Securities Industry Commentator by Bill Singer Esq

April 3, 2019
The American Institute of Certified Public Accountants ("AICPA") and the National Association of State Boards of Accountancy ("NASBA") entered into settlements with DOJ resolving allegations of discrimination on the basis of disability under Title III of the Americans with Disabilities Act ("ADA"). As set forth in part in the DOJ Release:

In order to become a licensed CPA, one must pass the CPA exam, which consists of four separate sections, available only on a computer. When the United States began its investigation in August 2017, there was no auxiliary aid software available to exam-takers with low vision that would allow them to both magnify the computer screen and have the computer read aloud sections of the text. Instead, those exam-takers had to use alternative auxiliary aids, and sometimes a human reader, for some portions of the exam, rather than the screen reader/magnifier they requested that was recommended by their qualified professional health care provider as appropriate for their disability. AICPA now makes screen reader/magnifier software available to exam-takers with low vision for all four sections of the exam and has made the text of the Authoritative Literature (resource materials for use during the exam) accessible through a screen reader. Under the terms of the settlement agreement, AICPA is continuing to work with advocacy organizations and auxiliary aid software developers to ensure ongoing accessibility of the exam to individuals with vision-related disabilities. 

Additionally, the AICPA will pay $15,000 to an individual who was a subject of the alleged discrimination. The United States will also identify other aggrieved persons who are blind or have low vision and recently took the CPA exam with an inappropriate auxiliary aid. Each additional aggrieved person shall receive up to $10,000 from AICPA, based on the details and extent of discrimination they suffered. Individuals who believe they are aggrieved persons under the terms of the agreement should contact the U.S. Attorney's Office at (617) 275-8756.
In a recent FINRA regulatory settlement, we come across a case in which a registered rep didn't make a bad situation worse. Which isn't to say that he undid the bad situation. He didn't. It is to say that he seems to have renounced engaging in further bad actions, which, if nothing else, gave FINRA an excuse to pull its punches. Some might say that the rep stopped short because his broker-dealer caught him in the act. That may be true. On the other hand, whatever the motivation, the confidential information of 1,696 retirement-plan participants never got misused beyond being wrongfully downloaded into spreadsheets and emailed away from the firm. Other than that Mrs. Lincoln, did you at least enjoy the play?
In a Complaint filed in the United States District Court for the Northern District of California, the SEC 
charged Daniel Mattes ( the founder and former chief executive of Silicon Valley startup Jumio Inc., a private mobile payments company) with having grossly overstated Jumio's 2013 and 2014 revenues and then his personal shares of the company to investors in the private, secondary market.  The Complaint alleges that Mattes made approximately $14 million by selling his Jumio shares and hid these sales from Jumio's board.  Jumio restated its financial results in 2015, wiping out most of its revenue, and the shares became worthless after it filed for bankruptcy in 2016.. Without admitting or denying the allegations, Mattesagreed to be enjoined from future similar violations and barred from being an officer or director of a publicly traded company in the U.S., and he will pay more than $16 million in disgorgement and prejudgment interest plus a $640,000 penalty. Separately, the SEC settled proceedings against Jumio's former CFO Chad Starkey
/33-10626.pdf for failing to exercise reasonable care concerning Jumio's financial statements and signing stock transfer agreements that falsely implied that Jumio's board of directors had approved Mattes' sales. Starkey entered into a cooperation agreement to assist the SEC; and he will pay approximately $420,000 in disgorgement and prejudgment interest.
In an Indictment filed in the United States District Court for the Western District of North Carolina, the following Defendants were charged with conspiracy to commit honest services wire fraud, and bribery concerning programs receiving federal funds and aiding and abetting.  Als, Defendant Hayes is charged with three counts of making false statements to the FBI:
  • Greg E. Lindberg,(the founder and Chairman of Eli Global LLC and the owner of Global Bankers Insurance Group);
  • John D. Gray (a consultant for Lindberg); 
  • Robert Cannon Hayes (North Carolina state political party Chairman ); and
  • John V. Palermo (Chairman of a Chatham County political party and an Eli Global executive )
As set forth in part in the DOJ Press Release:

[F]rom April 2017 to August 2018, Lindberg, Gray, Palermo and Hayes devised a scheme to defraud and deprive the citizens of North Carolina of the honest services of the Commissioner, an elected State official, through bribery.  As alleged in the indictment, the defendants engaged in a bribery scheme involving independent expenditure accounts and improper campaign contributions, for the purpose of causing the Commissioner to take official action favorable to Lindberg's company, GBIG.  As the indictment alleges, the defendants gave, offered, and promised the Commissioner millions of dollars in campaign contributions and other things of value, in exchange for the removal of NCDOI's Senior Deputy Commissioner, who was responsible for overseeing regulation and the periodic examination of GBIG. 

During the time frame relevant to the indictment, Lindberg, Gray, Palermo and the Commissioner held numerous in-person meetings at different locations, including in Statesville, North Carolina, and had telephonic and other communications with each other, and with Hayes, to discuss Lindberg's request for the personnel change in exchange for millions of dollars, and to devise a plan on how to funnel campaign contributions to the Commissioner anonymously.  In order to conceal the bribery scheme, Palermo allegedly set up, at the direction of Lindberg, two corporate entities to form an independent expenditure committee with the purpose of supporting the Commissioner's re-election campaign, and funded the entities with $1.5 million as promised to the Commissioner.  Also, at Lindberg and Gray's direction, Hayes allegedly caused the transfer of $250,000 from monies Lindberg had previously contributed to a North Carolina state party of which Hayes was Chairman, to the Commissioner's re-election campaign.

