Houston-Based Company and CEO Charged with Oil-and-Gas Fraud Charges

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced charges against a Houston-based oil-and-gas exploration and production company and its CEO for making fraudulent claims about the company’s oil reserves.

An SEC enforcement investigation found that Houston American Energy Corp. and John F. Terwilliger fraudulently claimed that a Colombian exploration concession in which Houston American only owned a fractional interest held between 1 billion and 4 billion barrels of oil reserves, and that the reserves were worth more than $100 per share to Houston American’s investors. The estimates lacked any reasonable basis and were falsely attributed to the concession’s operator, whose actual estimates were much lower.

“Terwilliger and Houston American misled investors by wildly exaggerating the extent and nature of their oil and gas holdings,” said Gerald H. Hodgkins, associate director of the SEC’s Enforcement Division. “They used a cadre of third parties to publicize and bolster their misleading claims.”

The SEC’s order instituting administrative proceedings also charges stock promoter Kevin T. McKnight and his firm Undiscovered Equities Inc., who were paid by Houston American to disseminate its fraudulent claims about the oil-and-gas concession project in Colombia.

The SEC’s Enforcement Division alleges that the fraudulent conduct by Terwilliger and Houston American occurred during several months in late 2009 and early 2010. During this time, Houston American raised approximately $13 million in a public offering and saw its stock price increase from less than $5 per share to more than $20 per share. Contrary to the lofty estimates made by Terwilliger and Houston American, the company participated in drilling multiple unsuccessful wells on the concession from 2010 to 2012, and withdrew from the operation in early 2013 without recovering any oil. The company’s stock price eventually cratered under the weight of the fraud. Houston American now trades for approximately 40 cents per share, which represents a market capitalization loss of $600 million since it peaked in April 2010.

The SEC’s order charges Terwilliger and Houston American with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 20(b) of the Exchange Act and Section 17(a) of the Securities Act of 1933. The Section 20(b) charges against Houston American and Terwilliger relate to statements made by touts and other third parties, who disseminated the Terwilliger’s and Houston American’s fraudulent estimates. McKnight and Undiscovered Equities are charged with violations of Section 17(b) of the Securities Act.

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SEC Obtains Nearly $70 Million Judgment Against Richmond, Va.-Based Financial Services and Brokerage Firms

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission announced that it has obtained a final judgment in federal court in Tennessee requiring a Richmond, Va.-based financial services holding company, a subsidiary brokerage firm, and their CEO to pay nearly $70 million as the outcome of a trial that found them liable for fraud.

The SEC’s complaint filed against AIC Inc., Community Bankers Securities LLC, and Nicholas D. Skaltsounis alleged that they conducted an offering fraud while selling AIC promissory notes and stock to numerous investors across multiple states, many of whom were elderly or unsophisticated brokerage customers. They misrepresented and omitted material information about the investments when pitching them to investors, including the safety and risk associated with the investments, the rates of return, and how the proceeds would be used by AIC. In reality, AIC and its subsidiaries were never profitable, and Skaltsounis and the companies used money raised from new investors to pay back principal and returns to existing investors.

“The very significant penalties in this case reinforce the message that we’re prepared to aggressively pursue companies and individuals, and when necessary take them to trial, in order to hold them accountable when they aren’t truthful with investors,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

A jury returned a verdict in the SEC’s favor in October 2013 after a nearly three-week trial in the Knoxville division of U.S. District Court for the Eastern District of Tennessee. Chief Judge Thomas A. Varlan issued the final judgments today that include the following monetary sanctions:
• AIC: disgorgement of $6,647,540, prejudgment interest of $969,262.10, and a penalty of $27.95 million for a total of $35,566,802.10.
• Community Bankers Securities: disgorgement of $2,830,946 plus prejudgment interest of $412,773.53 and a penalty of $27.95 million for a total of $31,193,719.53.
• Skaltsounis: disgorgement of $948,389.13 plus prejudgment interest of $138,282.35 and a penalty of $1.505 million for a total of $2,591,671.48.

The court also imposed permanent injunctions against AIC, Community Bankers Securities, and Skaltsounis for future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

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Va.-Based Broker Charged With Stealing Funds From Elderly Customers

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission charged a broker based in Roanoke, Va., with defrauding elderly customers, including some who are legally blind, by stealing their funds for her personal use and falsifying their account statements to cover up her fraud.

