SEC Whistleblower was Key to Enforcement Action Against Institutional Shareholder Services

Once again, the Securities and Exchange Commission (SEC) whistleblower program has proven to be a vital tool in the fight against securities fraud. After receiving a critical whistleblower tip concerning securities fraud within a Maryland-based proxy adviser firm, the SEC was able to quickly move forward with administrative proceedings. A successful settlement of charges against Institutional Shareholder Services, Inc. (ISS) was reached shortly thereafter.

ISS

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Fraudulent Activity at ISS

ISS, the largest shareholder advisory firm in the United States, was charged with failure to “safeguard confidential proxy voting information of clients participating in a number of significant proxy contests.” According to the SEC, from at least 2007 to 2012, Brian Zentmyer, a former ISS employee, provided confidential materials to a proxy solicitor. The leaked materials contained sensitive data concerning over 100 ISS clients, revealing just how each shareholder was casting his or her proxy votes.

In exchange for the information, Zentmyer was provided with multiple illegal kickbacks courtesy of the proxy solicitor. For example, the solicitor handed out approximately $20,000 for lavish meals with Zentmyer and his family, plus another $11,500 for the purchase of highly-sought after concert and sporting event tickets. In addition, the proxy solicitor provided Zentmyer with one round-trip first-class airline ticket.

The leak was, in part, due the fact that ISS had inadequate policies and procedures in place. For example, during the time in question, no company policies limited or controlled employee access to confidential client information. As a result, Zentmyer was able to log into the ISS voting website from both home and work, gathering sensitive proxy data. Zentmyer allegedly accessed the ISS voting website using his own personal email account, then passed the data along to the proxy solicitor.

After receiving the whistleblower’s tip, the SEC conducted its own investigation into the securities fraud allegations and found sufficient evidence to institute administrative proceedings against ISS. Non-public information about the voting habits of institutional shareholder clients is a valuable commodity to proxy solicitors, as client companies are able to use that sensitive data as a means to advance their own goals and agendas.

Proxy solicitation firms essentially provide service to corporate boards looking to build shareholder support for important corporate votes, such as a merger. Having advance knowledge of how shareholders are already voting can help sway the ultimate outcome. It makes for an unfair market, which violates SEC rules and regulations, specifically Section 204A of the Investment Advisers Act of 1940.

“Proxy advisers must tailor their controls based on the risks of their particular business in order to protect the integrity of the proxy voting process,” said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “The internal controls at ISS did not adequately address the potential misuse of confidential proxy voting information by firm employees.”

Julie M. Riewe, SEC Deputy Chief

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Terms of the Settlement

As a result of the SEC action, ISS quickly chose to settle the charges. Under the terms of the settlement, ISS agreed to cease and desist from committing or causing any future violations of Section 204A and will pay the SEC a penalty of $300,000. In addition, ISS agreed to hire an independent compliance consultant. The role of the consultant will be to focus on development, implementation and improvement of internal controls at ISS.

The SEC Whistleblower

The SEC whistleblower in this case, Carl Clark, worked for Georgeson Inc., which is the same proxy solicitation firm that Zentmyer had been leaking ISS confidential corporate voting information to. After learning of the scheme, Clark decided to take advantage of the SEC whistleblower program. He sent a letter to the SEC in January 2012, detailing the fraudulent activity. Clark also stated in the letter that his supervisors at Georgeson were completely aware of the scheme.

Thanks to vital inside information provided by Clark, the SEC was able to launch its investigation shortly thereafter receiving the tip and put an end to the fraudulent activity within ISS.

 

By | 2018-03-26T11:48:14+00:00 June 13th, 2013|SEC Fraud|