As Mary Jo White’s tenure at the helm of the Securities and Exchange Commission comes to a close, the Commission’s Enforcement Division announced the settlement of a series of actions generating more than $140 million in sanctions over four business days. Companies settled charges ranging from Foreign Corrupt Practices Act violations to improperly issued American Depository Receipts.
The prospects for the future of the SEC’s enforcement program are uncertain, with a chairman and two commissioners to be appointed by President-elect Trump. The White era is closing as it opened, however, with a firm commitment to vigorous enforcement, reflecting Chair White’s goal that “the SEC’s enforcement program is–and is perceived to be–everywhere, pursuing all types of violations of our federal securities laws, big and small.”
Three companies agreed to pay more than $74 million to settle charges arising from violations of the Foreign Corrupt Practices Act. Biomet, Inc., a Warsaw, Indiana-based medical device manufacturer, faced charges from both the SEC and the Justice Department. The company, a repeat offender, agreed to pay more than $30 million to settle all charges.
The SEC found that Biomet used and improperly recorded transactions with a known prohibited distributor in Brazil, and used a third-party customs broker to bribe Mexican customs officials to facilitate the importation of unregistered and mislabeled medical devices. In March 2012, the company agreed to pay $22 million and enter into a deferred prosecution agreement to settle charges that it bribed public doctors in Argentina, Brazil and China. “Biomet didn’t entirely learn its lesson the first time around as it continued to use a prohibited agent in Brazil and engaged in a new bribery scheme in Mexico,” said Kara Brockmeyer, chief of the Enforcement Division’s FCPA Unit.
Another $30 million-plus settlement came from charges against Chilean-based chemical and mining company Sociedad Quimica y Minera de Chile S.A. (SQM). The company will pay a $15 million penalty to settle the SEC charges and an additional $15.5 million penalty as part of a deferred prosecution agreement with the Justice Department. SQM also agreed to retain an independent compliance monitor for two years and to self-report to the SEC and Justice Department for one additional year. The SEC found that SQM paid nearly $15 million over at least seven years to Chilean political figures and others connected to them based on fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.
A $14 million tab was the price for another medical device company, Orthofix International N.V., to settle charges that it made improper payments to doctors at government-owned hospitals in Brazil, and committed accounting violations by improperly booking revenue. Orthofix admitted that the SEC's factual allegations were true and acknowledged that its conduct violated the federal securities laws.
Several banking and brokerage firms also paid up to settle charges in the last week. Morgan Stanley agreed to pay $13 million to clear up charges that it overcharged more than 149,000 advisory clients by $16 million. The overcharges allegedly resulted from the firm’s failure to adopt and implement adequate compliance policies and procedures.
Citadel Securities LLC settled charges for $22 million that its business unit handling retail customer orders from other brokerage firms made misleading statements to them about how it priced trades. Citadel Securities is a “wholesale market maker” or “internalizer” that specializes in handling retail orders from investors who are customers of other broker-dealers. Citadel Securities executes approximately 35 percent of the average daily volume of retail equity shares traded in the U.S. markets.
BNY Mellon, a worldwide banking and financial services corporation, allegedly improperly excluded approximately $14 billion in collateralized loan obligation assets from its disclosed risk-based capital ratios and risk-weighted assets. Due to the miscalculations, the firm understated its risk-weighted assets and overstated certain risk-based capital ratios in quarterly and annual reports for nearly four years. BNY Mellon settled the charges for $6.6 million.
Improperly-issued American Depository Receipts (ADRs) cost ITG, Inc., a registered broker-dealer, more than $24.4 million. ADRs are U.S. securities that represent shares of a foreign company. For all issued ADRs, the depositary must have a corresponding number of foreign shares in its custody. As alleged, for a period of three years, ITG facilitated "pre-release" transactions of ADRs to its counterparties without owning the foreign shares or taking the necessary steps to ensure that the shares would be properly held. The SEC claimed that many of the ADRs obtained by ITG through pre-release transactions were ultimately used to engage in short selling and dividend arbitrage even though they may not have been backed by the required foreign shares.
General Motors Co. agreed to a settlement calling for a $1 million penalty arising from the recall of more than 600,000 vehicles due to a faulty ignition switch. According to the SEC charges, GM knew of the potential losses for 18 months before its accountants became aware of the risk. As alleged, GM's deficient internal accounting controls prevented the company from properly assessing the potential impact of the defect and recalls on its financial statements.
Allergan Inc. ran afoul of the tender offer disclosure rules, and agreed to pay $15 million to settle SEC charges. Allergan received a hostile tender offer from Valeant Pharmaceuticals International and other bidders in June 2014. In response, Allergan filed a Schedule 14D-9 that described the offer as inadequate and disclosed that Allergan was not undertaking or engaged in negotiations that could result in an “extraordinary transaction” such as a merger or an acquisition. Allergan failed to disclose failed to disclose its negotiations with potential friendly merger partners as required by the tender offer rules despite repeated requests from the Corporation Finance staff to do so. Allergan admitted the SEC's factual allegations and acknowledged that its conduct violated the federal securities laws.
The flurry of settlement activity on the eve of the changing of the SEC guard reflects some basic realities. While nature abhors a vacuum, the financial markets abhor uncertainty. The settlements allow companies to close the books on these incidents and replace the market’s questions with hard and fast numbers. In addition, the departure of Chair White leaves the SEC with only two sworn members. While SEC rules do allow a two-member SEC to conduct Commission business, it is doubtful that Commissioners Kara M. Stein and Michael S. Piwowar would see eye to eye on the question of whether to accept a settlement offer—or where to go to lunch.
President-elect Trump has announced that Jay Clayton, a partner at Sullivan & Cromwell LLP, is his choice to succeed Chair White as the agency head. While the votes are there in the Senate to confirm him, the process may take some time before he is sworn in and gets up to speed with the SEC docket. The selection and confirmation of the two other Commission members will further slow the process.
As the enforcement process inexorably drags on, legal fees mount and the pressure builds on respondents to dispose of these matters. Given the unique situation in which the SEC finds itself at this juncture, these settlements may well have been priced to move.
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