According to the SEC’s complaint filed in U.S. District Court for the Western District of Virginia, Donna Jessee Tucker siphoned $730,289 from elderly customers and used the money to pay for such personal expenses as vacations, vehicles, clothes, and a country club membership. Tucker ensured that the customers received their monthly account statements electronically, knowing that they were unable or unwilling to access their statements in that format. The SEC further alleges that Tucker engaged in unauthorized trading and other financial transactions while making misrepresentations to customers about their investment accounts and forging brokerage, banking, and other documents.

The SEC’s investigation resulted from a broker-dealer examination of the firm where Tucker worked that was conducted by the SEC’s Philadelphia Regional Office.

“Tucker befriended her customers and gained their trust, only to be stealing their money behind their backs and giving them phony documents to hide it,” said Sharon Binger, director of the SEC’s Philadelphia office.

In a parallel action, the U.S. Attorney’s Office for the Western District of Virginia announced criminal charges against Tucker.

Tucker has agreed to settle the SEC’s charges and disgorge the $730,289 in ill-gotten gains either in the criminal case or the civil case. She consented to the entry of an order permanently enjoining her from violating Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The settlement is subject to court approval.

The SEC’s investigation was conducted by Brendan P. McGlynn, Lisa M. Candera, and Daniel L. Koster of the Philadelphia Regional Office, with assistance from Christopher R. Kelly. The examination that led to the investigation was conducted by James A. O’Leary, Calvin N. Inge, and William McIntyre under the supervision of Diane J. Hagy.

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Florida based CEO and CFO Charged witih Hiding Internal Controls Deficiencies and Violating Sarbances-Oxley

As published by the United States Securities and Exchange Commission,

The Securities and Exchange Commission announced charges against the CEO and former CFO of a Florida-based computer equipment company for misrepresenting to external auditors and the investing public the state of its internal controls over financial reporting.

The Sarbanes-Oxley Act of 2002 requires a management’s report on internal controls over financial reporting to be included in a company’s annual report. The CEO and CFO must sign certifications confirming they’ve disclosed all significant deficiencies to the outside auditors, reviewed the annual report, and attest to its accuracy.

The SEC’s Enforcement Division alleges that CEO Marc Sherman and former CFO Edward L. Cummings represented in a management’s report accompanying the fiscal year 2008 annual report for QSGI Inc. that Sherman participated in management’s assessment of the internal controls. However, Sherman did not actually participate. The Enforcement Division further alleges that Sherman and Cummings each certified that they had disclosed all significant deficiencies in internal controls to the outside auditors. On the contrary, Sherman and Cummings misled the auditors – chiefly by withholding that inadequate inventory controls existed within the company’s Minnesota operations. They also withheld from auditors and investors that Sherman was directing and Cummings participating in a series of maneuvers to accelerate the recognition of certain inventory and accounts receivables in QSGI’s books and records by up to a week at a time. The improper accounting maneuvers, which rendered QSGI’s books and records inaccurate, were performed in order to maximize the amount of money that QSGI could borrow from its chief creditor.

Cummings agreed to settle the charges, and the SEC’s Enforcement Division will litigate its case against Sherman in a separate administrative proceeding.

“Corporate executives have an obligation to take the Sarbanes-Oxley disclosure and certification requirements very seriously. Sherman and Cummings flouted these regulatory requirements and misled investors and external auditors in the process,” said Scott W. Friestad, associate director in the SEC’s Enforcement Division.

According to the SEC’s orders for the administrative proceedings, QSGI’s efforts in 2008 to introduce new internal controls to the operations at its Minnesota facility largely failed. The deficiencies existed throughout that fiscal year and continued until the company filed for bankruptcy in July 2009. QSGI failed to design inventory control procedures that took into account the existing control environment, such as employees’ qualifications and experience levels. For example, sales and warehouse personnel often failed to document their removal of items from inventory. When they did prepare the paperwork, accounting personnel often failed to process it and adjust inventory in the company’s financial reporting system.

The SEC’s Enforcement Division alleges that in management representation letters and other communications with QSGI’s external auditors, Sherman and Cummings claimed they had disclosed all significant deficiencies in internal controls over financial reporting. Yet they did not disclose or direct anyone else to disclose the ongoing inventory and accounts receivable issues, nor did they disclose the improper acceleration of recognition and the resulting falsification of QSGI’s books and records. In fact, Sherman and Cummings withheld information from the external auditors. Had they disclosed the deficiencies and the circumvention of inventory controls as well as the improper acceleration of accounts receivable and inventory recognition, the auditors would have changed the nature, timing, and extent of their procedures in conducting the audit of QSGI’s financial statements.

