Church fined by SEC

[bluebell]

32 minutes ago, Analytics said:

Yes, I think that "Public Square" article is deceptive in its own right.

Thanks for clarifying. It’s been interesting (not in a nefarious way) to see how different critics have come to some different conclusions. Same for members of course.

[smac97]

12 hours ago, bsjkki said:

This was expected. SEC.gov | SEC Charges The Church of Jesus Christ of Latter-day Saints and Its Investment Management Company for Disclosure Failures and Misstated Filings

I have previously commented on this theme a few times:

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I am not discounting all the litigation filed against the Church.  Sometimes the Church and/or its agents/representatives errs legally.  When and if that happens, and can be established through evidence and argument, the Church needs to take its legal lumps like anyone else.  So I don't begrudge anyone who has a legitimate (or at least colorable) grievance against the Church and avails himself to filing a lawsuit.

That said, I do have some concerns about the current largely unelected/unaccountable law-making and law-enforcing power of what legal and political wonks sometimes call "the administrative state."  One of the core components of the U.S. Constitution is the "separation of powers."  The legislative branch is supposed to legislate, and the executive branch is supposed to execute/enforce the legislation.  In the Administrative State, however, governmental entities run by unelected (and largely unaccountable) bureaucrats to both craft and enforce administrative rules and regulations that have the same force of law, the same effect, as legislatively-enacted laws.  From Wikipedia:

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The primary debate is over whether or not nonelected agencies of the government have the power to legislate as well as enforce. The argument for the power is that all federal agencies/ officials are subject to the President of the United States, who is elected accommodating the new power democratically so that it does not need to be voted on directly by the public; where the counter is that “agencies remain inefficient, ineffective, and undemocratic;” attempting to justify that the public’s inability to vote for the policy that the agency adopts is undemocratic/unconstitutional.

See also here:

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Federal administrative agencies, when granted the power to do so in a statutory grant of authority from Congress, may promulgate rules that have force of law. Agencies "legislate" through rulemaking—the power to promulgate (or issue) regulations. Such regulations are codified in the Code of Federal Regulations (CFR) and published in the Federal Register. Rules of lesser effect are published in a host of forms, including manuals for agency staff and for the public, circulars, bulletins, letter rulings, press releases, and the like.

And here:

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Act of Congress[edit]

In the United States, the equivalent at the federal level to the British concept of primary legislation is an Act of Congress. A statute that delegates authority to promulgate regulations to an agency is called an authorizing statute or delegation of rulemaking authority.

Regulations "with the force of law"[edit]

In the United States, a law promulgated by an executive branch agency of the US federal government pursuant to authority delegated by an Act of Congress is called a regulation or a rule — often with the qualifier that it is a rule given "the force of law" by the authorizing statute.

The body of law that governs agencies' exercise of rulemaking powers is called "administrative law", which derives primarily from the Administrative Procedure Act (APA) and decisions interpreting it. In addition to controlling "quasi-legislative" agency action, the APA also controls "quasi-judicial" actions in which an agency acts analogously to a court, rather than a legislature.

In 1819 the United States Supreme Court famously observed that “the power to tax involves the power to destroy."  More recently, in 2021 a number of states filed suit against the United States expressing concern about threats against the Separation of Powers concept that is so integral to the Constitution.  Some excerpts:

• Plaintiffs, the States of Missouri, Arizona, Arkansas, Indiana, Kansas, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Tennessee, and Utah, bring this action to vindicate the structural separation of powers in the federal government, the most fundamental bulwark of our liberty.  “Frequently,” a threat to the separation of powers “will come before the Court clad, so to speak, in sheep’s clothing…. But this wolf comes as a wolf.”  Morrison v. Olson, 487 U.S. 654, 699 (1988) (Scalia, J., dissenting). 
• Through Section 5 of Executive Order 13990, President Joseph R. Biden, Jr., has arrogated to the Executive Branch the unilateral power to dictate specific values for the “social costs” of greenhouse gases in virtually every regulatory program administered by the federal government.  He has done so without any statutory or constitutional authority. 
• This quintessentially legislative policy has enormous consequences for America’s economy and people.  In theory, the Biden Administration’s calculation of “social costs” would justify imposing trillions of dollars in regulatory costs on the American economy every year to offset these supposed costs. 
• The Biden Administration’s actions violate the separation of powers by encroaching on the legislative power that is exclusively vested in Congress through Article I, Section 1 of the U.S. Constitution.  The power to regulate is the power to destroy, and our Constitution does not vest in the President the unilateral authority to regulate virtually every aspect of the American economy. 

This suit was later dismissed on procedural grounds (lack of standing and ripeness).  The states appealed the dismissal to the 8th Circuit, which affirmed the dismissal, and SCOTUS declined to hear a further appeal.  Nevertheless, I found the paraphrase on the "power to tax" aphorism (that is, "{t}he power to regulate is the power to destroy") to be pretty apt.  As the Maryland Court of Appeals put it way back in 1989:

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"If, as has been said, `[T]he power to tax is the power to destroy,'[3] then it is equally true that the power to regulate is the power to destroy because one can be `regulated' out of business."[4]
...

[3] McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 327, 4 L. Ed. 579 (1819).
[4] Attributed to Jim Oigan. See Bomhardt v. State, 71 Md. App. 609, 526 A.2d 983 (1987).

As you can see, this concerns about the Administrative State are not new.  I think these issues generally don't garner much public attention or scrutiny because they aren't "sexy."  They are, instead, legally complex and obscure, and require quite a bit of context to understand.  See, e.g., here (by Michael Greve, a law professor at George Mason University School of Law) :

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They’re on to me. I’m “disgruntled” with my profession (Administrative Law), says Stephen Bainbridge; the whole field is a fraud.

Sort of—but not quite. In coming months I’ll devote a number of posts to the pathologies of our administrative law. To avoid further misunderstanding and to keep me gainfully employed, let’s take this from the top.

