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On September 27, 2016, the Securities and Exchange Commission (“SEC”) filed a complaint against oil services company Weatherford International PLC (“Weatherford”), consequently garnering a $140 million settlement related to fraudulent income tax accounting (the “Complaint”).  According to the Complaint, Weatherford issued false financial statements between 2007-2012 inflating earnings by more than $900 million.  Weatherford misrepresented both its earnings per share (“EPS”), and effective tax rate (“ETR”), and created a misperception for investors that a unique tax structure had been designed which provided it with a superior international tax avoidance strategy, when no such advantages existed.  James Hudgins (“Hudgins”), Weatherford’s Vice President of Tax and Darryl Kitay (“Kitay”), Weatherford’s Tax Manager (collectively the “Defendants”) have agreed to settle charges that they orchestrated this fraud. Weatherford’s market cap is currently $5.04 billion, with the $140 million fine representing 2.7% of total valuation.

Weathorford is charged with: violation of Securities Act Section 17(a) and the Securities and Exchange Act of 1934 (the “Exchange Act”) Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.  Defendant Hudgins is charged with: (i) willfully violating Securities Act Section 17(a), Exchange Act Sections 10(b), and 13(b)(5) and Rules 10b-5(a) and (c), 13b2-1 and 13b2-2 disseminated thereunder; (ii) orchestrating Weatherford’s violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and (B), and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder; and (iii) willfully violating federal securities laws pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. Defendant Kitay, due to his fraudulent conduct, faces charges of: (i) willfully violating Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5), and Rules 10b-5(a) and (c), 13b2-1 promulgated thereunder; (ii) instigating Weatherford’s violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and (B), and Rules 10b-5, 12b-20, 13a-1, 13a- 11, and 13a-13 promulgated thereunder; and (iii) willfully violating the federal securities laws pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.

Weatherford was formed in 1998 with the merger of two companies, and immediately embarked on a strategy of aggressive expansion.  This directive was achieved largely through hundreds of acquisitions of smaller natural gas equipment and service providers, purchases that Weatherford financed by issuing corporate bonds.  The SEC alleges that this unchecked growth was largely responsible for the lack of effective internal controls governing income tax accounting.  In 2002, Weatherford completed an inversion to become incorporated in Bermuda, in order to be headquartered in a place of 0% tax jurisdiction.  From 2003 through 2006, Weatherford continued to embark on ETR reduction strategies through tax hybridization schemes, including shifting debt assets to high tax jurisdictions such as the US and Canada, and equity assets to low or zero tax jurisdictions.  These strategies reduced Weatherford’s ETR from 36.3% in 2001 to 25.9% in 2006.  Each percentage point reduction in Weatherford’s ETR translated to an approximately $0.02 to $0.03 gain in Weatherford’s EPS, giving the company more latitude to issue debt and make more acquisitions to increase revenue.

On September 26^th, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint for Injunctive and Other Relief against Craig V. Sizer (“Sizer”) and Miguel Mesa (“Mesa”) (collectively referred to as the “Defendants”), for violating federal securities laws (the “complaint”).  The Defendants specifically violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (“the Exchange Act”), Rule 10b-5 thereunder, and Section 15(a) of the Exchange Act.  The Complaint alleges that the Defendants broke these antifraud and broker-dealer registration laws by deceiving over 600 investors of approximately $20 million and misappropriating the vast majority of these funds for personal use.

According to the Complaint, beginning in 2009 and continuing through August 2015, Sizer, former co-founder and former Chief Executive Officer of Sanomedics Inc. (“Sanomedics”) and former President and Board Director of Fun Cool Free Inc. (“Fun Free Cool”) (collectively referred to as the “Companies”), orchestrated the fraudulent sale of shares in both Companies.  This fraud involved equipping sales agents with materially misleading statements in relation to how investor capital would be spent.  According to the Complaint, Sizer hired Mesa to market these companies to investors.  Mesa oversaw boiler-room operations for sales agents, and provided them with scripts used to cold call prospective investors and fraudulently convince them to purchase shares in Sanomedics and Fun Cool Free.

The Complaint alleges, Sizer and Mesa used these tactics on many elderly, and financially illiterate investors.  They hired and directed Seven (7) or more sales agents, who purchased lists of contact numbers for individuals they believed possessed resources to invest, such as those who recently inherited sums of money.  Mesa told these sales agents that they did not need to be registered in order to sell stock.  These agents sold restricted stock to investors, ranging in prices from $0.05-$2.50 per share, while promising them outlandish profits and making untrue statements that they were buying the stock at a discount to the market.  Investors were also told that no fee or commission would be charged, while in actuality, Mesa paid 15-20% of the funds he misappropriated to the sales agents in the form of commissions.  Sizer was not, and never has been, registered as a broker despite courting investors personally.  Additionally, in 2004 and 2006 Mesa was charged in separate civil injunctive actions by the Commodities Futures Trading Commission (“CFTC”) for fraudulent activity in relation to trading futures and contracts. He was permanently barred from the commodities industry.  Both currently and during the relevant time period, Mesa was not registered as a broker or associated with a broker-dealer.

