 6, 2012, Saba Software cumulatively overstated its pre-tax earnings by approximately $70 million.

According to the SEC’s order, Farrell and Menon were responsible for ensuring that the professional services group within Saba Software met financial targets set by senior management.  Farrell was aware of situations where consultants planned to pre-book hours in order to achieve their quarterly revenue targets yet he failed to stop the practice.  In other instances when they had overrun their budgets, he directed consultants to “eat” the hours or back them out of the timesheet database.  Menon directed consultants reporting to him to book time to the timesheet database at quarter-end even though those hours would not be worked until the following quarter.  In other instances, he advised them to avoid inputting in the timekeeping system non-billable hours that they had worked.

The SEC’s order further finds that internal accounting controls at Saba Software were ineffective to counter-balance the revenue and margin targets set by senior management.  This problem was particularly acute in Saba Software’s India-based consulting group, which was referred to throughout the consulting organization as a “black box.”  This characterization reflected the fact that U.S. and European managers approving time records of India-based consultants for revenue recognition purposes had little visibility into who was performing what work and when.

“Saba Software used off-shore operations to cut costs, but also cut corners on its internal controls over financial reporting,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Weak internal controls create greater opportunity for accounting fraud, and investors are left holding the bag.”

Saba Software consented to the entry of an order finding that it violated the anti-fraud, books and records, and internal control provisions of the federal securities laws.  In addition to the $1.75 million financial penalty, Saba Software agreed to pay further penalties if it has not filed restatements of its earnings during those periods by later this year, and revocation of the registration for its securities if it doesn’t file those restatements by early next year.  Without admitting or denying the findings in the order, Saba Software also agreed to cease and desist from committing or causing future violations of these provisions of the securities laws.

Farrell and Menon each consented to the entry of an order finding that they violated the anti-fraud provisions and caused Saba Software’s violations.  The order also finds that they falsified books and records and circumvented the company’s internal controls.  Farrell agreed to pay disgorgement and prejudgment interest of $35,017 and a penalty of $50,000, and Menon agreed to pay disgorgement and prejudgment interest of $19,621 and a penalty of $50,000.  Without admitting or denying the findings, they each agreed to cease and desist from committing or causing future violations of these provisions the securities laws.

Yazdani consented to reimburse Saba Software for $2,570,596 in bonuses, incentive compensation, and stock sale profits that he received following the regulatory filings that the company is now required to restate.  He neither admitted nor denied the findings against the company in the order.

The SEC’s investigation, which is continuing, is being conducted by Mike Foley, Rebecca Lubens, and Erin Schneider of the San Francisco Regional Office.

CFTC CHARGES MAN AND COMPANY WITH FRAUD AND EMBEZZLEMENT RELATED TO COMMODITY POOL AND PONZI SCHEME

FROM:  COMMODITY FUTURES TRADING COMMISSION

CFTC Charges Ohio Resident John R. Bullar and his Company, Executive Management Advisors L.L.C., with Fraud and Embezzlement in Operating an $8.3 Million Commodity Pool and Ponzi Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a federal civil enforcement action in the U.S. District Court for the Southern District of Ohio against Defendants John R. Bullar, who resides in Cincinnati, Ohio, and Executive Management Advisors L.L.C., a company organized in Ohio and of which Bullar was the sole principal. The CFTC Complaint charges that the Defendants, while acting as Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs), fraudulently solicited over $8.3 million from at least 40 investors for pooling and trading in futures and options; provided participants with false account statements; embezzled and misappropriated participants’ funds; and acted as CPOs and CTAs while failing to register as such with the CFTC.

The CFTC Complaint alleges that the Defendants represented to participants that their funds would be pooled in a managed account to trade commodity futures and options contracts on designated contract markets. However, according to the Complaint, only a fraction of the participants’ funds was traded. Instead, as alleged, the Defendants operated a Ponzi scheme and misappropriated and embezzled approximately $6 million of participants’ funds. Bullar used these funds to pay his personal expenses, make cash withdrawals, issue checks to himself, and transfer money to his personal accounts or accounts that he controlled, according to the Complaint.

