Valeant and Philidor began negotiations for Valeant to purchase Philidor, and Valeant ultimately purchased an option to buy Philidor (the "Option") in exchange for $133 million in payments to Philidor's owners, and the promise of $100 million in additional milestone payments if Philidor were to meet certain sales targets. Despite the duty of loyalty owed by TANNER to Valeant, during negotiations relating to the Option, TANNER and DAVENPORT secretly made preparations for TANNER to receive a multimillion-dollar kickback out of the money that Valeant was going to pay Philidor's owners for the Option. Among other things, TANNER and DAVENPORT set up shell company bank accounts in order to launder the kickbacks to TANNER. While these preparations were underway, TANNER secretly advised DAVENPORT on his negotiations with Valeant. TANNER did this in contravention of his duties to Valeant and despite the fact that he was also internally advising Valeant in its negotiations with DAVENPORT about the Option.In addition to secretly helping DAVENPORT negotiate against Valeant in exchange for the promise of a kickback from DAVENPORT, TANNER took other actions to benefit Philidor and DAVENPORT personally, and against the direction of his supervisors at Valeant. For example, TANNER's supervisors directed him to identify other pharmacies that Valeant could use to distribute its drugs, in order to minimize the risks of overreliance on Philidor. TANNER deceived his supervisors into believing that he was pursuing their direction in good faith when, in fact, he lied about participating in meetings and doing due diligence on potential competitors to Philidor. In addition, TANNER helped Philidor and DAVENPORT secure favorable payment terms.In order to keep their scheme hidden from Valeant, TANNER often used a Philidor email account that TANNER maintained in the name of "Brian Wilson" to communicate with DAVENPORT. TANNER also pretended to be Brian Wilson in at least one meeting that he and DAVENPORT participated in on behalf of Philidor.In December 2014, Valeant acquired the Option. DAVENPORT, through two different entities that he controlled, received approximately $50 million of the $133 million that Valeant paid. DAVENPORT transferred $9.7 million of that amount to TANNER through a shell company he controlled, and then to a shell company controlled by TANNER, an entity called Befrielse Consolidated, LLC ("Befrielse"). TANNER concealed his receipt of this money from Valeant, in violation of his fiduciary duties to Valeant, and in violation of Valeant's conflict of interest policies. Prior to receiving the funds, TANNER had repeatedly certified to Valeant that he was in full compliance with Valeant's Standards of Business Conduct, which prohibited any conflicts of interest without full disclosure and approval by company management.After the Option purchase was completed, TANNER continued to use his position at Valeant to advance the interests of Philidor and DAVENPORT, including by resisting Valeant's efforts to collect payments from Philidor owed to Valeant and pursuing milestone payments under the terms of the Option that he secretly expected to share in. In communications concerning the scheme, using TANNER's secret Brian Wilson email account, DAVENPORT discussed with TANNER how TANNER would secretly continue to promote DAVENPORT's interests, even while he purported to represent Valeant's interests as the Valeant executive responsible for Philidor. Among other things, DAVENPORT stated that he pictured his and TANNER's "butch and sundance ride into the sunset (or off the cliff as in the flick)," to which TANNER responded, using the secret Brian Wilson account: "[G]ave me a good chuckle when I just saw it. Will have to keep playing the game :)." .
[I]n general, good faith judgments of CCOs made after reasonable inquiry and analysis should not be second guessed. In addition, indicia of good faith or lack of good faith are important factors in assessing reasonableness, fairness and equity in the application of CCO liability.While matters involving the determination of CCO liability are facts and circumstances specific, there are matter types where determinations of individual liability generally are straightforward. For example, absent unusual mitigating circumstances, when a CCO engages in wrongdoing, attempts to cover up wrongdoing, crosses a clearly established line, or fails meaningfully to implement compliance programs, policies, and procedures for which he or she has direct responsibility, we would expect liability to attach. In contrast, disciplinary action against individuals generally should not be based on an isolated circumstance where a CCO, using good faith judgment makes a decision, after reasonable inquiry, that with hindsight, proves to be problematic. When the facts and circumstances of matters fall outside these relatively clear examples of where liability should or should not attach, liability determinations will require matter-specific analysis and informed judgment.With that perspective, in this instance, on the record before us, it is clear that North failed to make reasonable efforts to fulfill the responsibilities of his position. It is the evidence of North's actions and failures to act that is the basis for his liability. North's failure to fulfill his own responsibilities was egregious. Here, North ignored red flags and repeatedly failed to perform compliance functions for which he was directly responsible. Under these facts and circumstances, FINRA's disciplinary action was clearly appropriate.In reaching this conclusion, we recognize that North was not the only person at Southridge whose performance may have been deficient with respect to the written supervisory procedures and review of electronic communications. The Commission has held repeatedly that the "chief executive officer of a brokerage firm is responsible for compliance with all of the requirements imposed on his firm 'unless and until he reasonably delegates particular functions to another person in the firm and neither knows nor has reason to know' that a problem has arisen." Although Schloth may have delegated the compliance functions with respect to establishing and maintaining adequate written procedures and reviewing electronic correspondence to North, that did not end his responsibilities. "It is not sufficient for the person with overarching supervisory responsibilities to delegate supervisory responsibility to a subordinate, even a capable one, and then simply wash his hands of the matter until a problem is brought to his attention. . . . Implicit is the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised." The record does not indicate what actions Schloth took to monitor whether North was reviewing electronic communications, and we are troubled by the possibility that North could have abdicated his own responsibilities to review those communications without Schloth knowing.Finally, it is not clear from the record why FINRA did not charge Southridge, although we take official notice of the fact that Southridge terminated or withdrew its registration over a year prior to FINRA instituting its action here. "A firm . . . can act only through its agents, and is accountable for the actions of its responsible officers." We think it important to make it clear to firms-by holding them responsible when there are problems-that it is in their interest to have effective, diligent compliance officers to help them remain in compliance with their obligations. Further, as we have said previously, "broker-dealers must provide effective staffing, sufficient resources and a system of follow-up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised." Indeed, in some cases it may be more appropriate to hold the firm liable rather than the compliance officer. In this case, we agree with FINRA that its disciplinary action against North was warranted.
The first scheme involved a fraud on investors in Maiden Capital LLC ("Maiden Capital"), a hedge fund based in Charlotte, North Carolina. Stephen Maiden was the managing member of Maiden Capital. Between in or about March 2009 and in or about June 2012, AMANAT, along with Maiden and others, devised and carried out a scheme to hide the fact that investments by Maiden Capital in Enable, an investment vehicle owned and managed by AMANAT, had been lost. To facilitate the scheme, Maiden, with AMANAT's assistance, generated fictitious client account statements that failed to disclose millions of dollars in Enable-related losses.The second scheme involved accounting fraud at KIT digital ("KITD"), a publicly traded company based in New York, New York, and Prague, Czech Republic. From at least in or about 2009 through in or about 2012, AMANAT, along with Tuzman, KITD's former CEO, and Robin Smyth, KITD's former CFO, engaged in an illegal scheme to deceive KITD shareholders, members of the investing public, KITD's independent auditors, and others concerning KITD's true operating performance and financial results. Instead of informing KITD's auditors and investors that millions of dollars that KITD had invested with Enable had been lost or fraudulently misappropriated, AMANAT falsely represented that KITD's investment with Enable was sound and earning steady interest.