What is the “Administrative State”?

What is its law? And why do many of us think it’s a constitutional problem?  It isn’t a lot of folks working for the gummint. The Constitution envisions and/or permits a postal service, a census bureau, a patent office, a revenue service, and a navy and an army (including a corps of engineers). Etc. Put the entire country in federal uniforms: there’d be nothing wrong with it, constitutionally speaking.

The hallmark of the administrative state is a power once known as “prerogative”—that is, the power to make binding rules without law, outside the law, or against the law, exercised by someone other than an elected legislature. John Locke understood that royal power, and was against it. The founders understood it, and they wrote an entire Constitution to suppress it. All legislative powers granted in  the Constitution are vested in the Congress, and nowhere else. Except, evidently,  when they’re vested in the Federal Communications Commission, or some other three-letter outfit. There’s the problem.

And here:

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{S}avvy liberal observers understand that this case—which prevented the EPA from issuing a sweeping new set of regulations regulating carbon emissions at power plants that could have raised the price of energy and had a devastating impact on the economy and consumers without the express permission of Congress—is every bit as significant as Dobbs.
...
This decision ...{is} based on a basic idea that ought to be at the heart of democratic self-rule. The laws and regulations that impact the everyday lives of both industries and individuals should be the result of the will of Congress—not an administrative state that has effectively taken over the nation's day-to-day governance.

For those raised on the "Schoolhouse Rock" explanation of the three branches of government, the existence of the administrative state is something of a mystery. Though technically under the purview of the executive branch, it has in essence taken over the responsibilities of Congress and the legislative branch. Partly the result of congressional inertia and gridlock, but mostly the product of the vast expansion of the government and its bureaucratic arm that has continued to metastasize since President Franklin Roosevelt's New Deal, it has become the long arm of the state drafting and then enforcing regulations that have the power of law, even though they were never part of any bill passed by Congress.

Unless Congress reasserts its lawmaking prerogative, the only other force that can check the administrative state is the judiciary. But the judiciary has been inhibited from doing so by the so-called "Chevron rule," named after a 1984 Supreme Court case in which it accepted the idea that judges should defer to administrative agencies' interpretations of the authority that Congress gave them in situations where the statutory text is ambiguous and the agency's interpretation is reasonable.

In the intervening 38 years, that has led to a state of affairs in which the courts have allowed the administrative state to completely usurp the constitutional role of the elected legislative branch—Congress.

The result is that the "Schoolhouse Rock" lesson on the Constitution has become obsolete. Despite the intentions of the Founders, it is now bureaucrats who are drafting the laws (in the form of regulations) and implementing them while simultaneously claiming that Congress passed legislation decades ago—in the West Virginia case, it was the Clean Air Act of 1970—giving them the authority to do so.
...
What the Court did in West Virginia is to deal a devastating blow to the unaccountable and unelected federal bureaucracy that has largely usurped the governance of the country over the course of the last several decades. If liberals want to revolutionize American society to avert global warming, they're going to have to actually pass the laws that will enable them to do so. But in this case, the Court has done more than hobble one particular left-wing objective. It has placed the extra-constitutional administrative state on warning that its ability to implement far-reaching policies by decree is over.

I am presenting this because I think a lot of people who are reading this story perhaps lack a sufficient context for understanding what is going on the the SEC regulation in view.  I think there are reasonable concerns to be had regarding unelected bureaucrats at a regulatory agency (the SEC) playing the role of (1) legislator (in crafting rules pertaining to the 13F form referenced in the various news articles), law enforcement / prosecutor (in investigating and enforcing compliance with the rules associated with the 13F form) and (3) judge and jury (in interpreting and applying the "force of law" rules associated with the 13F form).

That said, the SEC Order does indicate a number of things that merit attention and interest:

From page 1 of the Order (emphases added) :

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In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Ceaseand-Desist Proceedings...

On the basis of this Order and Respondents’ Offers, the Commission finds1 that...
...
1  The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.

If I am reading this correctly, the Commission is presenting its findings by way of "settlement" as opposed to having reached conclusions based on adjudicatory sifting of evidence.  Put another way, this may be the equivalent of a defendant settling with a plaintiff, with neither party having established actual wrongdoing or liability.

From the "Facts" section of the Order (which, again, do not appear to have been adjudicated) :

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4. Section 13(f) of the Exchange Act and Rule 13f-1 thereunder require that institutional investment managers file Forms 13F with the Commission on a quarterly basis if they exercise investment discretion over at least $100 million in securities that are traded on a national securities exchange or on the automated quotation system of a registered securities association (“Section 13(f) Securities”). Pursuant to Rule 13f-1(b), an investment manager is deemed to exercise discretion over all accounts for which any person or entity under the control of the investment manager exercises investment discretion. 

The "investment discretion" part here is significant.

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7. By at least 1998, senior management at Ensign Peak was aware of Ensign Peak’s  requirement to file Forms 13F and communicated this requirement to senior leadership of the Church.  

So far, so good.

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8. To prevent disclosure of the securities portfolio managed by Ensign Peak, the Church approved Ensign Peak’s plan of using other entities, instead of Ensign Peak, to file Forms 13F. The Church was concerned that disclosure of the assets in the name of Ensign Peak, a known Church affiliate, would lead to negative consequences in light of the size of the Church’s portfolio. Ensign Peak did not have the authority to implement this approach without the approval of the Church’s First Presidency. 

This is where the "Facts" start to become, in my view, a bit iffy.  The SEC is here assigning motives and thoughts, with no explanation as to the factual basis for these allegations.