The CFTC Complaint further alleges that the Defendants misrepresented and omitted material facts to pool participants by intentionally or recklessly (1) failing to disclose that most of the participants’ funds would not be invested and traded, (2) failing to disclose that Defendants were misappropriating and embezzling participants’ funds, (3) providing participants with false account statements showing fictitious profits and account balances and concealing trading losses, and (4) failing to disclose that pool participant funds were being used to pay certain pool participants their fictitious trading profits and/or balances as reported on false account statements for such participants.

In its continuing litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions from further violations of the federal commodities laws, as charged.

The CFTC thanks and acknowledges the assistance of the United States Attorney’s Office for the Southern District of Ohio, the Internal Revenue Service (Cincinnati Field Office), the Ohio Department of Commerce (Division of Securities-Enforcement), and the Office of the Hamilton County Prosecuting Attorney.

CFTC Division of Enforcement staff members responsible for this action are Xavier Romeu-Matta, Christopher Giglio, Douglas K. Yatter, Steven Ringer, Lenel Hickson, Jr., and Manal M. Sultan.

SEC CHARGES HEALTH FOOD COMPANY, CEO WITH GIVING FALSE PRESS RELEASES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Purported Health Food Company and CEO with Issuing False Press Releases in Microcap Fraud

09/23/2014 01:30 PM EDT

The Securities and Exchange Commission today charged a Florida-based penny stock company and its CEO with defrauding investors by issuing false and misleading press releases proclaiming large sales and fantastic revenue projections while the purported health food company actually was a failing enterprise.

The SEC alleges that Heathrow Natural Food & Beverage Inc. touted sales of natural health food products that the company had not even manufactured as well as non-existent distribution agreements with major retail chains.  Meanwhile, its CEO Michael S. Pagnano was prompting the illegal, unregistered distribution of billions of shares of company stock to several people or entities, including himself.  Pagnano profited by more than $150,000 by selling 877 million of his shares into the market as the false press releases were stimulating public demand for Heathrow stock.  Pagano also is charged with insider trading because he sold his shares while in possession of material nonpublic information about the falsehood of the press releases.

“Heathrow misled investors by peppering the market with remarkable press releases portraying the sky as the limit for worldwide distribution of huge volumes of its products while about the only thing the company was manufacturing was its sales projections out of thin air,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “CEOs of microcap issuers will be held accountable when they spread misinformation in the marketplace.”

The SEC separately charged New Jersey-based transfer agent Registrar and Transfer Company (R&T) and its CEO Thomas L. Montrone with violating the registration provisions of the federal securities laws and failing to supervise firm employees who enabled Heathrow’s unregistered distribution of billions of purportedly unrestricted shares of its stock.  An SEC examination of the firm revealed that R&T repeatedly failed to detect and address blatant red flags in connection with more than 54 share issuance requests from Pagnano, including the fact that none of them were accompanied by legal opinions pertaining to the shares to be issued.  In every instance, the shareholder for whom the issuance was requested was not the shareholder covered by the attached opinion letter.  R&T issued more than a billion shares to Pagnano directly in spite of the firm’s own written policy against honoring requests by company officers to issue unrestricted shares to themselves.  R&T even made special accommodations so the firm could keep track of Heathrow’s unusually large and frequent issuance requests, which totaled 5.6 billion shares in 27 months.

R&T agreed to settle the charges and pay disgorgement of $24,265.86 plus prejudgment interest of $3,401.78 and a penalty of $100,000.  Without admitting or denying the findings in the SEC’s order instituting a settled administrative proceeding, R&T agreed to engage an independent consultant and comply with certain undertakings while Montrone agreed to pay a $25,000 penalty and be suspended for 12 months from serving in a supervisory capacity with a transfer agent.

