CAPITAL ONE FINANCIAL CORP., AND TWO EXECUTIVES CHARGED BY SEC WITH UNDERSTATING AUTO LOAN LOSSES

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., April 24, 2013 — The Securities and Exchange Commission today charged Capital One Financial Corporation and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis.

An SEC investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18 percent in the second quarter and 9 percent in the third quarter.

Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives – former Chief Risk Officer Peter A. Schnall and former Divisional Credit Officer David A. LaGassa – also agreed to settle the charges against them.

"Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress," said George Canellos, Co-Director of the Division of Enforcement. "Capital One failed in this responsibility by underreporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis."

According to the SEC’s order instituting settled administrative proceedings, beginning in October 2006 and continuing through the third quarter of 2007, Capital One Auto Finance (COAF) experienced significantly higher charge-offs and delinquencies for its auto loans than it had originally forecasted. The elevated losses occurred within every type of loan in each of COAF’s lines of business. Its internal loss forecasting tool assessed that its escalating loss variances were attributable to an increase in a forecasting factor it called the "exogenous" – which measured the impact on credit losses from conditions external to the business such as macroeconomic conditions. A change in this exogenous factor generally had a significant impact on COAF’s loan loss expense, and it was closely monitored by the company through its loss forecasting tool. Capital One determined that incorporating the full exogenous levels into its loss forecast would have resulted in a second quarter allowance build of $72 million by year-end. Since no such expense was incorporated for the second quarter, it would have resulted in a third quarter allowance build of $85 million by year-end.

However, according to the SEC’s order, instead of incorporating the results of its loss forecasting tool, Capital One failed to include any of COAF’s exogenous-driven losses in its second quarter provision for loan losses and included only one-third of such losses in the third quarter. The exogenous losses were an integral component of Capital One’s methodology for calculating its provision for loan losses. As a result, Capital One’s second and third quarter loan loss expense for COAF did not appropriately estimate probable incurred losses in accordance with accounting requirements.

The SEC’s order also finds that Schnall and LaGassa caused Capital One’s understatements of its loan loss expense by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. Schnall, who oversaw Capital One’s credit management function, took inadequate steps to communicate COAF’s exogenous treatment to the senior management committee in charge of ensuring that the company’s allowance was compliant with accounting requirements. Despite warnings, he also failed to ensure that the exogenous treatment was properly documented. LaGassa, who managed the COAF loss forecasting process, failed to ensure that the proper exogenous levels were incorporated into the COAF loss forecast. He also failed to ensure that the exogenous treatment was documented consistent with policies and procedures.

"Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses," said Gerald W. Hodgkins, Associate Director of the Division of Enforcement. "The SEC will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations."

Capital One’s material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. Schnall and LaGassa caused Capital One’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One’s books and records violations.

Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.

KENNETH A. DACHMAN SENTENCED TO 10 YEARS IN PRISON AND ORDERED TO PAY OVER $4 MILLION IN RESTITUTION

FROM: SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission (SEC) announced that on January 17, 2013, in a criminal action brought by the U.S. Attorney's Office for the Northern District of Illinois, the Honorable James B. Zagel in the Northern District of Illinois sentenced Kenneth A. Dachman (Dachman) to 120 months in prison on 11 counts of wire fraud and ordered Dachman to pay more than $4 million in restitution to his victims. Judge Zagel also ordered Dachman to be placed on three years of supervised released following his prison sentence. [USA v. Kenneth A. Dachman, Case No. 1:11-CR-00504, USDC, N.D. Ill.].

Dachman was criminally charged for raising more than $4 million from investors for his now-defunct sleep disorder businesses, Central Sleep Diagnostics, LLC and Advanced Sleep Devices, LLC, which were located in the northern suburbs of Chicago. Between June 2008 and September 2010, Dachman fraudulently obtained funds from investors by misrepresenting the use of investor funds, the expected investment returns and risks involved in the investments, his business and academic background and the financial condition of his companies. The government established that Dachman misappropriated more than $2 million of commingled investor funds which he used for the benefit of himself and his family.

