BU211 Financial Accounting 2
Case Assignment #3– Buyer Beware AKA SEC Sanctions
BU211 Financial Accounting 2
Case #3
“Buyer Beware AKA SEC Sanctions”
Everyone, literally everyone, is touched by the commercial
okerage and investment community within the United States. Whether it is your children’s college funds, home-purchase savings, retirement funds, an employer's investments, your own company's assets and monetary reserves and growth funds, the impact will be there. History repeats itself and those lessons often go unlearned by company executives, owners and investors. This practice of “avoiding the past” allows continuing fraud or misguidance.
As Financial Accounting students, you should learn to identify these patterns and then use the financial ratios that you are learning to question investing patterns and corporate financial performance. No one protects your investment better than your educated mind and resources. This case will introduce you to RECENT Security and Exchange Commission's (SEC) sanctions, as well as older sanctions which have been repeated. Be prepared to take a walk on the “Dark Side” of Accounting and Financial Reporting – without a light saber sword.
This case includes a PDF article which summarizes the SEC sanctioned companies used in this case study. This information is offered to the Pubic directly from the Securities Exchange Commission website. It is not subject to copy-write laws and fees.
Each person has been assigned SEC sanctioned companies or events from the PDF document. The assignments are as follows:
1. Last Name A,B,C,D: BB&T, Me
ill Lynch, Canada Free-Market and MicroCap
2. Last Name E,F,G,H,I: Talimco LLC, WedBush and Yu-Cheng Lin (Believe Lin)
3. Last Name J,K,L,M,N: South Florida, JP Morgan and BitCoin Miners
4. Last Name: O,P,Q,U,V,W,X,Y,Z: VolksWagen and Lumber Liquidators
CASE ASSIGNMENT
You will first understand the SEC sanction and what areas of financial accounting or reporting was manipulated, resulted in the sanction. Determining the internal control environment and the areas which were compromised will also be included in your analysis.
After this basic understanding, you will need to:
(1) Identify the similarities in the companies assigned in your group. Also, identify the differences in the sanctions or the companies' misbehavior.
(2) Determine at least 4 ratios that could have been used to identify the i
egularities if financial statements had been reviewed by the private investor or independent auditor.
This ratio analysis will require you to review the company's normal 10K to understand how they present information to both the SEC and private investors. Your company assignment may include companies that are not publicly traded now, but still had SEC sanction due to their related or prior behavior.
(3) Justify your selection of the ratios you selected and recommend the actions a private investor could take to avoid investing in these sanctioned companies. More than 4 ratios can be utilized, but 4 is the minimum.
(4) Identify 3 internal controls that were violated and how you would strengthen these internal controls within these companies.
PAPER REQUIREMENTS
Your paper must be from 4-6 pages which should include a summary of the issues and sanctions. An assessment of possible preventions and future solutions should be included. Your report must be written in APA 6th Edition format, in Times New Roman, 12-point font with one inch margins and single or single/half spaced.
All research sources must be cited. Comparatives to the other companies, individuals or industries are allowed for the comparisons. Additional articles and examples from the Wall Street Journal collection could be used to strengthen your analysis.
SEC Sanctions
BB&T to Return More Than $5 Million to Retail Investors and Pay Penalty Relating to Directed Brokerage A
angements
FOR IMMEDIATE RELEASE XXXXXXXXXX
Washington D.C., March 5, 2019- The Securities and Exchange Commission today announced that BB&T Securities has agreed to return more than $5 million to retail investors and pay a $500,000 penalty to settle charges that a firm it acquired misled its advisory clients into believing they were receiving full service
okerage services in-house at a discount while significantly less expensive options were available externally.
According to the SEC's order, Valley Forge Asset Management used misleading statements and inadequate disclosures about its
okerage services and prices to convince customers to choose the in-house
oker.
Despite promises of a high level of service at a low cost, the SEC's order finds that Valley Forge did not provide any additional services to advisory clients using its in-house
okerage than it did to advisory clients who chose other
okerages with significantly lower commission rates. According to the order, Valley Forge charged commissions averaging roughly 4.5 times more than what clients would have paid using other
okerage options, and the firm obscured the price difference by claiming that it was giving clients a 70 percent discount off of its supposed retail commission rate.
"ValleyForge put its own interests ahead of its advisory clients, causing them to spend more money unnecessarily by portraying inaccurate costs and benefits of using its in-house
okerage," said Kelly L. Gibson, Associate Director of Enforcement in the SEC's Philadelphia Regional Office. "Dual registrants and advisers with affiliated
oker-dealers must accurately disclose all conflicts of interest arising from their
okerage a
angements. The SEC's examination and enforcement programs will continue to identify these types of violations and return money to harmed retail investors as quickly as possible."
