The Securities and Exchange Commission today charged Brixmor Property Group Inc., a publicly-traded real estate investment trust, and four former senior executives with fraud in connection with a scheme to manipulate a key non-GAAP metric relied on by analysts and investors to evaluate the company’s financial performance.
Brixmor has agreed to settle the Commission’s charges and pay a $7 million penalty.
The SEC’s complaint against the individuals, which was filed in the United States District Court for the Southern District of New York, alleges that from the third quarter of 2013 to the third quarter of 2015, Brixmor CEO Michael Carroll, CFO Michael Pappagallo, CAO Steven Splain and Senior VP of Accounting Michael Mortimer improperly adjusted Brixmor’s same property net operating income (SP NOI) in order to report quarterly numbers that hit the Company’s publicly-issued growth targets. According to the complaint, certain of the defendants described their manipulation of the non-GAAP measure as “mak[ing] the sausage,” using tactics such as selectively recognizing income from a “cookie jar” account, incorporating certain income that the company had represented was excluded, and improperly lowering the prior year’s SP NOI to give the appearance of stronger growth in the current year.
“We allege that these senior executives intentionally manipulated a key metric to mislead investors about Brixmor’s ability to hit its targets,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “A company that chooses to publicly present non-GAAP financial measures must do so truthfully.”
The SEC’s complaint charges Carroll, Pappagallo, Splain, and Mortimer with violating or aiding and abetting violations of the antifraud and books and records provisions of the Securities Exchange Act of 1934, as well as with violating Rule 100(b) of Regulation G, which pertains to the reporting of non-GAAP performance measures. The complaint seeks permanent injunctions, disgorgement plus interest and penalties, and officer-and-director bars. Splain and Mortimer have agreed to the entry of partial judgments against them in which they consent to injunctive relief with other monetary relief and bars to be determined by the court in the future. These settlements are subject to court approval.
The SEC’s settled order as to Brixmor finds that the company violated the antifraud provision of the federal securities laws and Rule 100(b) of Regulation G, and filed false and misleading annual, quarterly, and current reports with the SEC. Without admitting or denying the allegations, the company agreed to pay a $7 million penalty and comply with certain undertakings, including retaining an independent consultant to review and assess controls relating to the calculation and presentation of non-GAAP measures including SP NOI.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Carroll, Pappagallo, Splain, and Mortimer. Splain and Mortimer have pleaded guilty to those charges.
The SEC’s investigation was conducted by Tuongvy T. Le, Tejal D. Shah, Sheldon L. Pollock and Scott B. York. The litigation will be led by Nancy A. Brown, Ms. Shah, and Ms. Le. The case is being supervised by Lara Shalov Mehraban. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the U.S. Postal Inspection Service, and the New York State Department of Financial Services.
The Securities and Exchange Commission today announced charges against Facebook Inc. for making misleading disclosures regarding the risk of misuse of Facebook user data. For more than two years, Facebook’s public disclosures presented the risk of misuse of user data as merely hypothetical when Facebook knew that a third-party developer had actually misused Facebook user data. Public companies must identify and consider the material risks to their business and have procedures designed to make disclosures that are accurate in all material respects, including not continuing to describe a risk as hypothetical when it has in fact happened.
Facebook has agreed to pay $100 million to settle the charges.
According to the SEC’s complaint, in 2014 and 2015, the now-defunct advertising and data analytics company, Cambridge Analytica, paid an academic researcher, through a company he controlled, to collect and transfer data from Facebook to create personality scores for approximately 30 million Americans. In addition to the personality scores, the researcher, in violation of Facebook’s policies, also transferred to Cambridge Analytica the underlying Facebook user data, including names, genders, locations, birthdays, and “page likes.” Cambridge Analytica used this information in connection with its political advertising activities.
The SEC’s complaint alleges that Facebook discovered the misuse of its users’ information in 2015, but did not correct its existing disclosure for more than two years. Instead, Facebook continued to tell investors that “our users’ data may be improperly accessed, used or disclosed.” (emphasis added) According to the SEC complaint, Facebook reinforced this false impression when it told news reporters who were investigating Cambridge Analytica’s use of Facebook user data that it had discovered no evidence of wrongdoing. When the company finally did disclose the incident in March 2018, its stock price dropped.
The complaint further alleges that during this two-year period, Facebook had no specific policies or procedures in place to assess the results of their investigation for the purposes of making accurate disclosures in Facebook’s public filings.
“Public companies must accurately describe the material risks to their business,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “As alleged in our complaint, Facebook presented the risk of misuse of user data as hypothetical when they knew user data had in fact been misused. Public companies must have procedures in place to make accurate disclosures about material business risks.”
