Friday, 11 December 2015

SEC: Sports Team Offering Is A Penny Stock Fraud

The Securities and Exchange Commission today announced fraud charges and a court-ordered asset freeze obtained against a Florida-based penny stock company falsely touting itself as “the largest publicly traded diversified portfolio of professional sports teams in the world.”

The SEC alleges that Thomas Anthony Guerriero as CEO of Oxford City Football Club Inc. used pressure tactics and a boiler room of salespeople to raise more than $6.5 million from primarily inexperienced investors who were misled to believe that the company was a thriving conglomerate of sports teams, academic institutions, and real estate holdings.  But in reality the company was losing millions of dollars each year and turning zero profit from its two lower-division soccer teams in the U.K.

“As alleged in our complaint, Guerriero portrayed himself as one of the most powerful and influential CEOs in the history of Wall Street when he’s really a penny stock fraudster mixing lies and verbal threats to line his own pocket with money from unsuspecting investors,” said Scott Friestad, Associate Director of the SEC Enforcement Division.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida:

  • Since at least August 2013, Guerriero has operated a classic boiler room scheme under the guise of nominal legitimate businesses through which millions of unregistered shares of stock were sold to investors who were deceived about the stock value and potential profits.
  • Guerriero’s salespeople sold Oxford City stock to the public based on leads lists he purchased from third parties.  Guerriero crafted scripts for the salespeople, who used aliases to mask their true identities.
  • Prospective investors were told they were being offered a limited-time deal to purchase Oxford City shares at a deep discount from the publicly quoted price.  Unbeknownst to the victims, the stock price was controlled by Guerriero.
  • Guerriero claimed to record phone conversations with potential investors using a “verbal verification system” that supposedly tied the stock “transaction” to their social security number and birthday.  In reality, Guerriero and his associates simply pressed any button on their phone to make a sound signaling the fake start of a recording.  If investors later refused to pay, Guerriero would threaten them with lawsuits based on their “recorded” verbal commitment.
  • Investors were falsely told that Oxford City would pay a 50-cents-per-share dividend within a year.  In reality, the company was losing millions of dollars a year and was legally prohibited from paying a dividend.
  • Oxford City purportedly had real estate holdings worth approximately $100 million and owned a radio broadcast network that projected profits of almost $20 million.  Oxford City actually had assets of approximately $1 million and never owned a radio station – it simply purchased one hour of air time per week.
  • Oxford City claimed to own an online university with students already enrolled and projected profits of $495 million for the upcoming five-year period.  In reality, there was no such university that ever enrolled a student or had revenue.
  • Oxford City purported it would earn more than $238 million over five years from existing and new sports-related facilities.  The truth was that Oxford City owned a minority interest in a lower division English soccer club, which generated a small amount of revenue but never turned a profit.

The SEC’s complaint charges Guerriero and Oxford City with violations of Sections 10(b) and 20(b) of Securities Exchange Act of 1934 and Rule 10b-5 as well as Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933.

The SEC’s ongoing investigation is being conducted by Darren E. Long, Brian D. Vann, and David F. Miller, and supervised by Brian O. Quinn.  The litigation will be led by Matthew F. Scarlato, John J. Bowers, and Mr. Long.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation.

SEC Proposes Rules for Resource Extraction Issuers Under Dodd-Frank Act

The Securities and Exchange Commission today voted to propose rules that would require resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments for the commercial development of oil, natural gas or minerals.  The proposed rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to further the statutory objective to advance U.S. policy interests by promoting greater transparency about payments related to resource extraction.

Under the proposed rules, an issuer would be required to disclose payments made to the U.S. federal government or a foreign government if the issuer is required to file annual reports with the Commission under the Securities Exchange Act.  The issuer would also be required to disclose payments made by a subsidiary or entity controlled by the issuer.

“These proposed rules would implement a statutory mandate and require disclosure consistent with other payment transparency disclosure regimes around the world,” said SEC Chair Mary Jo White.  “We appreciate the valuable input that we have received from companies, industry groups, civil society organizations, foreign governments, and other federal agencies that helped inform the Commission and shape these proposed rules.”

The disclosure would be made at the project level similar to the approach adopted in the European Union and proposed in Canada.  The disclosure required by the proposed rules would be filed publicly with the Commission annually on Form SD.

Initial public comments on the proposed rules are due by January 25, 2016.  Reply comments, which may respond only to issues raised in the initial comment period, are due on February 16, 2016. 

