Recent Enforcement Actions Illustrate the Need for Good Recordkeeping

SEC v. Gold Standard Mining Corp.

SEC v. Orthofix International N.V.

In the Matter of Altamont Global Partners

Since the end of June, there have been three enforcement actions dealing with inadequate or improper accounting methods that did not follow generally accepted accounting practices (GAAP). Two enforcements were brought by the SEC and one by the NFA. Gold Standard Mining Corp. and Altamont Global Partners involve making false statements regarding the value of assets. Orthofix deals with the failure to adopt and follow appropriate internal procedures to ensure proper accounting. We are providing an overview of these actions and some of our thoughts below.

SEC v. Gold Standard Mining Corp.

  • Gold Mining Corp. made false and misleading statements in filings with the SEC regarding the acquisition, operations, and assets of a Russian subsidiary.
  • Gold Mining Corp. filed fraudulent financial statements from 2009-2011 that did not follow GAAP. Revenues were not reported accurately, and assets were grossly inflated. For example, one asset, a hotel, was valued as $3MM per room.
  • Gold Mining Corp. also failed to disclose a profit sharing agreement with the former owner of the Russian subsidiary.

The complaint can be found here.

SEC v. Orthofix International N.V.

  • Wholly owned Mexican subsidiary of Orthofix, Promeca, paid $317,000 in bribes to Mexican officials in order to obtain sales contracts from the Mexican government.
  • Promeca employees referred to the bribes as “chocolates” and fraudulently recorded the transactions as cash advances or promotional and training expenses.
  • Prior to the discovery of the bribery scheme, Orthofix did not have an effective Foreign Corrupt Practices Act compliance manual or training regime in place. The only anti-bribery materials given to Promeca were in English only.
  • Orthofix did not have an adequate internal auditing system in place and failed to conform with GAAP.

The complaint can be found here.

In the Matter of Altamont Global Partners

  • Funds managed by Altamont made loans to Altamont in violation of NFA Compliance Rule 2-45 which prohibits loans by commodity pools to its CPO/affiliated persons or entities.
  • Loan proceeds were used to pay operating expenses or paid directly to employees of Altamont.
  • Altamont falsified quarterly statements by hiding losses and inflating funds’ net asset value to make it appear as if trading had been successful.

The complaint can be found here.

Takeaways for Managers

Above all else, keep accurate and honest records. Managers should be sure to follow GAAP when creating financial records for their funds, and never falsify accounting documents. As Orthofix demonstrates, it is also crucially important that managers employ appropriate internal mechanisms to avoid fraudulent or harmful practices from developing. Rule 204-2 under the Advisers Act requires registered advisers to maintain true, complete, and current books and records relating to its investment advisory business. Generally, there are three categories of records to be maintained: (i) business records of the advisor, (ii) records of the adviser that relate to the adviser’s clients and the adviser’s advisory activities, and (iii) records relating to the adviser’s compliance program.

Conclusion

While Gold Mining Corp. and Orthofix involve the relationships between businesses and their subsidiaries, they offer good examples of the need to establish and maintain policies designed to prevent inaccurate recordkeeping. Altamont Global Partners represents a warning for fund managers to avoid falsifying their funds’ financial documents to hide losses or inflate net asset value.

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Cole-Frieman & Mallon LLP provides a full suite of legal and compliance services to investment managers. The firm can be reached through our contact page and Bart Mallon can be reached directly at 415-868-5345.

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