“R&T’s employees were trained to do little more than check boxes on a form, and for a period of more than two years they basically rubber-stamped Pagnano’s repeated unlawful requests to issue stock,” said Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “Transfer agents serve a pivotal function in the issuance of securities and their employees must be prepared to catch frauds, not enable them.  As we continue our crackdown against those who play central or supporting roles in a microcap scheme, transfer agents must ensure they have appropriate systems in place to detect flagrant red flags and prevent law violations like the ones that occurred with Heathrow.”

The SEC’s complaint filed in U.S. District Court for the Southern District of New York against Heathrow and Pagnano charges them with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (b) as well as violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933.

The SEC’s investigation was conducted by Michael Paley and Katherine Bromberg in the New York Regional Office, and the litigation against Heathrow and Pagnano will be led by Jack Kaufman.  The SEC’s examination of R&T was conducted by Steven Vitulano, Kenneth Liebl, Paul Eberhard, and Hitan Patel in the New York office’s broker-dealer inspection program.

HP RUSSIA PLEADS GUILTY BRIBING RUSSIAN GOVERNMENT OFFICIALS

FROM:  U.S. JUSTICE DEPARTMENT 

FOR IMMEDIATE RELEASE

Thursday, September 11, 2014

Hewlett-Packard Russia Pleads Guilty to and Sentenced for Bribery of Russian Government Officials

ZAO Hewlett-Packard A.O. (HP Russia), an international subsidiary of the California technology company Hewlett-Packard Company (HP Co.), pleaded guilty to felony violations of the Foreign Corrupt Practices Act (FCPA) and was then sentenced for bribing Russian government officials to secure a large technology contract with the Office of the Prosecutor General of the Russian Federation.

Principal Deputy Assistant Attorney General Marshall L. Miller of the Justice Department’s Criminal Division, U.S. Attorney Melinda Haag of the Northern District of California, Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office and Chief Richard Weber of the Internal Revenue Service – Criminal Investigation (IRS-CI) made the announcement.

HP Russia pleaded guilty this morning before U.S. District Judge D. Lowell Jensen of the Northern District of California to conspiracy and substantive violations of the anti-bribery and accounting provisions of the FCPA. According to the plea agreement, HP Russia executives created a multimillion dollar secret slush fund, at least part of which was used to bribe Russian government officials who awarded the company a contract valued at more than € 35 million.

At the conclusion of the plea proceeding, the court sentenced HP Russia to pay a $58,772,250 fine.

“In a brazen violation of the FCPA, Hewlett Packard’s Russia subsidiary used millions of dollars in bribes from a secret slush fund to secure a lucrative government contract,” said Principal Deputy Assistant Attorney General Miller.  “Even more troubling was that the government contract up for sale was with Russia’s top prosecutor’s office. Tech companies, like all companies, must compete on a level playing field, not resort to secret books and sham transactions to hide millions of dollars in bribes.  The Criminal Division has been at the forefront of this fight because when corruption takes hold overseas, American companies and the rule of law are harmed.  Today’s conviction and sentencing are important steps in our ongoing efforts to hold accountable those who corrupt the international marketplace.”

“Today’s conviction and sentence of HP Russia demonstrates that the United States Attorney’s Office is dedicated to aggressively prosecuting all forms of corporate fraud that touch our district, wherever they may occur,” said U.S. Attorney Haag.  “HP’s cooperation during the investigation is what we expect of major corporate leaders facing the challenges of doing business around the world.”

“For more than a decade HP Russia business executives participated in an elaborate scheme that involved paying bribes to government officials in exchange for large contracts,” said FBI Assistant Director in Charge McCabe. “There is no place for bribery in any business model or corporate culture. Along with the Department of Justice, the IRS and international law enforcement partners, the FBI is committed to investigating corrupt backroom deals that threaten our global commerce.”