Also, notably absent from this allegation is any reference to Ensign Peak having "received and relied upon legal counsel regarding how to comply with its reporting obligations."  Instead, the SEC alleges that the LLC strategy was "Ensign Peak's plan."  I find this to be pretty significant.  Even assuming the legal advice Ensign Peak received was wrong, the fact that Ensign Peak was acting based on legal advice speaks to its motives.  Ensign Peak and the Church are certainly obligated to comply with legal technicalities, and they are - at the end of the day - obligated to bear the consequences of noncompliance.  "I was following my attorney's legal advice" is generally not a sufficient basis for being excused from the consequences of noncompliance.  However, "I was following my attorney's legal advice" can well be a reasonable and equitable consideration.

Also, that the First Presidency initially approved "this approach," I think we can reasonably assume that they were assuming that the legal advice given to Ensign Peak was accurate and correct, and on that basis approved the approach.  "We believe in being subject to kings, presidents, rulers, and magistrates, in obeying, honoring, and sustaining the law."  (AoF 1:12.)  This is our doctrine, and it seemingly applies to even obscure and arcane "laws" such as 13F compliance.

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9. In 2001, at Ensign Peak’s recommendation, the Church created a trust, and a separate LLC under the ownership of the trust, to file Forms 13F. The Church designated Ensign Peak’s Managing Director as the trustee. Ensign Peak filed the first Form 13F identifying the Church’s Section 13(f) Securities in the name of the trust’s LLC. Senior leadership of the Church approved the creation of the first LLC to file Forms 13F.

Again, "{s}enior leadership of the Church" approving this approach was very likely based on the assumption that it was lawful and appropriate, which assumption was in turn likely based on the "legal counsel" Ensign Peak had received.

I currently work as in-house counsel for a corporation.  I regularly confer with the CEO and obtain his authorization to settle disputed cases, to formulate legal strategies, to work on regulatory compliance issues, and so on.  The CEO is a pretty smart guy, but he is not an attorney, so he relies mostly on my recommendations.  My recommendations, then, become pretty important because the corporation is responsible for any legal missteps it takes when relying on my recommendations.  Something similar appears to have happened with Ensign Peak and the Church.

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10. The first LLC was assigned a location in Glendale, California, although it conducted no business at that site. Ensign Peak signed an investment management agreement (“IMA”) with the LLC, and certain of Ensign Peak’s employees were assigned to be investment managers for the LLC. However, notwithstanding the IMA, Ensign Peak failed to transfer investment discretion to the LLC. Ensign Peak filed the first Form 13F in the name of this LLC on February 26, 2003, for the year ended December 31, 2002. Ensign Peak filed later Forms 13F using the name of the LLC through the quarter ended September 30, 2006.  

This may be where the legal advice went off the rails.  I have no particular expertise in this area, but "investment discretion" appears to be defined by statute, 15 U.S.C. 78(c)(a)(35), as follows:

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A person exercises “investment discretion” with respect to an account if, directly or indirectly, such person (A) is authorized to determine what securities or other property shall be purchased or sold by or for the account, (B) makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions, or (C) otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account as the Commission, by rule, determines, in the public interest or for the protection of investors, should be subject to the operation of the provisions of this chapter and the rules and regulations thereunder.

See also this Q&A from the SEC (notably updated on January 3, 2023) :

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Question 45 (Updated: January 3, 2023)

Q: What is sole investment discretion?

A: If you are the only entity managing the Section 13(f) securities reported on your Form 13F and you do not control (or are not controlled by) another reporting person, you have sole investment discretion. See Securities Exchange Act Section 3(a)(35), and Rule 13f-1(b). Enter the word SOLE in Column 6. See Special Instruction 11.b.vi to Form 13F [Adobe Acrobat^® (PDF) file].

For example, if you are an investment advisory firm reporting your aggregate holdings for all accounts under your management, you have sole investment discretion (even though the accounts may be handled by different individuals within your firm).

Question 46 (Updated: January 3, 2023)

Q: What is shared-defined investment discretion?

A: If you control another entity (or are controlled by another entity), you should report shared-defined investment discretion. This category includes parent corporations and their subsidiaries (e.g., a bank holding company and its subsidiaries), investment advisers and mutual funds that they advise, and insurance companies and their separate accounts. See Rule 13f-1(b) under the Securities Exchange Act. Enter the word DEFINED in Column 6. See Special Instruction 11.b.vi to Form 13F [Adobe Acrobat^® (PDF) file].

For example, if you are a bank holding company, you are required to file Form 13F even though you may not be directly involved in the management of Section 13(f) securities. Although your trust department or other subsidiary may handle that responsibility, you are deemed to have shared-defined investment discretion based on your corporate structure.

Question 47 (Updated: January 3, 2023)

Q: What is shared-other investment discretion?

A: If you share investment discretion in a manner that does not fit into the shared-defined category, you report shared-other investment discretion. You also would use this column where you are reporting multiple levels of shared investment discretion. See Securities Exchange Act Section 3(a)(35); Rule 13f-1(b) under the Securities Exchange Act; and SEC Release 34-15292. Enter the word OTHER in Column 6. See Special Instruction 11.b.vi to Form 13F [Adobe Acrobat^® (PDF) file].

If the manager of the LLC filing the 13F form did not have such "investment discretion," then that is apparently a problem.  The clarity of this issue in the SEC's guidance as it existed in 1998-2001 is presently unclear to me.  

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11. On March 15, 2005, the Church became aware that the public might link this first LLC to the Church because the person signing the Forms 13F was listed in a public directory as a Church employee. To address this issue, on March 21, 2005, the senior leadership of the Church approved a new reporting entity to be created with “better care being taken to ensure that neither the ‘Street’ nor the media [could] connect the new entity to Ensign Peak.”  

12. On December 1, 2005, Ensign Peak formed a second LLC as a Delaware nonprofit corporation, located in Wilmington, and named Ensign Peak’s Managing Director as its general manager. Ensign Peak then filed Forms 13F in the name of this new LLC. 

Apart from the "investment discretion" issue noted above, I don't see a problem with the Church wanting to obscure its investments.

