Chris G. Gunderson, Esq., Exchange Act Rel. 61234, December 23, 2009
Time since appeal – 1 year 11 months 5 days
Time since last brief – 1 year 3 months 21 days
Gunderson appealed from an ALJ decision permanently disqualifying him from practicing before the Commission under its Rule 102(e). The disqualification was based on an injunction entered against him for registration and antifraud violations involving Universal Express, Inc. See, SEC v. Universal Express, Inc., 475 F.Supp. 2d 412 (SDNY 2007), aff'd sub nom. SEC v. Altomare, 300 Fed. Appx. 70 (2d Cir. 2008 (per curium) (unpublished), cert. denied, 129 S. Ct. 2745 (2009). The Commission affirmed the sanction.
The district court found that pursuant to agreements drafted by Gunderson the company distributed more than 500 million shares of unregistered stock. The district court also found that Gunderson drafted fraudulent press releases for the company. It also found that Gunderson violated its injunctive order but declined to hold him in contempt due to the appointment of a receiver for Universal Express.
Given the egregious violations found by the district court one can only wonder why the Commission lingered over this matter for so long.
Bon Mots
Mutual Fund Frequent/Late Trader Barred, Ordered to Pay Disgorgement and Penalties Totaling $728,000
Gregory O. Trautman, Exchange Act Rel. 61167, December 15, 2009
Time since appeal – 1 year 9 months 20 days
Time since last brief – 1 year 6 months 24 days
Trautman was the CEO of a broker dealer. The ALJ found he schemed to defraud mutual funds through illegal late trading and fraudulent market timing of mutual fund shares on behalf of both customers and the firm. The Commission entered the following sanctions: a bar from associating with a broker-dealer; a cease and desist order; $608,000 of disgorgement, plus additional prejudgment interest; and a $120,000 penalty. Trautman's firm made $22.6 million in revenues from the scheme and mutual fund customers lost an estimated $102 million.
Late trading is the illegal and fraudulent practice of permitting mutual fund share orders received after 4 p.m. Eastern time when the market closes to receive that day's price instead of the next day's price. Frequent trading involves attempts to exploit pricing inefficiencies resulting from the fact that mutual fund prices are only calculated once at the end of the trading day. Although frequent trading is not per se illegal it violates the rules of most mutual funds that permit only a limited number of trades by investors. The practice harms long term shareholders and increases fund expenses. The opinion provides a detailed explanation of why both practices are harmful to investors and cites many of the Commission's significant cases in the area.
Trautman's firm actually established a mutual fund timing department. Many of the institutional clients of this department have been subject to civil or administrative cases. The firm developed a number of procedures designed to hide its trading activities from mutual funds. The Commission found that Trautman was personally involved in these activities and acted with scienter. It also found that Trautman aided and abetted the firm's violations.
The Commission took into account conduct that occurred before the limitations period in evaluating motive, intent and knowledge. As an evidentiary matter, it noted that it will not consider previous regulatory sanctions based solely on CRD printouts – instead it requires that the actual settlement records be introduced into evidence. The Commission also rejected Trautman's argument that no penalty or disgorgement should be imposed due to his financial condition. It noted that such a showing is only one factor that it will consider in determining monetary sanctions.
Time since appeal – 1 year 9 months 20 days
Time since last brief – 1 year 6 months 24 days
Trautman was the CEO of a broker dealer. The ALJ found he schemed to defraud mutual funds through illegal late trading and fraudulent market timing of mutual fund shares on behalf of both customers and the firm. The Commission entered the following sanctions: a bar from associating with a broker-dealer; a cease and desist order; $608,000 of disgorgement, plus additional prejudgment interest; and a $120,000 penalty. Trautman's firm made $22.6 million in revenues from the scheme and mutual fund customers lost an estimated $102 million.
Late trading is the illegal and fraudulent practice of permitting mutual fund share orders received after 4 p.m. Eastern time when the market closes to receive that day's price instead of the next day's price. Frequent trading involves attempts to exploit pricing inefficiencies resulting from the fact that mutual fund prices are only calculated once at the end of the trading day. Although frequent trading is not per se illegal it violates the rules of most mutual funds that permit only a limited number of trades by investors. The practice harms long term shareholders and increases fund expenses. The opinion provides a detailed explanation of why both practices are harmful to investors and cites many of the Commission's significant cases in the area.
Trautman's firm actually established a mutual fund timing department. Many of the institutional clients of this department have been subject to civil or administrative cases. The firm developed a number of procedures designed to hide its trading activities from mutual funds. The Commission found that Trautman was personally involved in these activities and acted with scienter. It also found that Trautman aided and abetted the firm's violations.
The Commission took into account conduct that occurred before the limitations period in evaluating motive, intent and knowledge. As an evidentiary matter, it noted that it will not consider previous regulatory sanctions based solely on CRD printouts – instead it requires that the actual settlement records be introduced into evidence. The Commission also rejected Trautman's argument that no penalty or disgorgement should be imposed due to his financial condition. It noted that such a showing is only one factor that it will consider in determining monetary sanctions.
