Thursday, 2 July 2015

SEC Reappoints Lewis H. Ferguson to Second Term on PCAOB

Otmane El Rhazi,

The Securities and Exchange Commission today announced that Public Company Accounting Oversight Board (PCAOB) member Lewis H. Ferguson has been reappointed for a second term on the Board.

“I am pleased with the Commission’s reappointment of Lew Ferguson as a PCAOB board member,” said SEC Chair Mary Jo White.  “Lew brings a wealth of institutional knowledge to his position and I look forward to the contributions he will make in his continued service as a Board Member.” 

The PCAOB provides oversight of the audits of financial statements of public companies and broker-dealers through registration, standard setting, inspection, and disciplinary programs.  As required by the Sarbanes-Oxley Act, the Commission is responsible for overseeing the PCAOB and appointing its members.

Mr. Ferguson’s new term runs until October 2019.  He was first appointed to the PCAOB in January 2011 and served as its first General Counsel from 2004 to 2007.  Before joining the PCAOB as a Board Member, Mr. Ferguson was a partner in the law firm of Gibson Dunn & Crutcher LLP, where he focused on securities regulation and corporate disclosure and governance.  He was a partner at the law firm of Williams & Connolly LLP from 1979 to 1994 and again from 1998 to 2004, specializing in corporate transactions, securities enforcement matters, and representation of audit committees and boards of directors.  From 1994 to 1998, he was Senior Vice President, General Counsel, and Director of Wright Medical Technology.

In April 2015, Mr. Ferguson began a four-year term as Chair of the Global Public Policy Committee Working Group of the International Forum of Independent Audit Regulators (IFIAR). He served as the IFIAR Chair for two years before that, following a one-year term as Vice Chair of IFIAR, an organization of 50 national audit oversight bodies that operate independently of the accounting profession. 

Mr. Ferguson received his B.A. cum laude from Yale College.  He has a B.A. and M.A. from Cambridge University and a J.D. from Harvard Law School, where he was a member of the Harvard Law Review.  Mr. Ferguson clerked for the Hon. Frank J. Murray, U.S. District Judge for the District of Massachusetts.

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Otmane El Rhazi
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SEC Halts Pyramid/Ponzi Scheme Targeting Spanish and Portuguese Communities

Otmane El Rhazi,

The Securities and Exchange Commission today announced fraud charges and an asset freeze against the operators of a pyramid and Ponzi scheme falsely promising a gold mine of investment opportunity to investors in Spanish and Portuguese-speaking communities in Massachusetts, Florida, and elsewhere in the U.S. 

The SEC alleges that DFRF Enterprises, named for its founder Daniel Fernandes Rojo Filho, claimed to operate more than 50 gold mines in Brazil and Africa, but the company’s revenues came solely from selling membership interests to investors and not from mining gold.  With the help of several promoters, they lured investors with such false promises as their money would be fully insured, DFRF has a line of credit with a Swiss private bank, and one-quarter of DFRF’s profits are used for charitable work in Africa.  The scheme raised more than $15 million from at least 1,400 investors by recruiting new members in pyramid scheme fashion to keep the fraud afloat, and commissions were paid to earlier investors in Ponzi-like fashion for their recruitment efforts.  The SEC further alleges that Filho has withdrawn more than $6 million of investor funds to buy a fleet of luxury cars among other personal expenses.

“DFRF and its operators falsely claimed that they were running a lucrative gold mining business when in reality they were operating a Ponzi and pyramid scheme that preyed on investors in particular ethnic communities who stand to lose millions of dollars,” said John T. Dugan, Associate Regional Director of the SEC’s Boston Regional Office.  “Investors were not given the full story about the true value and security of their investments.”

According to the SEC’s complaint filed June 30 and unsealed today in federal court in Boston, Filho is a Brazilian native who lives in Winter Garden, Fla., and he orchestrated the scheme with assistance from six promoters also charged in the case: Wanderley M. Dalman of Revere, Mass.; Gaspar C. Jesus of Malden, Mass.; Eduardo N. Da Silva of Orlando, Fla.; Heriberto C. Perez Valdes of Miami; Jeffrey A. Feldman of Boca Raton; and Romildo Da Cunha of Brazil. 

The SEC alleges that Filho and others began selling “memberships” in DFRF last year through meetings with prospective investors primarily in Massachusetts hotel conference rooms, private homes, and businesses.  DFRF promoted the investment opportunity through online videos in which Filho falsely claimed that the company had registered with the SEC and its stock would be publicly traded.  As DFRF’s marketing reach widened, membership sales dramatically increased from under $100,000 in June 2014 to more than $4 million in March 2015 alone.

The SEC’s complaint alleges that all defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and registration provisions Section 5(a) and 5(c) of the Securities Act.