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13. Several years later, in 2011, Ensign Peak became concerned that its portfolio had become so large that the Form 13F filings it made using the name of the second LLC might attract unwanted attention and sought the Church’s approval to form additional LLCs to file Forms 13F. On May 19, 2011, the Church’s senior leadership approved Ensign Peak’s recommendation to “clone” the second LLC to create new Form 13F filers.  

14. After obtaining Church approval, Ensign Peak formed new Clone LLCs for the purposes of filing Forms 13F. Five new entities were formed and given Delaware addresses, although none conducted business in Delaware.   

Again, from the Church's statement: "Since 2000, Ensign Peak received and relied upon legal counsel regarding how to comply with its reporting obligations while attempting to maintain the privacy of the portfolio. As a result, Ensign Peak established separate companies (LLCs) that each filed Forms 13F instead of a single aggregated filing. Ensign Peak and the church believe that all securities required to be reported were included in the filings by the separate companies."

I'm willing to give the Church the benefit of the doubt here, for a few reasons.

First, the Church is a pretty big bureaucracy, with attendant delays and hiccups and errors in decision-making processes.  The same government that is finding fault with the Church's financial arrangements was reported last year as having failed, for the fifth time, a DOD audit: 

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The Defense Department has failed its fifth-ever audit, unable to account for more than half of its assets, but the effort is being viewed as a “teachable moment,” according to its chief financial officer. 

After 1,600 auditors combed through DOD’s $3.5 trillion in assets and $3.7 trillion in liabilities, officials found that the department couldn’t account for about 61 percent of its assets, Pentagon Comptroller Mike McCord told reporters on Tuesday. 

I am not excusing the Church from its responsibilities.  Instead, I am noting that large bureaucracies frequently struggle to comply with every legal and regulatory obligation imposed on them.

Second, I wonder if the prior legal advice Ensign Peak had previously relied upon (circa 2000) was ever re-assessed for accuracy and completeness.  By way of illustration, just today I was reviewing templates used by my client to create important legal documents, and in them I found a number of errors which I brought to the attention of management.  These forms were created by an outside law firm some years ago, and my predecessors had apparently never really reviewed them.  This is understandable, given that my client uses many dozens of these templates.  Understandable, but not excusable.

Third, as we saw in the whole "LDS Charities Australia" kerfuffle, the Church seems to work hard to try to comply with the law, and yet controversy can nevertheless arise.  In the Australia dustup, it appears that the Church was on safe legal footing.  It seems that the Church's legal position on the current issue with 13F compliance is less certain.

Back to the Order:

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15. In 2015, Ensign Peak became aware that a third party appeared to have connected  the holdings of various LLCs back to Ensign Peak. Ensign Peak brought this issue to the attention of the Church. The senior leadership of the Church approved Ensign Peak’s recommendation to “gradually and carefully adapt Ensign Peak’s corporate structure to strengthen the portfolio’s confidentiality.”  

16. On November 6, 2015, the senior leadership of the Church approved Ensign Peak’s plan for the creation of additional Clone LLCs to further prevent disclosure of the Church’s holdings managed by Ensign Peak. Ensign Peak formed six additional Clone LLCs, bringing the total to twelve.

17. Ensign Peak had authority over all of the LLCs throughout their existence. The Church also had indirect authority over all of these LLCs since the Church controlled Ensign Peak and approved the approach of using the LLCs to file Forms 13F (the “LLC Structure”).   

Assuming this to be true (and that is a big assumption), it looks like the Church erred relative to Ensign Peak where it has succeeded relative to LDS Charities Australia.  Interestingly, both issues involve matters of "control."  Regarding LDS Charities Australia, the Church appears to have allocated actual decision-making authority to located-in-Australia personnel.  However, if corollary transfers of decision-making authority (in SEC-speak: "investment discretion") was not given to the LLCs, then this appears to have been an error.

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18. The Clone LLCs also entered into IMAs with Ensign Peak, whereby Ensign Peak was designated as the Clone LLCs’ client. These IMAs assigned discretion and authority to manage the securities portfolio to the LLCs. The Managing Director of Ensign Peak signed each IMA on behalf of Ensign Peak. In his capacity as General Manager of the Clone LLCs, he also signed the IMAs on behalf of each relevant Clone LLC.    

19. Despite the provisions in the IMAs stating that the Clone LLCs would have management authority, the Clone LLCs never exercised investment discretion over the Church’s assets. Although Ensign Peak designated several of its own investment managers to serve as investment managers for each Clone LLC, these investment managers continued to manage the Section 13(f) Securities on behalf of Ensign Peak. They did not know which assets were allocated to the Clone LLCs and performed no functions for the LLCs outside of their existing responsibilities for Ensign Peak.  

This really seems to be the heart of the controversy: Whether the LLCs "exercised investment discretion" or not.  The SEC has alleged that the LLCs did not have such discretion, the Church has neither admitted nor denied this point, and the matter was resolved via settlement without an adjudicative body having made a specific finding.

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21. Each Clone LLC was set up with a “Business Manager,” who, according to the terms of the LLC agreements, had responsibility for “the preparation and filing of the Company’s governmental reports, returns, notices and the like, including reports required by law of investment managers or entities exercising investment discretion.” However, the Business Managers performed no functions for the Clone LLCs outside of signing the Form 13F signature pages each quarter.  

22. Ensign Peak was responsible for designating the Clone LLCs’ Business Managers, many of whom were Church employees. Business Managers were selected because they had common names and a limited presence on social media, and were therefore less likely to be publicly connected to Ensign Peak or the Church. Ensign Peak provided the Business Managers very limited information about the Clone LLCs or why they were created.  

23.  Each Clone LLC was given an address outside of Utah although none of them conducted any business at those locations other than the receipt of mail. Ensign Peak chose multiple locations across the country for these purported offices to create the impression that the Clone LLCs conducted business operations throughout the U.S., making it more difficult to trace the Clone LLCs back to Ensign Peak or the Church. 