The SEC's order finds that BB&T Securities as the successor in interest to Valley Forge violated Sections 206 and 207 of the Investment Advisers Act of 1940. Without admitting or denying the findings , BB&T Securities consented to a cease-a d-desist order, a censure, and agreed to pay disgorgement of $4,712,366 and prejudgment interest of $497,387, which it will distribute to affected cu
ent and former clients through a Fair Fund, as well as a $500,000 penalty. BB&T Securities has ended Valley Forge's existing directed
okerage program by amending its cost structure and its disclosures.
The SEC's investigation was conducted by Norman P. Ostrove and Scott A. Thompson of the Philadelphia Regional Office with support from Eric Elefante, Scott Fisher, Michelle Eichner, Andy Green, Andy Groum, Joseph Francks, and Brian Ca
oll from the Office of Compliance Inspections and Examinations. The case was supervised by Ms. Gibson.
SEC Halts South Florida Alternative Investments Scheme Targeting Retail Investors
FOR IMMEDIATE RELEASE XXXXXXXXXX
Washington D.C., Feb. 26, 2019- The Securities and Exchange Commission today announced fraud charges and an asset freeze against the operators of a South Florida-based investment fund scheme, one of whom has a prior felony conviction and is on parole after nearly 20 years in prison.
The SEC filed an emergency action in federal district court against Castlebe
y Financial Services Group LLC, president T. Jonathon Turner, formerly known as Jon Ba
i Brothers, and CEO Norman M. Strell, alleging that in the past year they have defrauded investors out of $3.6 million. According to the SEC's complaint unsealed Feb. 25, 2019, Castlebe
y falsely represented to investors it had hundreds of millions of dollars in capital invested in local businesses and a portfolio of hundreds of investment properties. Castlebe
y claimed to offer high yields while protecting investors' principal by having it "fully insured and bonded" by CNA Financial Corp. and Chu
Group, when the insurance companies had no relationship with Castlebe
y and did not authorize it to use their logos in Castlebe
y's sales materials .
The SEC's complaint alleges that Turner and Strell misused investor funds to pay personal expenses and transfe
ed other funds to businesses they controlled and to family members. The complaint also alleges that Castlebe
y falsely stated on its website and in promotional materials that Turner has extensive finance industry experience, a MBA degree, and a law degree, while concealing that Turner has been convicted of multiple fraud, theft, and forgery felonies and was imprisoned from 1998 until 2016.
"We received an investor tip during the partial government shutdown that provided critical evidence. The team then moved quickly to halt the alleged ongoing fraud," said Eric I. Bustillo, Director of the Miami Regional Office. "We encourage anyone that suspects potential investment fraud to report it to the SEC."
The Honorable Judge Robin L. Rosenberg of the U.S. District Court for the Southern District of Florida granted the SEC's request for a temporary restraining order and temporary asset freeze against the defendants, and issued an order directing the defendants to provide a sworn accounting.
The SEC's investigation, which is continuing, is being led by Eric E. Morales and Fernando To
es in the Miami Regional Office and supervised by Jason R. Berkowitz and Glenn S. Gordon. The SEC's litigation is being led by Alejandro 0 . Soto and Mr. Morales, under the supervision of Andrew 0 . Schiff. The SEC appreciates the assistance of Florida's Office of Financial Regulation.
Me
ill Lynch to Pay Over $8 Million for Improper Handling of ADRs
FOR IMMEDIATE RELEASE XXXXXXXXXX
Washington D.C., March 22, 2019- TheSecurities and Exchange Commission today announced that Me
ill Lynch, Pierce, Fenner & Smith Incorporated will pay over $8 million to settle charges of improper handling of "pre-released" American Depositary Receipts (ADRs).
ADRs- U.S. securities that represent foreign shares of a foreign company- require a co
esponding number of foreign shares to be held in custody at a depositary bank. The practice of "pre-release" allows ADRs to be issued without the deposit of foreign shares, provided
okers receiving them have an agreement with a depositary bank and the
oker or its customer owns the number of foreign shares that co
esponds to the number of shares the ADR represents.
The SEC's order found that Me
ill Lynch improperly bo
owed pre-released ADRs from other
okers when Me
ill Lynch should have known that those
okers - middlemen who obtained pre-released ADRs from depositaries - did not own the foreign shares needed to support those ADRs. Such practices resulted in inflating the total number of a foreign issuer's tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend a
itrage that should not have been occu
ing. The order against Me
ill Lynch found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning bo
owing pre-released ADRs from these middlemen.
This is the SEC's ninth enforcement action against a bank or
oker resulting from its ongoing investigation into abusive ADR pre-release practices, which has thus far resulted in monetary settlements exceeding $370 million. Information about ADRs is available in an SEC Investor Bulletin.
"We are continuing to hold accountable financial institutions that engaged in abusive ADR practices," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "Our action conveys the message that an entity like Me
ill may not avoid