On or about Aug. 28, 2018, FBI agents interviewed Hayes about his involvement with and knowledge of the alleged improper campaign contributions.  During the interview, Hayes allegedly lied to FBI agents about directing funds, at Lindberg's request, from Lindberg's campaign contribution to the North Carolina state political party to the Commissioner's re-election campaign; about having any discussions with the Commissioner about Lindberg or Gray; and about discussing with the Commissioner personnel issues related to the Commissioner's office.

As set forth in the 2Cir's "Syllabus: and opening portion of the Opinion:

FIH, LLC ("FIH") appeals from the district court's grant of summary judgment dismissing its federal securities law claims against Foundation Capital Partners, LLC ("Foundation"), Dean Barr, Joseph Meehan, Thomas Ward, and Joseph Elmlinger (collectively "defendants"). FIH argues that it had reasonably relied on material misrepresentations by defendants in deciding to invest in Foundation, and that defendants are therefore liable under federal and state law. The district court concluded as a matter of law that FIH could not have reasonably relied on the alleged misrepresentations, because such reliance was precluded by a general merger clause in Foundation's LLC agreement, incorporated by reference into the subscription agreements by which FIH had invested in Foundation. Concluding that the merger clause did not as a matter of law preclude FIH's reasonable reliance on the alleged misrepresentations, we VACATE the judgment of the district court and REMAND for further proceedings. 

Syllabus of 2Cir Opinion

FIH, LLC ("FIH") appeals from a grant of summary judgment against it, entered by the United States District Court for the District of Connecticut (Arterton, J.), in its action against Foundation Capital Partners, LLC ("Foundation"), the general partner in a private equity fund set up to invest in minority interests in general partnerships of large hedge funds, and its memberpartners (collectively, "defendants"). FIH alleged that it had purchased a membership interest in Foundation on the basis of misrepresentations by defendants, and asserted claims against them under § 10(b) of the Securities Exchange Act of 1934, the Connecticut Securities Act, and Connecticut common law. The alleged misrepresentations are that Foundation had an active pipeline of investments and that two of Foundation's key partners were able t work together notwithstanding one partner's embittered divorce of the other's sister-in-law. The district court held that a merger clause in Foundation's LLC agreement, incorporated into the subscription agreements by which FIH invested in Foundation, precluded FIH's reasonable reliance on the alleged misrepresentations as a matter of law. For the reasons that follow, we VACATE and REMAND.

Page 3 of the 2Cir Opinion

We do not suggest in any way that general disclaimers or merger clauses, the sophistication of an investor, or the presence of various promises or representations in a written agreement are irrelevant to the reasonableness of a party's reliance on pre-contract factual misrepresentations. The defendants here remain free to argue to a jury, based on these or other factors, that FIH did not reasonably rely on any misrepresentations the jury might conclude were made. Indeed, as Emergent Capital demonstrates, there may be circumstances where a general disclaimer or merger clause, together with an extensive roster of specifically negotiated factual warranties and representations, can lead to a conclusion that, in the particular circumstances of a case, no reasonable jury could find reasonable reliance on a representation not inserted into the written contract. And, of course, careful investors negotiating the terms of an individualized investment can protect themselves by demanding that any representation that is critical to their investment decision be incorporated into the written investment agreement.

Page 25 of the 2Cir Opinion

SEC Charges College Official for Fraudulently Concealing Financial Troubles from Municipal Bond Investors (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York ("SDNY"), the SEC charged the College of New Rochelle's former Controller Keith Borge with violating, and aiding and abetting violations of, the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Borge agreed to a partial settlement that would permanently enjoin him from future misconduct, with potential monetary sanctions to be determined at a later date. In a parallel action, the SDNY U.S. Attorney's Office filed criminal charges against Borge, who pled guilty. after considering the College's extensive cooperation and remediation, the SEC did not charge the institution. As set forth in part in the SEC Release:

[I] recent years, the College of New Rochelle came under considerable financial stress because of declining student enrollment and plummeting revenue from tuition. To hide the college's deteriorating financial condition from investors, the college's former controller, Keith Borge, created false financial records, didn't file payroll tax submissions, and didn't assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college's operations. Borge's misconduct resulted in the college's financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million. Borge also falsely certified the accuracy of the college's financial statements. The financial statements were published by Borge to an online repository in connection with the College's continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors' decisions to invest in the bonds.
In a Complaint filed in the United States District Court for the Southern District of New York ("SDNY"), the SEC charged Robert P. DePalo with defrauding over twenty investors by misrepresenting the value of their investments and use of their funds, including by sending the first $2.3 million of investor funds to his personal bank account. Also, the Complaint alleged that DePalo made false statements to SEC examiners in an attempt to conceal the fraud. In a  final judgment entered in SDNY, Robert P. DePalo was permanently enjoined from violating the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act, and ordered to pay $6.5 million in disgorgement, which was deemed satisfied by the restitution order in the criminal case. Previously, the SEC barred DePalo from the securities industry, and obtained final judgments against his associates and entities controlled by DePalo. Based on conduct similar to that alleged in the SEC's Complaint, a New York State Supreme Court jury found DePalo guilty of criminal charges, which included grand larceny, money laundering, schemes to defraud, and other charges. DePalo was sentenced to 7-21 years in state prison, and ordered to pay full restitution to defrauded investors.