24. Each Clone LLC was also assigned a local phone number that would go directly to voicemail. An Ensign Peak senior manager instructed a Business Manager of one of the Clone LLCs to notify him of all voicemails from regulatory agencies to any of the Clone LLCs, but to delete all others.  

Again, apart from the "investment discretion" issue noted above, I don't see a problem with the Church wanting to obscure its investments.  Here, if the business managers were left "in the dark," if they were not given actual "investment discretion" authority, then that's a problem.

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25. After the Clone LLCs were formed, Ensign Peak prepared and filed Forms 13F with the Commission under the names of the Clone LLCs.  

26. To prepare the filings, Ensign Peak maintained a list of all Section 13(f) Securities within its portfolio, and allocated these securities to the various Clone LLCs. Ensign Peak allocated newly-held Section 13(f) Securities to a Clone LLC at the end of a quarter, and also reallocated other Section 13(f) Securities to new LLCs as the number of LLCs increased. Ensign Peak’s senior management then drafted the Forms 13F and filed them, generally before obtaining the Business Managers’ signatures.    

Hmm.  I'm not sure what to make of this.

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27. Each Form 13F filed in the name of a Clone LLC misstated that the LLC had sole investment discretion for the securities listed, that there were no other managers for these securities, and that the Clone LLC had sole voting discretion over these securities. Even though the IMAs stated that Ensign Peak had delegated investment discretion, Ensign Peak continued to manage the entire portfolio and at all times maintained investment and voting discretion over all the securities listed in the Forms 13F.  

28. Each Form 13F was signed by the designated Business Manager. The signature page stated, “The institutional investment manager filing this report and the person by whom it is signed hereby represent . . . that all information contained herein is true, correct and complete[.]” However, Ensign Peak provided the Business Managers with insufficient information about the Clone LLCs or the securities assigned to them that would enable the Business Managers to make this representation. When Ensign Peak obtained the Business Managers’ signatures for the Forms 13F, Ensign Peak gave the Business Managers only the signature pages of the Forms 13F and not the complete documents. In addition, the Forms 13F were often filed with electronic signatures before Ensign Peak actually obtained the Business Managers’ handwritten signatures.  

Again, without actual findings of fact by an adjudicative body, I'm not sure how much of this is accurate.

Again, if the Church has made a legal mistake, it needs to take its legal lumps like anyone else.  Indeed, I am grateful that the Church is not "above the law."  

Thanks,

-Smac

Edited February 22, 2023 by smac97

[OGHoosier]

29 minutes ago, Analytics said:

My understanding is that the clone LLC's didn't legally own any assets. The Church pretended they did on Form 13F, but no assets were ever legally transferred. 

25. After the Clone LLCs were formed, Ensign Peak prepared and filed Forms 13F with the Commission under the names of the Clone LLCs.

26. To prepare the filings, Ensign Peak maintained a list of all Section 13(f) Securities within its portfolio, and allocated these securities to the various Clone LLCs. Ensign Peak allocated newly-held Section 13(f) Securities to a Clone LLC at the end of a quarter, and also reallocated other Section 13(f) Securities to new LLCs as the number of LLCs increased. Ensign Peak’s senior management then drafted the Forms 13F and filed them, generally before obtaining the Business Managers’ signatures.

27. Each Form 13F filed in the name of a Clone LLC misstated that the LLC had sole investment discretion for the securities listed, that there were no other managers for these securities, and that the Clone LLC had sole voting discretion over these securities. Even though the IMAs stated that Ensign Peak had delegated investment discretion, Ensign Peak continued to manage the entire portfolio and at all times maintained investment and voting discretion over all the securities listed in the Forms 13F.

In an Excel workbook, Ensign Peaks allocated its own securities to the various shell companies, but never legally transferred them. 

 

"In an Excel workbook, Ensign Peaks allocated its own securities to the various shell companies, but never legally transferred them." Is this description in evidence, ie do we have the Excel workbooks, or is it your working theory on what happened? 

Because per the SEC's own FAQ, "investment discretion" is different from holding title to an asset. It refers to the practical ability to make decisions regarding the disposal and purchase of assets. A clone LLC can have title to an asset without having investment discretion if somebody else is really pulling the strings on what to do with the asset. If the clone LLC holds title to no assets but files a federal form claiming them, as you suggest the Church did, that is an entirely different and altogether more severe violation - securities fraud, which the SEC declines to charge to EPA and the Church. I see no evidence that such a charge is forthcoming.

Based on these pieces of evidence, I suggest that EPA did transfer assets to the clone LLCs, and point 26 does not indicate that EPA retained title to its allocated assets. The words "its portfolio" could be interpreted to mean EPA's de facto portfolio (including assets formally held by the clone LLCs), or it could describe EPA's process each quarter as they distributed newly acquired Section 13(f) securities to clone LLCs and executed transfers between clone LLCs. The wording here is difficult, but the fact that no fraud charges were announced rules out interpreting point 26 as saying EPA retained title to the securities.

Edited February 22, 2023 by OGHoosier

[smac97]

12 hours ago, ttribe said:

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I agree. Setting up shell llc's is a very bad look. 

In my experience as an expert witness who is a Certified Fraud Examiner, the establishment of the shell LLCs would be used to show an intent to, at best, mislead users of the filings, if not to outright defraud them. They need to get their house in order on this, right away.

I think you are substantially overstating things here.  Setting up LLCs is often an utterly mundane, and entirely legal and appropriate, thing to do. 

I have a client that works on house "flips."  For each and every transaction, we set up an LLC to A) hold title/ownership, B) allocate managerial authority, C) limit liability to the client, D) facilitate resolutions with borrowers, and for other legitimate reasons.  From Wikipedia (second emphasis added) :

Quote

A shell corporation is a company or corporation with no significant assets or operations often formed to obtain financing before beginning business. It may hold passive investments or be the registered owner of assets, such as intellectual property, or ships. Shell companies may be registered to the address of a company that provides a service setting up shell companies, and which may act as the agent for receipt of legal correspondence (such as an accountant or lawyer). The company may serve as a vehicle for business transactions without itself having any significant assets or operations.