In February 2012, the SEC filed a civil injunctive action against Dachman based on the same events. The SEC's action has been stayed pending the outcome of the criminal case.

THREE INDIVIDUALS AND ONE COMPANY SETTLE WITH SEC OVER ALLEGED STOCK MARKET MANIPULATION

FROM: SECURITIES AND EXCHANGE COMMISSION

Commission Settles with Four Defendants in Sedona Corporation Market Manipulation Fraud

The Securities and Exchange Commission announced that on December 19, 2012, the U.S. District Court for the Southern District of New York entered settled final judgments against defendants Andreas Badian, Jeffrey "Danny" Graham, Pond Securities Corporation (Pond), and Ezra Birnbaum in a Commission injunctive action arising from fraudulent manipulative trading in the securities of Sedona Corporation.

Without admitting or denying the allegations in the Commission's complaint, the defendants consented to the following relief: Badian consented to the entry of a judgment enjoining him from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rule 10b-5, and ordering him to pay disgorgement of $375,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, and a civil penalty of $75,000; Graham consented to the entry of a judgment ordering him to pay a civil penalty of $25,000; Pond consented to the entry of a judgment enjoining it from future violations of Section 17(a) of the Securities Act, Sections 10(b), 15(b), and 17(a) of the Exchange Act, Exchange Act Rules 10b-5, 15b7-1, and 17a-3, NASD Conduct Rule 3010, and a Commission Order issued pursuant to Section 21(a)(1) of the Exchange Act, and ordering it to pay disgorgement of $8,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $14,822.38, and a civil penalty of $177,177.62; and Birnbaum consented to the entry of a judgment enjoining him from future violations of NASD Conduct Rule 3010.

The Commission's complaint alleged that, from February to April 2001, Badian, Graham, Pond, and others participated in a scheme to manipulate Sedona's stock price. The complaint also alleged that Graham and others aided and abetted violations of the broker-dealer record-keeping requirements through the creation of trade tickets which falsely reported short sales of Sedona stock as "long" sales, and that Pond, Birnbaum, and defendant Shaye Hirsch violated NASD Conduct Rule 3010 by failing to supervise brokers at Pond.

On December 20, 2012, pursuant to its approval of the parties' stipulation of voluntary dismissal, the court entered an order dismissing all claims by the Commission against Hirsch. Defendants Jacob Spinner and Mottes Drillman had settled previously with the Commission. Accordingly, the civil action has been resolved in its entirety.

SEC IMPOSES A PENNY STOCK BAR AND OFFICER AND DIRECTOR BAR AGAINST FORMER CEO

FROM:  SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced that on November 14, 2012, the Honorable Colleen McMahon, United States District Court Judge for the Southern District of New York, granted the Commission's motion for summary judgment against Defendant Christopher Metcalf, and issued a final judgment imposing a $50,000 penalty against Metcalf and barring him from participating in an offering of penny stock and from acting as an officer or director of a public company for a period of five years. Metcalf had previously consented to the entry of partial judgment against him, permanently enjoining him from future violations of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The Commission's complaint, filed on January 24, 2011 in federal court in Manhattan, alleges that Metcalf, former President and CEO of Pantera Petroleum, Inc. ("Pantera"), and stock promoter Bozidar "Bob" Vukovich engaged in a fraudulent broker-bribery scheme designed to manipulate the market for Pantera common stock.

After considering the undisputed facts, the Court found that Metcalf "knowingly and enthusiastically engaged in a broker bribery/stock manipulation scheme involving Pantera's stock while serving as Pantera's President and CEO." The Court found a clear record of Metcalf's violations of the anti-fraud provisions of the federal securities laws and imposed a $50,000 civil penalty and a penny stock bar and officer and director bar against him.

The SEC acknowledges the assistance of the United States Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in this matter.