“HP Russia thought that they could play by a different set of rules than the rest of the international business community,” said IRS-CI Chief Weber. “Unfortunately, they are not alone. For other companies out there conducting business in this way, let the message be very clear—we will relentlessly follow the money trail. IRS-CI is a trusted leader in the pursuit of corporations and executives who circumvent the law. CI is committed to maintaining fair competition, free of corrupt. practices, through a potent synthesis of global teamwork and our dynamic financial investigative talents.”

According to the statement of facts filed with the plea agreement, HP Russia created excess profit margins to finance the slush fund through an elaborate buy-back deal scheme. HP subsidiaries first sold the computer hardware and other technology products called for under the contract to a Russian channel partner, then bought the same products back from an intermediary at a nearly €8 million mark-up and an additional €4.2 million in purported services, then sold the same products to the Office of the Prosecutor General of the Russian Federation at the increased price. The payments to the intermediary were then largely transferred through multiple layers of shell companies, some of which were directly associated with government officials. Proceeds from the slush fund were spent on travel services, luxury automobiles, expensive jewelry, clothing, furniture and various other items.

To keep track of and conceal these corrupt payments, the conspirators inside HP Russia kept two sets of books: secret spreadsheets that detailed the categories of bribe recipients, and sanitized versions that hid the bribes from others outside of HP Russia. They also entered into off-the-books side agreements to further mask the bribes. As one example, an HP Russia executive executed a letter agreement to pay €2.8 million in purported “commission” fees to a U.K.-registered shell company, which was linked to a director of the Russian government agency responsible for managing the Office of the Prosecutor General of the Russian Federation project. HP Russia never disclosed the existence of the agreement to internal or external auditors or management outside of HP Russia.

On April 9, 2014, the government also announced criminal resolutions with HP subsidiaries in Poland and Mexico which violated the FCPA in connection with contracts with Poland’s national police agency and Mexico’s state-owned petroleum company, respectively. Pursuant to a deferred prosecution agreement, the department filed a criminal information charging Hewlett-Packard Polska, Sp. Z o.o. with violating the accounting provisions of the FCPA. Hewlett-Packard Mexico, S. de R.L. de C.V. entered into a non-prosecution agreement with the government pursuant to which it has agreed to forfeit proceeds and has admitted and accepted responsibility for its misconduct. In total, the three HP entities will pay $76,760,224 in criminal penalties and forfeiture.

In a related FCPA matter, the U.S. Securities and Exchange Commission (SEC) filed a proposed final judgment in April 2014 to which HP Co. consented. Under the terms of the proposed final judgment, HP Co. has paid $31,472,250 in disgorgement, prejudgment interest and civil penalties, bringing the total amount of U.S. criminal and regulatory penalties against HP Co. and its subsidiaries to more than $108 million.  

Court filings acknowledge HP Co.’s extensive cooperation with the department, including conducting a robust internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence for the department.  Court filings also acknowledge the extensive anti-corruption remedial efforts undertaken by HP Co., including taking appropriate disciplinary action against culpable employees, and enhancing HP Co.’s internal accounting, reporting, and compliance functions.

The case is being investigated by the FBI’s Washington Field Office with assistance from the FBI’s New York Field Office and FBI Legal Attaché offices in Mexico City, Moscow, Berlin and Warsaw, and the IRS-CI’s Oakland Field Office. The case is being prosecuted by Trial Attorneys Ryan Rohlfsen and Jason Linder of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Adam A. Reeves of the Northern District of California. The Criminal Division’s Office of International Affairs also provided significant assistance in this matter.

The Justice Department expresses its deep appreciation for the significant assistance provided by the SEC’s Division of Enforcement, the Polish Anti-Corruption Bureau, the Polish Appellate Prosecutor’s Office, the Public Prosecutor’s Office in Dresden, Germany, and our law enforcement partners in Mexico, the United Kingdom, Lithuania, Latvia, Italy, Spain and Hungary.  

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