Shell companies are used for legitimate purposes but can be used for tax evasion, tax avoidance, money laundering, or to achieve a specific goal such as anonymity. Anonymity may be sought to shield personal assets from others, such as a spouse when a marriage is breaking down, from creditors, or from government authorities.

Shell companies legitimate business purposes are, for example, acting as trustee for a trust, and not engaging in any other activity on their own account. This structure creates limited liability for the trustee. A corporate shell can also be formed around a partnership to create limited liability for the partners, and other business ventures, or to immunize one part of a business from the risks of another part. Shell companies can be used to transfer assets from one company into a new one while leaving the liabilities in the former company.

There are plenty of "legitimate business purposes" for these entities, which substantially undermines your claim that "the establishment of the shell LLCs would be used to show an intent to, at best, mislead users of the filings, if not to outright defraud them" (emphasis added).

Thanks,

-Smac

[smac97]

12 hours ago, ttribe said:

I sincerely hope this prompts the Church to be more transparent with its finances.

Compliance with Form 13F is a fair distance from the Church being "more transparent with its finances."  The former is a legal requirement, the latter is not (and is arguably not even advisable).

Thanks,

-Smac

[smac97]

12 hours ago, Calm said:

Also 

https://www.deseret.com/u-s-world/2023/2/21/23602967/church-settles-case-with-sec-over-financial-reporting

I would love if whoever made this decision came clean on the reasoning, apologized and it was made clear (as in shared company policy) that is wasn’t going to happen again….I don’t see that as likely though.  

I think the Church's statement makes it clear that this matter has been resolved (so it is not "going to happen again") :

Quote

Since 2000, Ensign Peak received and relied upon legal counsel regarding how to comply with its reporting obligations while attempting to maintain the privacy of the portfolio. As a result, Ensign Peak established separate companies (LLCs) that each filed Forms 13F instead of a single aggregated filing. Ensign Peak and the church believe that all securities required to be reported were included in the filings by the separate companies.

In June 2019, the SEC first expressed concern about Ensign Peak’s reporting approach. Ensign Peak adjusted its approach and began filing a single aggregated report. Since that time, 13 quarterly reports have been filed in full accordance with SEC requirements.

This settlement relates to how the forms were filed previously. Ensign Peak and the church have cooperated with the government over a period of time as we sought resolution.

We affirm our commitment to comply with the law, regret mistakes made and now consider this matter closed.

The Church also stated that it "regret{s} mistakes made."

Thanks,

-Smac

[Analytics]

8 minutes ago, bluebell said:

Thanks for clarifying. It’s been interesting (not in a nefarious way) to see how different critics have come to some different conclusions. Same for members of course.

You're welcome. For the record, this is the part I find particularly dishonest:

In 2019, the SEC contacted EPA with concerns over EPA’s disclosure reporting practices. Based on the advice of its attorneys, between 2000-2019, each subsidiary LLC had been filing its own form 13F rather than filing one aggregate form.

https://publicsquaremag.org/faith/church-state/ensign-peak-clarifying-the-sec-announcement/

The article paints a picture of these subsidiaries being actual entities with actual employees and actual assets and business functions and so forth, and because of some ambiguity in the law, they decided to file their own 13F's. That just isn't what happened. The "subsidiaries" were really just shell companies that didn't own any assets and didn't have any business purpose. Their only reason for even existing was to obfuscate the Church's assets from the SEC.

The actual SEC report goes page after page about how deceptive the whole scheme was. To be honest, the Public Square Q&A should ask and answer questions like:

1. Why did these shell companies exist?
2. Where were they domiciled?
3. Why were they located in those places?
4. Did they have any employees in those places?
5. Did they have any employees anywhere?
6. Why did the Church need so many shell companies?
7. What is the role of the "business managers" of the shell companies?
8. How were the business managers selected?
9. Did the business managers know what they were signing?
10. Were there material inaccuracies in the filings?
11. Did the business managers know about it?
12. Did any of them resign from that role as business managers?
13. Why did they resign?

[Analytics]

13 minutes ago, OGHoosier said:

"In an Excel workbook, Ensign Peaks allocated its own securities to the various shell companies, but never legally transferred them." Is this description in evidence, ie do we have the Excel workbooks, or is it your working theory on what happened? 

Because per the SEC's own FAQ, "investment discretion" is different from holding title to an asset. It refers to the practical ability to make decisions regarding the disposal and purchase of assets. A clone LLC can have title to an asset without having investment discretion if somebody else is really pulling the strings on what to do with the cards. If the clone LLC holds title to no assets but files a federal form claiming them, as you claim, that is an entirely different and altogether more severe violation - securities fraud, which the SEC declines to charge to EPA and the Church. I see no evidence that such a charge is forthcoming.

Based on these pieces of evidence, I suggest that EPA did transfer assets to the clone LLCs, and point 26 does not indicate that EPA retained title to its allocated assets. The words "its portfolio" could be interpreted to mean EPA's de facto portfolio (including assets formally held by the clone LLCs), or it could describe EPA's process each quarter as they distributed newly acquired Section 13(f) securities to clone LLCs and executed transfers between clone LLCs. 

You should have explained this to the SEC. It would have saved the Church $5,000,000.

[OGHoosier]

14 minutes ago, bluebell said:

Thanks for clarifying. It’s been interesting (not in a nefarious way) to see how different critics have come to some different conclusions. Same for members of course.