Commission Dismisses Case Against CPAs
Kevin Hall, CPA, Rosemary Meyer, CPA, Exchange Act Rel. 61162, December 14, 2009
Time since appeal – 1 year 10 months 8 days
Time since last brief – 1 year 6 months 24 days
The ALJ found no improper conduct by these two accounts and the Division of Enforcement appealed. The Commission dismissed the case – a very significant loss for enforcement.
One has to wonder why it took so long for the Commission to rule on this matter. The ALJ's initial decision was in January 2008. It is simply wrong for the Commission to delay resolution of these cases for so long. Here, two auditors' careers have been terribly damaged as a result of the Commission's failure to take its responsibilities seriously. It is simply not in the public interest for the Commission to delay resolution of these administrative cases. The public interest demands more. The audit that resulted from these proceedings was for fiscal year 1999, so final resolution of this matter took nine years.
Hall was the KPMG engagement partner and Meyer the senior manager on the audit of U.S. Foodservice, Inc. in 1999. Hall and Meyer were charged with violations of the Commissions Rule 102(e) that allows it to administratively discipline CPAs in connection with public company audits. It was uncontested that the company had engaged in a fraudulent earnings management scheme involving its accounting for promotional allowances from vendors. Two company officers were criminally convicted.
In order to prevail enforcement must prove that the auditors engaged in:
"'improper professional conduct [which] for accountants includes '[r]epeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.' The term 'unreasonable' signifies an ordinary or simple negligence standard. Discipline under Rule 102(e) may be appropriate when the repetition of such negligent conduct shows an accountant's lack of competence to practice before the Commission. The negligence-based standards in Rule 102(e)(iv)(B) are objective, measured by the degree of the departure from professional standards rather than the intent of the accountant. In applying these standards, the Commission does not evaluate actions or judgments in the light of hindsight; it focuses, instead, on what the accountant knew or should have known at the time an action was taken or a decision was made." (footnotes omitted)
Much of the opinion involves the details of GAAS requirements for the confirmation process. The auditors noted various discrepancies and according to the Commission did not engage in "best audit practices." The Commission nevertheless concluded that their conduct was not unreasonable. Some third party confirmations were not included in the work papers and there was no way to verify the auditor's testimony about their claimed exculpatory contents. However since GAAS does not require auditors to maintain all documents they rely on in their workpapers there was no basis for the Commission to find the conduct unreasonable.
The Commission rejected the ALJ's suggestion that the Commission has no jurisdiction over accountants who review but do not audit a company's quarterly financial statements.
The Commission rejected due process claims by Hall and Meyer based on the fact that the Commission, unknown to them, was conducting and investigation of their then counsel during the investigation. That investigation was concluded without any action being taken.
Time since appeal – 1 year 10 months 8 days
Time since last brief – 1 year 6 months 24 days
The ALJ found no improper conduct by these two accounts and the Division of Enforcement appealed. The Commission dismissed the case – a very significant loss for enforcement.
One has to wonder why it took so long for the Commission to rule on this matter. The ALJ's initial decision was in January 2008. It is simply wrong for the Commission to delay resolution of these cases for so long. Here, two auditors' careers have been terribly damaged as a result of the Commission's failure to take its responsibilities seriously. It is simply not in the public interest for the Commission to delay resolution of these administrative cases. The public interest demands more. The audit that resulted from these proceedings was for fiscal year 1999, so final resolution of this matter took nine years.
Hall was the KPMG engagement partner and Meyer the senior manager on the audit of U.S. Foodservice, Inc. in 1999. Hall and Meyer were charged with violations of the Commissions Rule 102(e) that allows it to administratively discipline CPAs in connection with public company audits. It was uncontested that the company had engaged in a fraudulent earnings management scheme involving its accounting for promotional allowances from vendors. Two company officers were criminally convicted.
In order to prevail enforcement must prove that the auditors engaged in:
"'improper professional conduct [which] for accountants includes '[r]epeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.' The term 'unreasonable' signifies an ordinary or simple negligence standard. Discipline under Rule 102(e) may be appropriate when the repetition of such negligent conduct shows an accountant's lack of competence to practice before the Commission. The negligence-based standards in Rule 102(e)(iv)(B) are objective, measured by the degree of the departure from professional standards rather than the intent of the accountant. In applying these standards, the Commission does not evaluate actions or judgments in the light of hindsight; it focuses, instead, on what the accountant knew or should have known at the time an action was taken or a decision was made." (footnotes omitted)
Much of the opinion involves the details of GAAS requirements for the confirmation process. The auditors noted various discrepancies and according to the Commission did not engage in "best audit practices." The Commission nevertheless concluded that their conduct was not unreasonable. Some third party confirmations were not included in the work papers and there was no way to verify the auditor's testimony about their claimed exculpatory contents. However since GAAS does not require auditors to maintain all documents they rely on in their workpapers there was no basis for the Commission to find the conduct unreasonable.
The Commission rejected the ALJ's suggestion that the Commission has no jurisdiction over accountants who review but do not audit a company's quarterly financial statements.