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FACT SHEET

Disclosure of Payments by Resource Extraction Issuers

SEC Open Meeting

December 11, 2015

Action

The Commission will consider whether to propose rules that would require resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments for the purpose of commercially developing oil, natural gas or minerals.  The proposed rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would seek to carry out the statutory objective to advance U.S. policy interests and promote international efforts for greater transparency of payments made to governments for extractive activities.

Highlights of the Proposed Rules

Who Must Disclose:

The proposed rules would require a domestic or foreign issuer to disclose payments made to governments if:

  • The issuer is required to file an annual report with the Commission under the Securities Exchange Act (Exchange Act); and
  • The issuer engages in the commercial development of oil, natural gas, or minerals.

In addition, a resource extraction issuer would be required to disclose payments made by a subsidiary or another entity controlled by the issuer. For purposes of the rule, control would be determined by reference to financial consolidation principles that the issuer applies to the audited financial statements in its Exchange Act annual reports. 

What Must Be Disclosed:

Under the proposed rules, a resource extraction issuer would be required to disclose certain payments made to a foreign government, including foreign subnational governments, or the U.S. federal government.

Resource extraction issuers would need to disclose payments that are:  made to further the commercial development of oil, natural gas, or minerals; “not de minimis”; and within the types of payments specified in the rules.

The proposed rules would define commercial development of oil, natural gas, or minerals to include exploration, extraction, processing, and export, or the acquisition of a license for any such activity.  The proposed rules would define “not de minimis” as any payment, whether a single payment or a series of related payments, which equals or exceeds $100,000 during the same fiscal year.

The types of payments related to commercial development activities that would need to be disclosed include:  taxes; royalties; fees (including license fees); production entitlements; bonuses; dividends; and payments for infrastructure improvements.

The proposed rules would clarify the types of taxes, fees, bonuses, and dividends that are required to be disclosed and how they should be disclosed.  This list of payment types would be consistent with the requirements of the European Union, Canada, and the Extractive Industries Transparency Initiative. 

The proposed rules would require a resource extraction issuer to provide the following information about payments made to further the commercial development of oil, natural gas, or minerals:

  • Type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals.
  • Type and total amount of such payments for all projects made to each government.
  • Total amounts of the payments by category.
  • Currency used to make the payments.
  • Financial period in which the payments were made.
  • Business segment of the resource extraction issuer that made the payments.
  • The government that received the payments, and the country in which the government is located.
  • The project of the resource extraction issuer to which the payments relate.
  • The particular resource that is the subject of commercial development.
  • The subnational geographic location of the project.

The proposed rules would define “project” using an approach that is focused on the legal agreement that forms the basis for payment liabilities with a government.  This definition could also include operational activities governed by multiple legal agreements.

The proposing release notes that the Commission could provide exemptive relief from the requirements of the proposed rules on a case-by-case basis using its existing authority under the Exchange Act.  Also, in light of international developments, as well as the progress made by the U.S. Extractive Industries Transparency Initiative (USEITI), the proposed rules would allow issuers to use a report prepared for foreign regulatory purposes or for the USEITI to comply with the proposed rules if the Commission determines the requirements are substantially similar to the proposed rules.

How It Must Be Disclosed:

The proposed rules would require a resource extraction issuer to publicly disclose the information annually using Form SD.  The information would be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.

When It Must Be Disclosed:

A resource extraction issuer would be required to file the Form SD with the Commission no later than 150 days after the end of its fiscal year.

Background

Section 13(q) was added to the Exchange Act in 2010 by Section 1504 of the Dodd Frank Act.  It directs the Commission to issue final rules that require each resource extraction issuer to include in an annual report information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the federal government for the purpose of the commercial development of oil, natural gas, or minerals.  Among other things, Section 13(q) specifies that to the extent practicable, the rules shall support the commitment of the federal government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.

Rule 13q-1 was initially adopted by the Commission on August 22, 2012, but it was subsequently vacated by the U.S. District Court for the District of Columbia.  Since then, the European Union and Canada have adopted transparency initiatives similar to the rules the Commission previously adopted. 

What’s Next?

If approved for publication by the Commission, the proposed rules will be published on the Commission’s website and in the Federal Register.  Initial comments will be due on January 25, 2016.  Reply comments, which may respond only to issues raised in the initial comment period, will be due on February 16, 2016.

