United States: SEC Brings Post-MCDC Enforcement Actions Against Underwriter And Officials

On April 5, 2017 the SEC released two orders instituting cease-and-desist proceedings (consent decrees) which are the first post-MCDC cases finding securities law violations based on misstatements in official statements regarding compliance with previous continuing disclosure undertakings ("CDUs"). One case was against an underwriter, Lawson Financial Corporation ("LFC") and its CEO, Robert Lawson; the other case was brought against an LFC investment banker and purported underwriter's counsel, John Lynch.

LFC did not participate in MCDC. As the SEC promised at the start of MCDC, entities which violated securities laws and did not participate in the voluntary reporting program would be subject to more onerous sanctions.

These cases were linked to fraudulent bond sales on behalf of a developer of health care facilities named Christopher Brogdon (who has separately settled securities fraud charges by the SEC). However, these charges were largely based on false statements made in a series of 13 bond issues for Brogdon projects which each stated that the Brogdon-related entities had complied with prior CDUs, when in fact the required annual reports were often missing or late.

In the first order, LFC and Lawson were found to have violated the anti-fraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933 for failing to use adequate diligence in investigating Brogdon's CDU compliance, despite many warning signs. In addition, in one case, LFC was found to have violated Rule 15c2-12 and Lawson to have aided and abetted such violation because no CDU was ever signed.

The sanctions entered into were as follows:

  1. LFC and Lawson agreed to cease and desist from future violations of Section 17(a)(2) and (3) and Rule 15c2-12.
  2. LFC was censured.
  3. Lawson was subjected to a "bar," meaning he cannot associate with or act as an officer or director of a broker, dealer or other financial entity for 3 years.
  4. LFC and Lawson were jointly and severally required to pay disgorgement and interest totaling almost $200,000.
  5. LFC and Lawson were required to pay civil penalties of just under $200,000 and $80,000, respectively.

Except for item (1) above, all of these sanctions went beyond the "standard" settlement terms the SEC had made available to underwriters who voluntarily reported under the MCDC program, and, of course, the MCDC program did not apply to individuals at all. This is in line with a consistent practice in recent SEC enforcement actions to include culpable individuals along with organizations found to have violated securities laws.

LFC and Lawson consented to entry of these orders without admitting or denying the findings in the order (save for the SEC's jurisdiction), but in a new wrinkle, Lawson was required to admit to the findings for purposes of Bankruptcy Code Section 523, so that Lawson could not have the money penalties discharged if he filed for personal bankruptcy. This feature may be related to the fact that the SEC allowed Lawson to pay his penalties in installments over a period of one year.

The second order dealt only with Lynch, who was an investment banker at LFC and purportedly served as the underwriter's counsel in the Brogdon offerings. Lynch was found, like Lawson, to have violated the antifraud rules by failing to perform adequate diligence into Brogdon entities' compliance with prior CDUs, thus causing LFC to fail to comply with its diligence obligations. In addition, Lynch violated antifraud rules by permitting the Brogdon official statements to refer to him as underwriter's counsel for LFC, when in fact Lynch was not licensed to practice law in Arizona (where LFC was located) and had let his Pennsylvania law license lapse since 1983. As a result of these actions, Lynch was found to have violated the anti-fraud provisions of both Sections 17(a)(2) and (3) of the 1933 Act and Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934. Further, similar to Lawson, Lynch was sanctioned in connection with the offering in which no CDU was signed.

The sanctions levied against Lynch were as follows:

  1. He agreed to cease and desist from future violations or Sections 17(a)(2) and (3) and Rule 10b-5.
  2. He was denied the privilege to appear or practice before the SEC as an attorney.
  3. He was required to pay disgorgement and interest of $22,338.00 and pay a civil penalty in the same amount.
  4. Lynch did not at this time agree to a "bar" but a hearing was to be scheduled before an Administrative Law Judge on that question. For purposes of such proceeding Lynch may not argue that he did not violate federal securities laws.

As with Lawson, Lynch neither admitted nor denied the findings of the Order but was required to admit to the findings for purposes of Bankruptcy Code Section 523.

It can be noted that LFC and Lawson were only sanctioned based on a negligence standard under Section 17(a)(2) and (3) of the 1933 Act, while Lynch was also sanctioned under Section 10(b) and Rule 10b-5 under the 1934 Act, which involves a finding of recklessness or willful intent to defraud. The difference may be related to the fact that Lynch could be presumed to have known that he was not licensed to practice law, while still allowing such an implication to be included in the various official statements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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