On September 28^th, 2016, the Securities and Exchange Commission (“SEC”) charged a Peruvian brokerage firm manager and two lawyers with making trades that were informed by insider knowledge regarding the imminent merger of two mining companies (“The Complaint”).  The SEC alleges that the Defendants Nino Coppero del Valle (“Valle”) and Julio Antonio Castro Roca (“Roca”) (collectively the “Defendants”) conspired to trade on information regarding the tender offer that Canadian-based Hudbay Minerals (“Hudbay”) made to acquire shares of Arizona-based Augusta Resource Corp. (“Augusta”).  The Complaint charges the Defendants with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (“The Exchange Act”).   In addition, Valle, Roca, and broker affiliate Ricardo Carrion (“Carrion”) are charged with violating clauses regarding a stay on trading ahead of the announcement of a tender offer contained in Exchange Act Section 14(e) and Rule 14e-3.

Valle was an attorney at Hudbay who was privy to the acquisition, and relayed this knowledge to his close friend and fellow attorney Roca, who then allegedly acted on this information by making trades through a brokerage account he set up in the British Virgin Islands.  This account was allegedly registered offshore in order to avoid regulatory scrutiny about the timing of the trades and their connection to insiders.  The Complaint alleges that these unlawful trades netted Valle and Roca over $112,000 in illegal profits.

While researching how to make trades untraceable, Valle allegedly sourced an acquaintance Carrion—an employee at a Peruvian brokerage House—and gave him insider information in exchange for advice on obscuring the trades that his friend Roca intended to make.  Carrion’s brokerage house made a profit of $73,000 off of the insider information that Hudbay was intending to acquire a large percentage of Augusta and its operations.  In a warning to others and a reference to the SEC’s cross border enforcement powers, Andrew M. Calamari, Director of the SEC’s New York Regional Office, told the press: “[T]ry as they might, overseas traders shouldn’t presume they can cover their tracks to avoid detection and scrutiny from U.S. law enforcement when they violate insider trading laws.”

The Libyan Investment Authority (“LIA”) is in a current litigation battle with Goldman Sachs (“Goldman”) regarding Goldman’s potential exploitation of the relative inexperience and financial illiteracy of LIA managers. The Complaint alleges Goldman advised LIA to place trades that incurred enormous losses, while yielding Goldman approximately $200 million in fees.  LIA is suing Goldman for $1.2 Billion in losses, with the trial beginning in June 2016 in London.  LIA is arguing that its investment staffers never understood the complexity of the deals Goldman sold them, and were exploited through Goldman’s use of misleading marketing materials and lavish gifts that were bestowed on staffers.  LIA staffers gave statements saying that they had never heard of “derivatives,” “Goldman Sachs,” “options,” or “due diligence” while attempting to show the court the extent of their naiveté, despite the fact that they managed a multi-billion-dollar fund.  Goldman disputes the degree of LIA’s ineptitude and naiveté, arguing that LIA “[u]nderstood at all times that [our representative] was a salesman, and that his job was to sell investments to the LIA from which [Goldman] could make money.”  Furthermore, Goldman argues it is clear that LIA “[u]nderstood the disputed trades and entered into them of their own volition.”

Youssef Kabbaj (“Kabbaj”), a Goldman Sachs securities salesperson, almost singlehandedly wooed in excess of one billion dollars from the LIA in the form of complex derivative investments.  Kabbaj, an MIT engineering graduate from a wealthy and prominent African family, joined Goldman’s London office in 2006.  While assigned to a sales team covering Africa, a desk that posted little to no profit at that time, Kabbaj shrewdly identified Libya as an “elephant”—an incredibly wealthy petro state client with enormous coffers that could be persuaded to buy securities.  Despite being one of the wealthiest states in Africa, Libya had very few privately owned companies, no credit cards until late 2005, and limited experience with investing.  Kabbaj managed to persuade Mustaga Zarti (“Zarti”), the LIA Deputy Chief Executive, that Libya would miss out if it didn’t buy into the rising bull market.

Consequently, the LIA fund purchased in excess of $2 billion worth of bullish derivative bets on US banks, including Citibank, Lehman Brothers, and the French Utility EDF Group.  In the aftermath of the enormous losses these bets incurred, LIA management stated they were unaware they had purchased synthetic derivatives which, during the rapid devaluation of the 2008 financial crises, entirely wiped out their books, and thought instead they had purchased shares directly.  While synthetic derivatives can take innumerable forms—they can be structured in any way as long as there is a buyer to take the other side of the deal—the instruments Goldman sold to LIA were structured in a particularly risky manner.  If, for example, Citibank’s stock rose, then LIA would get a return on their investment in multiples of their initial purchase, due to the leverage.  If, however, Citibank’s stock fell, even incrementally, LIA’s entire book would have been wiped out.

