Last week the SEC brought an action this centered on hidden fees and a series of actions centered on microcap fraud and investment fund fraud. A pump and dump actions was filed centered on the manipulation of six different stocks since 2012. Investment fund actions were initiated based on allegations that: the reserves for an oil property were falsified; that investors were defrauded with claims that all their debt would be wiped out; and that investors were defrauded in a real estate venture.
Alert: The Office of Investor Education and Advocacy issued an investor alert titled: Marijuana-Related Investments (here).
Securities class actions
Cornerstone report: In the first half of this year plaintiffs have filed 78 new federal class action securities cases, an increase over the 66 filed during the same period in 2013, according to a new report from Cornerstone research (here). The number of actions filed in the first half of the year is less than the 82 filed in the second half of 2013, however. It is also less than the semiannual average between 1997 and 2013 of 95 cases filed.
If securities class actions continue to be filed for the remainder of the year at the same pace, a total of 156 suits will be brought in 2014. That would be the second lowest number since 2006 when a total of 120 securities class actions were filed.
For the first time since 1998 the number of companies listed on U.S. exchanges increased over the course of the year. Likewise, IPO activity for the first half of the year was strong with 112 offerings. At this pace the number for the year will exceed 2013 by 43%. That would represent a increase for the third consecutive year. In the first half of the year IPO activity equaled 71% of 2013 and exceeds that of 2009, 2010 and 2012.
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 5 civil injunctive action, DPAs, NPAs or reports and 2 administrative proceedings (excluding follow-on and Section 12(j) proceedings).
Concealed fees: SEC v. Blumberg, Civil Action No. 2:14-cv-04962 (D. N.J. Filed August 7, 2014) is an action against Anthony Blumberg, former chief executive officer of a broker-dealer subsidiary of ConvergEx Group LLC. For a five year period beginning in 2006 Mr. Blumberg is alleged to have participated in a scheme to charge clients hidden fees and cover it up through a variety of means. The complaint alleges violations of Exchange Act Section 10(b) and 15(c)(1)(A) and each subsection of Securities Act Section 17(a). A parallel criminal action was filed by the U.S. Attorney’s Office. Both cases are pending.
Pump and dump: SEC v. Galas, Civil Action No. 14-cv-5621 (W.D. Wash. Filed Aug. 5, 2014) is an action against Michail Galas, Alexander Hawatmeh, Christopher Mwroca and Tovy Pustovit. The defendants are charged with manipulating the share price of six microcap stocks since 2012 using coordinated trading, aggressive promotions over the internet through social media and e-mails. The manipulations have netted them over $2.5 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 9(a). The case is pending.
Investment fund fraud: In the Matter of Keido Kawamura, Adm. Proc. File No. 3-15826 (Aug. 5, 2014) is a proceeding which alleges that Respondent engaged in two schemes. In the first, from December 2011 through June 2012 investors were solicited for a so called hedge fund. Respondent claimed she had substantial experience and had achieved outstanding returns. Seven investors entrusted her with $200,000. Much of the money was misappropriated with the balance being lost in option trading. In the second, beginning in August 2012 Ms. Kawamura created a website that gave investment advice. It falsely claimed that Ms. Kawamura had annual returns of 800% in her personal brokerage account. The site raised about $50,000 from 70 subscribers. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. She also agreed to the entry of a securities industry bar and to pay disgorgement of $275,117.78, prejudgment interest and a penalty of $50,000.
Misappropriation: SEC v. Thornes, Civil Action No. 14-cv-06088 (C.D. Cal. Filed Aug. 4, 2014) is an action against John Thornes, formerly the sole owner of Thornes & Associates. The complaint alleges that he misappropriated about $4.4 million over three years beginning in 2010 by lying to the trustee of a trust for an elderly woman. The trustee was his mother. The money went largely to his friends. The complaint alleges violations Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Thornes settled with the Commission, consenting to the entry of a permanent injunction prohibiting violations of the Sections cited in the complaint. In addition, he will pay disgorgement of $4,366.70, prejudgment interest and a penalty equal to the disgorgement. He also agreed to the entry of a collateral industry bar and a penny stock bar. See Lit. Rel. No. 23058 (Aug. 4, 2014).