COMPANY AND EXECUTIVES CHARGED BY SEC WITH DEFRAUDING INVESTORS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Sept. 6, 2012 – The Securities and Exchange Commission today charged a solar panel manufacturer headquartered in South San Francisco and three of its former executives with defrauding investors by concealing the transfer of nearly half of the ownership stake in its Chinese subsidiary to three individuals in China who manage the subsidiary.

The SEC alleges that Worldwide Energy and Manufacturing USA Inc. (WEMU) raised nearly $9 million from U.S. investors in early 2010 in order to expand its solar subsidiary based in Rugao City, China. The Chinese subsidiary represented the bulk of WEMU’s operations and generated 77 percent of the company’s revenue the previous year. In a power point presentation at road shows and in other communications with investors, the company’s founder and chairman of the board Jimmy Wang and the company’s president Jeffrey Watson touted the solar subsidiary’s success as the primary growth area for the company and represented that the company fully owned its Chinese subsidiary. They neglected to tell investors that WEMU actually was set to transfer 49 percent of the equity in the Chinese subsidiary to its three managers. This critical ownership deal was not disclosed in the company’s filings or offering documents. Later, Wang and his wife Mindy Wang, who served as the company’s vice president, secretary and treasurer, went so far as to sign additional agreements to effectuate the transfer that were concealed from WEMU’s board and auditors.

WEMU, the Wangs, and Watson agreed to settle the SEC’s charges.

"WEMU and its executives deliberately withheld the fact that its investors would not have a full ownership stake in its largest and most profitable subsidiary," said Marc J. Fagel, Director of the SEC’s San Francisco Regional Office. "The decreased ownership interest in the subsidiary would be a key piece of information for anyone investing in a company with significant offshore operations."

According to the SEC’s complaint filed in federal court in San Francisco, because the company’s future success depended on the technical expertise and sales connections of the three Chinese solar managers, WEMU entered into a stock option agreement with them in January 2008 that included consideration for a future change in organizational structure. The Chinese subsidiary grew dramatically over the next year and quickly became WEMU’s most profitable subsidiary. In February 2009, Jimmy Wang signed two key agreements on behalf of WEMU to share 49 percent of the Chinese subsidiary’s net profits with the solar managers and to transfer 49 percent of the subsidiary’s equity to them in February 2010. Failure to disclose these agreements resulted in WEMU filing false and misleading quarterly reports for the first three quarters of 2009 and first quarter of 2010.

According to the SEC’s complaint, WEMU management began planning a capital raise in the fall of 2009 so it could expand its solar operations by building a factory in China to manufacture solar panels. When Jimmy Wang and Watson went out to raise money from investors in early 2010, there was no mention of the agreement to transfer an ownership stake. Instead, in order to avoid informing investors about the profit sharing arrangement and contractual obligation to transfer equity to the Chinese subsidiary’s managers, Jimmy and Mindy Wang traveled to China in March 2010 to secretly sign a set of side agreements that allowed the solar managers to begin the registration process with the Chinese government to effectuate the transfer. Both Jimmy and Mindy Wang concealed these side agreements from WEMU’s auditors, other executives, and its board of directors. The company’s failure to report the transfer of the solar subsidiary resulted in a material overstatement of net income to WEMU’s reported financial statements.

Without admitting or denying the SEC’s allegations, WEMU agreed to pay a $100,000 penalty and be permanently enjoined from future violations of antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The Wangs and Watson consented to permanent bars from serving as officers or directors of a public company and agreed to be permanently enjoined from future violations of the antifraud and other provisions of the federal securities laws. Mindy Wang and Watson each agreed to pay penalties of $50,000. The terms of the settlement with Jimmy Wang reflect credit given to him by the Commission for his substantial assistance in the investigation and the fact that he has entered into a cooperation agreement to assist in the ongoing investigation.

The SEC’s investigation was conducted by staff accountant Adrienne F. Miller, staff attorney Alice L. Jensen, and Assistant Regional Director Jina L. Choi in the SEC’s San Francisco Regional Office.

