SEC Alerts Compliance Officers about Deficiencies and Weaknesses Found During Recent Compliance Examinations
The Securities and Exchange Commission staff today released a new ComplianceAlert letter identifying common deficiencies and weaknesses that SEC examiners have recently found during compliance examinations of firms that are registered with the SEC. The ComplianceAlert is intended to foster robust compliance in the securities industry by providing information about deficiencies and encouraging chief compliance officers to take steps to address any similar issues at their firms.
The SEC's Office of Compliance Inspections and Examinations conducts compliance examinations of investment advisers, investment companies, broker-dealers, transfer agents and other types of SEC-registered firms to determine whether they are in compliance with the federal securities laws and regulations. The SEC staff last year issued its first ComplianceAlert letter to describe compliance issues and deficiencies found in examinations and to encourage firms to review compliance in those identified areas and implement improvements as appropriate.
"Our June 2007 ComplianceAlert was very well-received by industry compliance and legal professionals," said Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations. "Many industry compliance staff told us that, after reading it, they reviewed their firms' practices in the areas we noted and took steps to ensure that their firms' practices were fully compliant. By highlighting our recent examination findings in this way, we expect that this second ComplianceAlert will be similarly helpful to industry firms that are seeking to be proactive in addressing compliance risks."
The new ComplianceAlert letter describes examination findings in several areas:
(Press Rel. 2008-146)
Delinquent Filers' Stock Registrations Revoked
The registrations of the stock of Kafus Industries, Ltd., and Kingsfield Capital Corp. (n/k/a Kingsfield Environmental Corp.) have been revoked. Neither had filed any annual or quarterly reports with the Securities and Exchange Commission for more than seven years. Thus, each violated a crucial provision of the federal securities laws that requires public corporations to publicly disclose current, accurate financial information so that investors may make informed decisions. The revocations were ordered in an administrative proceeding before an administrative law judge. (Rel. 34-58202; File No. 13075)
SEC Charges Scott Hirth and ProQuest Company In Connection With Accounting Fraud Scheme
The Commission today charged Scott Hirth of Carleton, Michigan and ProQuest Company, headquartered in Ann Arbor Michigan, in connection with a financial fraud scheme that occurred from 2001 through 2005. Hirth was the former Vice-President of Finance and Chief Financial Officer for ProQuest's Information and Learning Division.
The Commission's complaint, filed in federal court in Detroit, alleged that at the end of monthly and quarterly reporting periods, from at least 2001 through 2005, Hirth made fraudulent manual journal entries in order to favorably alter ProQuest's financial results. These manual journal entries were adjustments to the balances in certain ProQuest accounts and were designed to increase revenue and decrease expenses at ProQuest. Through these false accounting entries, Hirth materially inflated ProQuest's reported Earnings Before Interest and Taxes for 2001 though 2004 and the first three quarters of 2005. The Commission further alleged that Hirth created false documentation to purportedly support the balances in the manipulated accounts and used "hidden rows" and "white font" functions in spreadsheets to conceal his false accounting entries. After ProQuest disclosed the accounting scheme in its public filings, the Commission alleged that ProQuest lost over $437 million in market capitalization. ProQuest's stock price dropped from $29.41 to $12.31 per share between February and April 2006. Finally, the Commission alleged that ProQuest failed to devise and maintain a system of internal accounting controls that could have prevented Hirth's scheme and failed to properly apply other basic accounting principles during this period.
ProQuest and Hirth consented to the settlement of this action without admitting or denying the allegations of the Commission's complaint. Under the settlement, Hirth is permanently enjoined from committing future violations of the federal securities laws, and he will pay disgorgement of $233,676.00, prejudgment interest of $54,474.25 and a civil penalty of $130,000, and consent to be permanently barred from serving as an officer and director of a public company and from practicing as an accountant before the Commission. ProQuest is permanently enjoined from future violations of the internal controls, books and records, and reporting provisions of the federal securities laws. [SEC v. Scott Hirth et al., 08 cv 13139 (E.D. Mich.)] (LR-20650)
Commission Files Lawsuit against HCC Insurance Holdings, Inc., Former HCC CEO, and Former HCC General Counsel for Stock Options Backdating Violations
The Commission filed a civil lawsuit on July 21 against HCC Insurance Holdings, Inc. (HCC), a Houston, Tex. insurance company; its former Chief Executive Officer, Stephen L. Way, 59, of Houston; and its former General Counsel, Christopher L. Martin, 41, of Houston, alleging violations related to stock-options backdating. Without admitting or denying the allegations, all three defendants agreed to settle the matter. The SEC filed its complaint in United States District Court in Houston.
The complaint alleges that, on at least 38 and as many as 58 occasions from 1997 through 2005, Way looked back at HCC's historical stock prices and, with the benefit of hindsight, chose grant dates for the options that coincided with the dates of low closing prices for the stock. At Way's direction or with his knowledge, Martin, among other things, prepared documents indicating that HCC's option grants had been made on earlier dates when HCC's stock price had closed lower whereas in fact no such grants had been made on those dates. These inaccurate and misleading documents included written actions of HCC's compensation committee, stock option agreements, and Forms 4 and 5 reporting the grants to the SEC. Among other things, the backdating of options caused the company to understate its compensation expense by approximately $26.6 million.
HCC consented to a permanent injunction from violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Way consented to a permanent injunction from violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b), 13(b)(5), 14(a), and 16(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, and 16a-3, and aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Way also agreed to pay a $200,000 penalty and to be barred from serving as an officer or director of a public reporting company for five years. Martin consented to a permanent injunction from violations of Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(b)(5) and 16(a), and Exchange Act Rules 13b2-1, 13b2-2, and 16a-3, and aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) and Rules 12b-20, 13a-1, 13a-11, 13a-13, 14a-3, and 14a-9 thereunder. Martin agreed to pay a $50,000 penalty. Martin also settled a related administrative proceeding pursuant to Rule 102(e) of the Commission's Rules of Practice by consenting, without admitting or denying the Commission's findings, to the entry of an order suspending him from appearing or practicing before the Commission as an attorney for two years. Settlement of the civil action is pending final approval by the court. [SEC v. HCC Insurance Holdings, Inc.; Stephen L. Way; and Christopher L. Martin, Civil Action No. 4:08 cv 2270 (S.D. Tex.)] (LR-20651; AAE Rel. 2847)
SECURITIES ACT REGISTRATIONS
RECENT 8K FILINGS