SEC Proposes New Derivatives Rules for Registered Funds and Business Development Companies

The Securities and Exchange Commission today voted to propose a new rule designed to enhance the regulation of the use of derivatives by registered investment companies, including mutual funds, exchange-traded funds (ETFs) and closed-end funds, as well as business development companies.  The proposed rule would limit funds’ use of derivatives and require them to put risk management measures in place which would result in better investor protections.

“Today’s proposal is designed to modernize the regulation of funds’ use of derivatives and safeguard both investors and our financial system,” said SEC Chair Mary Jo White.  “Derivatives can raise risks for a fund, including risks related to leverage, so it is important to require funds to monitor and manage derivatives-related risks and to provide limits on their use.”  

The Investment Company Act limits the ability of funds to engage in transactions that involve potential future payment obligations, including derivatives such as forwards, futures, swaps and written options.  The proposed rule would permit funds to enter into these derivatives transactions, provided that they comply with certain conditions.  

Under the proposed rule, a fund would be required to comply with one of two alternative portfolio limitations designed to limit the amount of leverage the fund may obtain through derivatives and certain other transactions. 

A fund would also have to manage the risks associated with their derivatives transactions by segregating certain assets in an amount designed to enable the fund to meet its obligations, including under stressed conditions.

A fund that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalized derivatives risk management program.

The proposed reforms would also address funds’ use of certain financial commitment transactions, such as reverse repurchase agreements and short sales, by requiring funds to segregate certain assets to cover their obligations under such transactions.

The proposal will be published on the Commission’s website and in the Federal Register.  The comment period for the proposal will be 90 days after publication in the Federal Register.

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FACT SHEET

Use of Derivatives by Registered Investment Companies and Business Development Companies

SEC Open Meeting

December 11, 2015

Action

The Commission will consider whether to propose a new rule designed to provide a modernized, more comprehensive approach to the regulation of funds’ use of derivatives.  The proposed rule would place restrictions on funds, such as mutual funds and exchange-traded funds (ETFs) that would limit their use of derivatives and require funds to put in place risk management measures resulting in better protection for investors.

Highlights of the Proposal

Requirements for Derivatives

Portfolio Limitations for Derivatives Transactions

Under the proposed rule, a fund would be required to comply with one of two alternative portfolio limitations designed to limit the amount of leverage the fund may obtain through derivatives and certain other transactions. 

  • Exposure-Based Portfolio Limit: Under the exposure-based portfolio limit, a fund would be required to limit its aggregate exposure to 150 percent of the fund’s net assets.  A fund’s “exposure” generally would be calculated as the aggregate notional amount of its derivatives transactions, together with its obligations under financial commitment transactions and certain other transactions. 

  • Risk-Based Portfolio Limit: Under the risk-based portfolio limit, a fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test (based on value-at-risk).  This test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives.      

Asset Segregation for Derivatives Transactions    

A fund would be required to manage the risks associated with derivatives by segregating certain assets (generally cash and cash equivalents) equal to the sum of two amounts. 

  • Mark-to-Market Coverage Amount A fund would be required to segregate assets equal to the amount that the fund would pay if the fund exited the derivatives transaction at the time of the determination.  

  • Risk-Based Coverage Amount:  A fund also would be required to segregate an additional risk-based coverage amount representing a reasonable estimate of the potential amount the fund would pay if the fund exited the derivatives transaction under stressed conditions.

Derivatives Risk Management Program

Funds that engage in more than limited derivatives transactions or use complex derivatives would be required to establish a formalized derivatives risk management program consisting of certain components administered by a designated derivatives risk manager.  The fund’s board of directors would be required to approve and review the derivatives risk management program and approve the derivatives risk manager. 

These formalized risk management program requirements would be in addition to certain requirements related to derivatives risk management that would apply to every fund that enters into derivatives transactions in reliance on the rule. 

Requirements for Financial Commitment Transactions

A fund that enters into financial commitment transactions would be required to segregate assets with a value equal to the full amount of cash or other assets that the fund is conditionally or unconditionally obligated to pay or deliver under those transactions.    

Disclosure and Reporting

The Commission will also consider whether to propose amendments to two reporting forms the Commission proposed in May 2015, Form N-PORT and Form N-CEN. 

Proposed Form N-PORT 

Form N-PORT would require registered funds other than money market funds to provide portfolio-wide and position-level holdings data to the Commission on a monthly basis.  The proposal would amend the form to require a fund that is required to have a derivatives risk management program to disclose additional risk metrics related to a fund’s use of certain derivatives.

Proposed Form N-CEN

Form N-CEN would require registered funds to annually report certain census-type information to the Commission.  The proposal would amend the form to require that a fund disclose whether it relied on the proposed rule during the reporting period and the particular portfolio limitation applicable to the fund.