The SEC acknowledges the assistance of the U.S. Department of Labor in this matter.

SEC FILES SUIT ALLEGING COMBINED PONZI AND PYRAMID SCHEME

FROM: SECURITIES AND EXCHANGE COMMISSION

On August 17, 2012, the Securities and Exchange Commission filed suit in the United States District Court for the Western District of North Carolina against Rex Venture Group LLC d/b/a ZeekRewards.com and Paul R. Burks, alleging that the defendants had been operating a combined Ponzi and Pyramid scheme. According to the Complaint, online marketer Paul Burks of Lexington, N.C. and his company Rex Venture Group raised more than $600 million from more than one million Internet customers nationwide and overseas through the website ZeekRewards.com, which they began in January 2011.

The Complaint alleged that defendants solicited investors through the Internet and other means to participate in the ZeekRewards program, a self-described "affiliate advertising division" for the companion website, Zeekler.com, through which the defendants operated penny auctions. The ZeekRewards program offered customers several ways to earn money, two of which – the "Retail Profit Pool" and the "Matrix" – involved purchasing securities in the form of investment contracts. These securities offerings were not registered with the SEC as required under the federal securities laws.

According to the Complaint, defendants promised investors a share of the company’s daily net profits in the form of daily profit share awards. The defendants represented that those daily awards were calculated by dividing up to 50 percent of the company’s "net profits" by the number of "profit points" outstanding among all "qualified affiliates," with those purported calculations consistently resulting in daily dividends averaging approximately 1.5 percent per day, fraudulently conveying the false impression that the company was extremely profitable. In fact, the investor payouts bore no relation to the company’s net profits. Most of ZeekRewards’ total revenues and the "net profits" paid to investors were comprised of funds received from new investors in classic Ponzi scheme fashion.

The Complaint further alleged that the scheme was teetering on collapse with investor funds at risk of dissipation without its emergency enforcement action. Last month, ZeekRewards brought in approximately $162 million while total investor cash payouts were approximately $160 million. If customers had continued increasingly to elect to receive cash payouts rather than reinvest their money to reach higher levels of rewards points, ZeekRewards’ cash outflows would have quickly exceeded its total revenue.

The Commission alleged that the defendants offered and sold securities in violation of the registration and antifraud provisions of the federal securities laws. The Complaint requested permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against the defendants. In addition, the Commission filed motions asking the Court to freeze Rex Venture’s assets and appoint a receiver over the company and its assets.

Without admitting or denying the Commission’s allegations, and simultaneously with the filing of the Complaint, the defendants consented to permanent injunctions against future violations of the registration and antifraud provisions. Burks also agreed to relinquish his interest in the company and its assets, and to pay a $4 million civil penalty. On Friday afternoon, August 17, 2012, the Court entered the consented-to judgments imposing the foregoing relief, and also ordered an emergency asset freeze and appointed a receiver, both as requested by the Commission. According to the Complaint, ZeekRewards holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds have been ordered frozen under the emergency asset freeze granted by the court at the SEC’s request. Additionally, under the Court’s order, the receiver has been tasked to collect, marshal, manage and distribute remaining assets for return to harmed investors.

MAJOR MUTUAL FUND COMPANY TO PAY $35 MILLION TO SETTLE CHARGES OF MAKING MISLEADING STATEMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., June 6, 2012 – The Securities and Exchange Commission today charged investment management company OppenheimerFunds Inc. and its sales and distribution arm with making misleading statements about two of its mutual funds struggling in the midst of the credit crisis in late 2008.

The SEC’s investigation found that Oppenheimer used derivative instruments known as total return swaps (TRS contracts) to add substantial commercial mortgage-backed securities (CMBS) exposure in a high-yield bond fund called the Oppenheimer Champion Income Fund and an intermediate-term, investment-grade fund called the Oppenheimer Core Bond Fund. The 2008 prospectus for the Champion fund didn’t adequately disclose the fund’s practice of assuming substantial leverage in using derivative instruments. And when declines in the CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects.

