SEC Enforcement Begins A “Busy” 2014

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In recent remarks SEC Chair Mary Jo White promised that 2014 would be a “busy” year for the Enforcement Division. If yesterday’s filings are any indication, there is no doubt that this statement is correct. Nearly 300 proceedings were initiated yesterday. The two groups of actions center on microcap fraud, a key focus for the Division according to Ms. White. One group of 256 actions are part of an initiative called “Shell-Expel.” The other group of 20 actions are stop order proceeding centered on a series of registration statements apparently masterminded by one securities law recidivist.

First, as part of Operation Shell-Expel the SEC Enforcement Division’s Office of Market Intelligence has been cleaning up the microcap marketplace by scrutinizing penny stocks nationwide and identifying clearly inactive companies,” according to the SEC’s Press Release (Feb. 3, 2014). That Release attaches an alphabetically arranged list of 255 issuers. The Commission suspended trading in the shares of each issuer, reciting in the pertinent orders that “[i]t appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities . . .” of the particular issuer. Under the terms of the Orders trading will be suspended. At the conclusion of the period quotes for the shares cannot be entered unless certain specific, current information is available for the issuer in accord with Rule 15c2-11. In the Matter Able Energy, Inc., SEA Release No. 71465 (Feb. 3, 2014).

Second, twenty stop order proceedings were filed against twenty different issuers but no action was brought against the culprit behind the registration statements. Each proceeding is essentially the same. It alleges that the management’s common shares, valued at between $10,000 to as much as $30,000, are being registered for resale; the issuer is engaged in “exploration for certain metals and other minerals;” the management consists of “one person;” and each Registration Statement includes false statements, failing to disclose fact that the firm’s executive officer and controlling director was charged with fraud in SEC v. Golden Apple Oil and Gas, Inc., et al., Civil Action No. 09-Civ-7580 (S.D.N.Y.) and has been barred from appearing before the Commission in In the Matter of John Briner, Exchange Act Release No. 63371 (Nov. 24, 2010). In each instance the issuer sought to withdraw its registration statement when informed that it should cooperate with a staff examination. That action “constitutes a failure to cooperate with, refusal to permit, and obstruction” of the examination by each issuer, according to the Order. See, e.g., In the Matter of the Registration Statement of Yuma Resources Inc., Adm. Proc. File No. 3-15734 (Feb. 3, 2014).

This is not the first time the Commission has filed groups of cases such as those brought yesterday. Previously, when Operation Broken Gate was announced, the agency filed a series of administrative proceedings against either small accounting firms or individual accountants. Similarly, in noting that the agency will focus on manipulative short selling in a press release the Commission announced the filing of a group of short selling cases.

The releases for these groups of cases do not provide details on how these initiatives fit into the overall enforcement program. For example, as part of Shell-Expel trading was suspended for 255 issuers. It is unclear how this initiative differs from the on-going Section 12j program. There the Commission periodically brings an administrative proceeding against an issuer who has failed to file the required periodic reports for a period of time. Frequently those actions are brought against groups of issuers listed in alphabetical order. No doubt there is a lack of current information about those firms as in the trading suspensions announced yesterday. Most of those proceedings are resolved by default, although a few end with settlements in which the company agrees to a revocation order.

In the stop order group of actions each issuer is apparently controlled by recidivist John Briner. In each case Mr. Briner appears to be trying to sell his shares to the public without telling investors who he is and what he has done. In each instance the proceeding could have ended before it began if the issuer was permitted to withdraw its registration statement. And, Mr. Briner is not a defendant or respondent in any proceeding despite the fact that he appears to be the mastermind of the operation. Yet if a key goal is to prevent future violations, such an action would appear essential, although it could be brought later.

If this is the new face of enforcement – groups of cases which create headlines about large numbers of actions – it may well be a busy year for the Enforcement Division, filing all of those proceedings.