Derivatives White Paper

The proposal refers to a white paper prepared by the SEC’s Division of Economic and Risk Analysis (DERA) staff entitled, “Use of Derivatives by Registered Investment Companies.”   Granular information on the extent to which funds currently use derivatives is not  generally available.  The paper analyzes the use of derivatives by a random sample generated by DERA of 10 percent of all registered funds.  The paper presents data on their derivatives positions, financial commitment transactions, and certain other transactions. 

 The paper reports that some funds use derivatives extensively, with notional exposures ranging up to approximately 950% of net assets, while most funds either do not use derivatives or do not use a substantial amount.  The paper also presents  figures showing that since 2010 some fund investment categories that make greater use of derivatives have received a disproportionately large share of inflows. 

The white paper will be available on www.sec.gov

Background

The ability of funds to borrow money or otherwise issue “senior securities” is limited under Section 18 of the Investment Company Act.  A core purpose of the Investment Company Act is the protection of investors against potential adverse effects of a fund’s leveraging its assets by issuing senior securities. 

Certain derivatives transactions (e.g., forwards, futures, swaps and written options), as well as financial commitment transactions (e.g., reverse repurchase agreements, short sale borrowings, or firm or standby commitment agreements or similar agreements) impose on a fund an obligation to pay money or deliver assets to the fund’s counterparty, which implicates section 18.  The Commission’s proposed derivatives framework would be an exemptive rule under section 18.   

What’s Next

If approved for publication by the Commission, the proposal will be published on the Commission’s website and in the Federal Register.  The comment period for the proposal will be 90 days after publication in the Federal Register. 

Thursday, 10 December 2015

SEC Suspends Public Accountants for Bad Auditing

The Securities and Exchange Commission today suspended five accountants and two audit firms from practicing or appearing before the SEC after they violated key rules that are designed to preserve the integrity of the financial reporting system.

According to the SEC’s orders instituting settled administrative proceedings, the accountants and firms at various times performed deficient audits of public companies, jeopardized the independence of other audits, and falsified and backdated audit documents among other misconduct.

“Auditors must follow the professional standards and avoid conflicts of interest when they opine on the financial information reported by public companies,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office. “These accountants and their firms showed complete disregard for the basic rules of their profession. As a result, they are now barred from working on any SEC-related matters.”

According to the SEC’s orders finding violations by Peter Messineo and his firm Messineo & Co., Charles Klein and his firm DKM Certified Public Accountants, Robin Bigalke, Joseph Mohr, and Richard Confessore:

  • Messineo and his firm, which had more than 70 corporate clients, skipped mandatory quality reviews for their own audits and performed deficient quality reviews for audits by another audit firm.
  • To cover up these violations, Bigalke falsified and backdated audit documents in her role as Messineo & Co.’s senior accountant. She also arranged with Mohr, the firm’s quality reviewer, the backdating of quality review documents.
  • Mohr falsely identified himself as a certified public accountant during a time when was not licensed as a CPA.
  • Messineo served as the CFO of two public companies being audited by Klein and DKM.  Messineo falsely certified the companies’ public filings despite knowing that auditor independence rules were being violated as Confessore was improperly serving conflicting roles as a member of the DKM audit team and an employee of Messineo & Co.
  • After Messineo resigned from his CFO positions at both public companies, he merged his audit firm into DKM and exacerbated DKM’s independence issues because he retained ownership interests in the two companies while DKM continued to audit them.

The SEC’s orders find that the accountants and firms violated or caused violations of Sections 13(a), 13(d), 15(d), and 16(a) of the Securities Exchange Act of 1934 and Rules 13a-1, 13a-13, 13a-14, 13d-1, 13d-2, 15d-1, and 16a-3 as well as Rule 2-02 of Regulation S-X. The order also finds they engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1). They consented to the orders without admitting or denying the findings. 

Messineo and his firm Messineo & Co. are permanently barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC. Klein, Confessore, and DKM are suspended from appearing or practicing before the SEC as accountants for at least two years. Mohr is suspended for at least four years and Bigalke is suspended for at least three years.  They are collectively paying penalties and disgorgement totaling more than $100,000 to settle the SEC’s charges.

The SEC’s investigation was conducted by Peter Bryan Moores, Patrick Noone, and Marc Jones, and the case was supervised by Kevin Currid. The SEC appreciates the assistance of the Public Company Accounting Oversight Board.