Securities Industry Commentator by Bill Singer Esq

September 30, 2019

featured in today's Securities Industry Commentator:

White House deliberates block on all US investments in China (
As reported by CNBC "Restricting investments in Chinese entities would be meant to protect U.S. investors from excessive risk due to lack of regulatory supervision, the source says."
Scandal-plagued Wells Fargo names BNY Mellon's Charles Scharf as CEO (
As reported by CNBC "The scandal-plagued bank has struggled for months to find a candidate willing to take the top position."

So . . . does that mean that the White House will block all US investments in Wells Fargo?
The SEC suspended a felon's ability to practice before it as a CPA, which was his chosen profession until he ran afoul of the law. He argues that he poses only a negligible risk to the public and should not be suspended by the federal regulator. It may well be that this convict will overturn his conviction, which is what he seems to be actively pursuing these days. Personally, I don't think he stands a chance, but, hey, if he's innocent, I wish him all the best with his appeals-- after all, I remember all too well the trials and tribulations of poor Andy Dufresne! 

SEC Charges Hologram Company and Its CEO with Fraud and Registration Violations (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Hologram USA Newtorks Inc. and its Chief Executive Officer Alkiviades David with violating the antifraud provisions of Section 17(a) of the Securities Act  and Section 10(b) and Rule 10b-5 of the Securities Exchange Act and the registration provisions of Sections 5(a) and 5(c) of the Securities Act. Additionally, David is charged with aiding and abetting Hologram USA's violations of the antifraud provisions. As alleged in part in the SEC Release:

[I]investors were drawn to Hologram USA's website by a TV commercial regarding an investment opportunity. The website contained information about a purported pending Regulation A securities offering, and a separate unregistered offering of convertible notes. As alleged in the complaint, Hologram USA used general solicitation and allowed non-accredited investors to purchase convertible shares, in violation of certain federal registration requirements. As presented on the website, Hologram USA's business plan included, in major part, the creation of "resurrection" performances in which the holograms of famous deceased artists would be used to create "live" concerts with the deceased. As alleged in the SEC's complaint, a slide deck available on the website for investors and potential investors contained false and misleading information concerning Hologram USA's right to present these shows, and its current theater network in which it planned to broadcast them.

Defendant sentenced for a second time for using counterfeit checks to buy United States Postage Stamps(DOJ Release)
John Lamb, a/k/a Johnny Lamb pled guilty in the United States District Court for the Northern District of Georgia and was sentenced to two years in prison plus three years of supervised release; and he was ordered to pay $143,960 restitution. As alleged in part in the DOJ Release:

From September 2018 through March 2019, John Lamb a/k/a Johnny Lamb engaged in a scheme to defraud the USPS throughout the Southeastern United States, including North Georgia.  Lamb negotiated over 200 counterfeit and forged checks at post offices in Georgia, Tennessee, North Carolina, Alabama, and Kentucky, defrauding the United States Postal Service of over $140,000.  The value of these checks ranged from $500 to $950, which he used to buy U.S. postage stamps. 

The U.S. Attorney's Office for the Northern District of Georgia prosecuted Lamb in 2014 for using counterfeit checks to buy over $500,000 worth of U.S. Postal Service products, including stamps and services.  He served a sentence in federal prison.

Bill Singer's Comment: Can you imagine when Lamb is walkin' the Yard and asked: "So, waddya in for?" He will likely say that he's a two timer, who ripped off the Feds. big time, six figgers. Sadly, when pressed, he will have to admit that he forged checks in order to buy postage stamps. With disdain, the boys in the big-house will derisively say "Stamps -- you're on the inside for stamps?" And with that, some large men will try to steal his pudding during lunch. I mean, geez, Johnny (if it's okay to call you by your first name), you shoulda thought bigger. More to the point, like, you know, who the hell uses stamps these days? I mean for godsakes, why didn't you buy fax paper while you were at it? Maybe you could have used the fake checks to buy holograms? What's a hologram, you ask -- didn't you read about the case immediately above yours?

Mylan to Pay $30 Million for Disclosure and Accounting Failure Relating to EpiPen (SEC Release)
In a Complaint filed in the United States District Court for the District of the District of Columbia, the SEC alleged that Mylan N.V. violated violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Without admitting or denying the SEC's allegations, Mylan agreed to the entry of a final judgment ordering a $30 million penalty and permanently enjoining it from violating those provisions. As alleged in part in the SEC Release:

[M]ylan classified EpiPen as a "generic" drug under the Medicaid Drug Rebate Program, which resulted in Mylan paying much lower rebates to the government than if EpiPen had been classified as a "branded" drug. The complaint alleges that in October 2014, the Centers for Medicare and Medicaid Services (CMS) informed Mylan that EpiPen was misclassified as a generic drug. Starting in November 2014, and continuing for nearly two years, the DOJ conducted a civil investigation into whether Mylan misclassified EpiPen and thereby overcharged the government for EpiPen sales to Medicaid patients. During the investigation, DOJ issued multiple subpoenas and investigative demands, rejected Mylan's arguments to close the investigation, and indicated its intent to sue Mylan if Mylan failed to make a settlement offer.  As alleged in the complaint, Mylan produced documents and other information to DOJ, including providing potential damages calculations and making offers of settlement.