According to the SEC’s orders, Sherman and Cummings signed a Form 10-K and Sherman signed a Form 10-K/A each containing the false management’s report on internal controls over financial reporting. And each signed certifications required under Section 302 of the Sarbanes-Oxley Act in which they falsely represented that they had evaluated the report and disclosed all significant deficiencies to the auditors.

The SEC’s Enforcement Division alleges that Sherman violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2. Sherman also is charged with causing QSGI’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).

Without admitting or denying the SEC’s findings, Cummings consented to a cease-and-desist order finding that he willfully violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2. The order also finds that he caused QSGI’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Cummings agreed to pay a $23,000 penalty, and to be barred from serving as an officer and director of a publicly traded company for five years. Cummings also agreed to be suspended for at least five years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

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SEC Charges Smith & Wesson With FCPA Violations

As released by the US Securities and Exchange Commission,

The Securities and Exchange Commission charged Smith & Wesson Holding Corporation with violating the Foreign Corrupt Practices Act (FCPA) when employees and representatives of the U.S.-based parent company authorized and made improper payments to foreign officials while trying to win contracts to supply firearm products to military and law enforcement overseas.

Smith & Wesson, which profited by more than $100,000 from the one contract that was completed before the unlawful activity was identified, has agreed to pay $2 million to settle the SEC’s charges. The company must report to the SEC on its FCPA compliance efforts for a period of two years.

According to the SEC’s order instituting a settled administrative proceeding, the Springfield, Mass.-based firearms manufacturer sought to break into new markets overseas starting in 2007 and continuing into early 2010. During that period, Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing, or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries.

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

According to the SEC’s order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department. Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments. Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852.

The SEC’s order finds that Smith & Wesson employees made or authorized improper payments related to multiple other pending or contemplated international sales contracts. For example, in 2009, Smith & Wesson attempted to win a contract to sell firearms to an Indonesian police department by making improper payments to its third-party agent in Indonesia. The agent indicated he would provide a portion of that money to Indonesian officials under the guise of legitimate firearm lab testing costs. He said Indonesian police officials expected to be paid additional amounts above the actual cost of testing the guns. Smith & Wesson officials authorized and made the inflated payment, but a deal was never consummated.

The SEC’s order finds that Smith & Wesson also authorized improper payments to third-party agents who indicated that portions would be provided to foreign officials in Turkey, Nepal, and Bangladesh. The attempts to secure sales contracts in those countries were ultimately unsuccessful.

The SEC’s order finds that Smith & Wesson violated the anti-bribery, internal controls and books and records provisions of the Securities Exchange Act of 1934. The company agreed to pay $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty. Smith & Wesson consented to the order without admitting or denying the findings. The SEC considered Smith & Wesson’s cooperation with the investigation as well as the remedial acts taken after the conduct came to light. Smith & Wesson halted the impending international sales transactions before they went through, and implemented a series of significant measures to improve its internal controls and compliance process. The company also terminated its entire international sales staff.

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Harbinger’s Former Chief Operating Officer Agrees to Settle Charges for Assisting Hedge Fund Scheme

As published by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission announced that the former chief operating officer at Harbinger Capital Partners LLC has agreed to settle charges that he assisted a scheme by the firm and its owner Philip A. Falcone to misappropriate millions of dollars from a hedge fund they managed to pay Falcone’s personal taxes.

Peter A. Jenson, who was charged along with Falcone and Harbinger in a 2012 enforcement action by the SEC, has agreed to admit wrongdoing and pay a $200,000 penalty. He also agreed to be prohibited from working in the securities industry for at least two years, and agreed to be suspended for at least two years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

The settlement papers were filed in U.S. District Court for the Southern District of New York and must be approved by the court.

Falcone and Harbinger consented to a settlement last year in which they agreed to pay more than $18 million and admit wrongdoing.

“Jenson assisted a fraudulent scheme that allowed Falcone to put his own interests ahead of investors by engaging in a related party loan on favorable terms,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit. “This settlement shows that we hold accountable not only those who perpetrate a scheme, but also those who enable them.”

In his settlement, Jenson admits that with knowledge of Falcone’s and Harbinger’s violations, he provided substantial assistance in connection with the loan by failing to:
• Ensure that the lender (Harbinger Capital Partners Special Situations Fund) had separate counsel.
• Ensure that the loan was consistent with Falcone’s fiduciary obligations to the Special Situations Fund.
• Ensure that Falcone paid an “above market” interest rate on the loan.
• Timely disclose the loan to investors.
• Take actions to cause the lender to accelerate Falcone’s payment on the loan once investors in the Special Situations Fund were permitted to begin redeeming their investments.