The Commission rejected due process claims by Hall and Meyer based on the fact that the Commission, unknown to them, was conducting and investigation of their then counsel during the investigation. That investigation was concluded without any action being taken.
NYSE Sanctions Sustained After Remand
James Gerard O'Callaghan, Exchange Act Rel. 61134, December 10, 2009
Time since appeal – 8 months 30 days
Time since last brief – 3 months 7 days
NYSE found that O'Callaghan a floor trader violated its rules by executing trades over which he had investment discretion. He was suspended for three months and fined $30,000. On appeal the Commission sustained the findings of violations but remanded for reconsideration of the sanctions expressing concern that the sanctions might be deemed punitive rather than remedial. NYSE found the original sanctions appropriate on remand. In this decision the Commission sustained the sanctions.
The facts here have not changed significantly since the original Commission ruling. Only a cynic would note that what has changed is the membership of the Commission.
Time since appeal – 8 months 30 days
Time since last brief – 3 months 7 days
NYSE found that O'Callaghan a floor trader violated its rules by executing trades over which he had investment discretion. He was suspended for three months and fined $30,000. On appeal the Commission sustained the findings of violations but remanded for reconsideration of the sanctions expressing concern that the sanctions might be deemed punitive rather than remedial. NYSE found the original sanctions appropriate on remand. In this decision the Commission sustained the sanctions.
The facts here have not changed significantly since the original Commission ruling. Only a cynic would note that what has changed is the membership of the Commission.
FInra Firm Revocation and Bar Upheld For Manipulation, Trader's Bar Reduced To Five Years With Right To Reapply
Kirlin Securities, Inc., Anthony Kirincic, Andrew Israel, Exchange Act Rel. 61135, December 10, 2009
Time since appeal – 8 months 15 days
Time since last brief – 4 months 28 days
Finra found that Kirlin, Kirincic, and Israel manipulated the price of the stock of Kirlin's publicly traded parent. Kirlin was expelled. Kirincic was barred. Israel was also barred. The Commission upheld the expulsion of the firm. It upheld the bar against Kirincic based on the manipulation, but set aside a sanction based on a Finra finding that he had falsified customer documents. The bar against Israel for manipulation was set aside and instead he was barred with a right to reapply after five years. Finally a restitution order against Kirlin and Israel for failure to provide best execution of a customer trade was set aside.
The manipulation was prompted by a decline in the price of the stock of Kirlin's parent that threatened it to be delisted by Nasdaq. The manipulation was accomplished through a series of crossed orders between accounts held by Kirincic's family. He also placed buy orders at escalating prices through accounts of family members. Kirincic was Kirlin's co-CEO and Israel was a trader who executed the trades.
Manipulation constitutes deliberate interference with the "free forces of supply and demand" and is almost always involves an extremely fact intensive investigation of market and trading activity. A rapid price rise in a thinly traded stock that is controlled by a firm with abundant supply, little investor interest, and the absence of favorable news about the company are emblematic of manipulation. The opinion is worth reading for its summary of the law of manipulation.
The Commission set aside Israel's bar because it found that he recklessly executed Kirincic's orders rather than knowingly participated in a manipulation. He was found reckless because Kirincic's orders were at successively higher bids despite circumstances that should have caused him to be alert to a possible manipulation.
It was not necessary for Finra to produce expert testimony to prove a manipulation as it is an expert body itself.
Time since appeal – 8 months 15 days
Time since last brief – 4 months 28 days
Finra found that Kirlin, Kirincic, and Israel manipulated the price of the stock of Kirlin's publicly traded parent. Kirlin was expelled. Kirincic was barred. Israel was also barred. The Commission upheld the expulsion of the firm. It upheld the bar against Kirincic based on the manipulation, but set aside a sanction based on a Finra finding that he had falsified customer documents. The bar against Israel for manipulation was set aside and instead he was barred with a right to reapply after five years. Finally a restitution order against Kirlin and Israel for failure to provide best execution of a customer trade was set aside.
The manipulation was prompted by a decline in the price of the stock of Kirlin's parent that threatened it to be delisted by Nasdaq. The manipulation was accomplished through a series of crossed orders between accounts held by Kirincic's family. He also placed buy orders at escalating prices through accounts of family members. Kirincic was Kirlin's co-CEO and Israel was a trader who executed the trades.
Manipulation constitutes deliberate interference with the "free forces of supply and demand" and is almost always involves an extremely fact intensive investigation of market and trading activity. A rapid price rise in a thinly traded stock that is controlled by a firm with abundant supply, little investor interest, and the absence of favorable news about the company are emblematic of manipulation. The opinion is worth reading for its summary of the law of manipulation.
The Commission set aside Israel's bar because it found that he recklessly executed Kirincic's orders rather than knowingly participated in a manipulation. He was found reckless because Kirincic's orders were at successively higher bids despite circumstances that should have caused him to be alert to a possible manipulation.
It was not necessary for Finra to produce expert testimony to prove a manipulation as it is an expert body itself.
Subscribe to:
Posts (Atom)
Posts