“We allege that Facebook exacerbated its disclosure failures when it misled reporters who asked the company about its investigation into Cambridge Analytica,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office. “This gave further weight to Facebook’s misleading statements in its public filings.”
Without admitting or denying the SEC’s allegations, Facebook has agreed to the entry of a final judgment ordering a $100 million penalty and permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a) thereunder.
The SEC’s investigation was conducted by Matthew Meyerhofer and Robert Tashjian and supervised by Tracy L. Davis and Erin Schneider of the San Francisco office.
The Securities and Exchange Commission today announced a half-million dollar award to an overseas whistleblower whose expeditious reporting helped the Commission bring a successful enforcement action.
“The Commission’s whistleblower award program has reached an important milestone,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “With recent actions, more than $2 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received by whistleblowers. This represents the direct and important role that whistleblowers, like the overseas whistleblower being awarded today, have in enforcement actions and the protection of investors.”
The SEC has awarded approximately $385 million to 65 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.
As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity.
The Securities and Exchange Commission today charged the former chief executive officer of a Chicago-area engine manufacturing company and two former senior sales executives for their roles in an accounting fraud that allegedly overstated the publicly-traded company’s revenues by almost $25 million.
According to the complaint, filed in federal court in Chicago, Gary Winemaster, Power Solutions International Inc.’s former CEO, and two former senior sales executives, Craig Davis and James Needham, caused Power Solutions to fraudulently record revenue for purported sales of products that were not complete, that the customer had not agreed to accept, for which the price was falsely inflated, and from improper “bill and hold” arrangements. The SEC further alleges that the defendants misled and concealed key information from Power Solutions’ internal accounting personnel and external auditor.
“Investors depend on company executives to provide accurate, reliable information about their company’s financial condition,” said Kathryn Pyszka, Associate Regional Director of the SEC’s Chicago Regional Office. “As we allege, these executives deprived investors of truthful information about Power Solutions’ financial health by causing the company to fraudulently record revenue to meet revenue targets and projections.”
The SEC’s complaint charges the defendants with violating various antifraud, books and records, reporting, and internal controls provisions of the federal securities laws as well as with aiding and abetting violations. The complaint seeks permanent injunctions and penalties against all defendants, disgorgement and prejudgment interest against Needham, an officer-and-director bar against Winemaster, and a clawback of incentive-related compensation paid to Winemaster during the alleged fraud.
The U.S. Attorney’s Office for the Northern District of Illinois filed criminal charges against the defendants for related misconduct.
The SEC’s investigation, which is continuing, was conducted by Michael Mueller and Timothy Tatman of the Chicago Regional Office under the supervision of Steven Klawans. The litigation will be led by Daniel Hayes. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the Federal Bureau of Investigation.
The Securities and Exchange Commission today announced an emergency action charging two individuals with running a pump and dump scheme targeting retail investors. The SEC also obtained an emergency court order freezing the defendants’ assets.
According to the SEC’s complaint, Florida resident Garrett M. O’Rourke and Maryland resident Michael J. Black worked together between 2016 and 2018 to fraudulently sell the stock of several microcap companies to investors, including elderly retail investors, using high pressure stock promotional campaigns. The SEC alleges that, as part of the scheme, O’Rourke aggressively touted the companies to prospective investors through unsolicited cold calls during which he repeatedly lied about his association with legitimate financial institutions and the prospects of the microcap companies. According to the complaint, O’Rourke also told prospective investors that he had their best interests in mind and that he had found promising investment opportunities for them. In actuality, however, O’Rourke was calling them to convince them to buy the stocks so that he and Black could sell their holdings in the same stocks for a profit. O’Rourke and Black also allegedly schemed to disguise their control over at least one of the microcap companies, EnviroTechnologies International, Inc., in order to facilitate their illegal sales of the company’s stock in the public securities market, generating millions of dollars in proceeds.
“The SEC continues to aggressively pursue microcap fraud, an ongoing source of harm to retail investors,” said John T. Dugan, Associate Director of Enforcement in the SEC’s Boston Regional Office. “Investors should beware of parties using the types of sales techniques alleged in our complaint, including unsolicited calls and high-pressure sales tactics.”
“We were able to halt O’Rourke’s and Black’s scheme and freeze their assets despite their elaborate attempts to conceal their conduct using overseas trading platforms and a fictitious name,” said Lara Shalov Mehraban, Associate Regional Director of Enforcement in the SEC’s New York Regional Office.
The SEC’s complaint, filed on July 17, 2019, in U.S. District Court for the Eastern District of New York, charges Black and O’Rourke with violating the antifraud and registration provisions of the federal securities laws. In addition to the asset freeze and other temporary relief obtained, the SEC is seeking permanent injunctions, return of allegedly ill-gotten gains with prejudgment interest, civil penalties, and penny stock bars.