As alleged in the complaint, public companies facing possible material losses from a lawsuit or government investigation must (1) disclose the loss contingency if a loss is reasonably possible; and (2) record an accrual for the estimated loss if the loss is probable and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DOJ investigation before October 2016, when it announced a $465 million settlement with DOJ. As a result, Mylan's public filings were false and misleading. Further, as alleged in the complaint, Mylan's 2014 and 2015 risk factor disclosures that a governmental authority may take a contrary position on Mylan's Medicaid submissions, when CMS had already informed Mylan that EpiPen was misclassified, were misleading.

Automaker to Pay $40 Million for Misleading Investors (SEC Release)
An SEC Order alleged that FCA US LLC and its parent Fiat Chrysler Automobiles N.V; violated the antifraud provisions of the Securities Act and the Securities Exchange Act, as well as the reporting, books and records, and internal accounting controls provisions of the Exchange Act.  Without admitting or denying the SEC's findings, the two companies greed to cease and desist from committing or causing any future violations of these provisions and to pay a civil penalty of $40 million on a joint and several basis. As alleged in part in the SEC Release:

[B]etween 2012 and 2016, FCA US issued monthly press releases falsely reporting new vehicle sales and falsely touting a "streak" of uninterrupted monthly year-over-year sales growth, when in fact, the growth streak had been broken in September 2013.  FCA US and Fiat Chrysler Automobiles included the press releases in their SEC filings.  New vehicle sales and the growth streak were key performance indicators that illustrated the company's competitive position and demand for its vehicles.  The SEC's order finds that FCA US inflated new vehicle sales results by paying dealers to report fake vehicle sales and maintaining a database of actual but unreported sales, which employees often referred to as a "cookie jar."  In months when the growth streak would have ended or when FCA US fell short of other targets, FCA US dipped into the "cookie jar" and reported old sales as if they had just occurred.
An SEC Order alleged that BMO Harris Financial Advisors Inc. and and BMO Asset Mgmt Corp. willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC's findings, BMO Harris and BMO Asset Mgmt agreed to cease and desist from committing or causing any future violations of these provisions, to pay disgorgement and prejudgment interest of $29.73 million, and to pay a civil penalty of $8.25 million, amounts which will be distributed to harmed investors, and to be censured. As set forth in part in the SEC Release. As alleged in part in the SEC Release:

[W]hen selecting investments for clients, BMO Harris Financial Advisors Inc. (BMO Harris) and BMO Asset Management Corp. (BMO Asset Mgmt) preferred mutual funds managed by BMO Asset Mgmt (proprietary funds) and invested approximately 50% of MAAP client assets in proprietary funds. This practice resulted in payment of additional management fees to BMO Asset Mgmt, however, the SEC's order found that neither BMO adviser disclosed this practice or the associated conflict of interest to clients. Moreover, the SEC's order found that, when considering mutual funds for MAAP, BMO Asset Mgmt evaluated the lower-cost institutional share class for both proprietary and non-proprietary funds, but the higher-cost, non-institutional share class for proprietary mutual funds always was selected for MAAP.

In addition, the SEC found that BMO Harris failed to disclose its conflicts of interest arising from investing MAAP client assets in higher-cost share classes of certain mutual funds, including funds managed by BMO Asset Mgmt, when lower-cost share classes were available. By selecting the higher-cost share classes, BMO Harris received revenue sharing payments and avoided paying certain transaction costs, while clients received lower returns on these investments.

CFTC Announces Approximately $7 Million Whistleblower Award (CFTC Release)
The CFTC awarded about $7 million to a whistleblower  In making its Award, the CFTC recommend payment to Claimant 1 but denied payment to Claimants 2 - 5. The CFTC Release noted, in part, that:

"Today's award demonstrates how integral whistleblowers have become to our enforcement efforts," said CFTC Director of Enforcement James McDonald.  "Forty percent of our investigations now involve whistleblowers.  We expect that number to increase as the CFTC continues to expand its whistleblower program."    

"This award shows that, in some cases, whistleblowers may provide information about wrongdoing that is not completely accurate, but if any information they provide leads us to open an investigation resulting in a successful enforcement action, we will reward them accordingly," said CFTC Whistleblower Office Director Christopher Ehrman.

As asserted in part in the CFTC Award:

[C]laimant 1 did not provide particularly significant information to the Commission. The charges the Commission brought were ultimately different from Claimant 1's allegations In addition, Clamant 1 provided limited assistance because Claimant 1 could not provide specifics to CFTC staff investigating the matter and did not understand how the violations under investigation worked.  The breakthrough in the investigation came from [REDACTED].