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SEC Announces Charges in Scheme to Secretly Enable Lawbreakers to Run Microcap Company

As released by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission today announced fraud charges against four individuals and a microcap company for concealing from investors that two lawbreakers ran the company.

According to the SEC’s orders instituting administrative proceedings, the mission of Natural Blue Resources Inc. was to create, acquire, or otherwise invest in environmentally-friendly companies, including an initiative to locate, purify, and sell water recovered from underground aquifers in New Mexico and other areas with depleting water resources. What investors didn’t know was that two individuals with prior law violations – James E. Cohen and Joseph Corazzi – secretly controlled the operational and management decisions of Natural Blue while calling themselves outside “consultants.” This arrangement enabled them to be de facto officers of Natural Blue and personally profit from the company without disclosing their past brushes with the law to investors. Cohen, who lives in Windermere, Fla., was previously incarcerated for financial fraud. Corazzi, who resides in Albuquerque, N.M., was previously charged with violating federal securities laws and permanently barred from acting as an officer or director of a public company.

“Cohen and Corazzi concealed their involvement through a so-called ‘consulting’ agreement, but their influence over the issuer spread much further,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division. “Investors in Natural Blue had a right to know who was running the company behind the scenes.”

The SEC has suspended trading in Natural Blue stock. The other two individuals charged in the case are Toney Anaya and Erik Perry, who were former chief executive officers at Natural Blue. The SEC’s orders find that they misled investors by failing to disclose that Cohen and Corazzi were running the company in spite of their criminal or disciplinary histories.

Anaya, who is a former New Mexico governor and attorney general, and Perry each agreed to settle the charges. Anaya has cooperated extensively with the SEC’s investigation.

“Preventing past law violators from raising money in our markets is critical to preserving investor confidence,” said Paul Levenson, director of the SEC’s Boston Regional Office. “Natural Blue and its officers attempted an end-run around the rules designed to prevent recidivists from getting their hands on the controls of public companies.”

According to the SEC’s orders, Cohen and Corazzi created Natural Blue so they and other entities they controlled could receive money and stock from the company and profit by hundreds of thousands of dollars. While Natural Blue was ostensibly led by Anaya and subsequently Perry, management decisions made by Cohen and Corazzi resulted in no revenues or viable business operations for the company. Anaya and Perry each deferred to Cohen and Corazzi in derogation of their responsibilities. Natural Blue and Perry also made various material misrepresentations about the company, its contracts, and its anticipated revenue in a February 2011 press release as well as on a website and verbally to investors.

Anaya, who served as Natural Blue’s CEO from August 2009 to January 2011, has signed a cooperation agreement with the SEC in which he has consented to the entry of a cease-and-desist order without admitting or denying the charges. He will be barred from participating in any offering of a penny stock for at least five years. Any financial penalties will be determined at a later date.

Perry, who replaced Anaya and served as CEO until June 2011, agreed to settle the case by consenting to the entry of a cease-and-desist order without admitting or denying the charges. Perry, who previously resided in Massachusetts and currently lives in Bulgaria, agreed to pay a $150,000 penalty and be permanently barred from serving as an officer or director of a public company and from participating in any offerings of penny stock.

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California School District Charged with Misleading Investors

As published by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission charged a school district in California with misleading bond investors about its failure to provide contractually required financial information and notices. The case is the first to be resolved under a new SEC initiative to address materially inaccurate statements in municipal bond offering documents.

The SEC found that in the course of a 2010 bond offering, Kings Canyon Joint Unified School District affirmed to investors that it had complied with its prior continuing disclosure obligations. The statement was inaccurate because between at least 2008 and 2010, the school district had failed to submit some required disclosures. The California school district agreed to settle the charges without admitting to or denying the findings.

Under the Municipalities Continuing Disclosure Cooperation (MCDC) initiative, the SEC’s Enforcement Division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations. The 2014 initiative, launched on March 10, expires on September 10.

“The integrity of the municipal securities market requires that issuers carefully comply with all of their disclosure obligations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “Our MCDC initiative is one piece of our efforts to ensure that issuers meet their obligations going forward.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit added, “An important component of the MCDC program is that it provides issuers who were already under investigation the opportunity to accept the standard terms and resolve their enforcement matters in a fair and efficient manner. We are pleased that King’s Canyon has taken advantage of the program and we continue to encourage all eligible issuers and underwriters to do so while the MCDC terms are still available.”