In a parallel criminal case, the U.S. Attorney’s Office for the Eastern District of New York today announced criminal charges against O’Rourke.
The SEC’s investigation was conducted by Trevor Donelan, Eric Forni, Kathy Shields, and Amy Gwiazda of the Boston Regional Office, and Rhonda Jung, Melissa Coppola, and Sandeep Satwalekar of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Offices for the Eastern District of New York and District of Massachusetts, the Federal Bureau of Investigation, the Royal Canadian Mounted Police, the British Columbia Securities Commission, the Malta Financial Services Authority, the Mauritius Financial Services Commission, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, and the Financial Industry Regulatory Authority.
The Securities and Exchange Commission today announced settled administrative proceedings against Swapnil Rege, a North Brunswick, New Jersey portfolio manager and trader, for mispricing private fund investments, resulting in a large personal bonus.
According to the SEC’s order, from June 2016 to April 2017, while employed by the fund’s adviser, Rege manipulated the inputs he used to value interest rate swaps and swap options to create the false impression that his investments for the fund were profitable. Rege’s conduct, the SEC’s order finds, artificially inflated the fund’s reported returns and caused the fund to pay too much in fees. Rege took steps to conceal his mispricing from the fund’s adviser. Because of Rege’s inflated valuations, he received a $600,000 bonus. The order states that the adviser ultimately fired Rege, closed the fund, and returned the excessive management fees to the fund.
“Rege overvalued fund assets to benefit only himself and then tried to cover it up,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Today the SEC, along with our colleagues at the Commodity Futures Trading Commission, are holding him accountable for his misconduct, which harmed both the fund and its investors.”
The SEC’s order finds that, based on the above conduct, Rege aided and abetted and caused the adviser’s violations of the antifraud provisions of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Without admitting or denying the findings in the SEC’s order, Rege agreed to a cease-and-desist order, an associational bar and investment company prohibition with a right to apply for reentry after three years, disgorgement of ill-gotten gains of $600,000 plus prejudgment interest, and a civil penalty of $100,000.
The Commodity Futures Trading Commission (CFTC) today also entered a consent order against Rege, involving substantially the same conduct as described in the SEC’s order. The CFTC’s order finds that Rege violated the Commodity Exchange Act and imposes a trading ban for a period of at least three years, disgorgement that will be deemed satisfied by the payment of disgorgement under the SEC’s order, and an additional penalty of $100,000.
The SEC’s investigation in this matter was conducted by Cynthia Storer Baran, Naomi Sevilla, Brian Fitzpatrick, and Robert Baker of the Asset Management Unit, with the assistance of Deena Bernstein of the Boston Regional Office. The SEC acknowledges and appreciates the assistance and cooperation of the CFTC.
The Securities and Exchange Commission today announced that its Retail Strategy Task Force will host a roundtable on October 3 on combating elder investor fraud. The roundtable will focus on the types of fraudulent and manipulative schemes currently targeting elder investors. The roundtable also will explore views from a broad range of regulators and industry experts on potential steps regulators, broker-dealers, investment advisers, and others can take to identify and combat elder investor fraud.
The roundtable will be held at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C. and will begin at 9:30 a.m. ET. The roundtable will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.
Members of the public who wish to provide their views on the topic may submit comments electronically or on paper. Please submit comments using one method only. Information that is submitted will become part of the public record of the roundtable and posted on the SEC’s website. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.
The Securities and Exchange Commission today charged AR Capital LLC, its founder Nicholas S. Schorsch, and its former CFO Brian Block with wrongfully obtaining millions of dollars in connection with two separate mergers between real estate investment trusts (REITs) that were sponsored and externally managed by AR Capital. The defendants agreed to settle the matter by, among other things, cumulatively agreeing to over $60 million in disgorgement, prejudgment interest and civil penalties.
According to the SEC’s complaint, between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (ARCP), a publicly-traded REIT, to merge with two publicly-held, non-traded REITs. The SEC alleges that AR Capital, Schorsch, and Block, acting in breach of the relevant proxy disclosures, inflated an incentive fee in both mergers. As alleged, this improper calculation allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation. In addition, the complaint alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements entered into in connection with the mergers.
“REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders.”
The SEC’s complaint, filed in federal district court in Manhattan, charges AR Capital and Block with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and falsifying books and records of ARCP. The complaint charges Schorsch with negligently violating the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933, as well as books and records violations.