On September 19, 2016, the SEC filed an Order Instituting Public Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Ernst & Young, Robert J. Brehl, CPA (“Brehl”), Pamela J. Hartford, CPA (“Hartford”), and Michael T. Kamienski, CPA (“Kamienski”) (the “Ernst & Young Order”).  The Ernst & Young Order was one of the first two enforcement actions ever filed by the SEC for auditor independence failures due to improper personal relationships between auditors and their clients’ employees.

Brehl served as Chief Accounting Officer of one of Ernst & Young’s public company clients (the “Issuer”) from January 2006 through July 2014, and is a certified public accountant (“CPA”) who resides in Kentucky.  Hartford initially served as the engagement partner and then as the coordinating partner on the Ernst & Young engagement team that provided audit and review services to the Issuer (the “Engagement Team”) until her termination on July 7, 2014.  Kamienski served as the coordinating partner on the Engagement Team from 2009 to 2013.  Beginning in December 2013, he also served as Ernst & Young’s Global Real Estate, Hospitality & Construction Assurance Leader, and then, in July 2014, as Ernst & Young’s Central Region Assurance Real Estate Market Segment Leader until his resignation in April 18, 2016.

According to the Ernst & Young Order, between March 2012 and June 2014, Hartford and Brehl “maintained a close personal and romantic relationship.”  Specifically, “[t]heir relationship was marked by a high level of personal intimacy, affection and friendship, near daily communications about personal and romantic matters (as well as work-related matters), and the occasional exchange of gifts of minimal value on holidays such as Valentine’s Day and birthdays.”  Further, from early 2013 through June 2014, Kamienski “was aware of facts suggesting a possible romantic relationship between Hartford and Brehl” and “should have identified those facts as red flags but did not” and failed to “raise concerns internally to [Ernst & Young’s] U.S. Independence group.”  During this time, Ernst & Young continued to maintain that it was an independent auditor on the Issuer’s financial statements and filings with the SEC.

On September 8, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint and Jury Demand with the United States District Court for the Southern District of New York (“Complaint”) against Brian S. Block (“Block”) and Lisa Pavelka McAlister (“McAlister”) relating to an alleged 2014 fraud that inflated the value of the largest publicly traded net lease real estate investment trust (“REIT”), American Realty Capital Properties, Inc. (“American Realty Capital”) (NASDAQ ticker symbol “ARCP”) (n/k/a VEREIT, Inc.).

Block was the CFO of American Realty Capital until he resigned on October 28, 2014.  He is a 44 year old certified public accountant (“CPA”) who is licensed and resides in Pennsylvania.  McAlister was appointed Chief Accounting Officer of American Realty Capital in November 2013, and subsequently became Principal Accounting Officer in May 2014 until she resigned on October 28, 2014.  McAlister is a 52 year old CPA who is licensed in New York and who resides in Massachusetts.  According to the Complaint, American Realty Capital reported total assets of approximately $21 billion during the relevant time period.

Publicly traded issuers must follow generally accepted accounting principles (“GAAP”) as set forth by the Financial Accounting Standards Board, and as adopted by the SEC.  One of the metrics captured is the net income and earnings per share (“EPS”).  According to the Complaint, American Realty Capital reported a non-GAAP metric, Adjusted Funds from Operations (“AFFO”), which is a metric typically used by most REITs.  According to the Complaint, and as defined by the National Association of Real Estate Investment Trusts, AFFO is an adjusted version of “a standardized metric of REIT operating performance.”

On August 10, 2016, the Securities and Exchange Commission (“SEC”) filed a complaint against Merrill Robertson, Jr. (“Mr. Robertson”), Sherman C. Vaughn, Jr. (“Mr. Vaughn”), and Cavalier Union Investments, LLC (“Cavalier Union”) (collectively the “Defendants”), alleging that they violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (the “Securities Act”), as well as Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder (the “Complaint”).

Mr. Robertson was a professional football player for the Philadelphia Eagles, and is currently a co-owner and Managing Principal of Cavalier Union who previously held Series 7 and 66 securities licenses between April 2008 and December 2009.  He is a resident of Chesterfield, Virginia.  Mr. Vaughn, along with Mr. Robertson, is a co-owner and Managing Principal of Cavalier Union.  Mr. Vaughn has never been registered with the SEC, and has filed for personal bankruptcy four times, which had not been disclosed to investors.  Mr. Vaughn is also a resident of Chesterfield, Virginia.  Cavalier Union is based in Midlothian, Virginia, and was formed in February 2010.  Cavalier Union is not registered with the SEC.

