This Week In Securities Litigation

by Dorsey & Whitney LLP

Robert Jackson and Hester Peirce were sworn in as Commissioners yesterday by Chairman Clayton. Mr. Jackson joined the agency from NYU School of law where he was a professor. Ms. Peirce was at the Mercatus Center at George Mason University were she was a Senior Research Fellow and Director of the Financial Markets Working Group. The Commission now has five commissioners.

SEC Enforcement – Litigated Actions

SEC v. Jones, Civil Action No. 17-11226 (D. Mass. Opinion Jan. 5, 2018). Defendant Cheryl Jones was named as a defendant. The complaint alleged she sold unregistered and worthless securities in the Bridge Fund, a Ponzi scheme operated by her brother Mark Jones. Mr. Jones created and operated the Bridge Fund from 2007 through 2015. The fund promised returns from using investor money to extend short-term “bridge loans” to Jamaican companies that had been approved for commercial bank loans but were in need of cash until the bank loans closed. In fact Mr. Jones took the investor cash. When the fund failed he pleaded guilty and was sentenced to serve seventy months in prison. He defaulted in an SEC enforcement action.

The SEC then filed an enforcement action on July 3, 2017 naming his sister as a defendant. Ms. Jones was one of the early investors in the Bridge Fund. The SEC claimed that she had directly or indirectly offered to sell or sold securities in the Fund based on four pieces of evidence: 1) Her brother paid Ms. Jones a 10% commission on securities purchased by eight investors she had introduced to him; 2) Ms. Jones communicated periodically with five of the eight investors; 3) she spoke with her brother about how to address investor concerns; and 4) three of the investors Ms. Jones contacted purchased over $540,000 of additional securities from her brother. Following discovery the Court rejected these claims, concluding essentially that there was no evidence linking Ms. Jones to the scheme during the limitation period, although she had recommended the investment to friends and received commissions in the early years of the scheme. The Court thus concluded that the SEC failed to establish that Ms. Jones had rendered substantial assistance to the sale of the unregistered, fraudulent shares.

Finally, while the Court agreed that the request for an injunction is one for equitable relief, “in a practical sense there is nothing remaining to be enjoined. Mark Jones is in prison, the Bridge Fund is defunct . . .” An injunction would only admonish Ms. Jones to obey the law. While that type of an injunction may or may not be enforceable, depending on the circumstances, in this case the Court found it would not comport with Rule 65.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 2 civil injunctive case and 1 administrative proceeding, excluding 12j and tag-along proceedings.

Offering fraud: SEC v. Haddad, Civil Action No. 3:18-cv-00055 (D. Conn. Filed Jan. 11, 2018) is an action which names as defendants David Haddad and two entities he controls, Trafalgar Square Risk Management, LLC and New England Re, LLC. Mr. Haddad held an insurance license and founded both firms. Over a four year period beginning in April 2012 he sold shares in each firm to at least 29 investors, raising about $2.5 million. The funds were supposed to be used to build each company. Instead must of the money went to Mr. Haddad. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action each Defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Mr. Haddad and Trafalgar agreed to pay, on a joint and several basis, disgorgement in the amount of $619,382.43 and prejudgment interest of $25,131.83; Mr. Haddad and New England agreed to pay, on a joint and several basis, disgorgement of $269,080 and prejudgment interest of $2,592.66. Mr. Haddad will also pay a penalty of $181,071 and has agreed to be barred from serving as an officer or director of a public company. He also agreed to the entry of a conduct injunction. See Lit. Rel. No 24028 (Jan. 11, 2018).