Without admitting or denying the allegations in the complaint, AR Capital, Schorsch, and Block have consented to entry of a final judgment that imposes permanent injunctions from violations of the charged provisions; orders combined disgorgement and prejudgment interest on a joint-and-several basis of over $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. The settlements are subject to court approval.
The SEC’s investigation has been conducted by Victor Suthammanont, Janna I. Berke, Hane L. Kim, Karen Willenken, Nancy A. Brown, and Wendy B. Tepperman of the SEC’s New York office, and supervised by Sanjay Wadhwa.
The Securities and Exchange Commission and the North American Securities Administrators Association (NASAA) have issued a summary that explains the application of the federal and state securities laws to opportunity zone investments. The “opportunity zone” program was established by the Tax Cuts and Jobs Act in December 2017 to provide tax incentives for long-term investing in designated economically distressed communities.
The summary is intended to help participants in the opportunity zone program understand the compliance implications for qualified opportunity funds under federal and state securities laws.
“The opportunity zone program has the potential to encourage investment and economic development in many areas across the country that are in need of capital. The staff statement released today will help market participants understand securities laws implications when seeking to raise capital for opportunity zones,” said SEC Chairman Jay Clayton. “In addition, today the SEC is issuing staff guidance regarding the ability of Main Street investors to participate in these offerings.”
“This new program provides an opportunity to strengthen investments in low-income communities and rural areas that traditionally struggled to attract the capital necessary to spur economic growth and job creation,” said Michael Pieciak, NASAA President and Vermont’s Commissioner of Financial Regulation. “This joint summary is a good example of state and federal regulators working collaboratively to address new compliance issues raised by an innovative program and thereby promoting our dual mission of protecting investors and helping facilitate capital formation.”
The summary discusses the opportunity zone program and when interests in qualified opportunity funds would be securities under federal and state securities laws. It also provides an overview of the SEC and state requirements relating to qualified opportunity funds and their securities offerings, broker-dealer registration, and considerations for advisers to a qualified opportunity fund.
The Opportunity Zones summary is available on the SEC’s website and NASAA’s website.
About the SEC:
The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
Formed in 1919, NASAA is the non-profit association of state, provincial, and territorial securities regulators in the United States, Canada and Mexico. NASAA has 67 members, including the securities regulators in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. NASAA’s U.S. members protect investors through the enforcement of state securities laws, commonly known as “Blue Sky Laws.” For more information, visit: www.nasaa.org.
The Securities and Exchange Commission today instituted two related enforcement actions against Nomura Securities International Inc., which has agreed to repay approximately $25 million to customers for its failure to adequately supervise traders in mortgage-backed securities.
The SEC orders find that Nomura bond traders made false and misleading statements to customers while negotiating sales of commercial and residential mortgage-backed securities (CMBS and RMBS). According to the SEC’s orders, several Nomura traders misled customers about the prices at which Nomura had bought securities, the amount of profit Nomura would receive on the customers’ potential trades, and who currently owned the securities, with traders often pretending that they were still negotiating with a third-party seller when Nomura had, in fact, already bought a security. The SEC’s orders further find that Nomura lacked compliance and surveillance procedures that were reasonably designed to prevent and detect this misconduct, which inflated the firm’s profits on CMBS and RMBS transactions at its customers’ expense. The SEC previously filed charges against two CMBS and three RMBS traders at Nomura, whose misrepresentations are described in the SEC’s orders.
“Firms acting as dealers in opaque markets like those for CMBS and RMBS must take steps to prevent misleading communications with their customers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
“These orders underscore that firms must have adequate supervisory procedures, particularly surrounding the sale of complex instruments,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “Weak procedures, such as those found here, may enable employee misconduct to go undetected.”
To settle the charges that it failed to reasonably supervise its traders, Nomura agreed in the two orders to be censured and to reimburse customers the full amount of firm profits earned on any RMBS or CMBS trades in which a misrepresentation was identified, paying over $20.7 million to RMBS customers and over $4.2 million to CMBS customers. Nomura also agreed to pay a $1 million penalty in the RMBS-related case and a $500,000 penalty in the CMBS-related case. Both orders note that the penalty amounts reflect substantial cooperation by Nomura during the SEC’s investigation, including remedial efforts by the firm to improve its surveillance procedures and other internal controls.
The SEC’s CMBS investigation and ensuing litigation was conducted by staff in the New York Regional Office, including Ladan Stewart, Chevon Walker, Richard Hong, and George Stepaniuk. The case is being supervised by Mr. Wadhwa. The RMBS investigation and ensuing litigation was conducted by staff in the Complex Financial Instruments Unit and the Boston Regional Office, including Susan Curtin, Kerry Dakin, Rua Kelly, Al Day and Celia Moore. The case is being supervised by Mr. Michael.