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.