I'd argue that the Public Square article is essentially right about the legal aspects of it - it's up to the SEC to decide whether or not an investment manager has de facto "investment discretion". The making of shell companies is not illegal - the violation is in putting your thumb too hard on the scale of the administration of said companies and reporting them as independent entities. If EPA had created the shell companies and put a trusted lieutenant in charge who made some investment decisions, there would have been no violation - even if that lieutenant ran the shop in line with EPA interests.

Now, the Public Square article doesn't address why the Church would want to obscure the size of their portfolio, which they clearly did. THAT is the real problem here. It doesn't bother me personally, but it is a major question to which Public Square does not speak. They might have an editorial up in a few days about it.

 

 

[smac97]

11 hours ago, Calm said:

From the DeseretNews link

Quote

The order contained allegations not addressed by the church, but the settlement brings the investigation to an end.

It is unfortunate, imo, these allegations weren’t addressed.  

The very purpose of settling a dispute is to not publicly address allegations.  

11 hours ago, Calm said:

Even if the reason given is very reasonable, at this point I think it would be better received if everything was covered.

Perhaps so.  Perhaps not.

11 hours ago, Calm said:

Quote

The church said it wanted to maintain the privacy of its holdings. Some church officials said previously that they wanted to avoid church members following church investments as a roadmap for personal investing because they might not be appropriate to their circumstances.

Wait a second….rereading this, the wanting to protect members from making stupid decisions being the reason this happened is speculation by the writer based on older comments…which is the same thing I did, this is not justification supplied by the Church or Ensign.  Reasonable, but not confirmed as why.

Very unsatisfying.

The SEC Order is likewise "unsatisfying."  It doesn't provide its sources.  It makes bare allegations, which many are taking to be established fact.

The Church has apparently made some mistakes as to regulatory compliance with SEC rules.  It happens.  Some or many of the allegations by the SEC may be inaccurate or false or misleading.  That happens, too.  The Church could have fought this to the bitter end, or it could broadly admitted and expressed regret for "mistakes made," adopted corrective measures, paid the fine, and moved on.  Neither would be ultimately "satisfying" to everyone, but that's the way our legal system works.

Thanks,

-Smac

[smac97]

12 hours ago, Teancum said:

Quote

I agree. Setting up shell llc's is a very bad look. 

You think?  The only reason to do things like this is to hide things.  

This is an unserious and ignorant, and demonstrably incorrect, assertion.

12 hours ago, Teancum said:

Is this being honest in dealing with your fellow men?

Are you still skinning puppies for fun and profit?

 

Thanks,

-Smac

[smac97]

11 hours ago, cacheman said:

Quote

Yeah, even if the church says not to mimic its financial structure, I am downright certain there would still be "Ensign Peak portfoliomaxxing" going on in various quarters.

I wonder if there is there historical precedent for this?  I know that I came across something a while back where church investments were put to a vote by the membership.  I believe that was about 100 years ago though.

The Kirtland Safety Society has some analogs.

Thanks,

-Smac

[smac97]

11 hours ago, webbles said:

The SEC order gives a pretty good historical rundown on what happened - https://www.sec.gov/litigation/admin/2023/34-96951.pdf

I'm not sure about that.  The SEC Order seems to be functionally equivalent to a civil "Complaint" or a criminal "Information" or indictment.  As I understand it, the statements in the Order are allegations, that is, "a claim of fact not yet proven to be true."

I am open to correction on this, though.

Thanks,

-Smac

[smac97]

11 hours ago, ksfisher said:

Quote

The Church is currently guarding against error by taking legal advice.  It didn’t work in this case.  Not sure how to reasonably guard against making the error of trusting the wrong legal advice…maybe have a double layer of asking for outside input on decisions?  Thankfully not my stewardship.  

I deal with motor carrier regulations all the time.  The book that the federal government publishes is around 600 pages.  2/3 of this is the actual regulations, 1/3 is guidance to interpret the regulations.  When a driver is inspected at a port of entry one inspector may interpret a regulation in one manner, another in a different way.  If they want to find something wrong they can always interpret something in a way so they can find something wrong.

If tax law is anything like this (and my impression is that it's worse) I don't see how even the best legal advice and second opinions will always be 100% correct.

I deal with real estate matters in Utah. It's my bread and butter, and has been for nearly twenty years.  And I still learn new things on a regular basis.  Technology (from the printing press on down) has made the law very complex these days.  Lawyers are incentivized to give good legal advice, but they ain't perfect.  Not by a country mile.  And then there are the times when the client doesn't listen . . . 

Thanks,

-Smac

[smac97]

11 hours ago, webbles said:

Apparently the Church Auditing Department recognized that the LLC structure was risky.  This is from the SEC order - https://www.sec.gov/litigation/admin/2023/34-96951.pdf

Quote

32. The Church and Ensign Peak continued to take the same approach to filing Forms 13F through the Clone LLCs despite two Church Audit Department (“CAD”) internal audits of Ensign Peak – one in 2014 and one in 2017—that reviewed the LLC Structure. In discussions with Ensign Peak’s senior management, although CAD did not recommend specific changes to the LLC Structure, CAD highlighted the risk that the SEC might disagree with the approach.

 

Bureaucratic inertia strikes again.  Bummer.

Thanks,

-Smac

[OGHoosier]

27 minutes ago, Analytics said:

You should have explained this to the SEC. It would have saved the Church $5,000,000.

The SEC's own definition for "investment discretion" has nothing to do with asset ownership, just de facto control. It's Question 6, you may confirm it at your leisure. EPA's de facto control over the securities held by the clone LLCs is the problem, not the actual ownership of the securities. Again, if it were so, more serious charges would be present, as the clone LLCs Form 13(f)'s would be fraudulent - claiming assets which they don't have - a charge which the SEC does not levy.

You don't do anything to rebut this, or correct your clearly mistaken interpretation of "investment discretion". Your whole case now hinges on the interpretation of point 26, which does not clearly say what you want it to say. Your case that the EPA didn't move assets to the shell companies is weak. 