The SEC’s investigation was conducted by Caitlyn M. Campbell, Mark Albers, John McCann, Frank C. Huntington, and Michele T. Perillo of the SEC’s Boston Regional Office, and assisted by Carlos Costa-Rodrigues in the agency’s Office of International Affairs.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, the Boston field office of the Federal Bureau of Investigation, the Massachusetts Securities Division of the Massachusetts Secretary of Commonwealth’s office, the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico, the British Columbia Securities Commission, the Swiss Financial Market Supervisory Authority, the Financial Services Commission  of Barbados, and the United Kingdom Financial Conduct Authority.

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Otmane El Rhazi
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Wednesday, 1 July 2015

SEC Solicits Public Comment on Audit Committee Disclosures

Otmane El Rhazi,

The Securities and Exchange Commission today voted to publish a concept release seeking public comment on current audit committee disclosure requirements, focusing on the committee’s oversight of independent auditors.  The Commission is interested in receiving information about the audit committee and auditor relationship and whether improvements can be made to enhance the information provided to investors about the audit committee’s responsibilities and activities.  

“Effective audit committee oversight is essential to investor protection and the functioning of our capital markets,” said SEC Chair Mary Jo White.  “The way audit committees exercise their oversight of independent auditors has evolved and it is important to evaluate whether investors have the information they need to make informed decisions.”   

In addition to seeking views about audit committee disclosures, the concept release invites comment on whether Commission disclosure requirements should be refined to provide more insight into the information the audit committee used and the factors it considered in overseeing the independent auditor.  This includes considerations related to the process for appointing or retaining the auditor and the qualifications of the auditor and certain members of the engagement team, among others.

The public comment period will remain open for 60 days following publication of the concept release in the Federal Register.   

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Otmane El Rhazi
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SEC Charges Deloitte & Touche With Violating Auditor Independence Rules

Otmane El Rhazi,

The Securities and Exchange Commission today charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited.  Deloitte agreed to pay more than $1 million to settle the charges.

The SEC charged the trustee Andrew C. Boynton with causing related reporting violations by the funds, and charged the funds’ administrator ALPS Fund Services with causing related compliance violations.  They also agreed to settle the charges.

Auditor independence rules require outside auditors to remain independent from their clients to ensure there is not even the appearance of a firm compromising its objectivity and impartiality when auditing financial statements.  According to the SEC’s order instituting a settled administrative proceeding, Deloitte violated the rules with respect to the appearance of independence by failing to follow its own policies and conduct an independence consultation prior to entering into a new business relationship with Boynton.  Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work.  Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees.

“The investing public depends on independent auditors like Deloitte to test the reliability of publicly-reported financial statements, and they have front-line responsibility for ensuring their own independence,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “But they are not alone in safeguarding the audit process, and the other fiduciaries charged in this case failed to fulfill their roles and preserve investor confidence.”

According to the SEC’s order:

  • Deloitte Consulting acquired a proprietary brainstorming business methodology from Boynton in 2006 and collaborated with Boynton to implement it and serve both internal and external firm clients through 2011.
  • As a member of the three funds’ boards and audit committees, Boynton was required to complete annual trustee and officer (T&O) questionnaires designed in part to identify conflicts of interest.  Boynton did not identify his business relationship with Deloitte Consulting in response to a question calling for identification of his “principal occupation(s) and other positions.”  Relying on his understanding that Deloitte Consulting was a separate legal entity from Deloitte, Boynton also did not identify the business relationship in his responses to a question added to the questionnaire in 2009 inquiring whether he had any “direct or material indirect business relationship” with Deloitte.
  • ALPS contractually agreed to assist the funds in discharging their responsibilities yet failed to adopt sufficient written policies and procedures as required to prevent auditor independence violations. The funds’ audit committee charter addressed auditor independence generally, but the T&O questionnaires did not expressly cover business relationships with the auditor’s affiliates.  The funds also did not have sufficient written policies and procedures to prevent other types of auditor independence violations, nor did they provide sufficient training to assist board members in the discharge of their responsibilities related to auditor independence. 

The SEC’s order censures Deloitte for violating the auditor independence standards of Rule 2-02(b) of Regulation S-X, and sanctioned Deloitte for causing the funds to violate Sections 20(a) and 30(a) of the Investment Company Act and Rule 20a-1 thereunder.  The order finds that Boynton was a cause of the same reporting violations and ALPS caused the funds’ related compliance violations under Rule 38a-1 of the Investment Company Act.  Each party agreed to cease and desist from future violations without admitting or denying the findings.  Deloitte agreed to pay disgorgement of audit fees in the amount of $497,438 plus prejudgment interest of $116,478 and a penalty of $500,000.  Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a penalty of $25,000.  ALPS agreed to pay a $45,000 penalty.

The SEC’s investigation was conducted by James J. Bresnicky and Brian M. Privor, and supervised by J. Lee Buck II.

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Otmane El Rhazi
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