Offering fraud: In the Matter of Huston American Energy Corp., Adm. Proc. File No. 3-16000 (August 4, 2014) is a proceeding naming as Respondents Huston American, a Texas based energy company, its CEO, John F. Terwilliger Jr. and the firm’s public relations consultant, Undiscovered Equities, Inc. and its president, Kevin T. McKnight. In late 2009 Huston American announced that it had entered into a farm-out agreement with the Operator of a property in Colombia’s Llanos Basin. Under the terms of the deal Huston American obtained a 25% non-operating interest in a 345,452 acre oil and gas exploration production area in the Basin known as CPO-4 block. From the operator of the property Huston American obtained information as to the estimated reserves. Without any basis Huston American multiplied the estimates and then used the numbers to raise about $13 million in an offering and significantly boost its share price. When two blog posts raised questions regarding the integrity of management and the validity of the estimates, the share price dropped. Subsequently, Huston American withdrew from the project. Over the life of the project Huston American raised and spent over $20 million. Mr. Terwilliger received a significant salary and bonus along with stock options. He later sold his shares for about $1.8 million. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as 20(b). The proceeding will be set for hearing.
Offering fraud: SEC v. Hurd, Civil Action No. 13 CV-04464 (C.D. Cal.) is a previously filed action against Robert Hurd, Your Best Memories International, Inc. and others. It alleged that the sale of interests in the company which supposedly made products to improve memory were unregistered. Mr. Gross resolved the action and the Court entered a final judgment by consent, prohibiting future violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). He will also pay $269,000 in disgorgement, and prejudgment interest, payment of which is waived based on financial condition. The Commission also issued an Order barring Mr. Gross from the securities business. The other defendants defaulted. See Lit. Rel. No. 23057 (Aug. 1, 2014).
Offering fraud: SEC v. AIC, Inc., Civil Action No. 3:11-cv-00176 (E.D. Tenn.) is a previously filed action against AIC, Community Bankers Securities, LLC, Nicholas Skaltsounis, John Guyettte and John Graves. The complaint centered on claims that over a three year period beginning in 2006 Mr. Skaltsounis and others sold promissory notes and stock to investors based on misrepresentations regarding the securities and the use of the proceeds, among other things. In October 2013 a jury returned a verdict after a three week trial, finding in favor of the Commission on all remaining counts against AIC, Community Bankers and Mr. Skaltsounis, finding violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The jury also found in favor of the Commission and against the two entity defendants on Exchange Act Section 20(a) claims and against Mr. Skaltsounis on a Section 20(e) claim. Prior to trial the Court granted summary judgment in favor of the Commission on its claims against AIC, Community Bankers and Mr. Skaltsounis based on Securities Act Sections 5(a) and 5(c). The Court has now entered permanent injunctions prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) as to AIC, Community Bankers Securities and Mr. Skaltsounis. In addition, AIC was order to pay disgorgement of $6,647,540, prejudgment interest and a penalty of $27.95 million. Community Bankers Securities was directed to pay disgorgement of $2,830,946, prejudgment interest and a penalty of $27.95 million. Mr. Skaltsounis was ordered to pay disgorgement of $948,389.13, prejudgment interest and a penalty of $1.505 million. Mrs. Guyette and Graves settled with the Commission prior to trial. See Lit. Rel. No. 22850 (Oct. 22, 2013).
Investment fund fraud: SEC v. Lawler, 1:14-cv-02468 (N.D. Ga. Filed July 31, 2014) names as a defendant Thomas Lawler, known as The Reverend Tom, his Freedom Foundation and other controlled entities. It focuses on a program which sells what are called administrative remedies or ARs. The AR is supposed to wipe out the investors debt. In addition, every $1,000 invested was claimed to yield at least $325,000. At least 2,000 ARs have been sold since 2004 at prices ranging from $1,000 to $10,000. No investor was ever paid but the Reverend used portions of the money for his own benefit. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23054 (Aug. 1, 2014).
Investment fraud: SEC v. Shailendra, Civil Action No. 1:14-cv-02465 (N.D. Ga. Filed July 31, 2014) is an action against M. Shi Shailendra who sold interests in a real estate investment vehicle which acquired distressed properties from the financial crisis.
There were two key points to the deal. One was Mr. Shailendra’s representation that he invested his own funds in Shi Investments Six. The other was the investors. Those solicited were primarily Atlanta-based doctors of Indian or Middle Eastern descent who placed great trust in defendant because of his heritage, prominence in the Indian-American community, political connections and willingness to risk his own funds. In fact Mr. Shailendra allocated himself an equity interest but it was not funded. He also misappropriated investor cash and at times used it to fund earlier deals. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). Mr. Shailendra settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of over $2 million and prejudgment interest but the settlement waives payment of that amount and a penalty based on inability to pay. Mr. Shailendra relinquished any claims he has against the development and agreed to the entry of an order barring him from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 23055 (Aug. 1, 2014).