Oppenheimer agreed to pay more than $35 million to settle the SEC’s charges.

“Mutual fund providers have an obligation to clearly and accurately convey the strategies and risks of the products they sell,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Candor, not wishful thinking, should drive communications with investors, particularly during times of market stress.”

Julie Lutz, Associate Director of the SEC’s Denver Regional Office, added, “These Oppenheimer funds had to sell bonds at the worst possible time to raise cash for TRS contract payments and cut their CMBS exposure to limit future losses. Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable.”

According to the SEC’s order instituting settled administrative proceedings against OppenheimerFunds and OppenheimerFunds Distributor Inc., the TRS contracts allowed the two funds to gain substantial exposure to commercial mortgages without purchasing actual bonds. But they also created large amounts of leverage in the funds. Beginning in mid-September 2008, steep CMBS market declines drove down the net asset values (NAVs) of both funds. These losses forced Oppenheimer to raise cash for month-end TRS contract payments by selling securities into an increasingly illiquid market.

According to the SEC’s order, the funds’ portfolio managers under instruction from senior management began executing a plan in mid-November to reduce CMBS exposure. Just as they began to do so, however, the CMBS market collapse accelerated, creating staggering cash liabilities for the funds and driving their NAVs even lower.

The SEC’s order found that continued CMBS declines forced the funds to sell more portfolio securities in order to raise cash for anticipated TRS contract payments. This task became increasingly difficult for the Champion fund, ultimately prompting Oppenheimer to make a $150 million cash infusion into the fund on November 21. Over the next two weeks, the funds continued to reduce their CMBS exposure to avoid further losses.

According to the SEC’s order, Oppenheimer advanced several misleading messages when responding to questions in the midst of these events. For instance, Oppenheimer

communicated to financial advisers (whose clients were invested in the funds) and fund shareholders directly that the funds had only suffered paper losses and their holdings and strategies remained intact. Oppenheimer also stressed that absent actual defaults, the funds would continue collecting payments on the funds’ bonds as they waited for markets to recover. These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which dampened their prospects for recovering CMBS-induced losses. Moreover, the funds had been forced to sell significant portions of their bond holdings to raise cash for anticipated TRS contract payments, resulting in realized investment losses and lost future income from the bonds.

The SEC’s investigation found that the Champion fund’s 2008 prospectus was materially misleading in describing the fund’s “main” investments in high-yield bonds without adequately disclosing the fund’s practice of assuming substantial leverage on top of those investments. While the prospectus disclosed that the fund “invested” in “swaps” and other derivatives “to try to enhance income or to try to manage investment risk,” it did not adequately disclose that the fund could use derivatives to such an extent that the fund’s total investment exposure could far exceed the value of its portfolio securities and, therefore, that its investment returns could depend primarily upon the performance of bonds that it did not own.

The SEC’s order finds that OppenheimerFunds violated Section 34(b) of the Investment Company Act of 1940, Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (Securities Act), and Section 206(4) of the Investment Advisers Act of 1940 and Rule 205(4)-8 promulgated thereunder. The order finds that OppenheimerFunds Distributor violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.

Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and prejudgment interest of $1,487,190. This money will be deposited into a fund for the benefit of investors. OppenheimerFunds and OppenheimerFunds Distributor also agreed to provisions in the order censuring them and directing them to cease and desist from committing or causing any violations or future violations of these statutes and rules.

The SEC’s investigation was conducted by Coates Lear, Jeffrey E. Oraker, Hugh C. Beck, Patricia E. Foley, and Mary S. Brady in the Denver Regional Office. The related examination of Oppenheimer was conducted by Francesco Spinella, Tracy O’Sullivan, C. Michael Hooper, Kathleen A. Raimondi, and Paula S. Weisz under the supervision of branch chief Kenneth O’Connor and assistant director Dawn Blankenship in the New York Regional Office.