Insider trading: In the Matter of Anthony P. Chiera, Adm. Proc. File No. 3-18335 (Jan. 11, 2018) is a proceeding which names as Respondents Mr. Chiera, a registered representative with a Commission registered broker-dealer and investment adviser, and Jeffrey Belfiore, formerly the Director of Retirement Plans at URS. The case centers on the acquisition of URS by AECOM, an engineering, design and construction company, announced on July 13, 2014. Prior to the deal announcement Mr. Belfiore learned about the then pending transaction through his employment. He told his long time friend, Anthony Chiera, in return for a promise of employment by his friend’s employer. Mr. Chiera purchased over 9,000 shares of URS. Following the announcement of the deal the share price increased by 12%, yielding trading profits of $48,983.67 for Mr. Chiera. In February 2015 Mr. Belfiore received and accepted an offer of employment from Mr. Chiera’s employer. The Order alleges violations of Exchange Act Section 10(b). To resolve the action each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, Mr. Chiera will be barred from the securities industry and pay disgorgement in the amount of his trading profits, prejudgment interest of $2,847.17 and a penalty equal to the amount of his trading profits. Mr. Balfiore will pay a penalty of $25,000 and is barred from serving as an officer or director of a public company.

Offering fraud: SEC v. Kaplan, Civil Action No. 3:16-cv-00270 (D. Nev.) is a previously filed action against attorney David Kaplan and three entities he controls, Synchronized Organizational Solutions International, Ltd., Manna International Enterprises Ltd., and Synchronized Organizational Solutions, Ltd. The complaint alleged that Mr. Kaplan raised about $15.8 million from 20 investors who were falsely lead to believe that they were placing their money in a private off-shore trading program that would provide estimated monthly profits of 10%. In fact much of the money was misappropriated. The Defendants settled with the Commission and the Court entered judgments by consent prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition the court directed that the Defendants pay disgorgement of $7,139,884.87, prejudgment interest of $680,157.61 and a penalty of $300,000. See Lit. Rel. No. 24027 (Jan. 9, 2018).

Offering fraud: SEC v. Rubbo, Civil Action No. 17-cv-02345 (S.D. Fl. Filed Jan. 8, 2018) is an action which names as defendants Joseph Rubbo and Angela Beckcom Rubbo Monaco. Both defendants are recidivist. Mr. Rubbio has a prior criminal conviction and both defendants have been enjoined by the SEC. This action is part of the SEC Miami office Recidivist Initiative. The complaint alleges that the defendants raised at least $5.4 million from 11 primarily elderly investors involving Florida entertainment companies. Investors were told that their funds would benefit the entertainment companies and their Spongebuddy product. Some investors were told that the Starz cable channel was interested in the properties as was the Pandora Radio. In fact much of the money was misappropriated by the Defendants. During the period of the solicitation neither of the Defendants were registered with the Commission. Steven Dykes, retained to cold call investors, was also not registered. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24026 (Jan. 8, 2018).


Crowd-sourcing: The Australian Securities and Investment Commission announced the licensing of the first crowd-sourced funding intermediaries under the new CSF regime. Seven companies have been issued Australian Financial Services license authorizations to act as intermediaries able to provide a crowd-sourced funds service. The service is designed to provide start-ups and small and medium sized businesses with a new means to access capital.

Hong Kong

Failure to keep records: The Securities and Futures Commission found that from August 2014 through January 2015 account executive Wu Hon Cheung of Hung Kai Investment Services Limited, failed to keep proper records. Specifically, he failed to use the telephone tape-recorded phone and did not record order details at the time for some of the client orders in a manual trade blotter as the firm required. The regulator imposed a fine of $50,000 and reprimanded Mr. Cheung.


Manipulation: The Financial Conduct Authority imposed a financial penalty of £250,000 on former Royal Bank of Scotland interest rate derivatives trader Neil Dannger. He is also prohibited from performing any function in relation to any regulated financial activity. The sanctions were imposed for his manipulative trading. Specifically, from mid-February 2007 through late November 2010 he routinely made requests to RBS’s primary submitters, intending to benefit the trading positions for which he and other derivative traders were responsible; took those trading positions into account when acting as a substitute submitter; and in some instances obtained a broker’s assistance to attempt to manipulate the JPY LIBOR submissions of other banks. Also From mid-September 2008 through late August 2009 he entered 28 wash trades.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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