The SEC just announced that a Houston technology solutions company agreed to pay a $2.5 million penalty to settle charges that it overstated profits, as well as that two former executives of the company agreed to settle charges of causing the violations.

Pressure to Perform Results In Fraud

The SEC’s order stated that after being pressured to improve the financial performance of the energy infrastructure segment of FMC Technologies, the segment’s controller Jeffrey Favret and business unit controller Steven Croft improperly reduced the value of a liability the company recorded for paid employee time off. The SEC alleged the improper adjustments overstated the company’s pre-tax operating profits by $800,000 and enabled the segment to meet its internal company target. The SEC charged that Favret and Croft also corrected a $730,000 error recorded in 2012 that increased the segment’s operating results, but later signed management representation letters attesting there had been no out-of-period adjustments larger than $250,000 for that period.

The SEC’s order also stated that Croft failed to comply with internal accounting controls when directing his business unit switch to a new accounting system without taking reasonable steps to ensure that errors would not occur.  Errors did occur which served to overstate the segment’s results in two quarterly periods.

Findings Unchallenged as Penalties Levied

FMC Technologies, Favret, and Croft consented to the SEC’s order without admitting or denying the findings.  In addition to the company penalty, Favret agreed to pay a $30,000 penalty and Croft agreed to pay a $10,000 penalty.  Favret and Croft, who are no longer with FMC Technologies, also agreed to be suspended from appearing or practicing before the SEC as accountants. The order permits them to apply for reinstatement after two years.

The SEC’s press release can be found at the following link:

https://www.sec.gov/news/pressrelease/2016-221.html

Jeff Petersen is an attorney licensed in California and Illinois representing clients in a wide variety of SEC investigations and SEC enforcement actions. He can be reached in California at 858.792.3666 and in Illinois at 312.450.4584.

SEC Recordings Released

Records just released by the SEC pertaining to its votes to bring legal action against companies and individuals revealed that the Commission is less divided on such votes than was commonly thought. The data revealed that SEC commissioners vote unanimously almost every time they take companies and executives to federal court. This is a stark contrast to the public disagreements that occur over regulatory matters, which in recent years have included the interpretation of rule-making requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

In total, 94% of the cases that have been brought since April 2013, when Mary Jo White became the agency’s chair, were done so unanimously.

The SEC decision to publish its voting records followed a Reuters request under the Freedom of Information Act request several years ago. The SEC had initially resisted release of internal voting records on purported privilege grounds.

The published data covers slightly more than 1,400 defendants in 414 cases filed in federal courts from April 11, 2013, through August 26, 2016.

Source:  http://ow.ly/ZWRQ305FfQY

Last month, San Diego-based investment adviser Raymond Lucia suffered a rejection by a panel of the U.S. Court of Appeals for the District of Columbia Circuit of his request that the court consider his challenge to the constitutionality of the SEC’s use of in-house courts.

SEC v. Adviser

Lucia, a well-known investment adviser with a long career, was charged by the SEC with conducting misleading investment seminars that promoted a “buckets of money” investing strategy that was purportedly supported by empirical testing, when no such reliable testing had been done. The SEC proceeding resulted in what Lucia’s own attorneys described as a “career-ending lifetime industry bar”.

The basis for Lucia’s challenge, rejected by the panel, was that the SEC’s selection of administrative law judges violated the Appointments Clause of the Constitution. Lucia today petitioned the court for a rehearing on the matter before all judges of the court, in order to determine whether the panel’s decision was wrong. 

Powerhouse Petition Calling On Precedent

Lucia is being represented by powerhouse securities lawyer Mark Perry of Gibson, Dunn & Crutcher. In the brief for rehearing en banc, Lucia argues that the panel erroneously concluded that the Appointments Clause does not apply to SEC ALJ’s because they are not “Officers” under that Clause. The panel relied on Circuit precedent that an ALJ without authority to issue final rulings cannot be deemed an Officer, but Lucia argues in his petition that such qualification flies in the face of prior U.S. Supreme Court precedent, and would remove a vast swath of administrative law judges across a number of federal government agencies from coverage under the Appointments Clause.

Lucia’s attorneys were not shy in the petition – calling the panel’s decision “at war” with Supreme Court precedent and the Constitution itself. We’ll see what judges in the D.C. Circuit may be inclined to agree if the petition for rehearing is granted. 

Jeff Petersen is an attorney licensed in California and Illinois representing clients in a wide variety of SEC enforcement proceedings. He can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.

Lynn Tilton filed an unsuccessful suit to enjoin the SEC proceeding against her and her company, on the grounds that the appointment of the SEC administrative law judges was unconstitutional.

Proceeding and Challenging

The Second Circuit ruled in June of this year that the federal district court lacked jurisdiction over that suit. Tilton’s SEC proceeding was therefore free to proceed as scheduled.

Tilton, however, recently filed another suit earlier this month again challenging the constitutionality of the SEC in-house tribunals, this time on the grounds that the lack of notice and opportunity to prepare for trial adequately and present a defense violates the Fifth Amendment. Tilton again sought to enjoin the SEC proceeding on the $200 million fraud action against her in this new action.

Although Tilton’s attorneys argued that the new case should be assigned to a court hearing another pending constitutional challenge in the Southern District of New York (Duka v. SEC, No. I 5-CV-357), the case has ended up with Judge Ronnie Abrams, who presided over Tilton’s initial action. 

Justification to Challenge

Judge Abrams issued an order on September 20, 2016 in the action, stating that in light of the Second Circuit ruling in the first Tilton action that there is no federal district court jurisdiction over the constitutional challenge, Tilton had to submit a written explanation by no later than September 27, 2016 as to why this new action is not similarly barred.

The newly-filed action is Case No. 16-cv-07048. 

Jeff Petersen is an attorney licensed in California and Chicago who represents clients in a wide variety of SEC enforcement proceedings. He can be contacted in California at 858.792.3666 and in Chicago at 312.583.7488.

The SEC’s insider trading case against renowned sports bettor Billy Walters, and former Dean Foods director Thomas Davis, will feature deposition testimony by pro golfer Phil Mickelson one way or the other. as both the SEC and Walters have listed Mickelson as a witness for deposition in the discovery phase of the matter. 

Details of the Case

The case involves allegations by the SEC that Walters used insider knowledge from Davis to benefit from the purchase of shares in Dean Foods, and urged Mickelson to place trades that would net large profits so that Mickelson could satisfy gambling debts owed to Walters. 

Mickelson purportedly bought over $2 million in shares of Dean Foods and made over $900,000 in profits on a subsequent trade of the stock, paying Walters back in part with the proceeds on the trade. Mickelson was not named as a party-defendant and settled any claim by the SEC for relief arising from the trade by making payment of all profits from the trade.

Whether Mickelson ultimately ever testifies at any trial won’t be known for quite some time — discovery is not scheduled to close until August of 2017. 

The case against Walters and Davis is pending in the Southern District of New York, No. 16-cv-3722.