According to the Complaint, the Defendants bilked more than $10 million from over 60 investors by fraudulently inducing them to invest in Cavalier Union promissory notes that purported to pay a fixed rate of return of between 10 and 20 percent by investing in “cash-producing tangible assets”, but were in fact part of a Ponzi scheme that allowed Mr. Robertson and Mr. Vaughn to live lavishly.  These investors were comprised of “unsophisticated senior citizens and former football coaches, donors, alumni, and employees of schools [Mr. Robertson] had attended”, and Mr. Robertson and Mr. Vaughn “lied about their sophistication, the safety and security of the [Cavalier Union] promissory notes, and [Cavalier Union’s] financial condition” and “claimed that [Cavalier Union] used investor money to invest in a broad range of business ventures, such as restaurants, real estate, alternative energy, and assisted living facilities.”

The Securities and Exchange Commission (“SEC”) announced on June 16 that Daniel Thibeault (“Thibeault”), a Massachusetts-based investment advisor facing both civil and criminal charges, was sentenced to 9 years in prison for his fraudulent misappropriation of more than $15 million in investor funds.  After numerous false statements to the SEC staff during the SEC’s investigation, Thibeault pled guilty to charges of securities fraud, wire fraud, aggravated identity theft, and obstruction of justice.  The criminal charges against Thibeault arose out of the same fraudulent conduct alleged in the SEC’s civil complaint.

Thibeault was the President and CEO of numerous investment advisory companies, including GL Capital Partners and GL Beyond Income Fund.  The SEC’s complaint alleged that Thibeault used GL Capital Partners to solicit investments in the GL Beyond Income Fund, claiming that investors’ money would be used to purchase variable rate consumer loans.  Investors were told that the purchased consumer loans would provide a return on investment when interest and principal payments were made on the loans.

The SEC’s complaint alleged, however, that investor money was never used to purchase the variable rate consumer loans, and that “defendants engaged in a scheme to create fictitious loans to divert investor money…and to report these fake loans as assets of the GL Beyond Income Fund.”  The plan was allegedly designed to hide that Thibeault and his associates had misappropriated millions from customers who had been told that they had collectively invested more than $40 million in the GL Beyond Income Fund since 2013.

On May 24, 2016, the Securities and Exchange Commission (“SEC”) charged Ash Narayan (“Narayan”), a California based investment adviser registered with RGT Capital Management (“RGT”), with fraud for secretly siphoning millions of dollars from investment accounts he managed for professional athletes, including NFL quarterback Mark Sanchez (“Sanchez”).

The SEC’s complaint (the “Complaint”) alleged that Narayan defrauded Sanchez, and MLB pitchers Jake Peavy and Roy Oswalt, of more than $33 million.  Narayan allegedly transferred the money to The Ticket Reserve, a struggling online sports and entertainment ticket business, without the knowledge or consent of the athletes he represented and often with forged signatures.  Narayan also inappropriately failed to disclose the fees he was receiving in return for investing the bulk of their money in the struggling company, that he himself owned more than three million The Ticket Reserve shares, and that he was a member of the company’s board of directors.

The Complaint stated that Narayan exploited the trust of athletes who relied on him to manage their finances.  Sanchez, for example, had his NFL paychecks deposited directly into his investment account managed by Narayan.  While professional athletes have high earning potential, they often only have a short window in which to earn money.  As a result, Sanchez and other athletes rely on financial advisors to pursue conservative interments that preserve their capital.  The Complaint stated that Narayan’s fraudulent investing did not adhere to this conservative investment objective.

A large number of investors are suing Bank of America’s brokerage arm, operated by Merrill Lynch, for sales practice abuses surrounding Strategic Return Notes.  As many as 44 complaints have been filed by investors against Merrill Lynch with the Financial Industry Regulatory Authority (“FINRA”).

Strategic Return Notes, issued by Bank of America, are structured notes linked to a proprietary volatility index (“VOL”). The VOL attempts to calculate the volatility of the S&P 500 (i.e., how drastically the S&P 500 changes in a given time frame).  News media outlets have reported that Merrill Lynch clients have lost most of their investments in a $150 million fund.

Merrill Lynch agreed to pay the SEC a $10 million penalty to settle charges that it made misleading statements in materials provided to retail investors about the Strategic Return Notes.  The SEC noted that the written materials for the Strategic Return Notes, which Merrill Lynch principally drafted and reviewed, did not disclose a quarterly cost of 1.5% that was tied to the value of the volatility index. FINRA also fined Merrill Lynch a $5 million fine for “negligent disclosure failures” in the sale of the volatility-linked structured notes.  Merrill Lynch neither admitted nor denied the charges made by the SEC and FINRA surrounding the Strategic Return Notes.