CFTC Enforcement actions
False pricing: CFTC v. Brooks, 13 cv 6879 (S.D.N.Y.) is a previously filed action against former Citicorp North America Inc. trader, John Brooks. The complaint alleged that over a period of about one year beginning in November 2010 Mr. Brooks inflated and mismarked the value of his position in NYMEX Chicago Ethanol Futures Contracts in Citi’s proprietary account by misrepresenting his profits and losses. The complaint alleged violations of the CEA antifraud provisions. The Court entered a consent order which permanently bans Mr. Brooks from registering with the CFTC, bans him for seven years from trading any CFTC regulated products and bans him for five years from trading CFTC regulated ethanol products. It also requires him to pay a monetary penalty of $500,000.
Investment fund fraud: U.S. v. Goldfarb, Case No. 3:11-cr-00099 (N.D. Cal.) is an action against former hedge fund manager Lawrence Goldfarb. The fund manager operated Baystar Capital II, L.P. It invested primarily in short-term investments but also others referred to as “side pockets.” Without consulting fund investors Mr. Goldfarb took the profits from one investment and placed them in other entities, including those in which he had an interest. When investors asked for their distributions Mr. Goldfarb made misrepresentations. Ultimately he caused $6 million in investor losses. Mr. Goldfarb settled an SEC action with a consent decree. SEC v. Goldfarb, 3:11-cv-00939 (N.D. Cal.). He resolved criminal charges with a deferred prosecution agreement which required him part that he pay restitution and disgorgement of $2 million. The court determined that he spend the money on luxury items rather than paying the required amount. Therefore he breached the DPA and his motion to dismiss the criminal charges was denied. Mr. Goldfarb pleaded guilty to one count of wire fraud. This week he was sentenced to serve fourteen months in prison.
Investment fund fraud: U.S. v. Holloway, Case No. 2:11-cr-00984 (D. Utah) is an action against Robert Holloway who operated US Ventures LC, founded in 1999. From October 2005 through April 2007 Mr. Holloway recruited U.S. investors with false representations regarding his investment program, raising about $33 million. It suffered over $10 million in losses. Those were concealed from investors with false statements. He also misappropriated more than $1.2 million in one year and paid for a variety of personal expenses from the fund. This week he was convicted by a jury on four counts of wire fraud and one count of making and subscribing a false income tax return. Sentencing is set for October 20, 2014.
Insider trading: U.S. v. Hixon, Case No. 1:14-cr-00227 (S.D.N.Y.) is an action in which Frank Hixon, formerly a senior managing director of Evercore Group, LLC, was sentenced to serve 30 months in prison for insider trading and making false statements. The insider trading was based on using inside information he obtained from his employer in three instances to trade. When FINRA initiated an inquiry he furnished them and later the FBI with false information.
Error report: The Securities and Investment Commission fined Credit Suisse AG $88,000 for failing to make an error report. It occurred in connection with a client trade on September 4, 2012. At that time a client order was incorrectly filled. When the client was notified he accepted the trade based on a waiver of the brokerage. The firm however failed to file the necessary error reports.
False information: The Securities and Futures Commission banned former licensed representative Manesh Vijaykumar Samtani of KGI Asia Ltd. and KGI Futures Ltd from the securities business for life. The action was taken in view of the fact that he provided six clients with false information about transactions in their accounts and failed to follow client instructions.
Corruption: Four individuals were sentenced in connection with the Innospec corruption charges which are discussed here. Dennis Kerrison, formerly the chief executive of the company, and who was previously convicted of conspiracy to commit corruption, was sentenced to serve four years in prison; Paul Jennings, the former CEO of the UK operation, and who pleaded guilty to two charges of conspiracy, was sentenced to serve two years in prison; Miltiades Papachristos, a former regional sales director, and who was also convicted of conspiracy to commit corruption, was sentenced to 18 months; and David Turner, a former sales director, who pleaded guilty to three charges of conspiracy, to commit corruption was sentenced to a sixteen month suspended sentence with 300 hours unpaid work. This brings the Innospec corruption cases to a conclusion.