Edited February 22, 2023 by OGHoosier

[smac97]

11 hours ago, ttribe said:

Actually, they very clearly intended to conceal the general wealth of the fund.

Actually, there is nothing wrong with that.

I am open to correction, of course.  Feel free to correct me by publishing the entirety of your personal finances for public consumption.  "Sauce for the goose" and all that.

11 hours ago, ttribe said:

They likely believed their actions were legal, but whether it was ethical is clearly up for debate.

As soon as you publish the entirety of your personal financials to the world, I'll start taking seriously your pronouncements about what is "ethical" and what is not.

11 hours ago, ttribe said:

The SEC stated - "To obscure the amount of the Church’s portfolio, and with the Church’s knowledge and approval, Ensign Peak created thirteen shell LLCs, ostensibly with locations throughout the U.S., and filed Forms 13F in the names of these LLCs rather than in Ensign Peak’s name."

As I understand it, the SEC Order contains allegations.  Claims of fact not yet proven to be true.

Thanks,

-Smac

[smac97]

11 hours ago, ttribe said:

Quote

They were used to inflate the Church's vast wealth and enrich the pockets of the presiding authorities. Wait, no. Taxes and everything else was paid. The fine is only that the Church attempted to conceal the extent of its financial holdings from the public, not actually avoid giving the government money.

Intentional concealment is a serious problem.

Then by all means, please set an example of overcoming this "serious problem" by ceasing your intentional concealment of your personal finances.  Please publish them to the world.  Also, your bank account numbers, bank and email logins, SSN, and your home address.

Go ahead.  I'll wait.  

11 hours ago, ttribe said:

Hence, the charges by the SEC. Attempting to downplay the ramifications of these acts is not helpful.

Nor is attempting to vilify the Church.  And yet here you are...

Thanks,

-Smac

[smac97]

11 hours ago, Teancum said:

Quote

They were told it was legal to do it that way though….

So?  Ultimately the reporting entity is responsible. 

Yes.  And yet an organization that relies on legal advice when proceeding on arcane and complex legal issues can be a pretty good indicator that the organization is attempting to comply with the law.

Now, I suppose one could insinuate that the Church's reliance on legal advice is something akin to Walter White's reliance on Saul Goodman.  But that would be rather conclusory and unfair.

11 hours ago, Teancum said:

A advise clients in tax issues all the time.  I prepare tax returns.  But guess who is ultimately responsible?  The client.  Yes I can be sued by a client for bad advice and IRs can charge me penalties as well for aggressive positions.  But the client has responsibility as well. To simply say  "Oh well we were following legal council is a bogus cop out.  

The Church will be paying millions in fines.

The Church has publicly stated: "We affirm our commitment to comply with the law, regret mistakes made and now consider this matter closed."

And yet here you are, imputing to it a "bogus cop out."

Heads we lose, tails we lose.  No matter what we do, faultfinders will ply their trade.

Thanks,

-Smac

[smac97]

11 hours ago, 2BizE said:

This is an old trick where the church tells the lawyers to do something and then hide behind the lawyers if it back fires.  

I'll issue a CFR here.  Chapter and verse, please.  When has the Church done this?  

11 hours ago, 2BizE said:

Church lawyers did not do this blindly. They knew the risks and certainly conveyed those risks to the church and EPA.

CFR, please, that "Church lawyers ... knew the risks" and "certainly conveyed those risks to the Church and EPA."

Thanks,

-Smac

[smac97]

11 hours ago, Calm said:

The Church Auditing Department sounded less than enthusiastic from the SEC report.  Got to wonder who actually made the decision and if the risks discussion was passed on fully along with the decision they were going to go ahead with it to whoever in the Church leadership oversees the financial guys….I am assuming here it was the finance guys at Ensign Peak that made the decision, I could be wrong.

As an attorney, I have occasionally experienced some perceived pressure to tell a client what it wants to hear, rather than what it needs to hear.  Nevertheless, our job is to provide the latter.  Whether that happened in this instance or not is unclear.

Thanks,

-Smac

[smac97]

11 hours ago, SteveO said:

This needs to be qualified with, “it happens ALL THE TIME on Wall Street.”  All.  The.  Time.  The government screwed up with $163 billion of the $873 billion COVID relief bill that was improperly spent.  Big organizations waste money, have corruption and fraud all the time.

Church needs to be better and held to a higher standard, no doubt.  But I’ve never liked the “business side” of the church ever since they found a loophole to avoid paying for my brother’s cancer he developed while on his mission.  

Out of curiosity, did your brother contract cancer because of his mission?

11 hours ago, SteveO said:

The business side of the church acts like a business.  They do business things.  They’re gonna look for ways to skirt transparency as far as they can possibly take it.  

As do most private individuals and organizations.

11 hours ago, SteveO said:

As I said, someone should lose their job, but this isn’t some nefarious crime that was committed.

Agreed.

Thanks,

-Smac

[JustAnAustralian]

Thinking about hypotheticals here, what would have happened if the church hadn't come to an agreement? Would it be some decade long court case? What kind of fine would they be looking at if a judge agreed it was dodgy?

[Analytics]

14 minutes ago, smac97 said:

As I understand it, the SEC Order contains allegations.  Claims of fact not yet proven to be true.

I would emphasize that the SEC spent years investigating this, and I’d add to that the fact that the church claims it cooperated fully. This makes me imagine pouring through thousands of pages of documents and extensive interviews with people at the Church and at Ensign Peaks at all levels. 

Given that, it’s hard for me to imagine them not understanding the material facts of what happened very well.

[smac97]

10 hours ago, ttribe said:

How is that you can take a genuine effort on my part to express sympathy for those who will struggle over this issue and turn it into some apologetic defense?  That's pretty poor manners.

I did not question your genuineness.  Nor did I attempt to "turn" your statement into something.  I responded with my own thoughts.  Expressing an opinion about a disputed issue is not "pretty poor manners."

Thanks,

-Smac