SEC FILES ACCOUNTING FRAUD CHARGES AGAINST COMPANY FOR MANIPULATING INVENTORY ACCOUNTS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles.  Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold.  Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

“Benson’s job as CFO was to protect the integrity of DGSE’s financial statements,” said David Woodcock, chair of the SEC Enforcement Division’s Financial Reporting and Audit Task Force and director of the Fort Worth Regional Office.  “Instead he took advantage of DGSE’s weak internal control environment to intentionally manipulate its public filings.”

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data.  The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores.  As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

The SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance.  The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars.  Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE.  Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE.  Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings.  Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating the antifraud, reporting, recordkeeping, lying-to-accountants and internal controls provisions of the federal securities laws.  DGSE is charged with reporting, recordkeeping, and internal controls failures.  DGSE and Benson each consented to injunctions against future violations of these provisions.  DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies.

The SEC’s investigation was conducted by Chris Davis, Keith Hunter, and Joann Harris of the Fort Worth Regional Office.

SEC STATEMENT ON ENFORCEMENT ACTION AGAINST JPMORGAN

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Statement on SEC Enforcement Action Against JPMorgan
 George Canellos
Co-Director of the SEC's Division of Enforcement
Sept. 19, 2013

Today we are announcing that JPMorgan Chase & Co. has agreed to admit wrongdoing and pay a $200 million penalty for its conduct in connection with the trading losses suffered by JPMorgan’s chief investment office (CIO) in 2012.

Last month, when we filed fraud charges against JPMorgan’s former traders, Javier Martin-Artajo and Julien Grout, we said these traders exploited massive shortcomings in JPMorgan’s internal controls infrastructure.

Today’s action makes clear that JPMorgan’s control breakdowns went far beyond the CIO trading book.  In addition to failing to keep watch over how the traders valued a very complex portfolio, JPMorgan’s senior management broke a cardinal rule of corporate governance:  inform your board of directors of matters that call into question the truth of what the company is disclosing to investors.  Here, at the very moment JPMorgan’s management was grappling with how to fix its internal control breakdowns and disclose the full scope of its CIO trading disaster, the bank’s Audit Committee was in the dark about the extent of these problems.

By not sharing these troubling facts with its directors, JPMorgan deprived them of information they vitally needed to make proper judgments about how to address the company’s problems — including what information could be relied upon as accurate and what information needed to be disclosed to investors and regulators.

At its core, today’s case is about transparency and accountability, and JPMorgan’s admissions are a key component in that message.  While not every case will be appropriate for admissions of wrongdoing, the SEC required JPMorgan to admit the facts in the SEC’s order – and acknowledge that it broke the law – because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.

The facts described in the SEC’s action called for a substantial penalty in addition to admissions of wrongdoing.  The $200 million penalty against JPMorgan is unprecedented for an internal controls case and is one of the largest penalties in the history of the SEC.  The penalty reflects the SEC’s assessment of the gravity of the control failures and the risks to which they exposed the firm and investors.  The $200 million will be placed in a fund for compensation of investors harmed by JPMorgan’s inaccurate financial reports.

Although today’s settlement resolves claims against JPMorgan relating to this matter, our investigation is continuing as to individuals.      

I would like to thank the U.S. Attorney’s Office for the Southern District of New York, the FBI, the Federal Reserve, and the Office of the Controller of the Currency for their assistance in this investigation.

I also thank the United Kingdom Financial Conduct Authority for its tremendous collaboration with the SEC in this matter.  The securities markets are global, and many of the leading participants in those markets operate all over the world.  Complex cases like this one — involving cross-border conduct in New York and London — cannot be effectively investigated and prosecuted without close cooperation of financial regulators in different countries.  Such cooperation is vital not only in developing the evidence of wrongdoing but in determining the appropriate regulatory response, including assessment of sanctions that reflect JPMorgan’s violation of the distinct laws in both countries but avoid duplication of punishment for the same conduct.

Last, I want to recognize the hard work and dedication of the SEC staff from the New York Regional Office that conducted this investigation, and that continue to aggressively investigate the facts surrounding this case:  Michael Osnato, Steven Rawlings, Daniel Michael, Peter Altenbach, Joshua Brodsky, and Joseph Boryshansky.

Just as last month’s trader mismarking case was the product of the SEC staff’s expertise and determination, the staff propelled today’s action forward by analyzing millions of documents, questioning dozens of witnesses, and ultimately discovering the facts that led to JPMorgan’s acknowledgement of wrongdoing. Using e-mail inboxes, calendars, and witness statements, the staff was able to reconstruct in vivid detail and as they unfolded the events in the first half of 2012, exposing both control weaknesses at CIO and the deficiencies in corporate governance at the highest level of the bank that JPMorgan has admitted in today’s action.

THE SEC AND THE GOLD MINE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today filed fraud charges against a California-based mining company and its CEO who induced hundreds of investors to pour $16 million into a fruitless gold mining venture.

The SEC alleges that Nekekim Corporation and Kenneth Carlton defrauded investors with representations that a special "complex ore" found at Nekekim's mine site in Nevada contained gold deposits worth at least $1.7 billion. Carlton highlighted test results produced by two small labs that used unconventional methods to test the ore for gold, but he withheld from investors other tests conducted by different firms that suggested the Nekekim mine site held little if any gold. The small labs' reliability also had been called into doubt by geologists and a government study. Yet as Nekekim failed to produce any mining revenue, Carlton gave shareholders false hope that the company was close to perfecting the custom method it supposedly needed to extract gold from its special ore.

Carlton agreed to settle the SEC's charges.

According to the SEC's complaint filed in federal court in Fresno, Calif., Nekekim succeeded in attracting investors from 2001 to 2011 in such U.S. states as California, Florida, and New Jersey as well as foreign countries including Canada, Australia, and Singapore. Carlton falsely represented to investors that a "physicist" who in reality had no scientific training helped develop a confidential gold extraction technique licensed by Nekekim. Carlton also promoted a series of other supposedly promising extraction methods in frequent reports to shareholders. In one newsletter, he touted: "A NEW GOLD RECOVERY PROCESS IS SUCCESSFUL." As each of these methods actually failed, Carlton's reports grossly overstated Nekekim's progress toward profitability while prompting shareholders to invest more money in the company.

Carlton, who lives in Clovis, Calif., agreed to a judgment requiring him to pay a $50,000 penalty and prohibiting him from selling securities for Nekekim or managing the company. He also will be prohibited from further violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Nekekim, based in Madera, Calif., agreed to a judgment prohibiting the same violations and requiring disclosure of these sanctions in any offering of securities for the next three years. Carlton and Nekekim neither admitted nor denied the SEC's allegations.

This case was investigated by Thomas Eme and Tracy Davis of the SEC's San Francisco office.