The SEC’s order instituting settled administrative proceedings finds that in three bond offerings between 2006 and 2007, Kings Canyon contractually agreed to disclose annual financial information and notices of certain events pertaining to those bonds. When it conducted a $6.8 million bond offering in November 2010, Kings Canyon was required to describe any instances where it had failed to materially comply with its prior disclosure obligations. In the 2010 offering document, Kings Canyon inaccurately affirmed that there was “no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation.” Because Kings Canyon failed to submit some of the contractually required disclosures relating to the 2006 and 2007 offerings, the November 2010 bond offering document contained an untrue statement of a material fact.

Without admitting or denying the SEC’s findings, Kings Canyon consented to an order to cease and desist from committing or causing any future violations of Section 17(a) of the Securities Act. It also agreed to adopt written policies for its continuing disclosure obligations, comply with its existing continuing disclosure obligations, cooperate with any subsequent investigation by the Enforcement Division, and disclose the terms of its settlement with the SEC in future bond offering materials.

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Fraud Charges Filed Against Three Former Regions Bank Executives in Accounting Scheme

As reported by the United States Securities and Exchange Commission:

The Securities and Exchange Commission announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes. As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.

The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions. Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking.

According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009. Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.

Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies. The SEC’s Division of Enforcement will continue to litigate its case against Neely.

“Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things.”

According to the SEC’s orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting. NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt. Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Bank’s interest income would be reduced. Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

The SEC’s Division of Enforcement alleges that when personnel within Regions Bank’s special asset department initiated procedures to place approximately $168 million in NPLs into non-accrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status. By failing to classify the impaired loans in accordance with its policies, Regions’ financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP. In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions’ CFO and other senior executives during a meeting in late March.

The SEC’s order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws. Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years.

The deferred prosecution agreement with Regions relates to the bank’s failure to maintain adequate accounting controls at the time. The agreement credits the company’s extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures. The agreement credits the substantial cooperation by Regions during the SEC’s investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserve’s action. Regions also will pay a $5 million penalty to the Alabama Department of Banking.

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Private Equity Firm Charged with Pay-to-Play Violations

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission today charged a Philadelphia-area private equity firm with violating “pay-to-play” rules by continuing to receive advisory fees from the city and state pension funds following campaign contributions made by an associate in 2011 to the governor of Pennsylvania and a candidate for mayor of Philadelphia.

In the SEC’s first case under pay-to-play rules for investment advisers, TL Ventures Inc. agreed to settle the charges by paying nearly $300,000.

Pay-to-play rules adopted in 2010 prohibit investment advisers from providing compensatory advisory services – either directly to a government client or through a pooled investment vehicle – for two years following a campaign contribution by the firm or certain associates to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets.

An SEC investigation found that TL Ventures violated pay-to-play rules by continuing to receive compensation from two public pension funds – Pennsylvania’s state retirement system and Philadelphia’s pension plan – within two years after an associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania. The mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. Therefore, a mayor can influence the hiring of investment advisers for the public pension fund. The 11-member board of Pennsylvania’s state retirement system includes six gubernatorial appointees. Therefore, a governor can influence the hiring of investment advisers for the public pension fund. After the contributions, TL Ventures improperly continued to receive compensation from the pension funds for those advisory services.

“We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences,” said Andrew Ceresney, director of the SEC Enforcement Division. “As we have done with broker-dealers, we will hold investment advisers strictly liable for pay-to-play violations.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, added, “Public pension funds are increasingly investing in alternative investment vehicles such as hedge funds and private equity funds. When dealing with public pension fund clients, advisers to those kinds of investment vehicles should be mindful of the restrictions that can arise from political contributions.”

The SEC’s orders instituting settled administrative proceedings also charged TL Ventures and an affiliated adviser Penn Mezzanine Partners Management L.P. with improperly acting as unregistered investment advisers. According to the orders, TL Ventures and Penn Mezzanine separately claimed to be exempt from SEC registration in March 2012, however their operations were closely integrated and significantly overlapped. Because they were not operationally independent of each other, TL Ventures and Penn Mezzanine should have been integrated as a single investment adviser for purposes of registration requirements or determining the applicability of any exemption.

The SEC’s order finds that TL Ventures violated Sections 203(a), 206(4) and 208(d) of the Investment Advisers Act of 1940 as well as Rule 206(4)-5. TL Ventures is ordered to pay disgorgement of $256,697, prejudgment interest of $3,197 and penalty of $35,000. TL Ventures agreed to be censured and to cease and desist from committing or causing any violations and any future violations of the provisions referenced in the order. TL

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